The only winning strategy is not to play the game…

How is it that America legislative politics have gotten so out of touch, so out of hand– so out of whack?  It’s no secret that lobbying has contorted the system.  Here, from UC Berkeley Post-Doc Fellow David Zetland, a wonderfully elegant explanation of how…

He demonstrates the “all-pay auction,” in which every bidder must pay his/her final bid, regardless of whether or not it wins.

 

Given the “all-pay auction” character of the donation-for-consideration system in Congress, politicians, the beneficiaries of the accumulated bidding for their favors, make out like…  er, bandits.  But citizens– and for that matter, the lobbying interests?  Not so much.

As Zetland observes (alluding to the 1980s classic War Games), the only winning strategy is not to play the game.

At the risk of sounding like the proverbial broken record, check out Change Congress.

 

 

 

The romance of retailing…

A guest post from (Roughly Daily):

source

But then, Zippy can console himself that, as recent honoree H.L. Mencken observed, “no one ever went broke underestimating the intelligence of the American public.”

As we revisit our plans to open that book store, we might recall that this is the anniversary of the premiere (in 1954) of Walt Disney’s first prime-time television program (Disneyland, on ABC; later re-titled The Wonderful World of Disney), the second longest running television franchise in the country (as measured in seasons aired), and arguably the nation’s first major full-length infomercial (…though Bonomo, The Magic Clown, which ran on NBC from 1949 to 1954– and which was essentially an advertisement for Bonomo Turkish Taffy– has a defensible rival claim to that honor).

source

Your correspondent is headed for points antipodal, where, as it happens, the drains do not spiral in a different direction, but where connectivity promises to be uncertain…  consequently, for the next week or so, these missives are likely to be more roughly than daily.

Hoist on our own placards…

source

So, further to the last several posts… why aren’t more Americans protesting the pass-through of bail-out money as bonuses to the financial executives whose deeds are effectively indistinguishable for those of Madoff or Drier?  Why are we not storming the halls of health insurers who stir opposition to reform in the name of free markets, but collude with the immunity of anti-trust exemption?

Why instead are so many marching against reform, waving placards and asserting “facts”– death panels and the like– that simply are not facts?

Why are so many of us acting against our own best interests and those of our society?

Perhaps (as was so often the case) W.H. Auden nailed it:

We would rather be ruined than changed. We would rather die in our dread than climb the cross of the moment and let our illusions die.

Surely, it is time to climb.

(Thanks to my friend Houston Spencer for his reminder of the quote.)

Advocate Lobbies To Make Small Business Even Smaller…

source: Berkeley Rep

Further to “Main Streets or Mean Streets,” this from the ever-insightful Simon Johnson:

The US Chamber of Commerce is opposing the administration’s proposed Consumer Financial Protection Agency, on the grounds that it would hurt small business.  Their argument is that this agency will extend the dead hand of government into every small business.

For the Chamber of Commerce, government is the enemy of small business and should always and everywhere be fought to a standstill.  Chamber Senior Vice President (and former Fred Thompson campaign manager) Tom Collamore sees this as “advocacy on behalf of small businesses, job creators, and entrepreneurs” (quoted in the WSJ link above), and the Chamber has launched the “American Free Enterprise” campaign.

Somewhere, the Chamber’s senior leadership missed the plot.  What brought on the greatest financial crisis since the 1930s?  What has hurt, directly and indirectly, small business of all kinds to an unprecedented degree over the past 12 months?  What is killing small and medium-sized banks at a rate not seen in nearly 80 years?

It’s the behavior of the financial sector, particularly big banks and their close allies – by consistently mistreating consumers.  And the letter and spirit of the regulatory regime let them get away with it.

Some members of Congress honestly believe that consumers should have a free choice, unfettered by any kind of restriction, regarding the financial products they buy.

But spend time talking to any marketing professional or call them to testify before your committee – or just ask Mr. Collamore, who was previously at Altria.  The state of knowledge regarding how to persuade people to buy stuff is impressive, the degree of potential manipulation for consumer preferences is simply stunning, and the “innovations” in this area are not slowing down.

The scope for taking advantage of consumers in subtle ways, or outright duping them, is probably higher for finance than for any other sector.  For fairly obvious reasons, people are more likely to misunderstand credit than, say, furniture.  Ambitious executives have therefore hammered hard on borrowers.  And the implications – as you have seen and are still seeing – of systemic financial misbehavior are awful in terms of human impact and essentially without limit in terms of ultimate macroeconomic downside.

Unscrupulous Finance has brought us down and will do it again.  Those most damaged now and in the future include small and medium-sized business owners who are trying to treat customers fairly.

The Chamber of Commerce is fighting the last war (or the one before that).  Their small business membership should wake up to the current reality and press the Chamber hard to change its position before it is too late.

President Obama needs to go over the heads of the Chamber’s leadership, reaching out to and running ads directly targeted at its small business membership.  The White House has to tackle this head on, framing the issue clearly for people with the help of very clear TV and radio ads.  The Chamber of Commerce is arguing that unfettered finance is good for small business.  They are wrong.

As Tom Frank has asked, “What’s the Matter with Kansas?“

Main Streets or Mean Streets?…

Dark clouds have gathered over small business in the U.S.– and over the prospect that it can lead us out of our economic morass in the way that it has in the past.  Two charts from Calculated Risk tell the unfortunate story:

1) Job losses (from peak pre-recession employment levels) have been worse in this recession than in any since the Great Depression:

click to enlarge

2) Those job losses have come, in this recession, much more heavily from small business (45%) than in the last recession:

click to enlarge

… Which together suggest that there’s less chance than our recent experience might suggest that small business will lead a recovery.  As Dr. Melinda Pitts of the Atlanta Fed (the author of the second chart) suggests:

Looking ahead, it’s not clear whether small businesses will continue to play their traditional role in hiring staff and helping to fuel an employment recovery. However, if the above-mentioned financial constraints [contraction in available credit; see here] are a major contributor to the disproportionately large employment contractions for very small firms, then the post-recession employment boost these firms typically provide may be less robust than in previous recoveries.

The implications of this hit to small business for the pace of a recovery are obvious and discouraging.

But in many ways more concerning are the the implications for the shape of a recovery.  As our economy begins to move up and out of the trough in which it’s mired, big companies will be playing a relatively larger role in the economy– and will be getting bigger (both relatively and absolutely).

Case in point: this morning’s New York Times reports that “Support Builds for Tax Credit to Help Hiring.”  But while one of the aims of the bipartisan sponsors of such a move is “to encourage small-business development,” it’s questionable whether it can.  Those tax credits will be useful only to companies that can find the cash to invest in new jobs that can generate profits to shelter… and in the credit-constricted environment in which we currently sit, that means companies that have either lots of cash or the “too big to fail” credibility that gives them access to debt.  In the current environment it does not mean small business.

Per “Beware the Land of the Giants…,” this is a dangerous situation; all growth is not created equal.  We live in a dynamic global market, where a nation must innovate or fall behind.  And we live in a nation in which wealth and incomes have polarized, and middle- and lower-class real wages have steadily fallen for over a decade.  Leaving aside the powerful arguments for fairness, considering only the economic, we live in a nation in which the lives of most must improve if there’s to be enough consumption to support all.

Which is all to say that, in the situation we’re in, it is not sufficient for the U.S. simply to stabilize its economy; we must reinvigorate it.  And if we’re going to re-energize, that means that we have to find ways to encourage small business, from main street shops to start-ups that aspire to grow into mega-corporations.

And that means that we need to rethink the ways that our government is “helping.”  As noted before, the one thing that the TARP funds did not do is the one thing they were meant to– re-start the flow of credit.   Thus, the continued decline in employment.

So, when the second round of “The Stimulus” comes (and it surely will, whether it’s acknowledged as that or not), it’s critical that it come with enforcement that assures that it is put to its intended purposes.

Similarly, as Congress looks to take steps that will be perceived as responsive to the pain that Americans are ever more widely feeling, it’s critical that those steps– from tax incentives to regulations– actually are responsive.

It’s not so complicated; but it’s hard.  It’s hard because the extraordinary tide of funding flowing into Washington to shape Congressional action– lobbying monies, campaign contributions– is flowing primarily from large, entrenched interests: the big, who want to get bigger.  The change that we need will come despite those efforts, not because of them.

We can, and we should, do our best to keep our Congresspeople honest and on mission.  And, given our not-very-encouraging experience of that effort, we should lean into effort’s like Larry Lessig’s Change Congress.

We are for sure going to continue to pay for the excesses of the past few decades.  The only question is whether we can convert that heavy penalty into the price of renewal.

Looking gift horses in their mouths…

“The Vine that Ate the South” (source: WolfeReports)

When is a “green shoot” not a “green shoot”? When it’s kudzu…

In yesterday’s New York Times, Andrew Ross Sorkin reports on two recent corporate mergers– Abbott’s purchase of a Solvay unit and Xerox’s absorption of ACS, each valued at over $6 Billion.  Good times are back, he suggests.

… taken in the context of what has been a merger drought — in the wake of the financial crisis, deal-making is still off by more than 50 percent from last year — the transactions suggest that the most senior ranks of corporate America may now have a more optimistic outlook on the economy than some people thought.

“Will you see us move with a lot of acquisitions over this next year? You betcha,” John Chambers, the chief executive of Cisco Systems, said in a recent meeting. “Especially if it plays out economically the way that I think.”

In fact, as noted here before, M&A activity has already run hot and heavy in the financial services arena, not despite, but because of the economic crisis and the bailout.  TARP and related funds, ostensibly meant to loosen credit for consumers and commerce, has instead been largely used to fund investments on the receiving banks’ own accounts– to help the favored “too large to fail”  banks buy up competition and expand their market shares.  (See the illustration here for a graphic– pun intended– depiction of your tax dollars at work.)

Now, Sorkin suggests, the imperial expansion moves to other arenas.

The greatest concentration of deal-making appears to be in the health care and technology sectors. Warner Chilcott made a $3.1 billion deal for Procter & Gamble’s drug business last month, for example, and Dell bought Perot Systems, a technology services company, for $3.9 billion. But deals are also being made in other sectors, like food; Kraft’s $16.7 billion unsolicited bid for Cadbury, which was rejected but remains a possibility, is the largest outstanding offer to date.

“If you’re healthy, it’s a great time to acquire inexpensively,” adds Ted Rouse, a head of Bain & Company’s global mergers and acquisitions practice. “But it’s an awful time for two weak companies to merge.”

The experience of the last several decades has trained us to see increased M&A activity as a sign of economic strength.  And indeed, when the economy is fertile– when every company that disappears via acquisition is replaced by two or three new start-ups with world-beating plans, it probably is a sign of economic health.

But when the companies that are swallowed up are not replaced– because funding/credit isn’t available or because IP laws are too restrictive or because oligopolists’ channel power freezes new players out or…  well, you get the picture– the prognosis is not so rosy.  At best, we get a return to the “gray flannel suit” 50s; at worst, a decline into the turbidity of the 30s.

As suggested in “Beware the Land of the Giants…“:

When oligopolies emerge, they do all they can to retard competition and innovation; it’s their self-interest.  But in a growing economy, their impact is measured in “decreases in the rate of growth,” “slowing rates of innovation.”  On balance, things are still trending up.  And to the extent that new entrants succeed, that innovation trumps defensiveness, the oligopolies fade.

But when oligopolies form by default in troubled times, their self-protection can salt the earth around them, can make it hard-to-impossible for ferment– for start-ups or disruptive innovation– to take root…  and it’s from those seeds that strong growth in a recovering economy can emerge.

We have a huge stake in making sure that the more concentrated economy with which we’ll emerge from this downturn is as “un-oligopolistic”– as free and open– as we can make it.

The problem is that it can be very hard to tell one kind of M&A activity from the other while in the midst of the deal stream.  A slide into oligopoly can feel, as it’s unfolding, just like the good old days of the 90s– one exciting deal after another– until it’s too late to do anything about it.  And when so many of the parties to the transactions are paid– and richly paid– on the transactions,  as opposed to the longer term outcomes of the deals (much less their utility to the economy as a whole), there is, to put it politely, no incentive for the actors to pause to consider.

But pause we should.  Vulnerable as we are in what may or may not yet be the trough of economic decline, We can ill afford an implosion of competition that resolves into a tar-baby of oligopolies.

HoHoHo.com…

source: eHow

As Columbus Day heaves onto the horizon, it’s time to steel ourselves for the appearance of Christmas decorations– and displays and promotions– in retail establishments of every stripe.  For each of the last several seasons, the tinsel has come out earlier.  Last year, it was interspersed in some emporia with Halloween frights; this year, we’d best be prepared to see it even earlier…

A Christmas Peril

Even before the Downturn, retailers were working harder and harder to squeeze growth out of the Christmas Season (famously, the period during which many see up to 40% and their sales and as much as 75% of their profits); competition and online-enhanced transparency were taking their tolls.  But with the added pressures of a recession– one in which there’s been a tremendous contraction of the credit that funded both merchants’ stocks and shoppers’ purchases– the game has gotten much tougher still.

Factor in the prospect that the current stock market recovery (and accompanying lift in confidence) is a “suckers’ rally,” and/or that swine flu will take a heavy toll (on the economy, if not lives), and/or that the weather won’t cooperate…  it’s not a pretty picture.  Indeed, Grant Thornton’s Reviving Retail (PDF) report suggests that as many as 10,000 (more) retail stores could close across the U.S. by the end of 2009.

But even assuming that these dangerous dynamics don’t break bad, there’s another challenge to navigate, one that’s already baked into the Christmas Season as a kind of dilemma:

On the one hand… Retailers have, understandably, been reducing their inventory levels.  While there are some signs that confidence may be returning, and thus, that orders may pick up for/in the Dec quarter, the base on which those additions would be made is quite low.  And the conventional wisdom in the investment community (c.f., e.g., here) remains adamant that low inventories are the way to go.

On the other hand… We consumers have been “trained,” over the last 15 years or so, to wait later and later to make our Christmas purchases.  Repeated assurances from retailers that we can “order as late as December 23 for guaranteed Christmas delivery!”, coupled with the sense that, in a growing number of categories, that waiting means lower prices (as retailers begin discounting before Christmas to make their December quarter targets) adds up to an environment in which the cagey shopper waits until the last minute to fill Santa’s sack.

Those cagey shoppers already suffered a fair amount a frantic substitution, as “last minute” meant “out of stock.”  But this year, when it’s likely that there’ll be more shoppers trying to be cagey (or, under financial strain, sacrificing their commitments to frugality only late in the season), that seems likely to be a much bigger issue.

Exactly what all this will mean, of course, remains to be seen; we’ll only know how well inventories match up to demand, and how consumers react to the experience, after the fact…  And that “fact” is likely to emerge very, very late in the season.

The Ghost of Christmas Yet to Come…

But beyond observing that the wise shopper might get his/her purchasing out of the way rather earlier this year , there is perhaps one confident conclusion we can draw:  this should be a good Christmas for online retailing (at least relatively).  Shopping for bargains in an environment of scarcity requires just the sort of ubiquitous access and transparency that on-line provides.

And if either H1N1 or horrible weather do materialize, shoppers are even likelier to retreat to their keyboards.

Which is all just to say that, while e-tailing (and what we might call “web-enabled shopping” from more traditional retailers) was already on the rise, the economic crisis and its manifestation in the retail environment seem likely to accelerate the shift.  I can’t imagine a retail landscape without stores– lots of stores– in my lifetime or in my daughter’s; but it seems sure that the center of gravity in retail will shift to the web (and to what the web becomes)… and, thanks to painful realities of post-Bubble life, that it will shift sooner than later.

The Mattress King is Dead!  Long Live TheMattressKing.com!

It’s a challenging prospect, and, I believe, an exciting one…  if only because (barring too much consolidation in the industry) the same dynamics that are creating the pressure on retail– competition and transparency– are likely to make, ironically, for a return to an important old-fashioned principle.  They promise thoroughly to dilute the effectiveness of the merchandising and advertising that is devoted to selling “differences” that don’t exist…  leaving manufacturers, merchants, and marketers only one viable option, selling real value.

And if so, then, as Tiny Tim proclaimed, “God bless us, every one!”

Happy 9-15!

On the anniversary of Lehman’s collapse, and in the wake of the subsequent trillions of dollars invested in TARP and associated life preservers, one might ask how the bail-out is going.

In at least in one of its hero dimensions– making credit more available to stoke a recovery–  data from Haver Analytics and Canadian advisory Gluskin Sheff suggests not so well:  bank credit has actually contracted to an extent not seen for decades.

source: El Comite De Can Roche, via Miguel Valls Figueras

Taxpayers’ investments in the financial incumbency has famously covered out-sized bonuses, and more vexingly, it has underwritten financial consolidation:

source: Washington Post

As I’ve argued here, I believe that this consolidation is part of an unfortunate trend in the U.S. economy.  But in any case, as we gather flowers to lay at Lehman’s grave, we can note that, as yet anyway, the bail-out seems to have had at best had no positive impact on the central thing that it was meant to cure.

Happy anniversary.

And now, the good news…

Further to the recent “Hi Ho!  Hi Ho!…,” a guest post from (Roughly) Daily:

Eat Less, Live Longer…

The chart above (courtesy of the OECD, via Swivel) plots relative levels of unemployment against life span…  and suggests that there may be a silver lining in the dark cloud of recession: there’s evidence that life expectancy increases during times of high unemployment.

Specifically, this data shows the relationship between unemployment and life expectancy for the USA between 1960 and 2006. The following series are shown:

* LIGHTER PURPLE: residual life expectancy – the difference between the actual and expected life expectancy, in lay-terms, how much longer people lived than they were expected to
* DARKER PURPLE: unemployment % – the unemployment rate for the year

For another dose of encouragement, see this Freakonomics post… and relaaaaax…

As we denominate our blessings in something other than dollars, we might recall that on this date in 1956, Elvis Presley sang “Don’t Be Cruel” in the first of his three appearances on The Ed Sullivan Show…

Hi, Ho! Hi, Ho! It’s Off To Work We Go…

illustration: Harry Campbell/NYT

On the occasion of the Labor Day break here in the U.S. (and, with apologies, a week late for the Bank Holidays elsewhere), a golden oldie:  Andrew Revkin’s 2005 New York Times article on the difference between GNP, Gross National Product, and “GNH”– Gross National Happiness.

We might recall that the vantage from which he was reporting was the climb to the market peak in late 07– indices at record highs and rising; GNP/GDP growing at at roughly twice the rate they had in the mid-90s– an intoxicating ascent that carried Consumer Confidence up with it.   Since then, of course, what turned out to be a bubble has burst.  So we might wonder what the chart that Revkin included with his piece (below) might look like if it were brought current to today.

It’s become a cliche to observe that “you get what you measure.”  But surely the more appropriate construction is “what you measure is all that you get– if that.”  And we were paying attention to too narrow a set of indicators, Revkin suggested (even in the halcyon days of 2005).

The work on defining “Gross National Happiness” continues:  you can see the proceedings of the Fourth (2008) GNH Conference, or attend the Ninth Conference this October.  And you can contemplate other efforts to “internalize externalities,” like the Genuine Progress Index.

But whatever our feelings about one set of metrics or another, it might be useful to ponder, on our extra day of rest, just what it is that we want to work for when we head back to the trenches on Tuesday…