Tuesday, May 01, 2007

The Devaluation of "America" the Brand

America is a brand. People around the world wear Nikes and use Google and drink Coke not just because of the merits of the individual products, but because these brands convey a sense of freedom and ubiquity. From a marketing perspective, these brands are actually all part of an umbrella brand, "America". When people across the world buy Nikes, they are not just buying shoes, they are buying "American Nikes," and are buying into the American dream.

When people don't like you, they don't like to give you money. The charts below show a remarkably correlation between a country's view of the United States and its currency's exchange rate with the U.S. Dollar. Over the past seven years, the citizens of the United Kingdom, Continental Europe, and Japan have all experienced a marked decrease in their opinion of the U.S., along with a corresponding decrease in the U.S. Dollar's value against their respective currencies. Russians have maintained a pretty stable view of the United States, and the Ruble has maintained a relatively stable in comparison to the U.S. Dollar. Unfortunately China's currency is pegged by its government so we can not test this theory with its currency.

While clearly there are many factors that define an exchange rate such as a country's inflation and growth rate, at the end of the day a currency's value relative to another is defined by how much each country buys from each other. When Europeans by less American goods, services, and financial instruments than we buy from them, their currency raises in value relative to the dollar. Even though American goods end up costing less, less of them are bought.

When Nikes symbolize more than Michael Jordan but a country that someone doesn't like, they just buy a pair of Adidas sneakers. Brand devaluation generally builds as a wave, where people's perception gradually starts to affect their buying behavior. This is something that needs to be reveresed - the devaluation of "America" the brand will cost U.S. businesses a tremendous amount of money, far more than the economic impact of the Kyoto protocols or the cost of the Iraq war.

Data is from the Pew Global Attitudes Report and OANDA Currency History.

Tuesday, August 15, 2006

Everything will Cost Nothing

It is obvious at this point that the cost of data communication, storage, and processing is rapidly approaching zero. The cost of these commodities follow an exponential curve towards zero when viewed along a timeline of a century, let alone a millennia. Almost every good and service in our economy is following a similar pricing curve. The accelerating reduction in price of goods and services has become particularly pronounced in this century as we approach the tail end of the exponential curve.

For example, the cost of a full day of food and crossing a continent was exorbitant 2000 years ago, relatively pricey 100 years ago, and it now costs $10 for some burritos and pizza and $100 for a JetBlue flight. When compared to the cost 2000 years ago, $110 is relatively nothing to eat all day and travel 3000 miles. Similarly, computing with a free tshatshki calculator costs almost nothing compared to having to have a team of people counting with abacuses 2000 years ago.

The following chart shows how virtually every good and service of the global economy is following a similar accelerating price trend towards zero.

The Cost of All Goods and Services is Approaching Zero

Digital goods such as data transmission and data processing are on the cusp of being free, with food, shipping, transportation rapidly approaching free. Energy (megawatt of electricity), basic medical care, and personal transportation (cars, etc.), are relatively expensive today but still enormously cheaper than 100 years ago and tremendously cheaper than 1000 years ago, and are trending downwards due to technical advancements.

The economic ramifications of this trend are remarkable. If everything is free, how is value created? What is the point of creating value if there is nothing to buy? How will be people distinguish themselves from each other without material indicators of success?

Manufacturers are creating artificial scarcity since products themselves are not scarce. There is no utilitarian difference between a $10,000 Balenciaga handbag, a $100 Target knockoff, a $25 Walmart knockoff, and a plastic bag. Such artificial scarcity is the last gasping holdover of the industrial economy as we enter the information economy, where the only thing of value is data and ideas rather than physical products.

Friday, July 21, 2006

Blue vs. Red is not Democrat vs. Republican

A lot of people have commented back about this blog and have the impression that it has an ardent Democrat or liberal tone. In fact, it has an ardent Blue State tone. The social and fiscal policies of politicians like Arnold Schwartzenegger, Rudy Guilliani, Barak Obama, and Hilary Clinton are actually remarkably similar. These pragmatic policies are "Blue State" positions, not Democratic or Republican positions. The industrial vs. agricultural divide of the Civil War still exists in the United States and has now morphed into the "Blue State" vs. "Red State" divide.

Based on the data in the previous post, it is beyond clear that the Blue States are far more successful than the Red States by any conceivable metric. Following are two themes that Blue Staters should execute on:

#1 - "Wealth and Progress" Message

The message of both Republicans and Democrats from the Blue States should be "Wealth and Progress." The Blue States have come up with a magic formula for making money and living a healthier life. The Red States have not. The message to the "Purple" swing states is very simple: would you rather be more like California or more like Alabama?

Progressive social issues should always be framed in the context of the "Wealth and Progress" message. Universal health care for children? Attracts the types of workers that Blue States need to make money. Gay rights? Attracts the types of workers that Blue States need to make money. Environmental protection? Attracts the type of modern industries that make money.

Blue State Republicans and Blue State Democrats with national visibility seem to desire validation from Red Staters. There is nothing sillier than Rudy Gulliani or Hilary Clinton at a NASCAR race. Blue Staters should not try to be Red Staters. Stick to the "Wealth and Progress" message and let everyone follow the money.

#2 - Reduce Federal Taxes

The Red Staters are continually advocating smaller government and cuts in Federal taxes. The Blue States should agree! The Blue States pay far more than their share of Federal taxes and are subsidizing the Red States. A 1% reduction in Federal taxes and a 1% increase in Califonia State taxes would actually give California twice as much money since California pays $2 in Federal taxes for every $1 it receives.

The Blue States are constantly compromising social and policies they would like in order to accommodate the Red States, and the Red States feel as if the Blue States are pushing liberal policies on them. If everyone agreed to lower the Federal tax rate, states could individually chose whether or not to raise taxes to maintain social services. The United States has become sophisticated enough that a return to a decentralized federalism would be successful. Each state would control its own destiny, and more importantly, states would learn very quickly from each other about what works and what doesn't work.

In the European Union, there is no question that England, France, and Germany subsidize Spain, Portugal, and Greece, and that those poorer countries need to get their fiscal and social policies in order. The Blue States are the wealth generation machine of the United States. Rather than continually accommodating the Red States, Blue Staters should always promote that their way of governing generates wealth and be very clear that they are subsidizing the Red States.

Blue is the New Green - Summary

Below are a series of demographic maps that show a remarkable correlation of both financial and socio-economic metrics to the Presidential Election Electoral Map of 2004. Financial metrics such as Gross State Product, Per Capital Income, Federal Taxes Paid vs. Received, Number of State Employees, Charitable Giving as well as socio-economic metrics such as College Education, Crime Rate, Infant Mortality Rate, Obesity Rate, and Divorce Rate are presented in a blue-red gradient, where blue is better and red is worse.

The data, most of which comes from the Federal government, shows that the "Blue States" host the most competitive industries, make most of the wealth in the United States, subsidize the "Red States" with Federal taxes on their wealth, use less electricity, run more efficient state governments, are better educated, and have a better quality of life. For a complete article explaining these maps and the data, please refer to the previous post on this blog.

Clearly, blue is the new green (as in dollars).

In the following maps, data is presented as blue is better and red is worse (other than the electoral map where better/worse is a matter of perspective!).

Saturday, July 15, 2006

Blue is the New Green

This posting plots numerous measures of the individual states of the United States with a blue-red gradient. The electoral map of the 2004 Presidential election correlates remarkably to measures such as gross state product, per capita income, federal taxes paid vs. received, number of state employees, college education rate, infant mortality rate, obesity rate, and divorce rate. An explanation for this correlation is how industries within the United States have gravitated to distinct geographic area, as shown in the following map.

California hosts two industries, Technology in San Francisco/Silicon Valley and Entertainment in Los Angeles. New York City hosts both the Finance and Media industries in one city. Advanced Manufacturing is hosted in the Great Lakes region, centered on Chicago. Seattle hosts Aerospace and New Jersey hosts Pharmaceuticals along the I-95 corridor. All of these industries require intensive intellectual capital.

Florida's Tourism and Texas' Energy industries are presenting in orange since they do not require intellectual capital. Florida has become the United State's center of Tourism, with huge influxes of Latin American and European visitors every year. While the Tourism industry does not require intellectual capital, it is a modern services business that is growing in particular areas worldwide.

Texas's Energy focus is the last successful industry in the United States that relies on excavation of natural resources rather than intellectual capital or services. Next generation energy development is concentrated in Northern California (solar) and in the Great Lakes area (power cell). Agriculture is not included as an area of competitive advantage since agriculture in both the United States and the European Union is protected with government subsidies from competition from developing nations. Hence the agricultural center of the United States does not have any financial strength or competitive advantage.

Virtually all of these industry concentrations correspond to the Democratic "blue states". Florida with its Tourism concentration is a "swing state". Texas with its Energy concentration is the lone exception or a red state that hosts an industry concentration, with the caveat again that it is an industry that relies on excavation of natural resources rather than intellectual capital.

While industries are primarily concentrated in particular regions, there are some outlying areas that are affiliated with that industry that are located in electoral red states. Examples include the technology industries in Austin, Texas and Research Triangle Park, North Carolina. Typically, these types of areas are blue counties hosted within red states. Travis County, home to Austin, Texas, voted for Kerry-Edwards 56% to Bush-Cheney 42%. Durham Country, home to Research Triangle Park, North Carolina voted in for Kerry-Edwards 68% to Bush-Cheney 32%.

The regions with industry concentrations have much higher Gross State Product than regions with no industry concentrations.

In fact, the Gross State Products of just California and New York are almost as much as all of the electoral red states other than Texas combined.

In addition, the regions with industry concentrations also have much higher per capita income, other than Texas's Energy and Florida's Tourism, since these industries do not require as much intellectual capital.

Although the blue states produce far more than the red states, they consume far less electricity per capita. California's electricty use per capita has been flat since the mid-1970's, while the the U.S. average has risen over 50%.

Given the concentration of wealth created by industry centers, these states contribute more than they receive in Federal taxes. In effect, the blue states are subsidizing the red states.

This effect also follows into state governments, where the red states hire more employees relative to their populations than the blue states. This is counter to the common supposition that blue states have bigger governments. Yet it is common for countries that have little economic potential to hire many government workers, each at a low wage.

The Blue States share a lot of their wealth, giving the most to nonprofits. Texas, in comparison, gives less than Maryland or Pennsyvlania.

There are distinct demographic differences between the wealth generating blue states and the red states. Given their industrial reliance on intellectual capital, it is no surprise that the blue states have more college educated residents relative to their populations.

The blue states also have a lower crime rate than the red states, which is suprising given the popular conception that there is more crime in urban areas. The distinction clearly is that the crime in the blue states is concentrated in cities and therefore much more apparent, while crime in the red states is more spread out.

A good indicator on the health of a society are infant mortality and obesity, since these are metrics that are independent of judgment or opinion. The electoral red states have a higher incidence of both infant mortality and obesity, particularly in the "bible belt."

The divorce rate also shows higher incidences in the electoral red states, but this is a little more subjective since it is influenced by cultural norms such as marrying younger.

The data presented here is from non-partisan sources, primarily the US Census Bureau. The data is plotted with a blue-red gradient, and it clearly shows that the blue states generate the majority of the wealth in the United States, subsidize the red states financially, and that blue state residents have a healthier quality of life. The only exception is Texas, whose oil-based Energy concentration offers the financial benefits of a blue state with the demographics of a red state.

When the economic future of the United States is discussed, people point to industries such as technology, aerospace, advanced manufacturing, media, biotechnology, finance, and entertainment. All of the industries dominated by the blue states.

Clearly, blue is the new green (as in dollars).

UPDATE: Some folks have asked for the source data. I put up the spreadsheet I built to calculate all of this here.