Paternalism run amock

City government legislates against temptation for low income Los Angelenos.

"Green with Envy" by Merle Hazzard

Déjà vu

Turns out that the current banking crisis is very similar to five post-war banking crises that preceeded it.

At this juncture, the book is still open on the how the current dislocations in the United States will play out. The precedent found in the aftermath of other episodes suggests that the strains can be quite severe, depending especially on the initial degree of trauma to the financial system (and to some extent, the policy response). The average drop in (real per capita) output growth is over 2 percent, and it typically takes two years to return to trend. For the five most catastrophic cases (which include episodes in Finland, Japan, Norway, Spain and Sweden), the drop in annual output growth from peak to trough is over 5 percent, and growth remained well below pre-crisis trend even after three years. These more catastrophic cases, of course, mark the boundary that policymakers particularly want to avoid.

Thanks to Merle Hazzard for pointing this out.

Good to Not-So Great

As I read recent news of problems at Fannie Mae, I recalled that it was one of the companies profiled in Jim Collins' smash book, Good to Great. Hmmm... I guess it's a lot easier to craft ex post explanations of success and find apparent patterns and causal explanations than it is to find a good predictive model of what companies are going to succeed in the future. As Steven Levitt of Freakonomics fame notes, a portfolio of the 11 companies featured in Good to Great has underperformed the S&P 500.

If you haven't had a chance, check out Phil Rosezweig's book, The Halo Effect, for a discussion of some of the problems in creating ex post explanations of success.

How can general hospitals compete with specialty hospitals?

In the past, we have blogged about the competition between General Acute Care Hosptials and Specialty Hospitals, (Hospitals trying to make the rules so their rivals won't). Speciality hospitals not only "cherry pick" the most profitable patients (insured patients, simple care), but give physicians an ownership stake so that they will refer patients there.

Now McKinsey has some advice on how General Hospitals can fight back.

trying to be all things to all patients is no longer a viable strategy.

organize by service line, focusing on building world-class capabilities in just a few clinical areas.

Choosing the right service lines to emphasize requires a superior understanding of a hospital’s economics and competitive environment.

Returns from Lobbying

I have always found defenses of political lobbying as something other than a quid pro quo to be a bit perplexing. If the companies aren't getting something of value, why are they spending all that money? A new working paper, Corporate Lobbying and Financial Performance, by Hui Chen at the University of Colorado at Boulder, Vanderbilt's David C. Parsley, and Ya-Wen Yang
of the University of Miami offers some evidence of the benefits of lobbying. The paper drew a short mention in a recent Business Week. Here's the abstract:

Corporate lobbying activities are designed to influence legislators and thus to further corporate goals by encouraging favorable policies and/or outcomes. Using data that became available after the passage of the Lobbying Disclosure Act of 1995, this study evaluates the effectiveness of corporate lobbying from a financial perspective. We find that a firm's lobbying expenses are positively correlated with its accounting-based financial performance. We also demonstrate that lobbying expenses are value-relevant to firms' market valuation. Finally, we use a portfolio approach to compare stock returns of lobbying firms with non-lobbying firms. We find that portfolios of firms with higher lobbying intensities significantly outperform portfolios of firms of similar size and book to market ratios as well as portfolios of firms with zero lobbying spending.

The One Lesson of Business (7 min lecture)

La renaissance française

President Sarkozy is liberating the French economy from the political shackles put on it by the unions. How an unpopular president is able to accomplish this is nothing short of a miracle.

1. First, by firing off in so many directions at once, Mr Sarkozy has made it difficult for the unions to focus. During the June strikes, for instance, it was unclear what the protests were supposed to be against. Pension reform? Working-time rules? Public-sector job cuts? “His method is to make everyone giddy,” comments one aide. At times, the president has played this game masterfully. When teachers went on strike in May against (modest) job cuts, Mr Sarkozy appeared on television not to calm but to wrong-foot them: he announced a new plan, popular with parents, to guarantee “minimum service” at schools during strikes.
2. Second, Mr Sarkozy has treated a select number of union leaders as grown-ups, taking them to fine restaurants in Paris and inviting them for talks at the Elysée. As Xavier Bertrand, the labour minister, puts it, “in the past, the government waited for a conflict and then negotiated; today, we talk first.” Mr Sarkozy's direct, inclusive approach goes down well with a group that is more used to disdain from French leaders. When Dominique de Villepin, a former prime minister, tried to introduce a flexible work contract for the young, he failed even to tell the unions about it first.
3. Third, if talks lead only to timid results, Mr Sarkozy seems willing to press ahead regardless, relying on public opinion for support. One example concerns working time. After months of talks on labour reform, unions and employers agreed in April to make elections to works councils more open and democratic, but did little to loosen the 35-hour week. So Mr Bertrand announced a new law, passed on July 23rd, to let companies negotiate longer working weeks with union representatives—all but squelching the 35-hour week.

Snapping magnetic fields cause Northern Lights

Even with the mystery gone, I still enjoy them.

Heads they win, tails we lose

In past blogs, we have documented the ruthless reaction of rural electrical and telephone CO*OPs to Representative Jim Cooper's simple call for transparency. Joe Stiglitz (Nobel Laureate) asks for similar transparency at Fannie and Freddie as the US government is about to embark on another private-public partnership, in which the private sector takes the profits and the public sector bears the risk:

1. First, it should be fully transparent, with taxpayers knowing the risks they have assumed and how much has been given to the shareholders and bondholders being bailed out.
2. Second, there should be full accountability. Those who are responsible for the mistakes – management, shareholders and bondholders – should all bear the consequences. Taxpayers should not be asked to pony up a penny while shareholders are being protected.
3. Finally, taxpayers should be com­pensated for the risks they face. The greater the risks, the greater the compensation.

UPDATE: Senator McCain expresses similar views:

“Americans should be outraged at the latest sweetheart deal in Washington,” writes McCain. “Congress will put U.S. taxpayers on the hook for potentially hundreds of billions of dollars to bail out Fannie Mae and Freddie Mac. It’s a tribute to what these two institutions — which most Americans have never heard of — have bought with more than $170-million worth of lobbyists in the past decade.”