Walmart's social responsibility

Everyone seems to be up in arms about Walmart's leaked memo and whether or not we are subsidizing them, but I think everyone is missing the real tragedy here. Walmart's employees aren't high income earners; they probably don't have much of an education. That means that, on average, they are probably more likely to take risks, smoke, be obese, not read, and not belong to gyms.

So how are they going to read or work out? They can't afford gym memberships or new books, and since Walmart's educated management obviously knows this, clearly they expect us to subsidize those things. God only knows how many millions or billions of dollars we taxpayers are paying to Walmart for schools, parks, and libraries, all for Walmart's employees.

---

Ridiculous, huh? The question is, of all of a person's needs and/or wants, how much should their employer pay for directly as opposed to paying cash and letting them buy/choose their own? Many seem to think that insurance ought to be one which the employer should provide directly, but even that is a misnomer. After all, the employer isn't buying "surgery" or "medicine": they are paying a third party to supply those things. A few arguments for and against employer-provided insurance:

• The employer can provide health insurance for less because of both volume discounts and because it protects the insurance company against adverse selection (unhealthy people will tend to buy more insurance, and since they know more about their health than the insurer, they will tend to get a better deal)
• Third party systems mask costs, so people tend to use more than they would otherwise. That's one reason why medical costs go up at multiples of the inflation rate.
  
• Healthy employees and employees with smaller families get screwed by employer-funded insurance because, while they pay the same amount in, they don't use it as much. In subsequent years, they pay more and more, but continue to use the same amount while others use more and drive prices up.
• What we call "health insurance" today is nothing like what we mean by "insurance" in other contexts. Car insurance doesn't pay for routine maintenance, oil, fuel, or other costs associated with ownership. Homeowners insurance doesn't pay for heating, water, basic repairs, or other costs associated with home ownership. But we expect health care insurance to pay for every doctor visit, every drug, every procedure that we need. We would be much better off using a cash-only basis for most visits, and catastrophic insurance for large bills (surgery, cancer, etc.). People who can't afford the latter could easily given a voucher to take to an existing insurer. A solution for people who can't afford the former would require a lot more thought than I'm going to put into this post because we would have to define preventive vs. reactive vs. defensive vs. unnecessary costs.
  

The furor over the Walmart memo comes from an intentionally inflamatory article in the New York Times, which focused on one of three specific prescriptions in this memo while leaving the other two unmentioned (which just goes to show, once again, why reading the actual document is always better than reading the press coverage of it). Even the one they cited was not that egregious in context (more below). Furthermore, Walmart proposed cutting the amount of time until associates become eligible for insurance and cutting the premiums, precisely the opposite of screwing their employees. One of the sources cited for their problems: employees are staying with the company longer, a sure sign that the employees see the job as being better than any alternative and quite probably a good deal.

What about the steps they proposed taking to recruit and retain healthier employees? They specifically state that many of the problems they are seeing are obesity-related, a fact not incongruent with their poorly educated workforce. This is due, in part, to their aging workforce, and also in part to the fact that many people prefer expensive medical technology to changes in behavior. Their solution was to attract a "healthier, more productive workforce" by

• designing "all jobs to include some physical activity (e.g. all cashiers do some cart gathering)." The horror, the horror. Lack of physical activity in fact is the number one cause of obesity, not diet. This is the only one of these measures covered by the newspaper of record.
  
• "Offer savings via the Discount card on healthy foods (e.g., fruits and vegetables)." Oh, the humanity. The vicious capitalist pigs are going to turn their employees into mindless, emaciated vegetarians. Fascists! (By the way ... "the Discount card"? Um, how much is that perq worth?)
• "Offer benefits that appeal to healthy Associates (e.g. an education offering targeted at students)" - this is one of the signs of their move toward a more educated workforce, discussed below. Watch out, uneducated workers: the activists are coming to save you from your terrible jobs.
  

All of those steps would be considered politically correct if undertaken by, for example, Ben and Jerry's, but since they are undertaken by evil, cruel, greedy Wal-mart, they must be meant to be cruel. Think of it: making cashiers get out into the sunlight (out of the artificial light and air conditioned store) and parking lot (where they face dangers including cars and UV radiation), exerting themselves in the sweltering heat. Reminds me of the way unions treat their temp workers!

You would think Walmart would get a break for being the provider of low-cost groceries, clothing , and other necessaries to the lowest income Americans, but Nooooo! (to quote John Belushi).

One "bold initiative" in the memo was to introduce Health Savings Accounts (HSAs) for Associates. In other words, to control costs by eliminating the third party payer system. People who have to face costs directly are more conscious of those costs and will both shop around and weigh their options more carefully. In the present system, where out-of-pocket costs are either zero or a flat co-payment fee, people prefer the premium service to anything else because it makes no sense to take second-best when two options cost the same. After all, "this is your health we're talking about," and, " you don't cut costs when it comes to your health." Now light up another cigarette and have another bacon cheesburger!

Something barely mentioned in the Times article should set off alarms to activists. That is, the memo points out the fact that associates with 7 years seniority are 55% more expensive than those with one year of seniority, but they are no more productive. The memo then goes on to say, under "limited Risk Initiatives", that they should capture savings from current efforts to increase productivity, including reducing the number of hours per store, reducing the number of part time Associates per store, and increasing the number of hours per Associate. In other words, they are going to not hire as many low-productivity, part-time employees, and instead replace them with automation and people who can manage the automation. Translation: the largest employer of the unemployable is going to solve its reputation problem by shifting its workforce toward more educated, employable people and technology. As usual, activists are doing nobody a favor. Indeed, Walmart is so committed to this strategy that they are pushing for increases in the minimum wage because it won't affect them, but it will presure their less-technologically advanced competitors. Good job, activists: you've just threatened the meager livelihoods of the people who have the fewest choices. Now, get back in your BMW and go home to the 'burbs.

The brightest point in the memo to my eyes was an initiative to work with "high performance provider ... networks...."

The quality of care and cost of care vary significantly among doctors. We should be on the cutting edge of efforts to identify the best doctors by, for instance, working with payors to find new ways to identify these doctors.

A later paragraph suggests they "continue to explore adding health clinics in stores." The world will be a much better place when someone figures out how to commoditize medicine, a solution which so far has been successfully thwarted by the most successful cartel the world has ever known: the AMA. Go get 'em, Walmart!

Corporate Social Responsibility

A recent Reason magazine article featured a debate between Milton Friedman, Whole Foods founder John Mackey, and Cypress Semiconductors' T. J. Rodgers. The basic arguments came down to Mackey's defense of a socially conscious and responsible corporation, Friedman's argument that all of Mackey's arguments collapsed to his original claim that the only social responsibility a corporation had was to make a profit, and T. J. Rodgers hodgepodge of ad hominem rhetoric.

When Mackey argues that his community involvement is good for his company, his vision collapses to marketing. When he argues that it is good for his employees, he is arguing for better productivity and therefore profitability. When it is good for customers, he is supporting his value proposition that keeps him in an upscale, high margin end of the market. It is only when he is directly making the point that his profitability allows him to not only sustain his vision, but to enhance and expand it to new markets, that he explicitly recognizes that he and Friedman are making the same points.

There was a block diagram illustrating Mackey's theory about the interaction between customers, investors, employees, and the local community which I found to be intriguing (not found in the online version, dammit). I have been thinking that a corporation can be more than just an investment vehicle: it can also be a vehicle to serve other interests, such as introducing a new type of thinking (e.g. open source manufacture), where profit may be incidental or even non-existent. However, I think that in one sense, Friedman is right: without the profit, you can't grow or perhaps even sustain such a vision. When Mackey says, "I believe the entrepreneurs, not the current investors in a company's stock, have the right and responsibility to define the purpose of the company," I think he is absolutely right. They should define the purpose, but if their vision requires outside investment, they are subject to the same customer-imposed constraints as anyone else (including gasoline sellers). If nobody wants to buy, they may have to revise their defined purpose.

I have written about this under my sweatshop series. Specifically, when trying to identify a solution, I noted that many of the examples of sweatshop-free businesses have been failures to one degree or another. The reason, in my opinion, was that they were focusing on how the garment manufacturing processes and their labor practices impacted the workers, with little or no regard to how they impacted customers. Paying people not to work, as Aaron Feuerstein did, ended up being so costly that he was bought and then forced out. SweatX closed their doors. Those two businesses and their entrepreneurial leaders, despite all of their best intentions, are no longer able to follow their vision because they didn't realize a profit.

My answer to Tyler's conjecture is that Friedman believes that most of the counterarguments collapse to profitability, and that profitability allows the other noble purposes to be fulfilled. If you want to rely on 501c(3) or other charitable means, someone first has to make and save profits to make those happen.

Technorati tags: sweatshop, corporate social responsibility

Gougers II

These two articles were next to each other on the front of the WSJ Online edition (I suspect these are pay articles):

High Price of Gas is Boon for Biofuels
Exxon Mobil Profit Surges 75%

Honestly, you couldn't make this stuff up if'n ya wanted to. In 1998, when the price of oil collapsed to $11 per barrel, the then-secretary of the Department of Energy, who happens to be the now-Governor of New Mexico, proposed a bail-out for the strategically critical oil companies who were being hurt by that "unfortunate" turn of events. Today, the populists want the oil companies to bail us out.

In fact, that was still a part of the Democrats' strategy as recently as 2001, when the Senate Energy Committee, led by Jeff Bingaman (D-NM) after the Jeffords defection, produced an energy bill with this interesting bit of pork in it:

Sec. 606. Crude Oil and Natural Gas Development Credit. Counter-cyclical tax credit for domestic development drilling and enhanced recovery work for natural gas and oil during periods of very low oil prices. Applies when oil is below $11/barrel, phasing out at $14. Intended to maintain stable investment in new drilling to keep the oil and gas service industry employed and to maintain stable natural gas supplies.

Actually, the oil companies already are "bailing us out". How many people actually changed their behavior when Katrina and Rita took 1/3 of the refineries offline? A few, but our consumption didn't fall by anywhere near 1/3. Somehow, the entire industry (or collection of industries) that pump, transport, refine, transport, and market gasoline were able to respond to that unplanned series of events, with barely a bump in the supply. Obviously, since people went right on doing what they wanted, and willingly paid the advertised price, we benefitted from that service. For this we should thank them; they don't ask that, though. They just want to be paid the advertised asking price.

We ought to be damn glad they make lots of money when things go badly and we refuse to change our own behavior. Just imagine if there were no more money to be made in a crisis not of their or our doing? There wouldn't be less money to be made, either, so it wouldn't benefit anyone to redirect fuel from areas like California to areas like Georgia. In the wake of both Wilma and the other storm, the prosecution of "gougers" by the state of Florida, there have been shortages in southern Florida. Duh.

Meanwhile, the recent spate of gasoline prices rises due to rising Asian (Chinese) demand, a decade of depressed exploration and development worldwide, constantly rising western (especially American) demand, tension in the Mideast, and bad weather have raised the related issues of global warming, terrorism, the energy dependence of our way of life, and the central player - petroleum - to levels not seen since 1983. Americans are interested once again in fuel economy, and Toyota and VW are ready for them while GM has its thumb up its collective butt. Every environmentalist in the world ought to get up every morning and thank the CEO of Exxon Mobil that he and the other oil companies are making record profits and not running a loss in order to "hook" us on cheap oil. They ought to realize that BP and Shell, also raking in record profits, are putting those profits right back into their solar and hydrogen research.

The populists - Bill O'Reilly, Dick Durbin, Dennis Hastert, Dick Morris, Jack Kingston, etc. - are calling for action against the oil companies. Newsflash: The problem isn't them. They only supply it and take the best price they can get. Otherwise, they would have run the price up years ago, and it would not have collapsed again in the last week. The problem is us; we keep demanding more and more fuel. Anyone suppose that any of the people listed above has changed their lifestyle by switching to a more economical car?

The only politician I've seen say anything approaching sensible on this issue has been Nancy Pelosi, who called for a repeal of "the tax breaks and subsidies provided to oil and gas companies in an energy bill President Bush signed into law earlier this year." In other words, let's return to something approaching an actual free market, not the mishmash of rules, regulations, tax breaks, sweetheart deals, subsidies, etc.

Amen.

Raise taxes, dammit

I recently posted about a comment made by a woman who happened to be riding the same shuttle as I. Actually, she made two memorable comments during the ride. When I got in, the passengers were discussing about how much the area has changed in the last 5 years. Since I've lived here about 20 years, I volunteered a few observations on how much change I have witnessed. Then we got into the standard discussion about the housing growth, where everyone could possibly be working, and the general conclusion that most of the growth is from retirees.

Then she made the oddest statement. Completely out of the blue, she said, "Well, one thing is for sure: they need to raise taxes to improve the schools." It struck me as odd because no reference was made to how the money is currently spent, how it could be spent better, how much is being spent, whether the schools are actually doing a good or bad job, social factors (including economic factors and the effect of immigrants), whether taxes wasted in a number of other ways could be redirected to schools, whether recent retirees buying big houses were already a net tax revenue increase (no kids, high property tax), etc. Just, "raise taxes."

I'm not the only one driven to insanity by such ignorance: guest blogger Jason Scorse of the Environmental Economics blog also has the reaction, as he discusses in this thought-provoking post.

For those who generally lean towards the Democrats (such as myself) the nagging feeling that they have truly have become an odd assortment of special interests groups without a clear unifying message is extremely troublesome. The “we need more money for programs X ,Y, and Z” without any assessment of how well the programs are working or how they could be improved is also problematic, and so is the complete lack of courage on the social issues front.

A few years ago, the school board asked the citizens whether they would pay for a new sports facility because they didn't want to pay to rent the university's facilities on game night any longer. It was defeated 2:1. Then the school board miraculously found the money languishing around in a rarely visited portion of the budget (the basement, I assume). They bought a local farm* and constructed a monument to the central tenet of modern high schooling: a football stadium. So my first suggestion is to sell off that land, and to let people who want to play football do it the way Little Leaguers and soccer players do it: join a league, pay your own way, and realize about $100k per school in equipment, staff, groundskeeping, and lost tax revenues.

My next suggestion is to use the unused 25% of the school. For 3 months out of the year, incredibly expensive buildings sit unused. Start year-round schooling, allow parents to opt their kids out (or not) of certain quarters by lottery. Some (me) would prefer to travel in the Spring, some would prefer the traditional Summer break, some (me again) might like to travel to New England in the Fall, and some might like to take up skiing during Winter break. I can't wait until the biannual request for more money because they are overcrowded. They could also rent the place out in the evenings for adult classes and make money that way.

And have I mentioned that a cheerleader carwash is always popular?

* The same people who want taxes raised without reference to anything usually refer to farms and other such spaces as "green space", "wetlands", or "our land" because "our food" is grown on it. As we all know, farmland is becoming rarer because of capitalistic greed, so we need local governments to prevent "sprawl". Unless those same local governments are building useful and necessary things like tennis courts for the people, even though the people foolishly voted against it.

Argoogling

Argoogling: argument by google. Find a key phrase in your interlocutor's argument, google for counterarguments, grab the first few lines of text, pass it off as expertise. CAUTION: When using this technique in conjunction with scholarly articles, you may be tripped up by the nuances in the author's argument. For example, they may back off from the hypothesis in the final summary, providing either counterexamples, other areas for research, or mitigating circumstances.

Alternative spelling: argugling

Definitive characteristics of pathological argooglers: failing to note major points, resorting to name-calling, flaming, etc.

In the year of google, 7

On the way to the airport in a shuttle, a woman who was running late made a remark about pulling an OJ Simpson through the airport. After a long pause, I remarked that such a statement might have a different connotation to someone who grew up in the 90s. Did she mean she was going to kill her ex-wife and her boyfriend, leave footprints in the blood and their blood in her drain, before flying to Chicago to dump the knife? I guessed not. But how to refer to a bygone, innocent era when it would be difficult to find out about such things?

Frankly, I'm surprised that googling "bg 'before google'" only yields 443 hits. A new meme is in order: we should start referring to the era before 1998 as "ceag" (common era, ante google). That was the era when people either had to agree to disagree because they couldn't check facts, or when they had to go to the library and spend time acquiring knowledge. We now live in the cepg (common era, post google), where everyone is an instant expert on everything.

Yes they are.

Yes they are.

Okay, you're right: no, they aren't.

If you participate in any active blog or other comment sections, where there is some interaction and disagreement between the commenters, then you have probably seen the Instant Expert. They never take the time to seriously consider opposing viewpoints. Instead, they fix their attention on some trivial aspect of a counterpoint, use Google to find some rebuttal, and use that rebuttal in place of a real, reasoned, argument. Sometimes that method leads them into defending the indefensible, an error which degenerates into the snide comment and name-calling flame war.

But I digress.

As I'm sure many people are aware, the power of Google is such that you can come up to speed on topics relatively quickly. There was a recent story about Colin Powell using it to come up to speed about a UN resolution while the Russian ambassador was still on the phone. This kind of access to information has a dual-edge power; the dark side of it is that people may become complacent in a number of ways:

• If you can have instant access to all information, it is unnecessary to develop any true expertise in any subject. Of course, it is hard to win acceptance on a job application by using "proficient with Google" as a qualification.
  
• When the cost of researching was high, we were more selective about what to research. Now that it has lowered, we try to research too many things at once. This is similar to the bullet above, but there I was talking about the temptation to never build expertise, here I am talking about the temptation to become expert in too many subjects
  
• The well-discussed problem that the lack of a gatekeeper on the internet means you don't have a gauge for the quality of information. That may be true, but there's a technological answer: gatekeeper sites such as refereed journals and commercial sites also have websites.
• Using google in the manner described is really no different than using PowerPoint to discuss complex technical issues, an error that Edward Tufte has discussed at length. Root cause analysis by bulleted list ... like this one
  

One benefit of Google, however, is the fact that it may change the way business is done. In the ceag, it was necessary for businesses and professionals to maintain a physical presence such as a shop or PO box. Moving ceag meant incurring expenses which sometimes precluded the move; moving cepg means keeping a web presence and updating any physical pointers (addresses, phone numbers) on the website. You can always be found, if you want to be, cepg.

Graphical Oil Paths

I've been thinking about a graphical depiction of the future of oil prices and production. Below is the updated but entirely American version of Figure 3 in Amory Lovins' Winning the Oil Endgame (which depicts world consumption). The data comes from the EIA historical website (production and oil prices to the refiner, adjusted to 2005 dollars with the BLS inflation calculator). (click on graph for a larger version)













Here's the narrative: Starting in 1973, production (demand) rose rapidly until the Arab embargo of 1979. Then, prices rose rapidly and production (demand) fell. By 1990, production (demand) had risen again to about the same level as it had been in the mid-70s, but real prices were lower. Prices remained steady even as production (yes, also demand) had risen far above what they had been in 1979. Lately, as everyone is well aware, prices have again risen, even as production (demand) skyrocketed throughout the 90's and 00's. But in the last few months, demand has finally fallen off. (The chart uses annual values until we get to January 2005, at which point it switches to monthly values through July. Both price and quantity values were not available for August, neither was available for September. I guessed that prices would be up and quantity down for September because ..., well, because it was obvious.).

So, now what? There are, as I see it, three options:

• The Peak Oil Pessimist path: Prices will continue to increase, but supply will now constrain demand and will gradually fall.
• The pseudo-Simon Optimist: We will continue to find more oil and prices will come down. I call it "pseudo" because I don't read Simon as having said we will always find more. He said that we will never run out, and that's a different statement.
  
• The Substitution Optimist: We will find substitutes and alternatives, driving both the price and the quantity consumed (supplied) down.

These are depicted here (click on graph for a larger version):















I'm curious about the pseudo-Simon path: will these charts of price vs. production always climb to the right, with periodic epicycles?

Technorati tags: peak oil, julian simon, amory lovins

Idiot Crusaders

Because the areas surrounding Las Cruces, New Mexico, don't have laws preventing crusading idiots from moving into them, ... crusading idiots occasionally move into them. "Las Cruces" is Spanish for "The Crosses"; the city has been around since at least 1848 and some authorities claim that the name derives from grave markers. It lies along the Onate trail, blazed by crusader Don Juan de Onate starting in 1598.

In a completely unrelated story, I'm sure, a certain Paul Weinbaum moved into the area near Las Cruces and decided that he didn't like the city logo, which depicts three crosses. Since he doesn't actually live in the city, he had to sue on behalf of his daughter, and Martin Boyd, who do live in the city. He also felt it necessary to sue the state government, whose transgression was to use the logo on highway overpasses. Apparently, "The crosses serve no governmental purpose other than to disenfranchise and discredit non-Christian citizens." It has not been revealed in what way they have been prevented from voting or otherwise been denied access to anything, ever, by the logo. According to one story in the paper, Paul's daughter was offended at having to sign school papers with a "religious" logo on them. Hmmm ... he's suing on behalf of his sensitively atheist daughter who doesn't live with him? Sounds familiar. He is ... ahem,... they are suing on both constitutional grounds and under the 1964 Civil Rights Act because prospective employees would have to sign a form with a "religious" symbol.

The 1st Amendment of the Constitution reads, "Congress shall make no law respecting an establishment of religion." Since Congress does not pick the City's logo, that doesn't apply and we can move on. The only relevant facts are whether or not the plaintiffs are actually "disenfranchised or discredited", and whether the logo is religious in nature.

Clearly, it is not Mr. Weinbaum's daughter who is offended: Mr. Weinbaum reveals himself to be among the easily offended, and not coincidentally, obsessed, bored, unreasonable, uninformed, an, well, I'm not a psychiatrist, so I'll stop there. Paul, who seems to be among only four people (himself, Martin Boyd, Jesse Chavez (president of an Association formed to file these nuisance necessary lawsuits, and we'll grant him his daughter) who gives a rodent's hindquarters about this (well, until recently, when a local radio station started a "Keep the Crosses" campaign and has since given away hundreds of bumper stickers, and a survey by the local paper was 108-0 against the lawsuit) says that he has protested to the Patent office and written "literally hundreds" of letters to protest the logo. After pestering the city officials this way, he has the nerve to call them the "City Belligerent" (a play on Santa Fe's "City Different"). He claims that he wants the money reimbursed (to taxpayers!) for the building of the logo on a sports stadium, and he wants it removed from everything the city owns. Obviously (to him), removing the logo from every police car, firetruck, building, and form is not going to cost the taxpayers anything because government labor is free. The thousands of man-hours he has personally devoted to this cause that could have been used to do productive things is the only possible meaning of thte "disenfranchisement" claimed in his lawsuit. As for the "discredit", one only needs to read his own words to see how much discredit could be heaped upon him.

So now that I've established that he can't read the Constitution, doesn't understand opportunity or labor costs, and that the only thing disenfranchising or discrediting him is his own obsession with something about which he is patently wrong, we only need to examine whether or not the logo is actually religious in nature. And we got the answer this morning in this letter to the editor of the Las Cruces Sun-News:

In keeping up with the city of Las Cruces' logo controversy, I feel ready to address the issue of the logo's origins.

The early '70s are still a blur as I try to recall how the logo came to be the city's. I was working for the city purchasing department and attending NMSU as an advertising art major.

A city department director had approached me about designing something that our welding shop could make as a wall plaque for the council chambers. I drew up the original design, a design that was changed slightly from what I had done.

If anyone remembers me from back then, I'm the same long-haired, no religion, Black Sabbath music lover, hung-over pot smoking, Playboy reading, Harley riding hippie that drew it up. "Religious symbol" was so far from my mind it had no bearing on the design whatsoever. I love this city today as I did then and yes, I've cleaned up nicely and grown up quite a bit. [emphasis added]

Guess what, the logo still has no religious symbolism to me today. It is the name of our city. We could change our name to what the truckers call it as they come down Interstate 10, but even some one with a vivid imagination would be hard pressed to design a "Stink City" logo.

We know the city's name came from crosses marking the graves of individuals killed during their travels. A cross was quick, easy to make for marking a grave then and getting back to traveling. If things and times were safer then, maybe tombstones could have been put there instead, but there is already a Tombstone so "Las Cruces" it is. To those suing, go away peacefully and leave our city alone.

RAYMOND GARCIA

Thanks, Raymond, for a very funny letter and absolutely conclusive evidence that the logo is areligious. It was designed to be easy to fabricate out of metal, full stop. Now maybe Mr. Weinbaum can move to Santa Fe, San Francisco, San Luis Obispo, San Diego, San Antonio, or any of a number of other places whose historic names reflect the fact that the Spaniards who conquered this territory used their personal belief system as moral cover for unreasonable and unconscionable political actions.

law
constitution
government
religion

Commitopia

What to do about Lenin's body? As Scott Scheule points out,

There's been a bit of hoopla lately about Lenin's body, which nowadays tends to sprout mushrooms and in earlier, more spry times, liked to kill people.

If there were any justice in the world, they would take it out to a shallow grave, throw a little kerosene on it, let it burn for a few minutes, then cover it with dirt and leave it unmarked, the same way that millions met their fate under his rule. Well, except that he didn't starve to death (the way he dealt with peasants) or get a bullet in the neck (the Cheka's favorite method).

But Bryan Caplan suggests that they auction it off on eBay. Well, that's a great idea - and I hope that GoldenPalace.com, winning bidder for the Virgin Mary Grilled Cheese, wins the auction. Why, think of the possibilities: they could open a whole Lenin-themed casino, complete with the opportunity to pull on the corpse's hinged arm for a chance to win $1 million whenever it comes up on 1, 2!, ...yes, 3! hammer and sickles! Think of the garish red-and-gold carpeting, the restaurants that only serve food to every fourth customer (unless you know to "bribe" the busboys, not pay the waitresses). The VIP Club is called - what else? - the Politburo. Leave your kids in The Gulag. You save a fortune on the hotel construction costs because, obviously, there are no phones, carpets, or hot water, and you only have one 30W lightbulb per room. The women's changing room at the DDR pool features heavy duty electric razors to remove that unwanted and unsightly body hair.

You ought to be able to power the place entirely off of generators driven by the spinning corpse.

Biodragster

Cool - via mode5, this Cummins diesel dragster has just dropped into the high 7 second range (7.98) for a quarter mile at 167 mph, running biodiesel from Blue Sun. Cool photographs of what happens when things break on dragsters on the Cummins site. For perspective, Tony Schumacher's current records are 4.437 s and a top speed of 336.15 mph in a top fuel dragster.

Now, drag racing ain't exactly the greenest sport in the world, but it serves a purpose that racing always has: it proves out new technology, lowering the acceptance barriers for consumers. No, you aren't going to be running nitromethane in your commuter vehicle any time soon, but you are much less likely to make stupid comments about how slow and powerless diesels are once you've seen someone take a NHRA trophy with one. And Cummins, a real diesel engine manufacturer, is using a modified engine from a Dodge truck with over 30,000 miles on it!

biodiesel

Porky's II: Back to the Energy?

From the Green Car Congress, the recent Republican refinery bill will blow money on this:

• Directs the DOE secretary to establish and to carry out a program to encourage the use of carpooling and vanpooling to reduce the consumption of gasoline.

I have an alternative solution that could solve both without requiring $1 of taxpayer money. It's called the price mechanism. Higher demand and lower production lead to higher prices, curbing demand and promoting construction of new capacity. Problem solved.

To their credit, it also addresses these problems:

• Cuts the number of "boutique fuels"--i.e., different blends mandated by regional regulation or sold to specific markets--from 19 to 6.
• Encourages the construction of new refineries to increase supply by streamlining siting procedures; providing regulatory risk insurance for refiners; mandating the siting of three refineries on designated federal lands; authorizing the president to enter into a contact to have a refinery permitted, constructed and operated to make petroleum products for military consumption; and removing a number of regulatory barriers.
• Promotes new pipelines by altering siting requirements for pipelines and for pipeline expansions.

Cutting the number of boutique fuels was addressed by Jim Hamilton a while back, so, Congress, good job on that. Relaxing regulations to allow new pipelines and to streamline the construction of new refineries is okay, provided they don't "relax regulations" in a way that shields oil companies from liability in case of a spill or damage to a neighboring property. Wish I had enough faith in these guys. Building on federal lands sounds a lot like giving them below-market leases. I'm also skeptical about the requirement to build a refinery for the DoD.

They do realize that these steps may lead to a decrease in the price of fuel, completely undermining the attempt to encourage car- and van-pooling, don't they? These guys do.

Finally, they had to add on these proofs of their own stupidity:

• Outlaws price gouging in gasoline or diesel sales.

• Permits the DOE secretary to sell petroleum products from the Strategic Petroleum Reserve (SPR) to finance construction of the additional capacity needed to fill the SPR to 1 billion barrels.

Run that second one by me again? They are selling the contents of the SPR to make the SPR even bigger? Hey, let's sell off all of the equipment in the factory so we can buy a bigger factory!

And could someone please define "gouging" to me in a way that is specific enough that not everyone would be guilty, and also in a way that everyone would be guilty if they were actually doing it? One definition I heard proposed was that anyone lifting their price more than 10% about the regional average is a gouger. Under that definition, if everyone tripled their prices, nobody would be guilty of gouging.

Meanwhile, not to be outdone on the pork barrel spending, or perhaps complete lack of math appreciation, Sen. Lieberman proposes that we require 30% of all cars sold be hybrids or "alternative fuels" models within 3 years. Um, Sen. Lieberman, the best anyone is predicting they can do by 2010 is between 3% and 7% (for a roundup of forecasts, see here). That includes the ability to design, test, troubleshoot, and fabricate cars, their assessment of fuel prices between now and then, and their ability to do these things as Totoya increases its market share. Meanwhile, Toyota is building them just as fast as they can, but you idiots think that incentives will make them come out faster. Furthermore, the faster you introduce hybrids, the faster we drop the price of oil.

Look, fellas. Leave it alone. We have the more expensive gasoline that every good environmentalist always wanted (not as expensive as they wanted it, but at least more expensive). This will encourage the steps everyone wanted. SUV sales have cratered. Toyota, Honda, and Ford are all selling hybrids. VW and Mercedes are selling turbodiesels. Biodiesel is competitive. Heck, bicycle sales are up. The market works; please don't screw it up.

Energy Intensity vs. per Capita GDP

From the EIA, I plotted this:














Norway and Canada are profligate energy users. "But," you protest, "it's colder there!" Yes, but it's colder in Japan, too. Japan, though, doesn't have much hydro from which to produce electricity; they have to import it all. The expense of importing all of their energy disciplines them to make better use of it. The spot marked "United" is the US.

Is Lean Production Hayekian?

I had a eureka moment earlier this week: Lean Production is Hayekian in both a macro and a micro sense. In the macro sense, this management theory evolved in an intensely competitive environment and came out on top. In the micro sense, Lean solves the knowledge problem within the corporation.

Producing complex machines (system of systems) requires lots of information gathering. In the Classical model, economists imagined a society of small, atomized producers in contractual agreements. For example, obtaining part A (brakes) would look like this:

• Send out a request for bids for A
• Response from supplier #1: I make A' (like A, only different)
• Is A=A'?
• If no, then change design to accommodate A'?
• If no, then change A' to A?
• Bid based on quantity, price, quality, duration of contract, other considerations like adjustment to demand, etc.
• What about competing bids and bidders: How does A' compare to A''? What if better design, higher price?
  

All of these are costs incurred just to get to the point of agreeing to a transaction, i.e. they are transaction costs. In "'The Nature of the Firm" (1937), Coase suggested this as the basis for creating a corporation in the first place: reducing transaction costs. Instead of going out for bids for these parts, firms will either grow the ability to do the work internally or buy a manufacturer outright, and then dictate design and cost to that department.

Exit the Classical model and enter the model of early mass production: Ford. Ford's vision was a completely vertically integrated system, which he realized in the Rouge plant. Ores and other raw materials came in one gate, cars went out the other. Ford was a genius, but he was also paranoid and insisted on centralizing all decisions in himself. This meant that one man, Henry Ford, had to have his hand in design, production, sales, marketing, finance, and everything else it took to make an automobile empire. The result: they made one model (the T), and they made it in every color you wanted as long as it was black. When Ford's mental faculties began to decline, so did the company.

Alfred Sloan at GM solved Ford's problem. He introduced decentralized centralization (or is it decentralized centralization?), a huge bureaucracy designed to solve the knowledge problem within the corporation by breaking it up and only dealing with aggregates. GM was (and is) a group of autonomous divisions managed "by the numbers"; they attempt to obtain economies of scale by sharing parts across platforms. Sloan graded each division chief on yield (number of cars) and quality (number of cars without defects), but that gives them the wrong incentive: managers move production lines quickly, fix problems in post-production, and keep huge reserves to prevent hold-ups. The central office decides how many of each car to make, then they make it dealers' problem to get rid of them.

While they solved the problem that Ford had - that no single person could possibly absorb, sort, analyse, and act on the information required to coordinate all the company's activities - the GM bureaucracy creates a huge overhead of specialists and a new knowledge problem. In the GM system, design engineers work with marketers, but don't know manufacturing, production engineers know manufacturing but not customer complaints, and industrial engineers are brought in to bridge design and manufacturing. The top knows whether each division is meeting its goals (whether the goals are appropriate is another question), but the left hand doesn't know what the right hand is doing, so they have to hire more hands to pass the information around. Thousands of faceless, third assistant headlight bezel design engineers have to put cover sheets on hundreds of thousands of TPS reports - didn't they get the memo?

Lenin's adoption of the dominant structure in America in 1918 (Taylorism and Ford-like centralization) turned out to be a ruinous decision from which Russia has yet to recover. If Schumpeter (Capitalism, Socialism, and Democracy, 1942) had been right about there being no significant scientific discoveries left to make, and that the only thing to do was to manage the economy scientifically (a gross oversimplification, I know), it's quite likely that the GM model, which was ascendant if not dominant at the time, would have been adopted. We would have had "corporatives" in another guise.

Fortunately, Schumpeter's observation about "creative destruction" was to prove his most lasting, and it was about to be illustrated in a way that hasn't completely run its course, even today. A Japanese engineer for Toyota by the name of Taiichi Ohno solved both the Ford and the GM problem with a set of brilliant insights, made necessary in part by Japan's post-war poverty (what is it they say about necessity and invention?). He developed a way to distribute decision-making at the lowest possible level, giving every floor worker the means and the directive to stop the assembly line when they saw the need. He also set up a system where downstream operations - starting with the dealer - initiate upstream activity by demand pull. Finally, designers, marketers, and factory floor technicians work together to solve customer complaints, adopting new accessories and features as needed. Toyota's cars are less costly to make in part because they design manufacturability into them. The central office provides guidance on strategic relationships and strategic investments. Today, the Toyota Production System (TPS) is the dominant paradigm. (The historical description of Ford, GM, and Toyota presented here is condensed from Womack, Jones, and Roos' The Machine That Changed the World: The Story of Lean Production)

Researcher Steven Spear says of Lean manufacturing,

"The products and services characteristic of our modern economy are far too complex for any one person to understand how they work. It is cognitively overwhelming. Therefore, organizations must have some mechanism for decomposing the whole system into sub-system and component parts, each "cognitively" small or simple enough for individual people to do meaningful work. However, decomposing the complex whole into simpler parts is only part of the challenge. The decomposition must occur in concert with complimentary mechanisms that reintegrate the parts into a meaningful, harmonious whole."

Note the similarity with Hayek's observation in The Problem of Knowledge in Society:

"Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others."

It was upon reading Spears' comments that I realized that Lean is Hayek writ small. And large, as tiny little Toyota prepares to overtake big, bad GM (here, here, here, etc. - what the hell do you have to hit these guys with to get it through to them?).

Am I going too far in drawing an analogy between central planning and free-market states and between old-style mass-production and Toyota lean production? In both cases, central planners are remote from information and problems. They suffer from the fact that even if everything relevant could be communicated to them, there is too much information for one person to absorb the minimum information necessary for one person to make sound decisions. The GM (mixed economy) model is more successful than Henry Ford's was (was, not is: Ford has supposedly seen the Lean light) because it moved slightly toward decentralization, but it sets up a bureaucracy of specialists and bad incentives. Worse, central planning treats employee/citizens as cogs in machine, justified by the thought that "what's good the company is good for them". The central government/management is in an adversarial relationship with the citizens/workers. On the other hand, the Toyota/market system puts decision-making with those who have the best information, it eliminates specialists and their regulations, it allows more spontaneous decision-making by autonomous groups, and encourages cooperation among citizens/employees, among suppliers/trade partners, and between employees and the company.

That begs the question - why not make employees completely autonomous? One answer is that citizens in a market economy have complete autonomy about what to do, how to do it, when to do it, indeed whether to do it, but you cannot run a company nor raise capital on that management philosophy. Under TPS, employees have no autonomy in the short run about what to do, but in the long run they (in their role supporting the designers/marketers) may decide that disc brakes are less valuable than regenerative braking systems in some future model. Lean requires absolutely no autonomy in the short run about how to do it work because standardized work is necessary to process understanding and improvement, but in the long run, teams are required to improve methods constantly. Finally, Lean dictates when actions are performed by the pulling mechanisms (kanban).

So, what about the other question begged by my analogy - can you run a country like a lean company? I would say "no" for several reasons. First, a society is not the same as its government (witness current conditions), whereas a company may be closely identified with its governing board, executives, etc. Second, a company (especially Toyota) is an entity born of cut-throat competition whose goal is to gain 100% market share. No government wants that, and no society should want it. Third, a company has a few specific inputs and outputs, while a country has potentially unlimited inputs and outputs (Japan and Hong Kong have been surprisingly productive for countries with virtually no natural resources). Fourth, employees leave every day, and are (in general) compensated fairly, while citizens are largely stuck in their country 24/7, compensation and taxes vary widely and sometimes unfairly.

Finally, I'd like to suggest an area for possible research. The Lean company still exists to minimize transaction costs compared to the condition in the idyllic, atomized society of small craft manufacturers, but Lean production succeeds because it serves to minimize transaction costs on use and distribution of knowledge within the corporate context. You don't have to fight to convince someone that you know a better way or that it should be adopted, nor do you have to fight to find out who has that kind of knowledge: the people who need or have that knowledge are already working together. That leads me to wonder if there is a theory of minimum possible costs, or a theory of The Perfect Corporation? If so, you could measure against that instead of your competitors, much in the same way you can calculate theoretical limits of quantum efficiency and then gauge semiconductor design against those. Lean may be better than GM which was better than Ford which was better than craft fabrication, but there may be a next generation more efficient than Lean, and such research might indicate how much more efficient a productive process could be.

lean production
lean
hayek

O'Reilly's economic illiteracy

I'm glad I'm not the only one who spotted O'Reilly's recent public demonstration of his complete lack of economic literacy. My observations were here, where I said

Lately, Bill O'Reilly has been demonstrating how poorly he understands not only the marginal concept, but how many bad economic cliches he can make when bloveating in full populist mode. Last week, he was telling us that they are obviously price fixing because oil only costs $4.50 for the Saudis to pump. That's the low cost oil, but we can't have all of it at that price. Last night, he advocated the "don't pump on Sunday" meme, exploded here. He didn't see how the hurricane in Louisiana has an effect on prices elsewhere, a problem exploded here. He seems to think that oil is different than any other commodity because, "I have to (heat my house, drive my car, etc.)." Have to. Apparently, neither O'Reilly nor the people he is looking out for own sweaters, have the ability to add insulation to their houses, couldn't live closer to work, can't carpool, can't buy smaller vehicles, can't buy smaller houses, couldn't prepay their gas last year, etc.

Kyle Markley does a great job of tracking down a transcript of the TV show and blowing it apart, line by line, on his Cap'n Arbyte blog. He quotes (with analysis added) the following unbelievable lines:

Getting to the bottom of high fuel prices. That is the subject of this evening's Talking Points Memo. It's not easy. Last night we had an extensive discussion about the pricing of gasoline and the huge profits American oil companies are making. One thing struck me: after all the experts we've talked with, after all the research we've done, we still can't find out who exactly sets the price of a gallon of gasoline. Which human being in America does that?
[...]
Every time I ask who sets the price I get "the market", "the Merc", "OPEC", and on and on. Well it's all B.S. Somebody tells your local gas station owner exactly what to charge. Somebody does that.

Kyle does miss one point, though: milk prices are set by a complicated formula and administered by the USDA.

O'Reilly's bio says that he has a degree in history from Marist College, a master's in broadcast journalism from Boston University, and a master's in public administration from Harvard. Apparently, none of those included a class in microeconomics. Surprisingly, the MPA didn't include a class in the operation of the energy markets or regulators. And finally, apparently nobody ever suggested to him that if your research produces an answer different from your theory, then perhaps the problem is with your theory. That would explain a lot about the quality of journalism. If a smart guy with 2 master's degrees can't get it right, how can we expect the other idiots to get it right?

I'm always amused by the back and forth between Bill's critics, who can't seem to agree whether he is a left-winger or conservative. They incorrectly use the term liberal, though I agree that lots of people have been misusing that word for the last hundred years or so. Bill is the oposite of a true liberal, one who believes in liberty. Bill is a populist. When he says he's "looking out for the folks", he means it literally. Sometimes that takes him slightly to the right, sometimes slightly to the left. That confuses lots of people who grew up believing that the political spectrum is one-dimensional, where everything is either left or right. Thus, the "either you're with us or against us" mentality of the left- and right-wing partisans.

I'm the opposite of Bill. I'm a classical liberal. Since that confuses people who now believe that liberal means "someone who believes in government intrusion in every aspect of life", we have resorted to using the term "libertarian". We think adults should be treated as adults who can look out for themselves.

Now, if only we could teach Bill that the correct term is "capitalist", not "capitalistic". Heck, why does he stop there? Couldn't he say that this is a "capitalisticasciousnessy" society? And then he could demand to know who it is that sets the price on all of the other goods we consume.

Incidentally, I still like listening to him because he's entertaining. But I do cut his mic when I'm tired of listening to his inane-yet-high-volume rants. If I want to listen to an idiot yelling nonsense at the top of his lungs, I'll listen to Savage or Air America.

Sweatshops all in one post

To wrap up the series I wrote on sweatshops, here are all of the relevant links:

• Sweatshops - Introduction
• Sweatshop Definitions - an attempt to define sweatshops
• Sweatshops and Pay - a discussion of pay, living wage, evidence, questions
• Average wages and average consumers: a mistake - how critics can go off the rails
• My solution to sweatshops - certify quality, not compassion

I believe that the term sweatshop is thrown around far too frequently, that bad assumptions are made, that much of the relevant discussion hides an agenda. The informal definition of sweatshop seems to be, "Any domestic factory that hires foreign labor, any factory operated outside the US, any apparel factory, or any factory used by one of the non-PC companies (Nike, Gap, etc.)." This is disingenuous and does not reflect any deep thinking or research by the speaker/writer. A slightly deeper, yet still not very serious definition seems to be commonly expressed as, "Any factory in which people work long hours in bad conditions for low pay." I don't believe this is serious because it poses more questions than it answers, since "long hours", "low pay", and "bad conditions" are not defined. Long, bad, and low ... relative to what? Certainly not to the next best alternative for many of the laborers; certainly not relative to what was thought to be long, bad, and low just a few years in the past; and certainly not relative to some non-apparel industries in the present. Therefore, I proposed to separate factories (whose hours, conditions, and pay may yet be unacceptable to present day, average Americans who have better alternatives) from sweatshops by this definition:

Any factory where the workers are legally prevented from quitting, striking, or organizing, and/or where the employers have perpetrated a fraud upon the workers by successfully misrepresenting the conditions of work.

My definition assumes that workers are in the best position to make judgements about their alternatives. Under this definition, prison factories, factories staffed by humans smuggled and held captive by organized crime, and other such factories qualify as sweatshops. Factories that you turn your nose up at, but which locals line up to work in, should simply be called factories, and the workers that work there should be able to retain their dignity rather than be wept over as victims by average Americans with a strong urge to treat everyone else as a child.

The next point I wished to make was that it is a mistake to think about the effects of paternalist policies in terms of how they effect the average prices, average laborers, or average consumers. It isn't the average that matters: it's the marginal price, marginal laborer, and marginal consumer that matter. This was the essential insight that broke economic price theory away from the cost-of-production misunderstanding that kept the classical economists from piercing some apparent paradoxes that riddled their explanations. Today, it keeps social critics from understanding why their theories seem to result in unintended consequences and perverse outcomes that need to be swept under the rug in the interest of not being confused by facts.

One solution suggested for sweatshops was to force everyone to pay higher prices because this would force factory owners to increase their workers' productivity. I believe the thinking on this was backwards, not only because it was based on average workers and average consumers, but because the evidence suggests that this will have one of those perverse outcomes. I think it's always more constructive to provide a solution in addition to a criticism instead of just a bare criticism, so I suggested my own solution to the problem of sweatshops. Rather than insisting on raising wages and prices with no compensation to consumers, I think that activists and others should insist on improved quality in their apparel and footwear.

Companies that make good quality manufactured goods should use management techniques that guarantee continuous improvement, standardized and documented processes, and flow. The production system developed by Toyota, whose family background was in textile manufacture, is now known as Lean Manufacturing. Experience shows that workers immersed in this type of factory management are more satisfied with their jobs, that they are more productive, and that they learn more about the craft of design, development, and production. There is a reason that the Toyota factories in the US have resisted unionization: the workers are already satisfied with their pay, work environment, and hours. Consumers are happy with the results. Toyota is preparing to challenge GM for leadership in world production.

sweatshops