Hey, everybody’s weighed in on healthcare, so here’s my 2 cents.  With all I’ve been bottling up about this topic in recent months, it’s well past time for a core dump.

Obama and congressional leaders are driving healthcare reform off a cliff, with each fighting for control of the wheel.  The Far Right has bailed out of the car altogether.  All this back and forth on healthcare is making me ill.  And here I forgot to pack my Dramamine.

Can somebody please crack a window?

Time to realign our wheels.  Let’s start with a few principles that I think nearly everyone can agree to:

• Some basic level of healthcare should be available to everybody
• Good health should be as affordable as possible
• People need to see the costs of healthcare firsthand, so they can make valid choices.
• The course of care should be determined by doctors and their patients, not insurance companies, lawyers, or governments.
• Nobody should have to pay for someone else’s avoidable healthcare costs (smoking, overeating, failure to take medication, etc.)

This all sounds very simple and reasonable.  However, we keep bumping up against some “inconvenient truths” (sorry, Al).

1. Healthcare is not a right, any more than good health is a right.  Using this kind of language just inflames opinions.  It stinks that people get sick, die, and/or have no healthcare.  But that doesn’t elevate it to a human right.
2. It’s insurance, people.  It’s a bet.  Nobody who wants to stay in business will stake a game with crappy house odds.  Which is why pre-existing conditions are rarely covered.  This isn’t to say they shouldn’t be, only that we have to recognize the high cost and the limitations of insurance markets to do so.
3. “Seeking profits” is not a dirty phrase.  I’m not sure how, even in the light of Wall Street’s recent fall from grace, it has become one.  Profit making isn’t evil, and those who do it well should be rewarded for it.
4. Comparisons with other countries and other health systems are mildly flawed at best, and invalid at worst. They deal too much in averages over large populations.  There are also many cultural, demographic, diet, and lifestyle differences that skew comparisons.  Any system we import will make some people worse off.  Is it any surprise then, that there’s opposition to the specific reforms being discussed in Washington?
5. Insuring more people will cost more money. From somebody–maybe not you, maybe not me, but someone for sure.  But as long as it’s the other guy it’s fine, right?
6. Life isn’t fair. I expect my children to have trouble learning this concept, but I take it as a given from adults—and yet I’m frequently disappointed.  The rich will always find a way to buy better healthcare, just like they buy McMansions.  And they should be allowed to, frankly.  It sucks for most of us, but that’s the way it is.
7. On the other hand, healthcare eventually has diminishing returns. You can sink millions into prolonging life for only a few months.  That doesn’t make much sense for a society.
8. People who oppose what Obama and Congress are doing are not evil or stupid. They just disagree.  They have different frameworks, different expectations, different needs.  And most do not oppose reform, as many want to claim.  They simply oppose the current proposals on the table.  These people are not sheep being led by Limbaugh and Beck (well, most aren’t) any more than anti-war liberals were the tools of Bin Laden under Bush.  Those who opposed Iraq were not treasonous.  Nor are those who want a different healthcare system than Nancy Pelosi’s vision horrible, selfish people.

Reconciling these truths with our principles is, of course, the crux of the difficulty.  It’s not made any better when we ignore reality, however.  Here’s my two-point prescription for lowering costs:

1. Increase competition among insurers.  People speak of this quite often, but without any discussion of why there is no competition.  And no, I do not think a public option helps.  Those that believe a public option will not raise the costs of private insurance need to take a closer look at Medicare.
2. Make consumers feel the true costs of their choices.  Or as Duke University’s Clark Havighurst calls it, “restoring price tags.”  When we make healthcare prices look cheap (through employer-provided insurance), and actually become cheap (through subsidies), the consumption of healthcare rises, as does its total cost.  Econ 101, folks.

Current congressional proposals do neither of these two things, and that is why many people oppose them.

Some ideas I’d like to see debated and perhaps included in any useful healthcare reform proposal:

• Separate insurance from health.  Health insurance is about making decisions on the amount of care, not the cost of delivering it.  If insurance has any impact on healthcare cost at all, it’s to distort it.  So stop linking the two and acting like each is the solution to the others problem.
• Separate employment from insurance.  This is where both sides have taken their eye off the ball.  This tie between insurance and employment is also the biggest reason there is no competition among insurers at the retail level.  But delinking is the surest way to (a) insulate people against simultaneously losing their job and their healthcare—surely something that ought to be top of mind these days—and (b) get people to see the true cost of their care. Interestingly, this was tried in 2007.  The Wyden-Bennett bill (otherwise known as the Healthy Americans Act) would have effected this separation.  But it was supported by only 13 other senators.  For once big labor and big business actually agreed on something—that this bill wasn’t good for either of them.  It would have been great for you and me.
• Let insurers write insurance across state lines. It is ludicrous that policies are different state to state.  Free the market.
• Enact tort reform.  I’ve never seen anyone credibly claim this is a leading cause of higher costs, but it is clear that defensive medicine is at least a contributing factor to the rise in prices and the number of unnecessary tests.  So let’s keep this on the table.
• Pay for solving healthcare problems, not for procedures.  I don’t hire a plumber to turn a wrench; I pay them for fixing my leaky faucet.  Yes, bills are usually itemized, but I want results, not activity, when I think of my health.
• If this means putting more doctors on salary, then fine. And any doctor that’s truly better at keeping people healthy should be paid a higher salary.  This system, while imperfect, works just fine in the business world, where outstanding performers (including some of those Wall Street masters-of-the-universe) are justifiably payed very, very well.  [By the way, why is it that many of the same people that want to rate doctors (who admittedly have only some control over the outcome of their work) are aghast at the concept of rating teachers (who have a similar amount of control over education outcomes)?  Food for thought.]
• Quit hiding subsidies, and let the market determine prices. Most of what Congress is doing boils down to a shell game to hide or ignore costs that they want the government (read: us) to cover.  But don’t force unnatural rules or prices on the market directly.  Let it do what it does best, then let people decide for themselves what level of funding from the government is appropriate.  Policies to cover pre-existing conditions are justifiably more expensive.  Some people can’t afford even basic insurance.  Forcing everyone to carry insurance sounds reasonable and will help cover some of that cost.  But recognize that this will all be expensive, and can’t be magically carved out of insurance company profits, no matter how “evil” or gargantuan you think they might be.
• Insure for catastrophic health problems only, and leave the relatively minor stuff to be paid out of pocket (or through supplemental insurance).  This isn’t that far removed from auto insurance, where people can choose policies that cover the really bad stuff, but pay for minor things themselves.  Including things like hangnail treatment (for example) in mandatory government-managed health insurance is a sure road to skyrocketing costs.
• Encourage both people and insurance companies to focus on preventative care. As a nation, we can’t solve our issues if we don’t stop abusing ourselves, with poor eating habits, smoking,  sedentary lifestyles, drugs, etc.  And at the end of the day, if we can achieve real competition among insurers, the smart ones will see it pays to make preventive care (annual checkups, for instance) mandatory, and to include it in basic insurance coverage, lowering costs and improving health for everyone.

Look, none of this stuff is original, and none of it is rocket science.  But we’re letting politics steer us away from real issues and valid solutions, instead taking us down a dead-end road.

Getting this right is far more important than scoring a political victory for either side.

Instead of arguing about what to do, we should be past that already, and debating the transition issues by now.  That road will have enough potholes as it is.  No need to play bumper cars with the country in the process.

Otherwise, as David Brooks said in today’s NY Times (in an essay I wish I’d been good enough to write), we’re headed for health insurance reform, not health care reform.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

Did you ever wonder if the game is rigged?

Sure, lots of recent sentiment seems to indicate that the worst is over.  Banks are declaring profits , the market is up, there are “green shoots” poking up through the dead leaves of the economy.  Real estate activity is picking up in moribund regions like Sacramento and Las Vegas.  Maybe we’re nearing bottom.

On the other hand, pundits can’t agree on whether we’re headed for massive inflation, or slip-sliding away down the deflationary toilet bowl.  Consensus seems to be that the bank “stress tests” are a sham, using unrealistically favorable assumptions.

Just yesterday we hear the government believes Bank of America (NYSE: BAC) will need to raise another $35B.  Does anyone really believe that will be the end?

Finally, there’s Fed Chairman Bernanke’s repeated assertion that none of the banks undergoing stress tests will be allowed to fail.  For all the talk about how we’re too smart to repeat the mistakes of either the Great Depression, or (more to the point) Japan’s “lost decade”, we seem well on the road to creating “zombie banks”.  Colorful shells made up of window dressing and government infusions, surrounding a soft, chewy middle of bad assets.

How many licks does it take to get to the center of a bad bank, anyway?

The real problem, I believe, is a collusion of sorts between the government and an oligarchy of “too big to fail” banks.  Both the government and Main Street are continually reminded of the dangers inherent in letting banks fail, in restricting pay, in interfering with the operations of the big banks–in fact, of any change at all to the status quo.  And, for the most part, we’re buying it.

Monday’s  Wall Street Journal spoke of how Stephen Friedman, the NY Fed Chairman, has benefited from his ties to Goldman Sachs (NYSE: GS)–yet another way investment bank elites have been influencing and then benefiting from policy.  There remains a revolving door between Wall Street executive suites and the Treasury.  And a recent Economist essay wonders why the Fed is perpetuating an oligarchy of “big three” ratings agencies, when they contributed to causing this mess in the first place.

This is not the behavior of the financial pillar of the world.  It’s the behavior of a banana republic after a bubble pops.

I’ve been sharing an excellent article with friends recently, by Simon Johnson, former chief economist of the International Monetary Fund.  Johnson makes an elegant and persuasive case that we are no different than emerging market economies such as Argentina, Malaysia, or Russia at key crisis points.

For me, the key takeaways from that article:

1. What we’re going through now is not–in the final analysis–all that rare.
2. Yes, it can happen to the U.S.
3. It’s a little surprising (and perhaps encouraging) that it hasn’t happened here more often.

True, there are differences, such as the dollar’s prominence in world financial affairs, and the trust the world has in U.S. Treasuries.  And there are encouraging signs in some of Obama’s and Geitner’s initiatives.

[As an aside, I'm still amazed at the schizophrenic approach the Treasury and Congress have taken to date.  They keep pumping (our) money into banks, but then turn around and hamstring their ability to be successful by imposing compensation restrictions, demanding lower lending rates and fees, and restructuring mortgages--reducing the value of those "bad assets".  Are we trying to buttress the banks or chop them off at the knees?  Can't we just pick one?]

The conclusion, however, is inescapable.

The key roadblock to rescuing our financial system lies in breaking the oligarchy of large Wall Street banks and the influence they have over the Fed and Treasury.

When you ask him anything, he never answers “no”.
He just “yes”es you to death, and as he takes your dough
He tells you, “Yes, we have no bananas
We have-a no bananas today.”

Just because we’re not primarily a tropical fruit exporter doesn’t mean we’re acting any better than those corrupt banana republics we so disdain.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

Today’s Wall Street Journal reports on GM offering a majority stake to the U.S. Government.   Taxpayers will own a bit of Chrysler as well, although the United Auto Workers will get the lion’s share.

Of course, the government also now has stakes in many of the large banks, e.g. Citigroup (NYSE: C) and Bank of America (NYSE: BAC).   Not to mention AIG (NYSE: AIG).   Or Fannie and Freddie (NYSE: FNM, FRE).  Who’s next, I wonder?  What company or industry in dire straits will turn to the government for aid, in return for preferred stock or something similar?

Somehow I don’t think this is what they meant by the “Ownership Society.”

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

In a recent Wall Street Journal there was an interesting article on jailbreaking iPhones.  It seems many people–more than I originally thought–may be using software to “break” the restrictions on an iPhone, allowing the installation of applications that have not been purchased through the App Store, or certified by Apple (NASDAQ: AAPL).

The article quoted Jay Freeman, developer of Cydia, as saying 1.7M have downloaded it–implying a like number of jailbroken iPhones.  Even if he’s exaggerating, it’s probably fair to say the total worldwide number of jailbroken iPhones could be in the millions now.

In terms of sheer volume, this doesn’t present much of a threat to App Store revenue.  Though certainly the availability of applications that are not blessed by closed Apple ecosystem will appeal to many.

Awhile back, I suggested that the most widespread app for the iPhone in 2009 would be a virus.  Subsequently, I was roundly flamed by the ever-sensitive Apple fanboys, who claimed that the App Store system is practically (if not completely) virus-proof.

Above all, there’s the dreaded “Kill Switch”, which lets Apple disable an application on every iPhone in the world, once its discovered to be malicious or defective in a way that allows the spread of a virus.

[The presence of that kill switch has become a lightning rod for those critical of the amount of control Apple has retained over its ecosystem.  Google's (NASDAQ: GOOG) Android OS for mobile phones promises a great deal of freedom and diversity.  Apple provides a more limited functionality, but users get stability,  increased virus security, and a world-class user experience.  The liberty vs. security trade-off seems universal.]

I’ll admit to a bit of hyperbole in my original post.  And I certainly got more of an education in iPhone security than I ever wanted.  So perhaps a virus won’t be the MOST downloaded app.  Or happen this year.  But I stand by my original sentiment.

Imagine the following:  One day, some unexpected data finds its way into your computer.  Some time later, tens or even hundreds of copies of the data leave your machine and end up on the hard drives of other people’s PCs.  And the process repeats until hundreds of thousands of computers have been infiltrated by copies of this data.

A virus, you say?  No, just a joke email.  But I think you get my point.

The problem with those who defend Apple is they have far too limited a definition of a virus.  No one says it has to be malicious, or take control of your hardware.  Hackers are first and foremost pranksters, who often spread mayhem but are also driven by the challenge–seeking recognition in their own way and in their own circles.

And people make mistakes.  That includes both the developers of legitimate iPhone applications, as well as Apple itself.  Perhaps an innocent error could sneak through the certification process and be exploited by a creative youth with time on his hands.  It needn’t be a malicious attack that takes over peoples’ iPhones.

On the other hand, imagine if you could claim bragging rights by forcing Steve Jobs to actually use that kill switch, disabling a popular application on every iPhone in the world.

That would make a hell of a “virus”, wouldn’t it?

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

On the front page of today’s Wall Street Journal:

Well, it could have been worse.  The sign could have said “Mission Accomplished”.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

It was exciting to watch such an historic inauguration yesterday.  I wish President Obama well.  [Note to the folks at WordPress: "Obama" is getting flagged by your spellcheck.  You probably want to fix that...]

He is clearly inheriting a mess, no matter whom you believe was responsible for it.   The Onion certainly has one view, as they noted on a recent video piece:  “Obama to keep Bush on as National Scapegoat.“

Terrorism threats, two wars to resolve–and plenty to avoid being entangled in, a banking system nearing either collapse or nationalization, a recession (perhaps a depression), energy and environmental issues, the list goes on and on.

The state of the country brings to mind my son, who as a baby suffered from colic.

As any of you who’ve experienced it know, this is a disaster.  For months, no matter what we did, he would just start crying for no apparent reason.  Every night, like clockwork.  (And before you ask, no, it wasn’t synced to the market close.)

Nothing we did, no medicine, no old folk remedy, no comfort we provided, seemed to help.  It simply had to run its course.  When his colicky period ended we were relieved, and now it’s a distant memory for us.

I suspect this is how–eventually–some of our current crises will play out.

I’m optimistic that Obama will be a very good President.  His early moves have indicated he is deliberative and even-handed.  And most of all, intelligent.  This is a hopeful time for many.    [Disclosure:  I voted for Obama.  My respect for his intelligence and leadership overcame my reluctance over his inexperience and the fear he would be too liberal.  I hope I am right.]

Some have suggested President Obama’s first major crisis will be a terrorist strike.  Others have opined that the economy will severely test our new leader.  I have another suspicion, that Obama’s initial challenge will be dealing with the inevitable disillusionment that accompanies his first few failures.  The existing groundswell of support, hope, enthusiasm, and (here it comes) irrational exuberance may not serve Obama well in the coming months.

When he stumbles, many of his supporters–some perhaps the most fervent–could quickly become critics instead.

In other words, it appears we are in an Obama bubble.  And when the bubble pops, there will likely be some oscillation in our new President’s approval rating.

This is not to say he will fail all together.  As I said, I’m hopeful.  But he is not perfect, he does not walk on water, nor did he arrive from the mountain with tablets in hand.  He is human.  More important, he is a politician, and is surrounded by other politicians.  Each with their own beliefs, agendas, and baggage.  No matter how well he has picked his advisers and cabinet, that will not change.

Still, he has already done one thing right.  By inheriting a country with so many issues–real and perceived–it appears there is very little downside risk for him.  And tremendous potential on the upside.

Or as a rather crafty mentor of mine said to me long ago:  “Never accept an offer to hold a happy baby.”

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

With the New Year upon us, and a possible rally (well, sometime this year we hope), it may be time to think about dipping your toes back into the market. But how to put your money to work?

For technology stocks, I think it’s important to have an “edge”.

Over the past few years, I’ve been following a trend that–while not new–still has plenty of legs. Particularly coming out of this bear market. It’s not a stock screen, but it helps me see which technologies could be viable investment candidates, and which might instead require swimming against the current.

Things like control, intelligence, and value creation have long been shifting away from the center. Moving from large, centralized bodies towards the edge. The edge of markets, networks, locales. There are exceptions, of course, but this movement is still happening.

So I always check first to see whether any new technology–or its market–supports this trend towards decentralization and democratization.

“Uh, gee Scott, that’s great. I have no idea what the hell you’re getting at.” Fair enough. Let’s look at a few examples.

Healthcare

Lots of innovation here. Doctors interacting with patients and each other at a distance. Sending X-Rays to specialists abroad for review. Doctor-patient consultations over videophone instead of in the office. Glucose testers and home dialysis kits let measurements occur at home, not the hospital. Portable ultrasound machines and defibrillators allow diagnosis and treatment in remote areas.

Consumers are rating doctors, sharing treatment experiences, and finding health information via social networks and the Internet. Doctors themselves are forming “expert” networks to vet new research and treatments according to the wisdom of crowds thesis.

All of this is related to distributing power or value creation away from traditional central facilities and control.

Companies such as Sonosite (NASDAQ: SONO), HealthGrades (NASDAQ: HGRD), WebMD (NASDAQ: WBMD), Vital Images (NASDAQ: VTAL), and American Well (private) are among many in this space.

Manufacturing

Here’s a favorite.

Computer Aided Design (CAD) made it easier for companies to decentralize or even outsource much of their product design. But now they’re actually outsourcing the fabrication, and in some cases the end product manufacture can be done outside of a factory.

3D Printing (often more formally termed Rapid Prototyping or Rapid Manufacturing) has come of age, with machines that can take computer files and fabricate plastic or metal objects from nothing more than raw material and software.  Before, even simple prototypes had to be fabricated over the course of weeks.  Now, companies can turn a design into a marketing concept model within hours, and make needed changes much quicker, shortening design cycles. They also can avoid expensive tooling, since short-run items can be “printed” instead of made with traditional manufacturing processes.

Companies like Stratasys (NASDAQ: SSYS) and 3D Systems (NASDAQ: TDSC) make large industrial grade fabricators, as well as less expensive versions suitable for office use. Soon, they (and others like Desktop Factory–private) will make consumer versions cost effective.

Why have a replacement part for that lawn mower or kitchen mixer shipped from the factory, when you could simply download the file and print it at home?

Municipal Networks

While many think this is an idea that went bust, there’s still a huge demand for municipal networks. FCC statistics on broadband penetration are quite misleading, and plenty of Americans have either pokey DSL-like speeds, or no broadband at all. Towns and public utilities, often in partnership with private enterprise, are filling the gap.

True, many of these projects have not fared well–but that was usually due to faulty business models, not the underlying tech. Many ideas have been tried, and people are getting much smarter. There are many thriving wireless and Fiber-to-the-Home projects.

Instead of one giant centralized “mother of all” (Ma) Bell owning your phone or Internet connection, the end piece is owned locally. And its often faster, with more capacity, than many parts of the Internet. This is recapitulating what happened years ago to television in underserved areas, as Community Antenna Television (CATV) gave birth to today’s cable networks.

And it’s happening with energy generation too.

Others

Here’s a partial list of other innovations that are benefiting from “the edge”:

So how do we wrap our minds around this explosion of innovation? I think of this trend as occurring in 3 distinct ways:

Decentralization–moving utility to the edge

The basis for this first one is hardware, and typically some kind of disintermediation. It’s driven by things like the availability of leading-edge technology, shrinking hardware sizes, falling costs, and the Internet.

Examples–3D printing, TiVo, municipal networks, distributed energy generation

Authoring–tapping users to create

Here the basis is centered more around software, the demand for mass customization, and hobbyists. You know, that class of people with time, passion, interest, and the willingness to work for nothing but recognition and/or personal satisfaction. The availability of software tools, Broadband, and the Long Tail (everyone’s a hobbyist in something) are drivers.

Examples–Blogs, mashups, personalized ad streams, podcasts, YouTube

Emergent Systems–enabling collective/cooperative effort

This last is typically facilitated by an enabling service. Often with the existence of an intermediary to provide a control or filtering function. But while the result mimics a more centralized function, the value is created on the edges–a true “whole is greater than sum of parts”. Here the driver is simply networks of people in easy, rapid communication. I think they call that the Internet.

Examples–Wikipedia, open-source software, eBay, prediction markets, grid computing

Then according to the man who showed his outstretched arm to space,
He turned around and pointed, revealing all the human race.
I shook my head and smiled a whisper, knowing all about the place.
Yes, “Close to the Edge”

Of course, like all classification systems, the answer you get will depend on which consultant you talk to. The concept is pretty general, and sometimes unwieldy. Regardless, I find the edge idea to have a lot of merit, and hope you do too.

The key is to find companies that create, use, and benefit from the technologies that are fostering these trends. Or the markets that they enable. It might be tool, a marketplace, an ad platform, a device, a network, whatever. Then do your research.

Once you get down to individual companies, it’s caveat emptor. Picking stocks based on trends alone is what cost people so much money investing in the likes of Webvan (another “edge” play) or Pets.com.

I have done research on some companies that are emblematic of this trend–including a few mentioned here–to a greater or lesser extent, some more recent than others. In fact many I covered as an analyst fell into this mold–and not by coincidence. But do your own due diligence before investing, or hire someone to do it for you.

Let me know if you think of other ways this idea might be manifesting in technology markets.

Disclosure: I currently hold no positions, either long or short, in any stocks mentioned here. However, I do consult with companies in some of the markets discussed.

…to bring you an important announcement.

In today’s NY Times, former FCC commissioners William Kennard and Michael Powell both urged Congress to delay implementation of the digital TV transition.  There’s been neither enough money set aside to subsidize converter boxes, nor are there enough in stock to satisfy demand anyway.

Oh, and not enough people have taken advantage of the government offer.  Nor is the FCC call center prepared to handle the estimated 1.5 million calls from confused consumers once the switchover occurs.

“Moreover, many people will need help hooking up their converter boxes and setting up their antennas. (Picking up the digital signal may require reorienting or moving an antenna, or buying a more powerful digital antenna.)”

That last part has not generally been communicated to anyone.  At least those likely to be affected.

[Switching to my best Jon Stewart falsetto]:   “Nailed it….”

I agree with the commissioners.  The FCC and other powers-that-be need to do a better job of making this transition happen.  It’s not a simple one, and there are technical elements beyond the skills of many people to understand without help.  Otherwise, as the article states, “If the transition to digital TV goes badly, it will inconvenience millions.”

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

Speaking of today’s NY Times, Paul Krugman’s op-ed just begs for a comment.

[Actually, I haven't spoken of the NY Times, because the article where I mention it hasn't been written yet.  But you've already read that article that I haven't written, because postings on blogs are displayed in reverse chronological order, so that article appears before this one.  Wait, I'm getting dizzy.  I'd better sit down.]

Anyway, the piece concerns Krugman’s belief that Obama’s proposed stimulus package is a good start, but is woefully short of what’s needed by the economy.  I think what he’s really saying is we have to reinflate the bubble.

I read Paul Krugman even though many times I don’t agree with him.  He’s an eminent economist, his writing is lucid, and I usually learn something new every time I read his stuff.  I do wish he’d stick with economics and avoid the purely political rants.

And I get impatient if he has too many columns in a row where he just whines without offering a specific solution.  But none of those problems arose today.

Here’s where I fall off the wagon:

Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.

And the Obama plan is nowhere near big enough to fill this “output gap.”

Yet by his own admission, Krugman believes that the economy that we had a year or two ago was an unsustainable balloon.  To quote:

The fact is that the U.S. economy’s growth over the past few years has depended on two unsustainable trends: a huge surge in house prices and a vast inflow of funds from Asia. Sooner or later, both trends will end, possibly abruptly.

So our national output rose to meet a demand that is unnatural.  Our ability to produce has outstripped our natural ability to consume.  Why, then, is he suggesting we try and ramp demand up to that pre-crisis level?

Our problem isn’t that the pump needs to be bigger.  It’s that the balloon we’re trying to reinflate is too large.  You don’t grow the economy to a level that’s an aberration without suffering contraction as things revert to the mean.  There’s no pain-free recession.

Now maybe I’m missing something.  If so, somebody explain.  Maybe that $15 trillion/year figure was less than our pre-crisis demand, and so Krugman’s large suggested figure is OK.  But it still seems to me that his remedy would simply set us up for some rather painful oscillations somewhere down the road.

And that assumes at least a modicum of fiscal stimulus is a good idea.  Others disagree.  For me, the jury’s out on Keynes.  But as I said recently in “Tiny Bubbles“, to try and pump that balloon all the way up again is a recipe for disaster.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

Smartphone applications are one of the biggest trends going, one that will only get bigger in 2009.  Not exactly unexpected, especially for anyone who’s followed Salesforce.com’s  (NYSE: CRM)  AppExchange model.  But despite how Google’s Android (NASDAQ: GOOG) foreshadowed the market, it’s taken the brilliance of Steve Jobs to get the ball rolling.

On the one hand, the dynamics are similar to ring tones

1. Cheap.   A few bucks each; some are free
2. Easy.   Apple (NASDAQ: AAPL) sets the standard for ease-of-use, though with the usual drawbacks that come from its closed system.  Android’s market will be a little more “wild west”, but probably more innovative for it.
3. Not originated by the service provider.   The best services never are, telcos are about as innovative as rocks.
4. Customizable.   Make your phone personal, whether it’s playing apps or having different ring tones for each caller.
5. Cachet.   Everyone wants the latest “cool” app, just like they wanted the most popular songs to sound out whenever their phone rings.

On the other hand, the mobile phone app phenomenon is also evolving  into an analogue for the gaming industry, with developers writing apps for one of only a few “platforms” (e.g. iPhone, Windows Mobile, Android, etc.).  I expect to see developers selling versions of their apps onto multiple platforms, especially for the more popular ones, just as happens with game consoles.

The last, and most ominous similarity, is with Windows.  Despite the existence of Android, there’s a chance the iPhone could become the uber platform, with most apps being written for it (at least first), creating a Microsoft-like dominance of phone applications.  All of which leads to the following prediction for the New Year:

The most widespread iPhone application in 2009 will be a virus.

Think about it.  All the elements are already there:

• rocketing platform/device popularity with a growing market share
• viral growth in application number and complexity, providing plenty of ready vectors for the introduction of malicious code
• existence of a large, dedicated, developer base
• a ready black market for both hardware and software–which means plenty of hackers.

Despite assurances to the contrary from its PR department, Apple software is not virus proof.  It’s largely benefited from a lack of attention given its small (though growing) share of the desktop/laptop market.  But the success of the iPhone changes those dynamics.  Already, iphone dev team has unlocked the iPhone 3G, and is even now delivering its yellowsn0w software to the masses.

True, Android will undoubtedly be more vulnerable, given its marketplace model and the lack of a central control.  But betting against hackers has always been a sucker play, and it will remain so even for the iPhone.  Just ask the Blu-ray folks.

The predators are circling.  And it’s only a matter of time.

Disclosure: The author holds no position in any of the stocks mentioned here.