Coyote Blog

Younger readers will be forgiven for not fully understanding just how credulous the American public became during the late 80′s and early 90′s as the media, prosecutors, and various advocacy groups worked hard to convince us every school was a sort of Road-Warrior-like playground for child predators.  Adult after adult were convicted based on bizarre stories about ritual murder, sexually depraved clowns, and all kinds of other dark erotic nightmares.  In most cases there was little or no physical evidence — only stories from children, usually coerced after numerous denials by “specialists.”  These specialists claimed to be able to bring back repressed memories, but critics soon suspected they were implanting fantasies.

Scores of innocent people went to jail — many still languish there, including targets of Janet Reno, who rode her fame from these high-profile false prosecutions all the way to the White House, and Martha Coakley, just missed parleying her bizarre prosecutions into a Senate seat  (Unbelievably, the Innocence Project, which does so much good work and should be working on some of Reno’s victims, actually invited her on to their board).

Radley Balko has yet another example I was not familiar with.   The only thing worse than these prosecutions is just how viciously current occupants of the DA office fight to prevent them from being questioned or overturned.

I am particularly sensitive to this subject because I sat on just such a jury in Dallas around 1992.    In this case the defendant was the alleged victim’s dad.  The initial accuser was the baby sitter, and red lights started going off for me when she sat in the witness box saying that she turned the dad into police after seeing another babysitter made a hero on the Oprah show.  The babysitter in my case clearly had fantasies of being on Oprah.  Fortunately, defense attorneys by 1992 had figured out the prosecution game and presented a lot of evidence against, and had a lot of sharp cross-examination of, the “expert” who had supposedly teased out the alleged victim’s suppressed memories.

We voted to acquit in about an hour, and it only took that long because there were two morons who misunderstood pretty much the whole foundation of our criminal justice system — they kept saying the guy was probably innocent but they just didn’t want to take the risk of letting a child molester go.  Made me pretty freaking scared to every put my fate in the hands of a jury  (ironically the jury in the famous McMartin pre-school case was hung 10-2 in favor of acquittal, with two holdouts).

Anyway, one oddity we did not understand as a jury was that we never heard from the victim.  I supposed it was some kind of age thing, that she was too young to testify.  As it turns out, we learned afterwards that she did not testify for the prosecution because she spent most of her time telling anyone who would listen that her dad was innocent and the whole thing was made up by the sitter.   Obviously the prosecution wasn’t going to call her, and her dad would not allow his attorneys to call her as a witness, despite her supportive testimony, because he did not want to subject his daughter to hostile cross-examination.  This is the guy the state wanted to prosecute — he risked jail to spare his daughter stress, when in turn the state was more than happy to put that little girl through whatever it took to grind out a false prosecution.

update: This is a tragic and amazing recantation by a child forced to lie by prosecutors in one of these cases.  Very brief excerpt of a long article:

I remember feeling like they didn’t pick just anybody–they picked me because I had a good memory of what they wanted, and they could rely on me to do a good job. I don’t think they thought I was telling the truth, just that I was telling the same stories consistently, doing what needed to be done to get these teachers judged guilty. I felt special. Important….

I remember going in our van with all my brothers and sisters and driving to airports and houses and being asked if we had been [abused in] these places. I remember telling people [that the McMartin teachers] took us to Harry’s Meat Market, and describing what I thought the market was like. I had never been in there before, and I was fairly certain I was going to get in trouble for what I was saying because it probably was not accurate. I imagined someone would say, “They don’t have that kind of freezer there.” And they did say that. But then someone said, “Well, they could have changed it.” It was like anything and everything I said would be believed.

The lawyers had all my stories written down and knew exactly what I had said before. So I knew I would have to say those exact things again and not have anything be different, otherwise they would know I was lying. I put a lot of pressure on myself. At night in bed, I would think hard about things I had said in the past and try to repeat only the things I knew I’d said before.

Here are apparently a couple of the new regs for-profit colleges are expecting:

One proposed rule, which is expected to be finalized this spring, will restrict students from using federal financial aid to pay for programs that rack up excessive loan debt but train students for occupations with relatively low entry-level salaries.

A second rule, which will go into effect this summer, will close loopholes that allowed admissions counselors to be compensated based on how many students they signed up

The first rule is particularly interesting to focus on, especially given that they do not apply to government-run schools.  This means that if you want to go to UCLA and run up loads of debt in economically dead-end majors like women’s studies or art history, you are still free to do so.  But go forbid you want to study to be a nurse or a teacher at the University of Phoenix.  This from the CEO of Apollo, the parent company of University of Phoenix

some of the trade-school-type programs may be more vulnerable because of gainful employment (the anticipated federal rule about debt and entry-level salaries). . . . Gainful employment will cause programs, in areas such as nursing or teacher education or law enforcement, (for) for-profits not to be able to offer them . . . (because the federal formula) uses first-year salaries.

I can tell you my first-year salary for what I wanted to do wouldn’t have qualified. It takes time.

Two things you can expect from any set of regulations.  1) Large companies will eventually benefit, because the compliance costs will weed out smaller companies and deter future startups.  2) Innovation will be reduced, as certain established business models and practices will become safe harbors under the rules, adding risk to anyone wishing to try an additional approach.

I am in the process of completing a home mortgage.  The process has become awful again, not as bad as it was in the early 90′s but harder and more frustrating than in the mid-2000′s.  There is one set of rules, and if one’s situation does not fit those rules, good freaking luck.  Right now, for example, getting a home mortgage when one is self-employed, even in a pretty large business with a decade of history, is really hard.

So I like this proposal

At the moment there is nobody doing conforming mortgages except Fannie and Freddie. Indeed there is almost nobody doing mortgages of any kind except Fannie and Freddie. If the free market wants the business they can have it. (They just don’t want it at this sort of interest rate spread – and I don’t blame them.)

All the government need to do is tell Frannie to raise their price a little each quarter. Currently they charge 20-25bps for guaranteeing mortgages. (The free market won’t take credit risk at that price.) So it is entirely open to the FHFA (and hence the Treasury) to tell Fannie and Freddie to raise their prices by 5bps. The government will get paid better for the risk they are taking (and what free market ideologue will disagree with that) and the private sector can compete if they want to.

I doubt the free market will. But then in a quarter or two Frannie can raise their pricing by another 5 bps. And a quarter or two later Frannie can raise by another 5bps.

At some stage you will get to a level where the private sector chooses to compete. Frannie should not set its price competitively though. In another quarter they should raise the price another 5bps. And in another quarter they should raise again.

By the way, this is a classic example of not learning from your last mistake.  That spread is absurdly low.  I wouldn’t guarantee my best friend’s loan for 20bp.  Would you take on the default risk of a $100,000 mortgage for $200 a year?

Supporters of Obamacare argued that it would reduce costs because decisions to fund or not fund certain procedures and drugs would be left to panels of experts (later derisively labelled “death panels”).

I have argued many times that these panel’s job is hopeless.  Solutions and products that may be right for one person may be a waste for another situation, and there is absolutely no way they have the information or the scope to make decisions with any kind of granularity.  One-size-fits-all solutions result.

But let’s hold that thought for a minute.  Let’s presume that these supposedly non-political boards will make near-perfect decisions.  Then what?  Those decisions become the law of the land?

Hah.  We have a parallel situation in the military, where DoD procurement supposedly acts as the disinterested expert, which Congress frequently ignores to pay off various constituencies.

If Congress is looking for New Year’s resolutions, it could start by breaking the habit of funding programs the government doesn’t want. A case in point is the attempt to throw another $450 million at the development of a second engine for the F-35 Joint Strike Fighter, a plan that Defense Secretary Robert Gates says the military doesn’t need.

In what has become an annual ritual, Congress is weighing whether one of the largest weapons programs in history should support the development of F-35 engines by both General Electric and Pratt & Whitney. In 2001, GE’s engine lost in the procurement competition to the one designed by Pratt & Whitney, as F-35 developers Lockheed Martin and Boeing preferred the latter version.

To hedge its technological risk, the Pentagon nonetheless sought financing for the GE engine as a backup through 2006 in case the Pratt & Whitney version fell short. That hasn’t happened, and as budgets have tightened the Pentagon has understandably decided that it needs only one engine design. As Secretary Gates put it, “Only in Washington does a proposal where everybody wins get considered a competition, where everybody is guaranteed a piece of the action at the end.”

The Pentagon’s opposition hasn’t stopped Congress, where the usual parochial suspects are still stumping for GE. And the White House appears to be bending.

Of course they are — the GE CEO carried a lot of water for Obama on health care and energy policy, and will be expecting a pay back.  Someone has to be terribly naive to believe similar shenanigans won’t take place with health care.

But we don’t have to wait to test this hypothesis.  The fifty states all have must-carry rules in their states, which have a lot more to do with political pull than science – more here and here.

I just got a note from Bank of America telling me that some of my accounts now have unlimited deposit insurance from the FDIC through 2012, above and beyond traditional limits.   We are worried about reckless banks so we are …  further reducing and socializing the costs of risk-taking?  Notice I received below, I cannot yet find any info on FDIC site.  As usual click to enlarge.

OK, I have to call bullsh*t on a certain cultural phenomenon.  At the risk of uttering a blasphemy, I have to say that In and Out Burger is simply not very good.  It seems to be hot among teens, so I get dragged to it from time to time by my kids, but the burgers are just meh and the fries are simply bad.  Among fast food joints, Wendy’s is much better and we have a veritable explosion of gourmet burger places here in Phoenix  (a trend I applaud as mightily as I did the craft beer phenomenon) that are all much better.  As a regional phenomenon that builds a cult following as it spreads east, it reminds me of nothing so much as the similar Coors beer craze in the 70′s, where easterners used to illegally carry Coors over state lines to bring some back home (e.g. Smokey and the Bandit).  And Coors sucks too.

University of Arizona President Robert Shelton absolutely berates the state legislature as a bunch of Neanderthals for slashing his budget:

During this period, we have seen our state appropriation cut by nearly one-quarter, going from approximately $440 million to $340 million. The impact of these cuts has been amplified because they have come at a time when we have been asked to grow our enrollment substantially, and indeed we have done just that, setting records for enrollment in each of the past four years.

So the sound bite for this year is that we are being asked by the state to do much, much more, while being given much, much less….

The sad thing, though, with some of these legislators is that they have no idea how much they risk our state’s future (and the quality of life for people who live here) when they try to lay waste to the single greatest engine of economic mobility that has ever been created. Because that’s what public higher education in this country is.

Here he gets over the top — look at the words he uses for the state legislature

When malevolent people talk about wanting to dismantle and destroy great universities, all they achieve is dire consequences for the human condition.

I am sure for the children shows up in there somewhere.  But is he right.  Well, technically, the legislature did cut his general fund appropriation.  But then they gave it back to him, and more, in different budget categories.  As it turns out, Shelton is being unbelievably disingenuous about this, and only the fact that most of his students went to public high schools and therefore can’t do math lets him get away with such an address.  Greg Patterson tracks down the facts:

I contacted the Joint Legislative Budget Committee and asked for UA’s total funding.Here’s the response:

Mr. Patterson

UA’s originally enacted FY 2008 General Fund appropriation was $362.4 million, and their current year (FY 2011) General Fund appropriation is $271.3 million, which is a decrease of $(91.1) million.

UA was appropriated $117.7 million in Other Appropriated Funds in FY 2008 and $219.3 million in the current year, which is an increase of $101.6 million.

UA’s Non-Appropriated and Federal Funds budget was $786.7 million in FY 2008 and $911.3 million in FY 2011, which is an increase of $124.6 million.

In total, UA’s FY 2008 budget was $1,266.8 million and their FY 2011 budget was $1,401.9 million, which is a total increase of $135.1 million.

So the University of Arizona’s total budget has increased by $135.1 million–over 10%–during the period in which the “malevolent” state leaders have been “slashing” the funding.

Unbelievable.  I am so sick of statists crying budget cut when in fact their budgets are increasing.  Mr. Shelton goes on for thousands of words of drivel about the poor state of public discourse in Arizona while simultaneously dropping this turd in the punch bowl.  How is public discourse supposed to improve when the president of one of our two state universities is spewing out what he must know are outright fabrications and misrepresentations.  Pathetic.

I tell folks all the time that  99% of the time the problem with bad governance is not bad people in the government (or at least not bad before they entered government) but bad incentives and information.

Take the recent public reaction against the new TSA search procedures.  Its not that everyone in the TSA aspired for a job where they could grope stranger’s nads.  Its that the incentives in government make risk management impossible.

Let’s look first at the cost side.  How much do internal TSA evaluation and incentive systems value

• protection of individual rights and privacy
• stewardship of taxpayers money

Can we safely say close to zero?  I don’t think anyone at the TSA is being denied promotion because they were insufficiently concerned with the fourth amendment.

So what is it that does matter in their incentive system?  I would argue that they have one single, overriding concern — to avoid an incident for which they can be retroactively blamed as being insufficiently diligent.   If you are confused about how this incentive might arise, Conservatives need only look at themselves.  How many of you have pounded Janey Napolitano for being insufficiently diligent, for example in her “the system worked as it was supposed to” comments.

I spent a lot of time at HBS, in consulting at McKinsey, and in corporate life worrying about incentive systems.  And the absolute first rule, in my mind, is to ignore the official incentive system and explore what really drives behavior.  For example, a company might have a finely balanced set of published performance measures, but if the last three promotions all went to the person who sucked up the most to the boss, the latter will likely influence behavior much more than the published system.

The same is true at the TSA.  I have no idea what their official performance metrics are.  But to a large extent these metrics are irrelevant anyway in an environment where it’s impossible to be fired and salaries and promotions have more to do with seniority than performance.   In this environment, unofficial incentives are going to be very powerful, and I am virtually positive the overriding such incentive is avoiding blame due to lack of diligence.

So we should not be surprised if the TSA runs out of control with its diligence in a way that is unchecked by any considerations of cost, privacy, or risk management.  This incentive is so powerful that the only way to override it is either through executive leadership or legislative action.  We’ll see if we get either, but trashing privacy and the fourth amendment tend to be bipartisan hobbies so I am not wildly confident much will change.

A while back another entrepreneur/blogger wrote and asked me about investment choices for retirement.  My philosophy on retirement seems to be a lot different than that of others, and I think owning one’s own company changes some of the dynamics of retirement investing.   Note that this advice is not right for everyone, and maybe no one, so read at your own risk.  I publish it because the person I wrote suggested I do so, and after weeks of crazy intense work schedules I finally have the time.

A blogger wrote me about his despair at finding appropriate investment vehicles for his retirement savings.   With relatively equal chances of 1) a long period of Japan-like slow growth or 2) a high inflationary period triggered by trying to avoid #1, both bonds and equities looked bad, and while real estate may have some value plays when things finally bottom out, neither of us has the time to pursue that.  [since our emails, International equities are something I have moved money into, both as a diversification play as well as a way to short the dollar].

As I wrote him in one email

There is still a good chance of returning to normal growth in the middle somewhere, but both those bookends [inflation and stagnation] loom much larger than they might have, say, in my calculations five years ago.  I have trouble figuring out what to invest in when both are possibilities.  Equities?  Great for hedging inflation but suck if there is a lost decade.  Bonds would make sense in that case, but their interest will be low and they will be awful if inflation ramps up.  If I really knew we would get inflation and devaluation, I would be leveraging like crazy because inflation transfers wealth from creditors to debtors.

As a result, I said that my main investment for my free capital was debt reduction and de-leveraging of my own business.  Paying down debt has the advantage of having an absolutely predictable return and it reduces risk.   This makes double sense for me as I have put new expansion investments in my business on hold until a variety of government issues from health care to tax rates become clearer.  (For example, in health care, because my company is an oddity, with seasonal part time workers mostly on Medicare already, no one can yet tell me what my future costs will be.  Estimates range from +0 to +20% of revenues!)

The key to my business, which may be very different from others, is that I make big investments to gain long-term contracts, but once captured, these contracts give my business a fair amount of stability and predictability.  Further, in the latest recession, my business has proved to be either counter-cyclical or at least recession-proof to some extent, as 2009 was actually a blow-out record year for us.  Given these facts, I am able to put a higher percentage of my net worth into my own business as an investment, without having to diversify as much in case of business trauma.  And I prefer this.  Given the choice of investing in a company I barely know on the NYSE or mine, which I understand and control, I prefer the latter.  Also, returns on capital from buying or investing in private small businesses can be much higher (with higher risk of course) than in traditional equities – see my whole series on buying a small business.

But here is where I really differ from most people: I take a very different view of retirement.   When I worked in grinding corporate jobs (e.g. up until I was about 40) I was very focused on retirement.  Now that I am doing something that is not brutally stressful,  I hardly think about retirement.   The whole concept of retirement now seems weird.  I have, after a lot of hard work, gotten my business to the point where I can generally work as hard as I want to — if I don’t work hard, the business does not grow but I have good people such that it doesn’t fall apart either.  I compete with people who are running businesses in their late 70′s who are still having a good time.  I can take nice trips when I want to, take the day off if I need to, or whatever.  My business actually has an off-season so I can be more relaxed part of the year.

My advice to this particular entrepreneur was to maybe reconsider the paradigm of “retirement.”  After all, the the long history of the world, retirement is a new concept that is barely 100 years old.

Are you the shuffleboard and golf type?  What do you imagine yourself doing after retirement?  I think you need some protection against becoming infirm or senile, but if you are healthy and vigorous, are you the type to get bored fast?  As an example, nearly all of my 400 employees are retired, but they all got bored and wanted something to do.

Here is an alternative, entrepreneur’s way to think about planning for retirement:  How do I work really hard building a business that in 10 years will have a position such that it spits out some level of cash without effort on my part and can still grow if I want to spend time on it.  I am surrounded in Scottsdale by people who have done exactly this after giving up a corporate job.  At some point they took their savings from their 30s and 40s and dumped it into a business where they could still have the lifestyle they wanted.  Buying or building the right company is sort of like buying a bond with an attached warrant whose value is related to how hard you want to work.

As I implied earlier, this is not an appropriate approach for every small business.   The problem with technology businesses, for example, is that they never seem to mature into that latter predictable-cash-flow-stable-market-share phase.  One is always running in place.  One lesson I never forgot from my corporate years:  In the industrial sector, I often saw people making loads of money selling bushings or some such whose design hadn’t changed since 1920.  It led me to this strategy:  Find a market with barriers to entry, which may well not be very sexy, and spend ten years battering you way in, and then relax behind those walls.  (As to sexy, the very first two classes of the first year Harvard Business School strategy course were a sexy cool software business and a boring stable industrial product business.  Of course,the boring stable water meters made a fortune, while the software business never made a good return on capital.  Beware of sexy businesses — see: Airlines).

One other paradigm I would challenge is the notion everything you do as an entrepeneur has to be started from scratch.  Many entrepreneurs have fun doing this but the prospect of doing a bootstrap startup when you are 70 years old is exhausting.   Such entrepreneurs who have had a life of serial startups might consider a new phase in their business career as they get older, when they have saved enough assets to perhaps buy into an existing business rather than starting from scratch.  I cannot tell you how many interesting small businesses there are that come up for sale with a guy who has an interesting product and has made some progress but can’t manage his way out of a paper bag and thus hits some growth ceiling.  I bought just such a core to my current business 8 years ago.  These businesses require a lot of due diligence, because they are a real mixed bag, but I bought mine in an asset sale for 3.5 times EBITDA (which is an entirely typical price).  Try buying Wall Street equities for 3.5 times EBITDA!  If you pick the right business, and you are a good manager, there is not a better investment out there.  Again,  see my whole series on buying a small business.

Of course this investing-for-retirement is higher risk, because one bets a substantial portion of his net worth on his own business.  But for those with confidence in their own ability, I find it a lot more compelling to bet my capital on myself rather than on guys I don’t know running the Fortune 500.

After having my car hit 3 times in one week driving in Italy, I swore this time I would do it without the car.  So I tried rail.  I had almost as much trouble with rail as with driving.

First, never, ever, ever buy a Eurail pass for Italy.  It is way too expensive compared to the train fares.  Its a good deal in Switzerland, so I bought one for Italy before doing the research.  It became a running joke in Italy – every single Italian rail employee we had to show the pass to told us we should not have bought it.  So not only did I pay too much, but I got reminded of it twice a day.

Second, all but the smallest and shabbiest trains require advanced reservations, but these reservations are nearly impossible to make if you are not Italian, because the rail site has some kind of weird block on most all American credit cards (much about this around the Internet).  This means that I can’t just have get-on-the train and go flexibility, I have to pick a train I want to use in the future and then stand in line at a rail station to purchase the ticket or reservation.    Lines do not move fast in Italian rail stations.

But the classic story comes from my minor infraction of rail policy that ended up costing me money.  I don’t know if this is just government or if it they have a lot of problem with cheating.  Apparently, each day you are supposed to fill that days date in the next slot on your Eurail pass before you get on the train.  I forgot to on one trip, so the conductor insisted I owed a 50 euro fine.  Seriously.  I said, let me add the date right now, but she said no.  They had a couple guys lined up to throw us off in the next random Italian town if we did not hand over the money  (reminds me of this story in England).

I will say, once I calmed down, that in retrospect the lecture from the Italian state employee on why it is important to follow every single rule and to trust our betters in government that all the rules are for a good reason was almost worth the 50-euro price of admission.

It took me a while to figure out what they were afraid of — I suppose if you did not write the date in advance, and the conductor never came by, you could get an extra day of travel.  Of course, I had paid extra money for a reservation on that particular train, so it was unlikely I was gaming the system (another reason not to get a Eurail pass in Italy, you still have to pay extra for nearly every train).  And it seemed odd that on a 2-hour train ride they thought it a real risk no conductor would come by, though on the very next day we took a 2-hour ride and there was no conductor, so I suppose it is possible.

In that latter case we were in a car where the AC failed on a hot day, and of course it was the only train we rode on the whole trip where the windows did not open.  No conductor took my ticket, but one did stand at the end of the car the whole trip turning away anyone who wanted to get an open seat in the next car — after all, we were assigned a specific seat and sitting in another would be against the rules.

The government is the first organization, given its unique powers to use force against citizens, that should be subject to surveillance and transparency.  Unfortunately, since it is the government itself that sets the rules, it is usually the last.  Following in the tradition of a Congress that exempts itself form most of its workplace regulation, comes the new financial bill which apparently exempts the SEC from most public scrutiny

Under a little-noticed provision of the recently passed financial-reform legislation, the Securities and Exchange Commission no longer has to comply with virtually all requests for information releases from the public, including those filed under the Freedom of Information Act.

The law, signed last week by President Obama, exempts the SEC from disclosing records or information derived from “surveillance, risk assessments, or other regulatory and oversight activities.” Given that the SEC is a regulatory body, the provision covers almost every action by the agency, lawyers say. Congress and federal agencies can request information, but the public cannot.

That argument comes despite the President saying that one of the cornerstones of the sweeping new legislation was more transparent financial markets. Indeed, in touting the new law, Obama specifically said it would “increase transparency in financial dealings.”

Apparently the children of the sixties, who once pushed for the Freedom of Information Act as a check to those in power, now are rolling it back once they are in power themselves.

I thought this was an interesting irony of our growing corporate state:

In my post “Attention Gov’t: This Is How Businesses Are Created” I brought up the point that government regulations keep the average American from investing in ground floor business opportunities with rules specifying how much money someone must have before they can invest in start-ups (unless the start-up is being done by a friend or family member).  Government regulations also prevent start-ups from advertising their investment opportunity.  If you need ground-floor investment (as opposed to loans) to bring your business to the proverbial next level, there is a wall of regulation that keeps you from asking for it from the general public and specifies what “sophisticated investors” (the already rich) you can approach and how.

Those rules are there to protect us middle class rubes from being taken in by crafty and ill-intentioned businessmen.

I contrasted this protection the government so thoughtfully provides us–keeping us from making possible bad investments–with it’s promotion of lotteries and acceptance of casino gambling.

Now these people who will not allow an entrepreneur to advertise or promote his start-up in order to get voluntary investment money from people willing to take a risk on the business idea or invention are looking at legalization of online gambling in the USA.

I was thinking today, what must the families of the 11 people killed on the Deepwater Horizon be thinking?  Their losses are never mentioned in any news reports I see.  Its all about getting oil on the ducks.

Sure, I am pissed off about the enormous damage to the Gulf Coast as well.  But I got to thinking, were I the engineer that made the wrong risk/safety decisions here, what would I feel most guilty about?  I was put in that position for years in a refinery, constantly asked, “is this safe” or “can we keep running” or “do we need to shut down” or “is that vibration a problem?”  These are difficult, because in the real-world of engineering, things are not ever perfectly safe.  But never-the-less, if I had made the wrong call here, I think I would be feeling a lot worse about the 11 dead people than a number of dead fish and birds.  Perhaps my priorities are out of whack with the times.

By the way, TJIC has a great post on risk and cost in the real world of engineering.  I agree with his thoughts 100% from my experience as a troubleshooter / engineer in the field making just these decisions.

Look, we all trade off safety in order to save time and expense.

Do you put on your seat belt when moving your car from one point in the driveway to another?

Do you buy the car that costs twice as much, because it’s got a 1% increase in crash survivability?

Did you pay $40k to get industrial fire sprinklers installed in your house?

Do you have a home defibrillation machine?

There is nothing wrong, in the abstract, with trading off safety in order to save time and expense.

The question is whether BP did this to a level that constitutes “gross negligence”.

Bruce McQuain tells some stories of bureaucratic frustration in the Gulf, as local governors trying to protect their state from the spill fights against a myriad of mindless bureaucracies.

The governor said the problem is there’s still no single person giving a “yes” or “no.” While the Gulf Coast governors have developed plans with the Coast Guard’s command center in the Gulf, things begin to shift when other agencies start weighing in, like the Environmental Protection Agency and the U.S. Fish and Wildlife Service. “It’s like this huge committee down there,” Riley said, “and every decision that we try to implement, any one person on that committee has absolute veto power.”

I would state the problem differently.  In the Federal bureaucracy, seemingly everyone has the power to say “no,” and absolutely no one is willing to risk their career or even a minor bureaucratic sanction to over-rule when someone else in the room says “no.”  I have seen it a hundred times in my business — we will be close to doing something for the public, building a new shower building in a campground for example, and some government employee in the room will say that their sister’s gynecologist’s barber’s housekeeper once overheard a conversation in a bar that some guy who may have visited a university once said he had heard a rumor that there might have been a Native American settlement somewhere within 100 miles of that spot 10,000 years ago — and suddenly the work on the shower has to stop for 6 months while we all run around calling in archeologists and taking this concern seriously.

The problem  in a government discussion, particularly a multi-agency discussion, is that EVERYONE can say “no,” and worse, since their incentives are loaded towards risk avoidance (they get punished for violating procedure, but never punished for missing an opportunity), they have a tendency to say “no” a lot, in fact to say “no” by default.  In the Gulf you have a thousand federal employees from 20 agencies whose entire incentive system, whose entire career, whose every lesson from every bureaucratic battle in a sort of long-term aversion therapy, prompts them to say “no” by reflex.

What is missing is someone who can say “yes,” and make it stick against all the no’s.  That does not have to be Obama — but it probably does have to be someone very senior who knows (and who everyone else knows) is backed to the hilt by the President and has an incentive system where the only measure of success is more or less oil damage, and thus for whom aggrieved bureaucrats (even senior ones) and petty procedure are irrelevant.  It does not appear such a person has been appointed.

Postscript: By the way, I don’t want folks to fall into the trap of thinking that these government folks are necessarily bad people.  I think that is a mistake both conservatives and liberals make — conservatives vilify government employees, while liberals want to believe that government would work right if we just had the right people in it.   I work with a lot of very bright, very good people in government.  The problem is that their incentives and information are awful.  How would you behave if for 20 years your main feedback was to be criticized for violating minor procedures or trying new things?  How would you have any understanding of business if you grew up in the bizarro world of government budgeting and accounting?   This is the problem with government – not that it is full of bad stupid people, but it takes good smart people and incentivizes them do counter-productive things.

Update: Here is a great example, from Kevin Drum, who is a smart guy but can’t do anything but dither in a decision among multiple risks:

It’s pretty hard to take the other side of this argument [ie defending the Coast Guard's decision to hold up the GUlf cleanup barges for minor rules violations]. But I wonder. We are, after all, talking about barges that are sucking up oil, and the last time I checked oil was pretty damn flammable. Everyone wants the cleanup operation to proceed with breakneck speed, but that’s exactly when people get tired and sloppy. And I wonder what everyone would think of the Coast Guard’s ridiculous rules if they waived them and then some boat went up in a huge fireball because a spark caught somewhere and no one had a fire extinguisher handy?

I will say again – I have been in many rooms of bureaucrats, both federal and private, and they all think this way.  These rooms are full of Kevin Drum’s wondering out loud, “I don’t know, what happens if…”  This is such a common phrase in these meetings I wish I had a dollar for every time I heard it.  Then everyone in the room defers to this hypothetical risk.   Bureaucrats are always more worried about sins of commission  (e.g. knowingly allowing a barge to go out without enough fire extinguishers in violation of guidelines) than the sin of omission (e.g. delay will allow the spill to get worse).  Even when the omission is 100% certainty and the danger from the act of commission is vaguely hypothetical.  It takes a leader to say “send the damn barges out now.”

From JM Berstein in the NY Times, via Kevin Drum, this is about Tea Partiers, but since it addresses the Tea Party distrust and disdain for government, I suppose it applies equally well to we libertarians:

My hypothesis is that what all the events precipitating the Tea Party movement share is that they demonstrated, emphatically and unconditionally, the depths of the absolute dependence of us all on government action, and in so doing they undermined the deeply held fiction of individual autonomy and self-sufficiency that are intrinsic parts of Americans’ collective self-understanding.

….This is the rage and anger I hear in the Tea Party movement; it is the sound of jilted lovers furious that the other — the anonymous blob called simply “government” — has suddenly let them down, suddenly made clear that they are dependent and limited beings, suddenly revealed them as vulnerable.

Do you get that – we oppose the overwhelming size of government not for any rational reason, but out of a psychological need to deny that the government is inevitably going to grow larger and increase its control over our lives.   This is so absurd it is freaking hilarious.  This is what Louis the XVI’s sycophants were telling him to make him feel better in 1789.  I mean, after 200 years of only limited government interference in health care, how is it that a law passed over majority opposition for government takeover of healthcare somehow “demonstrates the absolute dependence of us all on government action?”  Why doesn’t it reasonably demonstrate the depth of risk we all face from a minority who have constantly through history been bent on wielding power over us.

Kevin Drum, sort of to his credit, rejects this thesis in favor of his own

So then: why have tea partiers gone off the rails about the federal deficit? It’s not because of something unique in their psyches. And it’s not because they’re suddenly worried that America is going to go the way of Greece. (The polls I linked to above show that tea partiers care more about cutting taxes than reducing the size of government.) It’s because they’re the usual reactionary crowd that goes nuts whenever there’s a Democrat in the White House and they’re looking for something to be outraged about

So while he rejects the goofy psychobabble, he accepts the underlying premise, that any opposition to expansion of government and its power of coercion over individuals is irrational.

So take your pick — libertarians are either a) advocating limited government only as a psychological crutch to hide from ourselves that Obama is really our daddy or b) scheming reactionary nuts.  Whichever the case, remember that there can be no principled opposition to Big Brother.

I already wrote on the egregious FTC proposals to begin the government takeover of journalism.  But I missed this part, via South Bend Seven, which caught my eye in their post:

Tax on broadcast spectrum. They argue “commercial radio and television broadcasters are given monopoly rights to extremely lucrative spectrum at no charge,” and this is a massive public subsidy. They therefore suggest the revenues generated by that spectrum be taxed at a rate of 7 percent, which should result in a fund of between $3 and $6 billion. In exchange, commercial broadcasters would be relieved of any obligations to engage in “public-interest programming,” which the broadcasters claim costs them $10 billion annually.

Much of the TV and radio spectrum was indeed “given away,” in exactly the same process that the Homestead Act (and I believe the Northwest Ordinance before that) “gave away” land to Americans who were willing to develop it.  These acts gave land away to pioneers who were willing to take the risk and effort to develop what was essentially value-less land into a productive asset  (the land had potential value, but until someone tilled it and put up structures and built rail and road to it, it was worthless).  When TV and Radio broadcasters first started using the spectrum, it was worthless — and we were even less confident in its potential value than we were of the land in the Homestead Act.  The spectrum did not have value until private broadcasters demonstrated it had value through their investment, development, and experimentation.

So is Congress next going to tell everyone who lives on homesteaded land that they received a massive public subsidy and that their land is now going to be taxed?  The current landowner would likely argue that they didn’t get the land for free – they bought it for a substantial price from the previous owners, who bought if from someone else, who bought it from the original homesteader.  But the situation is no different in the broadcast spectrum.  Clear Channel did not get the spectrum for free — it did not even exist for decades after the spectrum was homesteaded — it paid a full market price for the spectrum it controls.

Postscript: However, I am happy to see even the leftish Obama Administration admit that public-interest programming is a questionable requirement.  Because broadcasters only make money if they broadcast things people want to see or hear, everything they do is “public-interest.”  What is meant in practice by the term “public-interest” should actually be called “political-interest” programming, because this programming tends to be uninteresting to the great majority of the public (have you ever listened to the garbage at 5am on Sunday morning on radio?) but is supported by small niche groups that have disproportionate political influence.  Let’s remove these requirements as stupid without holding up broadcasters for more taxes in exchange.

One point I have been making for a long time on health care is that all the studies showing waste and unproductive spending in health care are irrelevant to government policy because at the end of the day, the Federal government does not know how to capture these savings.  The CBO says basically the same thing in a chart from a recent presentation.  The chart is titled “Reducing Growth in Federal Health Spending”

On the upside:

• There is considerable agreement that a substantial share of current spending on health care contributes little if anything to people’s health.
• Providers and health analysts are making significant efforts to make the health system more efficient.

On the downside:

• It is not clear what specific policies the federal government can adopt to generate fundamental changes in the health system. That is, it is not clear what specific policies would translate the potentialfor significant cost savings into reality.
• Efforts to reduce costs increase the risk that people would not get some health care they need or would like to receive.

I am pretty confident from my experience with a high-deductible health care plan that the only way to start capturing savings is for individuals who recieve care to have the incentives and decision-making power to make cost-benefit tradeoffs in their own health care procurement.  This, however, is the absolute last thing this administration and Congress would ever allow, with the latest bill actually forcibly removing what small incentives that remained for individuals to make these tradeoffs.  All we are going to get are command and control care cuts  (based on the political power of the particular service or drug provider rather than medical efficacy) and price controls.

More at South Bend Seven

It sure looks like the Feds are bending over backwards to make sure R. Allen Stanford, accused of massive investment fraud, is not allowed to defend himself.  The Feds are running the whole playbook at him, from onerous pre-trial detention requirements to asset forfeiture (the latter to the point that the Feds are working to make sure the insurance policy he had to pay for his defense in such actions is not allowed to pay him.)  I understand that a guy who has substantial interest in offshore banking centers might be a flight risk, but this is absurd:

Mr. Stanford has been incarcerated since June 18, 2009 and was moved to the [Federal Detention Center] on September 29, 2009. Immediately upon his arrival at the FDC, he underwent general anesthesia surgery due to injuries that were inflicted upon him at the Joe Corley Detention Facility. He was then immediately taken from surgery and placed in the Maximum Security Section — known as the “Special Housing Unit” (SHU) — in a 7′ x 6 1/2′ solitary cell. He was kept there, 24 hours a day, unless visited by his lawyers. No other visitors were permitted, nor was he permitted to make or receive telephone calls. He had virtually no contact with other human beings, except for guards or his lawyers.

When he was taken from his cell, even for legal visits, he was forced to put his hands behind his back and place them through a small opening in the door. He then was handcuffed, with his arms behind his back, and removed from his cell. After being searched, he was escorted to the attorney visiting room down the hall from his cell; he was placed in the room and then the guards locked the heavy steel door. He was required, again, to back up to the door and place his shackled hands through the opening, so that the handcuffs could be removed. At the conclusion of his legal visits, he was handcuffed through the steel door, again, and then taken to a different cell where he was once again required to back up to the cell door to have his handcuffs removed and then forced to remove all of his clothing. Once he was nude, the guards then conducted a complete, external and internal search of his body, including his anus and genitalia. He was then shackled and returned to his cell. In his cell there was neither a television nor a radio and only minimal reading material  was made available to him. He remained there in complete solitude and isolation until the next time his lawyers returned for a visit.

In short, Mr. Stanford was confined under the same maximum security conditions as a convicted death row prisoner, even though the allegations against him are for white collar, non-violent offenses. He is certainly not viewed as someone who poses a threat to other persons or the community, nevertheless, he has been deprived of human contact, communication with family and friends, and was incarcerated under conditions reserved for the most violent of convicted criminals. Officials at the FDC informed counsel that this was for Mr. Stanford’s “own protection” and to minimize their liability.  .  .  .

Remember, he has not been convicted — this is pre-trial detention.  The sole goal, legally, is supposed to be to keep him from fleeing before his trial.

I am sensitive to this from my climate work.  My gut feel is that people who are truly confident in their case do not work overtime to make sure their opposition is not allowed to make their case.

There is an anti-immigrant playbook in this country that goes back at least to the 1840′s and the first wave of Irish immigrants.  Typical arguments applied to nearly every wave of immigrants to this country have been 1.  They are lazy; 2. They are going to take our jobs (funny in conjunction with #1); 3.  They increase crime and 4. They bring disease.

To date in Arizona, we have seen all three of the first arguments in spades, but until recently I had not seen #4.  But trust Sheriff Joe to be out front on this, issuing a press release stating:

Sheriff Joe Arpaio says that he has long argued the point that illegal immigration is not just a law enforcement problem but is a potential health hazard as well.

“This is a risk to our community and to my deputies,” Arpaio says. “Deputies never know what they may face in the course of enforcing human smuggling laws.”

Arpaio says that in the last two months, four inmates, all illegal aliens from the country of Mexico, were confirmed with having chicken pox, placing 160 inmates into immediate medical quarantine.

Earlier Apraio had this to say to GQ magazine (but he’s not a racist!)

All these people that come over, they could come with disease. There’s no control, no health checks or anything. They check fruits and vegetables, how come they don’t check people? No one talks about that! They’re all dirty.

Of course, like many of Arpaio’s fulminations, this release fell somewhere between a grand exaggeration and an outright lie.

Maricopa County health officials denied reports by the Sheriff’s Office that 160 jail inmates had been quarantined two months ago because of four illegal immigrants with chicken pox.

Officials also downplayed a news release issued by Sheriff Joe Arpaio’s office last night about chicken pox found in immigrants busted yesterday, noting that such minor outbreaks don’t normally make the news.

After our inquiries, MCSO Lieutenant Brian Lee said that Arpaio had, in fact, misspoken when he stated for the news release that a large-scale “quarantine” had taken place.

This is one of the better simple explanations of both the appeal and hidden risk of CDO’s. The example, which is short and is worth working through, ends this way:

Suppose that we misspecified the underlying probability of mortgage default and we later discover the true probability is not .05 but .06.  In terms of our original mortgages the true default rate is 20 percent higher than we thought–not good but not deadly either.  However, with this small error, the probability of default in the 10 tranche jumps from p=.0282 to p=.0775, a 175% increase.  Moreover, the probability of default of the CDO jumps from p=.0005 to p=.247, a 45,000% increase!

The dark magic of structured finance conjured many low-risk securities out of many risky securities.  Like all dark magic, however, the conjuring came at a price because if you didn’t get the spell exactly correct it was easy to create something much more risky and dangerous than you were likely to have ever imagined.

As an ex-engineer who used to do a lot of operations analysis as well as post-disaster failure analysis, this shares a central theme that I have found in many such failures — people tend to overestimate their own knowledge.

Coming in to a class at HBS, the professor had us all do a 20 question survey.  It asked us questions like “what is the population of Argentina” and then asked us to give the lowest and highest number we thought it would be such that the answer had a 95% chance of being in that range.  Based on this, only one of our 20 answers should have been out of my limits.  About eight of the answers were out of my ranges.  It was a really good lesson in overestimating one’s knowledge.

Which leaves me with a thought — if we define a large part of the problem as overestimating our understanding of a certain phenomenon, from your observation of the Obama administration and its personalities, what gives you any confidence that a new lager of government regulators will solve this problem?

WTF is this designed to accomplish, except to give Obama something to crow about in one or two news cycles while doubling down on the same kind of practices that got the housing market and banks into the current mess?  This reminds me so much of the final days of the government in Atlas Shrugged.  Fannie and Freddie are bankrupt?  Well, lets do the same thing to the FHA, just to save our sorry government jobs for a few weeks longer.

The Federal Housing Administration is heading toward a taxpayer bailout, yet the president’s latest mortgage modification plan would further increase the agency’s exposure to risky mortgages. Mark Calabria calls it a “Backdoor Bank Bailout.”The administration’s plan would encourage borrowers who owe more than their house is worth to refinance into FHA-insured mortgages. Therefore, the risk of a future foreclosure on these mortgages would fall to the government and taxpayers instead of private lenders.

A recent study from economists at New York University found that the FHA is underestimating its risk exposure. One of the problems is that the FHA isn’t properly accounting for the risk to underwater FHA mortgages that have been refinanced into new FHA mortgages. So it’s hard to see how the president’s plan to refinance private underwater mortgages into FHA mortgages won’t further exacerbate the situation.

The CBO, which Democrats frequently tell us to pay close attention to only when it is giving them the answers they want, is not particularly sanguine about the US budget deficit:

President Obama’s fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation’s economic output by 2020, the Congressional Budget Office reported Thursday.

In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president’s budget would generate a combined $9.75 trillion in deficits over the next decade.

Bruce McQuain, as always, has some good analysis.

States, apparently, are not in much better shape:

Pension plans for state government employees today report they are underfunded by $450 billion, according to a recent report from the Pew Charitable Trusts. But this vastly underestimates the true shortfall, because public pension accounting wrongly assumes that plans can earn high investment returns without risk. My research indicates that overall underfunding tops $3 trillion.

The problem is fundamental: According to accounting rules adopted by the states, a public sector pension plan may call itself “fully funded” even if there is a better-than-even chance it will be unable to meet its obligations. When that happens, the taxpayer is on the hook. Yet public pension plans ignore market risk even as they shift into risky foreign investments, hedge funds and private equity….

In a recent AEI working paper I’ve shown that the typical state employee public pension plan has only a 16% chance of solvency. More public pensions have a zero probability of solvency than have a probability in excess of 50%. When public pension assets fall short, taxpayers are legally obligated to make up the difference. The market value of this contingent liability exceeds $3 trillion.

Productive people in this country are about to get plastered with huge new taxes.  Hang on.

Cross-posted from Park Privatization

Len Gilroy of the Reason Foundation links my Glenn Beck interview and then goes deep on park privatization issues.  Check it out.  Potentially the biggest benefit to the public:

Appropriation risk: State parks operating under a concession no longer bear the appropriation risk that we’re seeing play out in real life across the country, as parks get axed from state budgets amid rampant state fiscal crises (some examples include California, New York and Louisiana). Really, this is more of a risk that’s eliminated, rather than transferred to the concessionaire (see revenue risk discussion above), so revenue/demand risk and appropriations risk are really two sides of the same coin.

If Obama really wanted to get small businesses to start investing again, he could announce that both cap-and-trade and the health care bill are dead-dead and will not be disinterred this year.   These two bills affect nearly 2/3 of our company’s cost structure.  Since we have single digit margins, small changes in the wage and fuel cost lines can completely wipe out our profits.  Not knowing what 2/3 of our costs were going to look like into the future, we have been sitting on our hands.

Unfortunately, this may not be enough.  The third leg of the uncertainty stool is income taxes, and its seems likely that some huge increase almost has to be forthcoming given Congress’s predilection for taxes and marked unwillingness to cut spending in any meaningful way.

Here is a very specific example.  We have an opportunity to invest about a half million dollars in a new operation in Texas.  Financing is available.  But in my evaluation spreadsheet, small changes in income tax rates combine with a potential 8% health care tax on wages and an unknown fuel tax increase to move the net present value by enormous amounts.  I am not going to risk a half million dollars on a 20-year investment when the government is considering so much legislation that will arbitrarily move the value of this investment.

This is why Obama’s offer of small business financing is meaningless.   In the last decade, government sponsored cheap money lured people into housing “investments” that eventually went upside down.   Are they now luring small businesses into a new trap, encouraging them to take on debt, only to slam the door on them with future increases to their operating costs and taxes?

Previously, I have criticized the proposed California high speed rail line (from San Diego to San Francisco) as grossly underestimating potential costs.  Brian Doherty has an article this week reality-checking its projected ridership, after the California legislative analysts’ office questioned the contingency analysis in the high-speed rail plan.

Eric Thronson, a fiscal and policy analyst for the office, called a risk assessment in the business plan “incomplete and inappropriate for a project of this magnitude.”

Thronson warned that there is no backup plan to keep the rail system solvent if it fails to draw 41 million people yearly. A bond measure approved by voters to help pay for the train network prohibits public funds from being spent on operating costs.

Doherty provides this reality check:

The future: where all of California’s fiscal messes wait to be addressed! By the way, that ridership figure of 41 million averages to over 112,000 train riders every single day of the year. The average daily usage of I-5–the entire road–is around 71,000, according to the Federal Highway Administration.

Here are a couple of other reality checks

• The entire passenger traffic from LAX to and from every other city in the country is 44 million a year (excludes international passengers)
• The current air passenger traffic between LAX and SFO is 2.7 million a year
• The passenger traffic of Amtrak in its entire national network is 28.7 million (including local commuter operations)