Posted by Marc Hodak on June 27, 2007 under History | 
On this day in 1893, the price of silver lost 15 percent of its value. This collapse triggered a panic that would eventually engulf over 600 banks and 15,000 businesses in bankruptcy, and lead to fifteen percent unemployment for the next several years.
What would cause such a drop in silver? How could a drop in one commodity have such a devastating effect? Just a few years earlier, the country was on a gold standard, which meant that the government had to keep gold reserves against which federal certificates could be redeemed. Since federal certificates were the basis for credit throughout the banking system, the gold standard, had the effect of keeping a lid on commodity prices and restricting the amount of credit that banks could issue. The resulting price stability and sound banking practices were beneficial to the East Coast money centers, but put a crimp on farmers and miners (i.e., commodity producers) who were subject to the tender mercies of fluctuating demand and (for the farmers) uncertain supply. This created the feeling among the western and southern population that the gold standard was mainly for the benefit of the urban bankers in the Northeast. Populist politicians fanned this suspicion, and in 1890 Congress passed the Sherman Silver Purchase Act which required the government buy 4.5 million ounces of silver per month, a dramatic increase from its earlier pattern of purchases.
This Act had several effects that would set the economy up for the Panic of 1893 and ensuing depression, including:
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Posted by Marc Hodak on June 25, 2007 under Unintended consequences |
Today’s WSJ had this story about the effects of “mainstreaming” children with learning disabilities. The original idea was that such children learn more and socialize better if they are placed in regular classes with ‘normal’ kids. Notwithstanding the weak empirical basis for this idea, those responsible for imposing mainstreaming on our schools clearly did not consider the collateral damage it might cause to the rest of the kids’ learning, or to the morale of teachers trying to educate them all. In fact, the article points out that:
the rush to mainstream disabled students is alienating teachers and driving some of the best from the profession. It has become a little-noticed but key factor behind teacher turnover, which experts say largely accounts for a shortage of qualified teachers in the U.S.
As with many social experiments with unintended consequences, this one has its basis in a federal law with a cute name–IDEA, the Individual with Disabilities Education Act–which required schools to bring disabled kids into regular classes.
Despite this federal mandate, mainstreaming was slow to take off. That’s because many districts tried it and quickly saw the problems it would cause. In Pennsylvania, it took a lawsuit by the Public Interest Law Center of Philadelphia to get that state to finally push “inclusion” in a serious way. Public interest lawyers have little patience for the real-world results of their ideas, and little tolerance for results that get in the way of their agenda. They want equality, and they want it now.
Now that the challenges of mainstreaming have become a key reason for teachers leaving their jobs, you’d think the proponents might be having second thoughts. Instead, they blame this failure on a lack of resources to support the teachers. Most school districts have tough choices when it comes to finances. Public interest lawyers, of course, aren’t there to help make the trade-offs, and don’t believe in having to make trade-offs, besides. Apparently, $11,485 per student is not enough. They want equality, they want it now, and they want you to pay for it, regardless the cost.
After all is said and done, it’s likely that the kids who were intended to be most helped by this law, the most problematic cases, have likely derived no net, positive benefits from inclusion. I’d love to see the studies. You’d think that serious policy-makers would, too.
Posted by Marc Hodak on June 24, 2007 under Invisible trade-offs |
You’d think that the financial press would understand, you know, finance…until you read stories with headlines like “Blackstone IPO Rallies 13% On a Down Day.”
First, what happened: Blackstone’s investment bankers priced their shares at $31 to those subscribers lucky enough to be let in on the IPO, pre-trading price. At Friday’s open, those shares immediately began trading at $37. They jumped up to $38, before quickly settling down to about $36, finally easing down to $35 by the end of the day. The rest of the market also started with an upward blip shortly after the opening, only to meander down over the course of the day, finishing down about 1 percent.
Next, the story around what happened: Most of the press counted the IPO subscription price as the starting point, and the final price after the first day of trading as the end point in their calculation, yielding the aforementioned 13 percent gain. They noted this gain in contrast to the decline in the overall market.
Here’s my version of the story: The investment banks under-priced Blackstone’s IPO, distributed to their favored clients, by about 15 percent. The floated shares subsequently lost about 5 percent of their actual market value on the first day of trading. This loss was greater than the overall market decline, suggesting either a high beta or significant disappointment.
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Posted by Marc Hodak on June 20, 2007 under Patterns without intention |
With the imminent release of Michael Moore’s film “Sicko,” both sides of the debate on socialized health care are ramping up their PR machines. The meta-debate is about how the medical community, especially Big Pharma, are funding the anti-Sicko think tanks and blogs.
Well, I think Michael Moore is full of sh*t, and I think socialized health care would be a disaster for us and the rest of the world that flocks here when they can’t get what they want at home. So I went about trying to figure out how I could get some of those Big Pharma dollars. Have to run just now, but will report on my success later…
Posted by Marc Hodak on June 17, 2007 under Collectivist instinct |
A recent Sun article includes this tidbit:
Governor Rell of Connecticut, who is considering a medical marijuana bill that lawmakers sent to her desk earlier this month, has also given mixed signals about her position. She has said it’s important to help seriously ill people alleviate their pain, but has expressed fear that legalizing the drug would undermine the message that recreational use of marijuana is dangerous.
So, the Governor begins with a well-worn lie. In fact, recreational use of marijuana is no more dangerous than recreationally driving around town, possibly much less so. She then continues with the awesome hubris of power: Who is Governor Rell to make trade-offs for seriously ill people trying to alleviate their pain vs. the “message” conveyed by legalizing the drug? It’s legal to clog your toilet with tennis balls, to drink red ink from a pen, and to fill one’s underwear with polyester carpet remnants. What does that say to the people? To our children?
Politicians, get over yourself. Realistically, the only people likely to pay attention to your moralistic messages about how they should live their lives are people who are smoking something.
Posted by Marc Hodak on June 16, 2007 under Invisible trade-offs |
Mike Nifong, the Duke lacrosse case prosecutor, finally resigned as Durham District Attorney. The coverage of Nifong has been fairly unrelenting. One who would have professed skepticism about the press’s feeding frenzy over the three accused Duke players might have to wonder if the press isn’t going overboard in its condemnations now, especially those who were so overboard the other way before. The press is an outrage machine. I learned long ago that one can believe maybe half of what they read in the news, but which half?
In the Duke lacrosse case, the best place to go for the full story remains here.
UPDATE: It’s all over for Nifong. Well, actually not all. Now come the civil cases…
Posted by Marc Hodak on June 15, 2007 under Invisible trade-offs |
Literal question. And I mean you personally.
The answer begins with a theory that not all of us have to die–ever. Please follow.
The Immortality Crossover. Right now, life expectancy is increasing by about two months per year. That means that a decade from now, if you’ve survive till then, your life expectancy may be nearly two years longer than someone who right now is ten years older than you. That increased life expectancy will be due to enhanced treatments developed between now and then. And the pace of advancement is accelerating. At some point, life expectancy will be increased by over one year for each year that goes by. Whoever is around at that crossover point will have a good shot at living indefinitely.
Are we there yet? That crossover point could, conceivably, be within the grasp of a generation that has already been born. The first immortals may be walking (or perhaps crawling) among us.
Can we keep our foot off the brakes? The pace of advancement for medical treatments will depend on exactly two things–the amount of resources devoted to such development, and the efficiency with which such resources are utilized. With regards to the first, total expenditures are rising. Everyone wants to live longer and healthier. With regards to the second, that spending is being funneled through both the private and public sectors. Both areas are contributing to advancement, but the public sector spending is more politicized and less efficient. The profit-driven, private sector is much faster and more focused on getting returns from their investment. Impact matters to them. It’s a fair bet that the more that the market is involved in allocating our health care spending, the more efficiently that (rising) spending will be used to develop new treatments. So, who would want to risk the pace of development by either slowing down the amount we spend on health care or the degree to which the market allocates that spending?
Hillary: The socialists and progressives among us have a view of how the world should work. In their world, Bill Gates could have just as well been a successful bureacrat in the Office of Computer Technology Development in the U.S. Department of Commerce. He could have helped government direct investment in software development. Our best software developers could have just as well worked for the National Institutes of Computing instead of Lotus or Adobe or Oracle. Our computers might even be better if they were required to pass muster with a government FCA instead of being allowed to be sold by any college student with Internet access. And if they could have sucked enough tax dollars out of the private economy, the government could have subsidized equal access to computer technology every step of the way.
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Posted by Marc Hodak on June 14, 2007 under Executive compensation |
The day I get back from vacation, I see this article about how much Stephen Schwarzman is worth–$7.5 billion.
Most people would think, “Wow. That’s a lot of golf balls” (or whatever). I thought, “Wow. Congress is going to see red on this one. They won’t be able to resist that bale of cash just sitting out there.” I figured that within a month, the other shoe would drop.
Well, as usual, I’m off on my timing. It took one day for Congress to react. It looks like the tax on carry is going to be amended for public PE firms. This won’t affect public partnerships of any other sort, just investment firms–the ones whose fabulously rich partners have been in the news. Yea, this measure has been considered for a while, long enough for Schwarzman to lobby for preferential treatment via a transition rule, but I can’t help but think that the pols who announced this might have taken a measure of the public mood in their timing.
Posted by Marc Hodak on June 13, 2007 under Collectivist instinct |
On our flight back from Switzerland, our airline showed a segment from CBS���s 60 Minutes. In my (much) younger days, I was continually amazed at CBS���s capacity to expose human cupidity and folly week after week. How could they do it? So, I finally got an answer���they invented it. And the viewers believe it, as I did before I got an economic education.
This story was about the awesome power of Big Pharma to undermine our democracy. The context was the passage of the Medicare prescription drug plan without the ability of government to negotiate drug prices. The blame for this was placed on Big Pharma’s lobbying spending. If I were quite ignorant about this issue, I would have been awed by this story. Instead, I was awed by what was left out:
�Ģ The pharmaceutical industry, instead of being portrayed as creating a profitable new market for its drugs, could have been seen as acting defensively to protect their profits from a major change in how drugs are distributed in this country.
�Ģ The prevention of a government buyer���s cartel (for which Big Pharma was heavily criticized in this report) might have been worth it for reasons other than preserving drug company profits.
�Ģ The power of lobbyists and the revolving door between Congress and lucrative lobbying opportunities is not owned by Big Pharma, or Big Business generally.
Instead, the CBS reporter was shocked, shocked that all these Washington people were following the money. I was shocked not so much by CBS’s perspective as by how completely one-sided was their presentation. Their unstated premise was that government should be free to use a certain segment of the population (e.g., those involved in producing drugs) to do what is ���right��� (according to CBS���s, selling drugs cheaply enough to undermine their profits), however that certain segment should not so aggressively resist being used.
Even taking the story at face value, a more realistic remedy would be to make government less attractive to all this wealth and influence by reducing the amount of government interference in the economy. But long before anyone could make such a point on a show on CBS, you’d hear the tick, tick, tick, tick, tick…
Posted by Marc Hodak on June 12, 2007 under History |
Light blogging this last week because I’ve been in Switzerland. We’ve basically driven across the country, from Geneva to St. Gallen. The proximate reasons for this trip were a lecture I gave at the University of St. Gallen and our annual meeting with my partners in Lucerne.
Our Swiss partner took us on a boat ride on beautiful Lake Lucerne today to the place where Switzerland was born. He pointed out the area where the William Tell legend occured. William Tell is a Swiss hero on the order of Paul Revere or Patrick Henry in the U.S. After hearing our host retell Tell’s story, I cheekily asked him, “So, how much of that story do you think is true?” He said, “Of course it’s true,” with the kind of smile that belied his assertion. I suggested that it was probably as true as our Paul Revere story.
Questioning legends is a much less popular pastime than propogating them. It almost seems unpatriotic to embrace the truth, suggesting that the first casualty of war never really recovers. Nevertheless, questioning the legends a significant part of my upcoming series on the History of Scandal, starting with the Enron Story. (I didn’t intend to segue that harshly into self-promotion. Really.)
