Author: Megan McArdle

Something I meant to write yesterday, but forgot, is that there’s considerable moral hazard if we allow multi-employer plans to segregate the employees of now-defunct companies.  As one of my commenters wrote:

The multi-employer plans are treated differently from the single-company
plans precisely because there is an expectation of the births and
deaths of employers in the marketplace. They are common in industries
like the garment industry, the construction industry and the trucking
industry,where companies come and go frequently.

There are a whole bunch of reasons for this birth and death cycle which aren’t particularly germane to our discussion.  But one thing that is worth noting is that it’s not uncommon for owners to serially start companies, or have three or four companies operating under the control of a single owner.  If you segregate the pensions of defunct firms, it seems to me that you may get a whole bunch of creative corporate bankruptcies so that the government can take over all the old pensions.

It’s also important to note that this is not simply a disaster created by corporate bankruptcies or other market exit.  As the same commenter notes:

The pension laws that govern the multi-employer plans already provide
very specific guidance on how pension fund deficits are to be handled.
In the non-construction multi-employer plans ( construction plans are
treated somewhat differently),the unfunded liability actually belongs to
the employer in proportion to his percentage of the fund’s hours over
the last five years. That liability should actually be booked each year
and becomes a clear balance sheet liability if there is ever a transfer
of ownership. Since the companies have equal representation on the plan
management boards, the rules were devised to give the companies a very
direct stake in the state of the fund and to discourage excess pension
awards.

In the non-construction world,when a company withdraws
from the marketplace or goes bankrupt,its share of the unfunded
liability is immediately due and payable. And the fund trustees have a
fiduciary responsibility to see that what is owed is paid.

So
what is the problem that Senator Casey is trying to solve? Did the
trustees of the plans fail to collect what is owed or assert claims in
bankruptcy? Did they allow the failing companies to avoid paying their
routine contributions? Did the trustees fail to keep an eye on what
companies are getting themselves in trouble? Did the company auditors
ignore this liability? Did the company executives conceal it from their
auditors and bankers? Were the executives negligent in even asking about
it? Many people may be liable, but that is no excuse for a bail out.
And if this is a bill just to solve the problems of one giant employer,
why did they let things get so bad that the problem arose in the first
place? Why wasn’t this problem sorted out in collective bargaining?

There
is no question that a lot of multi-employer plans have seen a growth in
unfunded liabilities since the stock market crashed. But they have also
seen substantial recovery since. And now they have to tell companies
what each has as a share of unfunded liabilities,to further reinforce
attention to the issue.

Now it may be that companies have left
the marketplace. If new union employers have come into the marketplace
there is no problem,since the contribution base hasn’t changed. If the
marketplace has gone open shop, then the plans have to either get more
money in the door from each remaining company and employee or cut the
pensions to fit the money available.

The problem, in other words, is that the pension funds did not accrue adequate assets to cover their liabilities, a problem which in some cases seems to rise to gross negligence.  Now those long deficiencies have to be made up by the companies that are still in business, including those that weren’t around when the worst of the underfunding occurred.

The problem that Casey is trying to solve is that the plans with the worst unfunded liabilities have trouble recruiting new members–both because companies fight hard to avoid “helping”, and because workers are now getting statements showing what terrible state the pension fund is in.  Naturally, the Teamsters would like the government to pick up the tab for their previous poor management, and Senator Casey is, as always, only too happy to help.  But whatever your view on unions, it cannot be true that every single thing the unions want is a good idea.  Just as support for some forms of deregulation does not imply that companies should also be able to dump toxic swill into public waterways, support for unionization should not imply that unions can screw up their pension fund management and get the government to make up the difference whenever the underfunding becomes too noticeable. 

If a company had done this, it would have to declare bankruptcy, and make way for more competent businesses.  Maybe the Teamsters should do the same.

Update:  a correspondent points out that it’s even worse than that.  UPS and the Teamster’s both had a big veto over companies that didn’t keep up their contribution, or the kinds of aggressive accounting tactics that result in underfunding.  Now the union is essentially selling out the workers of non-bankrupt employers (who, as I understand it, may get less than they were promised) in order to help out UPS.

Business – Pension – Stock market – Senator Casey – Investing

The accounts from BP on what happened at the well are sounding more and more troubling.  Warning signs were ignored; BP officials refused to listen to a specialist team that had just arrived, even when said team demanded evacuation (and got it, but only from their own company).  The well blew up a flew hours after their helicopter took off.

When events like this happen, we always ask the same question:  how could people be so stupid?  How could they ignore what is now plain to us?  There will be a lot of answers to that question, but I’m willing to bet that a lot of it will end up sounding like “We’d ignored those problems before, and it always turned out all right.“

Update:  A reader sends along this Malcolm Gladwell piece from 1996.

BP – Helicopter – United States – Business – Oil spill

Pete Davis on the line-item veto and its siblings:

Unless you have worked in the right places in Washington, you rarely see how much White House pork moves into bills before Congress. We tend to focus on congressional pork without realizing that presidents will use additional power to rescind as a lever to gain votes or to punish those who don’t go along or to reward supporters. A president may generate some modest budgetary savings on balance compared to what Congress wanted to spend, but it wouldn’t be worth the price in my opinion.

Line-item veto – White House – United States Congress – Congress – President

This morning, Tyler Cowen links to an interview with Joshua Coval of Harvard Business School on the effect of earmarks on the private business environment of a state.  It turns out that the American political system provides us with a little natural experiment:  when a member of Congress becomes chair of a powerful committee, earmarks to that member’s state or district increase dramatically.  But the result of this spending is more than a little surprising:

Sean Silverthorne: First, a little
bit about your empirical approach to the research. Why did you decide
to study changes in congressional committee chairmanships?

Joshua Coval: Our original goal was to investigate
how politically connected firms benefit from increases in the power of
their representatives. A benefit in focusing on changes in committee
chairmanships is that their timing is largely exogenous from the
perspective of the ascending chairman and his constituents. That is, a
change in chairmanship can only occur if the incumbent retires or is
voted out–both of which are entirely independent of what is currently
happening in the ascending chairman’s state.

Q: One of your findings was that the chairs
of powerful congressional committees truly bring home the bacon to their
states in the forms of earmark spending. Can you give a sense of how
large this effect is?

A: Sure. The average state experiences a 40 to 50
percent increase in earmark spending if its senator becomes chair of one
of the top-three committees. In the House, the average is around 20
percent. For broader measures of spending, such
as discretionary state-level federal transfers, the increase from being
represented by a powerful senator is around 10 percent.

Q: Perhaps the most intriguing finding, at
least for me, was the degree and consistency to which federal spending
at the state level seemed to be connected with a decrease in corporate
spending and employment. Did you suspect this was the case when you
started the study?

A: We began by examining how the average firm in a
chairman’s state was impacted by his ascension. The idea was that this
would provide a lower bound on the benefits from being politically
connected. It was an enormous surprise, at least to us, to learn that
the average firm in the chairman’s state did not benefit at all from the
increase in spending. Indeed, the firms significantly cut physical and
R&D spending, reduce employment, and experience lower sales.

The results show up throughout the past 40 years, in large and small
states, in large and small firms, and are most pronounced in
geographically concentrated firms and within the industries that are the
target of the spending.

Obviously, libertarians will find this result congenial. But frankly, it has me stonkered.  Earmarks are an exogenous gift of cash from outside the state–which in turn means a transfer of real resources into the state.  Why would private activity go down?

I can tell a story about crowding out, where the federal money either does something that the private sector might have done anyway, or hires away resources (particularly skilled labor) from private firms.  If the government is monopolizing the local supply of cranes and crane operators in order to build a new sewage treatment plant, your construction project may not get built.  And because government funds are for discrete projects, and future funds are uncertain–your chairman may get unelected, or their party may lose power–it’s probably hard to get firms or workers to relocate to your area in order to pick up the slack.

I can even tell a slightly more exotic story where there’s what economists call a “resource curse” to federal funds.  Countries that have large deposits of natural resources are not, as you would expect, richer and happier as a result; rather the reverse.  It turns out that when you have a fat supply of practically free money, the elites spend all their time thinking about how to divert that money into their pockets, and none of their time thinking about how to build good political and economic institutions.  And because the government can support itself without tax revenues, it is not made accountable to the citizenry it is betraying.  Norway is the great exception to this rule–but Norway had very strong institutions before it had fossil fuels.

The new thinking is that foreign aid may involve a resource curse as well.  And you can argue that perhaps this argument extends to federal largesse–the more money the state or district receives directly from the federal government, the less incentive it has to maximize the efficiency of its own institutions.

These are interesting stories, but do they explain a 15% drop in capital spending?  That’s a pretty big drop to be caused by something as seemingly innocuous as a new road project.  I remain puzzled, and would like to see a lot more work done in this area.

















United States – United States Congress – Tyler Cowen – Harvard Business School – Congress

Fox Business has made something of a splash claiming that Senator Casey has introduced a bill to bail out union pensions that will cost $165 billion.  Media Matters lashes back, arguing that the bill will only cost $8-10 billion and isn’t a bailout.  Who’s right?

As so often with these things, the truth is somewhere in between.

The bill in question will essentially let multi-employer union pension plans, like the Teamster’s plan that is currently causing UPS so much trouble, segregate out the workers of defunct companies and get the Pension Benefit Guarantee Corp to pony up for their benefits.  Media Matters says that the bailout won’t cost $165 billion, and they’re right;  that’s the total liabilities of the plan.  Theoretically, it could cost $165 billion if every single employer went bankrupt, but that’s not a very likely scenario.

However, Media Matters also says it’s not a bailout, which is silly.  When you give someone money because they’ve gotten their finances into an untenable state, that’s a bailout. $8-10 billion is double the current level of underfunding in the PBGC, and that’s just the undoubtedly rosy number cited by Senator Casey.  If the funding levels of the MEPs get worse (as is possible, even likely) it will cost more. 

More to the point, the multi-employer plans have not paid any premiums for the benefits Senator Casey now wants to give them.  The PBGC provides insurance (for which it does not charge adequate premiums, but that is another rant.)  It is not a charitable institution.

The whole point of a multi-employer plan is to pool the risk, and ensure that workers do not lose benefits merely because they have transferred around.  It is true that there are now big shortfalls in these plans, and the bankrupt employers are (definitionally) not around to help the going concerns make up their losses.  That makes it difficult to convince firms that they should, say, employ teamsters. 

But while there’s a certain amount of unfairness to this, I don’t see why it’s more fair to get the taxpayers to suck up the bill.  The employers knew what they were getting into.  So did the unions.  The PBGC exists to shelter workers from total destitution in the event that their pension fund does not have resources to meet its obligations, and there is no going concern behind the fund able to make up the shortfall.  It does not exist to make UPS more profitable, or more competitive with UPS.

Pension – Pension Benefit Guaranty Corporation – Insurance – PBGC – Business

This weekend, I had a conversation with someone non-crazy who thinks there is a not-insignificant chance that the Supreme Court will overturn health care reform, or at least the individual mandate (it’s not clear what happens to the rest of the law if the mandate goes down; there’s some possibility that this would invalidate the entire law).  Mind you, this person was not suggesting that the chances were, say, 85%; more like 25%.

But in a case like this, 25% is a big chance.  So we spent a bit of time speculating about what would happen next.

We know what happens if the court simply invalidates the mandate:  you get New York State, where the cost of insurance spirals out of control, until the few remaining people in the individual market are so sick that the death spiral bottoms out.  Adverse selection does have its limits, which is why, even before lemon laws, there was a market (however imperfect) for used cars.

What happens after that?  That would leave politicians deciding whether to repeal the most popular features, or end individual health insurance as we know it.  Fun choice.  My guess is that we’d get some weird hybrid model of corporate and state-sponsored insurance–but the state sponsored insurance would probably itself be overwhelmed by adverse selection, or (if we simply funded universal coverage out of tax dollars), by employers dumping their employees onto the public plan.  But I have no idea where the money would come from.

But what if the whole thing goes?  I don’t see a way forward for anything that current progressives think of as health care reform; it basically precludes the Netherlands model, and possibly most of the other European models, though I have to think more about the latter before I’m sure.  But there’s a strong possibility that any ruling that eliminated the individual mandate would make anything but single payer or a national health service illegal.  Ironically, a conservative court might push health policy to the left.

Or maybe a better way to put it is that it would polarize the choices:  incremental tweaks, or single payer. (I assume, perhaps incorrectly, that our legislators would not pursue the folly of guaranteed issue and community rating without a mandate).  Where would it go?

Not, I think, in the direction of single payer.  The bill would be staggering.  Yes, yes, I know you want to raise taxes to pay for it, but the price tag would still give American voters sticker shock.  You’d never get it through the Senate unless the composition of that august body radically changed.

My hope is that in this unlikely event, it would open the way for something more like what I’ve proposed:  catastrophic income insurance for everyone (i.e., the government will cover health care costs above some fairly high percentage of your income), with less support for first-dollar coverage. 

But that’s a pretty wan hope.  And unless these lawsuits clear the court systems before 2014, the dislocations would be massive.

I’m told that the finale of “Lost” had the third highest ad rates of this season, behind only the Superbowl and the Oscars.  How many people watched those ads?  According to Bloomberg News, about 13.5 million.

Compare that to the finale of MASH, which was watched by almost 106 million viewers (including me, up late by very special dispensation). 

Now, MASH was the most watched finale of all time.  But the stark difference between its numbers and those of the most-heralded finale of the year illustrate why no series is ever going to surpass MASH’s record.  (The superbowl finally did this year, as people tuned in to watch the Saints.)  We live in a different world, one where there’s something for almost everyone–but not the same thing.

Lost – Television program – M*A*S*H – Television – Arts

It’s no secret that I am not fond of the teacher’s unions.  I get into a lot of arguments about this, in which I am accused of being uninterested in any school reforms that don’t involve breaking the power of the teacher’s unions.  Of course, short of the not-very-successful class size reduction schemes, there aren’t many proposed reforms that don’t involve breaking the power of the teachers’ unions. 

Exhibit B is Steven Brill’s new piece on the teacher’s unions in New York, which illustrates just how far the unions are willing to go at the expense of the kids.  (Exhibit A is Brill’s piece on the NYC rubber rooms; he’s clearly assembling the material for a killer book.)  They cost the state a chance at millions because they were 100% completely opposed to things like performance pay, or allowing the district to transfer teachers where they are needed, rather than where they’d like to be.

But in a 403-page appendix to its 348-page application, New
York
included the M.O.U. that actually had been signed by all of its school
districts. It was worded almost exactly as the federal government’s
M.O.U. — except that after reciting everything that would be done to
link student tests to teacher evaluations, and to compensate teachers
and move them up on a career ladder according to those evaluations, the
New York M.O.U. inserted this qualifier: “consistent with any applicable
collective-bargaining requirements.” The same phrase was also inserted
after the promise to “ensure the equitable distribution of effective
teachers” — a reform aimed at allowing school systems to assign their
best teachers to the schools most in need. Then for good measure at the
end of the entire M.O.U. this sentence was added to cover everything:
“Nothing in this M.O.U. shall be construed to override any applicable
state or local collective-bargaining requirements.”

Of course the U.F.T.’s collective-bargaining agreements in New York
City, as well as union contracts in much of the rest of the state,
explicitly prohibit exactly the reforms promised in the application.
Changing that is the point of Duncan’s contest. When I asked Tisch about
this, she pointed to another added sentence, in which each school
system and the union agree to negotiate any necessary contract changes
in “good faith.” That’s the “way we solved that,” she says.

“Right,” Klein says. “That’s like telling a woman you’ll marry her in
the morning.”

Nor is it true, as one often hears, that teachers and principals have
nothing to do with the problems, but are mere hostages of terrible
conditions in their neighborhoods.  Brill points to a charter school
that actually shares all of its resources with a public school in the
same building–even, in some cases, the same families, as some send
different kids to the different schools.

But while the public side spends more, it produces less. P.S. 149
is
rated by the city as doing comparatively well in terms of student
achievement and has improved since Mayor Michael

Bloomberg took over the city’s schools in 2002 and appointed Joel
Klein as chancellor. Nonetheless, its students are performing
significantly behind the charter kids on the other side of the wall. To
take one representative example, 51 percent of the third-grade students
in the public school last year were reading at grade level, 49 percent
were reading below grade level and none were reading above. In the
charter, 72 percent were at grade level, 5 percent were reading below
level and 23 percent were reading above level. In math, the charter
third graders tied for top performing school in the state, surpassing
such high-end public school districts as Scarsdale.

Same building. Same community. Sometimes even the same parents. And the
classrooms have almost exactly the same number of students. In fact, the
charter school averages a student or two more per class. This calculus
challenges the teachers unions’ and Perkins’s “resources” argument —
that hiring more teachers so that classrooms will be smaller makes the
most difference. (That’s also the bedrock of the union refrain that
what’s good for teachers — hiring more of them — is always what’s good
for the children.) Indeed, the core of the reformers’ argument, and the
essence of the Obama approach to the Race to the Top, is that a slew of
research over the last decade has discovered that what makes the most
difference is the quality of the teachers and the principals who
supervise them. Dan Goldhaber, an education researcher at the University

of Washington, reported, “The effect of increases in teacher
quality swamps the impact of any other educational investment, such as
reductions in class size.”

This building on 118th Street could be Exhibit A for that conclusion.

It’s not necessarily that the teachers on one side are worse
teachers–but they operate in a very strict system of limits that, for
example, keeps their workday to exactly 6 hours and 57 minutes, while
the charter school classes run much longer.  Even terrific workers can
underperform in that kind of environment.  It doesn’t strike me that it
is likely to be much of an accident that urban schools have gotten worse
as the teachers’ unions have grown more powerful (though I certainly
wouldn’t argue that it’s the only contributing factor).

The issue with the teachers’ unions is not the unions per
se–agitating for higher pay wouldn’t make much difference, and is
indeed probably a great idea.  The problem is that the structure they
impose makes it almost impossible (though not quite!) to innovate, and
to spread the innovations that work. The cushy job protections and
strict work rules are great for the teachers.  But the schools aren’t
there for the benefit of the teachers.

I loathe those neat little summary headlines that purport to tell you why things sold off–“Dow Drops 100 points on unemployment worries” and so forth–as if the journalist surveyed all the millions of people who bought and sold stocks and found out why they did what they did.  So any attempt to fully explain this morning’s ugly market behavior in terms of one factor or another is bound to be deeply flawed.

I think what we can say is that the market is as nervous as a long-tailed cat in a room full of rocking chairs.  And no wonder.  Greeks are rioting again, casting serious doubts on the viability of this austerity plan. European leaders are still muttering about “wolfpacks” in the markets, which is usually the last refuge of desperate finance ministers taking unrealistic positions.  The euro has “relapsed“, falling back towards $1.20.  Jobless claims in the US rose unexpectedly last week, dampening the sense of forward momentum in the economy.  Mortgage applications are down, which means the housing market may retreat from any tentative gains now that the tax credit has expired. Financial reform is moving towards passage “with all the consistency and predictability of an old pickup with a busted clutch.”  And we seem to be hovering on the brink of deflation.

All of this raises the possibility of the dread “double dip” recession.  Worse, that recession was expected to come (if it did) when fiscal and monetary stimulus were withdrawn–not when a peripheral member of the eurozone ran out of borrowed money.  The parallels to the Great Depression are not perfect . . . but they’re certainly uncomfortable.  And if we do double-dip now, there’s a good possibility that we’ll eventually triple-dip, because all that extra money does have to be mopped off at some point.

Which of these factors is driving the markets down so sharply?  Frankly, any of them would be enough to trigger at least a little selloff.  At the moment, we seem to be in the middle of a highly imperfect

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Watching the Massachusetts health care reform unfold is like watching a tragic game of whack-a-mole.  As I noted before, the expected cost-savings have largely not materialized, pushing the thing way over budget, and despite the fact that it already had the highest rates in the country, the cost of insurance is rising at a brisk rate of roughly 10% a year.  The best you can say about this cost problem is the wan defense that I’ve now heard several times:  that by provoking a crisis, the system may now finally do real delivery service reform that will control costs.

Maybe.  That’s not actually what they’ve done so far; what they’ve done is appoint a commission, and attempt to control insurance prices.  Now that the providers are, predictably, losing money, the legislators are taking the mallet to the providers.  Hospitals that make too much money are going to have to make a “one time contribution” of $100 million to a fund to help small businesses buy insurance.

Even if you’re in favor of the healthy reform, this is a lousy, desperate way to go about it.  This kinds of mandatory “contributions” are essentially a punishment for past, legal behavior.  Practically, they tend to be vulnerable to regulatory takings challenges.  Economically, they dramatically ratchet up the risks of doing business in Massachusetts, which tends to do less than delightful things to your market as companies scale back their operations, transfer as much business as possible out of state, or decide to focus their efforts on things the government doesn’t care about so much, like plastic surgery.  And financially, the costs almost always come back at your consumers, as companies ratchet up their rates to make up the losses.

The quality of legislation coming out of Massachusetts on this stuff right now is really frighteningly bad.  There’s none of the technocratic fine tuning that we were assured was the greatest reward of this sort of program, just crude, blanket rules that do much reflect the realities of the market.  Rather, they’re a cathartic outlet for legislators frustration that any reality exists outside of the power of their pens.

Maybe the federal program will be different.  But I’m really not seeing how.  Ironically, the cash infusion from the Feds may save the Massachusetts program from bankruptcy.  But I don’t know who’s going to take care of the rest of us.

Massachusetts – Health care – Insurance – Massachusetts health care reform – United States

I loathe those neat little summary headlines that purport to tell you why things sold off–“Dow Drops 100 points on unemployment worries” and so forth–as if the journalist surveyed all the millions of people who bought and sold stocks and found out why they did what they did.  So any attempt to fully explain this morning’s ugly market behavior in terms of one factor or another is bound to be deeply flawed.

I think what we can say is that the market is as nervous as a long-tailed cat in a room full of rocking chairs.  And no wonder.  Greeks are rioting again, casting serious doubts on the viability of this austerity plan. European leaders are still muttering about “wolfpacks” in the markets, which is usually the last refuge of desperate finance ministers taking unrealistic positions.  The euro has “relapsed“, falling back towards $1.20.  Jobless claims in the US rose unexpectedly last week, dampening the sense of forward momentum in the economy.  Mortgage applications are down, which means the housing market may retreat from any tentative gains now that the tax credit has expired. Financial reform is moving towards passage “with all the consistency and predictability of an old pickup with a busted clutch.”  And we seem to be hovering on the brink of deflation.

All of this raises the possibility of the dread “double dip” recession. 
Worse, that recession was expected to come (if it did) when fiscal and
monetary stimulus were withdrawn–not when a peripheral member of the
eurozone ran out of borrowed money.  The parallels to the Great
Depression are not perfect . . . but they’re certainly uncomfortable. 
And if we do double-dip now, there’s a good possibility that we’ll
eventually triple-dip, because all that extra money does have to be
mopped off at some point.

Which of these factors is driving the markets down so sharply?  Frankly,
any of them would be enough to trigger at least a little selloff.  At
the moment, we seem to be in the middle of a highly imperfect storm.

A rather shocking graphic from Mike Mandel seems to indicated that finance isn’t suffering much during this recession:

At closer examination, though, I’m not sure how much that means. It’s not very surprising that commercial banking has lost very few jobs; it wasn’t the kind of boomtown that, say structured finance was.  And the “Finance and insurance” category includes Goldman Sachs–but also the millions who labor as claims adjusters and call center operators and actuaries in the insurance industry.  Insurance, unlike structured finance, is labor intensive:  it pays a lot of people a little money, instead of a few people a lot.  And it’s a highly regulated business without the wild swings in either demand or profitability that you see in Wall Street business lines.  Given those facts, the bulk of that “finance and insurance” line probably consists of mostly the latter.

That isn’t to say that financial workers aren’t surviving surprisingly well, given the carnage some of its employees managed–just that it’s hard to say one way or another using that data.

Update:  I see Felix Salmon had similar thoughts

So what’s my theory? If you look at the chart, it turns out that the
job losses in finance are put into two buckets. There’s “commercial
banking”, on the one hand, which has had very small job losses: people
have just as many checking accounts and bank loans as they always did.
And then there’s “finance and insurance”, which is what we generally
think of as Wall Street, but which also includes the enormous number of
employees in the insurance industry. And just like commercial banking,
the insurance industry is pretty steady, and is going to have seen very
few job losses indeed. What’s more, it’s probably bigger, in
terms of total headcount, than the investment-banking industry.

So assume that insurance has seen even fewer job losses than
commercial banking, and that it accounts for most of the jobs in
“finance and insurance” — in that case, the job losses on Wall Street
alone could be very large indeed to get to that final 7.3% figure.

Before reading too much into these numbers, then, I’d like to see a
bit more disaggregation. It might be true that Wall Street hasn’t seen
condign punishment in terms of job losses. But on the other hand, it
might not.

Oddly enough, the New York Times health blog has an item on performance reviews, which suggests that they’re probably a bad idea.  In theory, they may enhance feedback between manager and employee.  But in practice, employees should be getting feedback a lot more often than once a year, and performance reviews may embody the wrong sort of feedback.

Annual reviews not only create a high level of stress for workers, he
argues, but end up making everybody — bosses and subordinates — less
effective at their jobs. He says reviews are so subjective — so
dependent on the worker’s relationship with the boss — as to be
meaningless. He says he has heard from countless workers who say their
work life was ruined by an unfair review.

“There is a very bad set of values that are embedded in the air
because of performance reviews,” he told me.

Not every expert agrees that reviews should simply be abolished.
Robert I. Sutton, a Stanford University management professor, says they
can be valuable if properly executed. But he added, “In the typical
case, it’s done so badly it’s better not to do it at all.”

All this is, of course, from the perspective of the worker.  But from the perspective of the employer, the review may not exist to make employees more effective, but rather, to give companies a paper trail.  Lawsuits brought by ex-employees for discrimination or other unlawful behavior probably aren’t as common as human resources managers might think–but even one such lawsuit is one too many.  So companies like to document a record of poor performance and warnings before they fire someone.

This doesn’t actually mean that jobs are any safer: if before, a boss could fire you because he didn’t like you, he can now write you a bad performance review, and then fire you because he doesn’t like to.  But no one ever said our tort system made a whole lot of sense.

Human resources – New York Times – Employment – Stanford University – Robert I. Sutton

Felix Salmon on why people invest in stocks:

My feeling is that people like to invest in stocks because they like knowing that there’s a chance that the stock market will solve all their financial problems when it rises. Think of it as a three-pronged strategy: buy a house, invest in stocks, and work hard. Any one of these three things can pay off with lots of money at retirement, in the way that investing in TIPS won’t.

What’s more, an entire generation of Americans started working and saving and buying a house in the early 1970s — and millions of them hit the trifecta, becoming successful in their careers even as their stocks rose and the value of their real-estate soared. I doubt that particular combination is going to happen again in the U.S., but the experience of that generation is so powerful as to give a lot of people a lot of hope. Even if that hope isn’t particularly rational.

If you’re saving a little bit in the expectation that your 401(k) will boom, your house will appreciate, and Social Security will support you, you may well end up in big trouble.  Modern retirement planning should probably focus more on putting away an unreasonably large chunk of your income.

Paul Hsieh, a doctor, argues that insurers have made a Faustian bargain. They supported ObamaCare in order to get more customers, and now they’re finding that once you pay the danegeld, you never get rid of the Dane:

When South Dakota and Kentucky passed similar “guaranteed coverage” and price control laws several years ago, many insurers left these states
rather than slowly be bled to death. Implemented nationally, ObamaCare
could drive many insurers out of business altogether. In essence,
private insurers would survive only at the arbitrary pleasure of the
government. And the bureaucrats’ whims can be arbitrary indeed.

When insurers recently pointed out that ObamaCare did not actually require them to immediately offer coverage
for certain children with preexisting conditions, Secretary of Health
and Human Services Kathleen Sebelius immediately threatened to issue regulations forcing them to do so — regardless of the actual letter of the law.

And Congress is now seeking to expand the newly-passed ObamaCare legislation to give federal regulators the same power as Massachusetts state regulators to veto proposed insurance rate increases unless federal officials considered them “reasonable.”

ObamaCare
thus places a noose around private insurers’ necks. Insurance companies
will be required to offer numerous benefits determined by politicians
and lobbyists. But they will be allowed to charge only what government
bureaucrats permit. No business can survive long if it must offer
$2,000 worth of services to customers but can charge only $1,000.

Although
it is tempting to take delight at the insurance industry’s self-caused
plight, the inevitable collapse of the private insurance market would
also leave millions of Americans without coverage. Even though this
crisis would be caused by government policies, liberals would gleefully
portray it as a “failure of the free market” and demand that the
government “rescue” health care.

The problem is that Obamacare promised too much:  universal coverage, and no rationing, and lower costs.  Now government is left mandating the impossible (and no, Europe hasn’t found some magic way to do this–David Cutler, one of Obama’s former advisors on healthcare, told me in an interview a few months back that “they all ration”.)  But eventually we’re going to have to actually make a choice, not merely command companies to some how make this mess work.

The problem with the eurozone as currently constituted is that there are wide differences in both the business cycles and the relative productivity of various members.  Normally those differentials are handled by currency fluctuation and monetary policy.  The US finesses the problem of imperfect currency union with mobile labor markets and automatic fiscal transfers.  Absent these, all the work of adjustment has to be done by flexible wages.

Unfortunately, wages just aren’t that flexible–at least not downward.  Wages are what’s known as a “sticky” price, which is to say that they get stuck at various points.  In the case of wages, that means that they’re very unlikely to adjust downward.  In part that’s psychological adjustment, and in part that represents the long-term nature of peoples’ obligations; if you have a mortgage, a couple of car payments, and some student loans, it’s hard to suddenly take a 10% pay cut because business is off.  That’s why recessions tend to be characterized by sharp spikes in unemployment; unable to spread the pain, employers have to fire workers.

Paul Krugman offers a taste of just how big an adjustment will be required:

WAGES IN THE PERIPHERY NEED TO FALL 20-30 PERCENT RELATIVE TO GERMANY.

How hard will it be to achieve this? Look at Latvia, which has
pursued incredibly draconian austerity. Unemployment has risen from 6
percent before the crisis to 22.3 percent now — and wages are, indeed,
falling. But even in Latvia labor costs have fallen only 5.4 percent
from their peak; so it will take years of suffering to restore
competitiveness.

The official answer is that this just shows the need for more
flexible labor markets. But this was a subject we all batted back and
forth in the initial debate about the euro, circa 1990: nobody has labor markets that flexible. If the euro isn’t workable without highly flexible nominal wages, well, it isn’t workable.

I don’t know whether Krugman is right that wages in the periphery have to take a 20% nosedive in order to mediate the productivity differentials.  But I do know that he’s right that nobody’s labor market is that flexible.  In theory, it could happen, over a period of long years.  But it is nearly impossible for me to imagine any country sticking it out that long when devaluation is so tantalizingly possible.

US states don’t talk about this sort of thing because our labor markets are more flexible, because federal policy considerably eases the frictions, and because most of our states never had the capacity or identity to act as an independent government.  (Given labor mobility, people would refuse to secede simply because they have too much family and other ties in the rest of the country).  None of these things are true in any of the eurozone nations; they’re nations, with a strong national identity.

All of which is to say that, like Paul Krugman, I find it hard to imagine all this ending well.  But the universe has surprised me before.

Paul Krugman – United States – Latvia – Monetary policy – Economic

When MassCare passed, it was supposed to lower the average cost of healthcare by getting relatively cheap young people into the system, and ending the inefficiencies of caring for the uninsured.  Unfortunately, it hasn’t quite worked out that way.  The bill for the uninsured only dropped by about 40%; the young, cheap people turned out to almost all need subsidies, and worse, some of them figured out how to game the system by buying insurance, getting a bunch of expensive procedures, and then dropping the insurance again.  There was a brief improvement in insurance prices for the individual market, because Massachusetts, with its community rating and guaranteed issue, had had a pretty sizable problem with adverse selection.  But after a few years, insurance costs were still marching briskly upward, rates were among the highest in the country, and the system was putting heavy pressure on a budget that was already strained to the limit by the recession.

The Massachusetts governor’s answer to this problem was to
simply deny the Massachusetts insurers the right to raise their
prices.  Then, when they refused to quote prices on the exchange at the
old, controlled prices, the government essentially argued that they
were a bunch of whiny liars who didn’t need all that extra money, and
commanded them to list their insurance at the old prices.  As far as I
know, they never did find an actuary to sign off on the mandated
prices, but the insurers lost their hearing.

Well, now the whiny liars have upped the ante, claiming that they lost a bunch of money in the first three months of 2010,
mostly thanks to the extra money they had to reserve against the losses
they anticipate under the new rates.  It will be interesting to see
whether we get another War on Accounting, where Deval Patrick accuses
the state’s biggest insurers of the dastardly use of Generally Accepted
Accounting Principles in order to embarrass his awesome government
program.

And indeed, it’s not impossible that there’s a
strategic element to this; there’s always discretion in how companies
reserve for losses.  There is also always the possibility of accounting
error.  But those possibilities are not unlimited, because financials
have to be signed off on by auditors who are keenly alive to the
possibility of ending up on the wrong side of a lawsuit if they wink at
obviously misleading representations.  And four different companies
probably didn’t all make the same accounting error.

There’s a
depressing possibility, even a likelihood, that this is our future. 
It’s hard to simultaneously expand demand, while lowering the
incentives for supply (i.e. Medicare reimbursements), without having
some pretty dramatic mismatches between the two.  There’s an old adage
common in restaurants and engineering that goes “Good.  Fast. Cheap. Pick Two.” 
Change that middle word to “Universal” and you’ve got a pretty good
summation of the problem that Massachusetts now faces–and that the
rest of us soon will.
















Insurance – Deval Patrick – Massachusetts – Health care – Governor of Massachusetts

Commenter Dave Walser makes a good point:

What Professor Brown and others fail to understand is any measures that would increase the pay of adjunct professors would only increase the imbalance in the job market. If it were easier for an English PhD to make a living, more of us would have gotten that degree rather than pursuing a different field. I know I would have rather spent my days in college reading and discussing quality (and usually interesting) literature rather than parsing the tax code. I suspect, even today, I’d rather spend my days discussing Hamlet than accelerated depreciation. In making my choice between English and accounting, I listened to the price signal sent by starting salaries and earning potential. Dilute that price signal and many more will opt for a career in the humanities — which makes sense since the humanities is more intrinsically interesting as a field.

In other words, fixing the misery would only distribute the misery to PhDs who couldn’t get jobs as adjuncts.

A year after the bailouts that I, among others, opposed, General Motors has announced its first real profit–$1 billion in positive cash flow, and $865 million in net income.  At this pace, GM may emerge from bankruptcy and go public by the end of the year, which will allow the government to recoup some of its investment.

This is great news for taxpayers, and for GM employees.  The company didn’t just achieve the profit by cutting costs, but also by improving the revenue side.  However, there are still some dark spots on the record:

1. GM achieved its profits at a time when the number one Japanese carmaker was taking a giant hit to its reputation for quality.  Yet The Truth About Cars points out that it still slightly lost market share compared to Q12009–which, you will recall, was not exactly a stellar moment for the firm.
2. The Truth About Cars also points out that percentage of fleet sales actually rose, to 31% of all vehicles, and 40% of cars.  Fleet sales are often less profitable than retail sales, particularly to car rental firms, and they also depress the secondary market for your product–which in turn makes retail sales less profitable.
3. GM is looking to move back into the auto financing business.  It was a truism for years that automakers were actually financial firms with an auto business on the side, and this was one of the reasons that they were hit so hard by the financial crisis.  I’d like to see GM develop its core competency as an auto manufacturer again before it dips its toes back into the banking industry.
4. Europe is still struggling, while trucks are performing slightly better than the rest of the company.  That means that GM is still having trouble in small cars, doing better on big ones . . . at a time when gas prices are probably headed upwards.

But still, it’s good news!  Everyone should want to see GM do well.

The obvious question for folks like me is:  does this vindicate the bailout?  I don’t think so, for a bunch of reasons:

• Bailouts are, on principle, a bad idea–they murder economic dynamism, and breed really unhealthy relations between corporations, labor unions, and the state. (Yes, unhealthier than what we have now, on the relevant dimensions)  Doing this one will make it harder to avoid bailing out other struggling firms.  Even if this one had been individually worthwhile, it would still be dangerous because of the precedent.
• That said, the cost-cutting that made this turnaround possible is an effect of bankruptcy, not of government bailouts.  Arguably, the government interest in maximizing the number of UAW jobs has made things worse (though arguably, the financing terms have made things better).
• The taxpayer is still going to end up losing a giant amount of money on this thing.
• The notion that America could not have survived the collapse of GM is seriously overwrought.  They basically relied on the assumption that if GM was liquidated, all of GM’s manufacturing capacity would have disappeared, along with all of the buyers who bought GM cars.  But of course, profitable lines would have been sold to other manufacturers, and those other manufacturers would have produced more cars to satisfy market demand, for which they would have purchased more stuff from suppliers.  The dislocation would not have been zero, but it would not have rivaled, say, the construction industry.
• The civic cost of this was large.  Rightly or wrongly, this was seen as a payoff to powerful Democratic interest groups in a large state.  Not that this is exactly unheard of, but this was very public, and the price tag was very large.  Though I think that government should do less stuff, I do not actually think it is a good thing when public trust in institutions erodes further; I want a government that is highly trusted to do the relatively few jobs for which it is uniquely suited.

A piece on adjuncts in Inside Higher Ed has been attracting a lot of attention among academics of my acquaintance.  Its description of academic life is shockingly brutal–shocking even to me, who knows enough PhDs to be acquainted with the dismal facts:

When I began teaching at Columbia and Barnard in the 1960s, almost
all the positions in their German departments were tenure-track. I came
to SUNY New Paltz in the 70s, when there were only a couple of
virtually silent and invisible part-time adjuncts among the 35 teachers
in the entire Foreign Language Division. It was not until a few years
after the dawn of the new millennium that I, like Rip Van Winkle,
“awoke” after decades to a brand new reality: the number of
tenure-track faculty in my department had shrunk to a mere 10, while
some two dozen adjuncts were now teaching the bulk of our foreign
language courses. Yikes!

As everyone in academe now knows, the
professoriate has experienced a radical transformation over the past
few decades. These enormous changes have occurred so gradually,
however, that they are only now beginning to receive attention. The
general public has remained largely unaware of the staffing crisis in
higher education. As contingent colleagues around the country came to
outnumber the tenured faculty and as they were assigned an ever larger
share of the curriculum, they became an inescapable fact of academic
departmental life.

Nationally, adjuncts and contingent faculty — we call them ad-cons
— include part-time/adjunct faculty; full-time, nontenure-track
faculty; and graduate employees. Together these employees now make up an amazing 73 percent
of the nearly 1.6 million-employee instructional workforce in higher
education and teach over half of all undergraduate classes at public
institutions of higher education.

Now, he’s lumping together a bunch of different things:  I don’t really care if part timers and graduate students don’t get paid much . . . at least as long as the graduate students are on track to better jobs.  The core issue is full-time adjuncts, and whether the graduate students have a reasonable shot at a tenure-track position.

Unfortunately, the answer now is that they don’t.  Academia has bifurcated into two classes:  tenured professors who are decently paid, have lifetime job security, and get to work on whatever strikes their fancy; and adjuncts who are paid at the poverty level and may labor for years in the desperate and often futile hope of landing a tenure track position.  And, of course, graduate students, the number of whom may paradoxically increase as the number of tenure track jobs decreases–because someone has to teach all those intro classes.

I have long theorized that at least some of the leftward drift in academia can be explained by the fact that it has one of the most abusive labor markets in the world.  I theorize this because in interacting with many professors, I am bewildered by their beliefs about labor markets more generally; many seem to think of private labor markets as an endless well of exploitation where employees are virtual prisoners with no recourse in the face of horrific abuses.  Yet this does not describe the low wage jobs in which I’ve worked–there were of course individuals who had to hold onto that particular job for idiosyncratic reasons, but as a class, low wage workers do not face the kind of monolithic employer power that a surprising number of academics seem to believe is common.

It is common, of course–in academia.  Until they have tenure, faculty are virtual prisoners of their institution.  Those on the tenure track work alongside a vast class of have-nots who are some of the worst-paid high school graduates in the country.  So it’s not surprising to me that this is how academics come to view labor markets–nor that they naturally assume that it must be even worse on the outside.  And that’s before we start talking about the marriages strained, the personal lives stunted, because those lucky enough to get a tenure-track job have to move to a random location, often one not particularly suited to their spouses’ work ambitions or their own personal preferences . . . a location which, barring another job offer, they will have to spend the rest of their life in.

What puzzles me is how this job market persists, and is even worsening, in one of the most left-wing institutions in the country.  I implore my conservative commenters not to jump straight into the generalizations about how this always happens in socialist countries; I’m genuinely curious.  Almost every academic I know is committed to a pretty strongly left-wing vision of labor market institutions.  Even if it’s not their very first concern, one would assume that the collective preference should result in something much more egalitarian.  So what’s overriding that preference?

















Education – Higher education – Tenure – Colleges and Universities – Rip Van Winkle