Category Archives: Science & Technology

Smart Cities Council Comes to Virginia

The Smart Cities Council recently held a “Readiness Challenge” workshop in Virginia. I’ve banged the Smart Cities drum on and off over the years, but gave up when I saw so little reader interest. But I’ll take one more whack with a percussion mallet because the “smart cities” concept seems to be gaining momentum. The fact that several high-level people in the Northam administration attended the workshop signals more official interest than in the past.

A big focus of the workshop was universal broadband — bringing the benefits of high-speed Internet access to rural communities and the inner city. News that I had missed: Virginia now has a “chief broadband advisor” — Evan Feinman, who had served previously as executive director of the Virginia Tobacco Commission.

Other topics discussed:

  • Mobility options. Use smart mobility to reduce carbon emissions.
  • Energy planning. Deploy smart technologies to accelerate the adoption of electric vehicles.
  • Public safety. Improve data coordination between state agencies to address more complex public safety threats.
  • Standardize data. Improve data governance, develop a common architecture and data platform, and create incentives for data owners to work together. Also, prepare the next generation of data workers.

Information technology is not a silver bullet for Virginia’s immense challenges. But it is a potentially useful tool. Hopefully, some of the ideas spawned by this workshop will percolate through the impermeable strata of politics and bureaucracy to be adopted in the real world.

Read the Smart Cities Council account of the workshop here.

Taxes, Innovation and Virginia’s Lost Mojo

In 1940

In 1940, technological innovation in the United States was concentrated overwhelmingly in the Great Lakes states, the Northeast, and California. The powerful economic force known as agglomeration — in which geographic proximity boosts the productivity of inventors and researchers — acted to perpetuate those states’ lead. Yet over the following six decades, the propensity for innovation, as measured by patents per 10,000 state residents, diffused to Texas, the South Atlantic states (including Virginia), and the Rocky Mountain states. What drove that change?

One likely factor was tax rates — primarily for corporate income taxes, but for personal income taxes as well. And that should be a wake-up call to Virginia. The Old Dominion’s 6% top marginal tax rate for corporations gives the state a crummy 31st rank in the Tax Foundation’s business tax climate index, and its 5.75% top tax bracket contributes to the state’s 9th highest rank for state-and-local income taxes paid per year.

A new study by Ufuk Akcigit, a University of Chicago economics professor, and three colleagues has found that corporate and personal income tax rates have a profound effect over long periods of time on technological innovation. States their paper, “Taxation and Innovation in the 20th Century“:

Taxes affect the amount of innovation, the quality of innovation, and the location of inventive activity.

The effect of taxes on innovation is a consuming question in modern-day economics. Heavily dependent upon anecdotal evidence and incomplete data, the debate has been impossible to resolve decisively. However, Akcigit and his co-authors have set a new evidentiary standard by compiling three new datasets. First they constructed a database of inventors based on historical patent data since 1920, which allows them to track innovations over time, industry, and location. Secondly, they built a database of corporations’ R&D labs and research employment. Thirdly, they created a dataset of state-level corporate and personal income tax rates.

The authors find that personal and corporate income tax rates have “significant effects” at the state level on patents, citations (a measure of the significance of a given patent), the prevalence of inventors in a state, and the share of patents produced by firms compared to those produced by lone inventors.

Corporate inventors are the most “elastic” — economics speak for “sensitive” — to tax rates. Corporations tend to be unsentimental about where they invest. They have less loyalty to a given geographic area. They look to maximize their return on investment wherever they can find it. By contrast, individuals may have strong personal and sentimental attachments to a location. However, when inventors do choose to move, Akcigit has found, they are “significantly less likely” to move to states with higher taxes.

Though a significant factor in shaping the geographic distribution of innovation, taxes are not all-powerful. The authors readily acknowledge the influence of agglomeration effects. Within a given scientific or technological field, inventors like to stay close to the action — in other words, to locate near others in the same field. Often, agglomeration effects are stronger than tax rates.

Bacon’s bottom line: Let me offer a couple of refinements, and then a warning to Virginia.

The authors examine published corporate income tax rates. They do not take into account the impact of corporate tax giveaways — an essential strategy for some states (such as New York) to retain corporate activity and for other states (such as anyone trying to attract Amazon’s HQ2) to bribe corporate investors. Also, they don’t examine how the tax money is spent. In theory, highly skilled and educated inventors prefer to live and work in locations with superior amenities made possible with higher taxes. Finally, they neglect to examine university-generated R&D. It goes without saying that university R&D is tied to the geographic location of the institution (although research teams can be induced to move).

I would argue that powerful forces work to perpetuate the geographic status quo:

  • Agglomeration effects, in which inventors in industry clusters feed off one another. Silicon Valley is a classic example of how agglomeration effects outweigh the negative impact of high taxes and even higher real estate prices.
  • Government and cultural amenities, in which wealthy regions of the country spend more money on schools, higher-ed, and other amenities valued by the educated class, and where philanthropists have endowed local universities, medical centers, and arts & cultural institutions over the ages.
  • Tax-favored institutions, in which leading universities, disproportionately located in the Northeast, the Midwest and California, have accumulated massive tax-exempt endowments that allow them to underwrite the recruitment of world-class research faculty. Insofar as universities serve as anchors for innovation ecosystems, this tax advantage is crucial.

It is remarkable, given the extraordinary advantages of the incumbent innovation leaders, that research and innovation has migrated to other states at all. What allows these other states to compete? Lower corporate and individual taxes is one of the few public policy tools a poorer state can muster.

Once upon a time, Virginia was known as a low-tax, fast-growth state. That is no longer true. At best, we can claim to be a moderate-tax, moderate-growth state. We have neither the advantage of accumulated wealth in the form of world-class research universities, medical centers, foundations, museums, and cultural institutions nor the advantage of lower taxes that attract corporate investment. (Yeah, yeah, the University of Virginia is great, and so is the Virginia Museum, but overall Virginia is strictly second-tier.) Measured by economic performance, Virginia is in the muddled middle. Economic growth is plodding. For the first time in decades, more native-born Americans have been leaving the state than entering it. 

Is our tax policy to blame? Do our tax structures and budgetary priorities increasingly resemble those of the Midwestern and Northeastern states — without the inheritance of vast industrial-era wealth and philanthropy to underpin our economy? I suspect strongly that that’s the case.

To answer the question, it would help to have innovation data more recent than 2000. Economically speaking, Virginia was on a roll then. Today, the state is suffering economic malaise. I would not be surprised to find that our relative innovation standing has declined. Our governor and legislature propose lots of small-small remedies to jump-start the economy, but it’s hard to see how they will amount to much. Virginia’s relative decline warrants far more serious thought than it has received so far.

UVa’s $30 Million Raid on Tech’s Biocomplexity Initiative

Superstar faculty member Chris Barrett has leaped from Virginia Tech to UVa. Barrett is a global leader in applying computer science concepts and tools to make new discoveries in complex social systems.

The University of Virginia offered a biocomplexity research professor a 15% pay raise — to $450,000 — plus a rich set of fringe benefits to recruit him from Virginia Tech, according to Freedom of Information Act documents obtained by the Roanoke Times.

Chris Barrett, who was promised $30 million in startup funds, left his job as executive director of the Biocomplexity Institute of Virginia Tech to become the executive director of the Biocomplexity Initiative at UVa. He has persuaded at least seven of his Virginia Tech colleagues to join him in the move from Tech’s Arlington facility to UVa’s Fairfax health center at the Inova Bioinformatics campus.

Reports the Roanoke Times:

Barrett’s offer letter included a number of personal perks, including a $15,000 lump sum for moving expenses and temporary housing, a computer and cell phone, lab and office space including interim space, high performing computer resources and discretionary funds including a long-term rental car for use to travel to and from the Washington D.C., metro area and 10-15 business class trips worth up to $75,000 for the first year of his employment.

Perks were also guaranteed for other employees wishing to join Barrett. … Employees wishing to work for the initiative and Barrett could also be offered $15,000 for moving expenses and an allowance for temporary housing and “accelerated recruitment offer letters with appropriate faculty appointments and rank.”

Last week the University of Virginia Board of Visitors approved drawing $30 million from the university’s billion-dollar Strategic Investment Fund to fund the package.

Outwardly, Virginia Tech has displayed no sign of animosity toward UVa. According to the Roanoke Times: “UVa’s Executive Vice President and Provost Tom Katsouleas told The Daily Progress that he was working with Tech interim Provost Cyril Clarke to navigate the situation. Tech president Tim Sands said in the first week of new UVa President Jim Ryan’s tenure he called the new president to discuss the impending changes at the two universities.”

Bacon’s bottom line: There are at least two prisms through which to view this $30 million deal: (1) the impact on Virginia university efforts to build their R&D programs, and (2) the impact on the cost of attendance at the University of Virginia.

The recruitment of Barrett and other Tech professors undoubtedly represents a coup for UVa. Press reports do not say how much Barrett and his associates generate in research funding, but it must be a substantial sum to warrant a $30 million UVa investment. At the same time, the deal delivers a significant blow to Virginia Tech’s Biocomplexity Institute lab whose 50 tenure-track professors pulled in $103 million in award grants in the first six months of the last fiscal year. Viewed from the perspective of Virginia’s higher-education system, the deal does nothing to enhance the state’s R&D standing: UVa spent $30 million to shuffle Barrett and his research team from one Virginia research institution to another.

Legislators undoubtedly will be asking themselves, does it make sense for Virginia’s leading research institutions to poach superstar faculty from one another? If a Virginia university is going to spend $30 million to recruit a big name, shouldn’t it aim to bring in someone from outside the state?

The transaction also provides insight in how much it costs to play in the R&D big leagues. The annual cost of attendance at the University of Virginia is about $30,000.  For what it cost to recruit Barrett and his team, UVa could have offset the full tuition, fees, room, board and other expenses for 1,000 students for a year. (Or, if UVa had put the money into a scholarship endowment, it could pay total expenses for 50 students pretty much forever.)

The Board of Visitors can argue that undergraduate students won’t pay a dime toward the recruitment package, which is being financed by the Strategic Investment Fund — a superfund cobbled together from various working capital sources and reserves and invested at a higher rate of return than was achievable previously. But money is fungible. The Visitors just as easily could have devoted the money toward lower tuition & fees or increased financial aid. Alternatively, if advancing UVa’s institutional prestige was the foremost consideration, they could have used the funds to supplement salaries of humanities and social science professors. A $50,000 salary supplement goes a long way to hiring a nationally renowned professor of history or English.

It will be interesting to see what kind of Return on Investment UVa expects from its $30 million outlay. How much outside grant money will Barrett be able to bring to the university?

From a statewide higher-ed system perspective, the question is this: How much more grant money will Barrett bring in as a result of his new association with UVa and Inova than he would have generated as a Virginia Tech professor? Legislators should dig for answers.

Who Were the Puerto Rico 3,000; How Did They Die?

The death rate per 10,000 rises after Hurricane Maria a year ago, but more in line with historical trends before a “displacement adjustment.” Source: George Washington University

So, who were those 3,000 Puerto Ricans who died because of Hurricane Maria last year?  What killed them?  The storm down south and the controversy swirling over our illustrious President’s defensive tweet sent me searching for data.

It turns out there is no list of names.   There is no accounting of what causes of death were attributable to the aftermath of the devastating storm.  In fact, having now scanned the George Washington University report at the heart of this all, I have an itching feeling they missed a big statistical point.

The bottom line is that the researchers developed a model and made a projected estimate of the number of deaths to be expected on the island during the six months following the storm, based on previous year’s death numbers.   They then factored in the fact that a full 8 percent of the population, 280,000 people roughly, left the island following the storm.

With that population change factored in, the “expected” number of deaths was about 3,000 fewer than the 16,000 deaths which were recorded September through February.  Those 3,000 “excess” deaths above the projection are the one’s being attributed to the effects of the storm.  I’m rounding because their report admits the projection is not exact.  The chart I included above notes the higher death rate per 10,000 people.

There are not 3,000 death certificates noting hurricane-related causes (loss of electricity, stress, poor transportation response) and the authors chide the local medical community for not being sufficiently exact in filling out their death certificates.  So they are left with models and projections and estimates, which have translated into MSM-accepted Truth.

Here’s my question, the itch not addressed in the report, that I saw:   Who left?  Who departed following the storm?  Would the elderly, infirm and impoverished have been the ones to decamp to the mainland?  Or would they have been the one’s left behind?  Doesn’t the shift in the baseline also at least in part explain this?  The death rate really only jumped dramatically when you reduce the baseline population.

Had those people who left stayed, the number of deaths might have been the same (and then more in line with past history.)  Are they assuming mortality should have gone down after the migration but didn’t, and that’s a sign the storm continued to kill 500 more per month?

We estimate that in mid-September 2017 there were 3,327,917 inhabitants and in mid-February 2018 there were 3,048,173 inhabitants of Puerto Rico, representing a population reduction by approximately 8%. We factored this into the migration “displacement scenario” and compared it with a “census scenario,” which assumed no displacement from migration in the hurricane’s aftermath. We found that, historically, mortality slowly decreased until August 2017, and that rates increased for the period of September 2017 through February 2018, with the most dramatic increase shown in the displacement scenario accounting for post-hurricane migration (emphasis added).”

No question, the number of deaths from this kind of disaster is not – and never has been – limited to the people killed at the height of the storm.  But are the numbers being fudged here just a bit?  You must consider who could and would leave and who could not, and the population left behind.  But that takes away this wonderful cudgel for beating Trump (and it’s his own damn fault for taking the bait).

Gee, if you take a population and subtract 8 percent – most of them younger, healthy and affluent – is there anyplace in the world where you would NOT see an uptick in the death rate among those left behind?  Just asking.

AI – Nirvana or Apocalypse (for Virginia)?

Smells like tech spirit – Artificial Intelligence may be on its way to becoming the buzziest buzz-term in the buzzword laden history of the buzz-o-sphere.  No prior trend has engendered the societal debate that AI has sparked.  Scientistsbillionairespoliticianspoetspriestsbutchersbakers and candlestick makers have all gotten into the game.  Ok, the candlestick maker reference was hogwash but give that industry time … something will come up.  Everybody has an opinion and the opinions are “all over the map”.  Artificial intelligence will either be the recreation of Eden on Earth (without the troublesome snakes and apples) or the kind of zombie apocalypse that gives zombies nightmares.  Either way. it seems clear that AI will have a profound effect on how we live, work and play in Virginia.

“I’m sorry Dave, I’m afraid I can’t do that.”   Concerns about computers getting too big for their britches go back a long way.  Generation after generation had their fears of computer overlords generally mucking things up.  The average American Baby Boomer first learned the perils of artificial intelligence in 1968 from HAL of 2001: A Space Odyssey fame.  Thirty three years later everybody laughed when 2001 came and went without any psychotic computers in evidence (give or take the Apple Newton).  But here we are 17 years later and there are some very serious people with some very serious concerns.  Why did concerns about AI go from the realm of entertainment to a serious debate about the start of nirvana vs the end of mankind?

The winter of their discontent.  AI has gone through a series of boom and bust cycles over the decades from the hype of the 1970s and 80s to the last of the so-called AI winters from about 1990 through 2011.  In some ways the public’s fascination with AI elevated the highs and made the lows all that much lower.  In 1981 Japan’s MITI funded the Fifth Generation Computer Systems project with $850M.  The ambitious program would build a new generation of computers designed for AI along with the AI software needed to make the dream come true.  An impressive list of goals was drawn up.  Ten years later the goals had not been met.  Twenty, even thirty years later many of the goals from 1981 were still elusive.  Then, in 2011, came one of those bizarre occurrences that sort of change everything.

Your answer must be in the form of a question.  In January 2011 IBM’s AI platform, named Watson, played Jeopardy! against the two best human Jeopardy! players in history and beat them soundly.  The AI winter was over.  In reality, AI research had been going on at IBM and elsewhere during the so-called AI winter but the Jeopardy! contest reawakened the public’s fascination with AI.  AI research was often called something other than AI during the AI winter because of the stigma AI had developed.  Kind of like the way liberals now call themselves progressives.  There were neural networks, expert systems, knowledge engineering, etc.  However, it was AI.  The Watson Jeopardy! match put AI back in the public’s imagination and it’s been “off to the races” ever since.

The Last Question.  Google followed IBM with a more impressive AI demonstration.  In 2016, using its Deep Mind AI platform, Google defeated the reigning human Go master.  Go is a 3,000 year old Chinese board game that has been notoriously hard for AI platforms to successfully play due to the mind-boggling number of possible moves.  These advances, and many more, explain why the debate over AI and the future of mankind has reached such a fever pitch.  It appears that this time … AI is finally real.

Come out Virginia.  Don’t let ’em wait.  You backward states start much too late.  Ok, apologies to Billy Joel but Virginia has a long history of denying the present and ignoring the future.  In a world where Russian bots already stand accused of meddling in American elections Virginia needs a frank discussion regarding the escalating capabilities of automation and AI.  Will bots affect the 2019 Virginia elections?  How will automation impact Virginia’s economy?  Was it coincidence that Steve Haner’s by-line started appearing on BaconsRebellion about the same time that AI-powered bots began posting on social media?

— Don Rippert

Quincy Patterson – Welcome to Virginia (Tech)!

Photo Credit: Bleacher Report

Windy City Blues. The City of Chicago has been much maligned of late, mostly for its high murder rate but also (I suspect) for its loudly liberal mayor – Rahm Emanuel.  Emanuel is a favorite target of conservatives. The per capita rate of murder in Chicago is high but far from the highest in the nation. That dishonor belongs to St Louis. Some find it easy to dismiss Chicago as a place of hopelessness, losing its population (true),  in a state teetering on the verge of bankruptcy (maybe). I know a different Chicago. The City that Works. From Oak Street Beach to the Shedd Aquarium, from Rush Street to the Miracle Mile, Chicago is a fine American city full of fine Americans. Hell, the Cubs even won the World Series. But this is not the story of Chicago but of one remarkable Chicagoan, Quincy Patterson, who will soon be coming to The Old Dominion.

The City of Broad Shoulders. Quincy Patterson certainly has broad shoulders. At age 17 he’s 6’4” tall and weighs 230 pounds. He can reputedly throw a football almost 80 yards. All of this made him a four-star quarterback recruit wooed by colleges and universities across the nation. But he chose us, or more precisely, he chose Virginia Tech. So what? Good high school quarterbacks are not all that noteworthy and Virginia Tech has a long tradition of playing top tier college football. Why is this young man’s story worth telling? The answer: Four point four from an Academy school.

Four point four. That’s not his 40 yard dash time (although it might be close), it’s Quincy Patterson’s Grade Point Average (GPA) on a 4 point scale. He achieved that stratospheric GPA by taking a slew of AP courses at Eric Solorio Academy High School, a public high school located in the Gage Park area of Chicago. During one noteworthy semester of his junior year Quincy achieved the staggering GPA of 4.7. He also scored an impressive 680 on his math SAT. While I assume Mr. Patterson has aspirations to lead the Hokies to gridiron glory or to play in the NFL that’s not what he was talking about last February. He was talking about his passion for engineering, the major he will pursue at Virginia Tech.

I’d like to thank the academy. The Academy for Urban School Leadership (AUSL) is a Chicago non-profit school management organization founded 17 years ago. It manages 32 public schools in Chicago including Quincy Patterson’s alma mater. Beyond educating fine young people like Mr. Patterson the AUSL also operates the Chicago Teacher Residency Program, a yearlong urban teacher-training program. The paid training program provides the teacher-to-be with preparation, a teacher’s license and a master’s degree. In return, the teacher commits to teach in one of the AUSL managed schools for at least four years. Since its inception over 850 teachers have graduated from the program.

Observations and Implications. First, Virginia Tech will probably be an even better football team over the next few years. Second, Virginia Tech should be congratulated for staying focused on academics and engineering along with football while recruiting Quincy Patterson. Patterson had a number of fine schools on his final list including UNC, NC State and Illinois. Patterson says it was the focus on engineering and academics that made the difference for him. Third, the public-private alliance that spawned the AUSL in Chicago bears further study for possible applicability in Virginia. A future column will deal with the details of that program along with commentary from supporters and critics.

Nobody’s perfect. In an interview with the Pilot Online Quincy Patterson said, “I went on a road trip and got to see Virginia and Virginia Tech in the one day.” Ugh! And he chose Tech?!? Quincy, Quincy, Quincy … transfers are always available. Mr Patterson, if you happen to read this drop me a line. I know a great place for an authentic Chicago dog, let’s talk about Virginia universities! Until then, welcome and good luck.

— Don Rippert

Coming to a Military Near You: Robots, Drones and Artificial Intelligence

Paul Scharre, director of the Technology and National Security Program at the Center for a New American Security.

On Sept. 26, 1983, Lieutenant Colonel Stanislav Petrov was on duty in bunker Serpukhov-15 outside Moscow when sirens began blaring and a red backlit screen flashed a warning. The Soviet Union’s new Oko satellite-early warning system had detected what appeared to be an intercontinental ballistic missile launch from the United States. Then another. Then three more. It appeared that the Soviet Union was under nuclear attack. But Petrov was uncertain. A surprise attack by only five ICBMs made no sense. He called ground-based radar operators for confirmation. The ground radars detected nothing. Going with his gut, Petrov concluded that the new system had malfunctioned. He now didn’t launch a counter strike.

As it turned out, Petrov was right. Sunlight reflecting off cloud tops had triggered a false alarm. Thanks to one man’s intuition, nuclear war was averted, said Paul Scharre, author of “Army of None: Autonomous Weapons and the Future of War,” in a speech at Saint Stephen’s Episcopal church last night.

What would a machine have done in his place, Scharre asked. It would have done whatever it was programmed to do — even if it meant the destruction of the world.

Robots enhanced by artificial intelligence are coming on fast. We can see the technology in driverless cars, in the algorithms that drive stock market trading, and in weapons deployed by armed forces around the world. Some 16 countries now have armed drones. The Islamic State has weaponized machines that cost $300 retail. On a grander scale, the United States recently launched its first robotic submarine killer, which at $30 million a pop are a lot cheaper to build and operate than $2 billion destroyers.

There doesn’t seem to be any halting the rush toward using robots and AI to enhance our military, said Scharre. In the long run, they’re cheaper. Robots don’t need health care, they don’t ask for pensions, and their morale doesn’t suffer from continual overseas deployments. Also in war, as in finance, speed is crucial. Machines working on a faster decision-making curve will beat slower machines — and humans.

Computers can pound grand masters at chess and even beat humans at the infinitely more complex game of Go. Designers know how to program robots to abide by strict rules so they always obey the law. That’s great when situations are clear and predictable. But no one has figured out how to imbue technology with the kind of intuition that Stanislav Petrov displayed when he questioned the Oko system, Scharre said. No one has figured out how to imbue robots with the ability to make moral decisions in situations of conflict and ambiguity.

These moral issues are of more than remote interest to Virginians. Elected representatives such as U.S. Senator Mark Warner and former Governor Terry McAuliffe are enthusiastic proponents of developing autonomous vehicles and drones as an economic development strategy. The Old Dominion also is home to armed forces that will deploy AI-enhanced technologies — and home to some of the tech companies that write the code for Artificial Intelligence.

Despite misgivings, the U.S. has little choice but to pursue the technologies behind autonomous vehicles and weapons systems. Other countries are working on them, Scharre warns. China aspires to becoming the world leader in AI. If we fall behind in the race, we risk losing our military primacy.

Preserving the global balance of power, averting nuclear catastrophe, and probing the existential angst of robots are fine and dandy, but what about us? I mean, what’s the impact on Virginia? I asked Scharre, who resides in Northern Virginia, what an “Army of None” would mean for the military presence in the Old Dominion.

It turns out that “Army of None” makes a clever title for a book but is a bit of a misnomer. If there’s one thing that the U.S. Army and the Marines have learned from their long campaigns in Afghanistan and Iraq, it’s that they need manpower to fight insurgencies. While technology can make American soldiers more effective, they can’t substitute for boots on the ground.

Conversely, Scharre said, the Navy and Air Force are the branches of the armed services that have the most to gain from automation. The Navy doesn’t care how many men and women it takes to run a warship. Actually, the fewer the better — highly automated vessels mean less payroll, less pension cost, less deployment fatigue and more money for new weapons systems. By this logic, if the Navy aggressively adopts autonomous systems, the long-run outlook could be a much smaller (though higher tech) Navy payroll in Hampton Roads.

How about the tooth-to-tail ratio? The U.S. Defense Department famously has as many civilian employees today as combatants, the consequence of massive bureaucratization. Is there any hope, I asked, of replacing administrative drones with AI-enhanced drones? Scharre was noncommittal. It might be possible to use AI to improve the efficiency of business processes, just as it is in the private sector, he suggested. But don’t look for a massive displacement of excess admirals and generals, much less a wholesale riffing of mid-level functionaries.

Robots, it seems, do not yet constitute a constituency that can lobby for the advancement and preservation of their interests. Career employees in Northern Virginia’s defense bureaucracy are safe for now.

21st Century Wealth Creation: block.one

Dan Larimer. Photo credit: Roanoke Times

Nine years ago Dan Larimer was broke, living with his parents, driving a 2001 Nissan Altima, and recovering from a messy divorce. Today Forbes magazine estimates his net worth at $600 million. The source of the 35-year-old Virginia Tech graduate’s fortune? Crypto-currency.

As the Roanoke Times‘ Jacob Dimmit tells the story, when Larimer was down and out, he managed to scrape up $20 to purchase 400 bitcoins. Today, those coins are worth about $4 million.

But a fortuitous purchase of bitcoin isn’t what made him one of Virginia’s wealthiest people. Fascinated by crypto-currencies, Larimer began creating his own. He launched his first crypto-currency, BitShares, in 2014. The value of all BitShares now exceeds $400 million. Then he launched Steemit, the first social network to operate on a blockchain. That currency now has a market cap of $600 million.

Now Larimer is working on his latest and greatest project, block.one, which he hopes will outdo bitcoin. Block.one’s coin, EOS, already ranks as the ninth largest cryptocurrency by market value, worth $4 billion. And he’s barely gotten started.

Block.one is headquartered in the Cayman Islands to avoid government taxes and oversight, but the engineering office is in Blacksburg. The company is self-funding, selling a digital token that operates similarly to bitcoin. The plan is to develop software and applications on top of the blockchain technology upon which bitcoin and other crypto-currencies are based.

As the Roanoke Times describes it: “Block.one will create software that it releases into the public for free. Developers will use those tools to create their own applications that run on their own blockchains, much like the way Bill Gates and Microsoft created the Windows operating system for all sorts of personal computers.” It’s not clear from the article how Block.one is supposed to make a profit, but, hey, there’s a lot I don’t get about the technology.

“Chronicling wealth is a big part of what we do,” Jeff Kauflin, co-author of the Forbes Richest People in Crypto-Currency list, told the Roanoke Times. “Crypto is a legitimate asset class now. There’s a lot of wealth that’s been created based on it, hundreds of billions. We at Forbes think it should be treated as a legitimate asset class.”

Clearly, Larimer is a genius. With the encouragement of his father, a defense contractor, he began writing software on a Macintosh II as a fifth-grader. When he exhausted all of the Advance Placement computer science classes during his junior year in high school, he just taught himself. When he started at Virginia Tech, he tested out of three semesters of coursework.

A turn towards libertarian thinking. In Blacksburg, Larimer got married, had children, and then got divorced. He and his ex crafted a deal under arbitration. The courts overturned parts of the deal, leaving him feel cheated. “That was my first experience with the government not respecting arbitration,” he said said. “I view violence as a shortcut to governance. So I made it my mission in life to find free market solutions to securing life, liberty, property and justice for all.”

Larimer said he believes cryptocurrencies, and the blockchain technology that power them, can provide fairer solutions to all sorts of societal woes. Currency is the beginning, but Larimer said the technology has the potential to reach much further.

No one company or government controls the software, so authority is decentralized. It’s based on computer algorithms, so the subjectivity is removed from the equation. A contract agreed to by two parties, whether it’s the transfer of a bitcoin or a separation agreement, is set in stone and cannot be relitigated.

“Right now in the current system, I have no way to know if that’s your car,” Larimer said. “I have to go ask the government. And if there’s a dispute between us, I have to go ask the government. The government will decide and they may or may not honor our contract.”

In the future, Larimer imagines, vehicle registrations will be stored in a blockchain, or a public ledger containing the information on every vehicle transaction to ever occur.

A block will be created when a vehicle rolls off the assembly line, then another when it’s sold at a dealership. When that owner decides to sell the car on Craigslist, they accept payment and in exchange add another block transferring ownership yet again.

If there’s an argument years later about who owns the vehicle, anyone can look back at the public ledger, called the blockchain, track the chain of blocks back to the manufacturer and determine the rightful owner.

This would be a vehicle registration system that would give unprecedented transparency, where deals could never be undone and the government would be completely uninvolved.

Bacon’s bottom line: We live in strange and unsettled times. I cannot begin to fathom how information-age alchemists can conjure up billions of dollars from the ether through the creation of crypto-currencies. Such digital prestidigitation seems to nullify all the axioms and maxims for slow-and-steady wealth accumulation that I grew up with. I can’t begin to imagine the creative destruction that crypto-currencies and blockchain will unleash, and I have no ability to augur who the winners and losers will be, much less how to preserve the modest wealth that I have accumulated. If you’re on the wealth-creating end, it must be an exhilarating time. If you’re on the sidelines, it’s most disconcerting.

I will say this: If crypto-currencies and blockchains are going to transform the world, I’d like to see one of the epicenters of change arising in Blacksburg. If Block.one turns out to be the next Microsoft, Apple, Google, or Amazon, I’m glad that Virginians will see some benefit from it.

This Bitcoin Mania Is out of Control

If you don’t understand how to mine bitcoin, try reading this Wall Street Journal graphic. You still won’t understand, but at least you’ll have tried. (Click for larger image.)

If people want to invest in bitcoin, or invent competing cryptocurrencies, or dedicate their computers to “mining” bitcoin by solving computationally difficult puzzles, well, it’s a free country and they can do what they want. As a political-policy commentator, I would never advocate banning such endeavors. As a social commentator, I am moved to ask, are these people out of their minds? What a socially useless activity.

As a economic-development commentator,  however, I must cheer the initiative of Frederick Grede, Michael Adolphe, and other principals of Bcause, a company that aspires to become the largest bitcoin mining operation in North America. The Virginia Beach-based company has raised $5 million in funding led by Japanese financial-services firm SBI Holdings and plans to raise more.

A Wall Street Journal article today describes how Michael Poteat, an engineering student at Old Dominion University, started mining bitcoin four months ago. He purchased 20 “mining rigs,” computers that solve complex equations to generate new coins. The 20-year-old kept tripping the circuit breaker in his house, and he struggled to find a place to accommodate his operations. “It’s just difficult as an individual to handle all the logistics,” he says.

Then Poteat came across Bcause, which provides the infrastructure, security, and electricity to enable large-scale bitcoin mining.  The WSJ elaborates:

Bitcoin miners are rewarded with new coins and transaction fees for performing the calculations that make the bitcoin network tick. The more valuable a bitcoin is, the greater the incentive to start mining. But the more miners who participate, the more computations are needed to earn rewards.

The process can be expensive and cumbersome, requiring specialized hardware and large amounts of power. Such challenges have long prompted miners to share space and resources. Now, companies that harbor mining equipment are fielding more requests than ever. …

Bcause is one of the firms that have sprung up to cater to aspiring bitcoin miners. In an old beverage warehouse in Virginia Beach, the start up is running thousands of rigs for clients from the U.S. to Asia. … Bcause has contracts with clients to house about 60,000 mining rigs and will serve retail clients by renting out spare machines, a process known as “cloud mining.” It has about 5,000 machines up and running, and plans to outfit another site in eastern Pennsylvania.

The profitability of mining bitcoin hinges on the cost of buying the mining rigs — the Antminer S9 is the most popular — electricity, and, of course, the price of bitcoin. Right now, despite a recent slide, the price is still high by historical standards, and bitcoin mining is said to be “insanely profitable.”

As a hosting service, Bcause says it is insulated from price volatility because it doesn’t invest in the mining equipment or the cryptocurrency itself. However, it does plan to build out a one-stop shop for trading bitcoin, including a clearinghouse, and derivatives exchanges.

I confess: I don’t get it. I don’t understand what bitcoin is good for, other than as a vehicle for maniacal speculation. I don’t understand how bitcoin mining works. Maybe there is some social utility from all this fevered activity, but maybe we’re just bystanders to the 21st tech-economy answer to the 17th-century Dutch tulip bulb mania. Will bitcoin become the Next Big Thing, like the Internet, that will revolutionize commercial transactions and transform our lives? I don’t know. Will it crash and burn? I don’t know.

Peter Diamandis, serial tech entrepreneur and founder of the X Prize Foundation, spoke at the Richmond Forum earlier this month. He made the case that technological change is accelerating, driven by the geometric increase in computational power and the growing capabilities of Artificial Intelligence. A colleague of Ray Kurzweil, the author who coined the phrase, “The Singularity,” Diamandis said that technology is rapidly approaching escape velocity in which change will no longer be in human hands. So, yeah, it won’t be long before the robots take over.

Curse you, bitcoin!

In a world in which all the rules are changing, how do we know what to do? Will our skills and knowledge be worth anything a decade or two? What will happen to our pension funds and personal investments as half the companies in any given portfolio is disrupted and rendered worthless? Will there be any work to do, or will robots do it all for us? Will there be any purpose or meaning to human existence?

UVa Snags $27.5 Million Computer Research Grant

Kevin Skadron

Thanks to a $27.5 million grant from the Semiconductor Research Corp., the University of Virginia’s Department of Computer Science is tackling one of the most pressing problems in computer science and engineering — the so-called “memory wall,” reports the Daily Progress.

As health care, science and technology systems grow more and more data-intensive and analytics become more sophisticated, current computer systems are unable to feed data to the processor fast enough, wasting time and energy. That gap between needed power and ability, first articulated by UVa professor emeritus William Wulf and graduate student Sally McKee, is often called the “memory wall.”

The 20 faculty members on Skadron’s team will investigate how to rebuild the entire computer processing system, from better memory chips and wiring to new software that can process complex and fragmented problems. They are focusing on several specific areas of application, including advanced genomics, new cancer biomarkers and predictive home health care.

“The volume of data here, as well as the ways that we have to mine it, are basically impossible to work with in today’s systems,” Skadron said. “But if we can make that tractable, we can help do things like diagnose cancer patients.”

From an economic development perspective, the grant sounds like unalloyed good news. Kevin Skadron, chairman of the computer science department, says that he expects the university will garner some intellectual property rights from the research, providing funding for more research and innovation at the university. Who knows, perhaps UVa’s computer science school will form the nucleus of a Charlottesville-based innovation ecosystem that spins off new enterprises and highly paid private-sector jobs.

The program also could contribute to Virginia’s workforce development. According to a university press release, the center will create opportunities for undergraduate students to get involved in research as well as internships with companies that are program sponsors. Tens of thousands of IT jobs in Virginia are going unfilled, and this program conceivably could increase the supply of qualified workers (although it’s not clear if Ph.D.s with expertise in computer design match up with the skills demanded by Virginia’s IT companies).

Before we get too excited, it’s also worthwhile asking, “Who’s paying for all this?” As the Daily Progress notes, “Over the past few years, UVa’s School of Engineering & Applied Sciences has been pouring investment into cyber infrastructure.”

In other words, UVa had to make a big investment to get the computer-science program to the point where it could attract the “memory wall” research grant. How big of an investment? The Daily Progress did not think to ask, and UVa apparently did not volunteer a number. Moreover, there is the matter of overhead. Research contracts typically allocate a negotiated percentage of the grant to cover overhead such as lab space, computers, the labor-intensive grant-application apparatus, and general administration. It would be useful to know how much this research grant pays for, and whether it fully covers all costs.

In recent posts, Bacon’s Rebellion has asked to what extend university R&D programs are subsidized by undergraduate tuition. Interestingly, the new Center for Research in Intelligent Storage and Processing in Memory, or CRISP, will fund positions for about 100 Ph.D. students. One might infer from the wording of the press release that the graduate-student positions will be fully funded by outside money. If that inference is correct, perhaps we can likewise assume that graduate student stipends are not being subsidized by undergraduate tuition. But we don’t know for sure until someone asks.

UVa and Virginia’s other research universities are not accustomed to much oversight of their research programs. Research institutions have been free to pursue their dreams of R&D glory by running monies through an accounting black box. Meanwhile, state policy is to foster university research, even to support it with General Fund dollars, in the name of economic development, so no one in state government is asking questions. 

The Daily Progress reporter didn’t ask where the money is coming from, what investments UVa made to reach the point where it qualified for the grant, and what ongoing obligations it might incur that aren’t covered by the grant. That’s no slight on the reporter — until a few months ago, I would have assumed that the grant meant, “Whoopee! Free money!” Indeed, I still don’t pretend to know how the system works. But I am going up the learning curve, and I’ll keep asking questions.