Morning Fog

Ubiquitous In Business

Not too long ago, it seemed that General Motors' decision to excise more than a thousand of its dealerships was a sensible and essential step in its return to profitability.  But dealers complained, and got Congress to legislate a get-out-of-jail-free card -- the right to appeal the decision through arbitration.  Faced with the possibility of so many potentially expensive challenges, GM made the politically correct but profitably wrong decision, removing about half the affected dealers from the chopping block.

Once upon a time, it seemed that the U.S. Postal Service's effort to back away from universal service and to close many post offices seemed (along with other steps) to hold out the hope of resolving some of its fiscal problems.  But Congress was fearful of public reaction and so far has balked at approving this and other needed changes.  Faced with the likelihood that people would complain, Congress itself made the politically correct but fiscally irresponsible decision, so far keeping any post offices from being threatened by the chopping block.

There are two lessons here.  First, the fairly commonplace one that business decisions aren't -- or shouldn't be -- made based on a distorted concept of democracy.  People get fired, stores and factories get closed, and the wisest course usually is to let that happen, not reduce the decison to a vote by those affected - in the latter case, only one outcome can be expected, and economic inefficiencies are prolonged.

Second, that the whole idea of a business being everywhere at once is flawed.  The USPS has escaped the consequences of funding a post office in every tiny burg for political reasons.  By contrast, GM's story demonstrates that especially in this day and age, too many physical locations can become a burden, especially when they are kept afloat long after the customer base they were meant to serve has disappeared.  The store cutbacks effectuated over the past couple of years by such every-streetcorner chains as Starbucks and The Gap were thoroughly predictable and prove the same principle.  The U.S. business model leans toward the concept that growth can be maintained indefinitely.  It can't, so I suspect the cuts made so far by companies like GM and Starbucks won't be enough. 

AIG - More Bailing?

AIG, the company notorious for its leaky boat and the 300 million people in it bailing, has reported a loss for its last fiscal quarter.  Some people may be tempted to attribute that to overly generous bonuses, but I'm sure that's not the case.

Anyway, CEO Robert Benmosche professes optimism, and says that he's increasingly confident about the company's long-term future.  But the company's public filing left the door open:  they "may need additional support from the U.S. government."  Now, there's a company with a sense of humor!

Defending Toyota

Amid all the furor over Toyota recalls and appearances by the company's top executives at Congressional hearings, there is a subtext being heard here and there to the effect that the U.S. government, the media, and even ordinary drivers are unfairly "picking on" Toyota, exaggerating its difficulties.  The sub-subtext is that Congress is motivated to persecute poor little Toyota because the USG is a part owner of GM and Chrysler!

That's a pretty scurrilous accusation.  Toyota dealers have been riding high for at least three decades, with their cars flying off the lots, often at full list prices for the most popular models, so they've never experienced a down market. We can understand, but not forgive, their frustration and their paranoia in lashing out at Congress.  The latest entry in this war of words, however, is someone who should - quite certainly does - know better, namely Governor Haley Barbour of Mississippi 

The suggestion that the USG would pursue a vendetta against Toyota because of its ownership stake in GM is both offensive and unfounded.  Barbour asks if the government inquiry can be seen as unbiased; the Governor from Toyota might ask if his defense of the company can be seen as unbiased.  After all, as Barbour himself says, he pulled out many stops to get Toyota to build a plant in Mississippi.  The motive of his unmitigatedly self-serving promotional article is quite clear.  Barbour is sometimes mentioned as a Presidential candidate; this little foray into the world of opinion-making ought to pretty well dampen that kind of speculation.

Does Congress too often rush to public hearings whenever there are political points to be made?  Absolutely.  But from any reasonable perspective, the treatment Toyota is getting is perfectly normal, and is fully commensurate with the kinds of treatment other companies have received.  It's precisely because Toyota has so long been accepted as a paragon that the increasingly damaging chain of recall and cover-up has become such a hot news item.

More on Chinese Wind Turbines

Further on the wind turbines issue, Stephen Stromberg suggests the big issue is cost.  I know the Chinese supposedly produce everything in the world more cheaply than we do, and if we let them do so that's supposedly good for all (comparative advantage) but I purposely omitted that from my previous post because I think it's spurious.

I don't question that we probably can buy wind turbines from China for fewer bucks than from a domestic producer.  But there are many reasons those turbines are cheaper, and only a few have to do with cost of production.  The Chinese approach is different, i.e., "we will do what we need to do to sell these turbines, even sell at below cost, to establish a position in the market."  Second, of course, is the immense related issue of China's artificial currency valuation, an issue that we're pressuring them to resolve but which in the meantime makes their prices look better than they are.  

While I agree with Stromberg that we don't want a trade war, we DO want correction of unrealistic or artificial anomalies in international markets.  Otherwise, the whole theory of comparative advantage falls apart.  Comparative advantage may also need redefinition - it may be more than a matter of price, and perhaps ought to include some calculation of nonprice factors (jobs?) and even national security (can we afford to swap dependence on foreign oil for dependence on Chinese turbines?). 

Ultimately, the hope should be to spur a demand that can create a strong domestic industry, capable of competing on cost and quality with the Chinese product -- the better mousetrap, the 2G, if not the 4G, of wind turbine technology.  We can't expect to be there yet, but with some creative thinking it should be possible to get there.

Why Buy Wind Turbines In China?

ABC TV reported yesterday that a lot of the economic activity funded by new federal money for "green power" has actually gone to China and certain other foreign countries, creating new jobs there rather than in the U.S.  In particular, an upsurge in demand for wind turbines is being met in large part by non-U.S. producers.

What did surprise me was the way ABC reported the situation, especially in the video version featuring reporter Jonathan Karl and news anchor Diane Sawyer.  Because they basically stopped there, gnashing and wailing (and ol' Diane perpetually looks as if she's about to burst out crying) - gosh, new jobs in China, isn't that just awful?

I'm quite sure the report as given is true, but I'm not at all surprised by it.  The part ABC missed was that it's predictable, and that it probably couldn't have been prevented by anything in the legislation passed last year.  (Incidentally, legislation specifying "buy-American" is rare anyway because it runs against our international trade obligations.)  The real problem is long-term and multifaceted: 

For decades, economic policies (both private capital and to a lesser extent government)  have encouraged sending manufacturing jobs offshore so Americans could do cleaner work (like opening nail salons and flogging dubious investment instruments). 

A combination of forces has operated, also over decades, to shackle attempts to broaden our energy sources beyond fossil fuels. 

Finally, companies focused too narrowly on the short term have often been unwilling to invest in newer technologies if they could not see a very large and immediately developing market -- for example, that's why Applied Materials effectively sidetracked its solar energy division -- so I think we'll find that at the moment, there's nobody in the U.S. ready to produce turbines except on a relatively small scale.  (Those small U.S. producers, as was reported also in the ABC segment, are getting some orders, so some American workers are being hired or rehired.) 

So we've made our own bed, and we've lain in it so long it won't be easy to get out of it.  In the long term, federal support for the growth of this market may help American firms to jump in and compete for it.  Meanwhile... well, most people are familiar with the response notorious bank robber Willy Sutton gave when he was caught and some reporter asked why he robbed banks:  "Because that's where the money is."  Why buy wind turbines in China?  In large part, because that's where they build them.   

The Paradox Of Tax Expenditures

Yesterday, in a column about charitable giving,  Michael Gerson seemed horrified that efforts to reduce the tax deduction for charitable giving might be motivated by revenue considerations (rather than "fairness").  The revenue angle seemed self-evident to me, but Gerson's point is helpful in one respect -- it highlights the fact that a tax deduction, often popular with legislators who see it as a cost-free way of pandering to a constituency, does have a cost.  The opposite of "tax revenue" is "tax expenditure," and ultimately nearly all the deductions in our tax code are just inefficient and expensive spending to encourage a certain behavior.

My favorite example is the item on the income tax form that asks taxpayers if they want to have $3 donated to election campaign funding.    For years, the people who devised this scheme have puzzled over why more people don't accept the checkoff.  But I imagine most people think, as I did, that the accompanying disclaimer ("checking yes will not increase your taxes") is inherently false.  It may not add three dollars to the amount I pay this year, but in the long run, the money comes from somewhere - it's a hidden government expenditure.

Recently Len Burman, a professor of public administration and economics, wrote an excellent article about these tax expenditures.  It's well worth reading in its entirety but as a highlight, take this statement:  "A cap on tax expenditures would raise so much money because the expenditures are big and growing fast. The Office of Management and Budget counts 180 of them, totaling more than $1.1 trillion" [per year].  

Of course, as Burman points out, although there were some cuts in income tax deductions during the Reagan years, change is immensely difficult because every one of these special tax breaks has an army of special interests defending it now; they become entitlements, just as entrenched as social security or medicare.  Think of the uproar that would ensue (has ensued) when anyone mentions doing away with the mortgage interest credit, for example.  Yet this one, despite its popularity, also illustrates another fact about tax expenditures:  their existence can severely skew people's otherwise rational economic behavior.  In favoring breaks that assist people to invest in real estate, we shift funds into that sector, and contribute to such unwelcome phenomena as the recently-burst housing/loan bubble.

Burman speculates on what would happen if Pres. Obama's freeze/cap on [some categories of] discretionary spending were extended to "tax expenditures."  Does it sound like it's worth a look?  It does to me.

Monopoly Money: Ticketmaster

Have you bought tickets for an "event" lately?  A local music concert, a sports event, theater during your planned trip to New York, even a dogfight two blocks down from your house...you just can't avoid "Ticketmaster," the company that seems to have a lock on the tix for every entertainment in the country -- nor its exhorbitant add-on fees.

It turns out that Ticketmaster doesn't just seem to be everywhere, it is, with a recently reported 83% market share.   According to Steven Pearlstein in the Washington Post, a degree of competiton emerged about a year ago, but in short order, Ticketmaster and its rival LiveNation decided to merge; this in turn was challenged by antitrust authorities.  You can read all the details of the antitrust action in the article, but what comes through clearly to me in all of it is "monopoly." 

I don't begrudge a company a profit for services rendered, but on a typical order I made recently, Ticketmaster's fees and charges added 15% to the price of the event.  And that was before I declined the extra 4.75 they wanted just to e-mail the tickets (...wait, isn't e-mailing easier and cheaper than snail mail?  Shouldn't the e-mail be free, and the postally mailed tickets cost extra?)  Welcome to the world of monopoly pricing, prices that we unfortunately can't pay with Monopoly money.

The approval of the merger comes with some limitations aimed at benefitting consumers, but it will be interesting to see if anything really changes.  The basic fact is that - as in many other businesses in the past decade or so - you're being charged again for something that's already included.  Admission prices have always included the costs of printing, selling, tracking, and delivering the actual tickets.  It's part of the cost of doing business, so when you purchase admission to an event, you have a right to assume you don't get charged a separate fee for the receipt (which is effectively what a ticket is).

At the arena/theater/stadium box office, you don't; consumers can still normally avoid the add-on charges that way.  But if you don't want to drag yourself to the box office, or physically can't (e.g., buying tickets in advance for another city), you'll pay more.  Ticketmaster offers a degree of convenience that some people in some circumstances may value, but any website, not just Ticketmaster's, can offer the benefits of ordering across the country, or receiving your tickets quickly by e-mail.

The event venues have abdicated their responsibility to their patrons by not running their own ticket operations.  More should.  Too many of those that do will still charge you a fee for online orders (figuring, I guess, that if Ticketmaster can get away with it they can too).  That practice should cease.

Note: This piece is also being published on The Tin Lizard,  
because its subject matter is also relevant there.

Deficit Commission Is Decomissioned

Less than a month ago it seemed there was a glimmer of hope that a bipartisan effort in the Senate would produce a commission aimed at breaking the logjam that has prevented us from reining in growing deficits created by both parties.  The bipartisan commission was supposed to come up with a mixed package of steps to be taken, on which Congress would have to vote as a package -- no nitpicking this provision, or slipping in an exception for one Senator's corporate sugar daddy, or changing any of its recommendations. 

In principle, a commission shouldn't be necessary, and might even be considered anti-democratic.  It would take much of the management of our fiscal health out of the hands of elected officials whose job it really is.   Some will argue that's why the proposal was defeated in the Senate today.

In reality, though, it was because too many Senators still cling to their sense of entitlement to behave irresponsibly, their feeling that they and only they have the right to drive the government so far into debt that it can't escape, like a brontosaurus knee-deep in the La Brea Tar Pit.  

Another way of putting it is that people love government services (e.g. Medicare, or education for their kids) almost as much as they love their room-sized plasma TVs, but they will pay any price for the latter, and no price for the former.  The politician who leads the charge against that attitude knows he'll quickly become a casualty from friendly fire.

There are still some paths that might lead to a commission of some sort.  Sen. Baucus reportedly will offer a version that would allow our august legislators to alter the commission's recommendations, but that removes the one provision that might make it effective.  The President has vowed to create the commission by Executive Order and may do so, but its recommendations then won't have the force of law and would probably not be implemented. 

Our political system never seems to be able to solve a problem proactively; an intolerable situation must force itself on us by becoming a crisis we can't ignore.  Maybe when the dinosaur is neck-deep? 

Bonuses, Banks, And The Deficit

A dyed-in-the-wool Republican acquaintance of mine asked me the other day, after hearing something on the radio about the big bonuses some banks are planning to pay, whether I was "tired of Obama yet."   I answered no, what I was tired of was all of us having to keep paying the price of Republican, and specifically Dubya's, screwups.

The question, and my answer, together bring up two areas that I haven't had time to discuss directly until now:  The bank bonuses, and the tendency to blame the current administration for the shortcomings of the last one.  Fortunately, in the meantime, other commentators have said almost exactly what I would have said.

On the question of economic recovery, David Axelrod's opinion piece ("What Carl Rove Got Wrong on the U.S. Deficit") is a response to an earlier published comment by Carl Rove, who whined about the growing U.S. deficit.  Unfortunately, Rove completely ignored the fact that most of the deficit we have right now resulted from an irresponsible and impractical combination of heavy spending and tax reductions during the Bush administration.  Axelrod very properly takes him to task for that.

Of course, Rove and his GOP loyalists like to say that the Obama team ought to stop complaining about Bush and take ownership of the mess he (Bush) left.  Rove is like a New Orleans used car salesman whose entire inventory was flooded by Hurricane Katrina; of course he's quite eager to claim his cars weren't damaged, and to try to transfer ownership of them.  Nevertheless, I agree that any sitting Adminstration must step up and take charge.  Obama's done that, and it rankles with the GOP.

Certainly, it's now the responsibility of Obama and the Democrats to right the boat again; but let's remember the boat not only capsized, but had to be pulled up from the ocean floor before repairs could be undertaken.  Hence it's the responsibility of former Bush functionaries like Rove, and of American voters, to keep in mind exactly why the deficit is continuing to grow (not to mention other economic problems that continue to plague us).  As for the deficit itself, my memory isn't so short that I can't remember it was Clinton who last managed to eliminate the deficit, and Bush who destroyed that in a couple of short years.  So I'm not overly impressed when Republicans start getting all antsier-than-thou about the deficit as they are now doing. 

Regarding bank bonuses:  This is less a partisan issue (because both parties, as well as the media and the public, are in an uproar over it) than a matter of keeping our eye on the ball.   I am in full agreement with Steven Pearlstein that trying to penalize Wall Street is hypocritical .  I can't get enraged about the bonuses banks are paying their people.   Financial institutions have generally failed to consider the public relations aspects of some of their actions, and that's regrettable maybe, but it's nothing new.  It's what banks do.  Attempting to punish them for instinctive behavior is like beating your dog because it peed on the floor.  

Further, the idea of fines or taxes is poppycock; there is really no way to prevent those from coming right back on the consumer in the form of increased fees.   We have to recall that we bailed out these major financial institutions not just to help them (not even to help them, really), but to shore up the stability of our entire financial system, to the benefit of every man, woman, and child in the country.  That's what government is for; the return on the taxpayers' "investment" is huge, but it's largely incalculable and invisible.  (We would have a better idea of it if we had let the banks collapse, and all of us had lost our savings, our pensions, our 401Ks and IRAs -- but let's not dwell on that fearsome possibility). 

The bailout accomplished pretty much what it was designed to do.  Our focus now should be, not on bonuses, but on building a stronger system of controls that might (I emphasize might) prevent a similar meltdown in future. 

Mixed Signals Are Good News

Was I imagining things?  I thought I had been reading about job-satisfaction surveys that suggested a surprisingly high proportion of people were pretty pleased with their jobs despite the generally poor economic outlook.   Then I read another, suggesting that a majority are dissatisfied.  No, as it turns out, I'm not addled (well, not in this particular instance anyway) -- it's just that on any subject, different surveys, relying on different methods, different questions, and a different pool of respondents, can often get surprisingly different results.

The situation is similar with respect to economic indicators, as some numbers and experts suggest the economy is approaching rebound, while others point toward further deterioration.  Again, it seems to depend on what factors you choose to look at.  A Washington Post item , for example, zeroes in on the conflicting signals being given right now by statistics on pending home sales (labeled a negative indicator) versus new orders for manufactured goods (reported as a positive). 

Even the real meaning of these indicators is subject to interpretation, however.  For example, the Post's chart on pending home sales does indicate that sales for November were down compared to October - but I wish they'd provided a longer look back at these statistics.  True, the November 2009 new-home-purchase index of 96 looks low compared to October 2009 (at 115), but it's still very good compared to last November (82).  It seems natural to me that in most of the country, home purchases tend to drop seasonally.  In 2009 as in 1999 or 2005, there just tend to be fewer buyers out there looking as fall gives way to winter.  Further, why be surprised that new-contract signings ebb as special programs for first-time buyers phase out?  So, is this statistic truly bad news, or is it really good news?  Most likely, somewhere in between.

I think the one thing we can conclude in times like these is that mixed signals, whether relating to people's happiness, job satisfaction, or the state of the economy, are bound to develop.  They reflect, perhaps, that not everything is changing at the same rate, that some sectors will recover more quickly than others, or that some may disappear or redefine themselves entirely.  Yes, when everyone is uniformly glum, or conversely when no one can see the slightest cloud ahead in a blue sky of prosperity, that's when we should look for the exits.  But currently, views are mixed.  From my perspective, that's positive.