Archive for the ‘General Business’ Category.

Our Double Standard on White Collar Fraud

Nobody really liked Jeff Skilling of Enron and he sits in jail for 20 years.  We think Elizabeth Holmes is attractive and cool so that despite the fact that she committed serial fraud in lying about her company's technology and financials (far more baldly and egregiously than Skilling) and actually put people at risk through faulty medical testing, she got only a slap on the wrist.

And then there is Elon Musk.

I am not sure how I got in the role of fact-checking Elon Musk, but given the company's stated results to date and announced operating plans and strategies, there is simply no way for the Tesla to be profitable and cash flow positive in Q3, barring some deus ex machina like a massive energy credit or California subsidy windfall.  It's possible I could go in there and shut down R&D and model 3 production and milk the Model S and X for cash and might make this be true, but that is certainly not their announced business plan.  On their current path Tesla has to continue to burn cash through the rest of this year.  I am not even sure that if you stated their gross margin the same way that other automakers state their numbers that even it would be positive right now -- there is an argument to be made they are still losing money at the margin on every car they produce**.  I would add that in this point of their ramp, if you want to see Tesla the huge success that is baked into its current stock valuation, you don't want Tesla to be cash flow positive in the third quarter, you want it continuing to invest.   Amazon rules the world because it deferred profitability for years in favor of growth.

Tesla pretty much never ever lives up to Musk's promises, at least for the dates he promises them.  That is probably OK with things like deliveries of new products -- people understand he is pushing technology and new products can be delayed and they forgive entrepreneurs for being -- shall we say -- overly enthusiastic about such things.   But on financial stuff like this his statements are bordering on fraud.  But he'll never get called on it, because we like him in a way we didn't like Skilling.

I will add that if Musk wants to get snippy about the media's guesses about his company's prospects, and thinks we are all getting it wrong, he could sure be a lot more transparent about Tesla's financials and plans.  Go watch an Exxon-Mobil analyst presentation and compare it to Musk's quarterly arm-waving.  Also, one final memo to Musk:  responding to your critics on Twitter emulating Trump's style is not recommended.  Though it might be interesting to compare the irrational populist wave behind Trump with the populist wave behind Tesla.  Though the two Venn diagrams of supporters probably do not overlap much, the whole relationship feels similar to me.

Disclosure:  I have been short TSLA in the past but right now have no position.  To be honest, I am going to let Musk urge his fanboys to pump the stock a bit further before I short again.  The fanboy effect makes TSLA a dangerous short, as TSLA stock holders will defy reality for far longer than will holders of say GE or XOM.

 

** gross margin at TSLA is interesting because TSLA has no dealer network, something I like them for.  GM discounts its cars to their dealers (10% or so?) but in turn they offload a bunch of selling and support costs to the dealers.  In their gross margin, TSLA banks in their gross margin the extra 10% from not having to discount their cars but in turn does not charge gross margin for a lot of the extra sales and support costs they have to take on -- instead they drop these costs into SG&A overhead. The situation with gross margin is even more complicated because Tesla not only has to build out and operate its own warranty service, sales, and delivery network to replace traditional dealers, it is also building out its own fueling service to replace gas stations.  Here is one guy who thinks Tesla gross margin is really negative.  I have zero idea who he is but for the last year his predictions about Tesla have been a lot more reliable than Musk's statements.

Business Lesson From the Vietnam War

I just finished watching the PBS series on the Vietnam War and found the experience powerful and educational.  My only disappointment was that every soldier they interviewed and followed through the war ended up in the anti-war movement (or in the case of one POW, his wife did).  I agree with their perspective, and see the whole war as a giant waste, but unlike most people on campus nowadays, I like hearing from people with points of view that are different than mine.  I get nervous just having my expectations reinforced.  Surely there are veterans who thought the war was winnable and the US largely honorable -- I know some of these folks -- but we really do not get to hear their voices very often.   But with this proviso, the series was terrific.

One of the most important -- and hardest -- lessons of business is to think at the margin.  Perhaps the toughest corollary to this is: Sunk costs are sunk.  I don't care how much we have already spent on that factory -- that money is gone -- if it is going to take another $100 million to finish, are the benefits of the factory worth that $100 million? If not let's stop work on it no matter how much has already been spent.   I have worked to teach this to my wife.  I don't care how much the tickets for the show on Sunday night cost -- that money is gone -- isthe enjoyment we expect to get from the show worth the remaining costs we face (getting in the car, fighting for parking, etc)?

Transit projects thrive on the sunk cost fallacy.  Agencies explicitly try to get some money, spend it, and then claim the rest of the money has to be spent because we have already "invested so much".  Here is an example:

But what is really amazing is that Chicago embarked on building a $320 million downtown station for the project without even a plan for the rest of the line -- no design, no route, no land acquisition, no appropriation, no cost estimate, nothing.  There are currently tracks running near the station to the airport, but there are no passing sidings on these tracks, making it impossible for express and local trains to share the same track.  The express service idea would either require an extensive rebuilding of the entire current line using signaling and switching technologies that may not (according to Daley himself) even exist, or it requires an entirely new line cut through some of the densest urban environments in the country.  Even this critical decision on basic approach was not made before they started construction on the station, and in fact still has not been made.

Though the article does not mention it, this strikes me as a typical commuter rail strategy -- make some kind of toe-in-the-water investment on a less-than-critical-mass part of the system, and then use that as leverage with voters to approve funding so that the original investment will not be orphaned.

It amazes me that no politician in California has shut down the insane California high speed rail project, but I will bet you any amount of money that when they do the rail agency will be screaming that it can't be shut down because they have already spent billions of dollars and shutting them down would waste all that money.  Sorry, but that money has already been wasted, the point is to avoid all the additional money that will be wasted going forward.

The government decision-making around the Vietnam War seemed like nothing so much as a series of sunk cost fallacies.  We can't give up now, not after so many brave men have already died!  That last sentence could be the title of about half the episodes.   But sunk costs shouldn't matter in a go-forward decision -- but they do matter to ego and prestige.  Politicians talk about things like "the nation's honor" but what really matters at its heart is their own ego and perception.  Abandoning sunk costs, for the real humans making decisions (whether Presidents or CEOs) is about confessing past errors of judgment.  Its a hard thing to do, so hard a lot of extra people had to die in Vietnam before it could happen.  I can't find a transcript but Kissinger had some amazing quotes in Episode 9 that pretty baldly outline this problem.

 

 

Why Tesla Agreed to Pay Elon Musk So Much

Tesla agreed to give Elon Musk what is potentially the richest executive compensation package ever.  I will give my (*gasp*) cynical reason why I think they did this.  I can show you in one chart (Tesla Model 3 production, from Bloomberg):

I would argue that Elon Musk is the only one in the world who can run a company with so many spectacular failures to meet commitments and still have investors and customers coming back and begging for more.  A relatively large percentage of Teslas get delivered with manufacturing defects and their customers sing their praises (even while circulating delivery defect checklists).  Tesla keeps publishing Model 3 production hockey sticks (apparently with a straight face) and consistently miss (each quarter pushing back the forecast one quarter) and investors line up to buy more stock.  Tesla runs one of the least transparent major public companies in this country (so much so that people like Bloomberg have to spend enormous efforts just to estimate what is going on there) and no one is fazed.  Competitors like Volvo and Volkswagon and Toyota and even GM have started to push their EV technology past Tesla and actually sell more EV's than does Tesla (with the gap widening) and investors still treat Tesla like it has a 10-year unassailable lead on competition.

All because Elon Musk can stand up at a venue like SXSW, wave his hands, spin big visions, and the stock goes up $3 billion the next day.   Exxon-Mobil has a long history of meeting promises, reveals its capital spending plans in great detail, but misses on earnings by a few cents and loses $40 billion in market cap.  GE lost over half its market value when investors got uncomfortable with their lack of transparency and their failures to meet commitments.   Not so at Tesla, in large part because Elon Musk is PT Barnum reincarnated, or given the SpaceX business, he is Delos D. Harriman made real.

Disclosure:  I don't currently have any position in TSLA but over the last 2 years I have sold short when it reaches around $350 (e.g. after Elon Musk speaks) and buy to cover around $305 (e.g. when actual operational or financial data is released).  Sort of the mirror image of BTFD.

The Best New Technologies Don't Just Unseat Incumbents, They Grow the Market

I love Mark Perry's blog but I think he missed an opportunity to point out something awesome in this chart:

We spend a lot of time discussing how Uber and its app-based peers are upending the traditional taxi monopoly.  And no one enjoys seeing a government enforced crony monopoly overturned more than I.  But let's not miss the other story here, which is the tremendous increase in customer well-being and mobility.  Forget the mix for a second and add the two lines.  Monthly passenger rides, which were stuck in the 12-13 million a month range for years, have almost overnight doubled to about 25 million rides with the advent of ride-hailing and the entry of many ordinary folks without taxi medallions into the drive-for-hire business.  This is amazing!

Markets in Everything: Pizza Ordering Sneakers

Since I have not seen Marginal Revolution do this feature for a while, I will try to fill in.  "pie tops" -- sneakers with a button for ordering a pizza.

My New Favorite Entertainment

Reading dueling analyst reports on Tesla.  I can't think of another high-profile stock where there is so little consensus, where the range of opinions covers the whole spectrum.  With their quarterly earnings call tomorrow, it should be a most entertaining day.

Automation, or Perhaps Not (At Least for a While)

I thought this letter from Dan Hanson to Tyler Cowen was really thought provoking:

I wonder how many of the people making predictions about the future of truck drivers have ever ridden with one to see what they do?

One of the big failings of high-level analyses of future trends is that in general they either ignore or seriously underestimate the complexity of the job at a detailed level. Lots of jobs look simple or rote from a think tank or government office, but turn out to be quite complex when you dive into the details.

For example, truck drivers don’t just drive trucks. They also secure loads, including determining what to load first and last and how to tie it all down securely. They act as agents for the trunking company. They verify that what they are picking up is what is on the manifest. They are the early warning system for vehicle maintenance. They deal with the government and others at weighing stations. When sleeping in the cab, they act as security for the load. If the vehicle breaks down, they set up road flares and contact authorities. If the vehicle doesn’t handle correctly, the driver has to stop and analyze what’s wrong – blown tire, shifting load, whatever.

In addition, many truckers are sole proprietors who own their own trucks. This means they also do all the bookwork, preventative maintenance, taxes, etc. These people have local knowledge that is not easily transferable. They know the quirks of the routes, they have relationships with customers, they learn how best to navigate through certain areas, they understand how to optimize by splitting loads or arranging for return loads at their destination, etc. They also learn which customers pay promptly, which ones provide their loads in a way that’s easy to get on the truck, which ones generally have their paperwork in order, etc. Loading docks are not all equal. Some are very ad-hoc and require serious judgement to be able to manoever large trucks around them. Never underestimate the importance of local knowledge.

I’ve been working in automation for 20 years. When you see how hard it is to simply digitize a paper process inside a single plant (often a multi-year project), you start to roll your eyes at ivory tower claims of entire industries being totally transformed by automation in a few years. One thing I’ve learned is a fundamentally Hayekian insight: When it comes to large scale activities, nothing about change is easy, and top-down change generally fails. Just figuring out the requirements for computerizing a job is a laborious process full of potential errors. Many automation projects fail because the people at the high levels who plan them simply do not understand the needs of the people who have to live with the results.

Take factory automation. This is the simplest environment to automate, because factories are local, closed environments that can be modified to make things simpler. A lot of the activities that go on in a factory are extremely well defined and repetitive. Factory robots are readily available that can be trained to do just about anything physically a person can do. And yet, many factories have not automated simply because there are little details about how they work that are hard to define and automate, or because they aren’t organized enough in terms of information flow, paperwork, processes, etc. It can take a team of engineers many man years to just figure out exactly what a factory needs to do to make itself ready to be automated. Often that requires changes to the physical plant, digitization of manual processes, Statistical analysis of variance in output to determine where the process is not being defined correctly, etc.

A lot of pundits have a sense that automation is accelerating in replacing jobs. In fact, I predict it will slow down, because we have been picking the low hanging fruit first. That has given us an unrealistic idea of how hard it is to fully automate a job.

Based on this I can still think of some labor-saving, but not labor-eliminating, automation roles in trucking.

  • Convoying, allowing one driver to lead multiple additional automated trucks
  • Reduction in team driving.  Currently Federal rules (e.g. for rest breaks and maximum driving times) have created incentives for teams of two drivers to move priority freight that needs to be moving constantly and not parked while the driver sleeps.  Automation might allow one person plus the automated driver to keep trucks moving continuously and safely.

One thing not mentioned by Mr. Hanson is the role of regulation.  Safe automated trucks will likely exist LONG before Federal regulatory changes will occur to allow them much use.  This is not just because there is some delay with regulators getting comfortable with the safety aspects, but because affected groups with political pull who wish to keep the status quo will use safety concerns, real or imagined, to hold up the regulatory process.

If you think I am being too pessimistic, here is a story.  The typical steam engine of the 1930's needed a driver and a fireman -- the latter's job was to make sure the furnace was correctly fueled and operating well.  When diesel locomotives came along, one benefit among many was that the fireman was no longer needed.  Seeing this on the horizon, the fireman's union was ready to dig in their heals.  They actually, boldly, took the position NOT that a diesel locomotive needed a fireman, but that it should be required to have 2 firemen!  This was partially a subject for union negotiation, but in the dysfunctional world of railroad labor regulation, it also required some regulatory changes  (as the first industry with large workforces, the government took its first shot at labor regulation in a railroad-specific manner and the result was largely dysfunctional; fortunately for the rest of industry it did a better job with labor regulation later for everyone else).  It took years to totally eliminated fireman from diesel engines.  In fact, nearly every railroad labor saving technology like this (e.g. automatic brakes rather than men on roofs turning break wheels) led to regulatory foot-dagging that allowed the new technology but resisted the reduction in personnel.

Politics, Peer Virtue-Signalling, And the Agency Problem

The other day Megan McArdle wrote an article entitled "The CFPB Fight Is Completely Pointless...Why is either side spending political capital for brief control over this agency?"  In short, the the folks on the Left who mostly populate the Elizabeth Warren / Barrack Obama created agency argue that deputy director Leandra English should become acting director after the current director stepped down.  President Trump argues he should be able to appoint the acting director (as the President would for any other agency) and appointed CFPB critic Mick Mulvaney.

My heart thrills as readily as anyone’s to the sight of a doomed soldier playing Horatius at the Bridge. But at least Horatius Cocles had a purpose: He secured an orderly retreat, allowing the army to live to fight another day. What, exactly, do [Leandra] English and her supporters hope to achieve, other than a spectacle for wonky Washingtonians?

The most they can get is a brief period of business as usual, during which it will be hard to enact binding decisions because the legitimacy of her leadership will be in doubt. At worst, they get a humiliating smackdown from the courts, cementing their place in history as elitists who thought they were above petty restraints like elections or the Constitution.

And in the broader political picture, if you think Mulvaney is a bad, dangerous man who will privilege the interests of rich bankers over those of ordinary Americans, you’d probably rather have him running the CFPB than in his current job -- overseeing the entire federal budget. Even if English wins and sends him back to OMB, this seems like a Pyrrhic victory for the left.

While most everyone else on the Internet seems to be able to automatically intuit everyone else's internal motivations, I don't claim to have that ability.  So I will offer one possible motive why Leandra English might see personal benefit from this otherwise pointless struggle.

It is no news to say that the US has arrayed itself into multiple tribes that hate each other.  The election of President Trump has only accelerated this.  Trump is so disliked by those on the Left that folks on the Left can score major points with their tribe by publicly opposing him, even when their effort is doomed and ultimately pointless.   Wendy Davis is a good example of a politician who greatly increased her status in the Left-tribe with an ultimately doomed filibuster of an abortion bill in Texas (so much so that a hagiographic movie is being made about her).  I have wondered whether several of the judges who have temporarily halted controversial but probably legal executive actions by Trump were not motivated as much by playing to the audience in their tribe as they were by making a thoughtful legal decision.

Which brings me to the agency problem, which Wikipedia defines thus:

The principal–agent problem, in political science and economics, (also known as agency dilemma or the agency problem) occurs when one person or entity (the "agent") is able to make decisions on behalf of, or that impact, another person or entity: the "principal".[1] This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals, and is an example of moral hazard.

Common examples of this relationship include corporate management (agent) and shareholders (principal), politicians (agent) and voters (principal), or brokers (agent) and markets (buyers and sellers, principals).[2] Consider a legal client (the principal) wondering whether their lawyer (the agent) is recommending protracted legal proceedings because it is truly necessary for the client's well being, or because it will generate income for the lawyer. In fact the problem can arise in almost any context where one party is being paid by another to do something where the agent has a small or nonexistent share in the outcome, whether in formal employment or a negotiated deal such as paying for household jobs or car repairs

I think too often people define the agency problem only about economic incentives, e.g. my broker only recommends the stocks that pay him the highest commission.  But most of us are motivated by many things in addition to money.

Consider the example of a media conglomerate with multiple cable channels.  The managers of this media conglomerate are mostly of the Left.  One of their channels is called the shooting channel and focuses on gun reviews and the shooting sports.  The channel needs a new president, and it hires Hannah Progressive, either internally or from another successful media company.  Hannah is a talented media person with a proven track record of building cable channels and a perfect fit in every way except that she is disdainful of the shooting sports and groups like the NRA.  But let's say that Hannah is a true professional and can put that aside.  But what may be harder to put aside is the reaction of her peers.  She is going to get teased, maybe even bullied, by folks in her social circles.  Her peers are going to look down on her, even if she is successful (maybe especially if she is successful).  There is going to be tremendous pressure on her, both from her social circle as well as well as when she thinks about future job prospects an the industry dominated by the Left, to virtue-signal to others on the Left.  She could be tempted to shift content, alliances, advertisers,etc. in ways that signal virtue to her tribe but might alienate her current viewers and actually hurt the financial results of her company.

I frequently think about this in the context of how university presidents respond to protests, or how the NFL does so, or when seeing ESPN programming changes.  I have even seen it with programmers, working harder to impress their peers with the elegance of their code than to try to actually write things that serve the company and the customer.

Ethics Discussion

Is it ethical to pay a vendor in cash in order to get a substantial discount (e.g. 25%) even when one has a pretty good guess the vendor is accepting the cash and giving the discount in order to cheat on taxes and perhaps other laws?  Ignore the business reliability questions this raises (e.g. if one thinks the vendor is cheating Uncle Sam, doesn't this make it more likely he will also cheat me?).   Just pure ethics -- how responsible might one be for this vendor's illegal actions, and if one is, how sure would one have to be that the vendor has illegal intentions for this responsibility to cut in.

Elon Musk Is The Master of Yelling "Squirrel"

It is hard not to be conflicted about Elon Musk.  On the good side, he is pursuing fabulous and exciting goals  - space travel, high speed transportation, cheap tunnels, ubiquitous electric cars.  Listening to Musk is like riding through Disney's various Tomorrowland visions.  As a consumer, I love him.

As a taxpayer, I am not so thrilled.  Many of his companies (SolarCity and Tesla in particular) seem designed primarily as magnets for government subsidies.

But it is his shareholders I really have to wonder about.  I can't remember anyone in my lifetime who was so good at serving his shareholders Spam and convincing them they were eating filet mignon from a Michelin three star restaurant.  He announces quarter after quarter of failed expectations and greater-than-expected losses and then stands on stage and spins out all new visions and his fan-boys bid the stock to new all-time highs -- in fact to market valuations higher than GM, Ford, Nissan, or Honda.  Tesla's debt priced in the last offering well above what it should have given its rating and risks.   I thought his purchase by Tesla of his near-bankrupt other company Solar City had no strategic logic and was borderline corrupt, but my brother-in-law who is arguably a more successful entrepreneur than I thought it was brilliant, an example of Musk playing chess when everyone else is playing checkers.

So last week Tesla announced a really bad third quarter.  They lost a lot more money than they said they would, and produced a lot fewer of their new Model 3 cars than they promised.  Their manufacturing operations are in disarray and they are burning cash like crazy, such that the billions of funding they just raised will get burned up in just a couple more months.

But Tesla needs to stay hot.  California is considering new vehicle subsidy laws that are hand-crafted to pour money mainly into Tesla's pocket.  Cash is burning fast, and Musk is going to have to go back to the capital markets again, likely before the end of the year.  So out came Musk yesterday to yell

Tesla's main current problem is that they cannot seem to get up to volume production of their main new offering, the Model 3.  The factory appears to be in disarray and out of production and inventory space.  They can't produce enough batteries yet for the cars they are already making.  So what does Musk do?  Announce two entirely new vehicle platforms for tiny niche markets.

A workhorse truck and a new super car are in the works for Tesla, after founder and CEO Elon Musk introduced his company's latest effort to widen the U.S. market for electric vehicles Thursday night. Musk called the Roadster "the fastest production car ever made, period."

Musk unveiled the Roadster toward the end of an event that was supposed to be all about Tesla's new Semi trucks. Taking a page from Apple and other tech companies in using showmanship to wow crowds, Musk surprised the crowd by announcing there was one more thing to add — and the new car rolled out of the truck's trailer.

After touting the utility and efficiency of what he called a game-changing truck, Musk welcomed the Roadster to cheers from those attending the event at the Hawthorne Municipal Airport near Los Angeles.

You have to hand it to Musk -- no other car company could get a good bump in their stock by displaying what essentially are two concept cars with infinitesimal revenue potential.  Expect Tesla to have a bond or stock offering out soon while everyone still has stars in their eyes from these new vehicles and before anyone can refocus on production and profitability issues.

 

Stone Cold Lead Pipe Lock Prediction: Equifax Will Be Changing Its Name Within 18 Months

Whether it be via bankruptcy, a merger, or just an internal rebranding, I am pretty sure the Equifax name will not exist in 18 months**. I had a class in business school that studied cases from a number of corporate PR emergencies -- J & J's aggressive handling of the Tylenol poisoning cases is frequently studied as the gold standard for how to handle such a crisis.  However, most of the cases involved companies repeatedly firing additional rounds into their foot.  Equifax seems to be working from this latter script: (via Zero Hedge)

“Today, Equifax ended up creating that exact situation on Twitter. In a tweet to a potential victim, the credit bureau linked to securityequifax2017.com, instead of equifaxsecurity2017.com. It was an easy mistake to make, but the result sent the user to a site with no connection to Equifax itself. Equifax deleted the tweet shortly after this article was published, but it remained live for nearly 24 hours.”

Further research revealed three more tweets that had sent potential victims to the same false address, dating back as far as September 9th. These tweets have also since been deleted.

“Luckily, the alternate URL Equifax sent the victim to isn’t malicious. Full-stack developer Nick Sweeting set up the misspelled phishing site in order to expose vulnerabilities that existed in Equifax's response page. “I made the site because Equifax made a huge mistake by using a domain that doesn't have any trust attached to it [as opposed to hosting it on equifax.com],” Sweeting tells The Verge. “It makes it ridiculously easy for scammers to come in and build clones — they can buy up dozens of domains, and typo-squat to get people to type in their info.”

I recently froze my credit history at the four major credit monitoring companies.  I was super paranoid about making sure the domain I was entering my personal data into was a subdomain of company's domain.  Freeze.equifax.com would probably be safe.  But equifax.freeze.com would very likely be a phishing site.  As would be www.equifaxfreeze.com or www.freeze.com/equifax.  I know from training our employees on subdomains we use in our own company's web site that 99% of my employees do not understand the differences between these addresses.

 

** Because I can be a jerk but in generally harmless ways, for several years after the Valujet crashes in the Florida swamps I told my friends -- who were flying AirTran to save money -- that they should consider flying Valujet, which I claimed was even cheaper on those routes.  They said no way they would fly Valujet after Valujet had two crashes in a row that were ascribed to lax safety standards.  AirTran at the time was Valujet with the name changed.

The Diversity Paradox

I thought this was an interesting observation by University of New Mexico evolutionary psychology professor Geoffrey Miller, as quoted by Mark Perry:

Here, I just want to take a step back from the [Google] memo controversy, to highlight a paradox at the heart of the ‘equality and diversity’ dogma that dominates American corporate life. The memo didn’t address this paradox directly, but I think it’s implicit in the author’s critique of Google’s diversity programs. This dogma relies on two core assumptions:

  • The human sexes and races have exactly the same minds, with precisely identical distributions of traits, aptitudes, interests, and motivations; therefore, any inequalities of outcome in hiring and promotion must be due to systemic sexism and racism;
  • The human sexes and races have such radically different minds, backgrounds, perspectives, and insights, that companies must increase their demographic diversity in order to be competitive; any lack of demographic diversity must be due to short-sighted management that favors groupthink.

The obvious problem is that these two core assumptions are diametrically opposed. Let me explain. If different groups have minds that are precisely equivalent in every respect, then those minds are functionally interchangeable, and diversity would be irrelevant to corporate competitiveness. On the other hand, if demographic diversity gives a company any competitive advantages, it must be because there are important sex differences and race differences in how human minds work and interact.

Bottom Line: So, psychological interchangeability makes diversity meaningless. But psychological differences make equal outcomes impossible. Equality or diversity. You can’t have both. Weirdly, the same people who advocate for equality of outcome in every aspect of corporate life, also tend to advocate for diversity in every aspect of corporate life. They don’t even see the fundamentally irreconcilable assumptions behind this ‘equality and diversity’ dogma. American businesses also have to face the fact that the demographic differences that make diversity useful will not lead to equality of outcome in every hire or promotion. Equality or diversity: choose one.

Perry illustrates this with one of his ubiquitous Venn diagrams, which I am always happy to see because it just increases my royalties.

I am Going To Make A Fortune in the New Legalized Marijuana Market.... Uh, Maybe Not

Here are Coyote's first three rules of business strategy:

  1. If people are entering the business for personal, passionate, non-monetary reasons then the business is likely going to suck.  When I say "suck", I mean there may be revenues and customers and even some profits, but that the returns on investment are going to be bad**.  Typically, the supply of products and services and the competitive intensity in an industry will equilibrate over time -- if profits are bad, some competitors exit and the supply glut eases.  But if people really love the industry and do not want to work anywhere else and get emotional benefits from working there, there always tends to be an oversupply problem.  For decades, maybe its whole history, the airline industry was like this.  The restaurant industry is this way as well.  The brew pub industry is really, really like this -- go to any city and check the list of small businesses for sale, and an absurd number will be brew pubs.
  2. If the business is frequently featured in the media as the up and coming place to be and the hot place to work, stay away.  Having the media advertising for new entrants is only going to increase the competitive intensity and exacerbate the oversupply problem that every fast-growing industry inevitably faces as it matures.
  3. Beware the lottery effect -- One or two people who made fortunes in the business mask the thousands who lost money (Freakonics had an article on the drug trade positing that it works just this way -- while many of us assume the illegal drug trade makes everyone in it rich, in fact only a few really do so and the vast majority are and always will be grinders making little money for high risk).  Even those people who made tons of money in hot businesses sometimes just had good timing to get out at the right time before the reckoning came.  Mark Cuban is famous as an internet billionaire, but in fact Broadcast.com, which he sold for over $5 billion to Yahoo, only had revenues in its last independent quarter of about $14 million and was losing money (that's barely four times larger than my small company).

When I was at Harvard Business School, the first two cases in the first week of strategy class were a really cool high-tech semiconductor fab and a company that makes brass water meters that are sold to utilities.  After we had read the cases but before we discussed them, the professor asked us which company we would like to work for.  Everyone wanted the tech firm.  But as we worked through the cases, it became clear that the semiconductor firm had an almost impossible profitability problem, while Rockwell water meters minted money.  I never forgot that lesson - seemingly boring industries could be quite attractive, and this lesson was later hammered home for me as I later was VP of corporate strategy for Emerson Electric, a company that was built around making money from boring but profitable industrial products businesses.

Of course there are exceptions, but almost every one of these have built some sort of competitive advantage that allowed them to rise above the rivalry.  Google and Facebook are sexy and make money, but they have built scale and network effect advantages that make them hard now to challenge.   Apple makes money now because it has created switching costs (try switching from an iPhone to an Android and ever being able to text again with iPhone users) and a powerful brand.  The NFL owners have enormously sexy businesses but have created a brand and other competitive restrictions that protect their positions (not to mention have perfected the art of sucking money out of taxpayers for stadiums).  But even looking at these examples, the world is littered with folks who tried to be in the same business and failed.  Remember Nokia, Blackberry, Motorola, Lycos, Yahoo, AOL, Netscape, USFL, XFL, Myspace, etc.  I don't really know how strategy is being taught today, but I was schooled at HBS in Michael Porter's five forces.  I still find this framework useful, and probably about as much as any layman needs to know about business strategy.

But what about marijuana?  There are a lot of people very passionate about marijuana.  It is easy to grow (I remember an ex-girlfriend way back in the eighties whose mom grew it in the attic) and easy to sell (there is plenty of retail space nowadays going begging, or there is always the internet).  Every time there is some expansion opportunity in the business (e.g. a new state legalizing) the fact is advertised all over the media.  Overall, most folks are going to fail and most investment is not going to have very good returns for all the reasons listed above.   For most entrants, marijuana is gong to suck as a business for years to come.   And, some states seem to be developing onerous licensing regimes, and this may allow a few folks with the coveted licenses to make pretty good money.  Some day there could well be someone who consolidates the business and builds a powerful consumer brand and drives down costs and increases scale that makes money in marijuana.  But that is years away and typically the person who leads this is not among the initial entrants.  Remember, the vast vast majority of folks who traveled to California in the 1849 gold rush never made a cent.

You can already see this in California (my emphasis added). 

California's marijuana growers are producing far more pot than is consumed in-state — and will be forced to reduce crops under new regulations that ban exports, the Los Angeles Times reported.

"We are producing too much," Allen told the Sacramento Press Club during a panel discussion, the Times reported; he added that state-licensed growers "are going to have to scale back. We are on a painful downsizing curve."

Estimates vary for just how much surplus California produces — anywhere from five times to 12 times what is consumed in-state, the Times reported.

 

** You can tell I have classical training in business strategy because my goal is return on investment.  One can argue, perhaps snarkily but also somewhat accurately, that there is a new school of thought that does not care about profitability, revenues, or return on investment but on getting larger and larger valuations from private investors based on either user counts or just general buzz.  I am entirely unschooled in this modern form of strategy.  However, the general strategy of getting someone to overpay for something from you is as old as time.  I mentioned Mark Cuban but there are many other examples.  Donald Trump seems to have made a lot of money from a related strategy of fleecing his debt holders.

Commercial Airline Pilots, African Style

This was a letter from a pilot in answer to the question of why European airports ban flights from certain African airlines

One African airline I know of has the procedure that every landing must be a smooth one. That sounds okay to most people, but hopefully not to the pilots among us. They mandated that landing smoothly was more important than landing in the touchdown zone. They didn’t go around, they would simply touch down in the middle of the runway and slam on the brakes, close their eyes and pray that they didn’t go off the end of the runway. But the passengers never knew any of this, just feeling a smooth touchdown, so that was the most important factor for them.

The same airline would work out the maximum load they were able to safely lift in terms of passengers and freight, complete the load sheet and other paperwork to fit with this maximum, then do the real calculations in-flight, commonly landing more than five metric tonnes over the maximum landing weight.

The same airline made their pilots work 10 days on, one day off. They were not allowed to call in sick and any breach of this would necessitate armed men being sent to the pilots place of accommodation to physically force them onto the aircraft. I believe I know of two First Officers who got away with it — one because he had been arrested for murder, the other because he had been kidnapped. So I guess they weren’t totally unreasonable.

The SOP at my airline is to descend at 700 feet per minute for a three-degree approach and flare at about 20 feet. The SOP for this airline was to descend at 1500 feet per minute — thrust is idle so it saved them fuel — and flare at about 100 feet, floating down the runway to land dangerously, but smoothly, far far down the runway. Maintenance procedures were ignored and reports doctored. Licenses and check rides were given and passed based on bribes.

Eek.

By the way, if you are a frequent traveler interested in airline and credit card frequent flyer programs and benefits, the linked site is a good one.

Recent Harvard Business School Grads Hardest Hit

Apparently, European investment banks will have to start charging for research that, apparently, no one reads (emphasis added)

"The global investment research market is on the cusp of major disruption," said Benjamin Quinlan, CEO of Hong Kong-based Quinlan & Associates and author of a report on the challenges facing the research sector.

Forcing the change are new rules, known as Markets in Financial Instruments Directive, or MiFID II, due to take effect in January 2018 aiming to make European securities markets more transparent.

A key aspect of these rules is that investment banks must charge fund managers an explicit fee for research rather than bundling the cost into trading commissions charged to clients, as at present.

...For example, about 40,000 research reports are produced every week by the world's top 15 global investment banks, of which less than 1 percent are actually read by investors, according to Quinlan.

When I was there, an enormous number of Harvard Business School grads got their first post-b-school job as analysts writing just such reports.

Where Have All The Public Companies Gone?

From the WSJ today, this interesting bit:

In less than two decades, more than half of all publicly traded companies have disappeared. There were 7,355 U.S. stocks in November 1997, according to the Center for Research in Security Prices at the University of Chicago’s Booth School of Business. Nowadays, there are fewer than 3,600....

“Twenty years ago, there were over 4,000 stocks smaller” than the inclusion cutoff for the Russell 2000, says Lubos Pastor, a finance professor at the University of Chicago. “That number is down to less than 1,000 today.”

The article discusses the trend in the context of stock pickers having a smaller palette to work with, as it were, but obviously there are likely some economic implications here as well.  The first words the popped into my head were "Dodd-Frank" but for all the problems with that law, the chart makes clear that most of the decline occurred long before that law was passed.

Postscript:  The title of the article is "Stock Picking Is Dying Because There Are No More Stocks to Pick."  Maybe, but I would have been less charitable by saying that it was because as a group stock pickers have never been able to out-perform the market averages, even when there were twice as many stocks to choose from.

Update:  A reader writes:

Matt Levine, Bloomberg writer, has suggested recently that the reason this has happened is not that regulations on public companies have become especially onerous, it's that access to private money is easier now.

Public company regulations were always kind of onerous, but it was worth it to get access to the money only available in the public market. These days, when you can raise billions of dollars without ever going public, why bother?

In the context of stock-picking, I suppose all the good ones have moved to private equity firms.  As I suppose, have gone the good industry analysts

Why Monopsony Power May Be Irrelevant to the Effects of A Minimum Wage Increase

Most of us who took Econ 101 would expect that an increase in the minimum wage would increase unemployment, at least among low-skilled and younger workers.  After all, demand curves slope downards so that an increase in price of labor should result in a decrease in demand for that labor.

Supporters of the minimum wage, however, argue that employers have monopsony power when hiring low-skill workers. What they mean by this is that due to a bargaining power imbalance, employers can hire workers for less than they would be willing to pay in a truly competitive market.  As the theory goes, this in turn creates an additional consumer surplus for employers, which manifests itself as higher profits.  A minimum wage increase would thus reduce this surplus but not effect employment because companies before the new minimum wage were paying less than they were willing to pay.  Thus minimum wage supporters argue that higher wages mandated by minimum wage laws will be paid out of these excess profits, and not result in higher prices or less employment.

My understanding (and I am not an economist) is that the evidence for monopsony power in hiring low-skill workers is weak or at best limited to niche circumstances.  However, I am going to argue that it does not matter. Even if companies are able to pay workers less than they might via such monopsony power, whatever gains they reap from workers ends up in consumer hands.  As a result, minimum wage increases still must result either in employment reductions or consumer price increases or more likely both.

Why Monopsony Power May Not Matter

Why? Well, we need to back up and do a bit of business theory.  Just as macroeconomics (all the way back to Adam Smith) spends a lot of time thinking about why some countries are rich and some are poor, business theory spends a lot of time trying to figure out why some firms are profitable and some are not.  One of the seminal works in this area was Michael Porter's Five Forces model, where he outlines five characteristics of markets and firms that tend to drive profitability.  We won't go into them all, but the most important for us (and likely for Porter) is the threat of new entrants -- how easy or hard is it for new firms to enter the marketplace and begin competing against an incumbent firm.  If new companies can enter into competition easily, a profitable firm will simply attract new competitors, and keep attracting them until the returns in that market are competed down.

So let's consider a company paying minimum wage to most of its employees.  At least at current minimum wage levels, minimum wage employees will likely be in low-skill positions, ones that require little beyond a high school education.  Almost by definition, firms that depend on low-skill workers to deliver their product or service have difficulty establishing barriers to competition. One can’t be doing anything particularly tricky or hard to copy relying on workers with limited skills. As soon as one firm demonstrates there is money to be made using low-skill workers in a certain way, it is far too easy to copy that model.  As a result, most businesses that hire low-skill workers will have had their margins competed down to the lowest tolerable level.  Firms that rely mainly on low-skill workers almost all have single digit profit margins (net income divided by revenues) -- for comparison, last year Microsoft had a pre-tax net income margin of over 23%.

As a result, the least likely response to increasing labor costs due to regulation is that such costs will be offset out of profits, because for most of these firms profits have already been competed down to the minimum necessary to cover capital investment and the minimum returns to keep owners invested in the business. The much more likely responses will be

  1. Raising prices to cover the increased costs. This approach may be viable competitively, as most competitors will be facing the same legislated cost pressures, but may not be acceptable to consumers
  2. Reducing employment. This may take the form of stealth price increases (e.g. reduction in service levels for the same price) or be due to a reduction in volumes caused by price increases. It may also be due to targeted technology investments, as increases in labor costs also increase the returns to capital equipment that substitutes for labor
  3. Exiting one or more businesses and laying everyone off. This may take the form of targeted exits from low-margin lines of business, or liquidation of the entire company if the business Is no longer viable with the higher labor costs.

An Example

When I discuss this with folks, they will say that the increase could still come out of profitability -- a 5% margin could be reduced to 3% say.  When I get comments like this, it makes me realize that people don't understand the basic economics of a service firm, so a concrete example should help. Imagine a service business that relies mainly on minimum wage employees in which wages and other labor related costs (payroll taxes, workers compensation, etc) constitute about 50% of the company’s revenues. Imagine another 45% of company revenues going towards covering fixed costs, leaving 5% of revenues as profit.  This is a very typical cost breakdown, and in fact is close to that of my own business.  The 5% profit margin is likely the minimum required to support capital spending and to keep the owners of the company interested in retaining their investment in this business.

Now, imagine that the required minimum wage rises from $10 to $15 (exactly the increase we are in the middle of in California).  This will, all things equal, increase our example company's total wage bill by 50%. With the higher minimum wage, the company will be paying not 50% but 75% of its revenues to wages. Fixed costs will still be 45% of revenues, so now profits have shifted from 5% of revenues to a loss of 20% of revenues. This is why I tell folks the math of absorbing the wage increase in profits is often not even close.  Even if the company were to choose to become a non-profit charity outfit and work for no profit, barely a fifth of this minimum wage increase in this case could be absorbed.  Something else has to give -- it is simply math.

The absolute best case scenario for the business is that it can raise its prices 25% without any loss in volume. With this price increase, it will return to the same, minimum acceptable profit it was making before the regulation changed (profit in this case in absolute dollars -- the actual profit margin will be lowered to 4%). But note that this is a huge price increase. It is likely that some customers will stop buying, or buy less, at the new higher prices. If we assume the company loses 1% of unit volume for every 2% price increase, we find that the company now will have to raise prices 36% to stay even both of the minimum wage increase and lost volume. Under this scenario, the company would lose 18% of its unit sales and is assumed to reduce employee hours by the same amount.  In the short term, just for the company to survive, this minimum wage increase leads to a substantial price increase and a layoff of nearly 20% of the workers.   Of course, in real life there are other choices.  For example, rather than raise prices this much, companies may execute stealth price increases by laying off workers and reducing service levels for the same price (e.g. cleaning the bathroom less frequently in a restaurant).  In the long-term, a 50% increase in wage rates will suddenly make a lot of labor-saving capital investments more viable, and companies will likely substitute capital for labor, reducing employment even further but keeping prices more stable for consumers.

As you can see, in our example we don’t need to know anything about bargaining power and the fairness of wages. Simple math tells us that the typical low-margin service business that employs low-skill workers is going to have to respond with a combination of price increases and job reductions.

How My Company Has Responded

Just to put a bit more flesh on this, I will give a real example from my own company.  My company operates public recreation facilities, mainly campgrounds, under bid contracts.  To understand our response to rising minimum wage, you need to understand some background:

  • In bidding these, we bid both the camping fee we will charge to customers as well as the rent we will pay to the government for the concession.  Given the weights the government uses in the bid process, keeping customer price low is more important than the rent we pay, so in most cases the prices we charge customers are well below the private market rate for similar campgrounds.
  • We have limited ability to further increase productivity, in part because our ability to invest in these campgrounds in limited.
  • Because we have many contracts across the country, our reputation is important and so we seldom will entertain reductions in service, such as cleaning frequency
  • Labor and labor-related costs are about 50% of revenues, and most employees are paid minimum wage.  Profit margins hover around 5% of revenues

One of the states we operate in is California.  We are in the midst of a minimum wage increase there from $8 an hour several years ago to $15 several years hence, or an increase of 87.5%.  Basically we have had two responses:

  • In places where we are under the market price, we have been able to raise prices without a lot of drop in volume.  But this means that our camping rates in some locations have risen from $18 to a future $26 a night, an enormous increase in just a few years.
  • In places where we did not think the market would bear such a rate increase, or where our contract did not allow such a rate increase, we closed our operation.  In fact, we have exited about half our business in California (while simultaneously growing it aggressively in states like Tennessee).  In all cases this has resulted in a loss of employment -- either the location was never reopened by anyone else, or else it was reopened by a competitor with different reputational concerns who staffed the location with far fewer employees.

I Don't Think Gillette Would Complain If You Used Their Blades Without Their Razor

Apparently it is some kind of scandal surrounding Juicero, who I must admit I have never heard of until the recent spate of coverage.  In an emulation of Keurig, which I also know little about since I am not a coffee drinker, they have this juice-press thing that sells for $400 and that takes $7 proprietary bags of fruit or vegetables or whatever that the machine squeezes into juice.  Apparently, the scandal is that you can squeeze the bags just as well without the $400 juicer.

To which I answer:  duh.  I will bet my Harvard MBA that this company's business model really does not anticipate making most of its money from the machine.  The machine itself may actually not have any profit margin at all.  The bags at $7 certainly do.  The machine is the excuse for you to buy lots and lots of their high margin juice bags.  If you buy one a day for a year, that is over $2500 of revenue at a high margin vs. the original equipment sale of $400 at a low or no margin.  Telling this company their machine is not necessary is like telling Gillette you can use their $5 blades without having to use the razor that they pretty much give away anyway.

This is the joy of capitalism:  I absolutely guarantee you that within 60 days someone will be selling hand-squeezed juice bags for $5 each.

My Customer Service & Communication Advice to the United CEO

My company serves nearly 3 million visitors a year.  Though we always try for 100% satisfaction, some customers are going to slip through the cracks and be dissatisfied.   Each year, I get maybe 10 visitors who are severely dissatisfied, think they were mistreated, want to call their Congressman, are going to sue me, etc. I would say that these complaints eventually land on my desk but I actually look at every single comment card and letter and review that we get from customers and personally am involved with every single complaint of any sort.  Anyway, 10 or so are severe issues with a very upset customer that get to me without having been resolved in the field.

Folks who are involved in customer service will tell you that of these complaints, there will likely be a range of blame.  In some cases we screwed up.  In some cases no one screwed up but there was a mismatch of expectations.  And in some cases the customer was acting like a total asshole and was entirely to blame for the whole affair.  Sometimes it is hard to parse out after the fact which case is which -- something I wrote about here.  When these major complaints get to me, here is my guide to how I respond:

When we screw up:   "I am very sorry we did a poor job and you had a bad experience.  I am going to personally investigate immediately and we are going to make changes so this does not happen again -- but in the mean time, I want to refund your money and give you a certificate for some free camping so you can come back in the future and give us another chance to serve you well."

When the customer broke the rules and acted like a total jerk:   "I am very sorry we did a poor job and you had a bad experience.  I am going to personally investigate immediately and we are going to make changes so this does not happen again -- but in the mean time, I want to refund your money and give you a certificate for some free camping so you can come back in the future and give us another chance to serve you well."

When the exact situation is unclear:    "I am very sorry we did a poor job and you had a bad experience.  I am going to personally investigate immediately and we are going to make changes so this does not happen again -- but in the mean time, I want to refund your money and give you a certificate for some free camping so you can come back in the future and give us another chance to serve you well."

In any of these cases, if the customer describes poor behavior by my employees, I will tell them that "the behavior you are describing is absolutely unacceptable and, as I said, I am going to investigate personally as soon as we get off the phone."  You don't have to admit the behavior.  It is common that angry customers will dress up a story with a few added descriptions of outlandish employee behavior that may not actually be what happened.  You will try to figure that out later in the investigation.   But give the customer as much as you can.  If the customer said the employee used profanity, then it is perfectly fine to say "you are right, ms. customers, use of profanity by our employees is absolutely unacceptable" even if you suspect the employee did no such thing.

Giving this very positive response to customers who may have been bad actors or may be exaggerating can be hard because my local managers want to get very mad at me -- "Warren, don't you understand, he was a BAD customer.  You can't reward him for being a BAD customer."  To which I will say:  "First, you and I have not talked so I don't know yet if he was truly a BAD customer.  We may be the ones who screwed up.  But second, even if they were bad in some way, I am not rewarding a bad customer, I am trying to avoid a bad Tripadvisor review which will sit there on the Internet forever like a turd you can't flush.  And third, you seem to be trying to teach this customer a lesson, and make them realize they have been bad.  Even if the customer is really a jerk, this is never, ever ever ever going to happen.  You will never ever convince a jerk that they are a jerk, because almost by definition jerks last self-awareness, so stop trying."

We do a lot of training on this.  I tell folks all the time that if we have a customer like this who gets to me, I AM going to apologize and AM going to give them a refund and AM going to give them some free camping.  It doesn't mean that I am undermining the folks in the field, it means that this is smart business practice, particularly in this age of Internet reviews.  I tell my managers that they are letting their ego and pride stand in the way of having a customer walk away more satisfied, and if they refuse to check their ego, they are delegating the task of being humble upwards to me.  And over time, the good news is that most of my managers have gotten the message and have started emulating me so fewer and fewer of these ever reach me, they are solved much earlier in the field.

Postscript:  The first reaction I get from other business people is -- "don't you get taken advantage of and give out refunds to people who are just posturing about bad service just so they can get a refund?" And my answer is "yes".  But recognize that we have had over $100 million in revenues in this company since I started it, and we have perhaps paid $500 or $1000 is false refunds, or about .001% of revenues. I don't think .001% is very much to pay for the very high customer satisfaction rate we have.  But you would be surprised at the number of people that just can't let it go.  I don't know what this is called psychologically, but I will give another example.  We have a number of sites where the entrance station is not staffed on certain days and payment is on the honor system.  I have people who work for me who really get upset with me, telling me I simply HAVE to staff that gatehouse because some people are not paying.  You are being CHEATED!  I say that I am perfectly aware people are not paying, but it costs, all-in, probably $120-$150 to have a person sit in that gatehouse for 8 hours.  In that time perhaps 15 cars will come in.  At $6 apiece, even if every single one of them is cheating (and they do not, we have very good compliance in most honor system locations) I would be paying $150 to collect an extra $90 of revenue.  That would be insane.  But somehow the thought of lost revenue just makes some people crazy, no matter how expensive it is to chase it down.

Looking for Some Help -- Business Owners with 10-40 Employees

I am doing a paper on labor market regulation which I hope to get published through a prominent think tank.  I run a service business with about 300-400 near-minimum-wage employees, so I am familiar with a lot of labor regulation.  However, to make sure I am not missing something that may seem small to me but might be a big deal for a smaller company, I am looking to interview a few owners of small businesses.  I am looking for folks who run companies from 10-40 employees.  My preference is that most of the employees be average income or lower -- in other words, I don't really need to talk to the owners of 15-person hedge funds about overtime rules.

Interviews will be entirely private and no one will be quoted or referred to by name or even anonymously.  This is just background for me.  If you fit these criteria and are willing to help with a 30-minute phone interview, drop me an email at the contact link above.  I am out for a few days so you may not hear back for a week or so.

I Never Meet With Young Women Alone

Apparently Mike Pence is being criticized for refusing to meet alone with young women.  Seriously?  Because I have pretty much the exact same policy.   I never meet with young women one-on-one any more.  If I am interviewing a young woman for college, we meet in the Starbucks rather than my office.  I try to meet with sales people via the web rather than face-to-face, but if a young female sales person does show up at my door and I really must meet with them, we do it downstairs in the lobby and not in my office.

Am I being "dudely"?  ( I swear to God this is the world the Atlantic uses).  The explanation is simple, and can best be illustrated with this comment highlighted by Glen Reynolds:

1. Greatly expand definition of sexual harassment.
2. Make any accusation of sexual harassment career-ending.
3. Proclaim that women should always be believed when they accuse a man.
4. Complain that men won’t have 1-on-1 meetings with women.

Postscript:  To clarify, there is in Mike Pence's policy an element of avoiding temptation.  That is not my rational.  After nearly 30 years of testing, I find myself to be immune from temptation (at least in deed if not in thought).  This policy is pure self-protection.

Do Toner Cold Calls Really Sell Any Toner?

Every entrepreneur, I think, has his or her weird ticks.  One of mine is that I answer the main phone for our office here.  Granted, there are only a couple of us here (99.5% of our parks management people are actually in the parks, something that differentiates us from the government agencies we work with).  But answering the phone and sometimes directing calls is one way I sort of keep on top of what is going on.

Anyway, one result of this is I personally hear all the spam calls that come to our company,  of which calls to sell us merchant (ie credit card) processing services and to sell us toner are by far the most common.

Since I assume rational behavior by whatever firm is paying these people to make calls, I suppose they must get results.  But that amazes me.  Does some business after the 27th call asking to speak to the person who buys toner suddenly wake up and say, "Sure, send me some toner!" on the 28th call?  Ditto on merchant services.  In fact, though I put toner in the headline, merchant services amaze me even more as they are likely much closer to a buying company's core customer service processes than is printer toner.   Do people really buy based on cold calls?  I suppose they must.

It has been observed to me that this is just like the Nigerian email scam -- people are amazed folks still try this.  But in my mind it is different.  With an email scam, the costs are virtually zero so it costs nothing to spam zillions of people on the off chance one might be a hit.  For business sales, though, there has to be more of a cost to spam people.  (By the way, for this reason I proposed long ago that a tenth of a cent per email charge would end most spam and phishing.

My Favorite Description To Date of the Problems and Appeal of Trump

Scott Alexander has a great article on the problems with Trump's approach to economics.  I want to begin, though, with an analogy he uses at the end because it is the best single framework I have seen about understanding Trump's appeal:

Suppose you’re a hypercompetent billionaire in a decaying city, and you want to do something about the crime problem. What’s your best option? Maybe you could to donate money to law-enforcement, or after-school programs for at-risk teens, or urban renewal. Or you could urge your company full of engineering geniuses to invent new police tactics and better security systems. Or you could use your influence as a beloved celebrity to petition the government to pass laws which improve efficiency of the justice system.

Bruce Wayne decided to dress up in a bat costume and personally punch criminals. And we love him for it.

I worry that Trump’s plan for his administration is to dress up in a President costume and personally punch people we don’t like, while leaving policy to rot. And I worry it’s going to work.

Basically, Trump is acting like a small state governor, focusing his economic efforts on getting the Apple factory to come to town

So based on these two strategies, we are in for four years of sham Trump victories which look really convincing on a first glance. Every couple of weeks, until it gets boring, another company is going to say Trump convinced them to keep jobs in the United States. The total number of jobs saved this way will never be more than a tiny fraction of the jobs that could be saved by (eg) good economic policy, but nobody knows anything about economic policy and Trump will make sure everybody hears about Ford keeping jobs in the US. Every one of these victories will actively make the world worse, in the sense that these big companies will get taxpayer subsidies or favors they can call in later to distort government priorities, but nobody’s going to notice these either.

It seems appropriate to end this with a bit of Bastiat:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

As Predicted By Coyote Over a Year Ago, Other Car Manufacturers Have An Emissions Cheating Problem

Back in November of 2015 I wrote:

I would be stunned if the Volkswagen emissions cheating is limited to Volkswagen.  Volkswagen is not unique -- Cat and I think Cummins were busted a while back for the same thing.  US automakers don't have a lot of exposure to diesels (except for pickup trucks) but my guess is that something similar was ubiquitous.

My thinking was that the Cat, Cummins, and VW cheating incidents all demonstrated that automakers had hit a wall on diesel emissions compliance -- the regulations had gone beyond what automakers could comply with and still provide consumers with an acceptable level of performance.

So we have this:

U.S. environmental regulators accused Fiat Chrysler Automobiles NV of using software that allowed illegal emissions in diesel-powered vehicles, the latest broadside in an unprecedented government crackdown on auto makers for alleged pollution transgressions.

The Environmental Protection Agency, days before the end of the Obama administration, delivered a violation notice to Fiat Chrysler accusing the auto maker of using illegal software that allowed 104,000 recent diesel-powered Jeep Grand Cherokee sport utilities and Ram pickup trucks to spew toxic emissions beyond legal limits. The affected vehicles have model years ranging between 2014 and 2016.

Regulatory compliance can be a royal pain in the *ss, but I comply with everything I know about and can figure out in my own business.  There just is no percentage in cheating.  Where regulation has made my business untenable, such as in certain parts of California, I have closed the affected parts of the business.

So if I see no good reason to cheat in my own business when the rents for doing so would flow directly into my own pocket, how in the hell do middle managers on a salary with little or no share in the marginal profitability gains of the company convince themselves to take these risks?

Why Is the Diet Coke Always Out of Stock?

As a purchaser of Diet Coke in the medium-sized bottles, I have come to notice that all the other Coke products are often fully stocked, but the Diet Coke is sold out.  In hotels, when I hit the vending machine, if one type of soda is sold out, it will be the Diet Coke.   Here is my grocery store this morning, with a sight I have seen many times at each of the three stores where I shop.  Note that there is full stocking of all the Coke SKU's with a huge gap where the Diet Coke should be.

diet-coke

I like business analysis conundrums like this, so I can think of three explanations:

  1. Observer bias:  It could be all the other SKU's are out of stock an equal amount of time, but since I am not looking for them I do not notice.  I will say that I began thinking about this years ago and over the last year I have tried to pay special attention each time to what is and isn't stocked, but this is still a very likely possibility.
  2. Diet Coke loses money:  It is possible that Diet Coke has the lowest margins for the local distributor.  They are committed to stocking it by Coca-Cola, but they intentionally keep the shelf stock short to minimize sales of a bad product for them.
  3. Lack of granularity in distributor stocking plans:  By this I mean, if a distributor uses one stocking plan and set of product ratios in all stores, it may be that certain products sell out in areas that are over-weighted towards liking that product.  My gut feel is that Diet Coke, vs. Coke, skews more suburban and affluent.   So if they stock to a single standard plan across Phoenix, there may not be enough Diet Coke inventory in suburban grocery stores and fancier hotel vending machines.  This is a sort of variation of the observer bias issue -- Coke has a stocking problem only in a few locations, but I preferentially shop in those locations.