Posts tagged ‘running’

The Problem with Elon Musk

When first presented with the idea of the Hyperloop (a train running in vaccuum in an underground tube), I was extremely skeptical it made any sense.   Sure it might work (after all the London tube started out as a pneumatic system much like those that older ones of us remember sending receipts around department stores).   But did it make any economic sense.  Was it really likely that, if we can't afford rail lines above ground easily, we could afford to build thousands of miles of air-tight large-diameter tubes?  Honestly, it looked to me like any other silly idea on the cover of Popular Mechanics, right next to the titanium zeppelin the size of Connecticut that would someday be doing construction work.

So enter Elon Musk, who is very passionate about the idea, claims to be convinced it will work, and appears to be putting some money behind it.   With his support, the idea must immediately be treated as more credible, and it does indeed get a lot of press.  But here is the problem for me with Musk:  With him, the idea must also be treated as very probably another attempt by him to drain money out of the taxpayers' pockets into his.  Because that is what he does in so many of his enterprises.

Claire McCaskill Casts Herself as the Modern Donald Segretti

The people behind all of this were frightened of Muskie and that's what got him destroyed. They wanted to run against McGovern. Look who they're running against.

-- Deep Throat, in the movie "All the President's Men"

This is not the most amazing story I have ever heard told about political machinations, but it is perhaps the most amazing told by a sitting politician about her own actions.  How Democratic Senator Claire McCaskill (proudly) manipulated the GOP primary to get the incredibly weak opponent she wanted.  As told by ... Claire McCaskill.

It was August 7, 2012, and I was standing in my hotel room in Kansas City about to shotgun a beer for the first time in my life. I had just made the biggest gamble of my political career—a $1.7 million gamble—and it had paid off. Running for reelection to the U.S. Senate as a Democrat from Missouri, I had successfully manipulated the Republican primary so that in the general election I would face the candidate I was most likely to beat. And this is how I had promised my daughters we would celebrate.

 

Short Apple?

Verizon's decision to stop subsidizing smartphone purchases in exchange for 2-year contract lock-ins is going to be a big change in the industry.  It will be interesting to see what happens to handset prices.  A while back someone I know had a Verizon iphone that they lost.  They were talking about going out and buying a new one to replace it.   I said, "uggh, an $800 hit."  They looked at me like I was crazy.  They said they had paid something like $300 for it.  I pointed out that that was likely with a 2-year contract lock-in, and that a replacement would go full price which can run over $800 depending on which version they had.

They did not believe me.  In fact they were almost indignant that I would suggest such a thing.  And went running off the the Verizon store with every confidence an iPhone 6 plus could be purchased for $200-$300.

This situation has obtained for a decade.  It will be interesting to see what happens to iPhone sales when customers are exposed to something closer to the true price.  Since most iPhones without contract go for more (substantially more in fact) than the laptops I am buying my employees, I can't help but think that iPhone revenues will suffer.  (Of course, the result could be everyone who wants a new iPhone switching to AT&T from Verizon  -- it is not at all clear Verizon's new no-subsidy rates are low enough to be a better net deal than the old rates+subsidy).

I use Verizon because my business operates in the boondocks and Verizon is almost always the last carrier standing when I drive out to our locations.  I wonder if Verizon will now be allowing unlocked phones?  I presume this will be the case -- T-Mobile is the other company that ended phone subsidies and I moved my unlocked Nexus to them.

By the way, the current T-Mobile $50 a month plan allows unlimited data and text when roaming in 120 countries, and $0.20 a minute international calls from any of these countries.  This is even better than you can do with the old method of buying an international sim card and switching when you land.   No other US carrier is even in the ballpark.  You have to pay Verizon $20 a month or so to get them to reduce international roaming text costs to 50 cents each with some paltry amount of data.  For international travelers, there is no other choice even close to T-Mobile among US carriers.

The Uphill Battle to Reduce the Size of Government

Last year, when Congress did a 1-year renewal of legislation governing public recreation and fee policies (FLREA) they left out a tiny provision that discouraged government agencies from taking back tasks they had privatized.  With that gone, parts of the USFS immediately began to move to bring certain operations back in house, even when doing so required that they both spend more tax money AND reduce services levels to the public.  Such is the strength of incentives in any government bureaucracy to expand their scope, staffing, and budget, even when it makes no sense for the public.

This week in an article at PERC, I tell one such story in depth. Here is an excerpt:

Consider one example: The Tahoe National Forest in California recently took the operation of some of their parks out of private hands, ending a nearly 30-year partnership with one of our competitor companies.

Did the Forest Service do it to save money? The private concessionaire operated entirely with the user fees paid by visitors, using no taxpayer money, and even paid rent back to the government. The agency’s in-house operating plan for running these campgrounds requires at least $2 million in taxpayer money over the next five years to supplement user fees.

Did they do it to improve service? The private concessionaire employed more than 60 paid workers living on site, with managers who worked weekends and holidays. The Forest Service plan calls for half this number of paid employees, and none will live on site or work weekends—the busiest time for recreation.

Did they do it to address some egregious for-profit abuse? The agency is actually planning to replace dozens of paid private workers with volunteers. At the same time that the federal government is mandating higher minimum wages for campground concessionaires, the Forest Service is replacing paid workers with unpaid labor.

Did the Forest Service do it to keep user fees low? The original stated reason for kicking out the private operator was the concessionaire’s request to increase user fees in response to recent increases in California’s minimum wage. In the end, however, the Forest Service raised fees even higher than those proposed by the concessionaire.

Phoenix Light Rail: We Spent $1.4 Billion (and Growing) To Subsidize ASU Students

The AZ Republic has some of the first information I have ever seen on the nature of Phoenix light rail ridership.  The first part confirms what I have always said, that light rail's primary appeal is to middle and upper class whites who don't want to ride on the bus with the plebes

Light rail has changed the demographics of overall transit users since the system opened in 2008, according to Valley Metro.

Passengers report higher incomes than bus riders, with more than a quarter living in households making more than $50,000 a year. Many riders have cars they could use.

The 20-mile system running through Phoenix, Tempe and Mesa recorded more than than 14 million boardings last year. Still, census data estimate less than one-third of 1 percent of Phoenix commuters — or about 2,000 people — use rail as their main transportation to work.

.0033% huh?  If we built similar facilities to serve everyone, it would only cost us about $420 billion at the rate of $1.4 billion per third of a percent.

But I thought this next bit was the most startling.  I always had a sneaking suspicion this was true but never have seen it in print before:

While the much larger bus system reaches most corners of the Valley, light rail connects specific destinations along a single line. Nearly half of light-rail riders are enrolled in college.

I must have missed this in the original sales pitch for the light rail line: "Let's pay $1.4 billion so ASU students can get to more distant bars."   Note that by these numbers, students likely outnumber commuters 10:1.  Doesn't bode well for light rail extensions that don't plow right through the middle of the most populous college campus in the country.

Postscript:  They don't break out people riding to get to sporting events downtown, but sporting events make up most of the largest traffic days on the system.  From my personal acquaintances, many people use light rail as a substitute for expensive downtown parking at sporting events, parking (often semi-illegally) near light rail stops and taking the train the rest of the way in.  On the whole, its not very compelling as a taxpayer to be helping to subsidize someone else's parking.  And from a municipal fiscal standpoint, it means that light rail fares may be cannibalizing (on a much greater ratio than 1:1 given the price differential) parking fees at municipal parking lots.

So How Can Anyone Be Opposed to Non-Discrimination Laws

First, let me establish a few background facts.  Several years ago I headed an attempt to put a Constitutional amendment legalizing gay marriage on the ballot here in Arizona.  As far back as 2004 I had a gay couple running a campground, and faced a customer petition demanding we remove them because they promoted moral degeneracy by being gay (it's for the children!).  I told those customers to camp somewhere else, as we were not changing our staffing.  Since then I have probably hired more gay couples to run campgrounds than anyone else in the business.

So how could I possibly be opposed to this:

After a period of foreshadowing and rumor, the Equal Employment Opportunity Commission has now gone ahead and ruled that employment discrimination on the basis of sexual orientation is forbidden under existing federal civil rights law, specifically the current ban on sex discrimination. Congress may have declined to pass the long-pending Employment Non-Discrimination Act (ENDA), but no matter; the commission can reach the same result on its own just by reinterpreting current law.

There are multiple problems with non-discrimination law as currently implemented and enforced in the US.  Larger companies, for example, struggle with disparate impact lawsuits from the EEOC, where statistical metrics that may have nothing to do with past discrimination are never-the-less used to justify discrimination penalties.

Smaller companies like mine tend to have a different problem.  It is an unfortunate fact of life that the employees who do the worst job and/or break the rules the most frequently tend to be the same ones with the least self-awareness.  As a result, no one wants to believe their termination is "fair", no matter how well documented or justified (I wrote yesterday that I have personally struggled with the same thing in my past employment).

Most folks grumble and walk away.  But what if one is in a "protected group" under discrimination law?  Now, not only is this person personally convinced that their firing was unfair, but there is a whole body of law geared to the assumption that their group may be treated unfairly.  There are also many lawyers and activists who will tell them that they were almost certainly treated unfairly.

So a fair percentage of people in protected groups whom we fire for cause will file complaints with the government or outright sue us for discrimination.  I will begin by saying that we have never lost a single one of these cases.   In one or two we paid someone a nominal amount just to save legal costs of pursuing the case to the bitter end, but none of these cases were even close.

This easy ability to sue, enabled by our current implementation of discrimination law, imposes a couple of costs on us.  First, each of these suits cost us about $20,000 to win (insurance companies are smart, they know exactly how this game works, and will not sell one an employment practices defense policy without at least a $25,000 deductible, particularly in California).  It takes a lot of effort for the government, even if neutral and not biased against employers as they are in California, to determine if the employee who was fired happened to be Eskimo or if the employee was fired because he was an Eskimo.  Unfortunately, the costs of this discovery are not symmetric.  It costs employees and their attorneys virtually nothing to take a shot at us with such discrimination cases, but costs us$20,000 each to defend and win (talk about Pyrrhic victories).  Which is why we sometimes will hand someone a few bucks even if their claim is absurd, just to avoid what turns out to be essentially legal blackmail.

Second, the threat of such suits and legal costs sometimes changes our behavior in ways that might be detrimental to our customers.  A natural response to this kind of threat is to be double careful in documenting issues with employees in protected groups, meaning their termination for cause is often delayed.  In a service business, almost anyone fired for cause has demonstrated characteristics that seriously hinder customer service, so drawing out the termination process also extends the negative impact on customers.

To make all this worse, many employees have discovered a legal dodge to enhance their post-employment lawsuits (I know that several advocacy groups in California recommend this tactic).  If the employee suspects he or she is about to be fired, they will, before getting fired, claim all sorts of past discrimination.  Now, when terminated, they can claim they where a whistle blower that that their termination was not for cause but really was retaliation against them for being a whistle-blower.

I remember one employee in California taking just this tactic, claiming discrimination just ahead of his termination, though he never presented any evidence beyond the vague claim.  We wasted weeks with an outside investigator checking into his claims, all while customer complaints about the employee continued to come in.  Eventually, we found nothing and fired him.  And got sued.  The case was so weak it was eventually dropped but it cost us -- you guessed it -- about $20,000 to defend.  Given that this was more than the entire amount this operation had made over five years, it was the straw that broke the camel's back and led to us walking about from that particular operation and over half of our other California business.

The Greek Problem is Not a New Thing

I found this quote from an older Finem Respice article about Greek financial problems in the mid-20th-century to be pretty funny:

So hopeless was the state of Greek finances that, even as [the Nazis] routinely hung with piano wire prominent citizens and officials on the thinnest of provocations, and even given three years to do it, the Nazi's were somehow unable to compel what amounted to a totally subservient collaborator government to put its fiscal house in order.

The Axis administration soon realised it would be a waste of effort to get the Greek government to balance its accounts.

Later, in 1945, it was a British problem.  These problems from the late 1940's should sound really familiar:

Fortunately for Germany, by the time the matter came to a head the Germans had RSVP'd to Scobie and Greece was Britain's problem. It wasn't just partisans the British would end up having to fight....

What followed could only be described as a comic progression of populist pandering, the spread to the national economy of a series of parasitic labor unions and cabals, and a confidence on the part of the Allies in their own fiscal administration abilities that was as enduring as it was inflated.

At first [British Treasury Secretary] Waley sold gold to support the drachma, conditioning the sale on a series of fiscal and monetary reforms the Greeks adopted in principle and promised to implement– at some later date when it was somewhat more convenient. It was around this time Waley quipped:

...the Greek government are in effect paying doles to a large part of the population who spend all day parading in the streets in idleness with political demonstrations as their chief occupation.9

Liberation governments, fearing popular backlash were terrified of taxing the Greeks. Instead they continued to look for sources of wealth to redistribute, and were happy to resort to even the most gamey monetary policies to buy time. After raiding "punitively" the only entities with wealth of any kind (businesses) in 1945 in order to buy popular support with cheap food and wage increases, the Greeks were, again, running out of options.

The whole thing is interesting, and depressing.

So Given My German Ancestry, Is Anything Beyond Wearing Lederhosen and Invading France Cultural Appropration?

I will say that this story honestly loses me.  

Just when you think we’ve reached Peak Sensitivity, the scolds of social justice sprinkle more sand into their underpants. The Museum of Fine Arts in Boston is currently showing a superb exhibition of the art of Hokusai. As per common practice at scholarly institutions, it is displaying related material, including an exhibition of contemporary Japanese photographers responding to the devastating earthquake that hit the northern part of the country in 2011. It also rehung La Japonaise, an 1876 canvas in its collection by Claude Monet, depicting his wife Camille in a vermillion kimono.

Among the educational programming at the MFA was “Kimono Wednesdays,” an opportunity for museumgoers to try on replica of that kimono in the presence of Monet’s canvas. It was slated for Wednesday evenings, when the museum’s entrance fee is by donation, starting June 24 and running throughout the month of July. But it didn’t make it that far.

Demonstrators showed up at the first two events bearing posters accusing the participants of grave wrongdoing. “Try on the kimono; learn what it’s like to be a racist imperialist today!” exclaimed one. “Let’s dress up Orientalism with more Orientalism,” read another. The protest had been arranged through a Facebook group named Stand Against Yellow-Face @ the MFA (the discussions have moved to a Tumblr), where the principals and their supporters expressed great umbrage. “A willingness to engage in thoughtful dialogue (or not) with museum employees and visitors on the bullshit of this white supremacist ‘costume’ event are welcome,” wrote one of the organizers.

Eventually the museum caved and even apologized.  I can understand the caving -- as the author suggested, it simply was not a hill the museum needed to die on -- but these apologies for non-crimes have got to stop.  Someone has to show some backbone in the face of these absurd pogroms.

When my family was visiting castles in England, they  often had clothes for the kids to play dress-up in medieval garb.  When my son and his friends were at Octoberfest, they bought lederhosen to wear when they attended.  When I took Spanish for years in grade school, we often did projects that emulated various Spanish cultures we were studying (such as the Mexican tradition of leaving out decorated shoes for candy and gifts).  Are these all wrong now?

I suppose if the museum had a "dress like a Kamikaze pilot" promotion or "pretend to be a comfort girl" exhibit, I could see the problem.  But trying on a kimono?  Kimono's have gone through several cycles of being fashionable in the West over the last 200 years or so (in the James Bond books, Ian Fleming often noted that Bond preferred a kimono for sleeping).

Seriously, we Americans have little in the way of home grown culture - haven't we appropriated about everything?  And so what?  The opposite of cultural appropriation in my mind is cultural apartheid.   Which in fact seems to be what some progressives are advocating for on campus, coming full-circle and apparently asking for separate but equal facilities for women and certain ethnic groups so they won't be tainted by white maleness, or whatever.

More Subsidized Federal Student Loans => Higher Tuition

The Federal Reserve Bank of NY has a study on the effect of increasing student loan availability on tuition.  The key sentence is in bold:

When students fund their education through loans, changes in student borrowing and tuition are interlinked. Higher tuition costs raise loan demand, but loan supply also affects equilibrium tuition costs—for example, by relaxing students’ funding constraints. To resolve this simultaneity problem, we exploit detailed student-level financial data and changes in federal student aid programs to identify the impact of increased student loan funding on tuition. We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65 percent. We also find that Pell Grant aid and the unsubsidized federal loan program have pass-through effects on tuition, although these are economically and statistically not as strong. The subsidized loan effect on tuition is most pronounced for expensive, private institutions that are somewhat, but not among the most, selective.

If I understand this correctly, they are saying that policy change that result in $3 of additional subsidized borrowing capability by students leads to $2 in tuition increases.   Talk about running in place!

Hat tip to Neal McCluskey of Cato, who has links to many more studies with similar results.

Some More Thoughts on Greece -- When European Charity Runs Out, All That is Left is Inflation

People keep talking about reducing Greek debt to a sustainable level, but part of the problem is that there is not such level.  Even at zero.  The problem is that Greece is running a government deficit even before any debt service, so if creditors were to waive all of its debt, it would still need to be borrowing new money tomorrow.  Debt forgiveness is not enough -- what the Greeks need is for Europe to write off all its debt, and then (having lost all their money on the old debt) start lending new money immediately.  Note also that any bailout agreement reached this month will just put everyone back in the exact same place a few months from now.

This situation cannot be expected to change any time soon, for a variety of reasons from demographics (Greece has the oldest population in Europe, and a relatively rich pension system) to ideology (the current pseudo-Marxist government will never implement the reforms needed to turn the economy around, even if they promise to do so under duress).

With structural solutions unlikely, Greece has only the options of charity and inflation. Greece still seems to be hoping for charity, which they make harder by spewing derision at the same folks whom they are begging for alms.  Europe, certainly Germany, is in no mood to be charitable any longer, but may still do so depending on their calculation about which action -- bailout or exit -- has the worse long-term consequences for keeping Portugal, Spain, and Italy both in the Euro and continuing to pay their debts.

Lacking charity, the only thing left is inflation.  Some folks think I am advocating that option.  I am not.  The best possible hope for Greece is to slash its economic regulation, privatize business, and cut back on the public sector -- but that is not going to happen with the current government.  Or maybe any government.

I say inflation is the only option because that is what balances the budget and "solves" debt problems when politicians are unable or unwilling to make any hard choices.  It is sort of the default.  If they can't balance the budget or figure out how to pay off debt, then inflation does it for them by reducing the value of pensions and outstanding debts**.  This is what will happen with a Grexit -- a massive bout of devaluation and inflation what will greatly reduce the value of any IOU, whether it be a pension or a bank deposit.

Eventually, the one good thing that comes from inflation and devaluation is that the country becomes really cheap to outsiders.  Tourists will flock in and olive oil will sell well internationally as the new drachma loses its value, creating value for people holding stronger currencies and potentially forming the basis for some sort of economic revival.  My wife and I decided a few months back to postpone the Greek vacation we wanted this year -- too much turmoil is still possible -- and wait for it to be a bargain in 2016 or 2017.

 

**Postscript:  This is exactly why the Euro is both immensely seductive and a dangerous trap for countries like Greece.  Seductive, because it could pursue any sort of destructive banana republic fiscal policy it wished and still have a strong currency.  A trap because it can no longer print money and inflate away its debt problems.

Government Is Spending Millions to Rush To the Front of the Parade

From Shawn Regan at PERC, via Arnold Kling

Last year, riding the buzz over dying bees, the Obama administration announced the creation of a pollinator-health task force to develop a “federal strategy” to promote honeybees and other pollinators. Last month the task force unveiled its long-awaited plan, the National Strategy to Promote the Health of Honey Bees and Other Pollinators. The plan aims to reduce honeybee-colony losses to “sustainable” levels and create 7 million acres of pollinator-friendly habitat. It also calls for more than $82 million in federal funding to address pollinator health.

But here’s something you probably haven’t heard: There are more honeybee colonies in the United States today than there were when colony collapse disorder began in 2006. In fact, according to data released in March by the Department of Agriculture, U.S. honeybee-colony numbers are now at a 20-year high. And those colonies are producing plenty of honey. U.S. honey production is also at a 10-year high.

The White House downplays these extensive markets for pollination services. The task force makes no mention of the remarkable resilience of beekeepers. Instead, we’re told the government will address the crisis with an “all hands on deck” approach, by planting pollinator-friendly landscaping, expanding public education and outreach, and supporting more research on bee disease and potential environmental stressors.

I am sure the government, once they have had some bureaucrats running around filing reports and plans for a few years will soon claim credit for the improvement.  My prediction:  This agency will still be here 50 years from now.  You can never kill these things once created.  This is only slightly less irritating than politicians who claim that they "created X million jobs" when in office, but only slightly.

Update:  Another very similar example:  transfats.

The Food and Drug Administration recently moved to eliminate trans fats from the American diet, and food activists and the public-health lobby are claiming a historic victory. Yet this is a rare case of the Obama Administration regulating from behind. Markets had as much to do with the fall of trans fats as government did with their rise.

The FDA’s first restrictions on the use of partially hydrogenated oils as a major source of trans fats in processed foods—think Crisco shortening—give food makers three years to phase out the substance. Evidence began to accumulate in the early 2000s that trans fats were connected to bad cholesterol and cardiovascular diseases. Shoppers and diners concerned about health risks soon started to revolt against the fried and baked goods and the fast-food fare where they were prevalent.

Lo and behold, the food industry responded by changing their recipes and eliminating the oils from some 86% of their products. Trans fat consumption plunged by 78% over a decade, according to the FDA’s estimates, and is now well below the two grams per day that the American Heart Association says is the safe upper limit. The rare survivors of this purge are niche foods like microwave popcorn, frozen pizza and chocolate sprinkles, where trans fats are useful for improving taste and texture.

Greece's Lesson for Gold Bugs

I have been predicting for years that the only solution for the Greece problem is for it to exit the Euro, go through a horrible economic crisis and deal with substantial devaluation, and then hopefully move on with a cheaper currency that makes its tourist industry look better and plugs the hole between taxing and spending with inflation.  It appears we are closer than ever to this actually happening.  The Greeks would likely be moving forward now, like Iceland, if they had taken their medicine years ago rather than try to kick the can.  Now it is just going to be worse.

I have been enamored off and on with the idea of a gold standard but Megan McArdle made some powerful points today about how the Greek situation teaches us that a gold standard doesn't necessarily impose discipline on governments.

It's easy to moralize Greece's feckless borrowing, weak tax collection and long history of default, and hey, go ahead; I won't stop you. But whatever the nation's moral failures, what we're witnessing now shows the dangers of trying to cure the problems of weak fiscal discipline with some sort of externally imposed currency regime. Greek creditors and Brussels were not the only people to joyously embrace the belief that the euro would finally force Greece to keep its financial house in order; you hear the same arguments right here at home from American gold bugs. During the ardent height of Ron Paul's popularity, I tried to explain why this doesn't work: "You don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway."

This goes double for fiscal discipline. Moving to a fixed exchange rate protects bond-holders from one specific sort of risk: the possibility that inflation will erode the real value of your bonds. But that doesn't remove the risk. It just transforms it. Now that the government can't inflate away its debt, you instead face the risk that they are going to run out of money to pay their bills and suddenly default. That's exactly what happened to Argentina, and many other nations on various other currency regimes, from the gold standard to a currency peg. The ability to inflate the currency had gone away, but the currency regime didn't fix any of the underlying institutional problems that previous governments had solved with inflation. So bondholders protected themselves from inflation, and instead took a catastrophic haircut.

Postscript #1:  I had one issue with McArdle's piece when she writes

The only people this will be good for is people who long to vacation on the Greek Islands. If Grexit actually happens, book those plane tickets now, but hold off on the hotel. It will be cheaper in six months. Then try to enjoy it as you remember that those fabulous savings are someone else's whole life evaporating.

Hey, if Grexit occurs, you have no reason to feel guilty about taking advantage of the weak currency and low prices for a Greek vacation.  There is nothing the Greeks need more than for you to do exactly that.   It is the single best thing you could do for the Greek people.

Postscript#2:  Here is why exiting the Euro, devalutation, and inflation are the only way out for Greece at this point. Creditors allow countries to run long-term deficits and keep lending despite rising debt (see: Japan) because of a combination of a) the country can always just print the money they need; b) the country can raise taxes and take the money it needs or c) the country can keep spending flat and grow their way out from the debt.

None of these are available to Greece. They can't print money, at least without running up new debts (excess printing of Euros is automatically added to Greece's debt to the ECB).  They can't raise taxes because their citizens don't pay the taxes that already exist.  And they can't grow their way out because there is zero support for austerity or market-based reforms that would be necessary, and besides a huge portion of Greek deficit spending is for inherently unproductive activities.  At this point Greece's only option is charity, that the other countries of the EU will forgive debt or write them new debt, either to be nice or to avoid bad precedents with other PIGS countries.  But  the EU seems at the end of its charity rope, and besides given zero prospects of any sort of Greek recovery, even after a major write-off of debt the EU would be in the position of still having to send Greece new money for its new debts.

Even at the Margin With Capital Charges Sunk, Light Rail Economics are Awful

A reader and frequent contributor sent me this:

When 120,000 people head to downtown Orlando for the big July 4 fireworks show at Lake Eola, none will be getting on SunRail.

It’s not running.

Central Florida’s $1 billion commuter-rail line usually only operates Monday through Friday, and while a few special weekend events in recent months have booked the train, one of the biggest gatherings of the year won’t.

Fireworks at the Fountain, in addition to the sky show, will feature more than 25 vendors, live music and children’s activities.

But Orlando city staff researched the addition of SunRail service, but found it wouldn’t work, said Cassandra Lafser, the city’s public information officer.

“Several factors contributed to this decision, including safety, availability and costs,” Lafser said in a prepared statement.

“The city’s concerns included: total train capacity, safety and security, hours of operation, pedestrian wayfinding and transport operations between the downtown stations and Lake Eola, and funding availability.”

So, even in a situation where capital costs are sunk and can be ignored, an incremental decision to operate the train on a very heavy commuter day makes no economic sense.  You want to know why?  Because it makes no economic sense Monday through Friday either.  Light rail never pays back any of its capital costs, but the vast majority of light rail loses money operationally at the margin as well.

France Arrests Entrepreneurs for Crime of Innovation. Is it Any Wonder the Economy Sucks?

CEO of Uber France has been arrested because, uh, his competitors have resorted to violence to defend their inferior product.  The fact that the victim rather than the perpetrators of violence is getting arrested speaks volumes to how far governments will go to block innovation that hurts politically-connected incumbents.

After days of violent protests and defiance on the part of Uber's French management, two of the company's employees were taken into custody for "illicit activity" today. Uber France CEO Thibaut Simphal and Uber European GM Pierre-Dimitri Gore-Coty were arrested for running the company's ride-sharing service illegally. TechCrunch reports the pair is also being held under suspicion of "concealing digital documents." Last week, French Interior Minister Bernard Cazeneuve took legal action to shut down UberPOP, the service that employs non-professional drivers to provide rides, in response to protests that blocked key transportation hubs.

... While UberPOP was banned in France earlier this year, an appeals court said it could continue to operate until the final decision was handed down in September.

Putting Neville Chamberlain in Historic Context

One of the hardest things to do in history is to read history in context, shutting out our foreknowledge of what is going to happen -- knowledge the players at the time did not have.

Apparently Neville Chamberlain is back in the public discourse, again raised from the dead as the boogeyman to scare us away from any insufficiently militaristic approach to international affairs.

There is no doubt that Neville Chamberlain sold out the Czechs at Munich, and the Munich agreement was shown to be a fraud on Hitler's part when he invaded the rest of Czechoslovakia just months later.  In retrospect, we can weep at the lost opportunity as we now know, but no one knew then, that Hitler's generals planned a coup against him that was undermined by the Munich agreement.

But all that being said, let's not forget the historic context.  World War I was a cataclysm for England and Europe.   It was probably the worst thing to happen to Europe since the black death.   And many learned folks at the time felt that this disaster had been avoidable (and many historians today might agree).  They felt that there had been too much rush to war, and too little diplomacy.  If someone like Britain had been more aggressive in dragging all the parties to the bargaining table in 1914, perhaps a European-wide war could have been avoided or at least contained to the Balkans.

There simply was no energy in 1938, no collective will to start another war.  Even in France, which arguably had the most to lose from a reinvigorated Germany, the country simply could not face another war.   As an illustration, one could argue that an even better and more logical time to "stop Hitler" occurred before Munich in March of 1936 when Hitler violated the Versailles Treaty and reoccupied the Rhineland with military forces.  France had every right to oppose this occupation, and Hitler's generals said later that their forces were so puny at the time that the French could have stopped them with a brigade and sent them running back across the Rhine.  And the French did nothing.

In addition, Britain and France had very little ability to do much about Hitler's ambitions in Eastern Europe anyway.  How were they going to get troops to the Sudetenland?  We saw later in Poland how little ability they had to do anything in Eastern Europe.

And finally, everyone was boxed in by having accepted Woodrow Wilson's formula of "self-determination of peoples."  Building the entire post-war realignment on this shoddy building block is what really led to disaster.  Emphasizing this essentially nationalist formulation as the fundamental moral principle of international relations -- rather than, say, the protection of individual rights of all peoples -- really empowered Hitler.  In the Saarland, in the Rhineland, in Austria, and in the Sudetenland, it lent him the moral high ground.  He was just fulfilling Wilson's formulation, wasn't he?  These were all majority-German lands coming home to Germany.

Postscript:  Years ago in my youth I used to excoriate FDR for caving into Stalin at Yalta, specifically in giving away most of Eastern Europe.  I still wish he hadn't given his moral authority and approval to the move, but even if we stood on the table and screamed at Stalin in opposition, what were we going to do?  Was there any appetite for extending the war?  Zero.  That is what folks who oppose the dropping of the atomic bombs on Japan get wrong in suggesting there were alternatives.  All those alternatives involved a longer war and more American deaths which no one wanted.

Government's Systematic Indifference to Capital Maintenance

There is one thing you can almost always assume with government managed land and infrastructure -- facilities will likely have a large deferred maintenance backlog.  Two examples:

These problems are ubiquitous.  You can point to any government parks agency, and most any transit agency, and you will find the same problems.

Why?  Well, I have not studied the problem in any academic sense, but I am face-to-face with the problem every day in parks.

Let's start with the reason that is not true -- that somehow budgets can't support capital maintenance.  I know for a fact that this is not true in parks.  We operate over 100 public parks and are totally up to date with all maintenance and have no deferred maintenance backlog.  This is despite the fact that we work with only the fees paid by visitors at the gate.  Government agencies typically supplement fees at the gate with an equal amount of tax money and still don't keep up with maintenance.  So the issue may be costs or priorities, but the money is there to keep parks fixed up.  (I am willing to believe the same is not true of large transit projects, but these projects are known in advance not to be able to cover their lifecycle costs with revenues, and simply hide that fact from taxpayers until it is too late.  Thus the sales tax increase that is being requested in Phoenix to keep our new light rail running).

I think the cause lies in a couple areas related to government incentives

  1. Legislatures never want to appropriate for capital maintenance.  If the legislature somehow has, say, $100 million money it can spend on infrastructure, their incentives are to use it to build new things rather than to keep the old things in repair (e.g. to extend a rail line rather than to keep the old one fixed).
  2. If you want to understand a government agency's behavior, the best rule of thumb is to assume that they are working to maximize the headcount and the payroll budget of their agency.  I know that sounds cynical, but if you do not understand an agency's position or priorities, try applying this test:  What would the agency be doing or supporting if it were trying to maximize its payroll.  You will find this explains a lot

To understand #2, you have to understand that the pay and benefits -- and perhaps most important of all -- the prestige of an agency's leaders is set by its headcount and budgets.  Also, there are many lobbying forces that are always trying to pressure an agency, but no group is more ever-present, more ubiquitous, and more vocal than its own staff.   Also, since cutting staff is politically always the hardest thing for legislators to do, shifting more of the agency's budget to staff costs helps protect the agency against legislative budget cuts.  Non-headcount expenses are raw meat for budget cutters, and the first thing to get swept.  By the way, this is not unique to public agencies -- the same occurs in corporations.   But corporations, unlike government agencies, face the discipline of markets that places a check on this tendency.

This means that agencies are loath to pay for the outside resources (contractors and materials) that are needed for capital maintenance projects out of their regular budgets.  When given the choice of repairing a bathroom at the cost of keeping a staff person, agencies will always want to choose in favor of keeping the staff.  They assume capital maintenance can always be done later via special appropriation, but of course we saw earlier that legislators are equally unlikely to prioritize capital maintenance vs. other alternatives.

The other related problem faced is that this focus on internal staff tends to drive up pay and benefits of the agency workers.  This drives up the cost of fundamental day to day tasks (like cleaning bathrooms and mowing) and again helps to starve out longer-horizon maintenance functions.

As proof, you only have to look at the mix of agency budgets.  Many parks agencies (e.g. New Jersey state parks, which I have studied in depth) have as much as 85% of their budget go to internal staff.  My company, which does essentially the same thing (run parks) has about 32% of our budget go to staff.  State parks agencies have 50% or more of their staff in headquarters or regional offices.  In my company, 99% of the staff is in the parks.

I don't think that these incentives problems can be overcome -- they are simply too fundamental to how government works.  Which is why I spend my working hours trying to convince states to privatize the operation of their recreation facilities.

Where's Coyote

Well, it is time for many of our seasonal operations to open over the next few weeks so I have been running in circles on business issues.  Also, I must confess that blogging is becoming a sort of Groundhog Day (the movie) experience, with the same arguments circling over and over.  How many more times can I write, say, a long article about how minimum wage increases are a terrible anti-poverty program only to get one line emails asking me why I hate poor people.  So blogging will be light as I do real world work and try to recharge.

I will leave you with one note of optimism, from Mark Perry.  I went to college in the nadir (1980) of the American beer industry, where a small oligopoly of mediocre beer producers was protected by government legislation.  It was a classic example of how regulation drives monopoly, consolidation, and loss of choice.  With deregulation, the American beer industry has exploded.

beer1

 

As an aside, my current go-to beer is actually Brazilian, Xingu Black

 

Matt Walsh on Net Neutering

Matt Walsh has an epically good article on why we should fear having the same folks who freaked out over Janet Jackson's "wardrobe malfunction" running the Interntet

On Funding and Bias in Climate

I really, really did not want to have to write yet another post on this.  99+% of all climate funding goes to alarmists rather than skeptics.   Greenpeace laments donations of funds to skeptics by Exxon of a million dollars or so and wants to drive out all such funding when Greenpeace and Tides and the US Government are giving literally billions to alarmists.  Despite this staggering imbalance, the only stories you ever see are about the dangers and bias introduced by that measly 1% skeptics get.  I guess that 1% is spent pretty well because it sure seems to have people running in circles declaring the sky is falling.

One would think that at some point the world would wake up and realize that criticizing the funding sources behind an individual does not actually rebut that individual's arguments.

Potential bias introduced by funding sources (or some other influence) are a pointer -- they are an indication there might be a problem warranting deeper examination of the evidence introduced and the methodology of collecting that evidence.  Such potential biases are not themselves evidence, and do nothing to rebut an argument.  A reasonable way to use such biases in an argument would be something like:

I want to begin by noting that Joe may have had a predisposition to his stated conclusion even before he started because of [funding source, political view, whatever].  This means we need to very carefully look at how he got to his conclusion.  And I intend to show you that he made several important errors that should undermine our acceptance of his conclusions.  They are....

Unfortunately, nowadays people like the New York Times and our own Arizona Representative Raul Grijalva seem to feel like the job is done after the first sentence.  They have decided that the best way to refute recent scientific work by a number of climate scientists is to try to show that some of their funding comes from fossil fuel companies.

Beyond the strange implicit assumption that fossil fuel funding would automatically "disprove" a research paper, there is also an assumption that oil company funding is "unclean" while government or non-profit environmental group funding is "clean".  Remember the last time you saw a news story about a climate alarmist's funding?  Yeah, neither do I.

There is no justifiable reason for this asymmetry.  Funding does not potentially introduce bias because it is sourced from for-profit or non-profit entities.  In fact, the motivation of the funding source is virtually irrelevant.  The only relevant questions related to bias are:

  1. Did the funding source demand a certain conclusion at the outset of the study as the price of the funding -- or --
  2. Is there a reasonable expectation that the source would deny future funding if the conclusions of the study don't go their way

My sense is that #1 is rare and that the real issue is #2.

But #2 is ubiquitous.  Sure, if a group of skeptical scientists suddenly started writing papers about 8 degree warming predictions, Chevron is going to be less likely to fund their future research.  But on the flip side if Michael Mann suddenly started saying that future warming will only be a modest 1-2 degrees, do you think that he would continue to get funding from Greenpeace, the Tides Foundation, the WWF, or even from an Obama-run Federal agency?  No way.   There is absolutely no less bias introduced by Chevron funding than from Greenpeace funding, because in each case there can be a reasonable fear by the researcher that future funding would be denied by that source if the "right" answer was not reached.

Postscript & Disclosure of Biases:  I have never received any outside funding for this blog or my climate work.  However, if Chevron were to send me a check for a million dollars, I would probably cash it.  I do own individual shares of ExxonMobil stock as well as shares of the Vanguard S&P500 index fund, which includes equities of a number of energy companies.  I also am a frequent purchaser of gasoline and electricity, as well as a number of other products and services whose prices are tied to energy prices (e.g. air transportation).  As a consumer, I would rather not see the prices of these products rise.  I buy a lot of food, whose price might be improved by longer growing seasons.  My camping company tends to benefit from rising gasoline prices, because rising prices causes people to stay closer to home and camp at the type of places we operate.  It is hard to predict how regional climates will change if overall global temperatures rise, but since many of my campgrounds are summer escapes at high altitude, they would probably benefit somewhat from rising temperatures.  I own a home in Arizona whose value would probably be lessened if the world warmed 2-3 degrees, because it would make winters in the northeast and midwest more bearable and thus hurt Arizona as a location for a winter second home.  Global warming may reduce the life of my dog as we are less likely to walk her when it is over 100 degrees out which makes her less healthy.  I own land in Hawaii that might be more valuable if sea level rises puts it 6-8 inches close to the ocean.  I am planning a vacation to see the tulips bloom in Holland and changes in climate could shift the blooming date and thus cause me to miss the best colors.  Fifteen years from now my daughter would like a June wedding and changes to climate might cause it to rain that day.  My daughter also owns 5 shares of Walt Disney and their earnings might be helped by global warming as nostalgia for cooler weather could greatly increase DVD sales of "Frozen".

My Last Run

Well, that is kind of over-dramatic.  I will certainly continue to run sometimes.  I really enjoy running in cities where I travel as much as an exploration tool as for exercise.  But my knees are shot and I barely got through the half-marathon last weekend in 3 hours.  We had a great time though and Disney does a great job running these races.  And just about everyone wears costumes, which is fun.   It was worth the pain to do this event one last time with my daughter before she goes off to college.  Plus I now have another really awesome princess medal.

princess run-2

Where's Coyote?

I am off for Disney World to run in the Princess Half-Marathon this weekend.  My knees feel like I have four flat tires and have been driving on the rims for 20 miles, but I am running this last time with my daughter.

We started running this race together a number of years ago and the first time we ran was something of a breakthrough for my daughter -- the experience dedicating herself to a goal and the confidence she gained from achieving it led to many knock-on benefits, so much so that it became the core of her college essay.

That essay began with the story of she and I making our first tutu together.  At the time, I did not even know what tulle was, but we watched a YouTube video about how to make a tutu without sewing and we eventually got it done.   She ran the whole race, as she has ever since, with a tutu and a tiara on.  (By the way, I am always amazed at the niches in the Internet that I never knew existed.  This is the video we watched to make the tutu -- it has 2.4 million views!  We basically followed this process except we used a piece of underwear elastic for the waist band rather than ribbon).  My job is to cut the tulle into strips -- we make them twice as long as she wants the skirt, and then my daughter ties them to a piece of elastic in the middle, so two strands hang down.

The challenge has increasingly become to use different colors than any past tutu.   The last one looked more like a skirt.  This one she wanted to be shorter and puffier, more like a ballet tutu.  It is hard to capture it well in a picture to get the detail but this is the result:

click to enlarge

 

Not to worry, your humble correspondent will be in costume too.  I have some great Darth Vader running gear I will be wearing.  I wore a rebel pilot outfit last time.  Disney really hit on something with these runs -- they have 8-10 different ones now.  The Princess half-marathon is still the most popular and sells out in about 45 minutes.  It was as hard to get a spot in it as it is to get Comicon tickets.  But given the popularity, there are whole web sites specializing in themed and costumed running gear.  I love capitalism.

PS -- I am still amazed she takes on all this extra weight and drag for fashion.  When I have to run this far, I am tempted to cut off the ends of my shoelaces to save weight.

PPS-- Here was the first one, at the finish line (a little worse for wear)

finish

The Un-discussed Foreign Policy Alternative

I was going to write a longer post on foreign policy vis a vis terrorism and ISIS, but I lack both the time as well as confidence in my foreign policy knowledge.

I will offer this, though:  There seem to be but two policy positions being discussed

  1. The largely Conservative position that there is a dangerous and violent authoritarian streak running through the world of Islam and that we need to saddle up the troops and go break some heads and impose order
  2. The Progressive position embodied by the Obama Administration that there is nothing abnormal going on in Islam and that what we see is random violence spurred by poverty and thus we should not intervene militarily (I consider the current AUMF proposed by Obama to be political posturing to satisfy polls rather than anything driven by true belief).

Why is there not a third alternative to be at least considered -- that there is something really broken in a lot of Islam as practiced today (just as there was a lot of sh*t broken with Christianity in, say, the 14th-16th centuries) and that Islam as practiced in many Middle Eastern countries is wildly illiberal (way more illiberal than any failings of Israel, though you wouldn't know that if you were living on a college campus).  But, that we don't need to saddle up the troops and try to change things by force.

Conservatives who can look at things like serial failures in Federal education policy and reach the conclusion that we should be skeptical about Federal initiatives on education seem unable to draw similar conclusions from serial failures in US interventions in the Islamic world.  And for its part, the Obama administration seems to be living in some weird alternate universe trying desperately to ignore the reality of the situation.

Yes, I know the first response to all folks like me who advocate for non-intervention is "Munich" and "Czechoslovakia".  So be it.  But if we sent in the military every time someone yelled "appeasement" our aircraft would be worn out from moving troops around.  And we seem to be totally able to ignore atrocities and awful rulers in Sub-Saharan Africa.

As a minimum, I would like to see a coalition of Arab states coming to us and publicly asking us for help -- not this usual Middle East BS we hear that Saudi Ariabi (or whoever) really in private wants us there but publicly they will still lambaste us.  Without this support we can win the war but we have no moral authority (as we did after WWII) in the peace.  Which is one reason so many of our interventions in the Middle East and North Africa fail.

Bill Maher, Living in an Echo Chamber

I refuse to assume (contrary to the modern practice) that someone who disagrees with me is either stupid or ill-intentioned or both [OK, I did call people idiots here -- sorry, I was ranting].  Intelligent people of goodwill can disagree with each other, and the world would be a better place if more people embraced that simple notion.

Anyway, I won't blame lack of intelligence or bad motivations for the following statement from Bill Maher.  He seems to be a smart guy who is honestly motivated by what he says motivates him.  But this statement is just so ignorant and provably false that it must be the result of living in a very powerful echo chamber where no voices other than ones that agree with him are allowed.

HBO’s Bill Maher complained that comparing climate change skepticism to vaccine skepticism was unfair to vaccine skeptics before attacking GMOs on Friday’s “Real Time.”

“The analogy that I see all the time is that if you ask any questions [about vaccines], you are the same thing as a global warming denier. I think this is a very bad analogy, because I don’t think all science is alike. I think climate science is rather straightforward because you’re dealing with the earth, it’s a rock…climate scientists, from the very beginning, have pretty much said the same thing, and their predictions have pretty much come true. It’s atmospherics, and it’s geology, and chemistry. That’s not true of the medical industry. I mean, they’ve had to retract a million things because the human body is infinitely more mysterious” he stated.

Climate science is astoundingly complex with thousands or millions of variables interacting chaotically.  Separating cause and effect is a nightmare, because controlled experiments are impossible.  It is stupendously laughable that he could think this task somehow straightforward, or easier than running a double-blind medical study  (By the way, this is one reason for the retractions in medicine vs. climate -- medical studies are straightforward enough they can be easily replicated... or not, and thus retracted.  Proving cause and effect in climate is so hard that studies may be of low quality, but they are also hard to absolutely disprove).

It is funny of course that he would also say that all of climate scientists predictions have come true.  Pretty much none have come true.  They expected  rapidly rising temperatures and they have in fact risen only modestly, if at all, over the last 20 years or so.  They expected more hurricanes and there have been fewer.  They called for more tornadoes and there have been fewer.  The only reason any have been right at all is that climate scientists have separately forecasts opposite occurrences (e.g. more snow / less snow) so someone has to be right, though this state of affairs hardly argues for the certainty of climate predictions.

By the way, the assumption that Bill Maher is an intelligent person of goodwill who simply disagrees with me on things like climate and vaccines and GMO's is apparently not one he is willing to make himself about his critics.  e.g.:

Weekly Standard Senior Writer John McCormack then pointed out that there are legitimate scientists, such as Dr. Richard Lindzen, who are skeptical of man-made climate change theories, but that there were no serious vaccine-skeptic professors, to which Maher rebutted “the ones who are skeptics [on climate change], usually are paid off by the oil industry.”

I will point out to you that the Left's positions on climate, vaccines, and GMO's have many things in common, as I wrote in a long article on evaluating risks here.

Let's Make Employment of Low-Skill Labor Profitable Again

Brink Lindsey of Cato is gathering academic essays on the topic "If you could wave a magic wand and make one or two policy or institutional changes to brighten the U.S. economy’s long-term growth prospects, what would you change and why?"  I am by no means in the distinguished academic company that were invited to contribute, but I thought it was an interesting topic.  Here is my (uninvited) contribution.

The question of skills and the American workforce is typically tackled in only one direction:  that we need more high-skilled workers to meet the challenge of emerging industries and business models that are increasingly driven by technology.  A recent report by the OECD, and as summarized in the New York Times, is a typical example of this concern.  As Eduardo Porter writes in the Times:

To believe an exhaustive new report by the Organization for Economic Cooperation and Development, the skill level of the American labor force is not merely slipping in comparison to that of its peers around the world, it has fallen dangerously behind.

The report is based on assessments of literacy, math skills and problem-solving using information technology that were performed on about 160,000 people age 16 to 65 in 22 advanced nations of the O.E.C.D., plus Russia and Cyprus. Five thousand Americans were assessed. The results are disheartening....

“Unless there is a significant change of direction,” the report notes, “the work force skills of other O.E.C.D. countries will overtake those of the U.S. just at the moment when all O.E.C.D. countries will be facing (and indeed are already facing) major and fast-increasing competitive challenges from emerging economies.”

A lot of head scratching goes on as to why, when the income premium is so high for gaining skills, there are not more people seeking to gain them.  School systems are often blamed, which is fair in part (if I were to be given a second magic wand to wave, it would be to break up the senescent government school monopoly with some kind of school choice system).   But a large portion of the population apparently does not take advantage of the educational opportunities that do exist.  Why is that?

When one says "job skills," people often think of things like programming machine tools or writing Java code.  But for new or unskilled workers -- the very workers we worry are trapped in poverty in our cities -- even basic things we take for granted like showing up on-time reliably and working as a team with others represent skills that have to be learned.  Amazon.com CEO Jeff Bezos, despite his Princeton education, still learned many of his first real-world job skills working at McDonald's.  In fact, back in the 1970's, a survey found that 10% of Fortune 500 CEO's had their first work experience at McDonald's.

Part of what we call "the cycle of poverty" is due not just to a lack of skills, but to a lack of understanding of or appreciation for such skills that can cross generations.   Children of parents with few skills or little education can go on to achieve great things -- that is the American dream after all.  But in most of these cases, kids who are successful have parents who were, if not educated, at least knowledgeable about the importance of education, reliability, and teamwork -- understanding they often gained via what we call unskilled work.   The experience gained from unskilled work is a bridge to future success, both in this generation and the next.

But this road to success breaks down without that initial unskilled job.   Without a first, relatively simple job it is almost impossible to gain more sophisticated and lucrative work.  And kids with parents who have little or no experience working are more likely to inherit their parent's cynicism about the lack of opportunity than they are to get any push to do well in school, to work hard, or to learn to cooperate with others.

Unfortunately, there seem to be fewer and fewer opportunities for unskilled workers to find a job.  As I mentioned earlier, economists scratch their heads and wonder why there are not more skilled workers despite high rewards for gaining such skills.  I am not an economist, I am a business school grad.   We don't worry about explaining structural imbalances so much as look for the profitable opportunities they might present.  So a question we business folks might ask instead is:  If there are so many under-employed unskilled workers rattling around in the economy, why aren't entrepreneurs crafting business models to exploit this fact?

A few months back, I was at my Harvard Business School 25th reunion.  Over the weekend, they had dozens of lectures and programs on what is being researched and taught nowadays at the school.  I can't remember a single new business model discussed that relied on unskilled workers.

Is this just the way it is now?  Have the Internet and computers and robotics and complex genomics made unskilled work obsolete?  I don't think so.  I have been running a business for over a decade that employs more than 300 people in unskilled positions.  I will confess that the other day I came home tired from work and told my wife, "Honey, in my next company, I have to find a business that doesn't require employees."  But that despair doesn't come from a lack of opportunities to deliver value to customers with relatively unskilled labor.  And it doesn't come from any inherent issues I might have running a large people-driven service company -- in fact, I will say there has been absolutely nothing in my business life that has been more rewarding than seeing a person who has never had anything but unskilled jobs discover that they can become managers and learn more complex tasks.

The reason for my despair comes from a single source:  the government is making it increasingly difficult and costly to hire unskilled workers, while simultaneously creating a culture among new workers that short-circuits their ability to make progress.

The costs that government taxes and rules add to labor have been discussed many times, but usually individually.  Their impact is clearer when we discuss them as a whole.  Let's take California, because that state is one I know well.  To begin, the minimum wage is $9 (going to $10 an hour in 2016).  To that we have to add taxes and workers compensation premiums, both of which are high because because California does little to police fraud in unemployment and injury claims.  For us, these add another $3.15 an hour.  We also now have to add in the Obamacare employer mandate, which at a minimum of $3000 per full-time employee (accepting the penalty is cheaper than paying for health care) adds another $1.50 an hour.  And the new California paid sick leave mandate adds another 45 cents an hour.  So, looking just at core requirements, we are already up to a minimum of $14.10 an hour, less than 2/3 of which actually shows up in the employee's paycheck.

But these direct costs don't even begin cover the additional fixed costs of hiring employees.  We pay a payroll company thousands of dollars a year to make sure that regulations on taxes and paychecks are followed.  We spend so much time making sure our written plans and documentation on safety meet the requirements of OSHA and its California state equivalent that we barely have the capacity to actually focus on safety.  In California we have to have complex systems in place to make sure our employees don't work through their lunch break, that they have the right sort of chair and that they sit in them frequently enough, that they follow all the right procedures when the temperature outside goes over 85 degrees, that they get paid for sick leave and get their job back after extended medical leave.... the list goes on and on.

In a smaller company, we don't have lawyers and a large human resource staff.  In fact, we tend to have little staff at all.  If some new compliance issue arises -- which happens about every day the California legislature is in session -- the owner (me) has to figure out a solution.  In one year I literally spent more personal time on compliance with a single regulatory issue -- implementing increasingly detailed and draconian procedures so I could prove to the State of California that my employees were not working over their 30 minute lunch breaks -- than I did thinking about expanding the business or getting new contracts.

Towards the end of last year I was making a speech to a group of business school students, and someone asked me what my biggest accomplishment had been over the prior year.  I told them it was probably getting the company down from hundreds of full-time workers to less than 50, converting everyone to part-time.  And it was a huge effort, involving new systems and a number of capital investments to accommodate more staff working fewer hours.  And it had a huge payout, saving us hundreds of thousands of dollars a year in Obamacare penalties and compliance costs.  But come on!  How depressing is it that my biggest business accomplishment was not growing the business or coming up with a new customer service but in cutting the working hours for good employees?  But that is the reality of trying to run a service business today.  The business couldn't be profitable until we'd adjusted our practices to these new regulations, so there was no point in even thinking about growth until we had done so.

Labor-based business models that work at a $7 or $8 total labor cost may well not work at $15, and they certainly are not going to grow very fast if the people responsible for seeking out growth opportunities are instead consumed in a morass of legal compliance issues.  But there is perhaps an even more damaging impact of government interventions, and that is to the culture of work.  I will confess in advance I don't have comprehensive data to prove my hypothesis, but let me tell a couple of stories.

Until 2010, we never had an employee sue us.  We had over 8 years hiring 350 seasonal workers a year, mostly older retired folks, without any sort of legal issues.  Since 2010, we have had eight employee suits threatened or filed, all of which we have won but at a legal cost of $20-$25 thousand each (truly Pyrrhic victories).  So what changed around 2010?  Well, our work force composition changed a lot.  Before that time, we typically hired older retired folks, because the seasonal nature of the job is simply not very appropriate for a younger person trying to support themselves without other means (like retirement or Social Security).   However, after 2009 when a lot of younger folks were losing their traditional jobs, they began applying to our company.  Our work force shifted younger, which actually excited me because I felt it would help us in attracting a younger demographic to the campgrounds we operate.    But all eight of these legal actions were by these new, younger employees.  I asked one person who was suing us over what was a trivial slight, really a misunderstanding, why they did not just call me (my personal number is in their employee handbook) to fix it.  They said that if I had fixed it, they would have lost the opportunity to sue.

I mentioned earlier that we had struggled to comply with California meal break law.   The problem was that my workers needed extra money, and so begged me to be able to work through lunch so they could earn a half-hour more pay each day.  They said they would sign a paper saying they had agreed to this.  Little did I know that this was a strategy devised by a local attorney who understood meal break litigation better than I.  What he knew, but I didn't, was that based on new case law, a company had to get the employee's signature every day, not just once, to avoid the meal break penalties.  The attorney advised them they could get the money for working lunch AND they could sue later for more money (which he would get a cut of).  Which is exactly what they did, waiting until November to sue so they could get some extra money to pay for Christmas bills.  This is why -- believe it or not -- it is now a firing offense at our company to work through lunch in California.

Hopefully you see my concern.   I fear that we have trained a whole generation that the way one gets ahead is not to work hard and gain new skills but to seek out and exploit opportunities to file lawsuits.  That the way to work in an organization is not to learn to manage the inevitable frictions that result from different sorts of people working together but to sue at the first hint that you have been dissed.  As an aside, I think this sort of litigiousness, both of employees and customers, is yet another reason employers are reluctant to hire low-skilled employees.  If as a business owner one is absolutely liable for any knuckle-headed thing your most junior employee might utter, no matter how clear you are in your policies and actions that such behavior is not tolerated, then how likely are you to hire a high-school dropout with no work experience?

Is it any surprise that most entrepreneurs are pursuing business models where they leverage revenues via technology and a relatively small, high-skill workforce?  Uber and Lyft at first seem to buck this trend, with their thousands of drivers.  But in fact they prove the rule.  Uber and Lyft are very very careful to define themselves and their service in a way that all those drivers don't work for them.  I would go so far to say that if Uber were forced to actually put all of those drivers on their payroll, and deal with they myriad of labor compliance issues, their model would fall apart

We cannot address the skill gap unless people have entry level, low-skill-tolerant jobs to take the first steps up the ladder of success.  If the government continues on its current course, it will become impossible to run a business that employs unskilled workers.  The value of the work performed will simply not justify the cost.  We may be concerned about income inequality today, but if we kill off the profitability of employing unskilled workers, then we are going to be left with a true two-class society -- those with high-skill jobs and those on government assistance --and few options for moving from one to the other.

My Contributions to Social Science

It occurred to me that I have reached important insights into human behavior that it would be negligent of me to withhold from the world, so here they are:

The Cheerleader Effect:  The cheerleader effect describes a human perception issue where pictures of any woman in a group are often considered more attractive than a picture of that woman alone (this may apply to men as well, but I have always heard it referred to women).  Apparently women exploit this effect by posting pictures on dating sites that show them in groups of their friends rather than alone.  Anyway, I have developed two corollaries:

  • Polo Shirt Effect:  Polo shirts in a store appear more desirable when grouped with other similar shirts in an array of colors than when presented alone.  This effect is strong enough to trump the paradox of choice, where offering consumers more choices can tend to flummox them and cause them to buy less.  I believe arrays of multi-hued polo shirts presented together increase purchases of these shirts.
  • Christmas Tree Effect:  We almost never buy ornaments for our tree.  95% are individually ugly, but meaningful, constructions by our kids over the years.  The rest are what remain after breakage of some commercial ornaments we bought 20 years ago on deep discount in the after-Christmas sales.  But a tree constructed of these ornaments is beautiful.  So ornaments look far better when massed on a tree than they look individually.

Towards A Theory of Pedestrian Behavior:  One of the things I enjoy is urban running -- ie running through the streets of cities.  When we travel, this is one of my favorite ways to see cities, and it also helps me run further because I do not get bored.  But trying to run through sometimes crowded pedestrian areas can be frustrating, since one is trying to move faster than the crowd and the crowd typically does not expect a runner coming up behind them on the sidewalk.  As a result of many such runs, I have developed two laws of pedestrian behavior:

  1. Groups of pedestrians will expand to fill the width of the space allotted.  If the width changes, groups of pedestrians will respond very quickly and expand their group spacing to fill that width.  While this behavior is almost certainly natural, it is almost impossible to distinguish a group walking naturally from one purposefully trying to block passage by a faster pedestrian.  Corollary:  Groups too small to fill the width of a passage or sidewalk will weave.
  2. Groups of pedestrians, everything else being equal, will choose to pause and congregate at the bottleneck in any sidewalk, thus constricting an already narrow passage.  DisneyWorld is a great location for spotting this behavior.  Corollary:  A disproportionate number of people will choose to stop right at the exit door from an jetway when exiting an aircraft.