Archive for the big business, lawyers, and other annoyances Category

Case 1: You’re a doctor. Someone comes to you after several days of diarrhea. You prescribe…..a pill that induces vomiting?

Case 2: You’re a parent. Your child comes in crying, having fallen and broken his arm. You … take off your belt and give him a good thrashing, chiding him for misbehaving.

Case 3: You’re working in the yard, using a chain saw to trim tree limbs. The blade slips, opening a substantial cut in your thigh. You … take out your handy Buck knife and deepen the cut until the femoral artery is opened.

Obscene stories, all. One is medical malpractice. One is child abuse. And the third? Well, you’re just dead.

So why is it, then, that in a recession, so many CEOs, business owners, and not-for-profit administrators react by “cutting costs.” And, since the biggest costs are more often than not going to be “wages, salary, payroll”-type costs, cost-cutting is typically a euphemism for pay cuts and layoffs?

And then, having done nothing more than add their knife to the recession’s weapons, they blame the recession.

I’m sorry. You don’t solve the problems of a recession by cutting costs. You solve the problems of a recession by finding new ways of creating value. By being more entrepreneurial than ever.

(And no, this is not an endorsement of various idiocies coming from inside the Beltway these days. You don’t end a recession by simply changing which, or whose, femoral arteries you slash, and that’s all the idiots in Washington offer us.)

Frankly, I often want to vomit when I hear a certain kind of so-called “business” and “philanthropic” leader justifying their own idiocies by blaming the recession.

Okay, I get it. If a company has overpaid workers, salaries need cutting. If it has workers who aren’t productive enough to justify their wages, those workers should be let go. Those are sound business decisions. But they’re decisions that don’t have a damn thing to do with the recession.

If your sales and revenues are down, what you ought to be doing is figuring out ways of getting your sales and revenues back up again. Improving your product. Marketing it better. Finding new products to sell. Providing more services. Not abusing the people who determine the quality of your product. Not providing less service.

But what does the “cost-cutting” sort of manager or administrator do? Exactly the opposite. What’s the reaction when someone proposes something innovative, something new, something offering new entrepreneurial potential?

They respond by saying, We can’t afford that now. We need to tighten our belts. Oh, and by the way, you and your innovative ideas, here is the address of the state unemployment office.

Can’t they see that the belts they’re tightening are rarely wrapped around the waists of the overweight. That they’re around the necks of people with sore throats and a weakened cervical spine.

“Business cycles” don’t change the productivity of our wealth. Only decisions to change how we use our wealth (or, in the case of layoffs and such, whether we use our wealth at all).

If you want a cow to produce more milk, do you stop feeding it?

You want to get out of the “worst recession since the Great Depression”? I wish I had the solution. I don’t.

But I’m pretty darn sure some things won’t work. Tossing productive tools in the shed and locking the door. Starving the cow. Learning to tie a noose.

This just in: you don’t stop bleeding by cutting more arteries.

Well, not unless the patient is dead, anyway.

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I think few things frustrate me more about public discussion of economic matters than the pride of place given to business cycle talk. When I see a story about a “downturn” or “upturn” in the economy, I know that there is a better than 90 percent chance that that story is going to be filled with crap economics.

Let me be clear at the outset by what I mean by a “business cycle”: I’m referring to the short-term fluctuations in the economy as a whole. The upturns and downturns that are usually pointed to as evidence of “recession,” “recovery,” and the like, for the economy as a whole. I am not talking about what might be happening to an individual company or its employees, to a specific market, or even to what might be happening in one industry or locality.

I understand the frustrations, the human toll, that layoffs, changing relative prices, and the like, can have on people. I in no way want to minimize the negatives of what a lot of people are going through right now.

But just because life sucks for some families and some companies and some towns and even some regions doesn’t mean it sucks for everyone in the United States.

And I’m not talking about the long term trend in the economy (since with just one significant exception in the history of the United States, all changes in the long term trend of economic health have been positive). I’m only referring to the month-to-month, quarter-to-quarter, even year-to-year fluctuations in the economy as a whole.

I’m talking about the endless pontificating about economy-wide downturns which dominates the news. About stories that look at some segment of the economy and tell a story about how the entire economy is going into the toilet.

Anyone recall the doom and gloom that surrounded us when, a few months ago, gas prices shot past $4/gallon? Now that gas prices have fallen to under $2, is the economy saved? Neither the doom and gloom scenarios nor the salvation story should have any legs to them.

Frankly, one has more chance of getting rich at Vegas blackjack tables by following the advice of astrologers than one has of getting business cycle stories right by listening to CNN, The Nightly Business Report, either the front page or the editorial page of the NYTimes, or any national politician of either political party.

Or, for that matter, any past or present chair of the Fed.

Were this just another case of Sturgeon’s law in action, however, none of this would matter. Anyone who has spent as much time reading crap science fiction over the last 40+ years as I have has no business chiding others just for watching and reading crap economics.

But, unfortunately, the consequences of all this attention to bad economics are significant. It makes us susceptible to, it makes us willing to go along with, the proposals of charlatans and ignoramuses and really-smart-people-who-sound-like-they-know-what-they’re-talking-about-but-have-no-more-clue-than-the-rest-of-us about how the economy can be moved in the short term.

And when we listen to those proposals, there is a real possibility that that long-term trend is going to be threatened.

The crash of 1929 was not the disaster for the American economy. The disaster for the American economy was what we now call the Great Depression or, more precisely, the Great Contraction. And that disaster was caused and deepened, not by the market failures that culminated in people on Wall Street jumping out of windows in 1929. It was caused by the hubris of people like Hoover and Mellon and FDR, people who thought that the money supply and national income could be manipulated like the sand in their childhood sandboxes.

And it isn’t just the politicians who act bone-headedly when talk of business cycles gains too much prominence. Look around you. Look at the all the companies out there who are jumping on the “need to tighten our belts” and “need to layoff n thousand people” and all the rest. And then look more closely at their markets. Has anything really changed with their market’s fundamentals? Has the need for their product changed? Has the productivity of their workers changed?

The correlation between economy-wide business cycles and the fundamental supply/demand conditions for any company’s good and services is highly attenuated and nearly impossible to establish. Even if I was willing to accept the notion that company CEOs have better info on business cycles of the “economy” than the rest of us — which in my opinion is a bizarre notion, since even Nobel laureates have insufficient information to make that kind of specific prediction with any degree of accuracy — they should be focusing on matters closer to home. Things like why people don’t like their products, or why their employee productivity isn’t high enough, or what the new competitor from Montevideo or Dubai is doing.

John McCain took a lot of flack in the campaign when he talked about the underlying soundness of the economy. But unlike those ridiculing him, he *was* looking at the right questions.   He understood the difference between telling a story about how the economy is doing and telling a story about how individual people or companies or regions are doing.

Plot GDP or another measure of “national” economic activity for the last 50 or 100 or 200 years, and you see just how trivial temporary downturns prove to have been compared to the steady upward trend of things.

And plot it on semilog paper while you’re at it. The slope of a curve plotted on semilog paper reveals the rate of change as you progress along that curve (the steeper the slope, the greater the growth rate). And when you do, you’re going to see an amazing thing: the slope has been getting steeper. Not just for places like China or India. But for places like the US of A.

Are there fluctuations about that trend, moments when the curve gets flatter or even goes downward temporarily? Absolutely. I’m not saying there aren’t business cycles. I’m not saying economies don’t have downturns.

I’m saying that we don’t know enough to smooth those downturns out on a case-by-case basis. We only know enough to make things worse.

I’m saying that we’ve got better things to be doing, more important things to be worrying about, than what we should do to correct a “downturn” in “the economy.”

* * *

Still think I’m exaggerating? That Bernanke or Greenspan or your favorite economic editorialist or politician, all of whom are indeed probably a lot smarter than me, know a lot more about these things than Wade the no-name blogger does?

Well, in my next blog entry, I’ll show you a way you can test my claims.

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Tenured faculty members enjoy one perk still very rare in the rest of the working world — sabbaticals.  And for more than one reason, none of which I’m going to go into here, I’m glad I’m one of those sabbaticals right now.

But today I find myself with an addition reason for gladness.  Were I in the classroom this fall, I’m sure I’d be getting “Well, what do you think about the situation in the financial markets, the proposed bailouts, etc, etc?”  Such questions go with the territory when you teach economics.

But, while I have opinions, I am absolutely certain that very few of my students, or my colleagues, or my superiors, or my student’s parent’s would appreciate them.    And they would appreciate very much less my explanation of them, for, even for someone as verbose as I usually am, my explanation in this case would be very, very lengthy.  It is not  a simple situation.  It doesn’t have simple answers.  And any question or answer that claims otherwise is wrong.  Including, I expect, every question and answer about it in the upcoming presidential debates which I refuse to waste my time upon.

And, were I in the position of teacher this fall, I would feel compelled to give that explanation.

Compelled in a way that I do not feel in this blog.  Here, I’m perfectly content to just blurt out my convictions without explanation, just like everyone else.  And, no, I’m not particularly interested in arguing these points right now — because it would take too much time, and, believe it or not, there are far more important things to talk about.

So here are my blurts:
1.  Why in the world does anyone think that “government” can be trusted with a bailout decision.  Has the Bush administration, or the Congress, or their respective predecessors for the last 20 years or so, together or separately, provided any evidence that they should be trusted with $700 much less $700 billion?

2.  The people of this country have become addicted to the idea that “papa government is here to help us with every travail of our lives.”  Despite that government showing, over and over and over again, that it belongs at the top of any list of delinquent and abusive dads.

We are like unlearning victims of a Ponzi scheme:  First we went to them because they promised solutions to million-dollar problems.  When, helped by their fraud and mismanagement and out-and-out “governing” stupidity, those million-dollar problems were replaced by billion-dollar problems, we went to them again.  And, now, after more fraud and stupidity and help-that-is-no-real-help-at-all, we are going to them with “You Must Do Something About” a $700 billion problem.

Yes, America may have a financial crisis right now.  And I certainly have no easy solutions, much less any painless ones to that crisis.  But for the life of me, I simply don’t understand why people think the Bushs and the Pelosis, the McCains and the Obamas, are going to be the ones with the solution.

In the days, weeks, and months ahead, I expect no shortage of bickering and finger-pointing and grandiose plans promising solution of this latest crisis.  But, frankly, I have no confidence in these people even if they do somehow manage to come together and actually embrace the true bipartisanship they all claim is essential.

Because that’s not how Ponzi schemes work.   When we trust these con men and con women — any of them — with the $700 billion, all we are assured of is that tomorrow they’ll be asking us for control over $7 trillion more.

And that’s what we do with every problem today.  We ask con men and con women to solve it for us.

Pick any major national, regional, or state newspaper.  Dig into its archives for the last, say, five years.  And I bet you will be hard pressed to find three consecutive issues of their front page that doesn’t have one or more stories reflecting a majority opinion that “the government must do something” about some problem or event or catastrophe.

Heck, I’d be surprised to find two consecutive issues.  Ours is a nation whose history and success has been built on the notion of self-reliance.  Yet that self-reliance has become too much of a myth.  Every act of God or of our fellow man now deserves government assistance and retribution.

No single Ponzi scheme, not even one of $700 billion, can threaten an economy capable of generating at least $14 trillion of new value every year.

But a cultural addiction to the lures of Ponzi-masquerading-as-Papa?  That can.

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Over the years, I’ve spent a good deal of time with the ancient teachers of rhetoric. Socrates, Plato, and Aristotle. The Sophists. Cicero. And, my favorite, since his Institutio Oratoria provided an essential key that enabled me to finish my doctoral dissertation, Quintilian.

Unfortunately, over the years I’ve also spent too much time killing brain cells with beer and assorted alcoholoids. And so I’m not sure which of the ancients the below comes from, though my money is on Aristotle and somewhere in his _Ethics_ and/or _Rhetoric_. So let’s just say it comes from the ancients and move on, since who claimed it first is nowhere near as important as whether it is true.

Here’s the proposition: That the rhetoric of the “good” man who is well-trained in rhetoric will triumph over the rhetoric of the “bad” man who is similarly trained. Or, to put it another way, that if good ideas are presented with the same rhetorical skill as the bad ideas with which they compete, the good ideas will triumph.

I first encountered this idea when a college freshman. (Which is why my guess is it’s origin is Aristotle, since that freshman year saw me write my first major term paper on his Nicomachean Ethics.) And it has been an article of personal faith ever since.

Yet as I watch my email inbox fill up with spam and hype, and my post office box clutter with the worst kinds of junk mail, and American public conversation continue to be dominated by emptiness, triviality, and worse, I wonder whether that faith is seriously misplaced.

And, as I bring the tools of the economic way of thinking to bear, and particularly, the notions of information costs and the idea of “second best,” I wonder even more.

The defining fact of the “information age,” for me, is the systematic decline of a particular kind of information costs, namely the costs of putting information before us. If you want to speak where I’m going to hear you, it doesn’t cost you very much at all. And with the technology that has enabled cheap information transmission (broadband, fast computer processors, autoresponder software, and all the rest), you can talk at me over and over and over again.

And, short of becoming a monk or throwing my computer away, there’s not a whole lot I can do to stop being inundated by your information and the information of hundreds of people like you.

Of course, while I can’t stop y’all from talking at me, I can’t actually listen to all of you, any more than I can carry on a conversation with all 70,000 shouting people in Lambeau Field on game day. So you shout at me, louder, and so do all the rest, which makes it harder and harder for me to sort out who to listen to. But I do have to listen to someone….so I listen to…

…who?

I don’t think the answer is at all obvious. Because while its cheaper and cheaper for you to shout at me, any filter I apply to your shouting and that of your competitors for my attention … well, any such filter is costly and uncertain in its application.

That’s the economics of second best, you see. In a perfect world (“first best”), all information costs are zero. But we don’t live in a perfect world. Never have and never will. We live in a world where total information costs are always going to be positive. We’ve found ways, amazing ways, to decrease certain kinds of information costs — the costs of transmitting and accessing information. But we’ve made fewer inroads with respect to other kinds of information costs, the costs of listening to, interpreting, and evaluating information. And, because the cheap transmission has meant more and more information to wade through, we’ve arguably made that listening, interpreting, and evaluating MORE expensive rather than less.

And Economics 101 tells us that, when something becomes more expensive to do, people do less of it.

The notion that the truth will prevail, that rhetoricians who are both good at rhetoric and of good character will triumph over those who are only good at rhetoric, depends on the audience of their rhetoric seeing that rhetoric clearly. It depends on having audiences that listen well, interpret well, and evaluate well.

But you can’t learn to listen well, interpret well, and evaluate well, unless you’ve decided in the first place that listening and interpreting and evaluating are worth the (increasing) cost of doing so.

You’ll just bounce from one bad (in the character sense) seller of ideas to the next.

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I try to do a bit of random web-surfing every day. Start with a link that looks interesting, perhaps from my Yahoo page, or Google search results, or somewhere in the blogosphere. Not looking for anything in particular, just following connections.

It’s a great activity (though I strongly recommend using an alarm or something else to limit the time — this kind of thing can be a huge time waster if you let it).

Anyway, today’s surfing took me to the following AP article: “Employers use federal law to deny benefits”.

People ask me why I’m such a grumbler about using the state to solve problems. Well, this is a classic example of one reason, what the economist calls rent-seeking.

Here we have a statute supposedly designed to ensure that employers provide a certain quality of health care. And it gets used by those employers to avoid the very liability the law sought to impose.

The solution suggested by the article is even more government action — by Congress, by President Bush, by the Courts — to keep the evil employers from frustrating the law’s purpose.

And entirely missing the economic point. It’s no accident that Big Business is regularly involved in lobbying for consumer protection, safety, health care legislation, etc etc. Not only do they get public relations bennies for their social consciousness, they have the resources to ensure that the rules favor them. They can afford the $500/hour lawyers that draft the thousands of sections of fine print for both enabling legislation and implementing regulation. They know how many millions of dollars are going to be at stake and they can use those lawyers and others to ensure that they protect those millions of dollars.

“Rent” to an economist isn’t what you pay for the occupancy of your apartment, it’s any return over and above your opportunity cost. If you’ve got big rents possible — in this story, the millions of dollars that you will save in health care liability — you’re going to be willing to spend a lot of your resources up front to get the rules that favor you.

And guess what, the same rent-seeking motivation is going to make Big Business a big participant in the next round of negotiation for “health care reform”.

These sort of stories will allow the Senators Leahy of the world to push changes through. The regulations will get more and more complicated with more and more “protections” for us poor peons of the world.

And guess what: the corporations will hire more $500/hour lawyers to protect their million dollar rents by all the things that $500/hour lawyers are good at, things that are designed to make it harder and harder for us peons to get “justice” or whatever idealistic-sounding label the Senators Leahy put on it.

I’m not a big fan of Big Business. I’ve spent the better part of two decades researching the history of the corporate form of business organization, and I’m convinced that a big part of big business exists only because of one or another legislative/regulatory action that makes it economically necessary to be “big”. Not because of economies of scale or other ephemera of the microeconomic imagination.

But I’m wholly skeptical of our power to use the state to regulate the bastards.

Because the reason those lawyers get paid $500 an hour is that they can, and do, provide value of at least $5,000 an hour.

And in a battle between a salaried bureaucrat and a $500/hour lawyer, I’ll bet on the $500/hour lawyer.

Every time.

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All content of this blog, except comments added under names other than "Wade," are copyright © 2008, 2009 Wade E. Shilts