Five reasons why they should test autonomous cars in Ontario

Did I say five? I meant six…

Paul Leroux

It was late and I needed to get home. So I shut down my laptop, bundled myself in a warm jacket, and headed out to the QNX parking lot. A heavy snow had started to fall, making the roads slippery — but was I worried? Not really. In Ottawa, snow is a fact of life. You learn to live with it, and you learn to drive in it. So I cleared off the car windows, hopped in, and drove off.

Alas, my lack of concern was short-lived. The further I drove, the faster and thicker the snow fell. And then, it really started to come down. Pretty soon, all I could see out my windshield was a scene that looked like this, but with even less detail:



That’s right: a pure, unadulterated whiteout. Was I worried? Nope. But only because I was in a state of absolute terror. Fortunately, I could see the faintest wisp of tire tracks immediately in front of my car, so I followed them, praying that they didn’t lead into a ditch, or worse. (Spoiler alert: I made it home safe and sound.)

Of course, it doesn’t snow every day in Ottawa — or anywhere else in Ontario, for that matter. That said, we can get blanketed with the white stuff any time from October until April. And when we do, the snow can play havoc with highways, railways, airports, and even roofs.

Roofs, you say? One morning, a few years ago, I heard a (very) loud noise coming from the roof of QNX headquarters. When I looked out, this is what I saw — someone cleaning off the roof with a snow blower! So much snow had fallen that the integrity of the roof was being threatened:



When snow like this falls on the road, it can tax the abilities of even the best driver. But what happens when the driver isn’t a person, but the car itself? Good question. Snow and blowing snow can mask lane markers, cover street signs, and block light-detection sensors, making it difficult for an autonomous vehicle to determine where it should go and what it should do. Snow can even trick the vehicle into “seeing” phantom objects.

And it’s not just snow. Off the top of my head, I can think of 4 other phenomena common to Ontario roads that pose a challenge to human and robot drivers alike: black ice, freezing rain, extreme temperatures, and moose. I am only half joking about the last item: autonomous vehicles must respond appropriately to local fauna, not least when the animal in question weighs half a ton.

To put it simply, Ontario would be a perfect test bed for advancing the state of autonomous technologies. So imagine my delight when I learned that the Ontario government has decided to do something about it.

Starting January 1, Ontario will become the first Canadian province to allow road testing of automated vehicles and related technology. The provincial government is also pledging half a million dollars to the Ontario Centres of Excellence Connected Vehicle/Automated Vehicle Program, in addition to $2.45 million already provided.

The government has also installed some virtual guard rails. For instance, it insists that a trained driver stay behind the wheel at all times. The driver must monitor the operation of the autonomous vehicle and take over control whenever necessary.

Testing autonomous vehicles in Ontario simply makes sense, but not only because of the weather. The province also has a lot of automotive know-how. Chrysler, Ford, General Motors, Honda, and Toyota all have plants here, as do 350 parts suppliers. Moreover, the province has almost 100 companies and institutions involved in connected vehicle and automated vehicle technologies — including, of course, QNX Software Systems and its parent company, BlackBerry.

So next time you’re in Ontario, take a peek at the driver in the car next to you. But don’t be surprised if he or she isn’t holding the steering wheel.


A version of this post originally appeared in Connected Car Expo blog.

Walmart overseas: why so poor a performance?

Mike Smitka

Let me follow up on my previous post on Walmart's strategic challenges. There I noted that Walmart has been singularly unsuccessful in many of the markets it tried to enter. The "why" is my focus below.

Within economics and management there's a strand of research called "population ecology," spearheaded by the work of Glenn Carroll and Michael Hannan. They begin with a simple model: that early in its history an industry is populated by numerous firms with varying business strategies and management structures and operational setups. Some of these are ill suited to the competitive environment and disappear; others are a better fit and grow. These don't always scale. In my region of the US barbecue restaurants take a standardized form, a standard business model has evolved, but franchising doesn't seem to work.

I contend that the same is true for retail. In Japan at least 4 different national firms tried variations of the large-format, low-margin, high-volume retail store, and there are likely others that did so but failed before reaching a scale where I learned of them. (I know of a couple that appear to fit the mold but are limited to one or another region.) For example, while it claims a century-plus history, today's Jusco chain began in rural Japan, and expanded based on rural stores at the intersection of major roads. Even better, they were often able to do so outside of then-existing city boundaries, and so either were not regulated under the [now defunct] Large Store Law, or had only a small number of retailers on a town's main street who had to acquiesce to their setting up shop. I lived briefly in rural Niigata Prefecture, where there was a store as part of a mall outside of Muikamachi, at the intersection of two main roads and just off an expressway exit. The flower shop, the fruit shop, a local liquor store and others either found space inside the main Jusco building, or in a row of shops just across the parking lot. All of this was tied to regional logistics centers and the growth of national and not just regional wholesalers. They could also direct source clothing from overseas; most of what was on their racks carried labels of origin from elsewhere in Asia. Having previously lived in urban Japan in a house situated on a street of mom-and-pop retailers [that on one side was run by a mom, on the other by a dad], I was used to shopping daily for small quantities, and of facing that day's selection of fish and vegetables, a function of what the owner chose on their last trip to a local wholesale market or the current sale from distributor from whom they bought most of their clothing. These stores were friendly, but not inexpensive, and they kept short hours; they were often long closed by the time I got home. The alternative was the department store at a major train nexus, a possible stop on the way home. But there was no way to take a full shopping bag on a train during the Tokyo rush hour... So it was mind-blowing to drive to a mall in Japan, park my rental car and get out to find a huge store with copious variety and low prices.

Jusco and its rival Ito-Yokado chain filled the Walmart niche. They were intimately linked to the rise of new wholesale channels, they focused on markets where they faced no competition and lower capital costs, and from the beginning they built their businesses around modern inventory control systems and an ability to manage part-time workers to offer longer hours of operation. A third chain, Daiei, originated in urban areas. While it was for a while wildly successful, its focus on prime commuter-rail-based shopping areas left it with stores smaller in size and irregular in format – their layout and location were subject to the availability of a tract of land or an empty building of suitable size. In the process of expanding they accumulated a lot of debt, and ultimately went through a forced restructuring that left them under the control of the holding company of the Aeon chain, the parent to Jusco.

In short, by the time Walmart turned its attention to Japan, incumbent Japanese firms already occupied their strategic space: large-format rural "hypermarkets" open long hours that were in locations convenient for car-based shopping, buttressed by a strong position at the wholesale end, supported by management information systems and dedicated warehousing and logistics that gave them greater control over their sourcing and control of their inventory. While Walmart had a far bigger purchasing budget on a global basis, only some of what they'd order for US customers was appropriate to Japan, and they didn't have dedicated channels from their sources in China and elsewhere to store shelves in Osaka or Tokyo. Nor did they have sourcing for vegetables and other goods with short shelf lives. So while they did purchase the Seiyu retail chain, it was an older one with urban origins and a weak presence in the new car-based suburbs of Tokyo, and virtually no rural footprint. The store local to me in Inage, Chiba was a train stop (or 7 minute bike ride) away, but was small, and on a side street adjacent to a train station with room for only 4 cars to park. Yes, its price for peanut butter was great, but its vegetables were not, and the layout was impossible, I had to negotiate narrow stairs into a dingy basement. In contrast I could ride my bike in a different direction to an Aeon store that was bright, airy and had an adjacent food court and several other restaurants. It was also open both earlier and later, and off of two major roads with an attached multistory parking deck. And in another direction was a full shopping mall, a full kilometer in length on a major road, with parking for 2,000 cars and two hypermarkets facing each other. [Apparently when the developer told these stores they'd be "an anchor store" they heard they'd be "the anchor store" – great for shoppers, not so good for the stores!]

A final point: it wasn't just Walmart that tried and failed, but also the French giant Carrefour. They were more careful than Walmart, with better locations and larger footprints and parking garages for their stores. They still faced an uphill battle. Unfortunately they chose to advertise themselves as a French retailer. Japanese shoppers went in expecting fashionable clothes and accessories, unusual foods and a good selection of wine. What they found was a Walmart-like experience. By the time Carrefour realized its branding disconnect, it was too late.

To sum, 30 years ago "pre-modern" retail in Japan – and in Germany and France and the UK – was populated by a lot of entrepreneurial players. A few of them hit on the Walmart strategy, and of those some were analytic enough to realize why they were doing well, and grow. Carrefour and Tesco and Ito-Yokado and Metro and their peers have their strengths and weaknesses relative to Walmart. In the end, though, they're sufficiently strong and cover enough of their domestic markets to close off cross-border entry to the likes of Walmart. Unlike in their formative years, international expansion offers no low-hanging fruit ripe for outsiders to pick, be they a Walmart or a Kaufmarkt.

So what is it about Trader Joe's? They [and their sister operation Aldi] are to my knowledge the only foreign retailers in the grocery store segment in the US. Has TJ been able to cross other retail borders?

The Economics of Strategy: Walmart's Senescense

Michael Smitka

Washington and Lee University

October 22, 2015 WREL Update

Today there's no "news" – nothing in the latest economic data is (to me) surprising – so instead I'll speak on topics tied to my teaching, and close with a brief note on United Way of Rockbridge. This term I'm teaching three very different classes, a senior "capstone" focusing on modern macroeconomics, a course on China's economy, and the other on the economics of business strategy. On air I spoke on two topics. One was Walmart as an exemplar of strategy. Yesterday I also "taught" a paper of Milton Friedman's, and so I started a multiweek series examining the evolution of "rules versus discretion" in policymaking. But for this blog post I'll limit myself to Walmart.

...Walmart is left as a bottom-feeder…

First, Walmart's strategy was to use economies of scale to gain a competitive advantage in its initial market, rural America. As long-time residents of the Rockbridge area will recall, Lexington used to have a hardware store on a prime piece of Main Street. There's still a building supply business a couple blocks away, back near W&L's Lenfest Center, across from where the railway station was located, back in the days when every town had train service. Buena Vista still has a couple hardware stores, and in Lexington there's one off of Nelson Street, behind Wendy's and Frank's Pizza (which I like), and the Rockbridge Farmer's Coop at the south end of town.

As hinted at, the geography of hardware stores, and the local dry goods store and so on, dated back to when roads weren't particularly good and many people lacked cars. Such stores had a local monopoly albeit in a market of limited size; they didn't discount. Their focus on a local market meant they carried a restricted range of goods, so you might have to order what you needed. Their competition was not internet sales, but the Sears, Roebuck and Company catalog, which provided parcel post delivery that might prove cheaper than your local store, and offered a huge array of products that a small town retailer couldn't begin to touch. (Aside: only later did Sears move to brick and mortar – will history repeat, with Amazon stores in every town?)

Walmart took advantage of better roads and pervasive car ownership to set up larger stores with greater variety, and to use scale to allow it to offer these at a lower margin. It could staff lightly, by locating outside of towns it could manage its real estate costs while providing better parking and road access, and it chose to offer hours far longer than those of any downtown retailer. Call these economies of scale plus the ability to push against the operating limitations of small town retailing. In addition Walmart offered greater convenience by carrying in one location what would in general have been spread across several stores – basic clothing, hardware, and other "hard" goods. Eventually this expanded to include a pharmacy, groceries (with the launch of Supercenters in 1988) and a full line of consumer electronics. No single department could match those of a specialty retailer, and you couldn't get the service provided by the local hardware, which could advise on tools and materials. But a large proportion of sales volume was of common items where customers didn't need (and maybe didn't want) such service. And there was the convenience: quick in and out for three items, which might have required you to visit three stores downtown during the busiest part of your day. This we could term economies of scope.

Walmart pushed this strategy for their first couple decades, gradually expanding across rural America while avoiding suburban locations. (You still can't find Walmart in urban locations – they have zero stores in Detroit, zero stores in New York City.) They faced no competitors. K-Mart, for example, began as the Kresge Five-and-Dime chain, located in big cities, and gradually expanded to the suburbs. They never managed that transition well, the operational efficiencies never matched those of Walmart. Sears set up stores in urban areas, and then expanded to malls, but was unable to leverage its catalog strengths to create a distinctive bricks-and-mortar strategy in rural areas.

Walmart also offered operational efficiency. In the retail world, their management information system was matched only by that of 7/11 in Japan. When you went to Walmart, you could find what wanted; they did not stock out. In contrast, with K-Mart you could never be sure they'd actually have what you wanted on their shelves. Their stores were smaller, carried a narrower range and otherwise were not up to their competition, and in particular to Walmart.

Once Walmart had filled rural America, however, they started losing steam. While they were better than K-Mart, they did face competition. Real estate was more expensive, and urban consumers were more prosperous and had varied tastes. Walmart couldn't tap the full breadth of the population, and instead had to bottom-feed. In addition, expansion slowed.

...senescence will be followed by debility...

Meanwhile they'd become a mature big business, with a headquarters staffed by professionals in finance, marketing and other functions – that is, not staffed by people with hands sullied from initially working retail. They brought new ideas and technicals skills, but not necessary better ideas, or the ability to understand how their expertise contributed to the overall position of Walmart. In short, they could optimize their narrow function while losing sight of what the business was about.

That structure in general meant more rules and regulations, and less delegation of authority. Our local store can't readily adjust staffing when local conditions give them busy periods other than those built into regional and national operating plans. Ordering is at the regional level; garden supplies come in line with the growing season in Richmond and Virginia Beach, which means inventory arrives too early in the season to plant. All of this works to the advantage of smaller retailers more attuned to our area, or focused retailers (Lowes).

Then there's the stock market growth imperative, that each quarter ought to have higher profits than the preceding one. Why management should respond to this is not so clear. Some comes from the perverse incentives that pay and bonuses are more closely linked to scale than to profit margins. Put simply, it's better in pay and prestige to be an exec in a big business than a medium-sized one. At some point, though, Walmart scaled out, and additional expansion leads nowhere, or nowhere good. Walmart tried the international side, and lost billions in Germany, Korea and Japan, among others. (While they exited from Germany, they maintain ownership of the Seiyu chain in Japan, most of whose stores are small and in poor locations for today's suburban, car-driving population.) My sense is that they do well only in Mexico and secondarily in Canada, due to organic expansion. In other countries they tried the acquisition route, and so were unable to leverage such strengths as their US experience might afford. We'll see how they do in China...

Now if organic expansion is slow – adding a store doesn't add a visible amount to sales – and the merger and acquisition route has hit a dead end, then the only route remaining is to cut costs. When your business model was based from the start on low costs, that requires cutting services. Staffing means shelves don't get restocked, and checkout lines can be unbearably long. Middle management is cheapened, without authority you don't have to spend time on hiring and training good people, or encouraging those you have to develop in their jobs. All of this rebounds into a poorer customer experience.

And I see no way out. There's no room for expansion geographically. Higher-margin goods face the rise of online retail. Specialty chains and Target pull away the more desirable customers, aided and abetted by the shopping experience Walmart provides. So Walmart is left as a bottom-feeder. While they could spend more, that would hurt profits for a period of years, and might not be well-managed if those in Bentonville want to remain as decision makers. While I'm not aware of any retail concept that might eat into Walmart's core rural markets, I'm afraid that the management focus on growing profits means they will be neglected, with a cumulative impact on their profitability. My expectation is that senescence will be followed by debility.

================

---

================

For 2016 United Way of Rockbridge will provide grants for 22 projects to be undertaken by 18 community-oriented non-profits. One focus are critical needs such as food, shelter, and assistance to the disabled. Our other focus is on having a positive long-run impact on our community through improving the preparation of children for kindergarten and elementary school. Note that to be useful to these groups, who have to draw up their budgets and operating plans, we have to make our funding decisions well in advance of when we actually hand out money. So any amounts I mention are for CY2016.

Each week I'm speaking briefly about one of these organizations; today it's Campus Kitchen at Washington and Lee. They began in 2008, and work with the dining services of Washington and Lee, Virginia Military Institute, Carilion Stonewall-Jackson Hospital, and Walmart to see that food does not go to waste. To date they've repurposed 200 tons of food to provide almost a quarter million meals to families in the Rockbridge area. During the course of the year, they'll typically get over 300 individuals volunteering to collect and repackage food and for certain groups whom they serve, to cook meals.

This coming year UWR will fund two projects. One is $2,000 for their "backpack" program in cooperation with local schools, in which they send groceries home with children whose families face challenges in putting food on the table. The second project is $2,000 for their mobile food pantry, which provides food to outlying areas of the county that are not near any of the existing food pantries.

As with other projects, we evaluate their paper application, and then arrange for two reviewers from the community – volunteers including but not limited to members of the United Way board -- to visit each group. Unfortunately we can seldom provide groups with all the money they request; we instead strive to allocate to generate a good impact for the money we can allocate.

Later in the fall I'll have information on the progress of our 2015-16 Annual Campaign, which seeks to raise $250,000, slightly more than we managed last year. Please consider helping us toards our goal of "Building a Caring Community". Some of you will receive appeals through your employer. Even a dollar per pay period is meaningful – the groups we support leverage volunteers and other resources, so that even seemingly small amounts make a difference to someone. More generally, please visit our web site. You can use our "Donate Now" function to make a contribution with a credit or debit card. It's secure – we never see your card number, and the data isn't stored. We also provide details on our grants, our finances and Board. And our address, in case you'd like to contribute by check...

ADAS: The ecosystem's next frontier

At DevCon last week, Renesas showcased their ADAS concept vehicle. It was just what you would expect from an advanced demonstration, combining radar, lidar, cameras, V2X, algorithms, multiple displays and a huge amount of software to make it all work. They were talking about sensor fusion and complete surround view and, well, you get the picture.

What isn’t readily obvious as you experience the demo is the investment made and the collaboration required by Renesas and their ADAS ecosystem.

Partnership is a seldom recognized cornerstone of what will ultimately become true sensor fusion. It seems, to me at least, unlikely that anyone will be able to develop the entire system on their own. As processors become more and more powerful, the discrete ECUs will start to collapse into less distributed architectures with much more functionality on each chip. The amount of data coming into and being transmitted by the vehicle will continue to grow and the need to secure it will grow alongside. V2X, high definition map data, algorithms, specialized silicon, vision acceleration and more will become the norm in every vehicle.

How about QNX Software Systems? Are we going to do all of this on our own? I doubt it. Instead, we will continue to build on the same strategy that has helped take us to a leadership position in the infotainment market: collaborating with best of breed companies to deliver a solution on a safety-certified foundation that customers can leverage to differentiate their products.

The view from above at Renesas DevCon.

The Subaru Levorg debuts in Southeast Asia

Subaru has launched the Levorg for the Southeast Asian market in Taipei this week. The launched featured world renowned precision driver Russ Swift and Subaru Ambassadors Natalie Pickles and Monika Sta. Maria from Asia's Next Top Model.

Not sure whether the specs are the same between the UK and Asian models. In the UK, the 1.6i GT is available in three colours Crystal White Pearl, Lapis Blue Pearl and Steel Blue Metallic. It costs £27,495 (OTR White colour).

TPP and Inflation: Weekly News

Mike Smitka, Washington and Lee University

First, Wednesday Oct 14 and Thursday Oct 15 (today, but after taping my radio segment) saw the release of the latest inflation data. Neither suggests a rise in inflation; if anything, they point in the opposite direction and reinforce the sense that growth is not speeding up, and may even be slowing. Thus the Monday (Oct 12) speech by Federal Reserve Board Governor Lael Brainard suggesting that the Fed should hold off on interest rate increases until next year. (She is, of course, a voting member of the FOMC, which sets short-term interest rates.)

Headline PPI (the Producer Price Index) for September increased – er, fell! – 8.4% year-over-year, and fell at an annualized 1.6% month-over-month. Not surprisingly, lower energy prices were a big contributor. To give the full name of the relevant series, the Producer Price Index by Commodity for Crude Materials for Further Processing was below its level of 10 years ago, down 26% from last year and dropped at a 32% rate from August. Eliminating food and energy suggests not everything is down, as this "all other" price measure rose 2.1% over last year, and at an annualized 1.8% over August. That however is at or below the level of recent months.

Headline CPI is now out, and gives a similar picture. The headline index is unchanged from a year ago, and down 0.2% from August (an annualized rate of -2.4%). All items less food and energy rose 1.9% from a year ago, with rises of 3.2% for shelter, 2.4% for medical care services and 2.7% for medical care commodities pulling up the average. In other words, without new housing being built, rents are up in much of the US, and our lack of a national healthcare system means medical costs go up with every new service that hospitals offer and drug or device that pharmaceutical companies develop. (You may of course have read about companies buying up generic drug rights and boosting prices 5- and 6-fold.)

OK, for a longer-term item there's TPP, the Trans-Pacific Partnership agreement. It includes countries with whom we have just under half our trade, Mexico and Canada at the top, and Japan, Australia and New Zealand but also Chile and Peru in the Americas and Malaysia, Brunei, Singapore and Vietnam in Southeast Asia. Now with US tariffs already low, those that remain are in politically sensitive areas such as agriculture. Even though that's now a trivial share of the overall economy, it's not in Wyoming and many other states. And while Wyoming may have only one Congressman, it has 2 Senators so can't be ignored. So dairy and tobacco and sugar remain coddled. Then there are other special interests such as pharmaceuticals. If we're to get other countries to offer lower trade barriers, we have to offer something in return. Furthermore, most of the big gains have already been had through the WTO process, including China lowering trade barriers in many of its markets. So it's hard to get really excited about it.

In any case, it's a political dead letter with the start of our election season. The negotiations are handled by the Office of the US Trade Representative, which is under the White House and not the State Department. Nevertheless, the Secretary of State wields influence in such negotiations, and most of the work was done while that person was Hillary Clinton. She's now come out against it, as has essentially every other Democrat. But given some concessions on dairy, so has Wisconsin Senator Paul Ryan. From the US end, trade agreements are negotiated under "fast track" authority that mandates an up-or-down vote, without amendments. No other country would want to spend years horse trading with us, making concessions painful to their own constituents only to have the Senate in effect try to renegotiate the deal by tacking on changes. And of course negotiations are behind closed doors, because no one would be willing to make tentative offers if they were in the newspapers the next day, particularly as not everything is negotiated at once, so industry X would start screaming about one part of the deal before things that benefit them in another part of the deal are in place. But the same is true for every other multiparty negotiation that I know of, the bargaining is done out of the limelight, and only the final agreement released.

If it's ever brought to a vote, it won't happen until after the new administration takes office in early 2017. But Japan will then be in its election cycle. So I suspect it may never come into effect. The "fast track" depended on Republicans; only 13 Democratic Senators voted in favor. But the Democrats are now even more timid, with Bernie Sanders an outright protectionist, and many Republicans also feel compelled to cater to special interests in the primary cycle, even if the issues aren't harmful in a general election.

And special interests abound. US media firms wanted all sorts of special copyright restrictions, such as pushing for counting the data stored temporarily in a computer printer as an extra copy for which a fee is due. Obviously, no other country will accept that. Likewise pharmaceutical companies in the US can keep test results secret for 12 years, so that even if the foreign patent runs out a drug, it's not practical to actually make it because the data needed to get it approved in (say) Australia isn't available. Other countries pushed for 0 years, and Big Pharma didn't get what it wanted. These special interests may come around in the end, but their initial "disappointment" is what matters in an election season.

For more information, you can go to the USTR's web site for TPP, though the detailed agreement isn't yet available and unless you've followed trade deals, the details are hard to wade through. There are lots of items in the blogosphere; I suggest looking at a post by Jeffrey Frankel, though the Peterson Institute for International Economics and Paul Krugman have also weighed in.

Next week it's perhaps time to talk about Walmart and beer: Walmart because their engine stalled long ago and they're running out of the ability to manipulate their finances to paper over that fact, and beer with the tentative merger of AB InBev (Budweiser!) and SABMiller, the world's #1 and #2 brewers.
============

Finally, my United Way of Rockbridge spot, as our annual campaign gets up a head of steam with the launch of the workplace campaign at W&L later this month, and those at Mohawk (carpet) and Modine and Lowes also this fall.

I've talked about RAOC and BRAAC. Today I want to talk about a component of our strategic initiative. Most of what UWR funds are short-term "safety net" functions, food and health and help for the aged and support for families that face emergencies. But we also have an initiative to improve long-run outcomes in the Rockbridge area, with a focus on things that will improve early childhood education outcomes. This includes things such as the Campus Kitchen backpack program, and the Rockbridge Area Health Center program to provide dental care through our local schools. In addition, we have long supported Yellow Brick Road, providing funds so they can offer scholarships for daycare.

We also have our Rockbridge Reads program that focuses on preparing young children for kindergarten. One concrete measure was Mr. Ryan's reading program through the Rockbridge Regional Library, held in Glasgow and Fairfield that exposed youngsters to books, and adults on what sort of books work and how to make reading fun. Unfortunately Mr. Ryan moved out of the area, so that program is currently stalled until a new reader can be located. Then there are other programs. In the past the Blues Education Foundation of Buena Vista received funding, but they didn't apply this year. We did provide a small grant to Lexington schools for a pre-K program run this past summer. Hopefully we'll get local schools and daycare programs and the library and others coming up with concrete programs in the next few months so that they can apply for funds.

Go to our website at uwrockbridge.org to support us, or for more information.

What does a decades-old thought experiment have to do with self-driving cars?

Paul Leroux

Last week, I discussed, ever so briefly, some ethical issues raised by autonomous vehicles — including the argument that introducing them too slowly could be considered unethical!

My post included a video link to the trolley problem, a thought experiment that has long served as a tool for exploring how people make ethical decisions. In its original form, the trolley problem is quite simple: You see a trolley racing down a track on which five people are tied up. Next to you is a lever that can divert the trolley to an empty track. But before you can pull the lever, you notice that someone is, in fact, tied up on the second track. Do you do nothing and let all 5 people die, or do you pull the lever and kill the one person instead?

The trolley problem has undergone criticism for failing to represent real-world problems, for being too artificial. But if you ask Patryk Lin, a Cal Tech professor who has delivered talks to Google and Tesla on the ethics of self-driving cars, it can serve as a helpful teaching tool for automotive engineers — especially if its underlying concept is framed in automotive terms.

Here is how he presents it:

“You’re driving an autonomous car in manual mode—you’re inattentive and suddenly are heading towards five people at a farmer’s market. Your car senses this incoming collision, and has to decide how to react. If the only option is to jerk to the right, and hit one person instead of remaining on its course towards the five, what should it do?”

Of course, autonomous cars, with their better-than-human driving habits (e.g. people tailgate, robot cars don’t) should help prevent such difficult situations from happening in the first place. In the meantime, thinking carefully through this and other scenarios is just one more step on the road to building fully autonomous, and eventually driverless, cars.

Read more about the trolley problem and its application to autonomous cars in a recent article on The Atlantic.

Speaking of robot cars, if you missed last week's webinar on the role of software when transitioning from ADAS to autonomous driving, don't sweat it. It's now available on demand at Techonline.

Employment and Dynamic Scoring

Mike Smitka

Economics, Washington and Lee University

Here are quick notes on my WREL Lexington AM 1450 radio show of October 8, 2015. There's the employment update. I also did the calculations for last week's topic, whether tax cuts could boost revenues, and add those graphs. Plus a United Way of Rockbridge update.

The latest (un)employment data for September 2015 were released at 8:30 am sharp on Friday morning. The numbers were discouraging, lower than the growth of the potential workforce. This is in line with a gradual decline since the beginning of the year. Consistent with that, interest rates remain low, under 3% for 30-year bonds and 1% for 3-year bonds. Clearly bond markets don't anticipate rapid growth in the next year or so, nor do they see any increase in inflation down the road.

Graphs above show the growth of jobs relative to trend growth of the working-age population, corrected for the gradual retirement of the baby boomers. While the data are volatile (so I use a moving average in the graph), the trend since January is for a slowdown in the number of new jobs. On the other hand, the number of workers on involuntary short hours has fallen a lot, and the employment-population ratio for prime-age workers is improving. Bit by bit the economy is moving in the right direction.

Some 2.1 Americans have been unemployed for 27 months or more. By that point, many households will have exhausted their savings and find it hard to make mortgage payments... This number has been falling month by month, but it should be a sobering reminder that our economy has yet to fully recover from the collapse of the housing market and the rise in unemployment that began in early 2007.

Host Jim Bresnahan asked about consumer spending; that will be a topic for next week as I don't have data at hand. At the same time, Ben Bernanke's book will be out; you can already find excerpts on the web from reviewers who have pre-release copies, while Ben himself is doing PR for it, with an overview of some of the content.

Here is the bottom line in graphs for "dynamic scoring." Groups such as the Tax Foundation continue to argue that cuts will produce a burst of growth. Their argument is based on sophistry: after noting that demographics and lower productivity have slowed potential growth while improving labor markets limit the upside, they then argue that a big boost to growth is possible because that happened in the 1950s and 1960s – when population growth, productivity and women joining the labor force did permit higher growth. In any case, the fact remains that the cost of tax cuts is up front, while growth – if it speeds up – will not start immediately and will be gradual. So I ran a little simulation, with a 10% tax cut from 20% to 18%, giving a 20% boost to growth, from 2.5% to 3.0% in real terms starting immediately. That's a very, very optimistic assumption, given that we've already had a series of large tax cuts under Reagan, Bush Jr and Obama – that diminishing returns thing.

The graph on the left shows the boost in growth (the starting point is the most recent level of real chain-weighted GDP in US$ trillions). Over time, it adds up. However – as illustrated in the graph on the right – the decline in tax receipts is immediate, and it takes over 20 years for that to catch up. In the interim it adds to Federal debt – we don't get back to even for 40 years. A lot can go wrong in the interim. Furthermore, I did not do this in net present value terms. That makes the calculation even less favorable. In other words, I've tried to skew the case to favor tax cuts by choosing a large boost to growth and ignoring the time cost of money. Even so, I can't make the case.

---

United Way of Rockbridge: On October 8th I featured the Blue Ridge Autism and Achievement Center in Buena Vista. They help youth afflicted with autism, a very labor- and love-intensive task that requires staff knowledgeable in how to interact and teach/train young people with autism. Their pupils range from individuals with severe autism, who interact very poorly with the outside world, to individuals whom they can help transition into public schools. UWR helps with training their staff.

The ethics of robot cars

“By midcentury, the penetration of autonomous vehicles... could ultimately cause vehicle crashes in the U.S. to fall from second to ninth place in terms of their lethality ranking.” — McKinsey

Paul Leroux

If you saw a discarded two-by-four on the sidewalk, with rusty nails sticking out of it, what would you do? Chances are, you would move it to a safe spot. You might even bring it home, pull the nails out, and dispose of it properly. In any case, you would feel obliged to do something that reduces the probability of someone getting hurt.

Driver error is like a long sharp nail sticking out of that two-by-four. It is, in fact, the largest single contributor to road accidents. Which raises the question: If the auto industry had the technology, skills, and resources to build vehicles that could eliminate accidents caused by human error, would it not have a moral obligation to do so? I am speaking, of course, of self-driving cars.

Now, a philosopher I am not. I am ready to accept that my line of thinking on this matter has more holes than Swiss cheese. But if so, I’m not the only one with Emmenthal for brain matter. I am, in fact, in good company.

Take, for example, Bryant Walker-Smith, a professor in the schools of law and engineering at the University of South Carolina. In an article in MIT Technology Review, he argues that, given the number of accidents that involve human error, introducing self-driving technology too slowly could be considered unethical. (Mind you, he also underlines the importance of accepting ethical tradeoffs. We already accept that airbags may kill a few people while saving many; we may have to accept that the same principle will hold true for autonomous vehicles.)

Then there’s Roger Lanctot of Strategy Analytics. He argues that government agencies and the auto industry need to move much more aggressively on active-safety features like automated lane keeping and automated collision avoidance. He reasons that, because the technology is readily available — and can save lives — we should be using it.

Mind you, the devil is in the proverbial details. In the case of autonomous vehicles, the ethics of “doing the right thing” is only the first step. Once you decide to build autonomous capabilities into a vehicle, you often have to make ethics-based decisions as to how the vehicle will behave.

For instance, what if an autonomous car could avoid a child running across the street, but only at the risk of driving itself, and its passengers, into a brick wall? Whom should the car be programmed to save? The child or the passengers? And what about a situation where the vehicle must hit either of two vehicles — should it hit the vehicle with the better crash rating? If so, wouldn’t that penalize people for buying safer cars? This scenario may sound far-fetched, but vehicle-to-vehicle (V2X) technology could eventually make it possible.

The “trolley problem” captures the dilemma nicely:



Being aware of such dilemmas gives me more respect for the kinds of decisions automakers will have to make as they build a self-driving future. But you know what? All this talk of ethics brings something else to mind. I work for a company whose software has, for decades, been used in medical devices that help save lives. Knowing that we do good in the world is a daily inspiration — and has been for the last 25 years of my life. And now, with products like the QNX OS for Safety, we are starting to help automotive companies build ADAS systems that can help mitigate driver error and, ultimately, reduce accidents. So I’m doubly proud.

More to the point, I believe this same sense of pride, of helping to make the road a safer place, will be a powerful motivator for the thousands of engineers and development teams dedicated to paving the road from ADAS to autonomous. It’s just one more reason why autonomous cars aren’t a question of if, but only of when.

Can tax cuts pay for themselves?

The assorted Republican hopefuls are now trotting out pieces of policy platforms. Most of them aren't very good working with media. Then there's Trump. If you have to watch a would-be politician speaking nonsense, then he's the clear winner, so untroubled by consistency and logic as to be fun. So while Jim Bresnahan, the host of my radio show on WREL Lexington VA (at 1450 AM), asked me to comment on Trump. Well, I'm not willing to read much into any of the Republican policy pronouncements at this point. Those will flip: we know that what appeals to Republican primary voters does not work with the general electorate. Trump will do well if he reaches that point, as no one expects him to be consistent.

...the mantra that tax cuts ... pay for themselves ... but repetition doesn't mean it's true

That said, the biggest dollar component of Trump's proposals – as with those of Jeb Bush – consists of tax cuts for the rich. Yes, there's Trump's headline proposal of zero taxes below a certain income level, but those people already pay little or no income tax. Yes, certain deductions for the wealthy will be removed. At the same time, he's put forward a lot of arcane-sounding items that in fact represent very large tax cuts for the wealthy. That shouldn't be a surprise: he makes no bones about being a billionaire, and when it comes to taxes he knows how to butter his own bread. In any case, he's not shy about chanting the one mantra all Republicans share: cut taxes. Remember: presidential candidates can propose, but it's the actual elected Congress that legislates.

So let me turn to the other mantra our candidates are chanting: tax cuts are not only good for growth, there's so good for growth they'll pay for themselves. (There's jargon for that: dynamic scoring.) Constant repetition may be soothing for the stress of the campaign trail, but doesn't make it any more true or false. Art Laffer's conceptual case is merely that: with very high tax rates, a cut can lead to an increase in revenue. But we no longer have 90% (marginal) income tax rates, or even 40% rates. We can't presume that the conceptual case is relevant to US circumstances. That is, we need to do a reality check.

First, there's basic arithmetic of what it takes for a tax cut to be revenue neutral: if you cut taxes by 10%, then the economy has to grow by more than 10%, because you've shrunk the tax base. Furthermore, it has to do that immediately, because you lose revenues up front. That a decade from now the economy is larger is not sufficient to do the trick.

Second, there's diminishing returns. If tax cuts work, then most of the bang comes from the initial round of cuts. The second time around they won't work as well. By the third round they lose virtually all of their power. So if there is a big effect, that would have been with those of Reagan's first-term in the early 1980s. Now many listeners won't remember that era, after all the youngest of those who voted for him are now 53 years old. But while growth wasn't bad, most of that can be attributed to recovery from the Volcker recession and the second oil crisis, which included a drop in interest rates by over 10 percentage points from peak. (Three-year bond rates fell from a peak of over 16.5% to a bit under 6.5%.) Our second big round of cuts was under Bush Jr, with little visible impact. The third round under Obama had even less impact. (While that fact has disappeared from political rhetoric, Obama sided with Republicans, with half of the ARRA "stimulus" package in the form of tax cuts.) A fourth round will get us nothing.

Furthermore, the empirical evidence is that the biggest part of tax cuts in fact take the form of losses in revenue. The Federal deficit ballooned from 1.5% of GDP during the Reagan's first election campaign to 4.9% in 1986, well into his second term. Whatever gains those cuts brought through growth were far short of what was needed to offset them. A quick example: tax cuts for regular workers were up to 25%. So you'd need 25% more labor income to offset them. But while they were sold as "supply side" cuts, we didn't see the average work week go from 40 hours to 50 hours, or a huge jump in wages. But we did see consumption boom: these tax cuts did have a clear demand-side effect.

So neither logic nor empirical evidence provides a direct case that cuts pay for themselves.

Let's examine this from another angle: labor and capital. If the economy is to grow, then inputs have to grow. Is there evidence that employers can't find enough workers, and that is what is holding back growth? Likewise, do businesses find it hard to come up with the cash for investment?

On the first point, it's very clear that the problem is that workers lack of jobs, not that jobs lack workers. The number of long-term unemployed remains high by the standards of the past 70 years. Ditto the number of workers on involuntary short hours, the number of discouraged workers, and the number of workers with jobs that pay low wages.

On the second, firms are sitting on record amounts of cash, and they earn very little on it. Similarly, if a modest cut in tax rates would boost investment, then a modest cut in interest rates should likewise boost investment. Well, we've tried the latter to little effect: investment isn't low, but it's not enough to drive growth higher. The bottom line is that when it comes to investment businesses see a lack of opportunity, not a lack of ability.

To sum up, there's no evidence that yet one more round of tax cuts will be effective, much less serve as a panacea to America's slow recovery from the Great Recession. The evidence is however clear that cuts would boost our deficit.

[Aside: As an economist analyzing the impact of tax cuts provides empirical challenges. The underlying dynamics of population growth and ongoing investment and new technologies mean that there's a strong base of growth. This is the "cake," the substance of the economy. If tax cuts matter, then it's because they add icing to the cake. Since many other factors add icing, the bottom line is inevitably that tax cuts are at best a part. However, there is one major offsetting effect that does allow us to "bracket" the empirical impact: unfortunately the US cake isn't top-heavy with icing, the share of growth that can't be tied to extraneous factors such as taxes has shrunk over the past 25 years. So if taxes matter, they don't matter much.]

Addendum: see the blog post of Oct 8th, 2015 for graphs that present the arithmetic of "dynamic scoring." The bottom line is that tax cuts don't pay for themselves.

Miscellanous:

A quick news item was the failure of the latest effort to legislate by temper tantrum. Funding for the government isn't guaranteed, the bill that passed merely kicks the can down the road to December. Now those who voted for a shutdown surely could count votes, and knew it wouldn't go through, so it's hard to know whether they were serious. In any case, I personally dislike grandstanding of this sort.

---

United Way of Rockbridge:

We've now launched our 2015-16 fundraising campaign, with a goal of $250,000. It's too early to have any results. In any case, we've always had far more demand than resources: whatever we succeed in raising, we realistically have non-profits who could do much more for our community if we could help them with additional funding. So what I want to focus on during the next three months are these community-oriented non-profits.

One is the Rockbridge Area Occupation Center (RAOC), headquartered on Sycamore Street in Buena Vista. Their mission is to employ disabled members of our community. That helps these individuals to maintain a measure of independence, it improves their lives by giving them purpose, it lets them contribute directly to their community, and it provides for regular interaction with others. Towards this end RAOC defines its mission as to "Create a safe workplace where people with disabilities can provide high quality products & services in a timely manner." (http://raoc.org) They are very good at their mission: about 10% of their workers are ultimately able to find private-sector jobs.

To turn mission into practice requires three components. First, they need to locate work that aligns with the capabilities of their workforce of about 30-35 individuals. Second, they need to provide training and supervision. Third, they need to provide transportation, as most of their workers are unable to drive.

The Great Recession has made their operation more challenging, as numbers of businesses that employed their workers went out of business or cut back. So they are now undertaking jobs as far away as Lynchburg, with the attendant costs in transportation.

Keep them in mind this fall: they can assist with yardwork, some of their workers can use a chainsaw and help clear out woods, and of course there are other tasks that they can undertake. If you run a small business, consider using them to clean your workplace once a month. Willy Funkhouser, the Executive Director, can help you sort out what their workers can realistically do. Contact him through their website, or call 261-6159. Of course they welcome cash contributions, too, and have a click-to-donate function on their website.

Contributing to the United Way of Rockbridge is a way to help an array of such non-profits that serve our community. We currently fund 22 organizations and projects; for each, we review their funding proposal, check their financial statements, and have reviewers from our community meet with their leadership to gather information first-hand. We do say "no" when groups cannot make a compelling case that they will use our – your! – money well. And unfortunately we also turn down projects – and fund them at levels below what they request – because we don't have enough money to fund them all.

You can go to our website to contribute via a secure click-to-donate button at uwrockbridge.org, or contact us at our offices at 218 South Main Street (P. O. Box 1094) in Lexington, VA 24450. We do answer our phone, too, at 463-4414.