Month: August 2009

Which business is this?

Take a guess before you read too far:

His last quarter’s results,
which were announced on Wednesday, revealed a loss of $2.4 billion. The
business is on track to lose a staggering $7 billion in 2009, on around
$68 billion in revenue. That’s practically General Motors territory.What
can he do to fix the situation? Surprisingly little. His employees have
clauses in their union contracts that forbid layoffs. Nor can he
renegotiate their gold-plated benefits, the way, say, the auto
companies did when their backs were against the wall. Political
pressure makes it nearly impossible to shut down any of his company’s
34,000 facilities, no matter how outmoded or little used. He can borrow
money, but under the law, he can add only $3 billion in debt a year…

Every year between now and 2016, he has to put aside over $5 billion to
finance health benefits for future employees. You read that right:
future employees. There isn’t another business in the country that
finances benefits for employees it hasn’t even hired yet.

…A few weeks ago, the Government Accountability Office added the Postal Service to its list of “high risk” federal agencies,
meaning that it is in such dire straits that it needs “to restructure
to address its current and long-term financial viability.” Indeed, if
something doesn’t change by the fall, the Postal Service will have to
renege on those health benefit prepayments – despite its legal
obligation to pay them – or start missing payroll.

That's from the NYT, not The Weekly Standard.  They are also talking of moving to mail delivery only five days of week, an idea which originated from the postal service itself.  Many private businesses, in contrast, prefer to respond to crisis by trying to sell more of their product.  In fairness, it should be noted that the institution had a better record in the 2001-2006 period.

Bjorn Lomborg supports a climate change treaty


Bjorn Lomborg, an influential figure among climate change sceptics,
has thrown his weight behind a drive to forge a global deal to halt
rising world temperatures at a summit in Copenhagen this year.

“It’s incredibly important. We need a global deal on the climate,” Mr Lomborg told the Financial Times.

He does argue, correctly, that we should first focus on the low-hanging fruit, such as soot emissions and methane.

How good is the post office really?

A number of progressive bloggers have been making the point that most Americans approve of the postal service, or that they personally have had good experiences there.  They then seem to be concluding that the quasi-monopoly arrangement in that sector is likely efficient and the example of the post office should not be cited as evidence for government failure.

I do not find these arguments persuasive.

The following argument might work: "With competition in postal delivery, the natural market structure is duopoly (think UPS and FedEx), so price wouldn't fall much, coordination problems across dual networks would occur, and some rural users would be worse off.  So the current quasi-monopoly works about as well as we can hope for."

That is the argument which best defends the current structure of the post office as a privileged quasi-monopoly.

The real costs of the quasi-monopoly are the innovations and cost reductions we might have had but didn't, whether those are large or small (or negative possibly).  I doubt that the public is estimating that path when expressing their approval of the post office.

For obvious reasons, an inefficient quasi-monopolist might run high costs and overinvest in public relations.  Some of the world's worst post offices have pretty stamps and the guy behind the counter really does smile like grandpa.

From the comments: "After you consider the miracle of 40-50 cent Kiwi, does $.44 for first class mail sound like a bargain?"  The Kiwi fruit, of course, probably comes from Italy or New Zealand and it has to be grown and protected from bruising and shipped a long way.  It's a tricky comparison, however, read the comments here.

Felix Salmon on Short Sellers

What happens when companies engage in fraudulent activity? Short-sellers get wind of it, and, by selling the stock of the company in question, depress the share price and save uninformed investors some of the loss they would otherwise have suffered had they bought in at an undepressed level. How much is that worth? According to Xiaoxia Lou and Jonathan Karpoff, somewhere between 0.2% and 1.5% of the firm’s market cap.

But what if the short sellers have it wrong, and the company in question is not engaged in fraud? Well, in that case the uninformed investors have just been given the opportunity to buy into that question at a discount, thanks to the shorts. They win again!

Is there any downside to short-selling? Not really: the authors say that “there is no evidence that short selling exacerbates a downward price spiral when the misconduct is publicly revealed”.

So thank you, short-sellers, for saving us from buying in to fraudulent firms at inflated prices, and from giving us a nice discount on the share price of non-fraudulent firms. You rock!

That's Felix Salmon.  We need to make short selling easier not harder.  Wouldn't it be great if someone like Jim Cramer routinely recommend shorting a stock?

What is progressivism?

Arnold Kling asks this question, so I thought I'd try a stab at it, but trying to cast progressivism in the best possible light.  Of course my answer is not exclusive to Arnold's, as we might both be right about the elephant.  From an outsider's perspective, here is my take on what progressives believe or perhaps should believe:

1. There exists a better way and that is shown by the very successful polities of northwestern Europe and near-Europe.  We know that way can work, even if it is sometimes hard to implement. 

2. Progressive policies offer more scope for individualism and some kinds of freedom.  Greater security gives people a greater chance to develop themselves as individuals in important spheres of life, not just money-making and risk protection and winning relative status games. 

3. Determinism holds and tales of capitalist meritocracy are an illusion, to be kept only insofar as they are useful.

4. The needs of the neediest ought to be our top priority, as variations in the well-being of other individuals are usually small by comparison, at least in the United States.

5. U.S. policy is not generally controlled by egalitarian interests,  So it is doing "God's work" to push for such an egalitarian emphasis at the margin.  At the very least it will improve the quality of discourse, even if the U.S. never actually arrives in "progressive-land."

6. Limiting inequality will do more to check bad governance than will the quixotic libertarian attempt to limit the size of government.

7. Skepticism about the public sector is by no means altogether unwarranted, yet true redistributive programs are possible and they can work and be politically popular; we even have some here in the United States.

8. We should support free trade, more immigration, and more foreign aid, but the nation-state will remain the fundamental locus for redistribution.  That means helping the poor at home more than abroad; a decision to do otherwise would destroy political equilibrium and make everyone worse off.

9. State and local governments are fundamentally to be mistrusted (recall segregation) and thus we should transfer more power to the federal government, which tends to be bluntly and grossly egalitarian, when it manages to be egalitarian at all.  That is OK.

10. The United States has to struggle mightily to meet the progressive standards of western Europe and we should not equate the two regions in terms of their operation or capabilities.  Yet there is an alternative strand in American history, if not always a dominant one, showing that progressive change is possible.  Think Upton Sinclair and Martin Luther King and the organizers of early labor unions. 

11. The evidence on economic growth is murky and so it is not clear that doing any of this carries much of a penalty in terms of future growth.  In some regards it will enhance the especially beneficial sides of economic growth, even if it does not boost growth overall.

In due time I'll be writing more systematically about why those views are not, on the whole, my own.  But not today!

It would be interesting to see a progressive try to sum up an intelligent version of libertarianism.

My favorite things Sicily

1. Novel, set in: The Leopard, by Giuseppe di Lampedusa.

2. Movie, set in: This is a tough one.  But I'll opt for Visconti's The Leopard (big screen required, don't bother with Netflix) over Coppola's Godfather sequence, not to mention La Terra Trema and L'avventura.  Wow.  Is there a Sicily scene in Patton?

3. Chess opening: 5…a6, the Najdorf.  Chess is a good example of the more general point that it takes a long time to discover which innovations turn out to be valuable and which not.  Thirty years ago, who would have thought that 6.Be3 would become the most common response?

4. Playwright: Luigi Pirandello, but I would call this a "favorite only because I can't think of anyone else."

5. Opera composer: Bellini, especially the first Act of Norma, sung by Maria Callas.  There is also Alessandro Scarlatti but I don't know his music well.

6. Musical arranger: Pete Rugulo, yes he was born in Sicily and later he arranged for Stan Kenton.  That music still sounds impressive to me.

7. Philosopher: Gorgias was smart but cynical (if we trust Plato).  Empedocles was sooner a natural scientist in my view.  Archimedes I would count as a mathematician.  

8. Painter: Antonello de Messina is a clear first choice, unless you count De Chirico as Sicilian.  Here is a very good Messina image.

9. Movie director: Frank Capra was born in Sicily; see my comments on Pirandello.  Note by the way that I am not considering Sicilian-Americans unless they were born in Sicily.

They have a bunch of accomplished writers and poets I'm not familiar with, other than Lampedusa, so I don't have a favorite there.

The bottom line: A nice, diverse list, with numerous surprises.

Excess leverage was almost everywhere

And the job market is hurting in many sectors:

On opening night, there could be 30 or 40 fewer NBA jobs than a year ago.

Depending on exactly how large a roster each team wants, the total number of players is a bit higher than 400, so in percentage terms this is a big drop.  You'll notice that while NBA wages are adjusting downwards, the quantity of labor demanded is falling as well.


I'm not going to recap the whole debate but here are a few comments:

1. This is one of the better arguments for health care reform.  I don't know how widespread or significant the practice is, but something should be done to stop it.  Even if it covers only a small fraction of total medical expenditures, it is a significant moral wrong.

2. I am not convinced by the arguments that reputation provides an effective check on the practice.  Reputation affects market practices, but possibly reputation is part of the problem.  It's relative reputation which matters.  The operative reputational incentive is not always: provide a better product to get more customers.  Sometimes the reputational incentive is: customers tolerate bad treatment, because established reputations suggest they will receive equally bad treatment elsewhere.

Some of the used car market works that way too.  Why we sometimes get these bad reputational equilibria is a good question and I'd like to see it studied more. 

3. That all said, the central question concerns remedies.  Presumably the critics believe that egregious violations of law and contract are occurring.  If that is the case, why not just enforce the law more strongly and raise the penalties — significantly — for unjust treatment of sick individuals?  You can call this market failure, which it is, but it's also legal and regulatory failure as well.

If those legal parties cannot implement and enforce basic laws, can other legal parties successfully take on larger responsibilities for managing the U.S. health care sector?  Somehow it is assumed that the answer here is "yes."  I'm less certain.

You could try arguing that cases of unjust rescission are not easily observed or verified and thus tougher legal penalties will not work.  Maybe so, but then I fear the whole story becomes very muddied: "Rescission — I can't observe it, I can't verify it, yet I know it is true."

*Wrestling with Moses*

The subtitle is How Jane Jacobs Took On New York's Master Builder and Transformed the American City and the author is Anthony Flint.  Here is an excerpt:

Through school, Jane's sharp mind and her penchant for challenging authority — her parents raised her to pay attention to ethics but never blindly conform — made her a bit of a loner and slightly quirky.  Like many adolescents, she made up imaginary friends to talk to.  But hers were Thomas Jefferson and Ben Franklin.  Franklin "was interested in lofty things, but also in nitty-gritty, down-to-earth details, such as why the alley we were walking through wasn't paved, and who would pave it if it were paved.  He was interested in everything, so he was a very satisfying companion."  She explained traffic lights to him, and women's clothes, and the city's system of trash bins and collection.  Another imaginary friend was a Saxon chieftain named Cerdic, plucked from the pages of an English historical novel.

The parts of this book about Jacobs are splendid.  The parts about Moses are good, though they were more familiar to me.  I believe there has otherwise never been much biographical material on Jacobs's life.  Here is an excerpt from the book.  Here is one review.  Did you know about her book A Schoolteacher in Old Alaska?

Markets in Everything: Iraqi Mixed Marriages

Muhanad Talib, a Sunni Muslim, married his Shiite bride because she was a "suitable woman" for him. It also didn't hurt that their vows made them eligible for a $2,000 payout from the government.

Talib and his wife are among more than 1,700 newlywed couples who have accepted cash from a government program that encourages Sunnis and Shiites to tie the knot.

It's encouraging that according to the AP story such marriages are on the rise and the money seems to be treated more like a bonus than a compensating differential for risk.

Hat tip to Daniel Lippman.

China “facts” of the day

The reports have come in:

All but seven of the regions reported GDP growth rates above the
bureau’s first-half figure of 7.1 per cent. At the start of the year,
Beijing set 8 per cent as China’s growth target for the year.

…In recent years, provincial figures have suggested consistently the
world’s third-largest economy is bigger than Beijing’s published
estimate, but the discrepancy appears to have widened this year.

…The Global Times, controlled by the People’s Daily, the Communist party
mouthpiece, reported that the public reacted with “banter and sarcasm”
to NBS figures showing average urban wages in China rose 13 per cent in
the first half to $2,142.

It is noted that the state worked on the gdp numbers for a full fifteen days.  Yet not everyone is happy:

The criticism has prompted the NBS to launch a campaign last week,
entitled “Statistical Feelings: We have walked together – Celebrating
the 60th anniversary of the founding of New China,” to boost confidence
among statisticians.

The campaign has already produced works such
as: “I’m proud to be a brick in the statistical building of the
republic.” In another poem, a contributor writes: “I can rearrange the
stars in the sky because I have statistics.”

“Insight through horribleness”

I find myself wishing for a single word to express this concept.

I sometimes refer to the concept while reading.  I think: "this book has insight through horribleness."  It requires a certain twisted perceptiveness on the part of the author, but to be sure the author is not usually writing truth.

It differs from "insight through analysis," "insight through description," and related concepts.  I am never sure if I should report on books which offer insight through horribleness.  Jack Henry Abbott is a (dead) author who has insight through horribleness.