When I Make My Biggest Business Mistakes

As you probably can guess, I am spurred to write this post as I finally and forever bury the last traces of one of my larger business mistakes (which means that hopefully, the last of the restructuring charges are behind me).  I believe there is one constant element that permeates most of my major business mistakes:

My greatest mistakes have been made when I allow someone else's enthusiasm to overcome my rational business judgement.

I don't claim that this is everyone's problem, just mine.  I will say that the one thing about business disasters that follow a pattern is that it becomes easier to spot and avoid this pattern in the future.

Postscript:  I will add that I think this problem is a common feature of politics.  I personally fell into this trap with my initial support of the Iraq war, and I think a lot of others would say the same.  I feel like I avoided this trap with Obama.  In some sense, the political process has always used enthusiasm, or fear, or shame, or some other emotion to overcome the public's rational hesitation to have the government doing any number of things.  The Iowa caucus process is practically designed to allow group enthusiasm to trump people's rational voting intentions.

Perhaps My Most Hated Tax

This may surprise you, because it is one that is seldom discussed, but perhaps my most hated tax is local (usually county level) business personal property tax.

Why?  The actual tax bill itself is trivial.  The problem is that the paperwork is incredibly irritating.  Essentially, by each location, we have to keep track of every computer, printer, vehicle, fax machine, filing cabinet, microwave, store shelf, refrigerator, trailer, lawn mower, leaf blower (etc. etc. etc.) we own and report the value of every asset by class of equipment and year of acquisition.  And then we have to report additions and deletions to these assets.  When you consider we operate in over 30 counties, this becomes a big pain in the butt.

The net effect is that it is an enormous hassle that results in very few tax collections.  Kudos to states like Florida, that have recently initiated exemptions for companies with asset totals under a certain number.  In a lot of states I would happily pay a slightly higher fixed amount of money in lieu of all the tracking and reporting.

US Temperature Trends, In Context

There was some debate a while back around about a temperature chart some Conservative groups were passing around.

Obviously, on this scale, global warming does not look too scary.  The question is, is this scale at all relevant?  I could re-scale the 1929 stock market drop to a chart that goes from Dow 0 to, say, Dow 100,000 and the drop would hardly be noticeable.  That re-scaling wouldn't change the fact that the 1929 stock market crash was incredibly meaningful and had large impacts on the economy.  Kevin Drum wrote about the temperature chart above,

This is so phenomenally stupid that I figured it had to be a joke of some kind.

Mother Jones has banned me from commenting on Drum's site, so I could not participate in the conversation over this chart.  But I thought about it for a while, and I think the chart's author perhaps has a point but pulled it off poorly.  I am going to take another shot at it.

First, I always show the historic temperature anomaly on the zoomed in scale that you are used to seeing, e.g.  (as usual, click to enlarge)

click to enlarge

The problem with this chart is that it is utterly without context just as much as the previous chart.  Is 0.8C a lot or a little?  Going back to our stock market analogy, it's a bit like showing the recent daily fluctuations of the Dow on a scale from 16,300 to 16,350.  The variations will look huge, much larger than either their percentage variation or their meaningfulness to all but the most panicky investors.

So I have started including the chart below as well.  Note that it is in Fahrenheit (vs. the anomaly chart above in Celsius) because US audiences have a better intuition for Fahrenheit, and is only for the US vs. the global chart above.  It shows the range of variation in US monthly averages, with the orange being the monthly average daily maximum temperature across the US, the dark blue showing the monthly average daily minimum temperature, and the green the monthly mean.  The dotted line is the long-term linear trend

click to enlarge

Note that these are the US averages -- the full range of daily maximums and minimums for the US as a whole would be wider and the full range of individual location temperatures would be wider still.   A couple of observations:

  • It is always dangerous to eyeball charts, but you should be able to see what is well known to climate scientists (and not just some skeptic fever dream) -- that much of the increase over the last 30 years (and even 100 years) of average temperatures has come not from higher daytime highs but from higher nighttime minimum temperatures.  This is one reason skeptics often roll their eyes as attribution of 15 degree summer daytime record heat waves to global warming, since the majority of the global warming signal can actually be found with winter and nighttime temperatures.
  • The other reason skeptics roll their eyes at attribution of 15 degree heat waves to 1 degree long term trends is that this one degree trend is trivial compared to the natural variation found in intra-day temperatures, between seasons, or even across years.  It is for this context that I think this view of temperature trends is useful as a supplement to traditional anomaly charts (in my standard presentation, I show this chart scale once and the standard anomaly chart scale further up about 30 times, so that utility has limits).

Thank God We Have Unionized Government Workers and Not Some Damn Private Company

The TSA, which apparently stands for Theater of Security Absurdity, apparently is completely useless:

According to a report based on an internal investigation, "red teams" with the Department of Homeland Security's Office of the Inspector General were able to get banned items through the screening process in 67 out of 70 tests it conducted across the nation.

The test results were first reported by ABC News, and government officials confirmed them to CNN. Mark Hatfield, acting deputy director, will take over for Melvin Carraway until a new acting administrator is appointed. It was not immediately clear Tuesday where Carraway would be reassigned.

Fortunately, the TSA has been successful in creating accountability-free sinecures with stupendous pension and benefit plans for thousands of people who apparently learned the security trade from Sargent Schultz.

Local Media Still Trying to Save the Phoenix NHL Team

No one loves local sports teams more than the local media.  I think they know, but probably won't admit, that they would lose a huge chunk of their remaining readership / viewership for their news products if they did not have local sports to report on.  So you will almost never, ever, ever see local media reporting reporting on the true cost (in terms of handouts of taxpayer money) to retaining pro teams.

My coverage of the Phoenix/Arizona Coyotes hockey team goes way back, including even to a mention in a George Will column.  I won't repeat all of that.  I just want to point to this article entitled "Glendale selects AEG to manage Gila River Arena; Arizona Coyotes' future unclear."

Glendale selected facilities-management company AEG Facilities to operate Gila River Arena, likely hastening the city's split with the Arizona Coyotes hockey team.

The telling thing about the article is that it never once explains to readers why this bid award might hasten the split with the Coyotes.  They mention that the Coyotes chose not to bid on the contract.   So why is this award a problem for them?  Do they hate AEG for some reason?  If you really were new to the issues here, you would have to scratch your head and wonder why the two issues were connected.

Oddly enough, everyone knows the reason, but the local media really wants to avoid mentioning this reason.  Here is the elephant in the room no one will recognize:  The Coyotes struggle to make money in this market, a fact made worse by the terrible location of the stadium at the far end of town from most of the potential corporate ticket buyers and wealthy people.   As a result, the team languished in bankruptcy for years, in part because the NHL (who took over the team) refused to sell it at a reasonable market price.

They finally found a buyer who agreed to buy it for an above-market price, but did so only because there was an implicit promise by the town of Glendale to subsidize them the $100 million difference between the actual and market price of the team..  The Goldwater Institute called foul on this subsidy and got it stopped.  So the town found a way around it, promising to award the team the stadium management contract for a price  $8-$10 million a year above market rates for the service.   The present value of this above-market pricing over the life of the proposed contract nearly exactly matched the earlier subsidy proposal Goldwater killed.  Various folks cried foul again, seeing through this sham, and got that stopped.

So the reason this award of the stadium management contract to AEG is so devastating to the Coyotes is that this contract represented the last hope of exacting a hidden subsidy from the city.  With this contract awarded to an arms-length third party at market rates, the last chance of making the Coyote's business viable on the taxpayer's backs seems to have escaped.

Update:  I am hearing now that another reason the Coyotes are done in Glendale is that they think the city of Phoenix or Scottsdale will build them a new stadium.  ugh.  Will it never end.

When Julia Tried to Start a Business

I was doing a radio interview and was reminded of this article I wrote in response to the famous Obama "Life of Julia" piece extolling the virtues of government in our lives.  Since I spend so much of my time in the last few years finding ways to comply with ever more onerous regulations (rather than actually improving my business or customer service) I thought I would offer a different view.  When I argue that free market proponents need to talk about taxes less and regulation more, this is what I am thinking about.

Since it has been several years since this went up at Forbes, I want to reprint it here in full:

Last week, the Obama Administration released a campaign piece about the life of Julia, showing how Julia benefited from taxpayer largess and oversight by the state at many points in her life. But the campaign piece was incomplete, and missed the part where Julia attempted to start her own business. Long before she started a web business out of her home, she tried to start a retail business.

Julia always liked the outdoors — remember that taxpayers helped her retire from productive work so she could work in a community garden. Well, as she was growing up, Julia loved to camp outdoors. For years she camped at a lovely lakefront public campground until it was forced to close — unfortunately, the government agency that ran the campground had operating costs that were so much higher than the fees charged to visitors that they couldn’t afford to keep it open any longer.

But Julia had an idea. After forming a corporation (a surprisingly easy task with lots of private companies competing to help one complete the proper legal steps), Julia approached the public parks agency about the possibility of her leasing the campground and reopening it under private management. She was surprised, though, at the tremendous opposition she encountered in the agency. Despite the fact that she was willing to adhere to operating standards and restrictions set by the public agency, she initially encountered tremendous resistance. She had assumed a parks and recreation agency would welcome the opportunity to reopen a park to the public, be she had underestimated the near universal opposition to private enterprise she found among the agency’s employees.

Eventually, though, with a lot of hard work and some help from a local TV station that rallied park users to her cause, the public agency agreed to a one-year pilot of her idea.

So the hard part was behind her, right? Probably not. In fact, Julia expected entrepreneurship to be tough. She was worried about the challenges of hiring good employees, getting financing for new equipment, and marketing her new campground. As it turned out, though, she would have little time for any of these concerns.

Before she could even think about hiring employees, she had to get a federal tax ID number, or FEIN, for her company. This identification number allows her to collect and pay her employee’s Social Security and Medicare taxes, as well as withhold and submit the Federal income tax obligations of her employees. In addition to these reports, she also learned that she had to file a separate report each quarter on her employee’s earnings in order to file and pay Federal unemployment taxes.

But her state has its own income tax, so she had to register for a separate ID number to report and pay employee state tax withholding, and then had to fill out yet another registration for another ID number to file another regular report to pay state unemployment taxes. Her state also has a public rather than private workers compensation system, so she registered for another number so she could fill out another monthly report to pay state workers compensation premiums.

And of course, since Julia intends to make retail sales, she needed to register with the state (yet another number and report) to collect and pay sales tax — though her state calls it a “privilege” tax rather than a sales tax because, as the state’s web site explains, conducting commerce is a privilege that can only be exercised with the state’s permission. She is momentarily encouraged when she finds out her state sales tax does not apply to camping, only to eventually find out this is because the state has a completely separate system (yes, another registration number and monthly report) for collecting and paying lodging taxes. So sales in her campground store will be at one tax rate on one report while campsite rentals in the same park will pay a different tax rate on a different report. Which seems overly complicated until she finds out her county also has a separate sales and lodging tax that are added to the state’s, and must be reported separately under a different registration number to the County. Thank goodness she is not in a city, or she could easily have had to file and pay three separate sales taxes and three separate lodging taxes (city, county, state). If she ever decides to rent boats on the lake, she will have to get another state registration to pay a special state boat rental tax, the percentage of which varies based on whether a boat is motorized or human-powered.

Whew. Julia thought she had finally tracked down all her tax registrations, but she was wrong. Her corporation is an S-corporation, so she files and pays her corporate income taxes on her individual return. But it turns out her state also has a franchise tax on corporations she must pay separately, based on her total revenues. In addition, it turns out that each year she must produce a complete list of all her businesses personal property, from lawn mowers to computers to radios to chairs, and submit this list to the County so she can pay property taxes on all these items. Unfortunately, in her state the property tax bill does not end there. When the public agency was running the campground, the county was not allowed to charge another government agency property taxes on the assets. The agency still owns the property — it is just leasing it to Julia so she can operate it — but the county has a mechanism called the Leasehold Excise Tax to make Julia pay the property taxes the agency doesn’t have to pay.

So twelve registration numbers and 12 monthly/quarterly/yearly reports later, surely Julia has fulfilled all her obligations to the government. Unfortunately, no, because she has not even begun to address licensing issues. To begin, the County will require that she get an occupancy permit for her campground, which must be renewed annually. This seemed surprisingly easy, until someone from the County noticed she had removed an old rotting wooden deck from the back of her store that had been a safety issue and an eyesore. It turns out she was in violation of County law because she did not get a removal permit first. She was required to get a permit retroactively, which eventually required payments to seven different County agencies and at one point required, for a reason she never understood, the collection and testing of a soil sample.

Because she will be selling packaged foods in her store (e.g. chips and pop-tarts), she also has to get a health department license and inspection. She had originally intended to keep some fresh-brewed coffee for customers in the store, but it turned out that required a higher-level health license and eight hours training in food handling. She might have been willing to pursue it, but the inspector told her that to make coffee, she would need to install a three-basin stainless steel wash-up sink plus a separate mop sink in her store, and she decided that coffee would have to wait.

Once through the general health licensing process, she then needed to obtain licenses for individual products. She wanted to sell aspirin, so she had to get a state over-the counter drug sale license. She knew that customers would want cigarettes, so she had to obtain a tobacco sales license. One day as she was setting up, a state inspector noticed she had a carton of eggs in her cooler, and notified her she needed a state license to sell eggs (as Dave Barry would say, I am not making this up). And then there was the problem of beer.

She knew that selling beer would require an alcohol license. In addition to requiring a long, tedious application, getting such a license required that she be finger-printed at the local Sheriff’s office, that she measure the distance in feet to the nearest three stores that sold alcohol and the nearest school and church, and that she attend eight hours of special alcohol sales training. The whole application process took many months — at one point her application was kicked back to her because she included a computer CAD drawing of the store when the instructions require the drawing be made by hand (I repeat, I am not making this up). She finally thought she was home-free, when she found her state requires a public hearing as a final step to determine if the market really needs another liquor retailer. At that hearing, several large, powerful local liquor businesses testified that the market was already saturated and that they already had plenty of competition, thank you very much, and her application was denied.

By the time Julia called it quits, she still had multiple applications pending. She hadn’t yet figured out how to create the stormwater runnoff management plan needed for her stormwater permit. She hadn’t been able to satisfy the state air resources board in permitting her small above-ground fuel tank. And she was still going back and forth with the state department of water resources for her drinking water sampling and testing plan.

Julia gave up her dream of working outdoors, and spent the rest of her life closeted in a room staring at a computer screen. It wasn’t what she really wanted to do, but web design does not require a license (yet) and she could avoid the hassles involved with having employees. The public never got its park back, and the campground still sits closed, the facilities falling apart from neglect. But a few months after Julia gave up, a park agency employee wrote a scathing editorial in the local paper, citing Julia’s failure as a great example of how private enterprise has failed and the need for public agencies to do more.

Julia’s experience is a composite, but is based entirely on my personal, real experiences. Every tax, registration, report, inspection, and license mentioned is a real one my company has had to obtain at some point in our expansion to new states. The only difference is in the story of the liquor license, where after my local competitors initially blocked the license I had the wherewithal to fight and eventually get it issued.

Of Course There Are Accusations of Fraud in Iowa...

...Because the caucus process is absolutely backwards.  It uses non-anonymous voting, for god sakes.   Sophisticated democracies adopted anonymous voting centuries ago for really good reasons -- in particular it limited the ability to pressure people before and after their vote.  So no one should be surprised that a stupid system without anonymity designed to allow voters to "persuade" people voting for someone else over to their side results in stories of coercion and fraud.  Iowa should not be the first primary, not the least because of the damn ethanol issue but also because their process is archaic.

Federal Anti-SLAPP Statute -- Why It Is a Great Idea

Apparently, several lawmakers have proposed a Federal anti-SLAPP lawsuit.  This is a fabulous idea and long overdue.

I will say this is not a theoretical case for me.  I have to walk softly here because I am still in litigation, but I am currently being sued for defamation by a major corporation over a review of their services I posted hear and at Yelp  ( I won't name them but a quick search of my site for my being sued will get you there).   The suit is pretty transparently aimed at suppressing criticism, and only because I have some independent resources have I been able to pay the legal bills so far and stick to my guns.  Right or wrong has little to do with the suit -- I have every expectation of prevailing if this ever goes to trial, especially since the State of California just declared their product illegal in that state over many of the same issues I raised in my review. -- this is about making criticism of the company so expensive and scary that the average person won't attempt it.

Finally, The First Reason I Have Been Given to Vote Trump

Brown vs. Board of Education, 1954-2016

A Few Thoughts About the Yosemite Trademark Brouhaha

A lot of folks have been asking for my thoughts on this conflict, where Delaware North, the departing concessionaire at the Yosemite Lodge, is claiming they own trademarks associated with the old, beloved lodges that must be bought out for lots of money, either by the government or the new concessionaire.

There are lots of versions of National Park Service (NPS) concession contracts floating around out there, and as I have had a few of these contracts, I am generally familiar with the terms and problems that arise (though I want to caution I am not privy to any insider details of this dispute).  But here are a few thoughts:

One of the hardest problems with government concession contracts is how does the government provide incentives for the private company to invest capital in the concession without giving the concessionaire a long-term contract that reduces the government's control.  Since any improvements made to the government land can't be removed and become the property of the government, it probably takes a 30-year contract to cause private companies to want to make such investments (as they would then have time to get a return from the assets, and most improvements tend to have a 20-30 year life anyway).  But the government does not want to lock themselves into one concessionaire for 30 years - 10 is as far as the NPS generally wants to go.

So the NPS has a process by which private companies can make permanent investments in the facilities, and the amount of these investments are added to an account (it used to be called Leasehold Surrender Interest, or LSI, so I will call it that -- I am not sure what it is called in current contracts).  At the end of the contract, there are some formulas for valuing the LSI in the account, and if the concessionaire loses the contract, the next concessionaire has to buy out the LSI.  If there is no next concessionaire, the Feds have to buy it out.

This provides good incentive for investment, because money you put in you basically get out at the end, plus any return in the middle.  Also, since there is a federal guarantee of repayment, this makes it possible to get a bank loan to finance the improvements (otherwise an investment in leasehold improvements on government land that the bank can't put a lien on is impossible to get bank financing for).  But this also creates problems.  Over the years, the LSI can grow so huge that it becomes impractical for anyone to buy out -- the LSI numbers at these large concessions can be in the hundreds of millions of dollars.  This is what happened at the Grand Canyon, when the US Government had to pay down the LSI by tens of millions of dollars to get companies to bid.  The other issue is that it creates a large, unfunded, off-the-books obligation for the government (because they ultimately back repayment of the LSI) in the billions of dollars.

Anyway, it is my understanding that it is not the LSI that is the problem here.  NPS contracts also for years had a provision that not only did one have to buy out the previous concessionaire's LSI (which represents investments in permanent facilities), but one also had to buy all the personal property he had associated with the concession (eg boats, trucks, inventory, shelves, coolers, etc).  While the LSI provision is generally sensible, though with some issues, this personal property buyout often led to disaster.  Because, unlike LSI, there is no agreed-upon value for the property (if the NPS is following its process, they can tell you at any point in time what the LSI is worth and everyone should be in agreement -- no similar process exists for valuing personal property of the concession).

So here is the situation.  The outgoing concessionaire has an asking price for his personal property, and the incoming concessionaire has an offer price likely well south of the seller's price.  In a normal transaction, there is some negotiation.   But a key part of the negotiation is that at some point the buyer can just walk away and refuse to buy.  This walk-away is not allowed in the NPS contract situation.  The incoming guy HAS to buy.  So outgoing concessionaires, particularly unscrupulous ones, will set a huge asking price and refuse to come off it.  Arbitration is possible, but mediators often split the baby in a way that sellers still get above-market rates for their stuff.  And all the while this takes time -- one is supposed to be opening the concession and we have not even secured rights to the assets we need to run it!  So the clock is ticking AND we can't walk away.  Incoming concessionaires often get hosed  (which is why I believe new contracts in the NPS do not include this personal property buy-out provision).

This happened to us at a NPS marina in Colorado.  The previous concessionaire ran a number of businesses in the area.  When they lost the concession, they stripped it of any good assets it had and then went around to all of its other businesses and gathered up all the junk and useless assets they could find and dumped them into the concession.   They then demanded a huge price for all this junk.   The NPS was absolutely no help -- they had no records of concession assets, and with turnover no one had even really visited the concession much.   We ended up taking a loss in the $200,000 range, buying a whole yard of stuff that we almost immediately had to pay to have carted to a junk yard.  Later we found that we were on the hook for almost a half million in facility repairs the previous company had never made -- the NPS had detailed notebooks of the failed inspections and required maintenance that was never performed, but never once disclosed any of this to us until we had signed the contract, and then demanded that we were on the hook for it all.  But that is another story, which goes to explain why I will never, ever work with the NPS again.

Anyway, my take is that Delaware North is doing the same thing that happened to me in Colorado, but on a larger scale -- writing up the price of a bunch of assets (in this case intellectual property) and using the terms of the bad NPS contract to extract above-market pricing for them from the next concessionaire.  All entirely legal, but at the cost of absolutely destroying their reputation with the NPS (I wonder if Delaware North is planning to exit the NPS concession business anyway such that they don't care).  Anyway, the new concessionaire, Aramark has certain advantages that I did not have as a small company.  In particular, they can simply refuse to buy the assets (which they have -- they have already renamed all the lodges and stores) and fight the issue in the courts later.

By the way, if you are wondering how the US Government can be so casual with trademarks and intellectual property, this tends to be, in my experience, a huge blind spot for them.  As an example, the US Forest Service uses a single national reservations company and all of us concessionaires in the Forest Service are required to use that company.  Years ago, the company who won the contract promised better information on the website about each campground.  So, for the hundred plus campgrounds we operate, at the request of the US Forest Service, we spent weeks measuring sites, taking pictures, and drawing campground maps for posting on the reservation system.  Several years later, when this reservation company lost the contract, it turns out the company had contract provisions from the government that the believed let them retain all the intellectual property.  The company then claimed all the maps, pictures, and site descriptions -- that we developed -- were theirs.  What a mess.  I can't totally remember how it came out but I think we got the rights to the pictures and descriptions back but all new maps had to be made.  The point is that the government has historically been myopic about the value of non-physical assets.

There is Still Awesomeness In The World

The world can't be that bad of a place if the money and nervous energy of several billionaires has been channeled into competing with each other at space travel.

The Science is Settled!

“Scientists have solid experimental and theoretical evidence to support…the following predictions: In a decade, urban dwellers will have to wear gas masks to survive air pollution…by 1985 air pollution will have reduced the amount of sunlight reaching earth by one half….”
• Life Magazine, January 1970

Other prediction fails from the first Earth Day here.

More Evidence Against My Least Favorite Legislation of the 20th Century

I have written about the National Industrial Recovery Act many times, a love-note from FDR to Mussolini's fascist economic system that was thankfully overturned by the Supreme Court.  Its intent was to make the corporate-crony state the default economic system of the US.

Essentially, the NIRA cartelized the US economy, creating government-sponsored cartels in every industry that would set prices and wages as well as output and quality.  You can imagine exactly how well upstart competitors would have fared under this system.  I am pretty sure, for example, that the government mainframe cartel would never have let apply, or even DEC, see the light of day.

Now, a couple of academics have laid the blame for the long duration of the Great Depression at the NIRA's doorstep.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.
In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Hmm.  Certainly wages and prices are going to be especially "sticky" if the government creates cartels to keep them that way.

OK, Stat Geeks, Here is A Really Nerdy Game For You

Guess the Correlation

That's it.  They plot a distribution, you guess the correlation in the form of R.  If you are close, you keep going.  Too many misses and its game over.  Via Flowing Data.  Played around with it a bit, high score at 52 now.

statgame

 

Phoenix Light Rail (Continued) Fail

In 2014, I published  an article based on Valley Metro's (our transit operator in Phoenix) very own ridership chart.  Here was the chart I showed:

click to enlarge

My point was that the huge amount of money spent on light rail, which essentially constituted a single commuting route in this enormous and spread-out city, was cannibalizing bus service.   The cost and investment to carry a light rail passenger is at least an order of magnitude greater than that needed to carry a bus passenger, and no public system can long endure this sort of cost increase to shift passengers from a relatively cheap transit mode to an expensive one.  Inevitably, bus service (which mainly benefits the poor) is terminated to pay for the train (which benefits middle and upper class riders who would not be caught dead on a bus).  I am pretty sure the train would have been harder sell if they had been honest and said that they were going to have to cut bus service for the low-income working folks so that ASU students and Arizona Diamondbacks and Phoenix Suns fans could have a better way to get to the ballgame.

Anyway, Valley Metro has updated the chart for 2015 and it continues to look bad:

ridership-150812

They were smart to cut off history on this one so you can't see how they killed the growth trend with the advent of light rail.  But you see that total transit ridership fell, with a small fall in light rail ridership and a huge fall in bus ridership.   Oops.  As an aside, they still have not fixed their terrible chart plotting.  You can see this years bar for light rail being longer than the one for 2013 despite the fact the number is lower.

The 2016 numbers will be interesting.  Since 2015 they will have opened several light rail extensions and got themselves a huge new tax increase approved (over my stern opposition).

Update:  In retrospect, the bus ridership fall was significant but "huge" probably is an exaggeration.  I was fooled by looking at the bar lengths, which again seem to have nothing to do with the actual data.  They are clearly drawing this manually -- no automatic charting program would get it this wrong.

Is The Media Actually Waking Up to How Rail is Sinking Public Transit?

Readers will know that this is one of my favorite topics on this blog, how huge investments in showy rail projects that amp up the prestige of government officials tend to cannibalize lower cost bus service and, at the end of the day, actually reduce total transit ridership.  The LA Times almost sortof recognizes this, and Randal O'Toole is on the case:

“Billions spent, but fewer people are using public transportation,” declares the Los Angeles Times. The headline might have been more accurate if it read, “Billions spent, so thereforefewer are using public transit,” as the billions were spent on the wrong things.

The L.A. Times article focuses on Los Angeles’ Metropolitan Transportation Authority (Metro), though the same story could be written for many other cities. In Los Angeles, ridership peaked in 1985, fell to 1995, then grew again, and now is falling again. Unmentioned in the story, 1985 is just before Los Angeles transit shifted emphasis from providing low-cost bus service to building expensive rail lines, while 1995 is just before an NAACP lawsuit led to a court order to restore bus service lost since 1985 for ten years.

...

Transit ridership is very sensitive to transit vehicle revenue miles. Metro’s predecessor, the Southern California Rapid Transit District, ran buses for 92.6 million revenue miles in 1985. By 1995, to help pay for rail cost overruns, this had fallen to 78.9 million. Thanks to the court order in the NAACP case, this climbed back up to 92.9 million in 2006. But after the court order lapsed, it declined to 75.7 million in 2014. The riders gained on the multi-billion-dollar rail lines don’t come close to making up for this loss in bus service.

...

Los Angeles ridership trends are not unusual: transit agencies building expensive rail infrastructure often can’t afford to keep running the buses that carry the bulk of their riders, so ridership declines.

  • Ridership in Houston peaked at 102.5 million trips in 2006, falling to 85.9 million in 2014 thanks to cuts in bus service necessitated by the high cost of light rail;
  • Despite huge job growth, Washington ridership peaked at 494.2 million in 2009 and has since fallen to 470.4 million due at least in part to Metro’s inability to maintain the rail lines;
  • Atlanta ridership peaked at 170.0 million trips in 2000 and has since fallen nearly 20 percent to 137.5 million and per capita ridership has fallen by two thirds since 1985;
  • San Francisco Bay Area ridership reached 490.9 million in 1982, but was only 457.0 million in 2014 as BART expansions forced cutbacks in bus service, a one-third decline in per capita ridership;
  • Pittsburgh transit regularly carried more than 85 million riders per year in the 1980s but is now down to some 65 million;
  • Austin transit carried 38 million riders in 2000, but after opening a rail line in 2010, ridership is now down to 34 million.

I will add that total transit ridership has been totally flat in Phoenix after construction of a major light rail project.  The project's total cost is approaching $2 billion as they slowly add on short extensions, but this amount did nothing but cannibalize bus ridership.  In fact, the situation is worse than this, since before light rail was built, Phoenix transit ridership was growing rapidly every single year, so in fact light rail actually likely reduced ridership by about 14 million.  The whole story is here.  (I will have an update in a moment but they have updated the chart from that article and ridership fell yet again in 2015).

Revisiting James Hanson's 1988 Global Warming Forecast to Congress

(Cross-posted from Climate Skeptic)

I want to briefly revisit Hansen's 1998 Congressional forecast.  Yes, I and many others have churned over this ground many times, but I think I now have a better approach.   The typical approach has been to overlay some actual temperature data set on top of Hansen's forecast (e.g. here).  The problem is that with revisions to all of these data sets, particularly the GISS reset in 1999, none of these data sets match what Hansen was using at the time.  So we often get into arguments on where the forecast and actuals should be centered, etc.

This might be a better approach.  First, let's start with Hansen's forecast chart (click to enlarge).

hansen forecast

Folks have argued for years over which CO2 scenario best matches history.  I would argue it is somewhere between A and B, but you will see in a moment that it almost does not matter.    It turns out that both A and B have nearly the same regressed slope.

The approach I took this time was not to worry about matching exact starting points or reconciling difference anomaly base periods.  I merely took the slope of the A and B forecasts and compared it to the slope over the last 30 years of a couple of different temeprature databases (Hadley CRUT4 and the UAH v6 satellite data).

The only real issue is the start year.  The analysis is not very sensitive to the year, but I tried to find a logical start.  Hansen's chart is frustrating because his forecasts never converge exactly, even 20 years in the past.  However, they are nearly identical in 1986, a logical base year if Hansen was giving the speech in 1988, so I started there.  I didn't do anything fancy on the trend lines, just let Excel calculate the least squares regression.  This is what we get (as usual, click to enlarge).

click to enlarge

I think that tells the tale  pretty clearly.   Versus the gold standard surface temperature measurement (vs. Hansen's thumb-on-the-scale GISS) his forecast was 2x too high.  Versus the satellite measurements it was 3x too high.

The least squares regression approach probably under-estimates that A scenario growth rate, but that is OK, that just makes the conclusion more robust.

By the way, I owe someone a thanks for the digitized numbers behind Hansen's chart but it has been so many years since I downloaded them I honestly forgot who they came from.

A Media Article Actually Highlights the Trouble with A Falling Currency

If you listened to the media and political candidates, you would quickly come to the conclusion that the quickest way to prosperity and wealth is to have a worthless currency.  Every politician the world over argues for devaluing their own currency vs. other nations, with the logic that this helps domestic manufacturers by making imported competitors more expensive and making their own products less expensive to buy in other countries.  **

While the latter two statements are nominally true, the only way this actually helps an economy is if one ignores everyone except manufacturers in markets dominated by international trade.  What it ignores is that a falling currency makes purchases more expensive for everyone else.  Consumers and service industries and even manufacturers who depend on imported raw materials all suffer from a falling currency.  And this is not even to mention the effect on wealth -- if one's savings are all in assets denominated in the falling currency, one is clearly losing wealth as the currency falls.

Well, for the first time in a really long time, I actually saw an article this week that focuses on some of the problems of having a falling currency.  via zero hedge.

“I’ve never seen it that high. It’s usually $6.99, maybe $8 but that seems like quite a jump.”

Grapefruit isn’t the only produce to soar in price as fresh fruit has increased by 12.4 per cent since December 2014, and fresh vegetables are up 14.4 per cent, according to data from Statistics Canada released Friday. Led by those surging produce prices, Alberta’s annual inflation rate rose last month by 1.5 per cent, year over year.

The high prices are a direct result of adverse weather in the United States and the lower Canadian dollar since most produce is imported, said Jason Wiebe, president of Chongo’s Market at the Crossroads Farmers Market.

“Tomatoes trade the same as the TSX. It’s a commodity, too, and all produce is traded in U.S. dollars. In November, the retail cost of tomatoes on the vine was $1.99 a pound. Now I have to sell the same box at $3.99 pound.

“What’s going to be really interesting going forward is what happens to local growers come summer. With the dollar, they can make one and half or two times as much exporting than selling here.”

And that may only be the beginning of higher food costs, according to ATB chief economist Todd Hirsh.

“Going forward I think we’ll see even higher upward pressure on imported fruits and vegetables. If not for weather conditions, certainly that low Canadian dollar will affect it. Because the numbers we’re talking about today are from December and now in January we’re almost five to six per cent lower on that dollar….If people insist on eating fresh tomatoes and pineapple in January, they’ll be forced to pay for it.”

 

** To my eye, every government in the industrialized world is working as hard as they can to hammer down the value of their own currency.  As a result, a rising currency tends to mean only that the country in question has a central bank that is not working as hard and as fast as other countries to trash their currency.  All of which makes accusations that China is manipulating its currency an enormous joke.  Several trilling dollars in QE here and they are the ones manipulating their currency?

The Fight Against Global Warming, in One Picture

Using a helicopter and a large tank of heated water to deice a windmill so it can continue to reduce fossil fuel use and global warming.  (source)de-icing-wind-turbine

 

Thought for the Weekend:

From the people who brought you the DMV comes.... Postalcare

postalcare

Looking at the Business Cycle as an MBA Rather Than an Economist: The Effect of Organizational Dynamics on Recessions

I will confess that there is much about advanced economics that I have trouble following, because I just don't have the background.  I suspect I am more comfortable with a mal-investment model of recessions because it is something I can see and understand as a business guy, whereas when talk gets into monetary policy I can quickly get lost.

For example, in this Arnold Kling review of Scott Sumner's book on the Great Depression, I totally get this:

Sumner's theoretical framework starts with a straightforward explanation for fluctuations in employment and output. Large shortfalls in output and employment occur when relatively flexible prices fall in relation to relatively sticky wages. When firms face high wages and low prices, they have to cut back on employment and output.

A business guy (outside of a commodity business) would probably say he sees a fall in demand for his product rather than a fall in prices, but I understand enough economics to know that these are essentially interchangeable -- the business is seeing a fall in demand at the old price but would likely see the same old demand if the price were lowered.

However, when I read stuff like this, I start to get lost.

If investors believe that the future path of monetary policy is expansionary, then they will immediately start to bid up prices for sensitive commodities. This means that if the central bank sends a credible signal today that it will maintain an expansionary stance going forward, this can quickly raise prices relative to wages, leading to a rapid expansion of employment and output.

I understand it intellectually, but I certainly don't go on a buying spree the moment the Fed announces more QE (though in retrospect looking a the rise in financial asset prices over the last few years, I should have).

But where I was going with all this is there are real-world effects that I am positive contribute to the depth of recessions that I seldom see in these economic theories.  For example, economic theories tend to assume firms are properly staffed heading into the downturn, such that layoffs are driven by the fall in prices/demand.

But that is not ever the case.  In my experience, it is an iron law of organizations that their staffing grows fat in the good times.  No matter how tough or attentive the management, firms will put on too much staff.

My personal theory is that organizations have a life of their own.  Almost literally.   In many ways the organization acts as a living entity with a mind of its own, trying to grow and feed itself.  It does not consider what size it should be, any more than a deer heard is concerned about its size vs. the available food supply.  It will keep growing until it is culled by an outside  force (lack of food or a predator).

I think of organizations the same way, and the only way to check its growth is with active management from the top.  Managers have to constantly stay on top of the organization's size and be pruning or culling it constantly (depending on the metaphor you want to latch on to).  However, because of scale economies, profits tend to grow faster than revenues at the top of the business cycle.  This creates a certain comfort level among management, and since pruning the organization is emotionally difficult -- at the least saying no to people's resource requests and at the most demanding layoffs --managers don't keep up with their job in this area in the good times.  No one notices that a 15% profit growth could have been 20% if they organization had properly been kept in check.

Then comes the downturn.  Demand and/or prices are falling, and profits are falling faster than revenues, and the crisis is now at hand.   Now that we have overcome whatever emotional starting friction there is to have layoffs, we might as well do the job right and cut not only what is required to keep up with falling prices, but we might as well take a look at the bloat we accumulated in the good times and right-size that away as well.  In fact, many businesses I have worked for or with as a consultant like to overshoot what they might have previously thought of as the right-size point, and cut even deeper, hoping that the limited resources will push the organization into finding new inefficiencies in how it does things.

And thus, in my view, the degree of layoffs in a recession will tend to be larger than that one might predict solely from sticky wages and declining  prices/demand.

By the way, for those of us who are skeptical about the government's ability ever mange a task efficiently, this organizational theory is one explanation.  Often commenters make the mistake of assuming that when I criticize tendencies in government organizations to look after themselves (rather than their mission) that I am singling government out as somehow operating differently from the private world.  That is not true.  Government is made up of the same human beings as businesses (though perhaps there is some negative self-selection) and government organizations are going to have the same tendencies as private organizations.

The difference is one of correction mechanisms and incentives.  Eventually, the private organization must clean out the bloat or else it will fail and go out of business entirely (unless of course the government bails it out, see: GM).  There is no such accountability with government organizations.   They just deficit spend or demand more taxes when they get bloated.   Making this worse are the incentives of  government agency leaders.   Lacking a profit metric or even a customer service metric, government agency managers typically get their pay and prestige set based on the budget and headcount of the organization they run, so cost and headcount cutting run directly counter to their incentives.  Combine this with higher barriers in government organizations to cleaning house (e.g. public union power and politicization of what should be efficiency decisions) and we get the dysfunctionality of government.  But again note, this is an issue of accountability mechanisms and incentives, not of having better or worse or smarter people.

The Average Conservative Doesn't Care About Free Markets

For a long time I have hypothesized (and worried) that the average Republican / Conservative's support for free markets was merely tribal -- the team's official position was pro-free market, so individuals supported the team's position without actually, really understanding it.  I have developed this hypothesis after a lot of private discussions with Conservatives who have betrayed many of the same economic mis-conceptions and bits of ignorance that drive much bad interventionist government policy.

Now there is this, from the leading Republican candidate for President:

Speaking at Liberty University today, Trump escalated his rhetoric on Apple's overseas manufacturing, and claimed somehow the US would reclaim those jobs in the future. "We have such amazing people in this country: smart, sharp, energetic, they're amazing," Trump said. "I was saying make America great again, and I actually think we can say now, and I really believe this, we're gonna get things coming... we're gonna get Apple to start building their damn computers and things in this country, instead of in other countries."

So the Republican who is currently leading in the polls (among Republican voters, mind you) supports government intervention in a successful company's manufacturing and sourcing decisions.  Which just reinforces my view that we are dealing with the Coke and Pepsi party.  Heads we get statism, tails we get statism.

Thoughts on Ted Cruz's "New York Values" Statement

I don't want to give too much credence to Cruz's "New York values" dig on Trump.  First, it's silly -- New York is not at all monolithic.  Second, it doesn't really even apply to Trump, who often thumbs his nose at New York elite.

But I think that if you asked a lot of people in flyover country, the statement would still have resonance.  I think the reason is that while New York is not at all monolithic in its culture and values, its media exports do tend to be much more homogeneous and tend to reflect a Left-liberal coastal condescension.

I was thinking about this watching the Broadway show If/Then which was in Phoenix this weekend.  I thought this was a pretty forgettable musical, essentially a sort of remake of the movie "Sliding Doors", that was elevated by Idina Menzel in the lead.  We in flyover country seldom get stars of this caliber (at least after they are famous) in our roadshows and she (along with one other female lead who was quite good) made the show worth the ticket.

Anyway, a couple of observations about the show in the context of Cruz's statement:

  • No character in the show (with 2 exceptions) had a productive job in the private sector.  Everyone worked in the city planning department or was a housing activist or a public school teacher.  I kid you not, there was actually a song about the joys of urban planning.   The two exceptions were:  1)  a private architect who thanked the city planning department for overruling his designs and 2) an investment banker who acted like a complete tool and was included for 10 seconds only to illustrate the worst possible imaginable male date.
  • Accusing a character of being a Republican was used as a laugh-line twice.  Since the character was one the authors wanted to the audience to have sympathy for, the character quickly avowed he was an Independent.
  • Living any place in flyover country (e.g. Nebraska, Arizona**) was used as a laugh line in the show and choosing to live in those places was offered up as an example of bad decision-making.  The only place deemed acceptable to live outside of New York was Oregon.

I got over getting too worked up about this sort of stuff years ago (or else I would spend all my time holed up in a cave listening to a few old Rush albums).   Cruz was wrong to criticize New York values but I think there is a .... call it an attitude that emanates from New York media that the rest of the country sometimes finds irritating.

 

** in the show we saw, the lead character had just escaped from a bad marriage in Phoenix.  My guess is that this was not the original location, but was switched for the show here (though I could be wrong, since such a switch would have meant adjusting a couple of songs too).  Anyone see it on Broadway and know what location was used there?

Media Demonization of Koch Money is Pure Partisanship

The media does not like people spending money to elect non-Democrats.   That is the only conclusion I can draw from the fact that all of their articles on "dark money" seem to focus almost exclusively on the Koch brothers (who to my eye are more libertarian than Republican).  One would get the impression that the Koch's are the #1 giver of money to election campaigns, but in fact according to OpenSecrets.org they were #14 in 2014 and #49 in all elections since 2002.  Why wouldn't the media illustrate election-spending articles with someone in the top 10?  It's as if the sports media spent all its time talking exclusively about quarterback Ryan Tannehill (14th in 2015 in NFL passing yards per game) without ever mentioning Tom Brady or Drew Brees.

If the Koch brothers deserve to be excoriated for their election spending, then the organizations that give more than they must really be evil, right?  If one were cynical, one might think that the media ignores the top 8 or 10 because they mostly all give to Democrats.   Well, here is the list from 2014 via OpenSecrets.org.

2014-electrion-spending

Update, from a reader and via Instapundit:

Consider this: in 2013, the left wing Center for Public Integrity reported that “Four foundations run by [the Koch brothers] hold a combined $310 million in assets…” By contrast, the Ford Foundation’s endowment is more than $12 billion — about 38x larger than the Koch Foundations.

On a list of the top 100 US Foundations (by asset size), the Ford Foundation is #2. The various Koch Foundations don’t make the list, nor do they make the list of top 100 Foundations by annual giving.

Yet, the news media and transparency groups constantly harp on the Koch’s massive organization and its “insidious,” “dark money” influence on American politics, while almost completely ignoring the far larger left-wing political Foundations.

In part, this is due to the perception in the media that money from conservative/libertarian/free market leaning organizations must be tainted, while funding from left-wing Foundations is free of such bias. It may also be due to the fact that the left wing Foundations fund many media organizations — I’m looking at you, NPR, PBS, Washington Post, LA Times and others — sometimes even funding them to cover “[other people's] money in politics.”

 

Postscript:  If you really want dark, check out the website for hedge fund Elliott Management.   There is not a single byte of information in the publicly accessible pages, only links to contact forms.