Morning Fog

Hostess No Longer With The Mostest

Hostess Brands announced last week it would file for bankruptcy (the second time in about a decade).  It seems almost a classic case of a failing company, with a little blame to go around for everyone:

• Exogenous variables, such as the rising costs of basic commodity ingredients.  (Apparently Hostess uses actual flour and sugar, though if you've ever eaten these products, you might be forgiven for not realizing that.)
• Labor:  It appears Hostess's unions may have insisted on sticking to outmoded work practices -- like requiring separate delivery systems for bread and cakes?  -- C'mon!
• Changing markets:  There has been a huge revolution in eating habits in the U.S.  Sure, not everyone has turned the corner to organic vegetables and whole grains yet, but the trend is evident, and Hostess failed to keep up with their market.  They are the General Motors of the baked goods industry.

Management, however, is mainly at fault.  It's management's job to see long term trends, recognize shifts in input costs, shift the product line to meet changing demand, work with  persuade unions to adapt, and bring everything together into a smooth-running and profitable whole.  Hostess's management, having already been through bankruptcy once, seems to have failed twice to accomplish these things.

If we lionize the "private sector" or "business" for its efficiency, responsiveness, and ability to solve problems; and if we go so far as to propose it as a model for government, we have to be realistic about recognizing the holes in the myth.  Businesses can fail; managers can be inept; wrong decisions can be made, even right decisions may not pan out because of unpredictable changes in the economic environment; and hey, government can actually be useful in saving businesses from themselves.  But Hostess isn't GM; it's unlikely we'll see Uncle Sam riding to the rescue here. 

If you happen to be a fan of WonderBread or Twinkies, never fear, the company plans to continue operating during its restructuring, so you'll still be able to head down to the Seven-Eleven or grocery to pick up a few packages.  If you don't mind my asking, what kind of car are you driving for that trip?

Consolidating Government

President Obama has proposed consolidation of a number of government agencies that deal with business and trade.   Certainly there is overlap among these agencies in some cases, and gaps where things might fall between stools in other, so melding all the USG's commercial and business functions into one unified agency might have some functional appeal.   Whether it would truly reduce costs or not is a different question; unless existing programs are scrapped, I doubt the costs of operating them would decline much over the long term.

It's pretty clear the proposal for change is motivated more by politics than by concern for efficiency in government.  And in that sense, it's a clever move.   The GOP and a good part of its core constitutency are all about efficiency in government and support for business.  It should be a no-brainer for them to support the Obama idea.  But I suspect they'll kvetch about the details of the reorganization, decry the possible loss of programs, and complain, paradoxically, about downsizing USG support for businesses. 

The likelihood is that this proposal will become another hostage.  The GOP will refuse to consider an idea they would usually applaud, because to approve it might strengthen Obama, rather than contribute to defeating him.  Their dilemma, of course, is that rejection will only reinforce the party's image as the recalcitrant, doctrinaire Party Of No. 

More Jobs

In the ongoing race among various industries to kill evil regulations by branding them as job-killers, and to define themselves as the holy grail of job creators, the oil and gas companies are now making the cell phone industry - which recently was claiming that if they just get everything they want from Uncle Sam, they could create up to 96,000 jobs -- look like pikers by claiming they (the fossil fuel guys) will (likewise if they get whatever they want from government) create "up to" 600,000 jobs just in oil shale alone.

Believe it if you want.  I'd just note that if only one job were created, that would, I suppose, justify the claim of "up to 600,000."   

Postal Service Woes

The reports of USPS insolvency grow louder and more insistent.  Now, the venerable old "post office" has announced plans to drastically cut back services, including making delivery slower and dropping Saturday delivery.

I don't doubt that the USPS needs to continue to make cuts, improve its efficiency, and think of ways to enhance its income from services.  Nor do I agree with those who say "snail mail" is completely dead and isn't needed any more.  A few random observations, though, about this latest "plan:"

It seems counterintuitive to slow down delivery.  One-day delivery has become the norm within major metropolitan areas; it's unique (unless you count the hugely expensive alternatives).   Many businesses have come to depend on it, as have many households for their everyday letter mail.  Does it really make sense to make cuts in a part of the operation that is really a competitive advantage?  I don't think so; but prices could be raised.

Speaking of raising prices, one analysis I heard (don't recall now where) suggested that increasing the rate for a first-class letter to just 62 cents would fully cover the USPS's current deficits.  If that is so, why not do it?  To some, 62 cents may sound like a lot; yet I have lived in much smaller, more compact countries where delivery times and distances were far less than in the U.S., and a typical letter was far more than $ 0.62.  In Germany, for example, the cost of a letter was nearly a dollar -  15 years ago!  Why is USPS fooling around with a 1-cent increase that we've been promised for next spring, when clearly it needs more?

The postal gurus also want to cut a delivery day out of the weekly schedule.  Clearly that could save some money, but again, it seems counterintuitive to propose that Saturday be dropped.   I've always suggested it should be a day in mid-week, like Wednesday.  Otherwise, we have a two-day hiatus in delivery that can really snarl things up.  If we add in the slowed-down delivery schedule (above), and all those Monday holidays, a first-class letter mailed on a Friday might not be delivered across town until Wednesday or even Thursday.   We should at least insist that if there won't be delivery on Saturdays, there would be delivery on those Monday holidays.  If we have a three-day gap, we may as well not have service at all.

Technically, the USPS can make its own decisions on these things; the Postal Regulatory Commission gets an advisory opinion, but it's non-binding.  This helps explain the seemingly counterintuitive suggestions for cutbacks.  Personally, I would guess we're seeing strategy, rather than purely objective business decisions, in play.  Cuts are proposed for the most sensitive areas, in hopes of raising objections that will skew the decision-making progress and perhaps drive things toward a different outcome.  It's a game the military has played for ages, and although the USPS doesn't get USG funding, it might nevertheless hope for some special Congressional dispensation to proceed differently, rather than cut popular services.

AT&T Wedding To T-Mobile Postponed

(Note: This item is cross-posted from The Tin Lizard)

How do I love it that the AT&T/T-Mobile merger seems doomed to disapproval?  Let me count the ways:

1.  The public interest will be served.  No sane and disinterested observer could look at this plan and harbor any doubt that it would constitute a serious reduction of competition.  AT&T is/was hoping to silence an annoying competitor by buying it, and not coincidentally as I understand, to acquire and monopolize spectrum.

2.  Consumers will be served.  It wasn't just the huge share of the cell-service market that the new entity would have had (effectively split only with its equally giant competitor, Verizon).  Among today's carriers, T-Mobile has been the innovator in cell phone services, offering new arrangements and lower prices that forced the "big guys" to sit up and take notice.  AT&T, by contrast, was the carrier that provided inferior services at high prices.  There is no doubt which of those business models would have had the upper hand in the planned merged company.    

3.  AT&T's arrogance may suffer a minor blow.  The company was insufferably cocky that its planned deal would go through, advertising as if it were a done deal, and chatting freely with business columnists about how it was certain of approval because of its lobbying influence.

4.  Lying was not rewarded.  Those ads the company was running were full of made-up statistics about creating 96,000 new jobs, a claim that has been largely debunked.  Most people recognize, I think, that mergers seldom if ever result in the creation of jobs; mass firings are far more likely.  AT&T also puffed up its chest with patriotic pride, claiming it would repatriate 5,000 offshore jobs because the U.S. is a great place to do business.  That wouldn't be a bad thing, and sounds as if it might have been doable; but there was that nagging question - if the company believed so strongly in the U.S. as a business environment, why were those jobs offshored in the first place?

All in all, the whole undertaking of the merger was hypocritical.  No one but AT&T execs need lament its failure (if indeed that is the final outcome).   If the merger doesn't go through, I would not be at all surprised to find that AT&T was out of the wirelesss business within a couple of years.   That might (or might not) reduce the number of players in the field, but at least it would have come about as the result of real competition.  (Ah, competition, a lass beloved and coveted by CEOs when seen from afar, yet unwelcome in their own beds.)

Getting The Small-Business Myth Out Of Bed

Isn't the word "debunk" great?   First, it's one of those that has no "positive" form, like "unkempt."  So if you debunk something you can never rebunk it.  And how did it get bunked in the first place?

Second, it sounds a lot like what it means:  throwing something/someone out of a comfy bed.  Sometimes ideas take root and form a body of knowledge that everyone "knows," yet which is false.  That's the origin of "myth," something that in time grows larger than life through the overemphasis and exaggeration of certain perceived characteristics in which there may be a kernel of truth.   For example, the strength of Atlas or the patience of Job. 

Every society has its own myths. The U.S. is no exception.  We tend to share a mental image of our farmers, for example, as self-sufficient families tilling the soil of a few dozen acres of land they own.  This was true once but it's been untrue, in the main, for at least two generations, as the share of farming done by agrobusiness concerns has grown by leaps and bounds.  Still, we cling to the idea of the small family farmer, which makes realistic adjustment of our agricultural policies very difficult.

Another myth from which we suffer in making public policy is that "small business" is the engine of our national economic prosperity.   We hear "small business" and, egged on by our politicians who know that giant corporations don't evoke the same warm, fuzzy feelings that "family businesses" do, we think of the mom-and-pop store.  But those aren't the businesses that statisticians are referring to when we're told, for example, that "small business" creates the great preponderance of jobs in the U.S.  That statistic is based on inclusion of businesses whose annual sales may be in the multimillions. 

Occasionally, economists attempt to correct this false impression.   A recent example, and one well worth reading, is James Surowiecki's "Big Is Beautiful," in The New Yorker of October 31.  Among Surowiecki's telling points:  (1) Small businesses generally are less productive than those giant corporations with their economies of scale.  (2)  If "small business" (however defined) truly creates many jobs, it also destroys most of them because a huge percentage of small businesses don't survive their first year; and those that do often aren't really interested in becoming supercompanies, they're just looking for a basic income for their family and an independent way of life.

Nothing wrong with that.  As a matter of public policy, we may indeed want to facilitate small businesses if we believe it is desirable that this avenue to independence be open and accessible.  We should not, however, base planning for our economic recovery and growth on false assumptions about the role of small business in our economy.  The small business myth has found a comfortable warm bed at the heart of our political thinking about economic matters; it's time for it to be debunked.

Plenty Of Targets For Occupy Wrath

Alec MacGillis's essay ("Occupy what ...") in Sunday's Washington Post  was clever and thought-provoking.  Indeed there are many places legitimately to lay blame for the current state of our affairs ... some that might not occur to us immediately, or that may even seem counterintuitive.  I dare say there are others that could be added to the list too.

I particularly like "Occupy Tysons Corner," for the movement toward contracting out government functions has always been a foolish indulgence of small minds who thought that it didn't matter what you were paying to get a job done so long as it was off budget. It also debunks the myth that private enterprise is always cheaper and more efficient.  (Or does it perhaps "bunk" the reality that the complexity of many government jobs is often considerably higher than supposedly equivalent jobs in the private sector?  If not, why do contractors have to pay double the government rate to find employees to do them?) 

As for adding to this list, how about "Occupy the 99 Percent."?   The entire housing bubble could only have occurred in a market full of people ignoring reality, deceiving themselves about values, and far too focused on get-rich-quick schemes.

Nothing is quite as simple as it seems.  In a complex, interconnected global economy, no single factor or person can be identified as the only cause of a trend or phenomenon.   

The Economy - Can We Aspire To Be Greece?

As Thanksgiving draws nigh, pundits have begun to look at the deficit "supercommittee" set up back in August as part of the deal that allowed us to increase the national debt ceiling.  It's been very quiet, for the most part.  Most reports suggest that the group remains split, with neither side budging from its maximalist positions, and no agreement in sight.  The latest to express doubt is former White House Chief of Staff Erskine Bowles, who yesterday offered his own plan before the committee, out of concern, he said, that they might otherwise let the country down.

No surprise there.  The commission was engineered to "fail the country," as Bowles puts it, as soon as each party appointed its most stalwart, uncompromising partisans to be its members, eschewing those (such as Bowles) who had already worked on addressing the issues.  As I said then (along with many others, I'm sure): 

"...all our currently dysfunctional political system has to do is create a committee, agree on a huge menu of very difficult and controversial steps, get that done before Thanksgiving, and fashion and pass legislation to implement the cuts recommended.  Given what we've seen so far, does anyone think that's a realistic expectation?"

Is it possible, as some members of the Commission report, that progress is being made behind closed doors?  Let's hope so.  Otherwise, we're back where we started (or worse), with foreign governments and international markets seeing reason to doubt that we are competent to resolve our own problems.   With the example of Greece very fresh in people's minds at the moment, parallels will be drawn.

 

Lake Wobegon And Corporate Genius

I had never heard of anything called the "Lake Wobegon Effect," but the article so entitled was a fascinating eye-opener.  Its theme is twofold:  That corporate CEOs' salaries have skyrocketed in the past 15 years because every year, each corporation tries to outdo its rivals to give its own CEO the highest salary in the industry; and that there is little relationship between the CEO's results and his reward.  As a result, salaries jawbone upward, uncontrolled by any realistic measure, as Company A gives its top man 20 mil, and the next month, Company B feels it has to give its guy 21 mil, just to keep him hanging around (and to give Company B boasting rights - until Company C comes along...)  Taken together, these trends are what Whoriskey calls the "Lake Wobegon effect."

Corporate boards do this, they say, because they believe it's the way to hold on to the "best" execs; and even if the company had a terrible year, the CEO is likely to get a boost for that reason, and because the typical board is stacked with the CEO's wimpy personal buddies, who couldn't care less about stockholder interests.

This explains a lot.  It clarifies why, to the puzzlement of the average onlooker, a chief exec who failed to achieve the goals he was hired for, or who saw the company's stock decline by 50% during his last year, might nevertheless get a big raise.  

To an extent, yes, it's up to the corporation to pay its people as it sees fit.  The irony is that these people who are looked up to by some as paragons of effective, tough, results-oriented management don't seem to be able to see the dysfunction in the way things are working.  What would these guys (and the very rare gal in their midst) say if the same "system" applied in government?    How can they justify rewarding a non-performing exec for achieving nothing (or even taking things in the wrong direction)?  What are they thinking when they are concerned about keeping "talent" that hasn't demonstrated any accomplishment? 

One clear need is for some rules to prevent too much coziness between execs and the Boards who are supposed to oversee them in the stockholders' interest.   A government regulation might do the trick; but remember, these are the fellows who are so efficient and smart; regulation would just get in the way of their self-regulating drive toward efficiency.

It's a good channel for the "Occupy Wall Street" movement to explore.  And a good reason for them to be in the streets. 

 

Government As A Business - The Lesson of HP

Today, many novice politicians seem to be arguing that government should be operated like a business.  There are many reasons why that's an unapt analogy. 

One key one is that (thanks to the actions of those same politicians) government has no "cushion" of profits on which to base the quick shifting of assets from one priority to another.  Not only is government kept on a shoestring, but politicians have built in a spending incentive:  If a government agency does not spend, in one year, the amounts allocated to it in its budget, those funds return to the Treasury.  An agency that does a good cost-cutting job, or deploys a new technology that brings down costs, can't benefit from such performance by carrying its savings into the next year.  In business, this would be tantamount to requiring that any profits accumulated during the fiscal year and not expended by year-end must (repeat, must) be disbursed to the stockholders as dividends.  Would corporate execs squeal loudly at such a draconian restriction? 

Current political battles over government funding, from just keeping the government running to specific concerns like stable funding for essential agencies like the FAA and FEMA, illustrate how this all plays out to public detriment.  The legislated taboo on forward planning serves the public poorly.

Related to this point:  Yesterday's news of yet another sudden lurch in the fortunes of Hewlett Packard (HP), offers yet another object lesson in the differences between business and government.  From Packard to Hewlett-Packard, from Borders to Goldman Sachs, businesses come and go - in or out of existence, or to and from debilitating crises - with a suddenness that has become especially familiar to us in the current Republican version of a "healthy" economy.  But it begs the question:  Do we really want the nation's government to be that unstable?  What would be the effect on Americans, and on those stalwart, risk-averse businesses, if the MSN headline of the day was "U.S. government in default"? 

Possibly HP's new CEO Meg Whitman will take the company toward spinning off some unprofitable segments of the business.  I suppose "USGCO" could always sell off a cabinet department or agency:  I imagine the FDA's being outsourced on contract to China, and the Defense Department sold to somebody with enough petrodollars to support its huge costs, like Iran.