The state Legislature today gave final approval to a bill allowing Hawaii to become the first state to regulate gasoline prices.
The price cap would go into affect in July 2004.
The problems caused by the price cap will also go into effect in July 2004.
Gov. Ben Cayetano supports the legislation and has said he would sign the measure to try and lower Hawaii’s gasoline prices, traditionally among the highest in the country.
Which is unrelated to the fact that Hawaii's prices for everything except pineapples and coconuts are traditionally among the highest in the country.
Senators approved the bill by an 18-7 vote. The House passed the bill 30-20, with one member absent.
I want to meet the 7 Senators and 20 House members who were willing to stand athwart the vast economic ignorance of the body politic.
The bill would allow the state Public Utilities Commission to set a maximum price on gasoline based on an average of prices in West Coast markets. Profit margins for dealers would be capped at 16 cents per gallon on regular unleaded gasoline.
If this says what I think it does -- that they'll be setting Hawaii's prices to match those on the West Coast -- Hawaiians can mothball their cars now. But that can't be right; I assume they'll add some sort of shipping premium. Which will almost certainly be set too low. Hello, rationing.
As for that 16 cent "proft", how much do you want to bet that that "profit" is actually the retail price of the gas minus the wholesale price of the gas, factoring out overhead, taxes, land, rent, labor, depreciation and amortization, etc? Hawaiians served by small gas stations should buy a bicycle now; there's going to be a run on the stores when the last station on your turf closes.
Dealers say the preset profit margin will drive smaller gas stations, such as those on outer islands, out of business because their expenses are higher and they operate on smaller margins.
Opponents, who contend the law is simply an attempt to appease beleaguered consumers in an election year, also say the measure will raise gasoline prices by shuttering gas stations and driving some oil companies from the state completely, further reducing competition.
The long delays in the effective dates in the gasoline-price cap were negotiated as a compromise to get the bill through the Legislature, meaning gasoline wholesalers and retailers will certainly press lawmakers in the years to come to repeal or rewrite the bill to make it more to their liking.
So at least we can hope that they didn't really mean it.
NICE CALL, UNFORTUNATELY. This isn't exactly the kind of thing that one hopes to be right about. Nevertheless, labor market gurus Lawrence Mishel, Jared Bernstein, and Thatcher Tiffany of the Economic Policy Institute look pretty good right now. Back in January they predicted 6.5 % unemployment by November of this year. The jobless rate just hit 6.0 %, more than two points higher than its low of 3.9 % in October of 2000. [posted 3:00 pm]
Clicking through to the paper will reveal the Economic Policy Institute's startling insight: unemployment is a lagging indicator. The Wall Street Journal (not to mention yours truly) has pointed this out many times, but somehow, they're not on the Prospect's short list of sources.
Okay, so I'm not a fan. But I'd be just as repulsed if some president I liked did this. (I'm trying to think of a president I've liked. I admit, I did like it when Ronnie got up there and said, "Mr. Gorbachev, tear down this wall!" But not so much on the S&L thing.)
This man was the President of the United States. He held the highest office in the land. First among equals, and all that. And now he's thinking about joining the ranks of Ricki Lake and Jerry Springer?
Peggy Noonan thinks Hilary won't let him. Well, thank God someone in the family has some sense! What the hell could he possibly be thinking even letting this be floated? It's posting a "kick me" sign on the backside of democracy.
Whether or not you liked George Bush I as president, he is currently fulfulling one of the most important roles of the office, which is to shut the hell up when you're out of office. Do not offer unsolicited advice to the current president; do not take some high-profile job the aim of which is to convince you that you're still the most important person in the world. For one thing, that's me. And for another, you're retired. Go write a book. Spending all your time trying to get back in the spotlight just makes us think of those sad women in their fifties who used to be beauty queens and now spend all their time sitting around at bars, wearing too much makeup and hitting on younger men with frozen smiles who are desperately trying to escape the grasp of their talon-like nails.
In other words, it does not burnish your image.
And I won't even get started on the way Jimmy Carter is embarrassing himself by providing a constant reminder of why we had to take our Middle East policy away from him in the first place.
I'm appealing to the Democrats out there in my audience. Can't y'all find a home for these guys? Somewhere out in the country, where they can get fresh air and excercise? And where they, and for that matter we, could have some peace and quiet for a change?
So in the course of the discussion referenced below, Richard Bennett asked why libertarians fall silent on the subject of antitrust. And in the course of answering that (short answer: it doesn't do any good), I came across a very interesting piece of data: after the breakup of Standard Oil, prices rose.
This isn't actually as counterintuitive as you might think. One of the most revered professors at Chicago (revered for his brilliance, not his age; he's quite young) is Kevin Murphy, who was recently in the news for testifying in the Microsoft case. He has testified that in many cases, breaking up a natural monopoly (the kind that arises from market conditions rather than government fiat) can actually cause prices to rise. Why? Because a natural monopolist is typically offsetting a high fixed cost with a very large number of units, allowing them to underprice their competitors, which is what sustains the monopoly. There's evidence that this holds true in the Microsoft case; for a number of reasons, Microsoft is now the low-cost producer of operating system software.
(Yes, thank you over there in the Linux gallery; the fact that they're giving away their services does not make all the people who bring you Linux the low-cost producers. They're incurring economic costs in making the software; they're just not passing those costs on to consumers. Just trust me for now; we'll argue about economic costs another time.)
Pondering this, however, led me to think about global warming. Bear with me for a second and you'll see why.
The evidence that the breakup caused prices to rise is pretty compelling -- prices were declining in pretty much a straight line right up to the breakup, and rising in pretty much a straight line thereafter. But that's not the only factor. The market changed: among other things, the technology improved at a discontinuous rate, the mix of what was sold changed (gasoline overtook kerosene as automobile usage exploded), electricity displaced kerosene for lamps. I'm sure there were other littler changes I don't know about. You have to control for those things -- but it's hard to control for one thing when so many things are changing at once, and when so much of the change is one-shot.
This is why economics is not as rigorous a science as physics; you can't build controlled experiments. Oh, sometimes you can, or as good as; the models tell us that rent control will cause the number of apartment units to decline and the average price to rise, and sure enough, that's what happens every single time. But a lot of the time you can't.
Economists make up for this by getting a lot of data. The good news (for economists) is that there's so much variance in systems; it makes it easy to gather data. The bad news is that there's so much variance; it makes it hard to compare data. But overall this is great, because it allows economists to test, over time and distance, the effects of various policies.
But nonetheless, economists have to be careful in their predictions. Unless an economy is already imploding, you'll rarely see an economist recommend radical surgery, even if they think some system they've designed would be better. They have a healthy respect for the difficulties of forseeing every possible eventuality. One of the interesting things, to me, is how much less sure of themselves economists seem to have gotten since the 1960's.
(Now, the Reagan-era tax cuts may seem to you like radical surgery. But they're actually fairly minor, in global terms. Some of the things that social scientists propose doing to the economy would be the equivalent of an economist suggesting -- oh, I don't know, that we rip out our banking system and stock markets and replacing them with a newer model. Even the technocrats of the New Deal weren't that arrogant.)
Which is sort of how I feel about the global warming scientists. (aha! You see how neatly it segues). I'm not a climatologist; I am not qualified, other than in the broadest sense, to evaluate data on global warming. But I have some serious questions about their models.
Now, I could build a model of kerosene prices from, say, 1850 to 1930. I could factor in all the things I think affect kerosene prices; I could plot the discontinuities; I could do a little tweaking. If I kept changing the variables and the weight of the variables until they matched my historic data, I could probably come up with a model that accounted pretty neatly for the change in oil prices during and immediately after the life of Standard Oil.
The problem is, how do I test it? I can't make it be 1880 all over again so that I can see if the model works. For one thing, my computer won't run on kerosene.
In many ways, climate models are worse than economics models. For one thing, the system is both linear and unified, so that there's no alternate data. I might think that one of the variables in climate change is -- oh, I don't know, the number of swallows. I might even posit a physical model for this having to do with the thundering beating of thousands of little wings. But while the climate change might be associated with the number of swallows, it might just be random variance. Difficult to tell when I've got only one data set, and can't get another.
For another thing, there's a paucity of instrumental data before about 1850 -- the same time our carbon emissions exploded. The models use proxies, which produces a discontinuity in the data. Imagine trying to find out whether rent control lowerd the housing stock if you only had one economy -- New York City -- and your data on actual prices only ran from 1945, forcing you to rely on classified ads before that. How well would your model work? But the problems of climate modeling are even bigger.
Climatologists say that their models work (although explaining 40-60% of the variance in climate seems to be a little weak to me for making predictions, but what do I know?) The point is, their models work to predict the historical period they took their data from. The only way to test the hypothesis is to see if it predicts another period -- either one farther in the past, which makes data harder to gather, or one farther in the future, which means that we have to wait and see.
The ones I see getting published (who are, no doubt, the extremists who make good copy) are saying that we can't wait. We have to do something about global warming right now. But as far as I can tell, the only thing we can do about it is the equivalent of ripping out the banking system, abolishing the stock market, and raising taxes 50% to see what happens.
Kyoto, which most environmentalists agree would do almost nothing about global warming, would have cut GDP growth in half. Average GDP growth is in the 2% range. Cutting it in half would mean a decline in real living standards. And that's the soft-soap approach. Actually getting down in there and reversing the trend would mean going back and living the way we did in 1850 (Say 1865, as we take advantage of our non-carbon emitting technology advances such as -- ummm, the clothespin). Which means 75% of us back on the farm. Raise your hand if you fancy getting up at 5 am every day for the rest of your life to milk the cows.
If there were enough land to return to non-fossil fuel farming. There isn't.
And these are the off-the-top-of-my-head predictions for trying to reduce our carbon emissions to non-warming levels. I'm sure people who've thought about it longer have more thorough ones.
But that's not what you're saying, I hear you cry. You want to do something more moderate. Why? If indeed the models are right, anything that doesn't reduce our carbon levels back to, say, 1880 levels, will let the warming continue, albeit at a slower pace. Handing the problem to our grandchildren with fewer capital resources to spend. Presuming, of course, that China et al democratize and decide to play fair with cutting carbon emissions. How do you justify that moderate position?
Here's how I justify mine: there's not enough data to take drastic action. I won't rely on the certainty of the climate scientists; for people who've revised their positively certain predictions downward numerous times over the last ten years, the climatologists seem awfully convinced that this time, they've got it right. But I want to see a little more proof before you start toying with the economy. An industrial economy's like an engine; you don't rip out a big hunk of it and expect it to keep working the same.
Think of it this way: there's ample evidence that the stagflation of the 70's was brought about by a comparitively trivial offset in the oil supply. Multiply that by 20 times or so and you get the picture of what a really effective carbon emissions restriction might look like. Better yet, go to Argentina.
Update:
I misunderstood the modeling methodology; turns out it's better than I thought, though I still find the data set troubling.
Reader Troy, a climatologist, yells at me in the comments for many things, among them saying that it's not a science. I didn't say that; I said it's not at the same level of surety as sciences where it's possible to do controlled experiments. I think he'll give me that. But then, neither is my love, economics; that doesn't mean I think that you can't do valid work, only that you have to be careful about stating more certainty than you have. The scientists in the media, who may very well be the quotable wing-nuts, are more sure than their models could possibly allow. And they're advocating solutions that are either economically childish, or economically disastrous, based on their lack of certainty.
There seem to me to be troubling holes in the data, like the measurement discontinuity, that aren't resolvable because the system is linear and unified. But I don't know whether a thousand data points constitutes a statistically meaningful sample for climate change, whether a 20 point variance in explanation of outcomes is normal, how sparse the data is the farther you go back. . . in other words, I'm unversed in the tools of the trade. Perhaps these issues have been resolved. I defer to Troy on that; I'm a captive of my experts. But Troy, please don't yell at me for taking a bad reading of data I don't understand too well, and I promise not to send you a paper I understand and then make fun of you for misreading it. 'Kay?
I seem to have inadvertently staked out a more extreme position than I meant to. I am officially agnostic on whether there is significant global warming, because I don't have the tools to evaluate, and because I've got expert advocates screaming in both ears. I am very much in favor of converting to non-fossil fuel sources, but I think that the insistence on renewables is childish and unscientific when Nuclear's right here and it works. (btw, whatever happened to those cold fusion guys? Did it fizzle and I missed it?) I think the whole damn thing has been taken over by uneducated loons who either don't understand the science (I guess I'm in that camp), don't understand the actual economic repercussions of what they are proposing, understand both and wish the problem away by imagining a fairyland of affordable renewable energy (and/or a fairyland of bucolic splendor), or understand neither and imagine that we only continue emitting carbon because we're mean. I have seen no one who is willing to face up to the actual, real repercussions of what they're suggesting we do; either they're wishing away the problem, or they're wishing away the problems of the solution.
I was defending Swen Swenson's contention that, given the variation we've seen in climate over the eons, 200 or 1000 years is too small a data set to make certain predictions and then demand radical action. I still think that's true, in the sense that we could be worried about global warming until the glaciers start forming; in all the stuff I've seen that's serious, the natural variation always swamps the anthropogenic effect. Which might not be true at higher levels; you could answer that, I imagine. But whether or not warming will be disastrous will depend very much on that base level, about which we can do nothing. And the extent and nature of the warming seems to me to be very much (you'll pardon the pun) up in the air.
Incidentally, Jeff Goldstein has a very interesting question posed on his site; the debate is still raging. I'm a little part of it (check the comments). Interesting thoughts; you should definitely check it out.
An alert reader writes to say that Hawaii went ahead and capped gas taxes:
Well, the morons went ahead and did it, and the details appear to be even worse than originally advertised. Among other things, there will be a fixed maximum margin at the retail level. Want to trade politicians?
The state Legislature today gave final approval to a bill allowing Hawaii to become the first state to regulate gasoline prices.
The price cap would go into affect in July 2004.
Gov. Ben Cayetano supports the legislation and has said he would sign the measure to try and lower Hawaii’s gasoline prices, traditionally among the highest in the country.
Senators approved the bill by an 18-7 vote. The House passed the bill 30-20, with one member absent.
The bill would allow the state Public Utilities Commission to set a maximum price on gasoline based on an average of prices in West Coast markets. Profit margins for dealers would be capped at 16 cents per gallon on regular unleaded gasoline.
Dealers say the preset profit margin will drive smaller gas stations, such as those on outer islands, out of business because their expenses are higher and they operate on smaller margins.
Opponents, who contend the law is simply an attempt to appease beleaguered consumers in an election year, also say the measure will raise gasoline prices by shuttering gas stations and driving some oil companies from the state completely, further reducing competition.
Honolulu Advertiser, 5-4-02 (with details on some of their other masterstrokes this session, as well):
Consumer bills gain passage Before long, you may fill your car with state-regulated gas, pay a 5-cent deposit on a can of soda and $1.40 in tax on that pack of cigarettes, and get a check-up covered by state-regulated health insurance.
You may also buy your prescription drugs at a discount through a new state-run purchasing program for medicine. But you won't get a speeding ticket from any roadside photo-enforcement cameras.
Those small but significant changes in your everyday life are the work of the 2002 Legislature, which was gaveled to a close yesterday after pushing through many bills that are obvious attempts to appeal to average Hawai'i consumers in an election year.
In recent years, the Legislature's would-be consumer advocates often collided with entrenched special interests in the hearing rooms of the State Capitol and seemed to accomplish little.
This year, the Legislature brushed off the objections of huge national and international corporations and major local businesses to push gasoline-price caps, a bottle bill, discount prescription-drug pricing and new regulations on health insurance rates.
Gov. Ben Cayetano yesterday gave the Legislature an "A-minus" for its efforts this year, and Democrats in the Legislature said consumers will reap the benefits of additional state regulation of what they call "virtual monopolies."
Some Republicans and industry critics countered that most of the consumer bills that passed are blatantly political attempts to win favor with the voters and predicted most or all will fail or make things worse for consumers.
The public won't know the truth for some time, because it will be years before some of the measures take full effect. Bottles can't be cashed in for a nickel deposit until 2005, while the gas-price caps and a program to have the state negotiate prescription drug discounts both take effect in 2004.
The long delays in the effective dates in the gasoline-price cap were negotiated as a compromise to get the bill through the Legislature, meaning gasoline wholesalers and retailers will certainly press lawmakers in the years to come to repeal or rewrite the bill to make it more to their liking.
Other industry lobbyists will certainly press for changes in a number of the other bills, which means the new governor and future lawmakers will find the same issues on their desks starting next year.
It is also possible consumers will never see an impact from some bills that passed this year. Lawsuits are possible over the prescription drug bills, and are almost guaranteed over the gasoline-price caps.
But as lawmakers left the Capitol yesterday, they had a number of crowd-pleasing bills in their briefcases to carry back to their constituents to prepare for the campaigns this summer and fall.
Listening to consumers
Perhaps the first attempt to appeal to consumers this year was the measure to repeal the state's photo enforcement program, an astonishingly unpopular attempt to use high-tech cameras to cite motorists and force them to slow down.
Cayetano finally scrapped the program last month after the House and Senate responded to an outpouring of public complaints, and voted to repeal it. The private operator of the cameras is seeking $2 million to $4 million in compensation for the termination of its contract with the state.
The only measure to attract anything close to the attention focused on the traffic cameras was the plan to cap gasoline prices. That bill also gained its momentum from public complaints, in this case because of the settlement of the state's anti-trust lawsuit with the oil companies for $20 million.
Cayetano, who was disappointed with the settlement, said he supported price caps. House lawmakers responded with a bill, and Attorney General Earl Anzai weighed in with his own proposal. After initially saying the issue needed more study, Senate Commerce, Consumer Protection & House Committee Chairman Ron Menor agreed to a bill to cap retail and wholesale prices.
The bill, which won final approval in the House and Senate yesterday, would allow the state Public Utilities Commission to set maximum wholesale and retail prices based on West Coast prices. Allowances would be built to compensate oil companies and retailers for transportation, marketing and other costs, and higher prices would be allowed on the Neighbor Islands than on O'ahu.
The measure was strongly opposed by gasoline wholesalers and retailers, but it seems to be a winner with consumers.
"It's good for the people," said Kevin O'Connor, 38, a Nu'uanu automotive technician. "The government has to step in and control what the private sector can't do. You and I know there's fixing going on. It's capitalism run amok. I think it's (so) bad that the government has to step in."
Others want price relief right now and are worried the time delay built into the bill may derail the whole effort.
"I think it's a good bill that should be happening now," said Bill Unruh, 35.
"Because it's being put off, it's never going to happen. I feel sad for the politicians who can't act now. The prices are still high and they (gas companies) still can make 40 cents a gallon."
Health insurance rates
Lawmakers also went after health insurance rates, another situation where they believed a near-monopoly exists in Hawai'i.
House Bill 1761, which won final approval Tuesday, would give the state insurance commissioner authority to review proposed health insurance rates and reject them if they are deemed to be too high, too low or unfairly discriminatory.
If Cayetano signs the bill as expected, rate regulation of HMSA, Kaiser Permanente and other health insurers would begin next year.
That idea also seems to have the support of many consumers, including Manoa housewife Janet Haworth.
"Anything they want to do to regulate health insurance is fine with me," she said. "Regulate it all you want. It's so out of whack right now, hopefully someone will oversee it."
Also scheduled to begin next year is a program to provide the same prescription drug discounts for lower-income consumers as those granted to the Medicaid program. And in another effort to help consumers to purchase affordable prescription drugs, lawmakers approved the "Hawai'i Rx" program to allow the state to negotiate with the pharmaceutical companies for discounts.
Deposit on containers
A top issue for environmentalists at the Legislature this year was the bottle bill, which would impose a nickel deposit on most cans, bottles and plastic beverage containers. It would also impose another 2-cent non-refundable charge at the wholesale level to be used to subsidize recycling.
Representatives of the grocery and beverage industries argued the bill would do little to stop littering, and would divert less than 2 percent of the state's rubbish away from landfills.
Alan Nii, a Kaimuki retail sales worker, agreed. "I don't think it's going to affect recycling," he said. "It's going to look like another tax. I don't think a normal person will go out of their way to get a nickel back."
Others are more enthusiastic, such as Peter Meredith, a 45-year-old Makiki, furniture and cabinet finisher. "People are going to see there's money hiding in the bushes," he said. "It will give people more incentive to recycle. If they don't care, then the money will go to the state."
Balancing the budget
While increasing the cigarette tax in an election year might not seem like a political masterstroke, the majority Democrats believed it was a necessary step to balance the budget.
The voters are generally more accepting of "sin taxes" on alcohol and tobacco, and the ruling Democrats at the Legislature believed they needed the $16 million a year the state will collect by boosting the tobacco tax from $1 a pack to $1.40.
Republicans at the Legislature mobilized to fight Cayetano's controversial proposal to empty the Hawai'i Hurricane Relief Fund of $213 million, and the Democrats finally opted to take only $29 million from the fund.
To make the transfer more politically palatable, the Democrats announced the $29 million is only interest earned by the hurricane fund, meaning lawmakers did not touch the principal in the fund that was collected from the public through insurance premiums and mortgage recording fees.
Lawmakers also increased the fee for marriage licenses from $50 to $60, and imposed a new $4.50 per passenger charge on international and Mainland airline passengers to cover the cost of additional security measures at state airports.
James Miller asks why, if you can legally change your sex, you can't legally change your race and apply for all the benefits from the change. And the asnwer is. . . I don't know.
For those who aren't familiar with it, it's a home shopping channel. Not that I ever buy anything, but I can spend quite a while watching it. The business model fascinates me, and I love watching the ways in which they jigger their prices and service offerings to try to capture as much consumer surplus as possible from a demographic that doesn't have much surplus, if you know what I mean.
I also love watching the spokespeople, because they can find something to say about anything for two minutes. "You know what I love about this super-saver copy paper? It's so versatile. I mean, I can use it in the copy machine, I can use it in the printer -- I even let my kids draw on it, it's that economical. And I love that it's white. I just think white's a marvelous color -- it really goes with everything, and you never have to worry that what you're printing or copying won't show up the way you do with those colored papers. You know what else? This box is very easy to carry. It's got these little cut out handles on either side, so when your shipment comes, you can carry it anywhere -- I know if you're like me, your copy machine or computer is probably a ways away from the door, so it's important to be able to carry it easily and they've put these clever little handles in here so you can do just that." You get the idea.
Well, now I've got a store of my own to try it out on. That's right, I caved in to the peer pressure and opened a CafePress account, with loads of merchandise featuring three logos hand designed by me! More importantly, I got to write the copy for all of my stuff. It's a work in progress -- I imagine Ken Goldstein would roll over in his grave, if he were dead. So go check out my handiwork, and if you actually want to buy something, let me know if you go through with it.
If you want to buy, but you'd like one logo on an item that has another, email me and we'll work something out. Unfortunately, those pictures above aren't in the public domain, so I can't use them, but I think that what I came up with is rather clever, in an adolescent sort of way. Any way, let me know what you think.
I'm looking to do some simple html editing, but not so simple that I can code it myself. Can anyone recommend a relatively inexpensive, fairly functional html editor for moi? Winner gets my undying gratitude.
Joanne Jacobs points out that accountability only works if you don't wimp out:
Three years ago, 430 low-performing schools in California were given more state money to fund improvement. The schools were supposed to show progress or face a state takeover. Now the state is wimping out, reports the Sacramento Bee.
The state quietly has lowered its performance demands and expanded its penalty options for the 122 campuses that declined in student achievement last year and are subject to seizure if they repeat that dismal showing this year.
Put simply, a school could spend hundreds of thousands of dollars in state money, see its test scores fall each of the past two years and still not be taken over by the state or see a single teacher or administrator transferred.
Lowering the improvement criteria should drop the number of sanctioned schools to three dozen this year. That's still more than the state education department is prepared to handle. Most failing schools will face a "soft sanction." A team of education consultants will write an improvement plan and advise on implementation. Soft, yes. But where's the sanction? Where's the accountability?
Bush's "No Child Left Behind'' law demands that high-poverty schools show improvement or lose Title I federal aid. The feds will have to hang tough on accountability. Otherwise, nothing will change.
You know, I'm not saying that people in corporations don't engage in this kind of ass-covering when divisions they're friendly with fail to perform. But the states seem to do it every single time. And at least when companies engage in this kind of behavior, we get the pleasure of seeing them go out of business.
Thoughtful questions on the scandalous wreckage of our mental health system in New York from Gary Farber:
There's not much use in giving the operators of these homes more money without some way to increase the likelihood the money will actually be spent on patients, not simply used to increase the profit margin. How to best fix? I'm not sure. Create an adversarial ombudsman system that gets a tiny proportion of that money when it makes sure the money is spent on patients? It's difficult to find objective markers to tie incentives to, and one doesn't want to simply increase the familiar kind of audit-culture that Chris Bertram has been writing about so well of late. (My mom spent her life working for the NYC Board of Education, the last part as head of the Reading program at Erasmus High School; I know about the audit-culture of non-profit organizations.)
What's needed is a piece of the system to solely look out for the interests of patients, that is as large as necessary to do the job, as small as possible so as to minimize the bureaucracy it inherently is, and that is, of course, incorruptible. Sounds like we need Grey Lensmen. Failing that option?
I don't know either. Government service provision is generally a disaster because the government doesn't really care if you get services, only that you think you get them so that you'll keep electing the politicians who vote pay raises for the bureaucrats who administer the services. (I'm not talking about individual players here; I'm talking about the moral hazard of any system in which the market feedback is non-existant). When the people getting the services are stone crazy, it's more probable than not, as far as I can tell, that they won't get what the voters think they're giving them. This is as true in state-run facilities as private; in costly systems and cheap ones. In any system, the rule is, no feedback, no improvement.
(And I know my fellow libertarians are shocked at my willingness to spend taxpayer money. I make an exception for the retarded and insane, as well as the seriously physically disabled)
So I guess what I'm trying to say is, your guess is as good as mine.
Eugene Volokh has a cite from the American Prospect of Wayne LaPierre saying something excruciatingly dumb:
In fact, Andrew McKelvey's network kind of operates and sounds a lot like Osama bin Laden and the al Qaeda. A billionaire with an extremist political agenda, subverting honest diplomacy, using personal wealth to train and deploy activists, looking for vulnerabilities to attack, fomenting fear for political gain, funding an ongoing campaign to hijack your freedom and take a box-cutter to the Constitution. That's political terrorism, and it's a far greater threat to your freedom than any foreign force.
Wayne, love the organization, but ix-nay on the Osama comparisons, 'kay? I am hereby calling for a moratorium on comparing anyone to Osama Bin Laden unless:
1) They are Saudi 2) They are the head of a shadowy terror network 3) They have spent significant time in Afghanistan 4) They don't photograph well 5) Their name is "Osama Bin Laden" 6) They are dead.
Next project: retire "Nazi" from the general discourse.
Richard Bennett has some interesting thoughts on politics in Silicon Valley.
I'll tell you what drives me nuts about those who advocate regulation: it's always for someone else. These are the people in Silicon Valley who can tell you why the government should poke its nose into pharmaceutical companies, electricity generators, and tobacco firms, but software companies? Of course not -- the government doesn't know how to run a software company! I didn't spend five years living on Ni-Hi and onion soup mix while we started this firm to let some [expletive deleted] from the government tell me how to run it -- he'd just [expurgated] everything up!
Pardon me while I snicker.
More broadly, it is the idea, acquired I know not where, that because what you do is difficult and hard to understand, everything else is therefore simple and easy to understand, and you are therefore qualified to tell other people what to do, but not vice versa. And it's certainly not confined to Silicon Valley. An investment banker of my acquaintance was in favor of regulating, as far as I could tell, pretty much everything more vital to the national interest than the tropical-drinks-umbrella industry, with one curious exception: financial services. Oh, he'd advocate changes, but none that would actually, say, reduce the size of his bonus or his advancement potential. And I sat there in outright horror as this healthy 29-year old male said he'd be perfectly fine if regulating the pharmaceutical industry meant that no more drugs ever got invented. In the interests of fairness, you see -- making sure that drugs we already have get distributed equally. That this grossly privileges those who have diseases for which there are currently good medications available, over those whose diseases have no current palliative, fazed him not at all. That the new drugs might lower overall medical costs by replacing expensive surgery -- oh, don't quibble over details, he had a plan and he was ready to go with it. What's more frightening is that apparently, so are a good portion of our politicians, most of whom have no experience running anything except a lawsuit or a lobbying effort.
So I am now declaring Jane's First Rule of Political Discourse: You are not allowed to propose the government's regulating someone else's personal life or livelihood unless you are willing to accept an equally stringent restriction on your own "For the public interest". I imagine that I shall be one of many flagrant violators. But now you can call me on it. At the very least, it should make people think a little harder before they say "There oughta be a law".
Two seconds after I mention Robert Samuelson, I run across this post from Doug Turnbull:
The unstated assumption [in Samuelson's plaint about P/E ratios] is that investors buy stocks, and stocks are valued (or should be valued) on the basis of their P/E ratio. The fact that this ratio has gone way up since 1950 is supposedly a big problem. But isn't this change just a simple consequence of supply and demand? An even more widely circulated nugget of wisdom is that the 80's and 90's turned the US into a nation of shareholders, and many individuals now invest substantial sums of money in the stock market both directly and through mutual funds.
So, a lot of people now are investing in the market that didn't used to. Or, to put it another way, the demand for stocks has gone up. The supply of stocks, on the other hand, has perhaps not gone up nearly as much. (New stocks are not created ex nihilo--they have original owners who likely stay in the stock market after selling those shares, so stock supply cannot possibly outstrip demand to lower prices.) Like anything, if demand increases, then so does the price. (In fact, isn't this how stock prices are determined? They're set so the supply equals the demand?)
The problem with this is that stocks aren't supposed to have any extrinsic value, which is to say, value set by factors external to the product itself, such as consumer taste, government regulation, or supply and demand. Other than a few people who may get psychic joy from owning Disney or some such, or takeover barons who are trying to acquire a company for some nefarious yet highly profitable end, the only value of a stock to you is the money that you can reasonably expect to flow out of it in the form of dividends, or stock buy-backs -- its intrinsic value. Why is this so? Because no one will pay much more -- or much less -- than a dollar in order to get a dollar. If you're willing to pay more for a stock than the present value of its future cash flows, you're engaging in a money losing proposition. If you're paying less -- well, you're on to a good thing, but like most good things, it won't last. Other people will notice, and the price will snap back to -- yes, that's right, the present value of the expected future cash flows.
Note that that money doesn't have to flow to you. You may plan to sell it in a year -- but they're not going to pay you more than what it's worth to them. And what it's worth to them ought to be -- let's not always see the same hands -- the present value of the expected future cash flows.
That, in turn, is a product of two things: current earnings, and the amount by which you expect those earnings to grow in the future. Those are your cash flows. Now, because there's inflation and risk in the world, a dollar today is worth more than a dollar tomorrow, so you have to discount the cash flows in out years by a factor that accounts for those things. A very conservative discount rate would be 10%. So most earnings are discounted down to nothing, in present value dollars, by the time you look past 20 years, not to mention any projections you make about earnings 20 years from now are useless -- picture projecting this year's earnings for, say, Enron, in 1982.
So that's why P/E ratios historically range between 10-20 for mature businesses: anything higher implies an improbably high growth rate, sufficiently large to outweigh that 10% discount. That's why young industries with a lot of growth have very high P/E's on their stock -- growth rates of a couple hundred percent make out-year cash flows very valuable despite the discounting.
This is a simplistic model (and it's not exactly how you calculate the discounted cash flows -- I'm simplifying like hell), but it is a pretty good description of the intrinsic value of stocks. And it's pretty clear that they have little extrinsic value: few people are buying Microsoft for their retirement portfolio because they expect to enliven their golden years by looking at the pretty stock certificates.
But what about capital gains, I hear you cry? Well, what about them? Unless those capital gains represent accrued earnings that you eventually expect to be paid out, again, in either dividends or stock re-purchases, they're purely speculative.
Now, we're used to using speculative to mean "risky" or "bad", but there's also a technical meaning to speculative, which means buying something now that you think you'll be able to sell for a higher price later due to changes in the extrinsic value of the asset. Many markets, such as commodities, have a largely speculative factor -- a sudden frost shrinking the supply of oranges can raise the value of your frozen orange juice futures independant of the intrinsic qualities of the oranges. But as we've seen, stocks don't have extrinsic value, because no one should be willing to pay more than a dollar to make a dollar. So when people start valuing stocks based on something other than future cash flows, we call this "The Greater Fool Theory", about which long-time readers will have heard me speak (well, rant) before.
The Greater Fool Theory is what we call it when someone buys something for more than its intrinsic value because he thinks that some other idiot will buy it from him at an even higher price. It's what starts all speculative booms. To tie this to our recent stock market bubble: most of the investors are totally ignorant of the financials of the companies involved; they've seen it go up, so they figure it'll go up some more, often because they've armed themselves with some dimly understood investment theory that tells them it will, even though they don't understand the numbers. Many others know, at a more or less conscious level, that they're in the middle of a speculative boom -- they just think they'll be able to unload it on some sucker before the crash. About which they're usually wrong, but that's another rant.
So when we look at today's inflated P/E ratios, there are two possibilities: either expectations for growth in the economy have radically changed, or people are buying stocks because they think that some other idiot is going to buy it for a higher value, independant of the cash flows that can reasonably be expected from the stock. Which do you think is more likely?
Now, that may not be what you think you're doing when you buy a stock. Fine. What were the assumptions you used for your discounted cash flow? How did you generate your pro-forma financials, and what growth model did you use? Did you assume a risk premium of 7%, or higher?
You get my point. You have no idea what the expected future cash flows from your stock are. There's a greater than 50% chance you can't even tell me whether or not the stocks in your 401(k) pay dividends. And don't tell me that it's all okay because you buy mutual funds, either. The dynamic of most mutual funds is this: they say they're going to buy certain kinds of stock. They must buy that stock, regardless of the market. If large-caps are overvalued and you're in a blue-chip fund, you're paying someone else to buy you overvalued stock (they'll probably seek relatively less overvalued stocks, but if the average P/E is 35, whatever they find is probably still overvalued). So you're part of the problem. But don't get defensive -- so are the rest of the 135 million people who buy stock or mutual funds. The market has, collectively, taken leave of its senses. And I'm not on any high moral ground -- I've got mutual funds too, because hey, the money's got to go somewhere.
So to answer your question, Doug, limited supply shouldn't push P/E ratios up to 45, because the stock just isn't worth that much. That it has, means that we've stopped paying attention to what companies are worth. And historically, when that happens, it means that there's still quite a crash to come.
Now, Doug goes on to make a good point, which is that the oversupply of investors in the market has leveled off. I think that you can trace the excessive valuations in some large part to the need boomers have to invest for retirement, whether or not there's anything particularly good to invest in, which is what his post implies. However, he asks whether the market won't just stay flat until earnings catch up to valuations. Well, that's been historically true (check out the nasty two-decade stagnation prior to 1982, during which the market ended at exactly the same level at which it started. Which implies a precipitous real decline in value, because prices stayed flat during double-digit inflation). But it may not work this time. The reason that markets flatten in this way seems to be resistance of investors to selling at a lower price than they bought at, which sets a sort of floor. However, when the boomers retire, that money's coming out of the market no matter what level it's at -- they can't eat their stock certificates. Which starts, by my calculations, in 7 years. Not long enough for earnings to catch up to valuations. So if we don't have a crash now, we'll have five or ten years of stagnation, followed by a hell of a bang. Neither of which looks attractive.
What we won't have is rising stock prices for the foreseeable future -- at least, I can't see how. But I've been wrong before, so there's always hope.
In the first quarter, U.S. gross domestic product (GDP) -- the output of goods and services -- rose at an impressive annual rate of 5.8 percent. But if profits don't revive, the recovery may be weak or stillborn. Without higher profits, companies won't have the funds to finance new investment in factories, software or machinery. Profits also underpin stock prices. Poor profits may mean a poor market, dragging down consumer confidence and spending.
Given the ramifications, the present profits picture seems grim. Both sources of profits figures -- the government and companies -- show big declines. The Commerce Department reports that after-tax profits of U.S. companies dropped 16 percent last year to $482.5 billion from $573.9 billion in 2000. The decline began in the last quarter of 2000. Measured from there to the end of 2001 -- and using quarterly statistics -- the decline is 27 percent. But that's still not as large as the drop in company-reported profits, expressed as earnings per share. In 2000 the reported earnings of firms in the Standard & Poor's index of 500 companies were $50 a share for the entire index. In 2001 earnings tumbled 51 percent to $24.69.
Consider the implications for the stock market. Since 1950 the average price/earnings ratio (P/E) of the S&P 500 has been 16, says S&P's Howard Silverblatt. A dollar of earnings results, on average, in a stock price of $16. The S&P index is now about 1100. Divide that by earnings of $24.69, and the result is a P/E of almost 45. Gulp. The market is counting on a rapid rebound of profits. Investors aren't buying on the basis of today's earnings but on the much higher earnings expected for 2002 and 2003
My take on this -- probably worth about what you're paying for it (didn't you see the tip jar? It's right over there at the left. Convenient location, and it's open 24 hours!) is that the bull market represented, to some extent, a vicious circle of unrealistic earnings expectations putting pressure on companies to produce ever higher earnings, which caused them to fudge the numbers just a leetle bit, which confirmed the unrealistic expectations of the investors, who put pressure on companies to produce ever higher earnings. . .
It's like a supervisor I once worked with, whose idea of leadership was setting just-barely-unrealistic goals for his subordinates. This worked the first time, as they outdid themselves to get their bonuses -- but that just made him think that he'd set the fence too low. After two or three iterations, his subordinates just started managing his expectations with wildly outsized guesses about project requirements, and outright lies about what they'd accomplished. Actual productivity plummeted, because everyone had to spend all their time making up things to put on the report about what they'd accomplished. Not that Mr. Leadership noticed this. But I digress.
The point being that eventually, it no longer became possible to sustain these ever-increasing earnings -- and all the one-off tricks and restatements borrowed future earnings to pump up current ones. That future being now. People are expecting profits to reinflate, but I think we've still got a long haul before earnings have deflated to reasonable levels that will allow for decent future growth. But that's just one woman's opinion.
This is, of course, a gamble now compounded by growing mistrust of corporate profit reports. If Enron taught us anything it is that a company's financial statements don't always reflect -- as they should -- its financial condition. In theory, profits are simple: Revenues (generally, sales) minus costs (labor, material, overhead) equals profits. In practice, complexities arise. . . The trouble with company profit reports -- as Enron reminded -- is that they tend to be self-serving and sometimes dishonest. Corporate discomfort with financial reporting is longstanding. In 1923 only 242 of the 957 firms listed on the New York Stock Exchange provided both annual and quarterly financial reports, says Joel Seligman's authoritative book, "The Transformation of Wall Street."
Legitimate ambiguities exist about how and when some costs and revenues should be recorded. But the ambiguities have tempted companies, especially during the Great Bull Market, to become ever more obscure. One dubious practice has been "pro forma" earnings, which report profits without some costs. Companies with big debts, for instance, omit interest costs. There's a fairy tale quality to this, because (of course) companies have to pay interest. The flimsy justification has been that investors should see how the "underlying" business is performing. (To be fair, companies also have to report all costs according to "generally accepted accounting principles." But companies play down the fuller reports.)
Poor profits signal an economy crippled by some mix of surplus capacity (too many factories, office buildings or companies), weak demand and high costs. The question now is whether the recovery improves profits -- or whether poor profits doom the recovery.
Employment figures come out on Friday. I think we'll have a better idea then what that 5.8% Q1 growth really means -- it's all very well to talk about recovery, but a jobless, profitless recovery is going to offer thin cheer for most of us.
Anyway, I've cut some of the good bits out, so go read the article.
Oh, my goodness: the news is reporting that after a gun fight with whatever would-be martyrs decided to play Horatio at the Bridge (or perhaps, Custer at the Stand would be a more appropriate metaphor), the Church of the Nativity is on fire.
