Posts tagged ‘management’

Quick: From Media Reporting and Obama Speeches, What Is Your Impression of Wildfire Severity This Year

Wildfires are becoming a perennial favorite of our "Trend that is not a trend" series, showing how media creates trends out of single data points and even out of thin air.  Often, the evidence behind trends in media stories tends to be ... the increasing volume of media stories on that topic.  Thus the "Summer of the Shark" media fiasco.

About 98 out of 100 people I might ask would say that this is a record year for wildfires in the US.  In fact, it is, so far, one of the slowest wildfire seasons in recent memory.

Here is a screencap of the data from the National Inter-agency Fire Center.  Here is the link so you can see for yourself (though of course the data will be different over time since it shows year to date data for the day you check).

click to enlarge

 

Note that there is no apples to oranges BS here -- all data for all years are for Jan 1 to July 24 of that year.  So far this year, the number of fires is 31% below average and the total acres burned is nearly 60% below average.

Postscript:  By the way, I have every reason to hate wildfires.  A wildfire in the Sedona area shut down my largest business for the year, pretty much wiping out our company's earnings for the year.

Postscript #2:  There is clearly a trend in the data for acres burned (see whole database here).  I am not denying the trend, though we can argue how much is climate and how much is forest management and how much is simply more human contact with the wilderness.   What I object to is using individual events, particularly individual events in below-average years, as proof of the trend

 

What Happens When You Abandon Prices As A Supply-Demand Matching Tool? California Tries Totalitarianism

Mostly, we use prices to match supply and demand. When supplies of some item are short, rising prices provide incentives for conservation and substitution, as well as the creation of creative new sources of supply.

When we abandon prices, often out of some sort of political opportunism, chaos usually results.

California, for example, has never had the political will to allow water prices to rise when water is short. They cite all kinds of awful things that would happen to people if water prices were higher, but then proceed instead with all sorts of authoritarian rationing initiatives that strike me as far worse than any downsides of higher prices.

In this particular drought, California has taken a page from Nazi Germany block watches to try to ration water

So, faced with apparent indifference to stern warnings from state leaders and media alarms, cities across California have encouraged residents to tattle on their neighbors for wasting water — and the residents have responded in droves. Sacramento, for instance, has received more than 6,000 reports of water waste this year, up twentyfold from last year...

Some drought-conscious Californians have turned not only to tattling, but also to an age-old strategy to persuade friends and neighbors to cut back: shaming. On Twitter, radio shows and elsewhere, Californians are indulging in such sports as shower-shaming (trying to embarrass a neighbor or relative who takes a leisurely wash), car-wash-shaming and lawn-shaming.

“Is washing the sidewalk with water a good idea in a drought @sfgov?” Sahand Mirzahossein, a 32-year-old management consultant, posted on Twitter, along with a picture of a San Francisco city employee cleaning the sidewalk with a hose. (He said he hoped a city official would respond to his post, but he never heard back.)

Drought-shaming may sound like a petty, vindictive strategy, and officials at water agencies all denied wanting to shame anyone, preferring to call it “education” or “competition.” But there are signs that pitting residents against one another can pay dividends.

All this to get, in the best case, a 10% savings. How much would water prices have to rise to cut demand 10% and avoid all this creepy Orwellian crap?

One of the features of Nazi and communist block watch systems was that certain people would instrumentalize the system to use it to pay back old grudges. The same thing is apparently happening in California

In Santa Cruz, dozens of complaints have come from just a few residents, who seem to be trying to use the city’s tight water restrictions to indulge old grudges.

“You get people who hate their neighbors and chronically report them in hopes they’ll be thrown in prison for wasting water,” said Eileen Cross, Santa Cruz’s water conservation manager. People claim water-waste innocence, she said, and ask: “Was that my neighbor? She’s been after me ever since I got that dog.”

Ms. Franzi said that in her Sacramento neighborhood, people were now looking askance at one another, wondering who reported them for wasting water.

“There’s a lot of suspiciousness,” Ms. Franzi said. “It’s a little uncomfortable at this point.” She pointed out that she and her husband have proudly replaced their green lawn with drought-resistant plants, and even cut back showers to once every few days.

Update:  Seriously, for those that are unclear -- this is the alternative to capitalism.  This is the Progressive alternative to markets.  Sure, bad things happen in a free society with free markets, but how can anyone believe that this is a better alternative?

Don't Say I Didn't Warn You

I warned you that Cliven Bundy's ranch was the wrong hill to fight on over property rights and the role of government ownership on western lands.  And I was right.

This kind of thing should not come as a surprise.  This is a guy who simply did not want to pay his rent, and used the catch phrases of liberty to try to get sympathy.  I could find about a thousand far more sympathetic examples of folks screwed over by government land use regulations -- e.g. people whose puddle in the backyard is suddenly a wetlands that they can't build on.  But for some reason Conservatives all rushed to pile on this one example.  Stupid.  The media can probably be counted on to hide the unsavory back stories of Occupy Wall Street supporters, but there is no way they are going to do so for a "hero" of the right.   The BLM almost bailed Conservatives out of their stupid support for Bundy by their execrable on-site management of the raid, but Conservatives are now getting what they deserve for jumping in bed with this guy.

Problem Endemic To Public Parks Management

Glenn Reynolds is writing about colleges, but he could just as easily be writing about public parks:

Full-time administrators now outnumber full-time faculty. And when times get tough, schools have a disturbing tendency to shrink faculty numbers while keeping administrators on the payroll. Teaching gets done by low-paid, nontenured adjuncts, but nobody ever heard of an "adjunct administrator."

Replace "faculty" with "people actually working in a park" and administrators with "headquarters staff" and he has described the management of public parks exactly.  Most parks agencies are suffering from administrative bloat, with more people in headquarters than out in the field actually running parks.  When they have layoffs, it is always of field staff and not headquarters administrators.   In the parks world they will even ignore major maintenance needs in favor of making sure they have the funds to keep paying headquarters staff.

It is just absurd.  Of course, in my case, we make a business out of this.  We run public parks, and have 300 field employees actually in the parks and 2 in headquarters.  It allows us to cut costs while simultaneously doing a better job.

Obama's Demand for Wage Rules for Salaried Workers Will Have Far More Impact Than Proposed Minimum Wage Changes

The $10.10 minimum wage discussion has gotten a lot of attention.   But in 2011 only 3.8 million workers made at or below the minimum wage, and of these, at least half earn substantially more in reality through tips.

Obama's announcement yesterday that he wanted to substantially change the way salaried workers will likely have far more negative impacts on employment than his minimum wage proposals.

President Barack Obama is expected to order a rule change this week that would require employers to pay overtime to a larger number of salaried workers, two people familiar with the matter said.

Currently, many businesses aren't required to pay overtime to certain salaried workers if they earn more than $455 a week, a level that was set in 2004 and comes to roughly $24,000 a year. The White House is expected to direct the Labor Department to raise that salary threshold, though it is unclear by how much.

Ross Eisenbrey, vice president of the liberal Economic Policy Institute, and Jared Bernstein, a former White House economist, recently proposed the limit be increased to $984 a week, or roughly $50,000 a year.

"That would mean between five- and 10-million people could be affected, but they might choose a lower number," Mr. Eisenbrey said about the White House plans.

5-10 million is potentially 3x or more the people affected by a minimum wage change.  But in some sense, this still underestimates the impact.  Here is one example.  Last year the average starting salary of college graduates is about $45,000.  The median is likely lower.  This means that over half of all college graduates going into the work force will be taking hourly jobs that used to be salaried.   Teachers will be hourly.  Budget analysts will be hourly.  Etc.

So all these folks are saying - Yeah!  I get overtime!   Wrong.  They will be eligible for overtime.  But companies will quickly restructure their work processes to make sure no one works overtime.  And since their new hires are working just a straight 40 hours (with mandatory unpaid lunch break time in CA), they will likely pay less.   If I am paying $40,000 a year for someone who will work extra hours for me, I am not going to pay that amount to someone just punching a time clock.  And the whole psychological relationship is changed - a salaried person is someone on the management team.  A person punching a timeclock may not be treated the same way.

Further, when someone gets switched from salary to hourly, they lose a minimum pay guarantee.  When I get a $3,500 a month offer, I know that no matter how slow things are, until I am fired I get $3500 a month.  There is a floor on my earnings.  As an hourly worker, my hours can be adjusted up or down constantly.  There is no floor at all.

Oh, and by the way, remember Obamacare?  The PPACA penalizes companies who do not provide a health plan that meets certain (expensive) criteria.  But that penalty is not applied for workers who are "part-time" or work less than 30 hours a week.  Salaried workers are automatically full time.  But once you convert all those people to hourly and make sure they are working no more than 40 hours a week, is it really so large a step to getting them under 30 hours a week?

PS-  Well, for those who think schools assign too much homework, this could well be the end of homework.  The most dangerous possible thing with hourly workers is to give them the ability to assign themselves unlimited overtime.  Teachers could do this at home with grading papers.  If I were a school, I would ban teachers from doing any grading or schoolwork prep at home -- after all, it's hourly and probably overtime and they could work unlimited hours at home and how would you get it under control?  The only way to manage it would be to ban it entirely.

PPS- What about travel?  Would you ever let workers paid hourly travel?  You would have to pay all the travel time and maybe part of the hotel time and there would be huge potential for ending up with overtime bills so better to just ban travel all together.  I know this seems knee-jerk to ban something that might impose a lot of extra labor costs seems extreme, but just look at California.  In California, employees have the right to a half-hour lunch break without work.  They can work through lunch if they choose, but courts have imposed enough onerous reporting standards around this that most companies (like mine) have just banned working through lunch.  It is a firing offense in my company, and in many others in CA, to be caught working during lunch.  We are going to see the same thing working from home.  In fact, we already see this, as there are class actions right now against companies who provided employees with cell phones saying that giving them a cell phone put them "on call" and subject to overtime hours that had to paid at home.  Companies are now making it a firing offense to take one's company cell phone home.

Sorry this post is so disorganized, but this initiative caught be by surprise and I have not been thinking about it for very long.  I will try to work out a more rigorous article in the next few weeks.

Two Business Realities I Underestimated in My Youth

1.  Its all about having the right people.  When I was in b-school, I honestly laughed at statements like this.  I thought it was new age bullsh*t.  I was totally enamored of quantitative analysis and business strategy.  After running a business for 10 years, I now know that people are everything.  Everything - our ability to grow, to handle difficult compliance issues, to work safely, to reduce costs - relies entirely on my finding the right people in the right spots.  Everything else is a rounding error.

2.  There is only a very limited number of things you can deploy to the field at any one time.  It took me a really long time to realize that my mind - in fact, any manager's mind - likely works way faster than the bandwidth that exists to actually deploy new things to the field.  Putting customer initiative X on hold because compliance issue Y needs to be deployed first is really frustrating, but trying to do too much means nothing gets done.

I would observe relative to #2 above that over the last few years the combination of the Feds + legislatures like in CA are generating new compliance issues faster than we can deploy solutions and train for them.   In California, we have put most all new customer initiatives on hold because we are simply overwhelmed with management and employee training relative to various local government mandates.

Conflict of Interest

By the way, there is a reason for this choice (from an article on why unions are worried about the PPACA)

The second problem is that the 40 percent excise tax on especially expensive plans — the so-called Cadillac tax — is going to hit union plans especially hard. Unlike most people negotiating compensation, union negotiators make an explicit trade-off between wages and other benefits, and the benefit that they seem most attached to is generous health plans. Union plans are made more expensive still because union membership is heavily skewed toward older workers. They are thus very likely to get hit by the Cadillac tax, which takes effect in 2018.

The preference for health benefits over cash compensation makes some sense for tax reasons (as it shifts taxable income to nontaxable income).  And at some level it is typical of union thinking, which is often driven by seniority and by benefits for older workers over younger workers.  But there is another reason for this that is almost never stated -- the unions themselves run many of these health plans.  And because it is priced as a monopoly, the unions often earn monopoly rents on these plans, and use management of large health plans to justify much higher compensation levels for union leaders.  In Wisconsin, ending public union strangleholds on health plan management immediately saved the state and various local school districts millions of dollars when they were allowed to competitively bid these functions for the first time.

It's Not A Just Revenue Problem in Arizona Parks, It's A Cost Problem

Former Arizona State Parks director Ken Travous takes to the editorial page of our local paper to criticize current park management and the Arizona legislature for not sending enough money to parks"

Things were looking pretty good, and I guess that’s the problem. In some odd kind of way, employing some type of sideways logic, the Legislature deemed that if State Parks is getting along well, it must be out of our control. So, after 15 years of parks acting like a business, the Legislature decided to act like a government and take their money. A little bit here and there in the beginning, to test the public reaction, and then in breathtaking swaths.

Heritage Fund ... gone. Enhancement fund ... swiped. General fund? No way. A $250,000 bequest? Oops, they caught us; better put it back.

State Parks now has a mountainous backlog of maintenance projects all because the Legislature would rather wholly own a failure than share a success. We need to put people in the halls that care about those things that we want our children to enjoy, and a governor who will stand in the breach when the next onslaught appears.

I agree with Travous that our parks could use some more funds.  But what Mr. Travous ignores is that the seeds of this problem were very much sown on his watch.

Travous points out that revenues in the parks expanded to nearly $10 million when he was in charge.  But left unsaid is that at the same time agency expenses on his watch ballooned to a preposterous $33 million a year**.  At every turn, Travous made decisions that increased the agency's costs.  For example, park rangers were all given law enforcement certifications, substantially increasing their pay and putting them all into the much more expensive law enforcement pension fund.  There is little evidence this was necessary -- Arizona parks generally are not hotbeds of crime -- but it did infuriate many customers as some rangers focused more on citation-writing than customer service.  There is a reason McDonald's doesn't write citations in their own parking lot.

What Mr. Travous fails to mention is that the parks were falling apart on his watch - even with these huge budgets - because he tended to spend money on just about anything other than maintaining current infrastructure.  Infrastructure maintenance is not sexy, and sexy projects like the Kartchner Caverns development (it is a gorgeous park) always seem to win out in government budgeting.  You can see why in this editorial -- Kartcher is his legacy, whereas bathroom maintenance is next to invisible.  I know deferred maintenance was accumulating during his tenure because Arizona State Parks itself used to say so.  Way back in 2009 I saw a book Arizona State Parks used with legislators.  It showed pictures of deteriorating parks, with notes that many of these locations had not been properly maintained for a decade.  The current management inherited this problem from previous leaders like Travous, it did not create it.

So where were those huge budgets going, if not to maintenance?  Well, for one, Travous oversaw a crazy expansion of the state parks headquarters staff.    When he left, there were about 150 people (possibly more, it is hard to count) on the parks headquarters staff.  This is almost the same number of full-time employees that were actually in the field maintaining parks.  As a comparison, our company runs public parks and campgrounds very similar to those in Arizona State Parks and we serve about the same number of visitors -- but we have only 1.5 people in headquarters, allowing us to put our resources on the ground in parks serving customers and performing maintenance.  None of the 100+ parks we operate have the same deferred maintenance problems that Arizona State Parks have, despite operating with less than a third of the budget that Travous had in his heyday.

I am not much of a political analyst, but my reading is that the legislature cut park funds because it lost confidence in the ability of Arizona State Parks to manage itself.   Did they really need to cut, say, $250,000 from parks to close a billion dollar budget hole?  Arizona State Parks had its budgets cut because the legislature did not think it was acting fiscally prudent, like cutting off a child's allowance after he has shown bad judgement.

I have met with current Director Bryan Martyn and much of the Arizona State Park staff.  Ken Travous is not telling them anything they do not know.  Of course they would like more funds to fix up their parks.  But they understand that before they can expect any such largess, they need to prove that Arizona State Parks will use its funds in a fiscally sensible manner.  And I get the impression that they are succeeding, that the legislature is gaining confidence in this agency.  The irony is that  Arizona State Parks will be able to grow and get more funds only when it has overcome the problems Travous left for them.

 

 ** Footnote:  Getting an actual budget number for ASP is an arduous task.  I once talked to a very smart local consultant named Grady Gammage who worked with parks and finally despaired of accurately laying out the budget and allocating it to tasks.  What this achieves is that it allows insiders to criticize anyone they want as being "misinformed" because almost any number one picks is wrong.   The $33 million figure comes from outside consulting reports.  The headcount numbers come from numbers the ASP information officer gave me several years ago.  Headcount numbers are different today but the ones above are relevant to the agency as it existed when Travous left.

How Did Obamacare Authors Ever Fool Themselves Into Believing They Were "Bending the Cost Curve" With These Kind of Incentives?

I guess I never really paid much attention to how the Obamacare "risk corridors" work.  These are the reinsurance program that were meant to equalize the risks of various insurers in the exchanges -- but as exchange customers prove to be less healthy than predicted, they are more likely to become a government subsidy program for insurers.

I never knew how they worked.  Check out the incentives here:

According to the text of Obamacare, the health law's risk corridors—the insurance industry backstop that’s been dubbed a bailout—are only supposed to last through 2016. For the first three years of the exchanges, insurers who spend 3 percent more on health costs than expected will be reimbursed by the federal government. It’s symmetrical, so insurers who spend less will pay in, but there’s no requirement that the program be revenue neutral

So what, exactly, are the incentives for cost control?  If you lose control of your costs, the government simply pays for the amount you overspent.  Combine this with the fact that Obamacare puts caps on insurer non-patient-cost overhead spending, and I don't think you are going to see a lot of passion for claims management and reduction.  Note after a point, excess claims do not hurt profits (via the risk corridor) but more money spent on claims reduction and management does reduce profits (due to the overhead caps).

Nice incentives.

Postscript:  There is one flaw with my analysis -- 3% is a LOT of money, at least historically, for health insurers.  Why?  Because their margins are so thin.  I know this will come as a surprise with all the Obama demonization of insurance profits, but health insurers make something like 3-5% of revenues as net income.  My Boston mother-in-law, who is a very reliable gauge of opinion on the Left, thinks I am lying to her when I say this, even when I show her the Google finance pages for insurers, so convinced is she by the NYT and PBS that health insurer profits consume a huge portion of health care spending.

All that being said, I am pretty sure if I were an insurer, I could raise prices slightly, cut back on claims overhead, and make a guaranteed profit all while the government absorbs larger and larger losses.

Why Do We Manage Water Via Command and Control? And Is It Any Surprise We Are Constantly Having Shortages?

In most commodities that we consume,  market price signals serve to match supply and demand. When supplies are short, rising prices send producers looking for new supplies and consumers to considering conservation measures.  All without any top-down intervention by the state.  All without any coercion or tax money.

But for some reason water is managed differently.  Water prices never rise and fall with shortages -- we have been told in Phoenix for years that Lake Powell levels are dropping due to our water use but our water prices never change.  Further, water has become a political football, such that favored uses (farmers historically, but more recently environmental uses such as fish spawning) get deep subsidies.  You should see the water-intensive crops that are grown in the desert around Phoenix, all thanks to subsidized water to a favored constituency.   As a result, consumers use far more water than they might in any given year, and have no natural incentive to conserve when water becomes particularly dear, as it is in California.

So, when water is short, rather than relying on the market, politicians step in with command and control steps.  This is from an email I just received from state senator Fran Pavley in CA:

Senator Pavley said the state should consider measures that automatically take effect when a drought is declared to facilitate a more coordinated statewide response.

“We need a cohesive plan around the state that recognizes the problem,” Pavley said at a committee hearing. “It’s a shared responsibility no matter where you live, whether you are an urban user or an agricultural user.”

Measures could include mandatory conservation, compensation for farmers to fallow land, restrictions on the use of potable water for hydraulic fracturing (“fracking”), coordinated publicity campaigns for conservation, increased groundwater management, and incentives for residents to conserve water. Senator Pavley noted that her hometown Las Virgenes Municipal Water District is offering rebates for customers who remove lawns, install rain barrels or take other actions to conserve water.

Pavley also called for the state to create more reliable, sustainable supplies through strategies such as capturing and re-using stormwater and dry weather runoff, increasing the use of recycled water and cleaning up polluted groundwater basins.

Note the command and control on both sides of the equation, using taxpayer resources for new supply projects and using government coercion to manage demand.  Also, for bonus points, notice the Senator's use of the water shortage as an excuse to single out and punish private activity (fracking) she does not like.

All of this goes to show exactly why the government does not want a free market in water and would like to kill the free market in everything else:  because it gives them so much power.  Look at Ms. Pavley, and how much power she is grabbing for herself with the water shortage as an excuse.  Yesterday she was likely a legislative nobody.  Today she is proposing massive infrastrure spending and taking onto herself the power to pick winners and losers (farmers, I will pay you not to use water; frackers, you just have to shut down).  All the winners will show their gratitude next election cycle.  And all the losers will be encouraged to pay protection money so that next time around, they won't be the chosen victims.

Your Tax Dollars at Work

An anonymous quote from an employee at the Federal Mediation and Conciliation Service

"Let me give you the honest truth: A lot of FMCS employees don't do a hell of a lot, including myself. Personally, the reason that I've stayed is that I just don't feel like working that hard, plus the location on K Street is great, plus we all have these oversized offices with windows, plus management doesn't seem to care if we stay out at lunch a long time. Can you blame me?"

This is actually the least of the problems in the agency -- fraud appears to be rampant.  The Washington Examiner has a five part series.

The Problem with Job Discrimination Legislation

Congress is considering adding gays and lesbians to the list of protected groups covered by the EEOC.  As former chairman of a group that tried to get gay marriage legalized in Arizona (at least until we were shot down by gay rights groups that did not want libertarians or Republicans  helping to lead the effort), I hope I don't have to prove that I have no problem with differences in sexual orientation.  But I have a big problem with Federal employment discrimination law.

If you are unfamiliar with how it works, this is perhaps how you THINK it works:  An employee, who has been mistreated in a company based on clear prejudice for his or her race / gender / sexual orientation, etc. has tried to bring the problem to management's attention.  With no success via internal grievance processes, the employee turns finally to the government for help.

Ha!  If this were how it worked, I would have no problem with the law.  In reality, this is how it works:  Suddenly, as owner of the company, one finds a lawsuit or EEOC complain in his lap, generally with absolutely no warning.  In the few cases we have seen in our company, the employee never told anyone in the company about the alleged harassment, never gave me or management a chance to fix it, despite very clear policies in our employee's manuals that we don't tolerate such behavior and outlining methods for getting help.  There is nothing in EEO law that requires an employee to try to get the problem fixed via internal processes.

As a result, our company can be financially liable for allowing a discriminatory situation to exist that we could not have known about, because it happened in a one-on-one conversations and the alleged victim never reported it.

What I want is a reasonable chance to fix problems, get rid of bad supervisors, etc.  A reasonable anti-discrimination law would say that companies have to have a grievance process with such and such specifications, and that no one may sue until they have exhausted the grievance process or when there is no conforming grievance process.  If I don't fix the problem and give the employee a safe work environment, then a suit is appropriate.  The difference between this reasonable goal and the system we actually have is lawyers.  Lawyers do not want the problem to be fixed.  Lawyers want the problem to be as bad as possible and completely hidden from management so there is no chance it can be fixed before they can file a lucrative lawsuit.

I worry in particular about how this will play out with a new gay/lesbian discrimination law.  We have employed a number of gay couples over the years, and never had any particular internal issue  (I had to defend one couple in Florida from a set of customers who thought that it was inherently dangerous to employ gay people around children camping, but I did so gladly).  But I know I have employees who have religious beliefs different form my own such that they think gay people are damned, evil, whatever.  So now what do I do when I have one of these religious folks in conflict with an employee who is gay?  If I don't separate them, I am going to get sued by the gay person for a hostile work environment.  If I move the gay person, I will get sued for gay discrimination.  If I move or fire the religious person, I will get sued for religious discrimination.

I am happy to work hard to build a respectful, safe work environment, but such laws put me as a business owner in no-win situations.  And the lawyers who craft this stuff consider this a feature, not a bug.  Heads I sue you, tails I sue you.

The Real Health Insurance Shock Is Coming Next Fall

Obviously, the whole Obamacare implementation is in disarray.  Some of this I expected -- the policy cancellations -- and some of it I did not -- the horrendous systems implementation.  But I actually thought that most of this would be swept under the rug by a willing media.

What I really expected was for the true shock to come next fall.  And I think it is still coming.  I believe that despite rate increases, insurers are likely being overly optimistic about how much adverse selection and cost control issues they are going to have.  As a result, I expected, and still expect, huge premium increases in the fall of 2014.

Why?  The main benefit of Obamacare is for people who cannot afford health insurance but want it, and for people who are very sick and have lost their insurance.   Obamacare is a terrible plan as implemented because it futzes with virtually everything in the health care system when a more limited plan could have achieved the same humanitarian coverage goals.

Anyway, one reason Obamacare is so comprehensive is that it is based on a goal of cost control for the whole system.  Unfortunately, most all of its cost control goals are faulty.  From Megan McArdle, in an amazing article covering a huge range of Obamacare issues:

But I think it’s also clearly true that the majority of the public did not understand this. In 2008, the Barack Obama campaign told them that their premiums would go down under the new health-care law. And the law’s supporters believed it.

Q. Obama says his plan will save $2,500 annually for my family. How?

A. Through a combination of developing efficiencies in the system, expanding coverage to all Americans, and picking up the cost of some high-cost cases. Specifically:

-- Health IT investment, which will reduce unnecessary and wasteful spending in the health care system. Examples include extra hospital stays because of preventable medical errors and duplicative diagnostic tests;

-- Improving prevention and management of chronic conditions;

-- Increasing insurance industry competition and reining in the abusive practices of monopoly insurance and drug companies;

-- Providing reinsurance for catastrophic cases, which will reduce insurance premiums; and

-- Ensuring every American has health coverage, which will reduce spending on the “uncompensated” care of uninsured people who end up in emergency rooms and whose care is picked up by institutions and then passed through higher charges to insured individuals.

The part about reinsurance was always nonsense; unless it’s subsidized, reinsurance doesn’t save money for the system, though it may reduce the risk that an individual company will go broke. But the rest of it all sounded entirely plausible; I heard many smart wonks make most of these arguments in 2008 and 2009. However, it’s fair to say that by the time the law passed, the debate had pretty well established that few to none of them were true. “We all knew” that preventive care doesn’t save money, electronic medical records don’t save money, reducing uncompensated care saves very little money, and “reining in the abusive practices” of insurance companies was likely to raise premiums, not lower them, because those “abuses” mostly consist of refusing to cover very sick people.

The result?  Many of these things that supposedly reduced costs actually increase them.  So if you think the shock is high now, wait until next fall.  We will see:

  • Rates going up
  • Less choice, as insurers pull out of many local markets
  • Narrowing of doctors networks, and reduced choice in doctors
  • Companies dropping health care and dumping workers (and retirees if they can get away with it) into the exchanges and Medicare.

Apparently, Rental Homes Are Not Like Bonds

It is always hard to tell if the media is really offering a balanced sample of customer experiences when they pile on some company, but the Huffpo makes a pretty good case that large Wall Street home rental companies are doing a terrible job at customer service.

If so, I am unsurprised for three reasons:

  • I run what is essentially a property management company.  One thing I have learned is that everyone outside of the business systematically underestimates basic maintenance and operating costs, and few if any ever factor in the costs of longer-term capital maintenance.  Further, and perhaps more critically, outsiders frequently underestimate the detailed, even minute focus on process and organization that is necessary to make sure everything is getting maintained satisfactorily  particularly when the portfolio gets larger than the executive group can personally oversee.
  • I have rented out a second home for a few years.  It is difficult and expensive to stay on top of basic maintenance, and this is with one property that one is intimately familiar with.  I challenge you to find many people who will say they made money renting their second homes, particularly given the high cost of property management.  They may have made money on the appreciation of the real estate value, or reduced the net costs of owning a vacation home, but I seldom run into anyone making money on a annual basis (as long as the real cost of capital is being considered in the equation).
  • Wall Street has a long history of treating operational assets as financial assets.  There is a huge mindset difference between the two.  The book Barbarians at the Gate included some early history of LBO firms like KKR, and it is interesting the culture clashes they faced as they tried to explain the need to be operationally involved in their investments to the financial guys who wanted to treat them as Deals.

Litigation Virgin no More, and Good News on Parks for the Next Shutdown

My company has been sued a few times for slip and fall type stuff but I have never in my life been the plaintiff in a legal action.  As is perhaps appropriate given my political leanings, my first ever suit was against the the Federal government, specifically against the Forest Service seeking an injunction against their closure of the campgrounds we operate in the recent shutdown.

Unfortunately, the case reached the court on the day the shutdown lifted, but the judge was still very helpful in giving the Forest Service a swift kick in the butt to hurry them along so they didn't drag their feet reopening us.,

I had feared that we would lose the opportunity to set a precedent.  Since the shutdown was over I though the Court might consider this issue moot.  But apparently one can continue with such litigation to set a precedent if there is reason to think the circumstances will recur.  And the government attorney was kind enough to make a statement right in the court transcript (granted in context of a different argument) that this same shutdown situation is likely to reoccur as soon as early next year.

The good news is that we appear to have an argument that the Court is willing to entertain.  In fact, the statement below was a statement by the judge in the hearing (it's from the hearing transcript and Q&A with the government attorney and not from any official opinion).  It is not in any way binding but it gives us some confidence to try to proceed to get a ruling on the legality of our closure now, so we have it in our pocket for next time.  Here is the Court's statement, addressing the government attorney:

Well, the basic problem is that the Forest Service never should have closed these that were permitted properties.  And they in fact violated the agreement they had with these plaintiffs in doing so without necessity and determining they had a right to do so, which I don't think they did....

[the Forest Service has] nothing to do with the administration and management of the campgrounds other than the inspections at any given time.

So, what they have done is unreasonably close these parks, preventing the concessioners who pay a premium in order to get this permit and lease the property under the requirements in this permit -- and the Forest Service was very ill-advised to make the decision to close these grounds under these circumstances, where you have given up the maintenance and administration of these campsites.

I understand the overall obligation for public safety, but you have delegated that to private entities.  And you took it away when it wasn't costing you a dollar to leave it as was.  And in fact, that's where  we get into the restraint of trade and the fact that there are losses which are most likely uncompensatable.

 

By the way the case was National Forest Recreation Association et. al. vs. Tom Tidwell.  My company, among others, was al.

 

New Development: Our Closure Creates Chaos in Sedona

As you know (and am sure are tired of hearing about) the US Forest Service has closed all our privately-funded and operated parks on their land.  These include a number of very popular campgrounds and parks in the Sedona area.

Today we got a call from the County Sheriff saying that visitors were parked all over the highway and walking into our (closed) concession areas.  He said they were creating a serious public safety problem, particularly at Call of the Canyon** (also known as West Fork) and Crescent Moon Ranch (also known as Red Rock Crossing).  I told him that I had specifically raised this issue about these specific sites all the way up to Cal Joyner, Regional head of the USFS in Arizona, New Mexico and parts of Oklahoma and Texas.  And the US Forest Service had closed us anyway.  The Sheriff begged us to reopen the facilities and I told him I would love nothing more but my contracts were suspended and I had no legal basis for doing so.

So, apparently, the sheriff cut the cable on the facilities and is letting cars into the facilities, creating even more chaos.  There is no one there to monitor safety, provide security, clean the bathrooms, pick up trash, etc. -- all the things we do every day without taking one dollar of Federal money, if only the US Forest Service would let us.  I am actually happy the Sheriff is giving visitors access.  These facilities are particularly lovely in the Autumn.  But the US Forest Service needs to send 15 or 20 people to help manage them, but that would cost them money they do not have.  Or they could just let us get back to operating the sites, which does not cost them one dime.

 

** The West Fork of Oak Creek Canyon is so beautiful in the fall that Zane Grey immortalized it in a novel called "Call of the Canyon."  The trailhead and parking area are cramped and require a lot of active management even when staffed to keep them operating safely.

If You Are Still Confused About Public vs. Private Incentives...

Can you imagine a private employer doing this?

The U.S. Department of Housing and Urban Development said it will close its offices at 1:30 p.m. Other agencies, such as the Labor Department, expect most employees to be gone by mid-day, but haven't set a specific time.

Once they head home, furloughed employees are under strict orders not to do any work. That means no sneaking glances at Blackberries or smart phones to check emails, no turning on laptop computers, no checking office voicemail, and no use of any other government-issued equipment.

This is not good management.  This is not good government.  This a the management equivalent of a tantrum thrown by a four-year-old.  We'll show them!  Any private white collar workers who feel they are truly off the clock when they are at home and under no obligation to make sure all is going well in their assigned area of responsibility should tell us all where they work in the comments below.

Apparently No Mistakes Were Made in Yarnell Fire

The official report is out, and apparently absolutely no mistakes were made by anyone leading to the deaths of 19 in the Yarnell Hill fires.  Despite the fact that -- these 19 men were totally out of communication;  and no one knew where they were; and they entered a ridiculously dangerous patch of ground; and they were not pursuing any coherent goal anyone can name -- no one made any mistakes and there is nothing here to learn from.  Wow.

Here is my analysis of what is going on with this report:  Substantial mistakes were made by both the fire team and by their leaders.  Their leaders wrote the report, and certainly were not going to incriminate themselves, particularly given that they likely face years of litigation.  They could have perhaps outlined the mistakes the team made, but the families and supporters of the dead men would have raised a howl if the dead firefighters were blamed for mistakes while the leadership let themselves off the hook, and surely would have pushed back on the culpability of the firefighting effort's management.

So this report represents an implicit deal being offered to the families -- we will let your dead rest in peace by not highlighting the mistakes they made if you will lay off of us and the mistakes we made.   We will just blame it on God (I kid you not, see Prescott chief's statements here).  Most Arizonans I know seem willing to have these folks die as heroes who succumbed to the inherent risks of the profession, rather than stupid errors, so we may never have an honest assessment of what happened.  And yet again the opportunity to do a major housecleaning of wildland firefighting is missed.

Trend That is Not A Trend: Rolling Stone Wildfire Article

Rolling Stone brings us an absolutely great example of an article that claims a trend without actually showing the trend data, and where the actual data point to a trend in the opposite direction as the one claimed.

I won't go into the conclusions of the article.  Suffice it to say it is as polemical as anything I have read of late and could be subtitled "the Tea Party and Republicans suck."  Apparently Republicans are wrong to criticize government wildfire management and do so only because they suck, and the government should not spend any effort to fight wildfires that threaten private property but does so only because Republicans, who suck, make them.  Or something.

What I want to delve into is the claim by the author that wildfires are increasing due to global warming, and only evil Republicans (who suck) could possibly deny this obvious trend (numbers in parenthesis added so I can reference passages below):

 But the United States is facing an even more basic question: How should we manage fire, given the fact that, thanks to climate change, the destruction potential for wildfires across the nation has never been greater? In the past decade alone, at least 10 states – from Alaska to Florida – have been hit by the largest or most destructive wildfires in their respective histories (1). Nationally, the cost of fighting fires has increased from $1.1 billion in 1994 to $2.7 billion in 2011.(2)

The line separating "fire season" from the rest of the year is becoming blurry. A wildfire that began in Colorado in early October continued smoldering into May of this year. Arizona's first wildfire of 2013 began in February, months ahead of the traditional firefighting season(3). A year-round fire season may be the new normal. The danger is particularly acute in the Intermountain West, but with drought and record-high temperatures in the Northwest, Midwest, South and Southeast over the past several years, the threat is spreading to the point that few regions can be considered safe....

For wildland firefighters, the debate about global warming was over years ago. "On the fire lines, it is clear," fire geographer Michael Medler told a House committee in 2007. "Global warming is changing fire behavior, creating longer fire seasons and causing more frequent, large-scale, high-severity wildfires."...(4)

Scientists have cited climate change as a major contributor in some of the biggest wildfires in recent years, including the massive Siberian fires during a record heat wave in 2010 and the bushfires that killed 173 people in Australia in 2009.(5)...

The problem is especially acute in Arizona, where average annual temperatures have risen nearly three-quarters of a degree Fahrenheit each decade since 1970, making it the fastest­-warming state in the nation. Over the same period, the average annual number of Arizona wildfires on more than 1,000 acres has nearly quadrupled, a record unsurpassed by any other state and matched only by Idaho. One-quarter of Arizona's signature ponderosa pine and mixed-conifer forests have burned in just the past decade. (6)...

At a Senate hearing in June, United States Forest Service Chief Thomas Tidwell testified that the average wildfire today burns twice as many acres as it did 40 years ago(7). "In 2012, over 9.3 million acres burned in the United States," he said – an area larger than New Jersey, Connecticut and Delaware combined. Tidwell warned that the outlook for this year's fire season was particularly grave, with nearly 400 million acres – more than double the size of Texas – at a moderate-to-high risk of burning.(8)

These are the 8 statements I can find to support an upward trend in fires.  And you will note, I hope, that none of them include the most obvious data - what has the actual trend been in number of US wildfires and acres burned.  Each of these is either a statement of opinion or a data point related to fire severity in a particular year, but none actually address the point at hand:  are we getting more and larger fires?

Maybe the data does not exist.  But in fact it does, and I will say there is absolutely no way, no way, the author has not seen the data.  The reason it is not in this article is because it does not fit the "reporters" point of view so it is left out.  Here is where the US government tracks fires by year, at the National Interagency Fire Center.   To save you clicking through, here is the data as of this moment:

click to enlarge fires 2013 to date

 

Well what do you know?  The number of fires and the acres burned in 2013 are not some sort of record high -- in fact they actually are the, respectively, lowest and second lowest numbers of the last 10 years.  In fact, both the number of fires and the total acres burned are running a third below average.

The one thing this does not address is the size of fires.  The author implies that there are more fires burning more acres, which we see is clearly wrong, but perhaps the fires are getting larger?  Well, 2012 was indeed an outlier year in that fires were larger than average, but 2013 has returned to the trend which has actually been flat to down, again exactly opposite of the author's contention (data below is just math from chart above)

Click to enlarge

 

In the rest of the post, I will briefly walk through his 8 statements highlighted above and show why they exhibit many of the classic fallacies in trying to assert a trend where none exists.  In the postscript, I will address one other inconsistency from the article as to the cause of these fires which is a pretty hilarious of how to turn any data to supporting you hypothesis, even if it is unrelated.  Now to his 8 statements:

(1) Again, no trend here, this is simply a single data point.  He says that  10 states have set in one year or another in the last decade a record for one of two variables related to fires.  With 50 states and 2 variables, we have 100 measurements that can potentially hit a record in any one year.  So if we have measured fires and fire damage for about 100 years (about the age of the US Forest Service), then we would expect on average 10 new records every decade, exactly what the author found.  Further, at least one of these -- costliness of the fires -- should be increasing over time due to higher property valuations and inflation, factors I am betting the author did not adjust for.

(2)  This cost increase over 17 years represents a 5.4% per year inflation.  It is very possible this is entirely due to changes in firefighting unit costs and methods rather than any change in underlying fire counts.

(3) This is idiotic, a desperate reach by an author with an axe to grind.  Wildfires in Arizona often occur out of fire season.   Having a single fire in the winter means nothing.

(4) Again, we know the data does not support the point.  If the data does not support your point, find some "authority" that will say it is true.  There is always someone somewhere who will say anything is true.

(5) It is true that there are scientists who have blamed global warming for these fires.  Left unmentioned is that there are also scientists who think that it is impossible to parse the effect of a 0.5C increase in global temperatures from all the other potential causes of individual weather events and disasters.  If there is no data to support a trend in the mean, it is absolutely irresponsible to claim causality in isolated data points in the tails of the distribution

(6) The idea that temperatures in Arizona have risen 3/4 a degree F for four decades is madness.  Not even close.  This would be 3F, and there is simply no basis in any reputable data base I have seen to support this.  It is potentially possible to take a few AZ urban thermometers to see temperature increases of this magnitude, but they would be measuring mostly urban heat island effects, and not rural temperatures that drive wildfires (more discussion here).  The statement that "the average annual number of Arizona wildfires on more than 1,000 acres has nearly quadrupled" is so awkwardly worded we have to suspect the author is reaching here.  In fact, since wildfires average about 100 acres, the 1000 acre fire is going to be rare.  My bet is that this is a volatility in small numbers (e.g. 1 to 4) rather than a real trend.  His final statement that "One-quarter of Arizona's signature ponderosa pine and mixed-conifer forests have burned in just the past decade" is extremely disingenuous.  The reader will be forgiven for thinking that a quarter of the trees in Arizona have burned.  But in fact this only means there have been fires in a quarter of the forests -- a single tree in one forest burning would likely count for this metric as a forest which burned.

(7) This may well be true, but means nothing really.  It is more likely, particularly given the evidence of the rest of the article, to be due to forest management processes than global warming.

(8)  This is a data point, not a trend.  Is this a lot or a little?  And remember, no matter how much he says is at risk (and remember this man is testifying to get more budget money out of Congress, so he is going to exaggerate) the actual acreage burning is flat to down.

Postscript:  The article contains one of the most blatant data bait and switches I have ever seen.  The following quote is taken as-is in the article and has no breaks or editing and nothing left out.   Here is what you are going to see.  All the way up to the last paragraph, the author tells a compelling story that the fires are due to a series of USFS firefighting and fuel-management policies.  Fair enough.   His last paragraph says that Republicans are the big problem for opposing... opposing what?  Changes to the USFS fire management practices?  No, for opposing the Obama climate change plan. What??  He just spent paragraphs building a case that this is a fire and fuel management issue, but suddenly Republicans suck for opposing the climate change bill?

Like most land in the West, Yarnell is part of an ecosystem that evolved with fire. "The area has become unhealthy and unnatural," Hawes says, "because fires have been suppressed." Yarnell is in chaparral, a mix of small juniper, oak and manzanita trees, brush and grasses. For centuries, fires swept across the chaparral periodically, clearing out and resetting the "fuel load." But beginning in the early 1900s, U.S. wildfire policy was dominated by fire suppression, formalized in 1936 as "the 10 a.m. rule" – fires were to be extinguished by the morning after they were spotted; no exceptions. Back in the day, the logic behind the rule appeared sound: If you stop a fire when it's small, it won't become big. But wildland ecosystems need fire as much as they need rain, and it had been some 45 years since a large fire burned around Yarnell. Hawes estimates that there could have been up to five times more fuel to feed the Yarnell Hill fire than was natural.

The speed and intensity of a fire in overgrown chaparral is a wildland firefighter's nightmare, according to Rick Heron, part of another Arizona crew that worked on the Yarnell Hill fire. Volatile resins and waxy leaves make manzanita "gasoline in plant form," says Heron. He's worked chaparral fires where five-foot-tall manzanitas produced 25-foot-high flames. Then there are the decades of dried-up grasses, easily ignitable, and the quick-burning material known as "fine" or "flash" fuels. "That's the stuff that gets you," says Heron. "The fine, flashy fuels are just insane. It doesn't look like it's going to be a problem. But when the fire turns on you, man, you can't outdrive it. Let alone outrun it."

Beginning with the Forest Service in 1978, the 10 a.m. rule was gradually replaced by a plan that gave federal agencies the discretion to allow fires to burn where appropriate. But putting fire back in the landscape has proved harder to do in practice, where political pressures often trump science and best-management practices. That was the case last year when the Forest Service once again made fire suppression its default position. Fire managers were ordered to wage an "aggressive initial attack" on fires, and had to seek permission to deviate from this practice. The change was made for financial reasons. Faced with skyrocketing costs of battling major blazes and simultaneous cuts to the Forest Service firefighting budget, earlier suppression would, it was hoped, keep wildfires small and thus reduce the cost of battling big fires.

Some critics think election-year politics may have played a role in the decision. "The political liability of a house burning down is greater than the political liability of having a firefighter die," says Kierán Suckling, head of the Tucson-based Center for Biological Diversity. "If they die, you just hope that the public narrative is that they were American heroes."

The problem will only get worse as extremist Republicans and conservative Democrats foster a climate of malign neglect. Even before President Obama unveiled a new climate-change initiative days before the fire, House Speaker John Boehner dismissed the reported proposal as "absolutely crazy." Before he was elected to the Senate last November, Jeff Flake, then an Arizona congressman, fought to prohibit the National Science Foundation from funding research on developing a new model for international climate-change analysis, part of a program he called "meritless." The biggest contributor to Flake's Senate campaign was the Club for Growth, whose founder, Stephen Moore, called global warming "the biggest myth of the last one hundred years."

By the way, the Yarnell firefighters did not die due to global warming or even the 10am rule.  They died due to stupidity.  Whether their own or their leaders may never be clear, but I have yet to meet a single firefighter that thought they had any business being where they were and as out of communication as they were.

 

Money for Nothing, Detroit Edition

A huge portion of Detroit's operating costs go to police and fire.  If you include retiree health care and pensions, way over half of Detroit's budget goes to police and fire**.  That is an enormous increase since 1960.

detroit-bankruptcy-spending

So one might expect the schools to suck and the streetlights to be broken (which they do and are), but you would expect great freaking fire and police coverage.  But you would be wrong.  Detroit has one of the highest crime rates in the country.  This is what you get for your money there:

If you're a Detroiter who needs a police officer, it will take 58 minutes to get help -- more than five times what it takes elsewhere in the United States...

Here are some of the other problems outlined in the bankruptcy filing:

-- Response times for Emergency Medical Services and the Detroit Fire Department average 15 minutes, which is more than double the 7-minute averages seen in other cities.

-- The police department closes only 8.7% of its criminal cases, which the filing blames on the department's "lack of a case management system, lack of accountability for detectives, unfavorable work rules imposed by collective bargaining agreements and a high attrition rate in the investigative operations unit."

-- The city's violent crime rate is five times the national average, and the highest of any city with a population exceeding 200,000.

 

** This is in large part due to the power of their unions, and their ability in elections to translate hero worship for police and fire fighters into political power that will allow them to get anything they want.  As a politician, try to stand up for sanity and you will be deluged by union ads arguing that you don't respect our men who are risking their lives for you, etc. etc.

The Problem with Infrastructure

Obama, accompanied by the usual chorus on the Left including Kevin Drum, is yet again trumpeting infrastructure spending as a partial economic solution for what ails us, in part based on a McKinsey Global Institute report.   Infrastructure is like education (the other half of the Obama "plan") -- it's hard to find anyone against it per se, it is easy to find examples of it failing, and it is really hard to craft programs at the Federal level that really improve anything.

Having been inside the McKinsey sausage factor for five years, I was loath to just accept their conclusion without seeing the data, so I read the section of the report on infrastructure.  Having read the report, I still don't see how they got to the under-funding number.  Some of the evidence is laughably biased, such as pronouncements from the American Society of Civil Engineers, who clearly would be thrilled with more government infrastructure spending.  The rest comes from something called the world economic forum, but I simply don't have the energy right now to follow the pea any further.

I had two reactions to this plan:

  1. Presumably what infrastructure projects we choose matters, so how can we have any confidence (given things like our green energy investment program) that these investments will be chosen wisely and not based on political expediency?
  2. From my experience, and also from the McKinsey numbers, most of the infrastructure needs are refurbishment and replacement of existing infrastructure, rather than new infrastructure.  But politicians are typically loath to make these kind of investments, preferring to offer new toys to voters rather than saying all that money was spent just to keep their existing toys.  Just look at the DC metro system, which is still pursuing expensive expansion plans at the same time it refuses to perform capital maintenance and replacement on its current crumbling infrastructure.  Or look at Detroit which is falling apart but still wants to spend $400 million on a new hockey rink.

I was pleasantly surprised that McKinsey actually raised both of these issues as critical.  To the point about project selection:

To effectively deploy additional investment in infrastructure, the United States will have to improve its performance on project election, timely delivery and execution, and maintenance and renewal. This could raise the overall productivity of US infrastructure by as much as 40 percent and generate more economic impact for every dollar spent. And there is added pressure to raise infrastructure productivity today: as commodity prices rise, input costs are going up as well. In extreme circumstances, this can even lead to spot shortages of asphalt and other critical materials, making productive use of such assets even more important.

One of the most effective ways to make infrastructure investment more productive is to choose the right mix of projects from the outset. Too often, the primary approval criteria for project selection in the United States are political support and visibility rather than comprehensive cost-benefit analysis.129 Even when economic analysis is used, it is not always rigorous, or it may be disregarded in actual decision making. When state and local governments choose sub-optimal projects, the cost of financing rises, so focusing on those projects with the clearest returns is a crucial part of taking a more cost-effective approach for the nation as a whole.

In addition, planners at all levels of US government tend to have a bias toward addressing congestion and bottlenecks by building new capacity. But rather than immediately jumping to build new infrastructure projects to solve problems,
planners and project sponsors might first consider refurbishing existing assets or using technology to get more out of them. (See “Better maintenance, optimization, and demand management can extend the life of existing infrastructure assets” later in this chapter.)

The McKinsey study is not arguing for Keynesian digging holes and filling them in again.   They are arguing for infrastructure spending but only if it is better targeted than such programs have been in the past.   Anything about this Administration (or any other Administration, really) that gives you confidence this will happen?

In fact, they argue that a large reason for under-developed infrastructure is not the spending level per se but the insanely inefficient way in which government spends the money

Delays and cost overruns are a familiar refrain in infrastructure projects. Boston’s Big Dig, for example, remains the costliest highway project in US history and was plagued by years of delay and shoddy construction. Originally estimated at $2.6 billion, it now has a final price tag estimated by the Massachusetts Department of Transportation at $24.3 billion, including interest on borrowing. More recently, the San Francisco–Oakland Bay Bridge is being completed almost a decade late, and its original budget of $1.3 billion has grown to more than $6 billion.

Finally, their recommendation focuses more on maintenance and the prosaic, rather than expensive sexy headline grabbing investments (cough California high speed rail cough) that politicians prefer

Another major strategy for increasing infrastructure productivity involves maximizing the life span and capacity of existing assets. In many cases, directing more resources to these areas may be a more cost-effective choice for policy makers than new build-outs.

First, there is a need to focus more attention on maintenance, refurbishment, and renewal. This is an increasingly urgent issue for the nation’s aging water infrastructure, much of which was built in the years immediately after World War II; some of the nation’s oldest pipe systems are now more than a century old. Even more recent water treatment plants will need refurbishment: many built in the
1970s after passage of the Clean Water Act will soon require rehabilitation or replacement. Proactive maintenance to upgrade and extend the life of these aging systems is becoming a more urgent priority.

The study uses a GDP multiplier of 1.77 for infrastructure spending, which explains why their claimed GDP impacts are so high.  Using this kind of chicked-in-every-pot high multiplier will of course make infrastructure spending seem like a no-brainer.  Of course those of us with more sympathy towards Austrian economics, wherein recessions are caused by misallocations of capital, will worry that this kind of government spending program, shifting private resources to public decision makers to spend, will only double down on the same crap that caused the recession in the first place.  I grew up with Japan's MITI being praised as a model by the American Left, watched the lost decades that followed this government-directed investment program, and believe that a similar reckoning is coming in China.

Corporate Welfare and the Thin Edge of the Wedge

The other day, the City of Glendale approved a deal which has the city subsidizing (more in a second) the buyers of the Phoenix Coyotes hockey team to get them to actually stay in town rather than move to Seattle.  The deal is arguably better than deals it was offered in the past (it gets shares of parking and naming rights it did not have before) and may even be a rational deal given where it is today.

But that is the catch -- the phrase "where it is today."  At some level it is insane for a city of 250,000 people to pony up even more subsidies for a team that has the lowest attendance in the league.  The problem is that the city built the stadium in the first place -- a $300 million dollar palace for a metropolitan area that already had a major arena downtown and which was built (no disrespect to Glendale) on the ass-end of the metropolitan area, a good 90 minute round trip drive for the affluent Scottsdale and east-side corporate patrons who typically keep a sports franchise afloat.

Building this stadium was a terrible decision, and I and many others said so at the time.  But once the decision was made, it drove all the future decisions.  Because the hockey team is the only viable tenant to pay the rent in that building, the city rationally will kick back subsidies to the team to keep it in place to protect its rent payments and sales taxes from businesses supported by the team and the arena.  The original decision to build that stadium has handcuffed Glendale's fiscal situation for decades to come.  One can only hope that cities considering major stadium projects will look to Glendale's and Miami's recent experiences and think twice about building taxpayer funded facilities for billionaires.

The deal the other night to keep the team went down in the only way it could have.  As I had written, the NHL was insisting on selling the team for its costs when it took it over in bankruptcy, which were about $200 million, which was well north of the $100 million the team was worth, creating a bid-ask gap.  Several years ago, the city tried to just hand $100 million to a buyer to make up the gap, but failed when challenged by the Goldwater Institute.  The only real avenue it had left was to pass the value over to the buyers in the form of an above-market-rate stadium management contract.

And that is what happened, and I guess I will say at least it was all moderately transparent.  The NHL came down to a price of $175 million, still $75 million or so above what the team is worth.   The City had already sought arms-length bids for the stadium management contract, and knew that a fair market price for that contract would be $6 million per year.  It ended up paying the buying group $15 million per year for the 15-year contract, representing a subsidy of $9 million a year for 15 years.  By the way, the present value of $9 million over 15 years at 8% is... $75 million, exactly what was needed to make up the bid-ask gap.  Again, I think the city almost had to do it, because the revenue stream it was protecting is likely higher than $9 million.  But this is the kind of bad choices they saddled themselves with by building the stadium in the first place.

This May Finally End NHL Hockey in Arizona

Let me bring you up to speed:  The NHL owns the Phoenix Coyotes hockey team, having taken them over in bankruptcy.  It needs to sell the team and is demanding $200 million for the team, having promised the league owners it would not accept anything less (so they will not take a loss in the investment).  The team is worth, however, something like $100 million, at least if it stays in Arizona.

The team plays in a stadium built by the relatively small city (250,000 people) of Glendale, which put something like $300 million of taxpayer money into the stadium and has provided operating subsidies to the team the last several years that probably total another $100 million, at least.  The city has a bad hand, but keeps doubling down on its bet to try to retain the team.

The problem, of course, is the $100 million difference in the bid-ask for the team.  Glendale first tried to fix this by agreeing in a previous deal couple of years ago to basically give the buyer $100 million of taxpayer money to bridge the bid-ask gap.  The Goldwater Institute sued, saying that the Arizona Constitution pretty clearly states the government can't directly subsidize commercial interests.  They prevailed (before it ever reached court) and the deal died.

The only way left for Glendale to make the deal happen was to give a buyer $100 million in taxpayer money but to do so in a more disguised manner.  The one option they had was in the stadium management contract.  If they agreed, say, to pay the buyer $10 million a year over market rates for the stadium management contract, over 15 years that has about a $100 million present value.  They can get away with this because there is no objective valuation of what a management contract would cost on the open market.

But their ability to do this is, thankfully, about to die.  Under intense pressure, and in a fit of good government that I am sure Glendale regrets, it actually went out and sought arms-length contracts for stadium management from third parties.  It is enormously unlikely the city will accept any of these bids, because it needs the stadium contract as a carrot for someone to buy the Coyotes at the NHL's inflated price.  Besides, I bid on large contracts a lot and I have often been presented with bid packages from an entity that had no intention of awarding, but wanted me to go through all the bid effort just to establish an internal price benchmark or to keep their preferred provider honest.  I can smell these from a mile away now.

The problem Glendale will have, though, is that when these 3rd party bids become public (which they inevitably will), it will then be impossible to hide the implicit subsidy in the management contract.  Presumably, taxpayers then will push back on any future deals using this dodge, though Glendale citizens seem pretty supine so one never knows.  Also, the city can also tweak the responsibilities of the stadium contract, thereby allowing them to claim that comparisons against these past bids are apples and oranges (though this will be hard as I expect arms-length bids around $5 million a year vs. $15 million they propose to pay the team buyer).

PS-  It is hilarious to see worried comments from Gary Bettman (NHL Commissioner) about how hard on Glendale it will be if the Coyotes leave town.  Merely lowering his asking price to something less than 2x the market price would solve the problem in an instant.

Making Money in a Declining Business

One of the lessons we learned at business school is that there can still be money to be made in a declining business.  Today's case in point:  AOL.  The butt of much Internet-related humor, did you know that AOL still has 3.9 million US subscribers?  To give a sense of scale, that makes its subscriber base about as large as Charter Communications, a not insignificant 6th place player in the cable TV market.  Its income statements are a total mess, cluttered with enough special charges and unusual income items to scare me off from touching the stock, but it looks like it is still making about $50 million a quarter on about $500 million in sales.  Not what it once was, but not an awful business either.

A company like this run for cash flow could do well for quite a while for shareholders.  Of course, companies like that are seldom run for cash flow -- that is not how corporate management incentives work.  Corporate managers are going to want to take the cash flow from the declining business and try to build some new kind of empire on the corpse of the old one.  Shareholders can reasonably ask why they are not just dividended the cash to make their own reinvestment, but insiders benefit much more if the cash is reinvested within the company.  And sure enough, AOL seems to be buying a ton of small companies.

Progressives Suddenly Support Health Insurance Marketing

For years Progressives, led by President Obama during the legislative process for the PPACA, have attacked health insurance companies for their profits and overhead.  I never understood the former -- at generally 5% of revenues or less, even wiping health insurance profits out altogether would offset less than a year's worth of health care inflation.  The Progressive hatred for health insurance overhead was actually built into the PPACA, with limits on non-care expenses as a percent of premiums.

Progressive's justification for this was to compare health insurer's overhead against Medicare, which appears to have lower overhead as a percentage of revenues.  This is problematic, because lots of things that private insurers have to pay for actually still are paid for by the Federal government, but just don't hit Medicare's books due to funky government accounting.  Other private costs, particularly claims management, are areas that likely have a real return in fraud reduction.  In this case, Medicare's decision not to invest in claims management overhead shows up as costs elsewhere, specifically in fraudulent billings.

None of these areas of costs make for particularly fertile ground for demagoguing, so the Progressive argument against health insurance overhead usually boils down to marketing.  This argument makes a nice fit with progressive orthodoxy, which has always hated advertising as manipulative.  But health insurance marketing expenses mainly consist of

  1. Funding commissions to brokers, who actually sell the product, and
  2. Funding people to go to company open enrollments and explain health care options to participants

Suddenly, now that Progressives have taken over health care via the PPACA and federal exchanges, their tune has changed.  They seem to have a near infinite appetite for marketing money to support construction of the exchanges (which serve the role of the broker, though less well because there is no support)  and information about options to potential participants.  That these are exactly the kinds of expenses they have railed against for years in the private world seems to elicit no irony.  Via Cato

Now we learn, from the Washington Post’s Sara Kliff, “Sebelius has, over the past three months, made multiple phone calls to health industry executives, community organizations and church groups and directly asked that they contribute to non-profits that are working to enroll uninsured Americans and increase awareness of the law.”

This follows on from revelations in California (revelations that occurred before a new California law that makes PPACA costs double-secret).

[California] will also spend $250 million on a two-year marketing campaign [for its health insurance exchange]. By comparison California Senator Barbara Boxer spent $28 million on her 2010 statewide reelection campaign while her challenger spent another $22 million.

The most recent installment of the $910 million in federal money was a $674 million grant. The exchange's executive director noted that was less than the $706 million he had asked for. "The feds reduced the 2014 potential payment for outreach and enrollment by about $30 million," he said. "But we think we have enough resources on hand to do the biggest outreach that I have ever seen." ...

The California Exchange officials also say they need 20,000 part time enrollers to get everybody signed up––paying them $58 for each application. Having that many people out in the market creates quality control issues particularly when these people will be handling personal information like address, birth date, and social security number. California Blue Shield, by comparison has 5,000 employees serving 3.5 million members.

New York is off to a similar start. New York has received two grants totaling $340 million again just to set up an enrollment and eligibility process.

These are EXACTLY the same sorts of marketing costs progressives have railed on for years in the private world.