Soylent Green is Made of… Profit!

October 12, 2011

“People Over Profit!”

I keep hearing and seeing this phrase and can’t help but think of it as a caricature of college-stoner, Marxist-lite political economy.  It’s understandable that it would have gained traction among liberals of a certain streak: it’s pleasant, alliterative, and fits nicely on a bumper sticker.  But I do hate to see tens of millions of dollars of our nation’s collective (and publicly-subsidized) liberal arts education fail in the face of a catchy slogan.  Aren’t those of us with training in the humanities supposed to be, you know, enriching society with our critical thinking?  Wasn’t this sort of why those classes exploring the intersections of Japanese manga, the Cold War, and post-queer neo-colonial theory were worth spending several grand on, even though they didn’t exactly have a “practical” application?

How, exactly, does one put People over Profit?  Well, a good first question is: to whom is this exhortation addressed?

Any business consists of Owners and Employees.  Owners are the people whose capital is deployed (and risked) in conducting the affairs of the business, and who ‘control’ the business in the sense that they have certain contractual rights that are usually specified in the legal documents that govern the form of the business.  Employees are the people who actually do the work of the business from day to day, and who ‘control’ the business in the sense that they perform certain functions that interface with customers, suppliers, or the like.  It’s possible to be both an Owner and an Employee, say, if you’re a partner in a professional practice, or a shareholder of the corporation for which you work.

However, for modern businesses of sufficiently large size and scale – let’s call them, for the sake of argument, Evil Global Corporations – it’s unusual for an Employee individually (or all Employees collectively) to own enough of such a business to be an Owner in the sense that I describe it above.  The market value of the equity of Exxon Mobil Corporation – your typical EGC if ever there were one – is approximately $370 billion as of the moment I write this.  If you owned more than a vanishingly small percentage of this business, for how long would you choose to be an Employee instead of a Happy Retiree?

(As an aside, the distinction between Owners and Employees in the EGC gives rise to a whole host of complications that fall under the heading of “Principal-Agent Problems” — i.e., how do Owners who are not Employees get Employees who are not Owners to act in the Owners’ interests?  This subject is far deeper than I intend to cover here.)

So, to my original question: is the exhortation to put “People Over Profit” directed at Employees, Owners, or both?

It would be pretty fatuous to make this demand of Employees.  Imagine marching into a restaurant and demanding that your waiter put People Over Profit by serving you dinner for free.  Or staging a sit-in at Wal-Mart (another EGC!) until the Assistant District Sales Manager, the highest-ranking Employee you could find, gives you a discount on some clothing you really need.  It turns out that we tend to use words like “illegal” and “embezzlement” when Employees put People Over Profits.  So that can’t be the request.

What about Employees who have really fancy titles, like Chief Executive Officer, and who happen to be personally Rich?  Well, why does that change the analysis?  Should they be allowed, even expected, to give away the Owners’ property?  Perhaps if to do so were actually in the best interests of the Owners – but, in that case, isn’t it clear that the demand should be made directly of the Owners?

By the way, it doesn’t help if the Employee really passionately believes it would be in the best interest of the Owners to give away their property, but the Owners aren’t enlightened or compassionate enough to agree.  This is left as an exercise for the Reader.

So who are the Owners of the EGCs and their smaller but perhaps equally evil counterparts?  For publicly-traded corporations, it’s relatively easy to obtain a first-order answer.  Here’s an example for Bank of America Corporation, today’s poster child for corporate treachery.  The first-order answer for Bank of America, like most EGCs, is: “a whole bunch of financial institutions on behalf of their clients, and investment vehicles like mutual funds, exchange-traded funds, and hedge funds.”  In aggregate, the answer looks something like this.  But this first-order answer isn’t helpful.  A mutual fund, for instance, is itself owned by many Institutions and Individuals.  And who are these Institutions?  They may be endowments, foundations, pension funds.  And the Individuals?  Maybe the Rich… but also maybe (hopefully!) middle-class folks through their 401(k)s.

Point is: the Owners of EGCs come in all sorts of shapes and sizes, and serve a variety of constituencies – some of which sound Nice, like Retired Teachers; and some of which sound Bad, like Rich Financiers.  In this sense, it’s also fatuous to demand that Owners of EGCs put “People Over Profit” because, well… aren’t there people at the end of this chain, too?

To the extent that people are relying on the stock market to help them save for retirement, or were able to help afford college thanks to a university’s endowment, they are also just shouting at themselves.  But I suppose we all contain multitudes.

Fortunately, we have a more coherent framework at our disposal for expressing our desire that stuff be taken from some people and given to other people, whether the former party likes it or not – we call it Taxation.

“Tax Corporations!” is a marginally more coherent rallying cry than “People Over Profit” – but since Corporations are owned by People, we can reduce this even further:

“Tax Some People More Than They Are Currently Being Taxed!”

Not exactly the world’s most novel agenda for social justice, is it?  But at least it’s a prescription that can be coherently debated.

Try To Remember

September 30, 2011

It has been quite a while since my last update, Gentle Readers.  August and September decided to throw just a few curveballs at the financial markets, so my capacity for what I call ‘discretionary thought’ has been rather limited.

I’d imagine that the market’s daily gyrations mean little to people outside the investment profession – as, generally, they should.  As I’ve mentioned before, it partially amuses and partially saddens me to hear the portentous tones in which talking heads typically describe a daily rise or fall in the Dow of an essentially insignificant magnitude.  A claim such as: “the market was down ~0.5% today on renewed economic concerns” has about the same information content as: “Candidate X leads Candidate Y in polls by 2%.”  Political pundits typically have the decency to note the margin of error of polls that they cite, although they may not stop from drawing conclusions that are unjustifiable in light of it.  Financial pundits, by contrast, rarely contextualize the day’s movements in the market.  There isn’t always an explanation for why a market index fluctuates by a modest degree.  Sometimes there are just more buyers than sellers, and sometimes there are more sellers than buyers.  That’s it.

How would I better contextualize daily changes in the stock market?  Thanks to the wonders of the Bloomberg Professional data service, it takes me approximately three seconds to pull the daily percentage change in the S&P 500 for the last thirty years.  The average daily change, between 1/2/1981 and 9/30/2011, is 0.03%.  Three basis points!  The standard deviation, however, is 1.15%.  Let’s put to one side the question of whether or not daily stock market returns follow a statistically normal distribution and assume that this is a fair approximation, except for the issue of “fat tails” (i.e., events that in fact happen more frequently than “never in a million years,” notwithstanding the claims of statistics).  The implication is that we should generally be unmoved by daily changes of +/- 1%, and should throw pies at anyone who claims that these fluctuations are necessarily driven by some Big Economic Theme.

But when market indices fluctuate by several percentage points each day, it’s a bit more momentous.  It also used to be relatively rare.  Let’s define as “noteworthy” a daily change of +/- 2.3% in the S&P 500 index.  This represents about two standard deviations of difference from the average.  We’d expect to see moves of this magnitude only about 5% of the time, i.e., relatively infrequently.  In my analysis of 7,760 trading days, there are movements of this magnitude on 360 of them (4.6%).  So it seems reasonable to pay attention to them.

What’s remarkable to me is how these 360 “noteworthy” days are distributed over time.  We might naively assume that, over 30 years, there would be about 12 per year, or one per month.  But the market doesn’t work that way – volatility tends to beget volatility.  These noteworthy days are in fact quite concentrated.  There were 29 of them in 1987, but only three in total during the calmer years of 1992-1996.  There was another spike in 1998, related to the Russian debt crisis, and another in 2000-2002 related to the dot-com boom and bust.  There were zero noteworthy days from 2004-2006.  Ah, that happy, golden, bygone era.

Consider this: in 2008, there were 63 noteworthy days, of which 46 occurred in the final four months of the year.  This is not news to anyone who lived through those dark days, but it is staggering when considered in historical context of what ‘ordinary’ volatility should look like.

The market remains at an elevated level of volatility, having notched 17 noteworthy days through the end of the third quarter of this year.  The S&P 500 has lost just over 12% of its value since the end of July, which will certainly shock some people when they see their next 401(k) statement balance.

I tend to think that Wall Street, like a college extra-curricular group, has an institutional memory of no more than four years, so I suspect we’re approaching a phase where professional investors will become to some degree desensitized to historically ‘extraordinary’ volatility.  I don’t have a good guess as to what the implications will be.

Hold on to your hats!

Ten Morsels in Sixty Minutes

August 1, 2011

Some of my Loyal Readers (hi, Mom and Dad!) have expressed interest in hearing my take on all the many ways in which our government and economy are dysfunctional, but they have been too respectful of my hectic life to really insist on it (thanks).  Herewith, some observations and conjectures, most of which have probably been debated in greater factual detail elsewhere, and which reflect my views as of this point in time.  Unlike politicians, I reserve the right to change my mind if the facts, or my understanding of them, change!

  1. Public finance operates on totally counter-intuitive principles.  Responsible households and companies try to forecast what their revenues will look like and attempt to calibrate their expenses accordingly.  Sometimes expenses will outpace revenues for short-term reasons (e.g., the car breaks down) or long-term reasons (e.g., Junior goes to college increase his lifetime earnings potential).  In such cases, borrowing that is matched in tenor to the underlying reason, and for which there is a clear path to payback, may be advisable.  But, ultimately, the “top line” should drive the thinking.  Government, particularly in the last decade, evidently prefers to start with the level of expenditures it wants (i.e., generally, “more”) and then hope that the economy will grow enough to bring revenue into balance (and/or hope that it will be the other team that gets stuck with the task of raising revenues).  This strikes me as profoundly silly and probably intractable.
  2. There should be more outrage that the government’s fall-back option is always to cut discretionary spending.  I’d wager that some of the best rates of “return on investment” from government dollars come from spending under this rubric.  I’m pretty comfortable asserting that, compared to some schmancy new weapons program, it would be significantly more beneficial to America, for example, to triple the budget of the FDA and the US Patent Office to eliminate bureaucratic bottlenecks to innovation and improve the capacity to monitor, say, safety and effectiveness in the one case, and true novelty to weed out patent trolling (a cost to the economy) in the other.
  3. There is a corollary to #2 that I’m going to put in as stark and non-PC terms as possible just to make the point.  Instead of making investments that will increase America’s productive capacity (and future ability to generate revenue!) we are collectively committing the public purse to keeping old people alive as long as humanly possible.  This is a choice that we always want to make for our own family, but which in aggregate constitutes an extremely unproductive way to allocate resources.
  4. Here is another corollary to #2, also framed as starkly as possible: this is basically the Boomers’ own fault (albeit indirectly).  The tax revenues generated from their peak years of productivity should have given our government an amazing war chest with which to pay for their future care.  Instead, they (and their parents) elected politicians who chose to pour this money into the wealth-destroying enterprises of war and lots of healthcare for their parents.  Privately, many who could have saved during their peak earning years to fund healthcare in old age also failed to do so, because they generally, in aggregate, chose current consumption.  Unfortunately, the consequences of these decisions (i.e., what’s happening now) are likely to fall in a regressive manner, when they could have been funded progressively (via taxes already assessed and spent).
  5. An interesting dynamic related to #3 is that the current cohort of retirees and near-retirees is exceptionally rich in benefits-terms, whatever their wealth looks like otherwise.  Put another way, the government’s contingent liabilities to Medicaid Medicare [thanks Alison 😉 ] are, by accounting logic, assets to individuals that may or may not be monetized.  (When monetized, of course, the cash actually goes to healthcare providers – but the right to receive services is an asset of the individual.)  I wonder whether, if you offered the average 70 year-old a choice between (a) Medicaid Medicare status quo and (b) a much more limited entitlement and $100k for their grandkids, lots of them wouldn’t take (b).  Right now we give the elderly no incentive to consume less healthcare, even if they might derive significantly greater joy and happiness from other uses of the funds government was willing to spend on them anyway.
  6. I actually think my conclusion in #5 is the general case of what’s wrong with healthcare in America.  It’s impossible to rein in costs when a large cohort of consumers (i.e., the well-insured) are price insensitive.  In the abstract, everyone wants above-average healthcare at below-average cost.  Paging Dr. Wobegon!
  7. Politicians like bashing the wealthy who have done extraordinarily well but apparently have not incurred their fair share of society’s burdens.  This reasoning ignores the bug (or feature, depending on your persuasion) that we tax income, not wealth.  Once a person has made her fortune, we can perhaps squeeze out more at the margins, but the wealth horse has basically left the barn.  The estate tax should be the principal remedy for this.  Progressives should be mortally ashamed that they’ve lost this debate by allowing it to be anchored around how many small business owners will be “punished for dying” because their estate is worth some middling number of millions of dollars.  This is ludicrous.  Set the cap at $50 million, or some arbitrary number that doesn’t have a ‘B’ in it.  Confiscatory policies are un-American, yes.  But so is the entrenchment of wealth and privilege that is the destination this freight train is heading to, anyway.
  8. I’m more inclined than ever to think that political parties are The Problem in terms of why government can’t seem to act in the national interest instead of in political interests (and they clearly doth protest too much to the contrary).  I still don’t know how to fix this.  Attacking the gerrymandering of Congressional districts seems absolutely like one good way to start, although I am not holding my breath that this will be a Congressional priority…
  9. And, by the way, there is a lot that is profoundly screwed up and not at all in our national interest about how we as a society use prisons.  Besides the obvious dollar costs, I would love to see a thoughtful estimate of how much human capital we have essentially destroyed by imposing prison sentences for minor offenses, particularly those solely related to drug possession.  This may seem like a random point to make here, but the connection is that I think cornerstones of our prison system represent a massive nationwide misallocation of resources that we just can’t afford.
  10. That all said, I actually think a reasonable proprtion of politicians understand all of the above, but just don’t have the courage or influence to do anything about them.  I hope this dynamic will change, but I am not optimistic.

I’d welcome any comments on the above – as I pointed out, these views are evolving.

To Waterboard a Metaphor

July 29, 2011

It’s fun to use a credit card because you get your dinner or haircut or iPod now, but your bill doesn’t come until later.  Credit cards are accepted almost everywhere.  You can put most of your monthly expenses like utility bills on them and even make arrangements to be billed automatically.  But the best part is that you can even choose not to pay your bill in full!  Sure, it costs something to carry a balance on your credit card, but it’s so much less fun to pay bills than it is to buy things.

The best way to maximize your ratio of fun to not-fun is therefore to pay the minimum on your credit card every month.  Eventually, though, you hit your credit limit and the fun threatens to stop.  At that point, there are a few options.  One option is just to keep using another credit card, but let’s assume that’s not possible.  The next option is to pay down some of the balance (or go back to making purchases in cash), but that isn’t fun, because we’ve already established that it isn’t fun to pay bills.  Another option is not to pay the bill at all, but that would be even less fun – not only would you be cut off anyway from buying more things, you’d also start getting visits at home from guys with thick necks and questionable taste in jewelry… 

But my Readers are clever enough to have spotted the most fun option: request a credit limit increase!

The credit card company might balk a little bit at how much debt you have already accumulated, not to mention your other debt (like your huge mortgage!). But, frankly, your payment history is pristine, and the credit card company likes to earn its little bit of interest and transaction fees every time you make a charge.  After all, the credit card company needs to put its money to work somewhere.  Some shareholders have trouble understanding why the company keeps lending to customers like you.  They wonder, shouldn’t the company be supporting some local small businesses instead?  The company’s decision definitely would be likely to weigh on its stock price.  Fortunately, though, you happen to know that the company actually thinks it’s a competitive advantage to have a cheap stock price.  So the company hasn’t given you any indication that they’re going to deny a request from you anytime soon.

As long as the credit card company keeps increasing your credit limit, you can have basically as much fun as you want.  That is, unless some JERK comes along and hides your cell phone and locks you in your apartment to try to prevent you from actually calling the credit card company to request that increase.  Not fun!

That jerk would probably think he’s being pretty clever, since you’d have to finally start paying more of your bills every month in order not to run out of cash.  That would totally not be fun for you, but the worst part would be watching his smug reaction as you scrambled to keep the electricity on, while trying not to disappoint your hairstylist and the others who have enjoyed the benefit of your spending.  You just know he’s going to call up your hairstylist at the end of the month and have a good chat with her about how disappointed in you they both are.

But, wait a minute.  If my Readers were in this position, they would have spotted something fishy about the whole scenario long ago.  How on Earth did that jerk know where you live, never mind where you keep your phone? 

The most likely explanation is that he’s your embittered ex who is, for some reason, still a co-signer on the credit card. 

It’s not like that jerk hasn’t also been having a grand old time running up the charges every month!  In fact, half the charges that you have to pay for every month are for things like his multiple gym memberships and church dues and all those other bills that he put on auto-pay years and years ago.  Sure, it’s not fun for YOU to be paying HIS bills, but you’d always had a kind of understanding that everyone would have more fun if the credit limit just kept on being increased whenever necessary.  Who does he think he is, trying to stop your fun unilaterally?

Nevertheless, suppose you found yourself locked in the apartment just as the monthly bill was coming due.  You and the jerk could have a good shouting match; but although that might be fun for you, the neighbors would probably be scandalized by the whole tacky spectacle.  (You probably will do it anyway, though.)  You are NOT going to give him the satisfaction of begging for the phone back; that’s even less fun than not being able to buy things anymore.

So, you have two options.  The first option is to climb out the fire escape and call your buddy Ben, who seems to be able to create cash out of thin air.  (You’re always surprised that he doesn’t seem to be having any fun, with that kind of magical power.)  He’s a bit of an eccentric fellow with an artistic bent, so you know you can count on him to buy whatever doodle you put on paper for him.  You can then run that cash over to the credit card company in the nick of time.  It’s not fun to pay a bill, but it is fun to make doodles; so it’s sort of a wash.  And then you get to give a big raspberry to the jerk until the next time either of you needs to use the credit card.

The other option is to hold your breath until the jerk gives you the phone or you pass out.  You may risk some permanent brain damage that way… but, hey, some people get off on that sort of thing.

Addendum: Karl Smith has something serious to say about this metaphor.  For what it’s worth, I agree with his conclusion.

On Being Wrong (whether or not for justifiable reasons)

July 5, 2011

I’ve been eager to revisit my earlier thoughts on l’affaire DSK as the case against him began to unravel during the past few days.  As it turns out, we’ll probably never know for sure what happened in that hotel room.  It’s hard to imagine how a case can proceed in the face of questions about the alleged victim’s credibility.  This outcome would be understandable even though it may fall short of the ideal of justice (in the sense of objectively determining what happened and either punishing or vindicating the accused).  A witness’ credibility matters, but in theory it doesn’t map directly to truth or falsehood.  On the one hand, people may lie if they sense there could be something in it for them, no matter what the consequences for themselves or those accused – the Duke lacrosse case is one particularly salient example.  On the other hand, it’s also possible for people with questionable judgment or even bad intentions to be the victims of crime.  But as Citizens and Jurors, often the best we can do is handicap the likelihood that a given account is true, false, or somewhere in between, and questions of consistency and motivation matter in that calculus.

Given that my initial intuition about the case now appears much more likely to have been wrong, What have I learned?  The four heuristics that formed the basis of my intuition all still seem reasonable to me.  However, I think there were two probable sources of error that I underestimated at the time.  The first, which I think is the dominant source of error, is that the DA’s office was compelled to act on an accelerated timeline because DSK was in imminent danger of leaving the country.  I took the facts of an arrest and indictment as indications of the probability of the truth of the allegations (given the risks to various parties of “getting it wrong”) when in reality they may not have been more than a necessity to give the alleged victim a fair hearing.  The second is that I did not give sufficient consideration to the possibility that the alleged victim would act irrationally.  I had assumed that she would view her downside risk as being very high (in fact, it is – she may be headed for deportation or jail!) and would only take action if she were very sure she would prevail.  In reality, she may have either not been aware of the downside risks, or may have had unwarranted confidence in her likelihood of success.

My sense is that the DA’s office has acted properly throughout and has had the unenviable task of trying to balance the protection of a seemingly vulnerable accuser with fairness to a powerful international figure.  If they end up dropping this case due to the inconsistencies that have come to light, I don’t think it would be to their discredit.

Perhaps the DA’s next balancing act will be between the need to do justice to DSK to the extent that he has been wrongfully accused, and the desire to avoid chilling the powerless from speaking out against the powerful when they have truly been victimized.

Whimpers and Bangs

June 22, 2011

It has been a while, Dear Readers, and I apologize for the lapse in correspondence.  The past few weeks (really, months) have been pretty hectic.  Perhaps this has been a blessing in disguise, as I haven’t yet had a chance to succumb to the temptation to opine on the many reasons the World (as usual) is Ending. 

I have difficulty recalling any significant stretch of time where there haven’t been at least two or three imminent threats to civilization as we know it.  Right now, of course, we have the potential collapse of Europe, the potential descent of the Middle East into chaos (and not proximately because of Israel/Palestine this time!), and the potential nuclear meltdown of Japan, to name the first three catastrophes that come to mind.  This time last year, I think, the list would have been something like: fiscal oblivion in America, global warming, and loose nuclear bombs.  Thinking back through my lifetime in broad strokes, we had: the collapse of the global financial system, global food shortages, an inevitable and mutually destructive clash of civilizations with the Communists (i.e., China), Avian Flu, SARS, WMD and Islamist terrorism, the Asian and Russian financial crises, Ebola, the S&L crisis, AIDS, and of course another inevitable and mutually destructive clash of civilizations with the Communists (i.e., Russia)…

At some point there was talk of a giant asteroid destroying the planet.  Also, we’re probably going to run out of fish, farmland, and water in the next couple of decades.  If I spent more than fifteen minutes thinking about this, I could probably re-write “We Didn’t Start the Fire.”

My list of world-ending crises presumably reflects the sorts of issues on which I spend the majority of my intellectual energy: finance, geopolitics, health.  I’m sure there are others who worry about disasters on other fronts — for example, the erosion of the Traditional Family Unit and hence Civilization with all these gay people trying to get married willy-nilly, or the wholesale destruction of Human Dignity that might come from permitting informed end-of-life decisions for those who may want an alternative to becoming an exceptionally dignified (and collectively-subsidized) vegetable.

Perhaps I’ve become a bit jaded by the repeated failure of the World to End despite what seem to be humanity’s best efforts to push it there.  I’m reminded of the sport of ‘policy’ debate in high school, which when practiced poorly tended always to reduce to the question of whether the affirmative or negative position were more likely to lead to global nuclear holocaust.  Should the Federal government adopt a stimulus program?  Maybe so, because failure to stimulate the economy could lead to its collapse, which could lead to a resurgence of populist and nativist anger against those who are perceived to have stolen the American dream, which could lead to war with China as the world’s most prominent low-cost exporter, which could lead to global nuclear holocaust.  On the other hand, maybe not, because it could lead to unsustainable Federal spending, which could lead to a default on US Treasuries, which could lead to war with China as the largest holder of Treasuries, which could lead to global nuclear holocaust.  With so many policy decisions being made every day, it’s truly marvelous that civilization persists.

But I do remember how scary it looked from the front lines during the summer of 2008, when it seemed like one financial institution after another was destined to collapse.  It is easy to criticize in hindsight, as many pundits, politicians, litigators, and journalists have chosen to do.  We shouldn’t forget, though, that one reason the World hasn’t Ended just yet is that enough people throughout history seem consistently to make good-enough decisions under exceptional uncertainty.

Tuesday: Haikus and Mysteries XXI

May 24, 2011

Actually, I’m taking a pass this week… I was just pointed to Limericks Économiques, which, logically enough, is a collection of limericks on economics, markets, and current events.  It is outstanding and deserves to be browsed for several minutes.