Quote

Injuries and Usurpations (continued)

He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:

For quartering large bodies of armed troops among us:

For protecting them, by a mock Trial from punishment for any Murders which they should commit on the Inhabitants of these States:

For cutting off our Trade with all parts of the world:

For imposing Taxes on us without our Consent:

For depriving us in many cases, of the benefit of Trial by Jury:

For transporting us beyond Seas to be tried for pretended offences:

Many a slip ‘twixt the teacup and the lip. TV Review: 24

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So I’m finally catching up with 24. I was enthralled by the first season, and eagerly watched it as it came out. I recall reading at the time (don’t remember where) an interview with Keifer Sutherland where he speculated that the show could never run for more than two Seasons. While the second and third seasons kept me watching every week, I always felt a little less for having done so. Finally, by Season 4, it wasn’t important enough to set aside time to watch or record it, and I let it go.

Until now. It is one of the free shows available with Amazon Prime. And just like that, I’m back into the cycle of addiction. For some reason, year after year American deals with an existential terrorist threat and only one man, Agent Jack Bauer, can stop it. If you read it, I discussed what I called the “small world” problem in my Under the Dome review. Why the fate of the world so often depends on the doings of a handful of people within a 20-block radius in downtown Los Angeles is a puzzle I’ll leave to you, the reader.

Instead, I’ll comment on what is bothering me most about the series. It’s a minor thing, that has only reoccurred one or twice in each season. Each time I see it, though, it really irks me.

Now, much has been written about the silly portrayal of guns in Hollywood in general and in 24 in particular. I could go on and on about all the little mistakes in 24 that bug me. What really gets to me most, though, is the sounds made by empty guns. Especially machine guns. When a 24 machine gun runs out of ammunition, it makes this whirring and clicking noise – as if it were some kind of electric-powered minigun. Quite clearly, this was added in during the post-production sound editing. There are very obvious instances where a firearm is quite clearly empty and locked back, and yet it continues to make clicking noises that couldn’t possibly come from the real thing (or, for that matter, the blank-firing versions used to film the scene.)

So why does this happen?   Why can’t the entertainment business include even a high-school level of physics research into their stories? Do they not know, or do and just not care? Maybe it is a little of both. It’s quite likely that an L.A.-based sound editor has no direct knowledge of what a machine gun does or, more importantly, doesn’t sound like. It is also possible that, knowing that it’s likely that most of the viewing public shares in this ignorance, the producers/directors decide to exercise a little artistic license. In reality, how does one tell the difference between a wielded machine gun that has stopped firing because it is out of ammunition as opposed to the shooter simply having stopped firing. Short of having the character mutter, “Damn, I’m out” in every scene, a little sound effect will do the trick. We all know that a double-action revolver will click-click-click when you pull the trigger (thanks Deer Hunter).  So why not the same for any pistol? Similarly machine guns, but these also need some kind of a machine sound.  They are “machine” guns, after all.

That’s what really annoys me.   Yet, I keep watching so I guess, from Hollywood’s standpoint, it’s all OK.

 

You can always tell a Harvard Man…

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An article, The Capitalist’s Dilemma from the Harvard Business Review, was sent to me with the provocative subtitle “Why capitalism is broken, and what we can do to fix it.”  An excellent write-up, it certainly got me thinking.   While there is much to agree with, there would be a few things that I would like to add, were I a Harvard Man myself.  Read the article, as I mostly want to address the conclusions at the end.

Conclusion #1 focuses on (government) policy changes that would incentivize long-term investment. While an investor or a manager needs to look at the current situation (the abundance of cheap capital) as a given, this oversupply of money is, itself, the result of policy. This apparent over-supply of capital isn’t just a force of nature in these modern times. It is a direct result of stimulus, quantitative easing, and zero interest rate policy – not just from the government of the United States and the Federal Reserve, but as a coordinate effort around the globe. If you’re looking for a government policy “fix” for the perverse incentive of cheap money, why not look first at the cheap money policies?

Of course, I won’t try to lay out the mechanism of how a more rational interest rate and money supply would result in longer-term investment. Whereas the intended effect of something like a transaction tax may be obvious, the effects of rationalizing monetary policy are far less straightforward (unless you’re already on board). However, like long term investment itself, the elimination of the root cause of the investment problem should certainly pay off far more handsomely over the long term than reactive carrots and sticks.

Surely one of the problems in today’s investment environment is the elimination of the “safe” investment returns at 5 or 6 percent.  In order to earn what most of us think of as a minimum, long-term safe rate of investment, the financial community is forced into riskier and shorter term speculation.

Looking at it another way, if we accept the premise that the current environment is artificially created by current monetary policies, and therefore look at the “cash” as disconnected from “capital,” we might assume that true “capital” is as scarce as it has ever been.  The inability to make good decisions, then, is a result of being unable to evaluate the true cost of that capital in a world awash in cheap money. Returning monetary policy to the norm would be a major step in getting our systems to work properly again.

Conclusion #2, I don’t have an issue with the analysis given.  However, the conclusion that the solution for all the troubles in the world should come out of the MBA curricula as a tad self-important.  I guess that shouldn’t be surprising coming from the Harvard Business Review.  Does anyone outside of the Business School community actually consider the organization of topics in Business School courses to be a major driver in the economy?   Certainly, I would never expect a freshly-minted MBA to be ready to make the kind of complex investment decisions necessary to grow a business. Would you?

Conclusion #3 (and/or maybe #4) address changing the management style and incentives.  This is the counter-balance to #1, where you do have to look at the current monetary policy environment as a given. I am struck by the description of this problem as a”dilemma” and a “paradox.” To quote Ayn Rand, “Whenever you think you are facing a contradiction, check your premises.

The article discusses the irrationality of continuing to use a 20% IRR, as was common decades ago, makes no sense in the current monetary environment.   And yet everyone continues to do it.  Why?  Maybe because it isn’t so irrational.   Certainly, the Federal Reserve and U.S. Government intend to extend easy money policy into the foreseeable future. No doubt it has been a successful gambit so far, with the result of massive currency injections being low measures of inflation coexisting with record high stock markets.  Shouldn’t anyone with common sense see this as the “new normal?

Let’s set aside for the moment my off-the-wall theory about the true cost of capital being independent of currency.  Is it just possible that managers actually are rational?  Perhaps common sense actually suggests to them to expect a regression to the mean.  If a 20% IRR has served an institution well over the long term, then that might be the most rational figure going forward. Particularly if one is trying to make long term investments, isn’t it better to evaluate those investments using the logic of the last 100 years rather than the last 8?  Zero interest rates today may come close to guaranteeing low interest rates over 3 years. But should corporations bet their future on this environment being around for 10 or 20 years?

Conclusion #4, part II.

My digressions on monetary policy aside, there are some solid points made in this article that suggest that we, as a society, need to do some serious re-evaluation.  The authors criticize spreadsheet-driven decisions making in investments.   However, I would say this same criticism can be leveled at almost every aspect of corporate America.   Hiring decisions, promotions, purchasing decisions are all done far more “procedurally” or “algorithmically” than was the norm a few years ago. Even the day-to-day needs to follow the “right” technique for project management, a process which seems to me to emphasize efficiency and regimentation over creativity and innovation. It’s the implementation, on the grand scale, of that old phrase “no one ever got fired for buying IBM.”  If you’re using the state-of-the-art HR/sales/project management software, it’s not really your fault when something goes wrong.

If you agree that “capitalism is broken,” then I’d see we are going to need some major disruption in the business environment before we right this ship.  Those disruptions may come from the top down (e.g. another financial crisis) or it may continue to come from traditional sources, such as the innovative entrepreneur. As insightful as this article is, I don’t expect to come from the current crop of MBAs.

Finally, as a small reward (punishment?) for those who made it to the end of my post, I’ll give you the punch line. “You can always tell a Harvard man, you just can’t tell him much.”

Wherefore Welfare?

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I saw a couple of (presumably) unrelated posts on social media this morning with a theme that really struck me as meaningful.

The modern welfare state (American style) is not intended to solve poverty. Recognizing this fact goes a long way to explaining how it continues to thrive despite its apparent statistical failure.  The increase in the welfare state has been matched by an increase in poverty.

Suppose instead, though, that the real beneficiaries of these programs are the ones who are paying for them. This would explain why these programs would enjoy continued support in the face of said failure. In this model, the purpose of welfare is to redirect the poor from disturbing the people who are paying for that welfare.

If I own a store, I don’t want homeless men sleeping on the sidewalk in front of it. Is it because I feel bad for the plight of those poor souls? Maybe a little. But it’s mostly about how the image of my business is affected by the appearance of my surroundings.  Diverting some of the economic activity of my business into paying off those homeless men, so they go away, is a good use of my resources.  Socializing that cost with other taxpayers makes a very effective use of my resources, for my specific business.

In a larger sense, affording the poor an ability to “keep up appearances” despite their circumstances allows us all to move about in a society where, outwardly, poverty no longer exists.   Even when we know it does.

Viewed in this light, the war on poverty isn’t an invention of the ’60s, but a redirection of an age-old war.  Society has always sought to remove the unpleasant face of poverty from our collective sight.  Such was a time when the poor could be isolated, institutionalized, or even imprisoned.   Our modern sensibilities no longer accept such gross violations of human rights.  But as we have allowed the poor to walk among us, we are more and more left uncomfortable with their presence.   Thus we support the social welfare.  Modern programs are focused on maintaining the “dignity” of the recipient, which means allowing them to look an act like they aren’t actually poor.  In this way we can hide them in plain sight, rather than actually having to remove them.

Of course, when I say “we” support social welfare for these reasons, I don’t really mean all of us.   Some, of course, actually don’t support the welfare system.  Others cling to the utopian ideal that the reason that poverty has not yet been eliminated is the lack of resolve (and, naturally, money).  A more common counter from the left is that, while the “war on poverty” may fail to eliminate poverty, it does mitigate the worst of the negative impact of being poor.   Surely there is some success to be seen in a definition of poverty that includes big screen TVs and smart phones?  For others, seeing tax their tax money go to the poor is a form of indulgence – absolving one’s self of blame for being part of a society where such poverty exists.

The Left also has an institutional investment in the war on poverty.  Throwing ever more resources into a welfare state creates jobs.   Specifically, it creates public sector union jobs, populated by workers who pay union dues and vote Democrat.

As I suggested at the beginning of this article, I found this angle, personally, to be very enlightening.   I’ve always been uncomfortable with the argument that the beneficiaries of welfare are so numerous, that they vote themselves “largess out of the public treasury.”   Numerous they may be, but they are also too busy watching Judge Judy on their big screens to wield the political clout that those numbers might suggest.  In defining a genuine benefit for “the rest of us,” this explanation makes sense of the insensible for me.

Of course, there is still a problem.   While the “War On Poverty” may start to look like a success, it is an incredibly expensive one.  As it grows and morphs, as it distorts those markets and structures that it is intended to preserve, it must become ever less efficient.  A system intended to airbrush problems in a margin is not going to work when that margin is the majority, and has begun to assume much of what we define (the middle class) as the system itself.

More reading here and here.

Minimum Wage Links

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In New Hampshire, a bill to raise the minimum wage has passed the House and moves on to the Senate.  As the House debate heated up, there were a number of articles written pro and con.  I’ve saved a handful that seemed to be useful.

Minimum Wage should be $0.00

This first article was cited by conservatives arguing against the minimum wage, primarily because it was the New York Times making the argument.  Shockingly (considering the source) The Times asserts that the minimum wage should be zero.

As a matter of fact, I happen to agree, although perhaps not for the same reasons that this solution was proposed.  Much of  today’s “labor regulation” (that is, business regulations related to employment) is to force compliance with minimum wage laws.  If there were no minimum wage*, it could possibly free up a large amount of resources, both in terms of reduced cost to business and reduced expenses for government.

Instead of a minimum on wage, the New York Times article proposes an alternative of expanded tax credits.  This would also distort the market.  It would have the effect of subsidizing products created by low wage workers at the expense of everything else.

We could debate (and I’m not sure which side I would be on) whether the it is more fair, reasonable or efficient to burden the employer or the taxpayer with the subsidies that low wage workers are due.  I also anticipate that, on the slim chance that the minimum wage were replaced with tax credits, the current tracking and enforcement of wage and hour rules would still be deemed necessary for tracking the credits.

But actually eliminating the minimum wage is not really a part of the discussion.  For the foreseeable future, the political argument will only talk about raising or (possibly) lowering the minimum wage level.  In any case, this is an old article and I’m quite sure the New York Times no longer advocates for $0.00 minimum wage.

Benefit or Detriment?

The most recent pronouncement was the CBO report (as reported by local New Hampshire media).  The official Federal Government report was considered a coup by many opposing the minimum wage hike because CBO analyses are often optimistic, based on the assumptions that they are required to use.  It was a surprise to see it come out as mixed.  And it is still mixed – and will be used to support both sides of the argument.

Without question, an employee who remains in a job after a minimum wage is implemented will see a raise, and thus benefit from the increase.   But how many will remain in their jobs, and how many will be priced out of employment?  Answering this question, and deciding how to weight the two sides of this equation, becomes the crux of any attempt at an unbiased analysis.  While the CBO report carries a lot of weight, it is far from gospel.  It has it’s own assumptions and so its conclusions need to be evaluated in terms of all the data that is out there.

Unfortunately, I am not finding the link a this moment, but I was reading a study that tried to analyze job loss and the lack thereof in more detail.  This study found that the effect on employment varied, in a way that makes sense.

  • The study found no loss of jobs for college graduates.
  • There was a weak increase in unemployment for high school graduates.
  • The relationship between loss of jobs and higher minimum wage was even stronger for the lowest skilled workers.

This essay describes the argument, essentially that a higher minimum wage hurts those who you would think you are most trying to help.   The counter argument is presented here.

This second article, the pro-raise article, contains a quote that I found typifies the argument for the minimum wage.   The author asserts, “[W]hat [conservatives opposed to minimum wage hikes are] missing is that most jobs are created by middle class consumers buying what businesses large and small are selling; growth comes from the middle out, not the top down.”  This kind of economic pseudo-science is dangerous, probably even more so that it appears.  It is roughly a Keynesian take on the economy, but the more you try to apply rigor to the words (e.g. “growth comes from the middle out”), the less it means.  More on this in a future article.

Soft assertions using this kind of folk analogies to economic theory are often accompanied by references to actual academic studies.   Usually not directly, but rather in the form of a “studies show” kind of reference (much like I used a couple of paragraphs up, right?).  In trying to nail down which studies, and what they actually show, I came across this study that seems to back up a lot of the claims in the current discussion.

I do have an issue with the methodology, but that also is better addressed as a separate essay.   Until that is written, consider this one as a counter argument.

Cui bono?

The last category of articles I’ll discuss asks a question; Is it possible that proponents of a minimum wage increase are seeking to help groups other than the “working poor” that they claim to feel for?

This article suggests several such interests, including Unions and Big Business.

In addition to the arguments presented there, I’ve read a series of articles/editorials that imply that a meaningful number of union contracts include ties to the minimum wage in the negotiated wage scale.   That is, a contract may specify an automatic wage based on increases in the minimum.  This is another area where the evidence was discussed, without citing the actual data.  I did some of my own research.

First, I reviewed some of the public employee contracts in New Hampshire, which are publicly available.  I focused on these because, in New Hampshire in particular and in the U.S. in general, public sector unions make up the bulk of the union membership.   They also represent most of the “political clout” that can be seen as issues such as minimum wage are pushed.  While my review was hardly complete or systematic, I was unable to find any such references.   In fact, they might be illegal under State law, which requires legislative body approval of contract cost items.

Secondly, as I looked at a range of articles, I found references retail and service industries.   This makes sense.  Where union contracts cover industries with workers at or near the minimum wage, it makes sense (or may even be required) to factor in minimum wage changes during a contract period.

I hope you enjoy this list of light reading suggestions.

*I’ve noticed a misconception in a number of articles.   In the past, New Hampshire had raised the minimum wage above the national level.   In time, the Federal wage caught up with, and the surpassed the State minimum.  In the previous legislative session, the language setting the higher minimum language was removed.   This led several pundits to write (as a criticism of the Republican-led legislature) that NH eliminated the minimum wage.   This isn’t true.   Specifically, current New Hampshire law reads that the State minimum is the same as the Federal minimum, explicitly setting a State minimum wage.  There are states that do not have a minimum wage.   However, the Federal minimum always applies.

Minimum Wage

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A year or so ago, I was asked to give a talk.   The topic was going to be on minimum wage.  It seemed a very timely topic as proposals to increase the minimum wage either at the State level or at the National level were starting to gain some momentum.   The speaking engagement fell through, and I was left with a set of not-quite-completed research.

Fast forward to present day, and the minimum wage is among the top headlines.  The release of a Congressional Budget Office (CBO) report has reinvigorated the political battle.

The minimum wage debate often boils down to a single argument.  The pro-raise side seems to accept the benefits of increased wages without criticism.  The possibility of a down side is often dismissed, as the White House is doing with the CBO report.  For the anti-raise side of the argument, the relationship couldn’t be clearer – a higher minimum wage equals lower employment.

These latest headlines have thrown the pro-raise side into a bit of a spin.   Trying to piece together the discussion, it sometimes seems like they are claiming, simultaneously, several contradictory things.  First, as the White House is arguing, is the claim that other studies showing no net job loss are in fact still correct and the CBO is incorrect in their analysis.  Second, that even if there are job losses to the tune of 500,000, this figure is small and it will get lost in the noise of hirings and firings.  Third, it is in the interest of the greater good to raise the wages of some 900,000 who will be lifted out of poverty, even at the cost of unemployment for 500,000.

The anti-raise side is pleased with the report, as the the CBO (which seems to be more often than not over-optimistic) has got the trend right, even if the magnitude might be lower than they’d like to see.

In a future essay, I will look harder at the link between employment and minimum wage.  I’ve gone through some of the data behind the claim that raising the minimum wage will increase the number of jobs, and I have my concerns.  But for today, I want to work through an example.

Let’s imagine that I run a sandwich shop, which we’ll call La Sandwich Shoppe.  La Sandwich Shoppe is jointly owned by myself and two partners.   I pay myself to run it, as well as pay dividends to my partners.  My business is running pretty smoothly.  I have a good, steady clientele, I can afford to pay all my obligations, and I’m satisfied with the way things are.

One day, the baker who supplies all my bread tells me that his prices are going to go up.  It’s only a few cents per loaf, but since I’m making sandwiches, it turns out it’s going to cost me $10,000 more per month.

My first reaction is to look for a new bread vendor.  But suppose that the baker, himself, is only reacting to market forces and all vendors are raising their bread prices.   So after looking around, I remain convinced that my baker will continue to be the best for me, just now he is going to cost more.

Now what, use less bread?  Depending exactly how I run my businesses, that might be easy or it might not.  I could slice my bread a little thinner or use smaller rolls, but if my customers notice and decide that it makes for lesser sandwiches, I may lose them.   Let’s just say that for $10,000 per month, I’m not going to change the makeup of my menu.

My next reaction is to do some hard analysis of my business.   If I’m smart (and you should take me at my word – I am), I’m not going to let the reason I need to make changes affect the kind of changes I need to make.   My problem is that my business is going to be incurring and additional $10,000 per month in expenses.  To solve this problem, I need to cut $10,000.  My brainstorming has come up some options which seem promising:

  • 1 less employee

I’ve got 12 employees, and figure around $22,000 per year per employee in wages and associated costs.

When I look at how the work is done, I could probably get rid of the least productive worker and still be able to keep the business humming along.   Getting rid of more than one person, though, is probably going to require getting a lot more out of the staff that remains.

Eliminating one position doesn’t come close to saving enough money, and trying to figure out how to increase productivity is something that I’ll have to come back to if needed.   But for now, I’ll move on.

  • Less dividends

One might assume that my investors are pretty well off, and it would be better to ding them with any economic hardship rather than my customers or my workers.   So here, I have another obvious source of savings if I can’t come up with anything better.  However, as I’ve said, I had things pretty well in balance before this increase, so coming up with some genuine cost savings is still the preferred approach.

  • Reduce loan payments

Another significant cost to my business is servicing the financing on my equipment and my building.   As it turns out, I took out loans at a time when interest rates were much higher.   After calling up a couple of banks, I realize that if I restructure all of loans into a single payment, and refinance it at the currently-available low rates, I can actually save $12,000 per month in payments!

So… problem solved, right?   I’ve managed to make up for the bread price and then some, without cutting any people or services.  I bump up the dividends and all is well.

But…

  • The next time I am thinking about raising prices (maybe in response to price changes at my competitors), I remember that my costs have gone up.  It makes it that much more likely that I add a little bit to my price.
  • The next time an employee leaves, I remember that I figured out a way to do the work with one less, and maybe I don’t replace him.

In the short term, the increase in bread prices had a positive impact on my business.   It forced me to revisit my financing costs, and the net savings meant more profit for my partners.   Yes, that savings came out of the pocket of whoever held the paper on my old loans, but in the scheme of things that extra money in our local pockets seems to be worth more than a change to the books of some giant bank somewhere.   But in the long term, the increase in costs is going to be a contributing factor to price increases or reductions in the work force.

Of course, the point here isn’t to hold forth on the impacts of the price of bread on a restaurant’s business.   I wanted to talk about minimum wage.

The thing is, the analysis is the same.   Let’s say I pay my employees an average of $8.50 per hour.  The minimum wage goes up to $12.00*.   That’s an average of $3.50 per hour.   Multiply that by all 12 employees, factor in increases in payroll tax, benefit costs, it comes out to around $10,000 per month.

While my first instinct may be to fire someone to make the payroll balance out, if I’m smart (and I am, remember?) I’m going to look at the big picture and make up for the increase in minimum wage with a reduction in financing costs.  in the long term, however,  I’m going to come back to take a look at whether I need all 12 employees.   In  particular, that “worst employee” who looked worth keeping on at $8.50 per hour looks a lot less favorable at $12.  The negative effects on employment may well only show up in the long term, making them impossible to measure in the kind of analysis that the CBO does.

For someone opposing the minimum wage hike, this negative force is apparent.  It’s so obvious that it almost seems unnecessary to explain.   So that seems to lead to simplifying the argument and saying that the jobs lost will be immediate and directly related to the wage increase.   Of course, in some cases, I’m sure they are.   In other cases, the effects will be over a much longer term.

I’ll return to those longer term effects in a future essay.  Until then, enjoy every sandwich.

*Yes, that’s higher than the national proposal, and many of the State proposals.   But it made the math easier.

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