Outsourcing Sandy Springs, Georgia

The New York Times has a profile of Sandy Springs, a city in the Atlanta suburbs that has almost completely privatized:

Cities have dabbled for years with privatization, but few have taken the idea as far as Sandy Springs. Since the day it incorporated, Dec. 1, 2005, it has handed off to private enterprise just about every service that can be evaluated through metrics and inked into a contract.

To grasp how unusual this is, consider what Sandy Springs does not have. It does not have a fleet of vehicles for road repair, or a yard where the fleet is parked. It does not have long-term debt. It has no pension obligations. It does not have a city hall, for that matter, if your idea of a city hall is a building owned by the city. Sandy Springs rents.

The town does have a conventional police force and fire department, in part because the insurance premiums for a private company providing those services were deemed prohibitively high. But its 911 dispatch center is operated by a private company, iXP, with headquarters in Cranbury, N.J.

How taxes play a role with Sandy Springs:

Sandy Springs residents still send roughly $190 million a year to Fulton County through property taxes, about half of which goes to schools, including those in Sandy Springs. But by incorporating, the town gets to keep $90 million in taxes a year to spend as it pleases.

On how the city initially handled delivery of services and keeping costs in line:

Initially, and for the first five and a half years of its life, Sandy Springs used just one company, CH2M Hill, based in Englewood, Colo., to handle every service it delivered. Mr. McDonough says CH2M saved the town millions compared with the cost of hiring a conventional public work force, but last year Sandy Springs sliced the work into pieces and solicited competitive bids.

When the competition was over, the town had spread duties to a handful of corporations and total annual outlays dropped by $7 million.

To dissuade companies from raising prices or reducing the quality of service, the town awarded contracts to a couple of losing bidders for every winner it hired. The contracts do not come with any pay or any work — unless the winning bidder that prevailed fails to deliver. It’s a bit like the Miss America pageant anointing the runner-up as the one who will fulfill the winner’s duties if, for some reason, Miss America cannot.

Very interesting. I wonder how many other cities will follow this privatization route, both here in Georgia and across the United States.

Explaining How Money Works to a Five-Year-Old

One reddit user was confused about the current financial crisis and posed the following question:

Where is all the money? I hear nothing but bad news about financial crisis all over the world, and it seems that there is a shortage of cash – like it is some sort of natural resource.

People haven’t stopped buying stuff. They still need food, clothing, medicine, shelter. Taxes are still collected. Fines are still levied.

So where is all the money? I mean, labor has been produced to make things and wages paid to the laborers. The things are purchased by other laborers, who were paid for producing goods or services, etc. It’s a closed loop, right?

And he wanted it explained as though he were a five-year-old. So in steps user otherwiseyep who offers the following detailed explanation. It’s excellent and well-worth the read:

All actual “money” is debt. All of it, including monetary gold, etc. (Don’t argue with me yet, I’ll get to that.)

Imagine a pretend world with no money, some kind of primitive villiage or something. Now let’s invent paper money. You can’t just print a bunch of paper that says people have to give you stuff, because nobody would honor it. But you could print IOUs. Let’s walk through this…

  • Let’s say you’re an apple-farmer and I’m a hunter. You want some meat but haven’t harvested your crops yet. You say to me, “hey, go hunt me some meat and I’ll give you 1/10th of my apple harvest in the fall”. Fair enough, I give you meat, you owe me apples. There’s probably a lot of this kind of stuff going on, in addition to normal barter. In time, standard “prices” start to emerge: a deer haunch is worth a bushel of apples, or whatever.
  • Now, let’s say a week later, I realize that my kid needs a new pair of shoes more than I need a bushel of apples. I come back to you and say, “Hey remember that bushel of apples you owe me? Could you write a marker, redeemable for one bushel of apples, that I can give to the shoemaker in trade for a pair of shoes?” You say okay, and we have invented a transferable note, something a lot like money.
  • In time, our little villiage starts to figure out that a note redeemable for a bushel of apples can be swapped for all kinds of things. The fisherman who doesn’t even like apples will accept apple-certificates in trade for fish, because he knows he can trade them to boat-builder who loves apples. In time, you can even start to hire farm-workers without giving them anything except a note promising a cut of the future harvest.

Now, you are issuing debt: a promise to provide apples. The “money” is a transferable IOU– your workers get a promise to provide value equal to a day of farm-work, or whatever, and it’s transferrable, so they can use it to buy whatever they want. The worker gets fish from the fisherman, not in exchange for doing any work or giving him anything he can use, but in exchange for an IOU that the fisherman can redeem anywhere.

So far so good. But there are a couple of forks in the road here, on the way to a realistic monetary system, that we’ll address separately:

  • What happens if your apple orchard is destroyed in a wildfire? Suddenly all the notes that everyone has been trading are basically wiped out. It didn’t “go” anywhere, it’s just gone, it doesn’t exist. Real value was genuinely destroyed. There is no thermodynamic law of the conservation of monetary value– just as you and I created it by creating transferable debt, it can also be genuinely destroyed. (We’ll get back to this in a minute, it gets interesting).
  • The second issue is that, in all probability, the whole town is not just trading apple-certificates. I could also issue promises to catch deer, the fisherman could issue promises of fish, and so on. This could get pretty messy, especially if you got the notion to issue more apple-certificates than you can grow: you could buy all kinds of stuff with self-issued debt that you could never repay, and the town wouldn’t find out until harvest-time comes. Once again, value has been “destroyed” people worked and made stuff and gave you stuff in exchange for something that doesn’t exist, and will never exist. All that stuff they made is gone, you consumed it, and there is nothing to show for it.

The above two concerns are likely to become manifest in our village sooner or later, and probably sooner. This leads to the question of credit, which is, at its most basic, a measure of credibility. Every time you issue an apple-certificate, you are borrowing, with a promise to repay from future apple-harvests.

After the first couple of town scandals, people will start taking a closer look at the credibility of the issuer. Let’s say the town potato-farmer comes up with a scheme where his potato-certificates are actually issued by some credible third-party, say the town priest or whatever, who starts every growing season with a book of numbered certificates equal to the typical crop-yield and no more, and keeps half of the certificate on file, issuing the other half. Now there is an audit trail and a very credible system that is likely to earn the potato-grower a lot of credit, compared to other farmers in town. That means that the potato-grower can probably issue more notes at a better exchange rate than some murkier system. Similarly, the town drunk probably won’t get much value for his certificates promising a ship of gold.

Now we have something like a credit market emerging, and the potato-farmer is issuing something closer to what we might call a modern “bond”…

  • So some time goes by and people start catching onto this system of credit-worthiness, and farmers and fishermen and so on start to realize that they can get better value for their IOUs by demonstrating credibility. People with shakier reputations or dubious prospects may not be able to “issue money”, or might only be able to do so at very high “interest”. E.g., a new farmer with no track-record might have to promise me twice as many potatoes in exchange for a deer haunch, due to the risk that I might never see any potatoes at all.
  • This obviously gets very messy fast, as different apple- and potato-certificates have different values depending on whether they were issued by Bob or Jane, and everyone has to keep track of and evaluate whose future apples are worth what.
  • Some enterprising person, maybe the merchant who runs the trading-post, comes up with the idea to just issue one note for all the farms in town. He calls a meeting with all the farmers, and proposes to have the town priest keep a book of certificates and so on, and the farmers will get notes just like everyone else in exchange for the crops they contribute to the pool, and the merchant will keep a cut of the crops with which to hire some accountants and farm-surveyors to estimate the total crop yields across town and so on.
  • Everyone agrees (or at least, enough farmers agree to kind of force the other ones to get on-board if they want to participate meaningfully in the town economy), and we now have something like a central bank issuing something like fiat currency: that is, currency whose value is “decided” by some central authority, as opposed to the kind of straight-up exchange certificates that can be traded for an actual apple from the issuer, for example.
  • Now we have something that looks a lot like a modern monetary system. The town can set up audit committees or whatever, but the idea is that there is some central authority basically tasked with issuing money, and regulating the supply of that money according to the estimated size of ongoing and future economic activity (future crop yields).
  • If they issue too much money, we get inflation, where more apple-certificates are issued than apples grown, and each apple-note ends up being worth only three-quarters of an apple come harvest-time. If they issue too little currency, economic activity is needlessly restricted: the farmers are not able to hire enough workers to maximize crop yields and so on, the hunter starts hunting less because his deer meat is going bad since nobody has money to buy it, and so on.

At this point, you may be asking, “Why the hell go through all this complexity just to trade apples for deer and shoes? Isn’t this more trouble than it’s worth?”

The answer is because this is a vastly more efficient system than pure barter. I, as a hunter, no longer need to trade a physical deer haunch for a bushel of apples to carry over to the shoemaker in order to get shoes. You, as an apple-farmer, can hire workers before the crop is harvested, and therefore can grow more, and your workers can eat year-round instead of just getting a huge pile of apples at harvest-time to try and trade for for whatever they will need for the rest of the year.

So back to money…

The thing to remember is that all throughout, from the initial trade to this central-banking system, all of this money is debt. It is IOUs, except instead of being an IOU that says “Kancho_Ninja will give one bushel of apples to the bearer of this bond in October”, it says “Anyone in town will give you anything worth one bushel of apples in trade.”

The money is not an actual thing that you can eat or wear or build a house with, it’s an IOU that is redeemable anywhere, for anything, from anyone. It is a promise to pay equivalent value at some time in the future, except the holder of the money can call on anybody at all to fulfill that promise– they don’t have to go back to the original promiser.

This is where it starts getting interesting, and where we can start to answer your question…

(for the sake of simplicity, let’s stop calling these notes “apple certificates”, and pretend that the village has decided to call them “Loddars”).

  • So now you’re still growing apples, but instead of trading them for deer-haunches and shoes, you trade them for Loddars. So far, so good.
  • Once again, you want some meat, except harvest time hasn’t come yet so you don’t have any Loddars to buy meat with. You call me up (cellphones have been invented in this newly-efficient economy), “Hey otherwiseyep, any chance you could kill me a deer and I’ll give you ten Loddars for it at harvest-time?”
  • I say, “Jeez, I’d love to, but I really need all the cash I can get for every deer right now: my kid is out-growing shoes like crazy. Tell you what: if you can write me a promise to pay twelve Loddars in October, I can give that to the shoe-maker.” You groan about the “interest rate” but agree.

Did a lightbulb just go off? You and I have once again created Money. Twelve loddars now exist in the town economy that have not been printed by the central bank. Counting all the money trading hands in the village, there are now (a) all the loddars that have ever been printed, plus (b) twelve more that you have promised to produce.

This is important to understand: I just spent money on shoes, which you spent on deer meat, that has never been printed. It’s obviously not any of the banknotes that have already been issued, but it’s definitely real money, because I traded it for new shoes, and you traded it for a dead deer.

  • Once you and I and others start to catch on that this is possible, that we can spend money that we don’t have and that hasn’t even been printed yet, it is entirely possible for a situation to arise where the total amount of money changing hand in the village vastly exceeds the number of loddars that have actually been printed. And this can happen without fraud or inflation or anything like that, and can be perfectly legitimate.
  • Now, what happens if another wildfire hits your orchard? Those twelve loddars are destroyed, they are gone, the shoe-maker is twelve loddars poorer, without spending it and without anyone else getting twelve loddars richer.

The money that bought your deer and my shoes has simply vanished from the economy, as though it never existed, despite the fact that it bought stuff with genuine economic utility and value.

The above pretend history of the pretend village is not how modern money actually came to be. In reality, things are much less sequential and happen much more contemporaneously without the “eureka!” moments. The above was a parable to illustrate how money works to a 5-year-old, not an actual history of how money emerged.

Until fairly recent times, paper money was not really very useful or practical for most purposes, especially if you wanted to spend money in a different village than where it was printed.

If we go back in time a period before ATMs, wire-transfers, widespread literacy, etc, then a piece of paper written in Timbuktu is not likely to get you very far in Kathmandu. You could take your apples and deer-haunches and shoes around with you to trade, but the earliest naturally-emerging currencies tend to be hard things that were rare and easily-identifiable (jewels, colored shells, etc), and they frequently coincided with the personal decorations of the rich, in a self-reinforcing feedback loop (people with a surplus of time and food could decorate themselves with pretty things, which became valuable as status symbols, which made them more valuable as decorations, which made them more valuable as barter objects, which made them more prestigious shows of wealth, etc).

Gold emerged as a sort of inevitable global currency, before people even thought of it as currency. It is rare, portable, easy to identify, can easily be made into jewelry, and can be easily quantified (unlike, say, jewels or seashells, which are harder to treat as a “substance”). Once word got around that rich people like it, it became easy to barter with anyone, anywhere, for anything.

In the early stages, it was not really the same thing as “money”, it was just an easy thing to barter. But it had money-like characteristics:

  • If someone walked into your apple-orchard offering to trade a yellow rock for apples, you might look at them a little funny. What use does an apple-grower have for a yellow rock?
  • But if you know that rich people in town covet this soft yellow metal as something they can make jewelry out of, then you might be happy to trade apples for it.
  • Once everyone knows that rich people will trade for this stuff, it becomes something like actual currency: neither the hunter, the shoemaker, nor the fisherman in town has much use for it, but because they know they can redeem it for the stuff they do want and need, it becomes a sort of transferable IOU that can be redeemed anywhere, i.e., money.

The early history of paper money did not evolve the way I described in the earlier posts (although it could have, and would have got to the same place). Instead, the early history of paper money was certificates issued by storage-vaults of precious metals (i.e., early “banks”). Instead of carrying around yellow and silver rocks, you could deposit them somewhere and get a piece of paper entitling the holder to withdraw a certain quantity of gold or silver or whatever.

(via reddit)

The Gigapixel Camera

Scientists at Duke University have built an experimental camera that allows the user—after a photo is taken—to zoom in on portions of the image… The Wall Street Journal has the scoop on this billion pixel camera:

The Duke device, called Aware-2, is a long way from being a product. The current version needs lots of space to house and cool its electronic boards; it weighs 100 pounds and is about the size of two stacked microwave ovens. It also takes about 18 seconds to shoot a frame and record the data on a disk.

The $25 million project is funded by the Defense Advanced Research Projects Agency, part of the U.S. Department of Defense. The military is interested in high-resolution cameras as tools for aerial or land-based surveillance.

How does the camera work?

The secret of the Duke device is a spherical lens, a design first proposed in the late 19th century. Although very effective spherical lenses exist naturally—the human eye, for example—researchers have long found it tricky to accurately focus images using lab-made versions. The Duke group overcame the challenge by installing nearly 100 microcameras, each with a 14-megapixel sensor, on the outside of a small sphere about the size of a football. The setup yields nearly 100 separate—but accurately focused—images. A computer connected to the sphere then stitches them together to create a composite whole.

The current limitation? Besides it weight, it only shoots in black and white.

Personally, I think this isn’t the future of photography. Technically, this project is interesting and will have implications for photographers who do wide-scale panoramic shots. But for the average photographer, this is a step in the wrong direction: changing the image after the fact is counter intuitive to how photographers should work, namely framing the image in camera.

I’ve argued that the lytro is a gimmick, and I think this gigapixel camera might follow in the same direction.

About Those Nigerian Email Scams

If you’re reading this blog, or have used the Internet for some time, no doubt you’re familiar with the Nigerian scams. The big question, though: why are these scam emails written to sound so overwhelmingly unbelievable? Who the hell is going to (and does) fall for them?

Cormac Herley from Microsoft Research has been involved in interesting research: figuring out why scammers often claim they’re from Nigeria [PDF link]. Herley specializes in machine learning, and his finding is that the scammers aren’t interested in seeming believable. They just want to find the most gullible victims they can, to maximize their return on their effort.

[I]f the goal is to maximize response to the email campaign it would seem that mentioning ‘Nigeria’ (a country that to many has become synonymous with scams) is counter-productive. One could hardly choose a worse place to claim to be from if the goal is to lure the unwary into email communication…

“Since gullibility is unobservable, the best strategy is to get those who possess this quality to self-identify. An email with tales of fabulous amounts of money and West African corruption will strike all but the most gullible as bizarre. It will be recognized and ignored by anyone who has been using the Internet long enough to have seen it several times. It will be figured out by anyone savvy enough to use a search engine and follow up on the auto-complete suggestions [of search engines]. It won’t be pursued by anyone who consults sensible family or friends, or who reads any of the advice banks and money transfer agencies make available. Those who remain are the scammers’ ideal targets. They represent a tiny subset of the overall population.

A less outlandish wording that did not mention Nigeria would almost certainly gather more total responses and more viable responses, but would yield lower overall profit. Recall, that viability requires that the scammer actually extract money from the victim: those who are fooled for a while, but then figure it out, or who balk at the last hurdle are precisely the expensive false positives that the scammer must deter…

The hypothesis makes sense: if you can weed out the non-gullible population from the start, the odds of your scamming efforts will surely increase.

###

(via Gizmodo)

The French Love Their Books

There are two things you don’t throw out in France — bread and books.

That quote is from this New York Times piece detailing how books sales compare in the United States and France:

From 2003 to 2011 book sales in France increased by 6.5 percent. E-books account for only 1.8 percent of the general consumer publishing market here, compared with 6.4 percent in the United States. The French have a centuries-old reverence for the printed page.

There’s also this:

A 59-page study by the Culture Ministry in March made recommendations to delay the decline of print sales, including limiting rent increases for bookstores, emergency funds for booksellers from the book industry and increased cooperation between the industry and government.

One tiny operation determined to preserve the printed book is Circul’livre. On the third Sunday of every month this organization takes over a corner of the Rue des Martyrs south of Montmartre. A small band of retirees classify used books by subject and display them in open crates.

The books are not for sale. Customers just take as many books as they want as long as they adhere to an informal code of honor neither to sell nor destroy their bounty. They are encouraged to drop off their old books, a system that keeps the stock replenished.

 

On Hating Dreams

Michael Chabon, in New York Review of Books, writes on why he hates dreams:

Dreams are the Sea Monkeys of consciousness: in the back pages of sleep they promise us teeming submarine palaces but leave us, on waking, with a hermetic residue of freeze-dried dust. The wisdom of dreams is a fortune on paper that you can’t cash out, an oasis of shimmering water that turns, when you wake up, to a mouthful of sand. I hate them for their absurdities and deferrals, their endlessly broken promise to amount to something, by and by. I hate them for the way they ransack memory, jumbling treasure and trash. I hate them for their tedium, how they drag on, peter out, wander off…Dreams are effluvia, bodily information, to be shared only with intimates and doctors. 

Fun musings, but I think Chabon should dream more.

Medical Tourism in America

From John C. Goodman’s new book, Priceless: Curing the Healthcare Crisis, we learn that there is, in fact, a medical tourism market in the United States. In fact, even Americans can partake in it:

Moreover, you do not have to be a foreigner to benefit from domestic medical tourism. Colorado-based BridgeHealth International offers US employer plans a specialty network with flat fees for surgeries paid in advance that are 15 percent to 50 percent less than a typical network. North American Surgery, Inc., has negotiated deep discounts with 22 surgery centers, hospitals and clinics across the United States as an alternative to foreign travel for low-cost surgeries. As noted, the “cash” price for a hip replacement in the network is $16,000 to $19,000, making it competitive with facilities in India and Singapore.

One reason why so little is known about the domestic medical tourism market is that hospitals prefer that most of their patients not know about it. The reason: they are often offering the traveling patient package prices not available to local patients. That occurs because the hospital is only competing on price for the patients who travel.

(via Alex Tabarrok)

The Super Mario of Finance

Today’s quote of the day comes courtesy of Felix Salmon, who thinks we need Super Mario to come in and clean some financial pipes:

It seems we don’t need Ben Bernanke any more, we need Super Mario to come in and unclog those pipes. It’s a hugely important job, but the problem is that no one knows how to do it, especially insofar as the clogs look like rational market pricing more than crisis-related market inefficiency. (Remember, the prepayable fixed-rate 30-year mortgage itself is something which is never found in a laissez-faire capitalist system: only government intervention can ever persuade banks to issue such things.)

So who will be this Super Mario of finance? Click through the post to see a startling long-term trend in mortgage originations vs. FICO scores.

Flat-Out Love for Amazon

Jessica Park, author of Flat-Out Love, writes about the publishing industry in her post “How Amazon Saved My Life.” It’s well worth the read in entirety, but here are the highlights:

Publishers pay terribly and infrequently. They are shockingly dumb when it comes to pricing, and if I see one more friend’s NY-pubbed ebook priced at $12.99, I’m going to scream. They do minimal marketing and leave the vast majority of work up to the author. Unless, of course, you are already a big name author. Then they fly you around the country for signings and treat you like the precious moneymaking gem that you are. The rest of us get next to nothing in terms of promotion. If your book takes off, they get the credit. If it tanks, you get the blame.

On her incredible success publishing with Amazon:

Because of Amazon and other sites, I’m making enough money that I can continue writing. I’m averaging sales of 3,500 books a month, not including the month that Amazon featured Flat-Out Love in a list of books for $3.99 and under. That month I sold 45,000 Kindle copies, and sold over 10,000 the next month. Those numbers are insane to me. Absolutely insane. The fact that I continue to sell well a year after the book’s release is humbling. Yes, I wrote a book that has earned me excellent reviews, so I take credit for that, and I worked myself to death finding bloggers to review my book (God bless my loyal bloggers who took a chance on me!), but I have to credit Amazon with giving me such a strong platform with such overwhelming visibility. I can be a writer. I am a writer.

On being connected and encouraged by the fans:

Oh, the fans are simply unbelievable. We are so directly connected to them, and the ease of communication and feedback is unparalleled. I’m learning what readers want, and I can incorporate that into my work without worrying that an editor will nix all the good stuff. Their support and enthusiasm breathes life into days when I feel particularly challenged.

And who said that the traditional publishing industry is changing?