Posted by Marc Hodak on July 30, 2007 under Invisible trade-offs | 
That was the headline of a WSJ article today. It begins with the story of Invitrogen Corp. having spent $2.5 million and 10,000 man hours on SOX requirements.
Officials at the Carlsbad, Calif., biotechnology company think the costs are excessive. But they say Sarbanes-Oxley helped to spur other changes that made Invitrogen a better-run business.
So, this is an article about the benefits of a policy whose costs exceeded its benefits. This made me think of other policies that could spur similar articles:
* The government requires all restaurant food to be tested for bacteria before being served to customers. “Incidences of Food Poisoning Reduced”
* The government lowers highway speed limits to 40 mph. “Fewer Deaths on Our Nation’s Highways”**
* The government mandates blender blades be diamond-tipped. “Smoother Smoothies for Everyone!”
If positive, absolute benefits were the primary criteria by which laws should be passed, we’d end up with nominally more benefits, but with significantly less of the things that we could have had if our resources had been allocated elsewhere. (Sound familiar?) Unfortunately, newspapers can’t write compelling stories about the things we don’t have as a result of resources that were not devoted to them.
Congress, of course, counts on invisible opportunity costs staying that way. That’s why they didn’t simply mandate that companies put the proposed SOX rules up to a shareholder vote. They had neither the good will nor the good sense to do that. Letting people decide what to do, letting them weigh their interests for themselves, is not what lawmakers do.
** (HT: Larry Ribstein)
Posted by Marc Hodak on July 29, 2007 under Invisible trade-offs |
The Daily Dish picks up on a new study from Democracy Corps that purports to find a collapse of support for the GOP among young people.
Money quote:
Young people react with hostility to the Republicans on almost every measure and Republicans and younger voters disagree on almost every major issue of the day. The range of the issue disagreements range from the most prominent issues of the day (Iraq, immigration) to burning social issues (gay marriage, abortion) to fundamental ideological disagreements over the size and scope of government. This leaves both potential Democratic nominees with substantial leads over Rudy Giuliani, but importantly, both Democrats still have room to grow their support among younger voters. The current problems with the Republican brand are not fully reflected in young people’s preferences for President.
Notwithstanding the source (an ultra-liberal think tank), any approximation of this result can only be characterized as pathological incompetence on the part of the GOP. W had the perfect issue to turn this younger generation against the Democrats–Social Security, or, as I like to call it, the wholesale plundering of our youth by today’s older voters. He blew it.
I’m sure this generation now coming of age will one day look back on the growth of government in the first couple of decades this century (especially if we get the kind of president that Democracy Corps wants), and wonder how their parents/grandparents who professed to care about them so much could have stiffed them so badly.
(HT: ProfessorBainbridge.com)
Posted by Marc Hodak on July 25, 2007 under Regulation without regulators |
MySpace recently booted about 29,000 sexual predators from its site. Nobody asked them to do it. They just figured that it was good business to keep their young customers from getting, you know, raped. On the one hand, one could read that as a positive indicator that a private company has every incentive to police its space and keep it safe for its intended users. On the other hand, one can read that as the perfect excuse for government involvement in the Internet.
“The exploding epidemic of sex offender profiles on MySpace – 29,000 and counting – screams for action,” said Connecticut Attorney General Richard Blumenthal.
In North Carolina, Attorney General Roy Cooper wants a state law that would require children to obtain parental permission before creating profiles on sites such as MySpace, and require the site to check parents’ identity.
I guess that making MySpace the North Carolina AG’s deputy nanny can allow him to pretend to care more about my kids than I do. (I read the news, too, Roy.) I guess, too, that the action by MySpace doesn’t count as “action” as defined by the Connecticut AG. Politicians live by the premise that there is no regulation until the government does it, and voters will tend to believe them. Especially when it comes to protecting the children.
Posted by Marc Hodak on July 24, 2007 under Unintended consequences |
Earning guidance is a controversial practice on Wall Street. Companies don’t like it because they’re concerned that investors place too much emphasis on one little number–current earnings–instead of focusing on the long string of future earnings that everyone knows should guide valuation. Managers are also a little concerned about the liability associated with “misleading” investors about earnings, i.e., falling short, even if for reasons beyond anyone’s control. Wall Street has the same concerns as management, plus the sense that certain managers may be pushing the accounting envelope a little far, or making short-term decisions to manage their earnings. Governance mavens don’t like the idea of one party trying to manage the other’s expectations. They would rather that companies simply became more transparent without the games.
So, if everyone is wary about earnings guidance, why is it so common? Over a third of the S&P 500 and perhaps a larger percentage of investors play this game. This game becomes more easily understood if one sees Wall Street as an animal that needs a certain amount of variety in its diet. Information from companies is a type of nutrient for the capital markets, and we are seeing the effects of nutrient deficiency in the feeding frenzy that surrounds earnings announcements. Companies try to mitigate this frenzy by offering earnings guidance, even though they don’t necessarily benefit from doing so.
Earnings guidance has been around in some form for a long time, but it really became a focal point for the investment community after the introduction of Reg FD. The intent of Reg FD was to create a “level playing field” for corporate disclosure. The main effect, however, has been to severely constrain the flow of information between companies and outsiders. Companies are justifiably afraid to disclose information in something other than the prescribed manner, and the market has suffered from the effects of reduced disclosure.
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Posted by Marc Hodak on July 21, 2007 under Invisible trade-offs |
I was a paper boy in high school. I would get up at about 5 a.m., go to my drop point where a stack of papers would be waiting for me, and deliver them through the neighborhood in time for me to get back home and get ready for school. Once a month, I would go around door-to-door to collect money from the families on my route. It was generally the only time I saw them. They would tell me what a fine job I did, and often tip me a quarter or 50 cents. A couple of customers even tipped me a dollar. I always remembered who they were. Every now and then, someone might tell me that I wasn’t always getting the paper to them early enough, or that they preferred to get the paper at their side door rather than their front door, and I would adjust my deliveries to accommodate them.
Collecting money was a pain. I might have to go to some houses two or three times before finding someone home. After I collected the money, I would count up what I owed the newspaper, based on the wholesale price of the subscriptions, and put it in an envelope to give to Mr. B., the man who dropped off the papers for me each morning. The difference between what I collected and the wholesale price is what I got to keep.
One day, Mr. B. drove by to pick up the money, and he asked me if I would be interested in giving up collections. He offered to send out invoices, collect the money by mail, and instead of picking up an envelope of cash from me once a month, he’d bring me a check. He said it would be more efficient all around. Win-win.
I thought about it. The prospect of saving several hours a week not having to collect money definitely appealed to me. On the other hand, if I didn’t collect it myself, I would lose the tips, which were nice, and what little interaction I had with my customers, who were also generally nice, and who sometimes let me know when I needed to change something in my delivery. In the end, I decided that it was worth it to let Mr. B. handle collections.
The next month, instead of running around to collect money, I sat back in my room at home, finished some homework without having to rush, and generally enjoyed what seemed like a little time off. Then I got my check from Mr. B.
I looked at it, and quickly realized it was less than I expected. I asked him what happened to the rest. He smiled, shook his head, and explained that he subtracted the administrative costs associated with collections. I told him that he didn’t tell me about these administrative costs when he offered to do this. I was willing to give up the tips, but not this administrative cost, too. I told him this no longer seemed like such a win-win to me, and that I would just as soon return to the old way of collecting. Mr. B. smiled, shook his head, and said that there was no going back. I felt rooked.
That was my first experience with hidden trade-offs. After that, I became more careful whenever someone offered me a “win-win” opportunity. When a salesman promises me some sort of deal, I insist on understanding where, exactly, the value will come from. Will I be giving up some level of service in exchange for reduced costs? If not, where do the productivity gains come from? Sometimes, I would get good answers, and take a chance on the deal. If I didn’t get good enough answers, I would pass.
I love getting value for my time, energy, or money, but I always react to offers with a little skepticism. Certain people tend to gain my trust pretty easily. They tend to be deliberate, precise types who back up their claims with logical explanations and sound data. I’m glad to have the kind of training that enables me to understand their explanations and evaluate their data, otherwise my skepticism would have long ago degenerated into cynicism. Other kinds of people have very little credibility with me. They tend to smile and shake their heads when explaining why their last deal didn’t work out as well as they had promised. I no longer pursue their promises, no matter how wonderful they sound. Politicians generally belong to that group.
I wish more people had my experience of feeling duped at a time when the cost was low but the impact was high. Such an experience might coax more people to better learn how to evaluate promises. Unfortunately, it seems that most of my fellow citizens tend to be either credulous or cynical. I think that many of the problems we face today arise from that imbalance.
Posted by Marc Hodak on July 19, 2007 under Collectivist instinct |
Every now and then, I figure that maybe Europe is at a stage where it might begin keeping America honest. They may look over here at our freedoms, and decide they don’t want to be collectivist also-rans anymore, that they’re ready to step up to the challenge of being the place where the world wants to live, and reduce taxes, and reduce regulations, and spread those human rights like warm Nutella on a baguette.
Then they pull sh*t like this.
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Posted by Marc Hodak on July 18, 2007 under Invisible trade-offs |
Health policy advocates have long contended that the FDA’s power to review medical treatments has lead to far more patient deaths than lives saved. The theory, supported by a growing body of evidence, is underpinned by a simple set of incentives. If an approved drug leads to someone’s illness or death, it may get all over the news, and we know how the FDA’s antsy, congressional patrons would react to that. If an unapproved drug might have prevented hundreds or thousands of deaths, there would be no media or congressional reaction, because no one would likely know about it. So, the FDA has an institutional bias against drug approval below the very highest margins of safety, a decidedly non-economic standard, one that costs countless lives.
The exception that proves the rule: AIDS drugs. Here, the FDA’s cumbersome, time-consuming, costly review process was highlighted by a politicized, media-savvy group that acutely felt the lack of progress in the development of treatments.
Last year, the FDA’s authority was successfully challenged in court by the Abigail Alliance. This group was founded on behalf of 20-year old Abigail Burroughs (pictured above) who was denied access to a drug in 2001 that had passed Phase I trials. The drug that was later approved by the FDA, after she died. Imagine an FDA bureaucrat patiently trying to explain to you why a particular drug might have only an 9.3 percent chance of working on your dying child, and thus preventing your doctors or the drug manufacturer from selling it or giving it to you until more tests are done on its efficacy.
So, for the non-politicized masses with rarer diseases or no press agents, how far will the FDA go to protect its authority to tell dying patients what potentially life-saving drugs they may or may not take? After the court’s Abigail Alliance decision last year, the FDA filed a brief challenging the standing of Abigail Alliance members who have all died since their original briefs were filed in 2003. That’s right. The FDA, which arguably hastened their deaths, is arguing that their death undermines their standing to challenge the FDA.
That might be a statement about the size of their agency’s balls, or about the agency’s desperate grasp at a remedy for a judgment that threatens their regulatory body.
Posted by Marc Hodak on July 16, 2007 under Invisible trade-offs |
Most proponents of universal health care see the basic trade-off as health of the poor versus leisure of the well-off. Most economists, however, believe that the real trade-off is between access, cost control, and innovation. You can’t have more of one without less of the others. They also observe that in the real world, those trade-offs tend to place cost control first and innovation last. Access, sandwiched in the middle, is invariably compromised by rationing due to cost control. Elected officials have the last word on these trade-offs, and no one facing election in the next two-to-four years will spend scarce political capital on investments that might pay off in the next decade.
So, while proponents of universal health coverage posit that one can’t trade-off lives versus dollars, the laws of economics force those very trade-offs both today and into the future. The only difference between lack of universal coverage versus the lack of innovation is that those deprived of coverage can be filmed by Michael Moore today to get sympathy for universal coverage in this election cycle. Those deprived of innovation won’t be victims for years or decades, and Moore, if he hasn’t died from self-inflicted wounds by then, won’t have any idea which of the people dying from incurable diseases might have been cured if there had been greater rewards and incentives to innovation. Eventually, entire generations may be spared if innovation could proceed quickly enough.
So, the degree to which innovation affects life expectancy is an interesting question. This question has been partially answered by Frank Lichtenberg, a researcher at Columbia University. In short, innovation dramatically affects life expectancy, much more than policy-makers might suppose (or wish to acknowledge). Lichtenberg finds that life expectancy has increased very unevenly across the United States. In the last 13 years, life expectancy has increased by three to four years in some states while it has gone up less than a year in other states. Lichtenberg shows that two-thirds of that variation is due to differences in the availability of newer drugs, based on different Medicare policies across states.
This study indicates that the development and use of new medical goods and services…have been responsible for many recent gains in the health and longevity of Americans.
So, while party activists are asking, “how many people must die this year because they can’t afford medical care,” they will necessarily ignore the question: “How many people will die ten or twenty years from now because you want to force people and corporations supplying treatments today to make medical care universally affordable this year?”
Posted by Marc Hodak on under Invisible trade-offs |
The pervasive collectivist instinct discussed in certain posts here may seem discouraging to some of you, but take heart. I believe that the future belongs to those who love freedom. The evidence, though all around us, is sometimes disguised as braying by government officials. To wit:
It’s simply unconscionable from an ethics standpoint for this company to go in from this unfair bargaining position…It’s just exploiting a desperate town.
The company in this case is Google; the town is Lenoir, NC; and the complainant is a former North Carolina judge now running for Governor. He’s bellyaching that Google negotiated away most of the taxes they would have to pay as a condition for locating some of its vast computer systems in Lenoir. He’s pandering to residents who feel their town was “bullied into the deal and deprived of potential revenue.” Never mind that “potential” in this case means non-existent. They didn’t have those revenues, and never would if they failed to attract an employer like Google. So, the real complaint is that they had to compete for Google.
Actually, Lenoir did once have those revenues, but they lost them in the competition to keep their previous local industry. Alas, this is not really news. Localities always have to compete, and not just in the U.S. This competition is simply getting more visible, all over the world. That’s economics.
People who lose jobs to competition don’t like the laws of economics any more than people who fall and hurt themselves appreciate the laws of physics. But there is no point pretending they’re not real, or that the government can override them. Economic relationships and consequences are becoming increasingly transparent, to the point that anyone can see them. Eventually, taxation and regulations will be competed down to the lowest level needed to competitively provide essential services. Yes, troubled readers, we may very well be on the path toward libertarian Nirvana. All you have to do is live long enough to see it.
Posted by Marc Hodak on July 14, 2007 under Unintended consequences |
For most of our history, the U.S. penny was made mainly of bronze, which is 95 percent copper and 5 percent zinc and tin. As the penny’s value deflated over time, it’s constituent metals became worth more than one cent. In 1962, the tin content of pennies was removed to increase their melting point. By 1982, when the copper value of pennies became sufficiently worth more than a cent that pennies were again in danger of getting melted for their intrinsic value, the mint re-designed the penny to become a copper-coated zinc coin–97.5 percent zinc and 2.5% copper. Last year, even that mineral content was no longer cheap enough. The cost of minting a penny was about 1.23 cents, and once again an arbitrage opportunity for coins appeared.
Like all organizations involved in making things, government’s have various tools at their disposal, such as mineralogy and production efficiencies, with which to react to the arbitrage opportunities they sometimes create. But when all else fails, governments have a tool that no other organizations possess–a monopoly on violence. So, last December, the U.S. government instituted fines and jail time for anyone melting coins for their mineral value.
How effective are such government interventions? I guess it depends on how you define “effective.”
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