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 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 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 12, 2007 under Invisible trade-offs |
Only the worst managements do it. It’s a recipe for unintended consequences, like pushing for higher sales, and ending up with crappy profits because you gave up too much secure the sales. Or pushing for higher profits and ending up with crappy returns on investment because you invested too much to gain those profits. I see it all the time.
Guess what? You do too, when watching those managing our country:
“The longer I’m here, the more I’m persuaded that Iraq cannot be analyzed by these kind of discrete benchmarks,” [Ryan C. Crocker, U.S. ambassador to Iraq] said.
After the Iraqi government drew up the first list of benchmarks last year, American officials used them as their yardstick, frequently faulting the Iraqis for failure to act on them…
Measured solely by the legislative benchmarks, he said, “you could not achieve any of them, and still have a situation where arguably the country is moving in the right direction. And conversely, I think you could achieve them all and still not be heading towards stability, security and overall success for Iraq.”
The point here is not to support or criticize our position in Iraq. I’d like to avoid that verbal quagmire. The point here is how similar this sounds to Red Auerbach, former coach of the Boston Celtics.
For those of you not into basketball history, Red Auerbach was a heck of a coach. His Celtics won eleven NBA titles in 13 years. Maybe you remember how dominant the Chicago Bulls with Michael Jordan and Phil Jackson were the ’90s. Those Bulls would have had to win another five straight championships to match Auerbach’s record.
So, Red didn’t trust benchmarks, or “the stats” as he called them. Like all great coaches, Auerbach had a mental framework for what it took to win at his game: The person with the best shot should take the shot; the team should ensure that that person gets the ball; the team should prevent their opponents from getting good shots… Pretty straightforward. All that mattered to him was the score at the end of the game. He stayed away from the stats, especially as they applied to individual performers.
There’s only one stat I was ever concerned about. When this guy’s in the game, does the score go up in our favor or go against us? The Boston Celtics never had a league’s top scorer. We won seven championships without ever placing one Celtic in the top ten.
No Celtic got rated according to how many points or rebounds or assists or anything else he might have compiled. Each man was assessed according to his contribution toward making us a better team. That’s all I cared about. In our system, the guy who sets the good pick was just as important as the guy who made the shot.
How did Auerbach assess that while the game was being played? By watching. By being there.
Now, imagine his coaching task if, before every game, he went behind a curtain and could only manage his team by receiving stats and the play-by-play announcement? The inherent limitation of “managing by the numbers” becomes quite plain.
Read more of this article »
Posted by Marc Hodak on July 8, 2007 under Invisible trade-offs |
Isn’t it ridiculous that homeland security funds are being taken away from New York and given to terror targets like Louisville, KY, or Omaha, NE? That’s the understandable reaction of New York politicians.
“Why do they persist in giving money to places that need it a lot less than New York City?” said [New York Senator Charles] Schumer, a Democrat.
“They still just don’t get it,” said [New York Rep. Peter] King, the ranking Republican on the House Homeland Security Committee. “New York is by far the No. 1 terrorist target in the country, and no one else is even a close second.”
As a New Yorker, here is what I don’t get: Why should I expect people from Nebraska or Kentucky to pay for my security in New York any more than one should expect me in New York to pay for security in Nebraska or Kentucky? In other words, why should these tax dollars be funneled through Washington at all? It’s not like New York is a poor state. It’s not as if New Yorkers don’t choose to live there, acutely conscious of the risks of terrorism. It’s not like God said that New Yorkers and non-New Yorkers in middle America are bound to cross-subsidize each other on matters of local protection, even from foreign enemies. Politicians playing God have decreed that, but it doesn’t mean it has to be that way.
Everyone knows that the only reason Kentucky or Nebraska is getting Homeland Security funds at all, which include taxes collected from Kentuckians and Nebraskans as well as New Yorkers, is that (1) every state has representation in Congress, (2) Congressional representatives are in the business of getting the most for their respective constituencies, and (3) by just saying the right thing like, “Hey, terrorists can strike ANYWHERE,” congressmen can enlarge that tax pool, then dip into it to spread the wealth around. That’s what politicians do.
Now, I can see that if New York, or any state, were being attacked by a foreign army then, yeah, we all chip in for the common defense. I’m sure President Bush and the fear-mongering hawks on both sides of the aisle will say, “Well, Hodak doesn’t get it. This IS a war! Anyone who wants to treat terrorism as a criminal matter is basically surrendering to the enemy.”
Hmm, “war” or “criminal matter?” Politicians benefit from eliminating useful distinctions, like the possibility that the fight against terror could be viewed as both a war and a criminal matter. If they bought into that distinction, then they could allocate money to the military for the “war” aspect of this fight, i.e., hitting terrorist bases in Afghanistan or wherever, and allow the states to carry on the domestic, “criminal” aspects of the fight, like car bombs and shootings, ideally coordinating with the Feds rather than getting into pissing matches over turf.
In other word, they don’t have to funnel all that homeland security money through Homeland Security in Washington. Congress could allow local politicians to raise what they need locally to defend their localities from acts that are materially indistinguishable from crimes. In other words, we don’t have to impose a beggar-thy-neighbor system for local spending. Congress doesn’t have to bribe us with our own money to do what we need to in order to defend ourselves.
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.
Read more of this article »
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…
