Posted by Marc Hodak on March 31, 2007 under Collectivist instinct | 
If you didn’t think that anything could enhance one’s experience at the Grand Canyon, think again. The Hualapai Indians have created a stunning new attraction there–The Skywalk. This bridge 4000 feet above the canyon floor looks like an experience that would leave one breathless. However, this journalist’s description of his first steps out over the abyss revealed less about his spiritual awakening or engineering prowess than of his collectivist instincts:
The Skywalk’s builders have said repeatedly that the deck is extremely durable. It’s essentially a huge steel horseshoe, capable of withstanding 100 mph (160 kph) winds and holding several hundred 200-pound (90-kilogram) people at a time.
I had no reason to doubt them. But out on the edge, my mind was racing: I tried to remember if any government regulatory agency had checked how well this thing was anchored to the cliff.
This is plainly an emotional reaction to a scary situation. But I think this comment is scary, and I have an emotional reaction to it: Why the f*@k would anyone trust that a government regulatory agency has a greater interest in or expertise about the soundness of this structure than would the tribe that financed it, the engineers that built it, or the insurer bearing its risk?
And yet, I can’t say I’m surprised. News writers are notoriously wary of private agents and their self-interests versus “the government,” as if its agents were somehow endowed with a greater degree of expertise or caring for their fellow man. They often can’t fathom that, even regardless of their economic interests, the owners and operators would be any less concerned about their guests tumbling down the side of the Grand Canyon than some bureaucrat with a tape measure and some forms to fill out. It kind of leaves me breathless.
Posted by Marc Hodak on March 29, 2007 under Unintended consequences |
Given the ongoing insurance issues related to Katrina, Mississippi seems like a good place to visit in search of that twilight zone we like to call “the land of unintended consequences.”
After Hurricane Katrina devastated the Gulf coast in 2005, another storm engulfed the insurers. Apparently, they were refusing to pay hurricane victims for flood damage. Why would they do such a callous thing? Because flood damage is excluded from coverage by property and casualty insurers. In other words, insurers never promised to pay for flooding, and never collected premiums to compensate them for such coverage.
Nevertheless, politicians and lawyers in Mississippi, acting as “defenders of the people,” pressured the insurance companies into paying more than they contractually owed. These defenders said they were watching out for the welfare of their constituents. Yet, the main effect of going the extra mile to squeeze out the extra payments was to substantially reduce their constituents’ welfare by chasing away some of the biggest insurers in the state, and leaving their people with fewer insurers charging higher rates.
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Posted by Marc Hodak on March 28, 2007 under Unintended consequences |
In this day, even cigarette companies wouldn’t actually provide financial incentives to get people to start smoking. No, only people bent on helping smokers quit could come up with incentives like that. From today’s WSJ, we have the example of Rockford Acromatic Products:
The Illinois auto-parts maker used to offer $250 to employees who would stay smoke-free for several months. But some workers took up smoking just so they could quit and qualify for the reward. The company stopped offering the incentive.
“It was not our intention to encourage people to start smoking. It was aimed at people who already had a bad habit.”
That’s the way it is with incentives. People getting into the incentives game tend to have bad aim, like beginners in any sport. Even experienced incentive experts can’t always account for all of the secondary effects of their schemes.
For me, a key element in this note was that the company “stopped offering the incentive.” It’s not surprising that they stopped, of course, once they saw the perverse effect it was having. It was the speed with which they recognized this effect, and how quickly and completely they were able to change course. A more bureaucratic environment may have taken much longer to recognize the problem or deal with it. A more politicized environment, where the program was the pet project of a powerful manager, may have attempted to bury the potentially embarrassing glitch in the program, or even taken the higher numbers of people accepting the reward as proof of their program’s efficacy. I’ll leave it to the imagination of the reader to figure what a politicized bureaucracy would have done with such a program.
Posted by Marc Hodak on March 26, 2007 under Economics |
Am I the only person in the market who is baffled by the fact that investors seem to react well to falling prices of oil, metals, foodstuffs, or other commodities, but seem to panic at falling housing prices? Isn’t property value an input into business processes and the overall cost of living? If the answer to these questions is affirmative, then why should we care about falling property values?
Personally, I don’t care. In fact, I like falling property values, and not just because it rewards my view of the market when I sold my home a couple years ago and became a renter. I celebrate the decline in property value because it means that property will be cheaper for everyone, and cheaper stuff is a good thing.
But won’t all those owners in our ownership society be worse off? Only if they’ve speculated in multiple properties. Speculators are supposed to bear risk, and those who can’t are flushed out in a downturn, and that’s not all bad. People who live in their dwellings, however, shouldn’t care because they have to live somewhere, and if they decide to change where they live, they will be able to get a new place cheaper.
What about homebuilders and real estate agents? Aren’t they hurt by the drop in prices, and aren’t they an important sector? Sure, but no more so than oil companies hurt by falling oil prices, or gold mining firms hurt by falling gold prices. However, the pain of one sector is generally more than offset by the lower prices enjoyed by the rest of the market. Our overall economy would be much better off if steel cost a penny per ton, as long as the producers grumbling about it could stay in business at that price. And unlike mining firms, homebuilders can always build more homes to meet the higher demand associated with lower costs.
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Posted by Marc Hodak on March 22, 2007 under Unintended consequences |
Teach for America is a group that takes kids just out of college and gives them the opportunity, if you could call it that, to teach in inner city schools for a couple of years. I came across two articles on this venture. One is the harrowing story of a real person’s experience trying to serve his “strong sense of social justice.” The other article is from the Onion. Normally, the Onion presents the more absurd version of reality. I think this is an excellent example of how reality ultimately trumps idealism…or of life imitating art.
Posted by Marc Hodak on March 18, 2007 under Collectivist instinct |
Tyler Cowen has created a kerfuffle among libertarians by suggesting that they should stop worrying and learn to love big government. He says:
The more wealth we have, the more government we can afford. Furthermore, the better government operates, the more government people will demand. That is the fundamental paradox of libertarianism. Many initial victories bring later defeats.
I am not so worried about this paradox of libertarianism. Overall libertarians should embrace these developments. We should embrace a world with growing wealth, growing positive liberty, and yes, growing government. We don���t have to favor the growth in government per se, but we do need to recognize that sometimes it is a package deal.
Cowen is a thoughtful commentator on politics and economics, but I think that he suffers here from a version of Stockholm Syndrome. He accepts the growth of government as an inevitable complement to growth of wealth. He refers to government as a kind of discretionary product upon which ���people��� can choose to spend that wealth. Aside from the questionable conflation of which people are making which choices, I believe that his conclusion fundamentally misreads history.
The global trend is clearly toward greater wealth and greater freedom. The trend in America, however, appears to re-inforce the notion of a “package deal” that Cowen is espousing. But the U.S. is not evidence of a counter-trend so much as an example of a fortuitous starting point as a libertarian’s wet dream that could not last.
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Posted by Marc Hodak on March 15, 2007 under Economics |
Actually, he writes an article called “Statistics can mislead as easily as they can enlighten” published in CSM. It points out a useful distinction akin to the fallacy of division, hearkening back to one of my favorite books of all time, “How to Lie with Statistics.”
The French figure prominently in his examples, but the title is misleading. (Extra credit for anyone who can identify the title’s fallacy.)
Posted by Marc Hodak on under Futurama |
Actually, I’m just referring to the price of cancer drugs, as mentioned in today’s WSJ, which drugs unfortunately do not yet offer the prospect of immortality. The point of the article’s protagonist, Morgan Stanley biotech analyst Steven Harr, is that if the drug companies price their breakthroughs too high, they will face a political backlash that could undermine their long-term profitability. So, he says, they need to limit how much they earn from their breakthroughs by moderating their prices.
Setting aside the key assumption behind this claim, i.e., that the drug companies can forestall regulation by pre-emptively pricing below what the market can bear, I think this article presents a glimpse into what I believe will be the most important social debate of all time, the coming war over who will be allowed to afford immortality.
As I see it, it’s just a matter of time before the totality of human health problems becomes treatable. We will eventually, perhaps a long time from now, get to the point where even the poorest person will have access to these treatments. Between now and then, however, one thing needs to happen: the life-extending treatments need to be developed.
Their pace of development will be faster or slower depending on the rewards of development and overall economic growth. There will inevitably be a phase-in period, which could last several generations, where those treatments will not be universally available at market prices, so they will need to be rationed or heavily subsidized.
The key question, and this is where the mega-debate will happen, will be over the means of rationing or level of subsidization during this transition period. Market-based rationing without subsidization means that the treatments will go to the richest. It will also mean that those developing the treatments will have the maximum incentive to develop more, faster, and that the overall economy will grow more quickly, all of which hastens the day when the full set of treatments exist and are universally available.
In the meantime, will society accept the idea that Bill Gate’s kids or grandkids get to live forever but yours and mine may not? Of course, if we ration these treatments on any other basis, or tax everyone so that they are universally available more quickly, then the market will suffer. Either the drug company incentives or resources for further development won’t be there (which is the effect of the policy described in today’s article), or the economy as a whole will suffer from trying to afford the unaffordable–universal access to expensive innovations.
That’s going to be the big debate.
Posted by Marc Hodak on March 13, 2007 under Executive compensation |
The W$J gave front-page prominence to executive compensation, again. Today’s article highlighted five “players” and the groups they represent. Jesse Brill, “The Networker.” urged a tally sheet for directors. Lucian Bebchuk, “The Professor,” is known as the main academic proponent of the “managerial power” thesis of why pay has grown. “The Bureaucrat” is Meredith Miller, assistant treasurer of the state of Connecticut. “Mutual Fund Trustee” John Hill, from Putnam Funds represents institutional investors. Finally, “The Union Leader,” Edward Durkin, helps oversee the giant pension fund of the United Brotherhood of Carpenters and Joiners.
Other than having nicknames strongly reminiscent of a 70s heist flick, these “players” share an interest in what the authors call shareholder activism on executive compensation. But what interest, exactly, does each player have? What type of activism does each player promote? When you get into the article, it turns out that their interests and methods only partly overlap. The point of overlap, of course, is reducing the perceived abuses of CEO pay. But they define the scope and nature of thoses abuses differently, and pursue correspondingly different policies to rectify them.
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Posted by Marc Hodak on March 12, 2007 under Executive compensation |
For many governance critics, the level and growth of CEO pay suggests something is broken with the way boards oversee their companies. The idea that there is a problem, of course, attracts the idea that we need a political solution. Thus, a bill to allow shareholders a direct vote on executive compensation has been introduced by Barney Frank (D-MA). The proposal sounds sensible. The shareholders, after all, own the firm. In a perfect world, shareholders should decide exactly how their companies are run, including compensation policies.
In the real world, shareholder involvement in corporate operations, including human resource decisions, is simply infeasible. That’s why we have boards. Boards can study the issues in depth, consult with relevant experts, and bring their often-considerable operational experience and judgment to bear on key decisions affecting the value of the firm. Increased shareholder involvement would do little to address the underlying drivers of executive compensation. It would, however, create new agency costs of unpredictable magnitude regarding board oversight.
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