Who, What, When, Where, and Why?

Several years ago a Kennedy descendant flew his private airplane from New Jersey (I think ) to an island in the Atlantic offshore New England.  It crashed and he was killed.  I probably heard it first on the TV news and then in the local paper.  Both of those reports said who it was, what, when and where it happened, but didn’t say why or how.   I’m not a pilot, but In my company at one point in charge of managing our private planes.  So I had some interest in “why & how” it happened.

A day or two later, there was a story in the Wall Street Journal that reported on how and why people thought it might have happened.  It was an interesting and useful article to me.  It was also about twice as long as the article in the local paper, but I read the whole thing and think I learned something useful from it.

A few years ago my friends who were journalists or studying journalism told me of the “5-W” questions that writers or reporters should remember when writing an article reporting on a news event.  The 5-W’s are the questions Who?, What? When? Where? and Why?  Today’s news media I think does a good job with Who, What, When, and Where.  But the “Why?” question is frequently ignored.  And in most cases – as it was in the Kennedy Plane crash – the “why?” question may be the most important if the reader needs or wants to learn something from the event.  But it takes longer to learn “why” something happened, and it may require some special knowledge or expertise.  Another thing is it also takes longer to explain the answer to why, than it does for the other 4 questions.  And by the time you get the answer, it may be “old news”.  But in conceptual discussions involving the role of the press, they always take the “high moral ground” that the press is helping the voters learn and understand issues.  That is probably why we have all the open records and open meetings laws.  But the problem is that if they don’t answer the “why?” questions, the readers aren’t learning much.

To be fair, today’s “for profit” news media – both TV and newspapers – are in an increasingly competitive environment.  With all the electronic environment, news papers are having trouble surviving, and what used to be our 3 main TV news networks has a lot of competition from all the cable and internet stations.  In the struggle for survival, they need to have a lot of readers and viewers.  That results in advertising dollars and subscribers, and the revenue is important to their survival.  Which  probably leads to the dominance of the other thing I learned from my reporter friends “If it bleeds, it leads”.   News has to be “new” and the more sensational it is the more readers and viewers it is likely to get.  That helps the top accounting line – the revenue.  So if it takes longer to get to “why?”, the event might not be “new news” any more.  The other problem may be with the “expense” line.  The “why” answers no doubt take more reporter time which adds to the expense.  But it also takes – in the case of newspapers – more paper and more ink.  The Wall Street Journal article on the Kennedy plane crash was at least twice as long as the local paper article. In the case of TV, the daily network news programs are only a half-hour long and with the ad’s that leaves only about 20 minutes for actual news reporting.  That’s led to the famous “10 second sound bite”.  To explain “why” something happened takes a lot longer than the usual story time of 1 or 2 minutes.  10 second sound bites are usually someone telling their position on a political or other event.  So in the bite, one might learn what the interviewees’ position is on an issue, but not “why?”.  One network a few years ago advertised that their news program would have more “depth”.  I got excited because I thought they might explain the plusses and minuses of each side of an issue.  Instead, the time was increased from one minute to two minutes and the number of 10 second sound bites was increased from 2 to 4 (the idea of “balance” in TV reporting is apparently to have an equal number of sound bytes on each side of an issue.)  Still no “Why?” reporting.

I once had a course in dealing with the news media rom a lady who had been a reporter for CNN.  One of the things she warned us about were 10 second sound bytes.  She said if the interview lasts any time at all, you may say something that can be taken “out of context” and made to sound in the 10 second sound bite as something that is different from what you really think.  The fix, she told us, was make the point you want to get across into a short “elevator speech” and regardless of the question you get from the reporter, that speech is your answer.  And she worked on the other side of the camera, so I thought that she probably knew what she was talking about.

So the newspapers – including the Wall Street Journal – are using thinner paper, less paper, and less ink.  Stories are getting shorter and the “why?” question may have gone away completely except for maybe the “editorial page”.  But the editorial page has many column’s  by people who are trying to “sell” their side of an issue, and so the “why” does not include both the plusses and the minuses – so there is little “balance”  in these columns.  There may also be a question of accuracy or lack of specifics.

So is watching the news and reading the paper a waste of time?  No, I don’t think so, but you can get most of news in the headlines and your left to guess on what the whole story is.

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Public Knowledge, Projections, and Memory

In 1978, the U. S. Congress enacted energy legislation that outlawed the use of Natural Gas to generate electricity.  “knowledgeable Experts” were projecting that we would be out of natural gas by 1985.  Thus the popular opinion was we were facing a serious crises. The government and many of the rest of us thought that natural gas use priority should be to provide heat for homes, apartment buildings, hospitals, and if enough – office buildings.  At the time the majority of electric generation was done with coal, and their were some advantages to coal for base load electrical generation and  coal and oil would be difficult and expensive to use for home heat and hospitals since most were set up for gas.  At the time there was about 25% of electrical power generated by natural gas.  Some say that there was evidence when the law was passed in 1978,  but certainly by 1980, it was apparent that there would be enough natural gas to last a great deal longer than 1685.  But by 1985, with the law was still in place, there was O% of power generation with natural gas.  But the 1978 ban was not rescinded until 1989 – more than 10 years after it became apparent that the law wasn’t needed.  Those of us who may have disagreed with the “knowledgable Experts” opinion had some knowledge of what we thought would happen, but we did not know with certainty.  So if the media reporter had asked “do we agree with the experts?” the correct answer would be “I don’t know”.

By the late 1990’s the global average temperatures had gone up fairly steadily since 1980.  The projection by “Knowledgeable Experts” was that it would continue and it was primarily driven by people’s use of fossil fuels – of which coal is the worst and natural gas is the best from a CO2 release standpoint.  Probably not everyone involved in atmospheric projections agreed with the “knowledgeable Experts”,  that the warming trend would continue indefinitely, but – like the folks that were involved in the oil industry in the 1970’s, they could not be sure – so the correct answer was “I don’t know”.  An “I don’t know answer is treated by a lot of people – including many in the media – as a passive, non-committal, abstention  vote. So it’s reported that the vast majority of “Knowledgeable Experts” agree on the projections.  As a result our government is attempting to limit the use of coal as a fuel for any use including Power generation.

But in the first decade of this century, the average temperatures did not continue to rise significantly.  And in the second decade it is not rising as rapidly either, although the weather has gotten more strange.  It seems that the 1980 world average temperature was at or below the below the median of the cycles that the world has been through – it was called by some “the beginning or the new ice age”.   The up cycle has never been higher than the temperature cycles in the history of the earth either, although some were projected by one of the “experts” using what was later determined by professional statisticians as not valid statistical analysis.  But there seemed to be a correlation in the 1990’s between the temperature rise and the increase in man generated CO2.  Could the average temperature rise in the 1980’s been a return to normal? and the increase in CO2 generation been a result of the elimination of gas in electric generation because natural gas was eliminated in power generation and replaced by coal and heavy oil ?   I’ve heard the scientific explanation of why CO2 causes global warning and it sounds reasonable.  So do I believe that CO2 can cause global warming?  – yes.  So do I believe that man generated global CO2 is causing irreversible global warming?  I think maybe not, but the honest answer is “I don’t know”.  So the honest answer might be to not disagree with the folks saying “yes” absolutely.  Those holding reservations and thinking “we are not sure” are the answers would not say “maybe, but we’re not sure”.   So since no one is saying “absolutely not”, the media is reporting that all “experts” agree that man-generated CO2 is causing global warming and that it won’t be reversed except by a reduction in man-made CO2.  Is that correct or does it depend on how the questions are asked and the answers are interpreted?  The statistics have shown a correlation between the warming temperatures and the amount of CO2 in the atmosphere. So our government and other governments in the world have reacted to that by steps to minimize Man-made CO2 generation.

But the temperatures are not rising the way they were.  In a recent article in the Wall Street Journal,  Paul Tice reported that in 2007 the UN’s intergovernmental Panel on Climate Change (IPCC) study was the basis for the US. Government’s EPA labeling CO2 as a pollutant.  But the study  “was already outdated by that time”, but the EPA reacted in 2009.  He reports that in 2013 the IPCC issued a more “circumspect report which noted a hiatus in global warming since 1998 and a break down in the correlation between the world’s average surface temperature and the atmospheric CO2 levels.  In the meantime, our governments action has cost the government $20 to 25 billion per year.  However, since we did not run out of natural gas, since the early 1990’s, the power companies have built almost all new generation plants on natural gas in the 1990’s because it’s cheaper and more convenient.  A lot of the coal plants are old and probably need to be replaced on the future, but the urgency has no doubt caused all our power costs to go up as well.  It was an urgency that cost us money and probably wasn’t necessary.

Our environmental exercise sounds a lot like the natural gas exercise of the 1970’s and 1980’s.  Both caused some pain and agony and cost us money and probably were not necessary. There have been articles written suggesting that coal jobs will not necessarily come back as a result of Trump’s canceling Obama”s EPA emphasis on not using coal to generated electricity.  Coal has been losing out to natural gas for several decades (except in the 80’s) because natural gas is cheaper, and easier.  We would probably be father along today if natural gas had not been outlawed for electricity.

There have been other similar things that I remember as well.  Why do we do this?  The first problem is that people have a tendency to project things into the future the way they have been headed in the fairly recent past.  That’s happened with natural gas and it may have happened again with global warming.  Secondly, most of our issues today are scientific or economic.  Most people don’t have much education in either including news reporters and lawyers ( and in case you haven’t noticed most of our politicians ar lawyers.) There were correlations with the environment and directions in gas usage that could be used to “prove” points that people wanted to make.  Correlation does not prove “cause and effect”.  Probability and statistics is may be the least intuitive and trickiest math discipline, and the weather people misused it in projecting an increasing world temperature.   There are lots of variables that effect things, but we tend to oversimplify.  Some variables may not be recognized and some of the relevant data may not be available.   But those who have data to “prove” their assertions have an advantage over those who don’t agree with them for reasons that may be valid, but are not supportable by data or precise theory.  And “I don’t know for sure” answers get disregarded by reporters. “If it bleeds it leads” so stuff that appears to be a problem is reported first.  Fixes and corrections, if they are noted at all are usually not on the front page.  ( In the early 1990’s the organization where I worked, got some complaints  from our employees about the styrofoam cups in the coffee rooms because they believed styrofoam had environmental problems because of CFC’s. (a chemical that had been used in its production and had been declared a hazard in the 1970’s,)  But it turns out that in the early 1990’s when we were getting these complaints, styrofoam had not been manufactured with CFC’s by anyone in at least 10 years.  Freedom is great and a free market economy has been mostly good news over a lot of years even though there has been an “invisible hand” that has helped make it so.  The Law of Unintended Consequences is not dead, but the unintended consequences are not always bad.  If we producers and consumers are free to decide what people want, invent new stuff and take responsiblity for ourselves, and believe in helping our fellow citizens, we make many fewer mistakes than a few politicians in Washington D.C.

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Not-for Profit College Cost rising faster than inflation – Pt 2

In Part-1, we talked about non-profit colleges and three things that have changed in the last 30 or 40 years.  (1) The recognized effect of big time athletic programs and the fact that college coaches salaries have risen to be the highest paid public employees in most states.  (2) the development of college rating systems and their effect on the college hiring/staffing decisions with the current emphasis on academic background and the elimination of teaching staff with practical real world experience.  (3) The emphasis on being a “selective” academic institutions with its emphasis for attracting many more applicants than can be accepted.  And one of the ways this is done is by the elimination of required courses and flexibility in majors.

One thing we didn’t cover is that non-athletic costs have also gone up partly because of the attempts to attract students.  What I learned when my kids were in college, was that many of their classmates in picking a school gave weight to those that had competitive division I athletic programs.  If having a succesful athletic programs is important, then they obviously need to spend money on facilities as well as hire good coaches.  But at the same time it is important to attract other students, non-athletic scholarship students, by having “plush” facilities.  For example, when I was in college, I had a single dorm room that was pretty small, maybe about 10′ by 15′.  It had a single bed, a built-in desk, a four drawer chest of  drawers, and maybe a two or three-foot closet to hang clothes in..  The only bathroom on the large floor was a community bath at the end of the hall.  Everyone on the floor had to share the bathroom – even to brush their teeth.  None of my kids had that.  They had more space with two or three rooms and an adjacent bath room.  Today colleges are building dorms with apartment style facilities – living rooms, bedrooms, and baths etc.  These are not only more expensive to build, but have to be more expensive to maintain.   And there are other obviously upgraded facilities.

What we haven’t discussed is how the differences in costs have tended to result in students who end up with mountains of debt which they have difficulty paying.  Nor have we really addressed the assumption that everyone needs to go to a four-year college and get a BA degree.

Lets start with the assumption that everyone needs a four-year college degree.  The man who I heard talk last Friday morning heads a “for-profit” school that trains pilots and aircraft maintenance people for world commercial airlines.  The first point he made is that the airlines are short on pilots.  If they had more pilots, they could fly more flights to smaller airports.  In this day and age a community with good airline connections will attract more industry.  He also made the point that the newer airplanes have become technologically impressive and they require maintenance people who are well and extensively trained.  Everyone that graduates from his school has a well-paying job.  The starting pay for maintenance people is $20/per hour (~ $40,000 per year) which is about the same as higher paid graduates with BA’s and BS’s from more expensive colleges.  The training takes about half the time, and costs about the same as the less expensive college costs.  Not only that, but experienced maintenance people can make as much as $150,000 dollars per year.  (Which probably puts them statistically in the top 5%-7% or in the “rich” category of Americans.)

Several years ago I did some work with our local chamber of Commerce and was part of a few of us non-chamber people who talked to prospective employers considering  basing some of their manufacturing in Tulsa.  They thought one of the  most impressive thing about Tulsa was not the availability of four-year colleges, but the presence of technical education that was available through Tulsa Technology College.  Tulsa Tech is not an accredited University wich offers four-year degrees, but does tech training similar to what the school man Friday morning represented.  In fact they do some of the same types of training that his school does, but Tulsa Tech does not work just for the airline industry and they are a “not-for – profit”.

At this point, it might be useful to remind us that a “not-for-profit” is not prevented from making a “profit”, but they are approved of that status because they were formed to provide a service needed by the community they serve,  but at a minimum, they need to balance their budget.  The difference between “for profit” and not-for profit is whether they have to pay taxes on their net-income.  The other difference is that if I give money to a not-for – profit I get to deduct it from my taxable income because if counts as a charitable contribution.   For-profit universities don’t get contributions.  Public Universities have the availability of Tax dollars, but they may need both tuition and contributions to be competitive. Private colleges do not have the availability of tax dollars, so the tuitions are usually higher and contributions are probably more important.  Most private schools have endowments that are public information and frequently get reported along with the rating scores by people doing the ratings.  Net-income can make the endowments grow which are seen as positives by most people.

So money is not unimportant to most Universities, public and private because it helps their ratings, their appearance, and the management approval ratings.

One of the things that has changed in the last few years is the availability of student loans that are “government guaranteed”.  The students agree to pay them back, but by all reports, there are a lot of young people burdened by thousands of dollars in debt on leaving school.  This has apparently been a problem for a lot of them.  They are morally obligated to pay the money back, but even if they have a job it’s a difficult burden.  Not only are starting salaries not always that good, but most grads are on their own for the first time.  They are establishing homes and families and have a great number of needs for starting life on their own.  The universities on the other hand are not risking much.  The loans are guaranteed and so they have nothing to really lose.  A “selective” school can sell the students with higher tuitions because there is loan money available.  Some (private only?) schools can attract better students to their institutions by charging higher tuitions than they actually need and offering “scholarships” from the school to attract acceptance by higher rated students.  And the SAT scores of the freshman classes are published in their school ratings by people doing the published ratings.  This also probably helps them attract more applicants which makes them more selective.

There are, it seems, a few people today that have not bought into the idea that everyone needs, or should attend a University in pursuit of a four-year degree.  Not everyone may be suited to the academic life.  And people who attend college for a year or two and drop out may be burdened by debt without good job prospects.  Even 4 year graduates who don’t major in areas where job prospects are good may have even more debt without good job prospects.  We had a mayor that thought that high school students should be made aware of other less academic but skilled job carriers that they might like better and be more suited to.  But our current mayor has apparently signed on to the conventional wisdom that everyone should attend college and get a four-year degree.  Unfortunately not all high school students may understand what other options exist.  I think it would be good if they were fully informed and could make the choice themselves.  After all it’s their life and there are a lot of honorable options.  We need aircraft mechanics and they are well paid.  I don’t think I have a talent for that. But I like to fly, so I’m glad that there are people who do like that and are well-trained and well paid.  I’m also glad for a lot of other skilled workers as well.  They do and get paid for stuff that I’m not particularly good at.

If we had less emphasis on College, we might have a better balanced work force and better, cheaper colleges.  What do you think?

 

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Why Are not-for-profit College Costs increasing faster than inflation?

My paper carried an article a few months ago that the highest paid state employee in all bur one or two states is that states major college football coach, with the college basketball coaches not far behind.  From the numbers I’ve seen, major college sports coaches are well into the top 3% of U. S. individual income distributions and are no doubt bringing the top 5% of incomes higher.  Interestingly enough this does not seem to be much of an issue with the media and the public although there has been a lot of hand-ringing about the national income spreads going up.  At the same time college costs for the last couple of decades have been going up well past inflation percentages.  Are these tuition costs being driven by coaches salaries?  Maybe, but I don’t think that’s the primary reason.  Both prices are probably being driven by the same motivation.  It has a lot to do with competitive competition and the assistance of the Federal Government through student loan programs along with some insistence that everyone needs at least a four-year college degree.

Several years ago when I was working for a major corporation I ended up spending some time in Boston working with one of our corporate lawyers on a litigation issue.  We were using the help of a Boston Law firm , and one day we ended at the end of the day with a little time to spare.  Our corporate attorney, had, in his younger days attended Boston College.  The lawyers in the Boston firm asked if we had been out to see the BC campus and we hadn’t.  So they said if we had not seen it since they gone “big time” in division I college football that we ought to go because there had been significant money spent on the campus buildings.  They said that when the school had some big time success in football, the money that people gave the school went up significantly.  But not just for the athletic programs, but for the academic side as well.  Our lawyer, Gil, and I had a chance to take the subway out to the school before we caught the plane back to Tulsa and Gil was very impressed.  There were apparently new academic buildings, new dorms and an upgraded and changed campus from what he remembered.

So I learned something I had not expected on that trip.  A successful athletic program can have a significant effect on the whole University.  But I suspect that it needs to be succesful enough to be known nationally and have a significant amount of Nationally televised games.  With the number of games on TV these days, that is not as  big a deal as it was then.  BC had done that well enough to have few game clips become national standards.  For most colleges the two big “revenue sports” are football and basketball.  The football team probably needs bowl game and basketball needs “March madness”.  And coaches are the key to that.  So a lot of big colleges don’t want to take a chance on promoting assistant coaches, they want “proven” head coaches who have already done it at some other school.  These coaches are already making big money, so the hiring college has to pay more to get him and keep him. All this causes salaries to keep ratcheting up.

The other thing that’s changed are school rating systems.  When I went off to college (many years ago) there weren’t any well publicized national rating systems.  My high school teachers and advisors had some ideas of which schools might be better or not so good, but these all seemed to be just impressions not based on any significant objective data.  Now there several annual rating systems that are based on “objective data”.  Some of the data seems to be valid – like how many of their graduates got jobs and at what salaries.  Some things that the schools have control over may be not be particularly good indicators.  Two of the most reported re the assumed quality of the faculty based on some things that may or may not be applicable to the classroom.  The most obvious is the idea that a university that has more PhD’s is going to have better classes.  And at the same time, real world work experience is apparently not important.  When I was in both undergrad school in engineering and as a grad student in a respected MBA program, the best instructors that I remember may not have had PhD’s, but even if they did they had non-academic practical experience.  The worst instructors were those that had legitimate PhD’s but no practical real world experience.  But most of today’s rating systems give no credit for real world experience, but they give credit for PhD’s and publication of articles.  At one point im my career I was in the position  of manager of a Management Science department trying to do some analytical models that would help the operating management do better planning and have better results.  We had some significant successes that are still in use today.  During that time I had a subscription to an ORSA/TIMS (Operation research/management science professional organization) set of publications.   The two different publications had articles written by academic professionals  – one was academic theory and the other was “practical applications”.  I never spent much time with the “theory” publication – mainly it was too esoteric for me to understand or see much value in.  But for a while I tried to read the “practical applications” publication.  The practical articles seemed to have been written by people who had no experience in the real world, and most of the articles in there seemed to be out of touch with reality.  .

But the employment of PhD’s with or without any piratical experience is critical to the rating systems.  The other thing that gets noticed a lot is a University’s student acceptance ratio.  How many have applied compared to how many actually accepted.  I applied to 3 schools,  but my children and grand-children have applied to more than that, but not as many as now are the average number.  It helps a University in the rating system to have a lot of applications.  The more they have that are more than they plan to accept, the higher marks they get.  One thing that helps their application numbers in addition to those things mentioned earlier is to have more flexibility in the course requirements.  Fewer required courses and more flexibility in what the student might be interested in taking whether if helps him or her in their after school life. So both my universities have cut the number of required courses.  I heard a guy speak this morning and he cited the number of currently unemployed university grads who had not taken courses that helped them prepare for paid jobs.  He reminded me of a young guy that we hired after he went back to junior college and take a two-year degree in computer programming.  It seem he had both a BA and masters degree in Greet mythology, but those degrees did not get him a paying job, so he went back and got a two-year programming degree and we hired him. But if he thought he would get a high paid job out of his 1st two degrees, he was sadly mistaken.  Does everyone need a college BA to get a well paid job?  Maybe not.

I will probably do a part 2 to this post since I have not covered everything I would like to cover.  But I seem to have run out of time and space and I would not want to make it too long to read.

 

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A Federal Reserve Report says Economists Fail at Forecasting – Really?

Robert J Samuelson had a syndicated column recently reporting on a U.S. Federal Reserve study of the accuracy of Macro-economic forecasting.  The study looked at forecasts of “important economic” indicators such as unemployment, interest rates, gross domestic product and compared the forecasts with the actual outcomes.  The study concluded that “considerable uncertainty surrounds all macroeconomic projections”. In fact, he said that the study authors found forecasting mistakes have worsened since the 2008 – 2009 financial crises.  The study he said compared forecasts from the Fed, the Congressional Budget Office, and the Survey of Professional economists.  The macroeconomic forecasts are no better than were the forecasts in the 1920’s before macroeconomic Keynesian theory.  Samuelson concluded that if macro-forcasts are flawed then we are destined to have periodic recessions.  The reason for the inaccuracy he concludes is that there are too many variables and people tend to think that the future will resemble the past.

I don’t disagree with anything he said, but I think there may be some things of importance to add.  Looking back on my experience, I think we could improve our forecasts.  Maybe not enough to avoid recessions, but maybe enough to avoid government policy adding to the problem.  Keynesian Economics was developed in the late 1930,s and seems to be a reflection on Roosevelt’s governmental policies during the great recession.  By the 1960’s we had decided that the government, which had not tried previously to control the national economy, not only could, but should try to control the health of the Economy.  The debate among the well-respected economist was between whether government fiscal policy or monetary policy was more important.  The monetary people put the most emphasis on the growth of the money supply and to a lesser extent on interest rates, while the fiscal folks looked at government spending and budget deficits.  On the fiscal side, the theory was to have a balanced budget during good times and run a deficit only as a stimulant during down times.  That made sense to me then, but we seem to be running a budget deficit now in good times or bad.  I have a problem with that.  On the monetary side, the emphasis was on monetary growth.  The problem there was that monetary growth did not seem to come from only the government printing money, but also from things like borrowing which was controlled by interest rates, was difficult to measure and possibly beyond government control.  But when I was in graduate business school in the early 1970’s the emphasis was on macroeconomic policy and forecasting. Adam Smith’s “invisible hand” was pretty much thought to be a thing of the past with very little importance to the overall economy. Not that microeconomics was wrong, it just wasn’t important.  In fact, my good friend who was also one of the PhD Economics professors told me when I mentioned that I might like to take a microeconomics course that micro was not important, only macro was important.

I decided later that maybe macro was important to him, because he got interviewed frequently by the media when government policy was involved, and that only involved macro variables.  In my graduate level economic forecasting class, Keynesian economic principles seem to assume that people would react the same way to the same government stimulus every time.  While working for a private company with operations in many different markets, I used micro and hardly ever used macroeconomics.  In between government forecasts of the entire economy and Adam Smith’s invisible hand is the subject of Industry Economics, which involves more micro theory than macro theory.  Working in a corporate planning group of a Fortune 100 multi-industry conglomerate we had several industry economists and only one macro-economist.  The industry economists were at the forefront of most of the planning studies and got questioned regularly by the organizational executives.  The macro guy was pretty much ignored by the corporate leadership.  (The media rarely talked to him either.)

I think Samuelson is right, part of the problem with macroeconomic forecast is that there are many variables.  But there may be more to it than that.  Keynesian Macro-economics, and the government’s ability to control the economy boils down to a very few variables.  The Fed today has as its major variable – interest rates.  Maybe to a lesser extent money supply.   The fiscal side is what the government spends money on – and not everything seems to have equal stimulus to the national economy – some things tend to be more job creating and some less. But the basic idea is that deficits are economically stimulating.  But with politics and different points of view on when and what to spend money on, the timing of most things that congress does is usually off – and timing is frequently a critical factor to keep the economy out of recession.  But the biggest problem is people and how they will react.  In physics in college I learned the “Ideal Gas Law” that is simple with few variables not unlike the government’s macro economic variables. In Engineering I learned that there is no “ideal gas” in the real world, and so there have to be corrective factors for each type of gas.  But with atoms and molecules, once the corrective factors are determined by experiment, the real gasses will react the same way every time.  That’s not true with people.  They tend to react more consistently to micro and industry economic factors.  But at the macro level, other things get in the way and make reactions inconsistent.

People have different needs and expectations depending on a lot of other variables.  How they react is dependant on a number of others factors that are not always consistent. .  Inanimate objects – atoms and molecules will react the same way over decades and centuries.  For example, as Samuelson said, anything that has been going in the same direction for several years, people expect to continue in the same pattern.  “Real estate went up for several decades, therefore it will continue.”  was part of the problem that led to the 2007 great recession.  It’s hard for me to believe how many of my friends saving for retirement got burned in the market by the tech bubble and decided to invest in real estate because “it will go up for ever”.  And the tech bubble or the end to the “new” economy was brought on at least in part, because a lot of people thought that companies would continue spending on tech the way they had been doing in the late 1990’s.  Demographics has something to do with a lot of this.  When the baby boomers were coming to maturity in the 1960’s , low-interest rates tended to be welcome because they made spending on things that people wanted and needed when they are coming out on their own, marring and having family’s. Now the Baby Boom generation is in retirement or saving for retirement and the low-interest rates penalize their retirement goals.  Micro – economics variables have much more consistency and stability than macro variables do.  The test period for a lot of government stimulation was in the 1960,s, but the population is not reacting the same way now as then for understandable reasons.  But what made this change worse was the market crash in 2001 (the end of the “new economy”?)  and the Fed dropped interest rates at a time when the housing markets were still going up and people thought they would forever.  The low-interest rates helped people buy real estate, and when the real estate bubble came apart in 2007, the Fed was accused of causing the problem by holding rates down too far for too long.  Rates since 2007 have been down 3 or 4 times as long with not much apparent effect.

The government organizations in the study – the Fed and the Congressional Budget Office seem to concentrate on the effects of changes in the government controlled variables –   Interest rates, Tax rates, government spending and deficits.  I don’t think they look at new government regulations that don’t affect government spending and tax rates.  The Fed dropped interest rates in 2007, which was a stimulus for more borrowing, but at about the same time we had new Financial Bank Regulations which means the banks did not have as much money to loan and had to be more stringent in who they lent it to.  Individuals might had lower interest rates if they could get loans.  But many who would like to have it could not get it.  This did not increase government spending, but it probably negated some of the effects of lower interest rates.  This is not in any of the macro-economic classes that I had in Grad School, but it is distinctly a factor in industry economics since it both raised their administrative costs and cut the loans they could make effecting their revenue.  Other regulations with good intentions no doubt raised costs and had other micro-economic consequences not accounted for in the forecasts.

But colleges and doctorate programs tend to emphasize macro-economics because we still believe that government can control the economy.  It also gets their economics departments more visibility with media interviews.  It’s one more of those beliefs that people need to change, and as Samuelson suggests, we should be prepared for more economic ups and downs.

 

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Unintended Consequences and Positive Results

In the previous post I tried to demonstrate how  unintended consequences on the part of a central government can have negative results.  Unintended consequences can sometimes have positive results.  Adam Smith used the term “invisible hand” in his work on free market economics.  What he said, in effect, was that individuals when taking responsibility for their own welfare and working for their own interest could help the general economy un-intentionally.  We started out in this country with a free market economy, and it has worked pretty well for many years.  Individuals produced things that other people wanted to buy.  They produced these things in order to provide for themselves and their families.  If they did not produce things that others wanted then their would be no sales, no revenue and no profits.  In providing goods that others wanted and valued they helped themselves.  So in helping themselves, they also helped the overall economic well-being of the whole even though that was not their primary intention.

That doesn’t mean that we did not have some problems.  As Charles Kindleberger in his book “Manias, Panics, and Crashes”  pointed out is that sometimes people become part of a Mania.  They buy stuff because everybody else seems to want it and the price goes too high.  When a lot of people start to believe that the price will go up forever,  it will not end well.  It’s worse for those participating in the mania, but that doesn’t mean that other non-participants won’t be hurt by the overall economic effect as well.  His example of the first mania was the Tulip Crises in the 1400’s.  That one primarily effected people who bought into the tulip bulb mania.  As we have become more economically connected, more us are no doubt effected.  The 2000/2001 crash brought the stock market down pretty sharply which did harm to a lot of people who did not invest in World Com or Enron. But those of us not invested into those type stocks recovered pretty quickly.  The Sarbanes-Oxley legislation was passed by the government to us from another recession?  Did it work?  We had a worse one in 2007, but the subject of the mania was different.  The answer then was the Dodd-Frank legislation.  Will that work to prevent another one?  Maybe we learn from our mistakes, but we seem to find new ones.  We’ve never had another “Tulip Crises” and most, if not all of the other manias have only happened once.

In the U.S., we had a free market economy without a lot of government intervention until the depression of the 1930’s.  Not that we did not have business cycles.  My father graduated from college in 1932 with a business degree.  In the business school they taught students how they should learn to deal with business cycles because we would always have them.  Then we had the “New Deal” followed by a “macro-economic” theory book by John Maynard Keynes.  The result was we began to think that the government could control the economy.  Our fore-fathers thought that each state should manage  the rules of business in their state and the federal government should stay out of it except for regulation of “interstate” commerce.  With modern technology and more goods moving “interstate” our federal legislature seems to have ruled that everything is “interstate” commerce and therefore subject to Federal regulation.  And with Keynesian economic theory they can “manage” the economy so that we will never have another recession.  Right????

When I was in college in the late 1960’s we learned “macro” economics and were told that “micro” economics was not worth the time to study.  Adam Smith’s invisible hand free market economy is “micro” economy.  Keynesian economic theory has always seemed to me to have been inspired by the New Deal.  Did the “new deal” end the depression?  That is something that has been subject to debate since the 1930’s.  A couple of months ago, Robert Samuelson – who writes an op-ed syndicated column – had a piece in the Tulsa paper.  In it he said he had recently discovered that there had been a severe down turn in the economy about 1920, and it appeared from the data to as bad or almost as bad as the depression that happened 10 year later.  The 1920 down turn was over in about a year to 1.5 years and was followed by the “roaring twenties”.  The government had not tried to manage the 1920 recession, but the recovery was very much quicker than happened in the 1930’s.  Maybe he thought the “New Deal” had made the made the 1930’s down turned not so severe to individuals, but had made the recovery much longer.

So why do our government leaders and economists think that macro-economics is so good for us and that the government should be able to manage our economy?  For starters the theory is very appealing.  Who wants to trust “an invisible hand” ?  It’s more comforting to think someone has control and wants to help our well-being.  From the politicians standpoint it makes their job more important and gives them something to promise the electorate during campaigns.  (And even if it doesn’t work, they can promise the voters that they tried by passing “comprehensive” legislation.)  For the economists it also makes their job more important.  They can now get appointed to important staff positions in Washington.  For those not going to Washington, they get questions and interviews in the local news media that they would not get otherwise.  They can become well-known even without going to Washington.  For the news media, it probably makes their job easier because they have some “knowledgeable” individuals to talk to that they can quote as an authority in the news.  And if there is disagreement between experts, the news media has conflicts to report which no doubt draws readers and viewers.

So what do you think?  I think Samuelson is probably right the government may be able to mitigate the pain, but that may cause the recovery to take longer. Is that good or bad?  It probably depends.  But I think that a key is not so much the idea of an invisible hand vs. governmental intervention, but the belief that I have to take responsibility for my own well-being.  A lot of the government well fair programs put in place to help people hurt by a problem that’s not their fault, give them money, but do not do other things to help them get back on their on two feet.  Giving people money without requiring anything from them tends to create dependence, when they really need help to get back to independence in a reasonable period of time.  With where we seem to be today, there are too many people who think that the government should be at least partly, if not fully responsible for their well-being.  Without people taking responsibility for their own well-being, we are going to have problems regardless.  Private non-profit agencies generally do a much better job than the government, because they know the individuals and provide help beyond the money.

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It’s a Wonderful Life, the Rationing of Capital, and Economic Recovery

The movie “It’s a Wonderful Life” is shown every year at Christmas and we usually watch it.  This year was no different.  Mr. Bailey of Bailey Savings and loan is shown what life would be like if he hadn’t been alive.  It was not very pretty.  His town was called “Pottersville” after Mr. Potter who was a financial rival who was not willing to take chances on where he invested or loaned money.  He only wanted to finance things that he knew would be good for him.  Bailey Savings and Loan was willing to loan money to people who were of good character and needed money and Mr. Bailey knew they would try to pay him back if they could.  Mr. Potter was not willing to do that.  He was not willing to do anything with his money if he would be good for him.  So in his world – “capitol was rationed”.  The result was not pretty.  People did not have as much and weren’t nearly as happy.

There have been a couple of articles lately about the our Federal government and the Dodd-Frank legislation which was supposed to protect us from a repeat of the “Great Recession” which has caused banks through well-meaning legislation to “ration capitol” by in essence becoming “Mr. Potter”.  The rules require banks to act like Mr. Potter and have caused a lot of the Bailey Savings and Loans to close.  The authors say the result may have a lot to do with why low-interest rates have not been much help to the economy.  Low interest rates are good only if you can qualify for loans, and if you can qualify, you probably don’t need the money.  The statistics are that “since 2008, one in four community banks have vanished.  That ‘s 1,971 banks according to the institute for Local Self Reliance.”  The people needing money the most are typically small start-up companies who have not been able to qualify for loans with the bigger banks.  And the bigger banks are under tougher requirements.  And start-up companies in the past recession recoveries have supplied most of the new jobs.  So in the name of saving us from another great recession, the federal government has become Mr. Potter and the country may be starting to look like “Pottersville”.

Another article that has made my paper recently has been about the results of the “Sarbanes-Oxley” legislation that was written after the 2001 recession as a way to save us from a repeat.  (Interestingly enough, the Fed dropped the rates after that recession to almost the level of today for about 18 months instead of the 8 or 9 years that we have had since the “Great Recession”.  The Fed was accused of keeping those rates down too long and causing the “Great Recession”)  Maybe the culprit of 2007 recession might have been – at least in part, the Sarbanes-Oxley legislation which was passed in 2002 with the good intentions of keeping us free from future recessions.  Sarbanes-Oxley required a significant increase in auditing requirements for public firms.  Since 2002 academic studies and annual reports apparently reveal that auditing costs have increased to double, triple or even quadruple what they were before.  A 2009 SEC study found that smaller public firms have auditing costs 7 times more than large public companies. Not surprisingly over the past decade the number of firms that are listed on the U.S. stock exchanges has dropped by almost 30% .  And the size of companies launching IPO’s (going public) has gone up significantly.

The alternative to getting bank loans for most small companies is doing equity financing through stock offerings.  If one getting loans is not permitted and the other is too expensive – what is one to do?  The “road to Hell is paved with good intentions” and the “Law of Un-intended Consequences” has not been repealed.  Our representatives in Washington are well-intentioned, but they are also interested in re-election and don’t seem to have any interest in admitting that things did not go quite the way they had hoped. But instead make promises to fix problems.  Maybe the best answer is to keep the Federal Government from “trying to save us”.  We might be better off if the government did nothing?

There is a book by Charles P. Kindleberger called “Manias, Panics, and Crashes” .  What he did was study all the economic crashes since the Tulip Crises of the late 1400’s.  His conclusion is that they all go through the same phases.  People development a mania for something and put way too much money into it driving up the price expecting it to go up forever.  Which it of course doesn’t, and so panic sets in and there is a crash where people lose money and economies crash.  The crash of the economy may hurt people who do not participate in the mania.  Sound familiar?  But economies usually recover on their own after they get over people and governments trying to help.  One interesting thing about the book is none of the manias that lead to the crashes happen over the same thing twice.  Since the 1400’s we’ve never had another Tulip Mania.  Nor has anything else ever been the cause of a crash twice.  Apparently we learn from our mistakes without the government’s help.

So if the same thing never happens twice, do we need government to help us with what we have all ready learned.  The military is often accused of preparing to fight the “last war” which is a mistake because with the advancement of weaponry, skills, and tactics, we have never fought the same war twice.  Maybe we have our government saving us from the crash, when we’ll never have another one like it.  We will have another one, but it will have a different cause.  And the government action may cause untended consequences that will either cause another problem or keep us from recovering as fast from the last one.  Maybe it would be better if the government did not do anything?

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