The one passage that really stuck out for me:

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

Let us break this anecdote down a bit. Apple, like many companies, will “announce” a product weeks or months before it is actually available for sale. This is done to allow marketing departments to whip up customer anticipation for the product, allow reviewers to get their hands on the product prior to sale and so forth. The product announcement is made once final test-production prototypes are completed and internal testing makes sure the product is ready for full-scale mass production. All that is left to do is let the factory ramp up production so that inventories are prepared for the demand once the product actually hits store shelves.

But something happened in this case. Either through a mistake or via a last-minute product engineering “ah-ha moment” the screen specifications were changed on the cusp of the beginning of production — or even after production had started — necessitating the need for the above mentioned crash rejiggering of the the production line.

Therefore, according to Apple, production in China allows for the kind of flexibility (which can also be read as “ass covering” in some cases) and speed that is simply impossible in the United States. And that’s before we even start to consider the actual cost of making the things here due to the ridiculous labor cost differences between the U.S. and China. End of story, right?

Workers at the Foxlink factory in China catch a nap during lunch. Photo: Flickr user, dcmaster. Creative-Commons, non-commercial, attribution.

According to UK-based technology magazine, The Inquirer, the parts cost of an iPhone 4 (last year’s model), which costs approxmately $499 at full retail price, was about $187. Other anecdotal reports put the per-unit labor cost of an iPHone at between $7 and $20. The Inquirer article ignores the fact that all of the sub-components are manufactured in East Asia as well. Producing all of the components and the final product in a complete U.S. manufacturing ecosystem would, indeed probably result in a $1000 iPhone.

Instead, let’s imagine a world where Apple has decided to build a final iPhone assembly plant in the U.S. All the parts are still produced in East Asia, but Apple has decided to actually assemble the iPhone in a U.S. plant where the production can be closely monitored. And hey, it’s a P.R. win. The plant is located in a right-to-work state, let’s say, Tennessee. We’ll estimate that the increased transportation costs of the parts and labor costs amount to an cost increase of $65 per unit, between 3 and 9 times the cost in China.

The iPhone would either be that much more expensive or Apple could eat some or all of the difference and take a smaller net profit per phone. Apple is estimated to net between $180 and $220 per phone. In other words, it is certainly possible for Apple to produce the iPhone in the United States and still make a (albeit smaller) profit.

But, could Apple have pulled off its last-minute modification of the iPhone in an American factory?

In Tennessee, the word comes down from Cupertino. Engineers are flown in by corporate jet, managers wake up supervisors who roust employees. Employees would be then be paid LOTS of overtime to come in late, weekends, work double shifts, et cetera to pull it off. Sure, it would cost a small fortune in overtime and shipping and all the rest. Some employees would not be available or would refuse to work the crazy hours. It would be a logistical nightmare, but it could be done.

Or maybe not. Perhaps employee intransigence at the factory would make it impossible to summon the required manpower at the last minute. Perhaps a key shipper… Perhaps a Union shipper would not or could not get the new parts moved on the ridiculous timeline. In that case, marketing disaster. The on-sale date slips by days or weeks. The trade press is full of stories about “production problems,” and Apple’s glittering public perception gets a black eye. Some mid-level managers at Apple loose their jobs. There are hard questions from the Board of Directors and shareholders.

Or not. The marketing team could (also) be woken in the middle of the night and told to produce a new ad campaign: “Dear Apple Fans,

Love, Apple.”

But they don’t. Why? Because they don’t have to. The downside risk isn’t worth the effort. The “breathtaking speed and flexibility” that the anonymous source at Apple mentioned makes sure they don’t have to bother with that. Because the circumstances of workers in China are just a couple of notches above indentured servitude, there is a negligible cost for either planning mistakes or last-minute design changes. In any traditional, Western economy such things have the potential to cost a fortune and ruin companies and careers.

Because in China (and India, and all over the developing world) there are hundreds of millions of people who are so desperate to escape from the poverty that they will of their own accord subject themselves to utterly inhumane conditions with little or no ability to organize to better those conditions. It means that a nearly endless source of cheap, expendable human beings enables companies like Apple to make what we would consider a ridiculous expectation seem ordinary.

How ironic then that all of the high-technology products that are used to make what is left of industry and work in the West so much more efficient that fewer and fewer people can actually find work. How ironic that this high-tech system is totally reliant on the deployment of anonymous and utterly replaceable human beings on a scale that would make a Egyptian Pharaoh blush.

The speed of China’s development both economically and in its social sphere means that this situation is not really sustainable. Already, big Chinese companies are under pressure to pay higher wages and take more extreme measures to maintain their ridiculous labor cost advantages. Chinese workers are getting uppity and starting to demand some tangible benefits in exchange for all their sacrifices. Within this coming decade, China’s labor-cost advantages in manufacturing will start to erode significantly as China’s leaders trade off workforce costs in exchange for social stability.

But not to worry. Although there is only one China, there is still all of Africa.

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

“Everything’s fucked up, and nobody goes to jail,” he said. “That’s your whole story right there. Hell, you don’t even have to write the rest of it. Just write that.”

I put down my notebook. “Just that?”

“That’s right,” he said, signaling to the waitress for the check. “Everything’s fucked up, and nobody goes to jail. You can end the piece right there.”

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world’s wealth — and nobody went to jail.

The wife was recently hit by the Facebook Deactivation Bug. Long backstory short, she went through the proper channels and was asked to verify her identity with an actual scan of her Driver’s Licence. Despite this she shortly received a form e-mail saying her account had been permanently deleted for TOS violation (multiple accounts); no avenue for appeal, no human-moderated return address, final decision.

A week or so later she attempted to log in again just for giggles and, voila! her account was restored, all settings and posts in place but with no explanation/apology whatsoever.

Long kitchen discussion ensued the sailient points of which were:
1) Facebook is run by assholes.
2) Facebook, by virtue of its installed base, is the most important social networking platform (first mover advantage, market share, etc.)
3) Social network platforms are critical to innovative, new social/economic models e.g. Metacurrency/EaaS.
4) Facebook is probably not the platform for this (closed source, non-transparent, dictatorial management) but it’s overall ease-of-use and robust feature set is a good start.

During the discussion I touched on a recent WNYC RadioLab podcast surrounding books by Steven Johnson and Kevin Kelly, “What Does Technology Want?”

Kelly’s thesis is that technology has its own process of evolution. That new innovations, once the precursor technologies have been solved, are pretty much inevitable, i.e. the telephone once the telegraph was sufficiently developed and basic audio wave theories discovered. Multiple people working the problem, Bell just got there first. “Discovery” though was nearly simultaneous as the next step was rather self-evident. Ditto the “discovery” of the double-helix and decoding of human DNA sequence.

It appears that many of the constituent applications of a metacurrency/EaaS ecosystem are already in place:
1) Facebook-like technologies for communication, social networking, aggregation of groups, etc. For example, still very rough, but promising is the open-source social networking platform, Diaspora.
2) Kickstarter and other crowd and microfinancing platforms are in place for raising capital. (Existing currencies or future metacurrencies)
3) Development and collaboration platforms in abundance. (Google docs, CSV systems, CRM etc.) Very mature tech here.

Therefore, to me, the final barrier to setting up an working EaaS/metacurrency ecosystem are the technological underpinnings of reliable identity- , reputation- and work-unit management systems that bolt onto a hybrid system that incorporates the elements above.

Key Issues in Metacurrency/EaaS Development:

Currency of any type is all about trust. In order for you to accept payment from me for any kind of exchange of good or services you have to trust that my money will be able to buy you something. First we need to trust each other, then we need to trust that the money is worth something.

The two primary technological issues to be addressed by a metacurrency/EaaS system are:

Indentity management. A person must have at least one verifiable identity. Must be robust enough to prevent trivial attempts to create sock-puppets, and gaming of reputation/rewards system. Examples: OpenID for portable, single-sign on technology and cryptographic Web of Trust.

Reputation/Metacurrency management. The mathematical basis and logical rules for the system must be open (public) and simple. Openess facilitates participants to build trust in the system and to also verify that their remuneration tracks with their contributions (the perceived utility of their labor). Simplicity in important so that a new participant can easily grasp how it works (again, fostering trust) and thus, be encouraged to enter into the community.

Note the inclusion of “reputation” in the last issue above. There is currency (money) and currency (reputation). There is the tangible, money aspect — what you get paid in exchange for goods or services rendered to me that needs to be transferable for other goods and services on your part. The more fuzzy and intangible reputation cannot necessarily be directly transferred into cash, but it has a currency of its within the community of EaaS communities. Do you do good work? Do you play well with others? What skills do you have and how advanced are they? A positive balance of reputation will enable the user to move between EaaS communities and ventures without having to start from a clean slate.

Via Democracy in America, a recap:

I think popular deficit anxiety is related to a mistrust that what worked to end the Great Depression will still work today. The political will to achieve sufficient stimulus spending to kick-start the American economy out of its shortage of aggregate demand in the 1930s arrived in the form of an existential military threat: for four years, the government blew out all the stops on spending and printed money like there was no tomorrow. (Wars make it easy to get people to think that way.) At the end of the war, the national debt was over 100% of GDP, and the de-militarising economy faced a realignment that dwarfs anything today’s creative-destruction fans could imagine. But that late-1940s economy could count on two things: lots of young families who’d been starved of consumer goods for years and had built up a tremendous appetite, and a technological moment in which all sorts of fabulous new consumer goods were just being invented and advertised and pouring onto the shelves. In an industrial economy that was inventing amazing stuff people had never seen before—Whirlpools, Buicks, split-level ranch houses—demand was not hard to create. Today’s post-industrial economy is still creating a lot of amazing stuff people have never seen before, but a tremendous amount of it is downloadable and free. Much of the rest is fabulously expensive, and only useful if you have a rare genetic disease.

Paul Krugman has a famous essay in which he explains that our inability to imagine what people will spend money on as the economy changes is a failure of our imagination, not of the economy. But still, I’m having a hard time imagining what people will spend money on as the economy changes. We could certainly use a bunch of high-speed trains, a smart electric grid, highway and water-main upgrades and so forth, but only government can pay for those things, and to do that, you have to either tax or borrow. And those are the two things the public remains unwilling to do, because they don’t believe the spending will do the trick.

It seems to me that there is some room for splitting the difference here. I think a reasonable coalition could be assembled to cut spending by:

• raising the retirement age to 68 or or even 70, as the EU is preparing to do
• increase the social security contribution limit above $102,000 to say… oh, half a million sounds good

cutting several tens of billions from the Pentagon budget by killing programs aimed and fighting a Major Land/Air/Sea War (I’m looking at you DDG-1000, F-35and, and Expeditionary Fighting Vehicle) and refocusing on asymmetric war fighting (people).

One could then take about half of that and put it straight to bottom line deficit reduction — the retirement, SS moves alone would have long-term beneficial help for the deficit beyond the simple year-on-year revenue savings — and put the other half into big budget, big vision jobs projects like high speed rail and smart grid technology.

This is something that could probably get done in the House. In the Senate on the other hand, good luck getting it through without some Senator blocking the process because his/her sacred cow of a DoD project is on the chopping block.

The problem for Tourre—and for Wall Street more broadly—is that they’re so intent on proving that what they did was legal that they can’t see that what they did was wrong. These are men (and they usually are men) of the market, and they played by the market’s rules. And the market’s rules are these: you make as much money as you can without actually going to jail. This is a world in which people are applauded for “blowing up the customer”—that is to say, offloading a crap product on a dim investor.

Once upon a time, the financial services industry existed to perform an essential social good: they provided capitol that businesses large and small required to run their operations, expand and to build stuff. They charged interest on that capitol to hedge against non-payment and to provide income to the banks. And to the extent that those businesses paid back that capitol (almost always), the owners and investors of the financial services businesses thrived. Long before the invention of deriviatives and hedge funds, working for a large investment bank was a ticket to if not filthy lucre, at least to a very well-off life.

At some point this all changed. And the point of the exercise became to make money for the sake of making money. How much money wasn’t even the point. As many wealthy individuals have said over the years, after the first few million the money doesn’t matter any more, its just a way of keeping score.

If anything has been rather well proved by the last few years it is the lie that the financial services industry should not be excessively regulated because it is the essential engine of economic growth.

The financial services industry worked just fine at “being the engine of economic growth,” for the nation in the sixty-six years between the enactment of the Glass-Stegall Act in 1933 and its repeal in 1999. Any argument that returning to such a strict regulatory regime would somehow strangle the American ecnomy is, quire frankly, bullshit.

And to cheapen this first post back from over a month away even more… I’m just going to link to another blog.

Via Economist blog Democracy In America

PAUL KRUGMAN says the really glaring malefactor wasn’t Goldman Sachs; it was the rating agencies. The problem, he says, is rooted in the notorious system in which the rating agencies are paid by the issuer of the security being rated, and he suggests a proposal by Matthew Richardson and Lawrence White of New York University to have the SEC pick the agency to rate each security. Dean Baker likes this solution too. Kevin Drum demurs:

I guess this is my question: if you do this, the ratings agencies no longer have any incentives to do much of anything. There are three of them, and presumably each one would get a third of the business at a price set by the SEC. So their incentive would be to hire the cheapest possible analysts and cut costs to the bone. The result would be ratings agencies even less able to cope with complex modern securities than the current ones.

This is what stonkers me about the ratings dilemma: there just doesn’t seem to be any good answer. Turning the ratings agencies into regulated utilities might be better than the current situation, but not by much. And if you’re going to do that, why bother with ratings agencies at all? Why not just have the SEC provide ratings?

Ezra Klein replies: “Actually, why not?” Indeed, it seems like a good question. My instinct is that it’s better to keep the ratings agencies as heavily-regulated public utilities than have the government actually assume their function. There are lots of reasons why certain things work better as regulated utilities than as government agencies. Electricity transmission, for example, is pretty much a natural monopoly, but we don’t have the Department of Energy just take over the whole business.

Indeed. The idea that a private business whose core business is to basically provide a public service — for example, financial ratings agencies, utilities, product safety ratings businesses — should have the same opportunities for unlimited growth and profit potential than say, a company that actually makes stuff, seems to me to be a bit silly. Sure they can make money and people who are interested in this kind of thing either from a sense of wanting to do well by doing good, or as a way of having a nice, “safe” job are going to want to do it. But that doesn’t mean that you are going to get filthy rich.

Just as there are different career options for people of differing skills and ambitions in life, it seems to me that a free market system can have room for different business models.

From his latest letter to Berkshire-Hathaway shareholders, Buffet lays down the smack on Wall Street, financial regulators and Congress:

It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.

In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.

It has not been shareholders who have botched the operations of some of our country’s largest financial
institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed out” is to make a mockery of the term.

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

More than a third of the streetlights in Colorado Springs will go dark Monday. The police helicopters are for sale on the Internet. The city is dumping firefighting jobs, a vice team, burglary investigators, beat cops — dozens of police and fire positions will go unfilled.

The parks department removed trash cans last week, replacing them with signs urging users to pack out their own litter.

Neighbors are encouraged to bring their own lawn mowers to local green spaces, because parks workers will mow them only once every two weeks. If that.

Water cutbacks mean most parks will be dead, brown turf by July; the flower and fertilizer budget is zero.

City recreation centers, indoor and outdoor pools, and a handful of museums will close for good March 31 unless they find private funding to stay open. Buses no longer run on evenings and weekends. The city won’t pay for any street paving, relying instead on a regional authority that can meet only about 10 percent of the need.

Since the global financial system unraveled in 2008, U.S. policymakers have struggled heroically to improve the performance and oversight of global banks and investment firms. But these actions have been largely unresponsive to the growing number of Americans who would like to remove their hard-earned retirement savings from these high financial fliers altogether and invest their nest eggs in their community. Might it be time for policymakers to consider the potential stimulus payoffs from nurturing micro-equity investments?

Growing evidence suggests that every dollar spent at a locally owned business generates two to four times more economic benefit—measured in income, wealth, jobs, and tax revenue—than a dollar spent at a globally owned business. That is because locally owned businesses spend much more of their money locally and thereby pump up the so-called economic multiplier. Other studies suggest that local businesses are critical to tourism, walkable communities, entrepreneurship, social equality, civil society, charitable giving, revitalized downtowns, and even political participation.

We have two fundamentally contradictory legal regimes operating today. One, called gambling, allows every adult, irrespective of income, to risk everything for a probable loss. Another, called small-stock investing, prohibits 98 percent of us from investing in the local businesses that are essential for the well-being of community, unless businesses pay prohibitively expensive lawyers’ fees to prepare the unreadable disclosure statements.

Something is deeply wrong here. Outdated federal securities laws have left Main Street dangerously dependent on Wall Street, and overhauling them may well be a key to economic revitalization.

Click on graphic for larger view.

The Lost Decade In America. Source: Washington Post

Welcome to 2010. What’s your plan for the next ten years?