Posts tagged ‘investments’

Is The Carbon Tax A Pricing Signal To Reduce CO2, Or A Funding Mechanism for a Patronage System to Feed Various Constituencies?

This is an absolutely fascinating article at Vox on efforts by green forces and the Left to defeat a carbon tax ballot initiative in Washington State.  The ballot initiative was written very similarly to my proposed plan, where a carbon tax would be made revenue neutral by offsetting other taxes, particularly regressive ones.

Apparently, the Left is opposing the initiative in part because

  1. It turns out the carbon tax, for many on the Left, is more about increasing the size of government rather than really (or at least solely) for climate policy, and thus they do not like the revenue neutrality aspects.  They see carbon taxes as one of the last new frontiers in new government revenue generation, and feel like it would be wasted to make it revenue neutral
  2. The Greens have made common cause with the social justice warrior types, so they dislike the Washington initiative because it fails to allow various social justice and ethnic groups cash in.
  3. Apparently, folks on both the Left and the Right actually like government picking winners and tinkering in individual subsidies and programs, such as funding various green energy and conservation initiatives.  To me, that stuff is all a total waste and made irrelevant by a carbon tax, whose whole point is to allow markets to make the most efficient CO2 reduction choices, but looking at this election it would not be the first time the electorate was ignorant on basic economics.

There is a real disconnect here that it is important to understand.  I don't think I really understood how many of us could use the term "carbon tax" but understand its operation in fundamentally different ways, but I think that is the case.

The authors of the law, like me, see the carbon tax as a pricing signal to efficiently change behaviors in the market around use of carbon-based fuels.  The whole point of a carbon tax is to let individual actions and market forces shape how solutions are created.  But the Left seems to see the carbon tax totally differently.  They don't understand, or don't accept, the power of the pricing signal in the market, or else they would not say things like they want a "put a fee on emissions and reinvest that revenue in clean energy" -- the latter is a redundant and pointless government action if one accepts the power of the tax, since individuals will already be responding by making such investments.  The Left instead sees the carbon tax as the source of a new kitty of money that then must be fought over in some sort of political process.

Check out this passage, and consider whether these folks are thinking of the carbon tax as a pricing signal or a source of new money to be spread around:

Either way, state social justice groups did not feel consulted. "Rather than engaging with these communities," wrote Rich Stolz and De'Sean Quinn of environmental justice group OneAmerica, "I-732 organizers patronized and ignored concerns raised by these stakeholders."

White people who work with other white people — and the white people who write about them — tend to slough off this critique. What matters, they insist, is the effect of the policy, not the historical accident of who wrote it down.

Bauman points to a set of policy demands posted by Black Lives Matter. Among them: "shift from sales taxes to taxing externalities such as environmental damage." Also: "Expand the earned income tax credit."

"Well," Bauman says, "we did both those things, right?"

But communities of color want more than for mostly white environmental groups to take their welfare into account. Most of all, affected groups want some say in what constitutes their welfare. "All of us want to be included from the beginning of any decision," says Schaefer. "We don't want to be told after the fact, ‘Hey, by the way, we decided all this stuff for you.’"

This tension within the climate movement has played out most recently in California, where low-income and minority groups have won substantial changes to the state’s climate law, ensuring that a larger portion of cap-and-trade revenue is directed to their communities. Given demographic changes sweeping the country — and climate funders’ newfound attention to building up the capacity of those groups — those tensions are unlikely to remain confined to the West Coast.

These folks see the carbon tax as a pool of money to fund a patronage system, and are thus scared that any groups not involved in crafting the legislation will be left out of the benefits of the patronage -- after all, that is how most programs from the Left are put together.  The Obama stimulus program back in 2009 was such a patronage project, and those who were in on crafting it got windfalls, and those who were left out of the process had to pay for it all.  Either the Left assume that everything works this way, even when it does not, or they want everything to work this way -- I don't know which.

One thing I do know is that I fear I am going to lose this argument in the future.  Here is one way to look at it -- are more people graduating from college looking at the world through the lens of markets and economics and incentives or are more graduating structuring issues in terms of social justice and government authority?


The Corporate State, In One Chart

James Bessen has a terrific article in the Harvard Business Review on the estimated contribution to corporate profits of rent-seeking, or the acquisition of special favors, subsidies, and protections from the government that shelter a company from the normal competition of a free market.  Bessen argues that such rent-seeking is major explanatory factor for recent rises in corporate profits.


This topic will be a familiar one to Coyoteblog readers.   Show me a regulation and I will show you the large corporation that is able to use it to throttle competition.  I remember when everyone claimed the retail minimum wage was going to hurt Wal-Mart, but in fact Wal-Mart actually supported it because it was paying a higher wage than its smaller upstart competitors and thus the minimum wage would tend to hurt Wal-Mart's competition worse than it would be hurt.  Taxi service is one of the most regulated businesses in the country (at least in relation to the complexity of the business) and we are seeing just how much these regulations have supported taxi profits as we watch the taxi companies use the regulations to try to hammer Uber and Lyft.

According to Bessen, the effect is both large and on the rise:

I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase....

The pattern around the 1992 Cable Act is representative: I find that firms experiencing major regulatory change see their valuations rise 12% compared to closely matched control groups. Smaller regulatory changes are also associated with a subsequent rise in firm market values and profits.

This research supports the view that political rent seeking is responsible for a significant portion of the rise in profits. Firms influence the legislative and regulatory process and they engage in a wide range of activity to profit from regulatory changes, with significant success. Without further research, we cannot say for sure whether this activity is making the economy less dynamic and more unequal, but the magnitude of this effect certainly heightens those concerns.

Two characteristics make these changes particularly worrisome. First, the link between regulation and profits is highly concentrated in a small number of politically influential industries. Among non-financial corporations, most of the effect is accounted for by just five industries: pharmaceuticals/chemicals, petroleum refining, transportation equipment/defense, utilities, and communications. These industries comprise, in effect, a “rent seeking sector.” Concentration of political influence among a narrow group of firms means that those firms may skew policy for the entire economy. For example, the pharmaceutical industry has actively stymied efforts to address problems of patent trolls that affect many other industries.

I would add two other industries to this list -- medicine and legal.  The reason it likely does not show up in his study is that the returns in these businesses show up to individuals or small private firms.  But heavy regulation, and in particular a licensing process wherein one must get permission from the incumbents in order to compete with them, has always kept prices and returns in these businesses artificially high.

Note by the way that the breakpoint year of 2000 makes this a bipartisan issue, occurring in equal measure in Republican and Democratic Congresses and Presidencies.

And I don't think I need to remind folks, but both of our Presidential candidates are absolutely steeped in and committed to this cronyist, corporatist system

Matt Yglesias Summarizes the Public Parks Opportunity in One Paragraph

A two-fer!  This is from Yglesias's very good article on passenger rail also quoted in the previous post.  In discussing why Amtrak is generally uninterested in making incremental improvements on the Northeast Corridor, he writes:

The way Amtrak is currently set up, there's no real incentive to undertake incremental improvements. The Northeast Corridor already generates an operating profit, which simply defrays losses elsewhere in the system. Making it run better doesn't generate any wins for the people who would have to do the work, and would plausibly just lead Congress to reduce subsidies. If the NEC were spun off as an independent entity — perhaps even a private company — then it could internalize the gains from improved service and seek private financing to make cost-effective investments.

Long-time readers will know that my company privatizes the operation (but not the ownership) of public parks.  I will make two-hour presentations to parks agencies about how we can improve operations quality while cutting costs by 30-50% or more, and the near-universal response is, "well, if you reduce costs, then the legislature will just reduce our appropriations."  More efficient park operations, and at the margin better visitor service, don't create any wins for agency employees given their incentives.  In fact, if the parks are improved and more people show up, their job is just harder.  I had the manager of Arizona's premier state park tell me, absolutely in all seriousness, that he had the best job in the world if it wasn't for all the visitors.  Can you imagine a McDonald's franchise manager saying that?   As I have always said, government is not populated with bad people, it is populated with perfectly normal people who have terrible incentives.

When agencies choose how to spend incremental funds, they will almost always try to route these to the agency staff, in the form of more headcount and/or more pay.  When money is actually spent to make investments in the parks themselves, projects are chosen not by return on investment or customer priorities, but based on which ones will create the most prestige for the agency and its leaders.  This latter is one reason the Washington Metro is the mess it is, as the agency and the politicians who make appropriations will always prioritize system expansions over capital maintenance and sensible incremental improvements.

Why Wind and Solar Are Not Currently the Answer on Emissions Reductions

I have made this point forever, but it always bears repeating -- the variability of wind and solar require hot fossil fuel backups that leads to little reduction in total fossil fuel generation capacity (so that wind and solar investments are entirely duplicative) and less-than-expected reductions in actual emissions.

I don't think wind will ever be viable, except perhaps in a few unique offshore locations.  Solar is potentially viable with a 10x or so reduction in panel costs and a 10-100x reduction in battery/energy storage costs.  I honestly think that day will come, but we are not there.

From the Unbroken Window comes this slide from an interesting presentation at the Ontario Society of Professional Engineers, essentially making the same points I and others have been trying to make for years.


I made the point about nuclear in my climate legislative proposal here.

Net Neutrality: I Told Your So

From the WSJ (emphasis added):

Netflix now admits that for the past five years, all through the debate on net neutrality, it was deliberately slowing its videos watched by users on AT&T and Verizon’s wireless networks. The company did so for good reason—to protect users from overage penalties. But it never told users at a time when Netflix was claiming carriers generally were deliberately slowing its service to protect their own TV businesses—a big lie, it turned out.

All this has brought considerable and well-deserved obloquy on the head of Netflix CEOReed Hastings for his role in inviting extreme Obama utility regulation of the Internet. Others deserve blame too. Google lobbied the administration privately but was too chicken to speak up publicly against utility regulation.

But Netfix appears to have acted out of especially puerile and venal motives. Netflix at the time was trying to use political pressure to cut favorable deals to connect directly to last-mile operators like Comcast and Verizon—a penny-ante consideration worth a few million dollars at best, for which Netflix helped create a major public policy wrong-turn.

This is what I wrote about net neutrality a couple of years ago:

Net Neutrality is one of those Orwellian words that mean exactly the opposite of what they sound like.  There is a battle that goes on in the marketplace in virtually every communication medium between content creators and content deliverers.  We can certainly see this in cable TV, as media companies and the cable companies that deliver their product occasionally have battles that break out in public.   But one could argue similar things go on even in, say, shipping, where magazine publishers push for special postal rates and Amazon negotiates special bulk UPS rates.

In fact, this fight for rents across a vertical supply chain exists in virtually every industry.  Consumers will pay so much for a finished product.  Any vertical supply chain is constantly battling over how much each step in the chain gets of the final consumer price.

What "net neutrality" actually means is that certain people, including apparently the President, want to tip the balance in this negotiation towards the content creators (no surprise given Hollywood's support for Democrats).  Netflix, for example, takes a huge amount of bandwidth that costs ISP's a lot of money to provide.  But Netflix doesn't want the ISP's to be be able to charge for this extra bandwidth Netflix uses - Netflix wants to get all the benefit of taking up the lion's share of ISP bandwidth investments without having to pay for it.  Net Neutrality is corporate welfare for content creators....

I am still pretty sure the net effect of these regulations, whether they really affect net neutrality or not, will be to disarm ISP's in favor of content providers in the typical supply chain vertical wars that occur in a free market.  At the end of the day, an ISP's last resort in negotiating with a content provider is to shut them out for a time, just as the content provider can do the same in reverse to the ISP's customers.  Banning an ISP from doing so is like banning a union from striking.


You Know It Is Time to Short the Economy When...

.... your paper prints headlines that say "Economists: Zero chance of Arizona recession."  I am sure Houston would have said the exact same thing, right up until oil prices dropped to $30 and suddenly there was like a 100% chance.  When the Arizona Republic makes a definitive economic prediction, bet the other side.

Anyway, I am considering this headline to be a flashing indicator of the top.  In 2005 I wrote about another such indicator that told me the housing market had peaked:

So, to date [May 31, 2005], I have been unconvinced about the housing bubble, at least as it applied to our community.  After all, demographics over the next 20-30 years are only going to support Scottsdale area real estate.

However, over the weekend I had a disturbing experience:   At a social function, I heard a dentist enthusiastically telling a doctor that he needs to be buying condos and raw land.  The dentist claimed to be flipping raw land parcels for 100% in less than 6 months.

For those who don't know, this is a big flashing red light.  When doctors and dentists start trying to sell you on a particular type of investment, run away like they have the plague.  At Harvard Business School, I had a great investment management class with a professor who has schooled many of the best in the business.  If an investment we were analyzing turned out to be a real dog, he would ask us "who do you sell this to?" and the class would shout "doctors!"  And, if the investment was really, really bad, to the point of being insane, the class would instead shout "dentists!"

Which reminds me that in the last 6 months I have started hearing radio commercials again urging folks to get into the house-flipping business and make their fortune.  Whenever institutions start selling investments to you, the average Joe, rather than just investing themselves, that should be taken as a signal that we are approaching a top**.  About 12-18 months before oil prices tanked, I started getting flooded with spam calls at work trying to sell me various sorts of oil exploration investments.

** Postscript:  In 2010, when house prices were low and some were going for a song in foreclosure, there were no house flipping commercials on radio.   That is because Blackstone and other major institutions were too busy buying them up.  Now that these companies see less value, you are hearing house flipping commercials.   You know that guy who has a book with his fool-proof method for making a fortune?  So why is he wasting his time selling books for $2 a copy in royalties rather than following his method?

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.

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).

And This is Different from the US, How?

I am out of the country (currently in Thailand for a wedding).  I read this in the local Asian WSJ, an article about money and patronage in the Malaysian political process.  And while I suppose I was supposed to think "wow, Malaysia is sure screwed up" -- all I was really left with at the end of this article was "how is this any different from the US?" How does 1MDB differ from, say, various green energy funds at the Federal level or community development funds at the local level?

Malaysian Prime Minister Najib Razak was fighting for his political life this summer after revelations that almost $700 million from an undisclosed source had entered his personal bank accounts.

Under pressure within his party to resign, he called together a group of senior leaders in July to remind them everyone had benefited from the money.

The funds, Mr. Najib said, weren’t used for his personal enrichment. Instead, they were channeled to politicians or into spending on projects aimed at helping the ruling party win elections in 2013, he said, according to a cabinet minister who was present.

“I took the money to spend for us,” the minister quoted Mr. Najib as saying.

It still isn’t clear where the $700 million came from or where it went. But a six-month Wall Street Journal examination revealed that public entities spent hundreds of millions of dollars on a massive patronage machine to help ensure Mr. Najib’s United Malays National Organization stayed in power. The payments, while legal, represented a new milestone in Malaysia’s freewheeling electoral system, according to ruling-party officials....

The effort relied heavily on the state investment fund Mr. Najib controlled, 1Malaysia Development Bhd., according to minutes from 1MDB board meetings seen by The Wall Street Journal and interviews with people who worked there.

The prime minister, who is chairman of 1MDB’s board of advisers, promised repeatedly that the fund would boost Malaysia’s economy by attracting foreign capital. It rolled up more than $11 billion in debt without luring major investments.

Yet Mr. Najib used the fund to funnel at least $140 million to charity projects such as schools and low-cost housing in ways that boosted UMNO’s election chances, the Journal investigation found.

The minutes portray a fund that repeatedly prioritized political spending, even when 1MDB’s cash flow was insufficient to cover its debt payments.

This illustrates one (of many) reasons why those lobbying to reduce campaign spending are on the wrong track.  Because no matter how much one limits the direct spending in elections, no country, including the US, ever limits politicians from these sorts of patronage projects, which are essentially vote-buying schemes with my tax money.

The reason there is so much money in politics is because supporters of large government have raised the stakes for elections.  Want to see money leave politics? -- eliminate the government's ability to sacrifice one group to another while subsidizing a third, and no one will spend spend a billion dollars to get his guy elected to public office.

By the way, in this current Presidential election we are seeing a vivid demonstration of another reason campaign spending limits are misguided.  With strict spending limits, the advantage goes to the incumbent.  The only people who can break through this advantage are people who are either a) already famous for some other reason or b) people who resort to the craziest populist rhetoric.  Both of which describe Donald Trump to a T (update:  Trump has spent virtually no money in this election, so he should be the dream candidate of clean elections folks, right?)

The Paradox of Index Funds (And the Joy of Shopping)

Mark Perry makes the (updated) case for index funds.  I need no convincing, as most** of my savings (such that they are) are in Vanguard index funds of various sorts.

But as I was reading his article, I couldn't help thinking that there is a flaw with the "everyone should be in index funds" advice -- if everyone actually was 100% in index funds, they would not work.  Index funds are premised on the idea that stock prices are pretty well reflective of the information out there in the marketplace -- the company's future prospects, the strength of its market position, the direction of external factors such as economic growth and interest rates, etc.  But this is only going to be true if there are investors out there trying to pick stocks and beat the market -- ie if everyone is not in index funds.

It sort of reminds me of the old economics joke where a man is walking down the street with an economist, and the economist walks right past a $20 bill lying on the ground.  The man says to the economist -- "do you realize you just walked past a $20 bill?" and the economist answered, "It couldn't really be there -- in an efficient market, someone would have already picked it up."

In some ways, the stock pricing paradox here is just an example of a larger phenomena which for the lack of a better name I call "the joy of shopping."  People make fun of shopping all the time, but economically shopping is really a miracle.  All the things we attribute to prices and efficient markets and competition and the accountability of markets depend on shopping.  Individuals have to be out there making price-value trade-offs between products, or between buying something and not buying something.   For example, at least half of everything wrong with health care economics can be explained by lack of shopping.

The interesting thing is that only a small percentage of consumers in any particular market have to be hard-core shoppers (meaning they do tons of research and compare prices across multiple sellers) for all of us to benefit.  I seldom look at a price in Wal-Mart because I know other people who care a lot have enforced a discipline on Wal-Mart.  Just as with my Vanguard mutual funds, I depend on that core of folks who walks the aisles of Wal-Mart checking every price against Amazon and Target.


** I do enjoy picking stocks, and have a particular affinity for shorting things too early.  I never, ever let this portfolio grow to more than 5% of my total savings, and treat it explicitly as a sandbox to play in rather than real investments on which my future well-being depends.

Why Valley Metro (Phoenix Light Rail) Can't Be Trusted and Shouldn't Be Given More Tax Money to Play With

I was reading this article in the Arizona Republic (which is generally an unskeptical cheerleader for light rail investments) and looking at the claim that Valley Metro (the operator of Phoenix light rail) had a 45% fare recovery ratio in 2013.  One would think that means that their fares cover 45% of their costs -- which would be awful for any real enterprise but is pretty good for government-run rail systems.

But in fact, Valley Metro (along with rail supporters in the Administration) stack the deck by defining most of the costs out of this metric so it looks far better than it really is.  In fact, by my reading of their financial statements, the true fare recovery is at best 15.2% and likely much worse.

Here are the Valley Metro financials for 2013, from their annual report



Look at their costs of $75+ million and fares of about $12.8 million.  How do they get to 45%?  Simple -- they leave the majority of their costs out.  They exclude administrative costs, financing costs, and depreciation (essentially their capital cost) from the equation.  This means that their fare recover is 45% -- IF you ignore their large administrative costs and you ignore the $1.4+ billion the line cost to build.   Further, because of the way the government does its finances, it is also missing any financing costs (interest and such on debt).

So the true cost recovery, stated in a way that  a reasonable person would think about such a number, is 16.8% at best.  If one takes into account the $8.28 million in "non-operating expenses" the number is 15.2%.  And it is even lower if you were to include interest and other financing costs.

I am sure Valley Metro will argue that this is the way the Feds measure it.  I don't care.  It has an obligation to accurately report its financial position to the public who is paying for it, particularly when the public is considering further investments in the form of higher taxes.  The 45% is a meaningless number that is crafted solely to make light rail look financial stronger than it really is.

This, by the way, is why total ridership of rail + buses has stalled since the construction of the light rail line.  Light rail is so expensive per rider that it is starving cash from the rest of the system.

It's Not A Market Failure When People Avoid a Crappy Investment

Environmentalists often claim that people systematically under-invest in energy conservation, something they call a market failure.   This is why Obama and the Left put in a much heralded provision in the stimulus package that used Federal money to subsidize home energy conservation (new windows and insulation and such).

A new study in the NBER looks at the results.  This is the abstract:

Conventional wisdom suggests that energy efficiency (EE) policies are beneficial because they induce investments that pay for themselves and lead to emissions reductions. However, this belief is primarily based on projections from engineering models. This paper reports on the results of an experimental evaluation of the nation’s largest residential EE program conducted on a sample of more than 30,000 households. The findings suggest that the upfront investment costs are about twice the actual energy savings. Further, the model-projected savings are roughly 2.5 times the actual savings. While this might be attributed to the “rebound” effect – when demand for energy end uses increases as a result of greater efficiency – the paper fails to find evidence of significantly higher indoor temperatures at weatherized homes. Even when accounting for the broader societal benefits of energy efficiency investments, the costs still substantially outweigh the benefits; the average rate of return is approximately -9.5% annually.

The only failure here is the government diverting capital from productive uses into money-losing ventures like this one.

Trade and The World's Most Misunderstood Accounting Identity: Y=C+I+G+X-M

Repeat after me:  Y=C+I+G+X-M is an accounting rule.  It does not explain anything about the economy.  It is as useful to telling us anything interesting about the economy as the equation biomass=plants+animals+bacteria tells us anything about the ecosystem.

Which is why this kind of article in the press makes me crazy (emphasis added)

The U.S. trade gap narrowed in April as the effects of a West Coast port slowdown faded, easing one of the biggest drags on economic growth during the opening months of the year....

This year’s volatile import and export figures worked out to an overall drag on the economy in the opening months of 2015....

A surge in imports and falling exports subtracted 1.9 percentage points from the headline figure. As measured by GDP, exports are a positive for economic growth, while imports are a negative...

“The huge drag on GDP from trade in Q1 will almost certainly not be repeated in Q2,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

Here is the logic.  The GDP is calculated by adding Consumer spending + Industrial spending + Government spending + eXports and then subtracting iMports.  Because imports are subtracted in the GDP equation, they look to the layman like they shrink the economy.  How do we grow the economy?  Why, let's reduce that number that is subtracted!  But this is wrong.  Totally wrong.   I have tried many times to explain this, but let me see if I can work by analogy.

Let's say we wanted an equation to count the amount of clothing we owned.  To make things simple, let's say we are only concerned with the total of Shirts, Pants, and Underwear.   Most of our clothes are in the closet, so we say our clothes are equal to the S+P+U we count in our closet.  But wait, we may have Loaned clothes to other people.  Those are not in our closet but should count.  So now clothes = S+P+U+L.  But we may also have borrowed clothes.  Some of those clothes we counted in the closet may be Borrowed and thus not actually ours, so we need to back these out.  Our final equation is clothes = S+P+U+L-B.  Look familiar?

Let's go further.  Let's say that we want to increase our number of clothes.  We want wardrobe growth!  Well, it looks like those borrowed clothes are a "drag" on our wardrobe size.  If we get rid of the borrowed clothes, that negative B term will get smaller and our wardrobe has to get larger, right?

Wrong.  Remember, like the GDP equation, our wardrobe size equation is just an accounting identity.  The negative B term was put in to account for the fact that some of the clothes we counted in S+P+U in the closet were not actually ours.  But if we decrease B, say by returning our friend's shirt, the S term will go down by the exact same amount.  Sure, B goes down, but so do the number of shirts we count in the closet.  So focusing on the B term gets us nowhere.

But it is actually worse than that, because focusing on reducing B makes us worse off.  If B rises, our wardrobe is no larger, but we get the use of all of those other pieces of clothing.  Our owned wardrobe may not be any larger but we get access to more choices and clothing possibilities.  When we drive B down to zero, our wardrobe is no larger and we are worse off with fewer choices.

Returning to the economy, I don't want to say that it's impossible for increases in imports to drag the economy.  For example, if oil prices rise, the imports number measured in dollars will likely rise, and the economy will likely be worse off as we have to give up buying other things to continue to buy the oil we need.  But, absent major price changes, drops in exports more likely just mirror drops in C+I+G.  If consumers are hurting, they spend less on everything, including imported goods.   At the end of the day, none of these numbers (Mr. Keynes, are you listening?) are independent variables.

Postscript:  By the way, the trade deficit is a mirage in another way - it looks at only a subset of trans-national financial transactions.   The flow of dollars is (mostly) always in balance.  So if we are net sending dollars overseas when trading hard goods, the dollars come back in foreign purchases of investments and financial goods (which aren't included in the trade numbers).  Saying we have a trade deficit is the same as saying we have a net investment surplus.  For you physical scientists out there, measuring the trade deficit is like drawing your box around the process wrong such that you miss some of the forces.

If you really want to know our trade problem, it's not the trade deficit per se, but the fact that the funds coming back via investments are largely invested in value-destroying government debt rather than productive investments.

The Fatal Allure of the Sexy Business

The tech site Engadget directed me to this article on Visual FX and CGI as a "must-read".  What I found was one of the odder economics and business hypotheses I have encountered lately.

The article begins by relating that VFX and digital effects specialty houses all lose money, even when they are providing effects for wildly profitable movies (e.g. Avengers) and purports to explain why this should be.  The author believes that this is a result of Hollywood purposely criticizing the artistry of VFX movies as a way to keep returns in the VFX companies down (and thus increase the returns of film producers).

As the debate surrounding what visual effects are worth rages on, it is clear that the studios themselves have an interest in perpetuating the myth that VFX are the product of clinical assembly lines and the results are equally lifeless and mechanical. Blaming computers for the dumbing down of movies has become a journalistic trope that is bandied about to squeeze the one part of the Hollywood machine that has no union or organizational skill to push back. The right hand asserts they are something not worth paying top dollar for, while the left lines up an interminable roster of VFX-based box office juggernauts for the foreseeable future.

The author goes so far as to say that Avatar was denied the best picture Oscar specifically to support the anti-VFX sentiment and keep returns of VFX companies down (emphasis added).

In 2010, James Cameron’s Avatar became the highest grossing film of all time just 41 days after its release, raking in an incredible $2.7 billion by the end of its run. Weta Digital, the VFX studio that created the majority of the visual effects, along with Lightstorm Entertainment, invested years in developing the tools and talent necessary to create Cameron’s almost entirely computer generated vision, with the cost of making the film rumored to be upwards of $500 million. Cameron had promised to show the world what visual effects could do and he succeeded. The results were universally lauded as visually stunning and unparalleled.

Yet, rather famously, the film and Cameron were snubbed that year at the Academy Awards, both for Best Picture and Best Director. The blame was laid at the feet of the critical success of The Hurt Locker. However, awarding Avatar the Academy’s highest honor would have been acknowledging visual effects as not only lucrative, but high art as well, worthy of its astronomical price tag. And that was a bargaining chip Hollywood was unwilling to concede to an industry it continues to hold hostage with threats of outsourcing to unskilled laborers around the globe.

This hypothesis seems outlandish, and in fact the author never really provides any evidence whatsoever for her hypothesis.   At least equally likely is that Hollywood insiders are snobbish and conservative and reject new approaches to film-making in a way that the public does not.  Or it could be that Avatar wasn't a very good movie (go try to watch it again today, you will be surprised what a yawner it is).  So why are VFX companies really losing money on profitable films?   Let's take a step back, because there is a useful business lesson buried in here somewhere.  I think.

This discussion is a sub-set of an age-old business problem -- how do rents in a supply chain get divided up?   Think of the billion plus dollars the new Avengers movie will make.  Everyone in the supply chain for making that movie, from the actors to the caterers to the VFX houses to the distribution companies believe their contribution has immense value, and that they should be getting a solid cut of the profits.  But profits in a supply chain are not divided up based on some third party assessing value, they are divided up by negotiation.  And the results of that negotiation depend on a lot of factors -- the number of competitors, the uniqueness of the service, regulatory rules, etc.  The most visible example of this sort of negotiation we see frequently in the news is in sports, where players and team owners are explicitly negotiating the division of the end revenue pie between themselves.

If we return to the article, the author actually gives us a hint of the true dynamic that is likely bringing down VFX profits.

The international subsidies-driven business model under which VFX companies operate has been well documented. In pursuit of tax rebates offered by various governments to produce films in their jurisdiction, studios insist that VFX companies open branches in these locations or reduce their bids by the amount of the subsidy in question. Even as studios, directors, and audiences demand the latest in cutting edge technology, VFX houses must underbid one another to get the work and many have been shuttered due to operational losses in the wake of explosive blockbuster budgets. The cost of research and development, shrinking schedules, and the unlimited changes that are the building blocks of every tentpole film, are shouldered entirely by VFX houses.

This is the best clue we get to the real problem.  Here is what I infer from this paragraph:

  1. This is a high fixed cost industry.  There are enormous up-front investments in research into new techniques and large investments in the latest technology, which presumably must be constantly refreshed because it has a short half-life before it is out of date.  The situation is worsened by government policy, which provides incentives for VFX companies to build extra capacity in multiple countries, losing economy of scale benefits from large concentrated production facilities.    One would presume from this that these companies' marginal cost of output, say 15 seconds of finished effects, is way way below their total costs.
  2. There is rivalry among VFX companies that seem to have excess capacity, such that bidding for work is very aggressive.  In such situations (think American railroads in the late 19th century) competitors lower prices down to marginal cost to keep their capacity and their trained people working.  Over time, of course, this leads to numerous bankruptices

I will add a third point which the author fails to cover.  To do so I will return to one of my favorite things I learned at Harvard Business School (HBS).  At HBS, in the first two days of strategy class, we studied two very different business cases.  The first was of a water meter manufacturer, a dead boring predictable unsexy business.  The second was a semiconductor company, which was hip and cool and really sexy.  It turned out that the water meter company coined money.  The semiconductor business was in and out of bankruptcy.

Why?  Well the water meter company had limited investment (made the same meters the same way for decades) and made most of its money off the replacement market, where it had no competitors since users pretty much had to replace with the same meter.  The semiconductor business had numerous shifting competitors and was constantly trying to scrape up enough investment money to keep up with shifting technology.  But there was one more difference.  By being sexy, tons of people wanted to be in the semiconductor business. They got non-monetary benefits from being in it (ie it was cool and interesting).  When there is an industry where lots of people are getting into the business for reasons other than making money, look out!  The profits are probably going to be terrible.   This is why most restaurants fail.  The business-for-sale listings are awash in brew pubs.   The aviation industry was like this for years, and I would argue this also suppresses rents in farming.

I don't know this for a fact, but I would bet that the VFX industry attracts a lot of people because it is sexy.  Yes, like a lot of programming, the actual work is detailed and dull.  But if the coding is detailed and dull, would you rather be doing it for Exxon's new back-office system or to put Ironman on the big screen (and have your name deep into the film credits, seen by the dozen or so people who hang around waiting for the Marvel Easter egg at the end)?

This is why I think a conspiracy theory to believe Hollywood is dissing the artistry of VFX movies as a way to keep VFX company rents down is silly.  It is totally unnecessary to explain the bad rents.  Had you told me it was a high investment business with huge fixed costs and much lower marginal costs and alot of rivalry driven by participants who piled into the business because it was sexy, I would have told you to stop right there and I could have immediately predicted poor returns and bankruptcies.

So what can VFX companies do?  I have no idea.  The first idea I would offer them is branding.  If you are buried deep in the supply chain and want to increase your bargaining power, one way to do it is to develop a brand with the end consumer.   If consumers suddenly latch on to, say, the CoyoteFX brand as being innovative or better in some way, such that they might be more likely to go to a movie with CoyoteFX sequences, then CoyoteFX now has a LOT more power in negotiations with producers.  Dolby Sound is a great example -- you probably don't even know what it is but movies used to advertise they had it.  Certain camera technologies like Panavision are another, where movies actually sold themselves in part on the features of one member of their supply chain.  As a digital house, Pixar effectively did this -- so well in fact its brand actually was bigger than Disney's (its distributor) for a while, and Disney was forced to buy them.  This does not happen just in movies.  I just bought a car that advertised it had a premium Bose sound system.  The car maker doesn't advertise who made, say, the fuel tanks, so my guess is that Bose, via branding, gets a better cut of the supply chain than does the fuel tank maker.

What I Think is Going on With Greece

I want to offer a perspective on the Greek financial mess.

I am not confused about the Greek desire to get out from under their debt load - past governments have built up intolerable levels of debt which is costs a huge portion of Greek GDP to pay off.

At one time in my life I would have been confused by folks, often on the Left, who argue that the answer to Greek debt problems is ... deficit spending.  This might have seen inexplicable to me earlier in life as a wondered how the same behavior of fiscal irresponsibility that led them into debt would get them out.  But I have learned that there is no limit to the optimism Keynesians hold for the effects of government spending.  The last trillion of debt may have not done anything measurable but the next trillion is always going to be the one that turns us around.  Sort of like Cubs fans.

No, what confuses me today is the fact that other institutions and countries are still willing to buy Greek debt and even entertain some sort of debt swap where they end up with even more Greek debt.  I have heard it said by many experts that it is unrealistic to expect that lenders will get even a fraction of their principle back from these loans.  So why loan more?

The key for me in understanding this is the book "Engineering the Financial Crisis".  In that book, the authors presented the theory that the Basel capital accords, which set capital requirements for banks, had a lot to do with the last financial crisis.  Specifically, the rules allowed bank investments in two types of securities to be counted at 100% towards their capital levels.  Any other type of investment was severely discounted, so there were enormous incentives in the regulations to focus bank investments on these two types of securities.  What were they?  Sovereign debt and mortgages (and mortgage-backed securities).

In the authors' view, which I find persuasive, a lot of the last financial crisis was caused by these rules creating a huge artificial demand by banks for mortgage securities.  This created a sort of monoculture that was susceptible to small contagions spreading rapidly.  As this demand for mortgage backed securities inevitably drove down their returns, it also created a demand for higher-yielding, riskier mortgage investments that might still "count" as mortgage securities under the capital requirements.

Anyway, for the Greek crisis, we need to look at the other piece of these capital requirements that give 100% capital credit:  sovereign debt.  Now, I may have this wrong, but for Euro denominated credit, it all counts as 100% whether its German or Greek, which is a bit like saying a mortgage to Bill Gates and a mortgage to Clark Griswold's country cousins count the same, but those are the rules.

So here is the problem as I understand it:  Greek debt, because of its risk, paid higher returns than other sovereign debt but still counted the same against capital requirements.   So European banks loaded up on it.  Now that the debt is clearly bad, I am sure they would love to get paid for it.  But what they want even more is to continue to get credit for it on their balance sheets against capital requirements.  So what the banks need more than getting paid is for the debt to still exist and to (nominally) be current so that they can still count it on their balance sheets.  Otherwise, if the debt gets written off, that means banks need to run out and raise hundreds of billions in new capital to replace it.

Yes, I know this seems insane.  If everyone knows that the debt is virtually worthless, isn't it a sham to keep taking expensive steps (like issuing even more new debt) just to make sure the debt still appears on the books at 100%?  Yes, of course it is.  This is a problem with just about every system ever tried on bank capital requirements.  Such requirements make sense (even to this libertarian) in a world of deposit insurance and too big to fail, but they can and do create expensive unintended consequences.

In China, It's 1928

I know I have been warning about a Chinese recession/depression for a while, but it takes a while (and still will take some time) for this disaster to play out.  But the warning signs are all there.  This article today in the WSJ is a great example.  

A little over a year ago, a Chinese credit agency downgraded a government-owned financing company in this dusty industrial city. Default—nearly unheard-of in China on government bonds—was a possibility, it said.

But during discussions with lenders, city officials made sure Wuhan Urban Construction Investment & Development Corp. could keep borrowing, officials with knowledge of the matter say. The city during those discussions said it backed the finance firm, essentially guaranteeing the debt, and helped the company restructure its assets to entice investors to lend more.

Borrowing by firms like Wuhan Urban is a big reason China’s debt load is expanding. The International Monetary Fund says China’s debt is growing more rapidly than debt in Japan, South Korea and the U.S. did before they tumbled into deep recessions. Local-government borrowing is responsible for one-fourth of the buildup in China’s overall domestic debt since 2008....

Even before its latest step, Beijing had put forward plans to slow local-borrowing growth. But China’s local governments have a surprising ability to resist policies. Another central-government priority—reducing excess production in steel, cement and other industries—has foundered due to local opposition.

“The guys running local government financing operations won’t roll over and die,” says Fraser Howie, co-author of “Red Capitalism,” a study of China’s financial system. “These companies take on a life of their own.”

Perhaps we should call this the looming Thomas Friedman recession, as China goes bankrupt doing exactly what Friedman admires - building more and more infrastructure and then taking out debt and building even more.

There is absolutely no reason to believe, as folks like Friedman do, that this investment in infrastructure automatically has a positive return, and in fact there are a lot of reasons to think it does not (ie gluts of housing and basic materials).  As I have written before, like light rail spending in the US, these infrastructure investments pay their benefits mostly in prestige to local government officials and rents for politically connected contractors and government workers and not in real returns to future economic growth.

I tend to accept the Austrian theory of recessions, which I would simplify (perhaps inaccurately) as mis-allocation of capital and labor investments leading to economic downturns as the economy restructures.  The longer the reckoning is put off, the worse the recession.   These mis-allocations can sometimes be due to private causes (e.g. over-euphoric investments in early Internet companies in the late 1990's) but they often have public causes (e.g. artificially low interest rates or government programs to promote investment in a single industry like, say, housing).

I am convinced this is what brought down Japan -- after years of admiration for Japan, inc. and MITI economic management, it turns out the government had directed all capital into a few export manufacturing industries, while continuing to protect retail and agriculture locally from any real change or competition.  Which is why 25 years of government directed deficit spending has not fixed the recession -- it just doubles down on the original cause.  For those of you too young to remember, the Friedman-types of the world were all praising Japan to the hilt in the late 80's as the model we should all be following.  People like this don't admit error, they simply shut up about Japan and started praising the same behaviors in China.

The same reckoning is coming to China.  Probably not this year or the next, but within the next 5 years almost for sure.  It is 1928 in China.

Postscript:  By 1928, I mean a year of apparent prosperity before the Great Depression in 1929.  I am not referring to the nominal reunification of China or start of the "republic" under Chiang Kai-shek.

Want to Increase Infrastructure Money for Highways Immediately by 31%? Stop Diverting Highway Money to Transit

This DOT table, pointed out to me by Randal O'Toole, shows that money spent on highways could be increased immediately by over 30% if highway money was not diverted to transit and other uses.  About 13% of state gas tax revenues meant for highways are diverted to non-highway transit projects (e.g. light rail boondoggles).  Another 9.4% are diverted to general funds, and may not be applied to transportation projects at all.   The same table shows that if all state MVD receipts were used to support investments for cars rather than transit and general spending, money available for roads would increase 45% from those funds.

Transit projects should be supported by their own riders.  This will never happen, because they are so egregiously expensive per passenger-mile that no one would ride them if their trip were not subsidized by the rest of us**.  And I am exhausted with having folks argue that highways are "subsidized" because they require tax money beyond the gas taxes (which are essentially a user fee) when these extra tax monies for highways would be largely unneeded if the highway funds were used for highways.  The diversion to general funds is particularly troubling, since sleazy government officials are obviously trying to piggy-back off the popularity of highway infrastructure investment to generate a slush fund for activities taxpayers are less likely to support.

And please do not tell me that as a highway driver, investments in transit are doing me a favor by getting cars off the road.  Transit investments are so expensive per passenger mile that the same money spent getting a few cars off the road via transit would substantially increase road and highway capacities.  A dollar of highway investment carries at least an order of magnitude more passenger miles than a dollar of transit spending.

** I am always amazed that supporters of such transit projects call light rail projects "sustainable".  Forget for a minute that they seldom use less energy per passenger mile than driving.   Think about all the resources that go into them.  This at first seems like a hard problem -- how do we account for all the resources that go into transit vs. go into driving.  But then we realize it is actually easy, because we have a simple tool for valuing resource inputs:  price.  Prices are a great miracle.  They provide us with a sort of weighted average of the value and scarcity of the resources (both hard, like titanium, and soft, like labor and innovation) that go into a product.  So if light rail costs 10x or more per passenger mile than driving, as it often does, this means that it uses ten times the value of resource inputs as driving.  This is sustainable?  I do not think that word means what you think it means.

Explaining the Financial Crisis: Government Creation of a Financial Investment Mono-culture

Arnold Kling on the recent financial crisis:

1. The facts are that one can just as easily blame the financial crash on an attempted tightening of regulation. That is, in the process of trying to rein in bank risk-taking by adopting risk-based capital regulations, regulators gave preference to highly-rated mortgage-backed securities, which in turn led to the manufacturing of such securities out of sub-prime loans.

2. The global imbalances that many of us thought were a bigger risk factor than the housing bubble did not in fact blow up the way that we thought that they would. The housing bubble blew up instead.

What he is referring to is a redefinition by governments in the Basel accords of how capital levels at banks should be calculated when determining capital sufficiency.  I will oversimplify here, but basically it categorized some assets as "safe" and some as "risky".  Those that were risky had their value cut in half for purposes of capital calculations, while those that were "safe" had their value counted at 100%.  So if a bank invested a million dollars in safe assets, that would count as a million dollar towards its capital requirements, but would count only $500,000 towards those requirements if it were invested in risky assets.  As a result, a bank that needed a billion dollars in capital would need a billion of safe assets or two billion of risky assets.

Well, this obviously created a strong incentive for banks to invest in assets deemed by the government as "safe".  Which of course was the whole point -- if we are going to have taxpayer-backed deposit insurance and bank bailouts, the prices of that is getting into banks' shorts about the risks they are taking with their investments.  This is the attempted tightening of regulation to which Kling refers.  Regulators were trying for tougher, not weaker standards.

But any libertarian could tell you the problem that is coming here -- the regulatory effort was substituting the risk judgement of thousands or millions of people (individual bank and financial investors) for the risk judgement of a few regulators.  There is no guarantee, in fact no reason to believe, the judgement of these regulators is any better than the judgement of the banks.  Their incentives might be different, but there is also not any guarantee the regulators' incentives are better (the notion they are driven by the "public good" is a cozy myth that never actually occurs in reality).

Anyway, what assets did the regulators choose as "safe"?  Again, we will simplify, but basically sovereign debt and mortgages (including the least risky tranches of mortgage-backed debt).  So you are a bank president in this new regime.  You only have enough capital to meet government requirements if you get 100% credit for your investments, so it must be invested in "safe" assets.  What do you tell your investment staff?  You tell them to go invest the money in the "safe" asset that has the highest return.

And for most banks, this was mortgage-backed securities.  So, using the word Brad DeLong applied to deregulation, there was an "orgy" of buying of mortgage-backed securities.  There was simply enormous demand.  You hear stories about fraud and people cooking up all kinds of crazy mortgage products and trying to shove as many people as possible into mortgages, and here is one reason -- banks needed these things.  For the average investor, most of us stayed out.   In the 1980's, mortgage-backed securities were a pretty good investment for individuals looking for a bit more yield, but these changing regulations meant that banks needed these things, so the prices got bid up (and thus yields bid down) until they only made sense for the financial institutions that had to have them.

It was like suddenly passing a law saying that the only food people on government assistance could buy with their food stamps was oranges and orange derivatives (e.g. orange juice).  Grocery stores would instantly be out of oranges and orange juice.  People around the world would be scrambling to find ways to get more oranges to market.  Fortunes would be made by clever people who could find more oranges.  Fraud would likely occur as people watered down their orange derivatives or slipped in some Tang.  Those of us not on government assistance would stay away from oranges and eat other things, since oranges were now incredibly expensive and would only be bought at their current prices by folks forced to do so.  Eventually, things would settle down as everyone who could do so started to grow oranges. And all would be fine again, that is until there was a bad freeze and the orange crop failed.

Government regulation -- completely well-intentioned -- had created a mono-culture.  The diversity of investment choices that might be present when every bank was making its own asset risk decisions was replaced by a regime where just a few regulators picked and chose the assets.  And like any biological mono-culture, the ecosystem might be stronger for a while if those choices were good ones, but it made the whole system vulnerable to anything that might undermine mortgages.  When the housing market got sick (and as Kling says government regulation had some blame there as well), the system was suddenly incredibly vulnerable because it was over-invested in this one type of asset.  The US banking industry was a mono-culture through which a new disease ravaged the population.

Postscript:  So with this experience in hand, banks moved out of mortage-backed securities and into the last "safe" asset, sovereign debt.  And again, bank presidents told their folks to get the best possible yield in "safe" assets.  So banks loaded up on sovereign debt, in particular increasing the demand for higher-yield debt from places like, say, Greece.  Which helps to explain why the market still keeps buying up PIIGS debt when any rational person would consider these countries close to default.  So these countries continue their deficit spending without any market check, because financial institutions keep buying this stuff because it is all they can buy.  Which is where we are today, with a new monoculture of government debt, which government officials swear is the last "safe" asset.  Stay tuned....

Postscript #2:  Every failure and crisis does not have to be due to fraud and/or gross negligence.  Certainly we had fraud and gross negligence, both by private and public parties.  But I am reminded of a quote which I use all the time but to this day I still do not know if it is real.  In the great mini-series "From the Earth to the Moon", the actor playing astronaut Frank Borman says to a Congressional investigation, vis a vis the fatal Apollo 1 fire, that it was "a failure of imagination."  Engineers hadn't even considered the possibility of this kind of failure on the ground.

In the same way, for all the regulatory and private foibles associated with the 2008/9 financial crisis, there was also a failure of imagination.  There were people who thought housing was a bubble.  There were people who thought financial institutions were taking too much risk.  There were people who thought mortgage lending standards were too lax.  But with few exceptions, nobody from progressive Marxists to libertarian anarcho-capitalists, from regulators to bank risk managers, really believed there was substantial risk in the AAA tranches of mortgage securities.  Hopefully we know better now but I doubt it.

Update#1:  The LA Times attributes "failure of imagination" as a real quote from Borman.  Good, I love that quote.  When I was an engineer investigating actual failures of various sorts (in an oil refinery), the vast majority were human errors in procedure or the result of doing things unsafely that we really knew in advance to be unsafe.  But the biggest fire we had when I was there was truly a failure of imagination.  I won't go into it, but it resulted from a metallurgical failure that in turn resulted form a set of conditions that we never dreamed could have existed.

By the way, this is really off topic, but the current state of tort law has really killed quality safety discussion in companies of just this sort of thing.  Every company should be asking itself all the time, "is this unsafe?"  or "under what conditions might this be unsafe" or "what might happen if..."   Unfortunately, honest discussions of possible safety issues often end up as plaintiff's evidence in trials.  The attorney will say "the company KNEW it was unsafe and didn't do anything about it", often distorting what are honest and healthy internal discussions on safety that we should want occurring into evidence of evil malfeasance.  So companies now show employees videos like one I remember called, I kid you not, "don't write it down."

Net Neutrality is Not Neutrality, It is Actually the Opposite. It's Corporate Welfare for Netflix and Google

Net Neutrality is one of those Orwellian words that mean exactly the opposite of what they sound like.  There is a battle that goes on in the marketplace in virtually every communication medium between content creators and content deliverers.  We can certainly see this in cable TV, as media companies and the cable companies that deliver their product occasionally have battles that break out in public.   But one could argue similar things go on even in, say, shipping, where magazine publishers push for special postal rates and Amazon negotiates special bulk UPS rates.

In fact, this fight for rents across a vertical supply chain exists in virtually every industry.  Consumers will pay so much for a finished product.  Any vertical supply chain is constantly battling over how much each step in the chain gets of the final consumer price.

What "net neutrality" actually means is that certain people, including apparently the President, want to tip the balance in this negotiation towards the content creators (no surprise given Hollywood's support for Democrats).  Netflix, for example, takes a huge amount of bandwidth that costs ISP's a lot of money to provide.  But Netflix doesn't want the ISP's to be be able to charge for this extra bandwidth Netflix uses - Netflix wants to get all the benefit of taking up the lion's share of ISP bandwidth investments without having to pay for it.  Net Neutrality is corporate welfare for content creators.

Check this out: Two companies (Netflix and Google) use half the total downstream US bandwidth.  They use orders and orders of magnitude more bandwidth than any other content creators, but don't want to pay for it (source)


Why should you care?  Well, the tilting of this balance has real implications for innovation.  It creates incentives for content creators to devise new bandwidth-heavy services.  On the other hand, it pretty much wipes out any incentive for ISP's (cable companies, phone companies, etc) to invest in bandwidth infrastructure (cell phone companies, to my understand, are typically exempted from net neutrality proposals).  Why bother investing in more bandwidth infrastrcture if the government is so obviously intent on tilting the rewards of such investments towards content creators?  Expect to see continued lamentations from folks (ironically mostly on the Left, who support net neutrality) that the US trails in providing high-speed Internet infrastructure.

Don't believe me?  Well, AT&T and Verizon have halted their fiber rollout.  Google has not, but Google is really increasingly on the content creation side.  And that is one strategy for dealing with this problem of the government tilting the power balance in a vertical supply chain:  vertical integration.

Postscript:  There are folks out there who always feel better as a consumer if their services are heavily regulated by the Government.  Well, the Internet is currently largely unregulated, but the cable TV industry is heavily regulated.  Which one are you more satisfied with?

Update:  OK, after a lot of comments and emails, I am willing to admit I am conflating multiple issues, some of which fit the strict definition of net neutrality (e.g.  ISP A can't block Planned Parenthood sites because its CEO is anti-abortion) with other potential ISP-content provider conflicts.  I am working on some updates as I study more, but I will say in response that

  1. President Obama is essentially doing the same thing, trying to ram through a regulatory power grab (shifting ISPs to Title II oversight) that actually has vanishly little to do with the strict definition of net neutrality.   Net neutrality supporters should be forewarned that the number of content and privacy restrictions that will pour forth from regulators will dwarf the essentially non-existent cases of net neutrality violation we have seen so far in the unregulated market.
  2. I am still pretty sure the net effect of these regulations, whether they really affect net neutrality or not, will be to disarm ISP's in favor of content providers in the typical supply chain vertical wars that occur in a free market.  At the end of the day, an ISP's last resort in negotiating with a content provider is to shut them out for a time, just as the content provider can do the same in reverse to the ISP's customers.  Banning an ISP from doing so is like banning a union from striking. And for those who keep telling me that this sort of behavior is different and won't be illegal under net neutrality, then please explain to me how in practice one defines a ban based on a supply chain rent-division arguments and a ban based on nefarious non neutrality.

Great Example of the Completely Insane Way We Manage Water

Virtually every product and service we purchase has its supply and demand match by prices.  Higher prices tell buyers they should conserve, and tell suppliers to expend extra effort finding more.

Except for water.

Every water shortage you ever read about is the result of refusing to let prices float to dynamically match supply and demand.  And more specifically, are the result of a populist political desire to keep water prices below what would be a market clearing price (or perhaps more accurately, a price that maintains reservoir levels both above and below ground at target levels).

So, some groups in Arizona are offering a$100,000 prize to help solve the water shortage.  And what is it they are looking for?  A better price system?  Nah:

A $100,000 prize awaits the group that comes up with the most innovative ­campaign to push water scarcity into the forefront of public ­conversation...

The competition wants to create a public-service campaign that raises awareness about the challenges facing Arizona's long-term water supply so residents will feel an urgency to start working on them now.

If Arizonans don't change how they consume water and start brainstorming new solutions for dwindling supplies, shortages won't be a choice, they will be an unavoidable reality. Planning for the future of water now will help ensure there is enough water for future generations, Brownell said.

The message isn't new; it has been taught with puppets, posters, television spots, brochures and landscape-design classes for years.

But experts, researchers and industry workers agree that as long as taps gush clear,drinkable water, it's hard to keep water scarcity part of public conversation.

"One challenge is getting people to take ownership of their decisions and how they contribute to the demand side of the equation," said Dave White, co-director of Arizona State University's Decision Center for a Desert City, which studies water use and sustainability....

Possible solutions to meeting Arizona's future water needs include:

• Desalination of sea water, which requires large financial investment and collaboration between government agencies and possibly Mexico.

• Rebates for water-efficient systems. Tucson offers up to $1,000 for households that install gray-water recycling systems to reuse water from sinks, showers and washing machinesfor irrigation.

• Increasing the use of recycled or reclaimed water. Arizona already uses this water to irrigate landscaping and recharge aquifers, but not as drinking water.

• Cloud seeding. The Central Arizona Project has spent nearly $800,000 to blast silver iodide into clouds to try to increase snowfall in Colorado, Utah and Wyoming, where the snowpack feeds the Colorado River.

I will say that it is nice to see supply side solutions suggested rather than the usual demand side command and control and guilt-tripping.   But how can we possibly evaluate new water supply solutions like desalinization if we don't know the real price of water?  Accurate prices are critical for evaluating large investments.

If I find the time, I am going to tilt at a windmill here and submit an entry.  They want graphics of your communications and advertising materials -- I'll just show a copy of a water bill with a higher price on it.  It costs zero (since bills are already going out) and unlike advertising, it reaches everyone and has direct impact on behavior.  If you want to steal my idea and submit, you are welcome to because 1. The more the merrier and 2.  Intelligent market-based solutions are never ever going to win because the judges are the people who benefit from the current authoritarian system.

PS-  the site has lots of useful data for those of you who want to play authoritarian planner -- let some users have all the water they want, while deciding that other uses are frivolous!  Much better you decide than let users decide for themselves using accurate prices.

Feminists and Disarming the Victim and a Modest Proposal

I have just been flabbergasted at the feminist reaction against efforts to teach women to be more difficult targets for sexual predators (e.g. communicating the dangers of binge drinking, nail polish that detects date rape drugs, etc).  Nobody thinks that encouraging people to buy burglar alarms or lock their doors is somehow shifting blame for robbery to the victim.  But that is exactly the argument feminists are making vis a vis sexual assault on campus.  They argue that any effort to teach victims to be a tougher target is an insult to women and must be avoided.

This is just stupid.  So stupid that I wonder if there is an ulterior motive.  There is no way you ever are going to get rid of bad people doing bad things.  Our historic messaging on things like date rape may have been confused or insufficiently pointed, but we have always been clear on, say, murder and there is still plenty of that which goes on.  I almost wonder if feminists want women to continue to be victims so they can continue to be relevant and have influence.  It's a sick thought but what other explanation can there be for purposely disarming victims?

So I was jogging the other night through a university (Vanderbilt) and saw all those little blue light emergency phones that are so prevalent on campus.   In most cases, the ubiquity of those emergency phones is a result of the growing female population on campus and are there primarily to make women (and perhaps more importantly, their parents who write the checks) be safer feel more comfortable.  Women's groups were big supporters of these investments.  But why?  Isn't that inconsistent?  Shouldn't we consider investment in such emergency devices as wrong-headed attempts to avoid fixing the root cause, which is some inherent flaw in males?

If you say no, that it would be dumb to rip out the emergency phones, then why is it dumb to teach Freshman women some basic safety skills that may prevent them from being victims?   I have taken numerous campus tours with my kids and in almost every one they point out the blue light phones and in almost every case say, "I have never heard of these being used, but they are there."  I guarantee 30 minutes helping women understand how to avoid particularly risky situations would have a higher return than the phones.

I say this with some experience.  I was in a business for a while that required international travel and in which there was some history of executives getting attacked or kidnapped in foreign cities.  The company gave us a one-day risk-identification as well as beginner escape and evasion course.  It was some of the most useful training I have ever had.  And not for a single second did I think anyone was trying to blame me for street crime in foreign cities.

Apparently, Corporations Are Not Investing Because They Are Not "Socially Engaged"

Paul Roberts has an editorial in the LA Times that sortof, kindof mirrors my post the other day that observed that corporate stock buybacks (and investments to reduce tax rates) were likely signs of a bad investment climate.  Until he starts talking about solutions

Roberts begins in a similar manner

Here's a depressing statistic: Last year, U.S. companies spent a whopping $598 billion — not to develop new technologies, open new markets or to hire new workers but to buy up their own shares. By removing shares from circulation, companies made remaining shares pricier, thus creating the impression of a healthier business without the risks of actual business activity.

Share buybacks aren't illegal, and, to be fair, they make sense when companies truly don't have something better to reinvest their profits in. But U.S. companies do have something better: They could be reinvesting in the U.S. economy in ways that spur growth and generate jobs. The fact that they're not explains a lot about the weakness of the job market and the sliding prospects of the American middle class.

I suppose I would dispute him in his implication that there is something unseemly about buybacks.  They are actually a great mechanism for economic efficiency.  If companies do not have good investment prospects, we WANT them returning the cash to their shareholders, rather than doing things like the boneheaded diversification of the 1960's and 1970's (that made investment bankers so rich unwinding in the 1980's).  That way, individuals can redeploy capital in more promising places.  The lack of investment opportunities and return of capital to shareholders is a bad sign for investment prospects of large companies, but it is not at all a bad sign for the ethics of corporate management.   I would argue this is the most ethical possible thing for corporations to do if they honestly do not feel they have a productive use for their cash.

The bigger story here is what might be called the Great Narrowing of the Corporate Mind: the growing willingness by business to pursue an agenda separate from, and even entirely at odds with, the broader goals of society. We saw this before the 2008 crash, when top U.S. banks used dodgy financial tools to score quick profits while shoving the risk onto taxpayers. We're seeing it again as U.S. companies reincorporate overseas to avoid paying U.S. taxes. This narrow mind-set is also evident in the way companies slash spending, not just on staffing but also on socially essential activities, such as long-term research or maintenance, to hit earnings targets and to keep share prices up....

It wasn't always like this. From the 1920s to the early 1970s, American business was far more in step with the larger social enterprise. Corporations were just as hungry for profits, but more of those profits were reinvested in new plants, new technologies and new, better-trained workers — "assets" whose returns benefited not only corporations but the broader society.

Yes, much of that corporate oblige was coerced: After the excesses of the Roaring '20s, regulators kept a rein on business, even as powerful unions exploited tight labor markets to win concessions. But companies also saw that investing in workers, communities and other stakeholders was key to sustainable profits. That such enlightened corporate self-interest corresponds with the long postwar period of broadly based prosperity is hardly a coincidence....

Without a more socially engaged corporate culture, the U.S. economy will continue to lose the capacity to generate long-term prosperity, compete globally or solve complicated economic challenges, such as climate change. We need to restore a broader sense of the corporation as a social citizen — no less focused on profit but far more cognizant of the fact that, in an interconnected economic world, there is no such thing as narrow self-interest.

There is so much crap here it is hard to know where to start.  Since I work for a living rather than write editorials, I will just pound out some quick thoughts

  • As is so typical with Leftist nostalgia for the 1950's, his view is entirely focused on large corporations.  But the innovation model has changed in a lot of industries.  Small companies and entrepreneurs are doing innovation, then get bought by large corporations with access to markets and capital needed to expanded (the drug industry increasingly works this way).  Corporate buybacks return capital to the hands of individuals and potential entrepreneurs and funding angels.
  • But the Left is working hard to kill innovation and entrepreneurship and solidify the position of large corporations.  Large corporations increasingly have the scale to manage regulatory compliance that chokes smaller companies.  And for areas that Mr. Roberts mentions, like climate and green energy, the government manages that whole sector as a crony enterprise, giving capital to political donors and people who can afford lobbyists and ignoring everyone else.  "Socially engaged" investing is nearly always managed like this, as cronyism where the politician you held a fundraiser for is more important than your technology or business plan.  *cough* Solyndra *cough*
  • One enormous reason that companies are buying back their own stock is the Federal Reserve's quantitative easing program, which I would bet anything Mr. Roberts fully supports.  This program concentrates capital in the hands of a few large banks and corporations, and encourages low-risk financial investments of capital over operational investments
  • All those "Social engagement" folks on the Left seem to spend more time stopping investment rather than encouraging it.  They fight tooth and nail the single most productive investment area in the US right now (fracking), they fight new construction in many places (e.g. most all places in California), they fight for workers in entrenched competitors against new business models like Lyft and Uber, they fight every urban Wal-Mart that attempts to get built.  I would argue one large reason for the lack of operational investment is that the Left blocks and/or makes more expensive the investments corporations want to make, offering for alternatives only crap like green energy which doesn't work as an investment unless it is subsidized and you can't count on the subsidies unless you held an Obama fundraiser lately.
  • If corporations make bad investments and tick off their workers and do all the things he suggests, they get run out of business.  And incredibly, he even acknowledges this:  "And here is the paradox. Companies are so obsessed with short-term performance that they are undermining their long-term self-interest. Employees have been demoralized by constant cutbacks. Investment in equipment upgrades, worker training and research — all essential to long-term profitability and competitiveness — is falling."  So fine, the problem corrects itself over time.  
  • He even acknowledges that corporations that are following his preferred investment strategy exist and are prospering -- he points to Google.   Google is a great example of exactly what he is missing. Search engines and Internet functionality that Google thrives on were not developed in corporate R&D departments.  I don't get how he can write so fondly about Google and simultaneously write that he wishes, say, US Steel, were investing more in R&D.  I would think having dinosaur corporations eschew trying to invest in these new areas, and having them return the money to their shareholders, and then having those individuals invest the money in startups like Google would be a good thing.  But like many Leftists he just can't get around the 1950's model.  At the end of the day, entrepreneurship is too chaotic -- the Left wants large corporations that it can easily see and control.

A Bad Sign for the Economy

I don't think readers will be surprised to learn that I don't have any particular moral problem with tax inversions, reverse acquisitions that allow companies to take advantage of lower foreign tax rates.  The US has perhaps the most costly and unwieldy tax code in the world, made worse by our unique insistence on double taxation of foreign earnings that prevents companies like Apple from repatriating billions of dollars.  My tax plan begins with the elimination of corporate income taxes altogether, not only as an efficiency and growth step but as a huge step in fighting cronyism.

So I certainly don't share all this creepy Leftist desire for loyalty oaths and such from corporations.  But I do have a concern about the economy.  Over the past couple of years, it appears that a lot of corporate borrowing has been to:

  1. Buy back their own stock
  2. Reduce their tax rate, in part through inversions (apparently over 2/3 of 2014 M&A volume is inversions)

When the two best investments a company can find are in its own stock and in reducing tax rates, then there appears to be a problem with the underlying universe of investment opportunities.

Actually, the best investment our company has found this year is in closing operations in California and escaping that regulatory and litigation mess.


Let's Not Paint the Toyota Move to Texas Too Much as A Drive For Free Markets

I totally understand why Toyota would want to leave California.   I often wonder why any manufacturing business would remain in California.  I actually have thought about whether there is a private equity opportunity to buy California manufacturers and make money by moving them to lower cost jurisdictions.

I am particularly sympathetic this year.  We have four or five campground opportunities where we could be making money this year by making investments in these facilities.  But these initiatives would all take my time, and my time has been 110% devoted to catching up on regulatory compliance issues, particularly in California.   Every state has stupid compliance requirements, but California stands out for two reasons

  1. It has a lot, lot more of these requirements
  2. The cost of non-compliance is way higher than in other states.  You don't just get an order to clean up your act in 60 days, you get slammed with tens of thousands of dollars of legal fees from predatory law firms that have been given a hunting license by the state legislature to seek out and reward themselves when they find non-compliance minutia (e.g. numbers on the paycheck in the wrong font size).

So  I totally understand why Toyota is coming to Texas.  But also note that the state of Texas handed Toyota tens of millions of dollars in taxpayer money for the move, money for which smaller and less politically-connected companies don't qualify.  This corporate relocation incentive game is one of the worst uses of tax money, as it produces no new economic activity, but simply shifts it across arbitrary lines on the map.

If You Love Net Neutrality, Then You Can't Complain About Lack of ISP Competition and Investment

Kevin Drum laments that net neutrality seems to be dead, as he puts it:

So Google and Microsoft and Netflix and other large, well-capitalized incumbents will pay for speedy service. Smaller companies that can't—or that ISPs just aren't interested in dealing with—will get whatever plodding service is left for everyone else. ISPs won't be allowed to deliberately slow down traffic from specific sites, but that's about all that's left of net neutrality. Once you've approved the notion of two-tier service, it hardly matters whether you're speeding up some of the sites or slowing down others.

At some level, this statement is silly.   Really, does Netflix and Gmail really need the same connection speed?  And by the way, it makes a lot of difference whether investment is to give more speed to certain websites beyond what the consumer gets now vs. slowing down all the non-payers.  What honest consumer could ever see these options as similar?  Trust a progressive to consider cutting down all the tall trees to be equivalent to raising the short trees.

But here is another thought - Drum is among those who frequently complain about his lack of ISP choices and the slowness of developing speedier service.  But if I am an ISP, do I really want to invest billions in extra bandwidth when the benefits of this investment will accrue 100% to companies like Netflix rather than myself? And don't be confused, studies have shown Netflix using a third of all Internet capacity during peak times.  (updated data here, showing Google and Netflix together using more than half the capacity).  This strikes me as a free rider problem that normally the Left would jump right on.

It's hard to guess how things will play out, but there is a case to be made that Netflix and others paying for the bandwidth they consume will be a huge boon to home ISP access.  A second stream of income to ISP's based on bandwidth and speeds may be just what is needed to revitalize that business.  Of course, monopoly providers could just drop the money to the bottom line without doing anything to their infrastructure, but I trust that Netflix and Google will have every incentive to pound the hell out of ISP's who don't actually invest.  They are not particularly happy about this extra expense, so if they pay it, they are gong to make damn sure they get the speed and bandwidth they promised.  We individual customers have in the past had little power to influence ISP's bandwidth and speed investments, but now we have powerful allies.