Sebastien Gay

Apple, with its new invention known as the Ipad, has once again lived up to the technological hype that it created.  The new product is stylish and it runs a pretty smooth ride.  As usual in the first run of a new apple product, the innovation is incomplete so that the second version will also sell in six months or a year from now.  We are in a society of consumption of ideas after all.

So far, Apple has been spared the complaint of monopoly or abuse of dominant position by the other playesr, but it might just be a question of time until such a case arises.  For example, Apple requires any inventor of an ipod app to be first reviewed by its own panel of engineers so that it can be evaluated in terms of safety and adeahrence to the safety of ipods or iphones.  If safety is a plus, some applications are rejected because they will cut part of the profits of apple: for example, apple rejected an application to make phone calls over the 3G network by google.  Google and Apple are competitors and it looks suspicious that the application was rejected swiftly and without other notion that it could be a problem with its current network provider ATT.

Apple is a smart company that knows that controlling content is controlling a stream of revenue in the future and the development of applications.  This control should be challenged by the department of justice that needs to check if all of the decisions are really made for a higher security or to prevent some competitors from benefiting from the support of the technology that Apple provides.

In the days following the announcement in France that the torture television program was a psychological experiment, undoubtedly French citizens such as myself are wondering: Am I in the ranks of the 20 percent who walked away, or do I have the capacity to commit atrocities? It may seem hard to know for certain. We were not on that studio room and if we volunteered to participate now, the experiment would not work. It is not hard, however, to determine whether we are in the class of the 20 percent.  You need only ask yourself a simple question: Did you protest when you learned the program was an experiment?

The experiment tested an unfortunate few on whether the French have learned from the Holocaust. Conducting test, in itself, demonstrates we have not. The Nazis demonstrated a fundamental disregard for the sanctity of human life. They did so most notoriously through their horrific genocide. They also acted upon their lack of respect for life by experimenting on their prisoners.  The victims of their experiments suffered psychological and psychical injuries, often leading to death. On a smaller scale, the experiment conducted on our French audience is disturbingly similar. The producers and psychologists cannot claim ignorance of the psychological harm such an experiment causes the participants, even the 20 percent that walked away. The well-known similar experiments conducted in the United States in the 1970s support such conclusions. And yet, the French government willingly allowed psychological harm to befall the audience members.

Simply put, in the name of learning from our terrible past, we have perpetuated its most basic lesson: Respect the life of our fellow man, woman, and child.

Chicago would have been the perfect city for the games: from the lakefront to the nice neighborhoods, the city is designed to host the games.  But in not awarding the games to Chicago, the IOC gave us the gift of not spending money irresponsibly.  In times of recession, it is always a good idea to stimulate the economy, but we need projects now, not in three years.

The city might be disappointed in the short-run, but the money that could have been invested in the games could be directed more efficiently towards public projects: a modernization of the public transportation, increased police forces, repair of our bridges and buildings.  City hall will also benefit from not having to over-promise that taxes will not increase as now the bid is over.  Historically Olympic Games have been proven to be an expensive marketing tool for cities and countries to promote tourism.  When the final bill comes, after overspending, and taxpayers in the Olympic cities need to foot it, resentment happens.  Chicago will avoid that.

Olympic  games organization need a revamping, where the games are first self-sustainable with their own money, granted by sponsorship, and then the committee should chose a country where they would pay for the organization of the games and then pocket the benefits of sales tickets.  Even if the Olympic committee does not want to take on the organizational burden, they might want to divide the competition in different venues.  It makes economic sense to divide the economic burden between countries that could fight for events or packages of events:  this year for example, Chicago could have hosted the baseball , basketball, and marathon, whereas Rio could have gotten beach volley, soccer, and archery, and Tokyo could have organized volleyball, track and field and boxing.  The incentive for countries to divide up the Olympics is to be able to host events without having to pay for the entire Olympics.  An “a la carte” pricing if you will.   Everyone would benefit as countries would fight for events that are more representative of their people and perhaps make better bids.

Overall Chicago’s lost bid is Chicago’s win.  The time is not right to organize the games and the IOC might have wanted to reform its policies.

Health care has been producing a lively debate in the United States.  A lot of theories are advanced, but no one really understands the entire goal of this political exercise.  Philosophically both sides of the debate have a point, but no one really solves the real problems: (1) financing the reform, (2) making a reform a reality at no cost, and (3) giving freedom to the American people to choose to participate in health care if they want to.  Among those, the main problem with the current system is the increasing cost of the health care. How can we continue to sustain such high prices without looking into the system?

The first real improvement of our health care system would come when the Department of Justice starts looking into the different relationships between insurance companies, hospitals, and pharmaceutical companies.  If the market is private and competitive, how can we explain that an aspirin costs $11?  The Justice Department needs to review the industry and make an assessment of a possible collusion between the actors to keep prices up, as there is some suspicion that insurance companies engage in price fixing in order to maintain the bills paid by patients so high.  Moreover, the generic debate needs to be revisited.  The generic drugs are almost equivalent to the brand name, but sometimes have more side-effects that brand name drugs.  Should we continue a straight switch to generics or is the mandatory switch to generic biasing competition in the pharmaceutical industry?  Also, should we outlaw the practices of the pharmaceutical industry that offers samples and gifts to doctors?  Some of these questions would need to be answered first by the DOJ before changing the entire system.

Last year’s outbreak of H1N1 has raised concerns about the possible difficulty to contain the number of people infected during this year’s flu season.  A vaccine is developed and ready to be distributed.  The burning question is how we will distribute the vaccine among the population in order to prevent too many people from being infected by the H1N1 virus.  The CDC has expressed that priority should be given to children or young adults (6 months to 25 years-old) as they are the most likely to be hit by the virus.  That approach offers the benefit of preventing the high-rick population from getting the virus, but might not be the one protecting people at a larger scale.

From an efficiency point of view, we might want to consider the following approach that would curb the propagation of the H1N1 flu in the first place.  Vaccines should be made available to children and people who work with children:  school workers and teachers should be vaccinated so that they do not become a vector of transmission of the virus.  Also, parents with young children should be vaccinated as they represent a risky population in terms of transmission.  Such a policy might help contain the H1N1 cases in the coming months.

The recent $100 price cut for the PlayStation 3 is supposed to boost Sony’s sales for the gaming system.  Price cuts are a very traditional way for businesses to increase their sales when faced with a sagging demand.  But in order to protect the consumer one could ask if consumers that bought their console within two months of the price cut are or are not harmed by such a policy.
Usually companies offer a one month grace period such that if a price drop occurs consumers would end up getting the difference back (as long as they ask for it).  In the case of Sony’s Playstation 3 or others, the person that bought it a month and a day ago gets nothing.  According to their sales policy there is no possible leeway.  But why does an extra day represent potential harm for the consumer?  Had he waited a day longer to buy his console, he could have had $100 back because he would have fallen into the “one-month grace period” rule from the day of purchase.   Note that consumers could potentially claim harm due to the fact that they might have received their console only a week later.
A good policy, that could prevent Sony and others to face a potential class action harm for an unexpected price decrease, would be to offer consumer a time-varying compensation:  within a month of the price drop, the consumer gets the entire difference, within the two-month period the consumer gets a half, and within the three month period, the consumer gets a quarter of it.  After three months it might be more difficult to advocate for damages, as consumers have been using their system for a while.  Such a policy might help companies content customers that feel betrayed by a sharp drop in price.

This is the English transcript of Dr. Sebastien Gay’s interview with BFM, Business&FM newspaper and Business FM radio.

1. The efforts to overcome crisis in all countries where economies have suffered from the global developments involve two major principles - increasing role of the state in strategic industries and large-scale financial support. What are the long-term risks of such approaches?

There are several long-term risks associated with adopting a government-driven strategy to address the emergencies in strategic industries.  Most concerning is the incentive structure that is established by such an approach; those large companies that struggle in a weak economy will attempt to hold the country hostage by claiming their necessity.  As the responsibility for business mistakes shifts from big companies to the government, the companies’ management teams will be more willing to take greater risks because they will not bear the costs if they fail.  It is also important to point out that the term “strategic industries” is a judgment-based term, where “strategic” is based on whether the industry is a significant player in the economy.  If government takes a greater role in those industries it considers “strategic” it is, in essence, selecting the winners and losers of the economy and denying the market its role in making that choice.  Greater government involvement in strategic industries can also discourage innovation and entrepreneurship, encourage more mergers and acquisitions, and dissuade private investment, particularly in small companies.

Large-scale financial support by the government also bears similar long-term risks; however, the increase in financial support brings an additional factor to consider.  For now, the government is supporting its increased spending by printing money (a short-term solution) and borrowing from growing nations like China.  International relations may be seriously impacted by the shifting dynamic between the United States as a debtor and other international players as its lenders.

2. Bad assets represent a key problem that has led to the freezing of the markets. How would you assess the idea to create special banks to accumulate such assets, the so-called “bad banks”. What should be the proportion between public and private capital in such banks? And what could be the mechanism to raise private capital for this purpose?

The “bad bank” concept is a good idea so long as the government is able to resell the bundled bad assets on Wall Street.  The government should have 100% capital in the bad banks in the beginning.  The government can issue bonds to raise capital for the new banks.  The mechanism to raise private capital for this purpose is the securities market. The first issue to unpack is the idea of the “bad assets.”  These assets, particularly sub-prime mortgages, were always high-risk assets.  The reason they were high risk was because (1) the sub-prime mortgage industry was very fragile and (2) there was a chance that significant amounts of money could be made by securitizing them as mortgage-backed securities.  Some market players who refrained from selling off the assets on the stock market profited off the short-run fees, but should reasonably have been aware that the long-run result was collapse.  What has changed from then until now is the lack of uncertainty; before, there was a chance – however small – that the risky assets could succeed on the stock market and there were investors willing to buy and resell them quickly.  In order to restore investor confidence in these so-called “bad assets,” there must be increased uncertainty (i.e. the possibility of positive yields) injected into the securities market.  The market player in the best position to do so is the government.  The government should work on the other side of the market to make sure there is less certainty about foreclosures so that a positive risk-analysis is put back in the securities market.  Whoever grabs the bad assets at their cheapest can potentially make a huge gain.  In the long run, however, the problem remains that such markets for risky mortgage-backed securities and other similarly risky assets exist at all.  The so-called “bad banks” should be temporary to allow such securities to eventually disappear and greater regulation over such industries must be implemented.  There should be no newly created sub-prime mortgage-backed securities, and the existing ones will expire at the final payment of the corresponding loans.  Moreover, loan regulations must be put in place to prevent dishonest loan practices from occurring as freely as they have in the past.

3. Are there any dangers in expanding the consumer credit stimulation program, Term Asset-Backed-Securities Loan Facility (TALF)?

The purpose of TALF is to increase the availability of credit to small businesses and consumers.  There are many benefits of such a program; namely, it can restore consumer confidence, stave off increasing unemployment, and clean up banks’ balance sheets.  Of course, it fails to resolve other pressing concerns.  First, there is no guarantee that banks will offer new loans under the program.  The brief experience with TARP suggests that banks do not want to use the money provided by the government for the intended purpose of loosening the credit market. Second, the program is only delaying what could be a more dangerous problem down the road if the newly-acquired loans fail, which adds greater burden to the government in the long run.

4. During the last years, there has been much discussion that America “lives beyond means”, that the “world finances the American economy”, etc. If we put aside politics, the new stimulus package to be passed by the Congress requires more than $800 billion. It means the public borrowing will rise. What could be the sources of further borrowing for the administration, particularly - internal or external?

There are not many options available on the borrowing front.  The government can issue bonds to raise capital and will certainly borrow heavily from international players, particularly China.  It is not a good situation for the US economy.  The most the government can hope for is earning tax revenue from new or growing industries in the future.

Find the original interview at: http://www.bfm.ru/news/2009/02/20/sebastien-gay.html

The latest government stimulus plan is another disappointing addition to the collection of recent stimulus packages mistakenly trying to fight fire with fire.  The logic of Congress and the White House seems to be that the economy will be revived by giving people more money to spend. Government officials – from Obama to Pelosi – caution us on the importance of regaining confidence to restore the economy.  How quickly they forget what brought the economy to its knees!  We are in this crisis because Americans’ expectations of spending are too high.  We gambled on credit card debt and convinced ourselves to buy houses we could not reasonably afford.  We had too much faith in our government to watch over us, and too much faith that our nation’s companies were playing fair.  I do not claim that the White House or Congress has bad intentions, but sometimes the best of intentions can turn into a nightmare.   The cynicism Americans are feeling toward big company players like AIG and toward Congress and the White House is a good thing.  We are responsible for vigilant oversight of them, too.  Developing a practice of bailouts lessens the expected cost of financial failure – both personal and corporate – which can create dangerous risk analyses down the road.  Furthermore, in the long run, the stimulus package can itself become a part of the problem, as we will sustain the bad habits of over-spending.

Instead of reinforcing bad habits, a perhaps good (albeit painful) solution to the economic crisis is to let Americans go through the pain to set lower spending expectations.  We need to let people go through hard times in terms of lowered consumption (not lowered health, of course) to bring reality to the economy.  The economy will then be built on reasonable expectations, and we will be more prepared for the next inevitable recession.  A good way to accomplish these needed long-term goals while also ensuring that basic necessities are given to struggling Americans is to give people a small, monthly rebate check of $50 or $100 over the next two years.  A small rebate will allow Americans add a little money in the economy without overspending and creating a spending bubble.  My proposed solution is not an electroshock to the economy, but rather a supervised slow recovery process.  In addition, “short-term responsibility” legislation should be put in place to limit financially over-extended individuals and over-leveraged companies from pursuing new lines of credit and leveraging.  People and companies over the limit should be required to report to financial advisers on a monthly basis to verify that they are making sound decisions (Think about it as a parole officer for credit).

Achieving a reasonable level of consumption and returning to full responsibility for our debts will help us return to the optimal level of consumption.   Let’s all acknowledge the elephant in the room.  We cannot return to the kind of spending we once mistakenly enjoyed.

Call them customers of size (like Southwest) or passengers with a high body mass (like Air France), but one thing is for certain:  As airline passengers become larger, they are taking up more space on planes.  Traveling is uncomfortable enough as it is with consistent delays, lost luggage, and – most recently in Seattle – accidental gassing of passengers, without having to deal with the awkwardness of other passengers encroaching into seat space they did not purchase.  Of course, there is no need to blame only obese passengers; passengers wearing giant coats and passengers who have extremely broad shoulders, to name a couple, are also encroachers.  Most airlines keep quiet about their internal policies for addressing encroaching passengers, but a few are upfront about their procedures.  Air France, for example, lists the width of the aisles and onboard seating, stating tersely, “If your waist measurement exceeds this, you must reserve an additional seat.”  Southwest avoids the measurement standard, instead relying on the simple rule:  If you cannot lower your armrests, you need to purchase an additional seat.  JetBlue uses a different test:  “People who are unable to sit in the seat in the full upright position with the seat belt fastened” may not be allowed to fly at all.  Airlines that require large passengers to purchase an additional seat do not actually require the passengers to pay fully for it.  Air France offers a 25% discount to their high body mass passengers when they purchase two seats.  Southwest refunds the additional seat at the end of the trip.

At first glance, the policies established by the airlines may seem to resolve the problem, but anyone who has traveled knows that there are plenty of passengers who pass the tests described above but still take up extra space.  Your neighbor’s hips push into your seat a couple inches and you have to squeeze yourself into the opposite side of your seat to avoid the unwanted physical contact.  Moreover, as our nation becomes increasingly more politically correct, you might feel a lingering guilt about reacting strongly against the contact.  You look around at the other passengers as you lean heavily away from your large neighbor, and worry that they are thinking:  How rude of him to treat his neighbor as if being fat is somehow contagious!  Poor thing, she probably has a glandular problem. From the perspective of the large passenger, she may feel very uncomfortable knowing that she is taking up your space, but she cannot do anything about it…right?

Wrong.  What happens when someone trespasses on your property?  You can call the police and file a lawsuit for the resulting damage.  What happens when someone steps into your personal space at work?  You are legally protected to confront the person and can seek support from human resources.  It is inconsistent to fail in providing airline passengers similar recourse when another person infringes on their right to enjoy a full seat.  People who use public transportation might respond to such an argument by reporting the many uncomfortable experiences they have had on the subway or in a city bus.  There is an important difference between public transportation and airline travel:  As an airline passenger, you are paying for the rental rights to a specific seat on a specific plane.  Sure, on Southwest you have choice of your seat, but ultimately you have purchased a seat.  As a public transportation passenger, you are paying for the option to ride on a specific bus or train.  If one bus is packed, the choice is yours to push on in or wait for the next one to arrive.

Unlike public transportation passengers, when an airline passenger purchases a plane ticket, she is paying for two primary things:  the transportation from her point of departure to her arrival destination, and the quality of the transportation.  The quality of transportation varies, depending on whether she purchases a coach, business, or first class ticket.  The airline may offer snacks or individual television sets to improve its quality; however, the single-most significant component of the transportation quality is the airplane seat.  Airplane passengers are, essentially, extremely short-term tenants who rent the space in which they sit for the duration of the flight.  They do not just rent the seat itself; they rent an invisible box that includes the empty space from the seat to the ceiling and from the seat to the floor.  The armrests are divided in half, meaning that window- and aisle-seat passengers have one and a half armrests, whereas middle-seat passengers only have access to one arm rest (the sum of each half of an armrest they can access on either side).  If we visualize this abstract box, we can draw cubic inches that compose it.  When a passenger purchases a ticket, she is buying all of those cubic inches that compose her personal box.  The value of the cubic inches is calculated by the difference of the price of the ticket and the value of transportation.  For example, if a passenger purchases a ticket from San Francisco to New York City for $500 and the value of transportation is $250, then the value of her transportation quality, in sum, is $250.

Let’s assume away the value of snacks, drinks, and the tiny televisions that hardly work (their value is minimal), and assume that a passenger buys the rental rights to 100 cubic inches when she purchases a plane ticket.  That means that each cubic inch is worth $2.50 to her – not to the airline.  The airlines do not need to have these passengers buy an additional seat; rather, they need to facilitate transactions between passengers so that the encroaching passenger compensates her neighbor for the extent of encroachment.  The practical concerns can be easily resolved.  All the airlines need to do is include extendable rulers so that passengers can estimate the extent of the encroachment and address the transaction.  Worried that your new, giant hat will get crushed in the storage bins?  Looks like 5 cubic inches of encroachment.  Pay up the $12.50 to your neighbor.  The naysayers who will criticize the idea for its practicality problems or undoubted disputes that will arise should be reminded that we already go through a great deal of largely impractical airport practices:  We take off our shoes, we pay extra for our luggage, and we make airport restaurants filthy rich from all the food we buy over delays.  One more moment of awkwardness and one more swipe of the credit card will have a minor, marginal impact on the challenges of traveling today.

Last week England decided against switching from informed consent to presumed consent for organ donations because a committee of experts felt it would not significantly raise donations.  In informed consent countries, agents are only donors when deceased if they registered to do so while alive. Conversely, in presumed consent countries, everybody is a potential donor once deceased. Therefore people need to register if they do (respectively do not) want to donate their body in informed (respectively presumed) consent countries.

While some studies found that there is a positive effect of presumed consent on organ donations, it is difficult to actually make the leap of faith that a change of legislation would increase donations.  The problem of presumed consent countries, such as France and Portugal, is that they rely on the fact that a deceased person is a donor by default.  Hence, in case people die and did not express any preference over organ donation, the next of kin that survives her has the choice between giving the organs and preventing the organs from being harvested.  Given that the family ends up making the final choice, the informed consent system might lead to more organ donations.  Spain is often regarded as an example of successful presumed consent country.  But their success is driven by the presence of organ coordinators that are trained to identify potential transplant organs and to talk to the families about the process of donation.

For England, the solution to the problem of organ donations requires a more dynamic approach involving more than new legislation, such as harnessing market forces and involving members of the community.  For starters, markets could potentially eliminate organ shortages and significantly reduce health care costs (see Becker and Elias, 2006, Introducing Incentives in the Market for Live and Cadaveric Organ Donations).  A market for buying and selling organs would result in the existence of an equilibrium price for living and cadaveric donors.  It would also decrease medical costs:  Today, the cost of kidney dialysis is about $44,000 per year.   The cost of kidney transplant and medical care for the first year is about $90,000.   After the first year, medical treatments, mostly for immunosuppressant drugs to prevent rejection are $16,000. That means after about two and a half years transplants save the medical system $27,000 per year as opposed to patients remaining on long term dialysis.

Secondly, the success of organ donation programs in England  depend primarily on people understanding what   the complete set of benefits:  England is now making the right first step by starting a $9 million public awareness campaign to raise donations.  But in order to stay on the right track, the English government should favor the creation of organ coordinators to produce a steady and permanent increase in organ donations.  Responsibility of people and the existence of a registry that collects people’s preferences on organ donations (yes or no) and not only one side of the question (for example, saying non donor if you are in a presumed consent country) would lead to a much needed donation spike.