Now this is creative, and capitalistic

Can the world's greatest capitalist be wrong about how to make it better? Steven Landsburgh thinks so:

If you encourage corporations to do more good (in the form of philanthropy, etc.), then you detract from their primary mission. If you encourage corporations to do less bad, then you *enhance* their primary mission.

If Archer Daniel Midland wants to get creative, I’d like to see them abolish their lobbying arm and let the sugar quota expire. If the oil companies want to get creative, let them refuse on principle to accept subsidies for offshore oil drilling. Let the auto and steel industries announce that they will no longer lobby for tariffs or other forms of protection.

More ethanol insanity

Even the lefties realize it

Oxfam's biofuel policy adviser Rob Bailey, criticised rich countries for using subsidies and tax breaks to encourage the use of food crops for alternative sources of energy like ethanol.

"If the fuel value for a crop exceeds its food value, then it will be used for fuel instead," he said.

"Rich countries... are making climate change worse, not better, they are stealing crops and land away from food production, and they are destroying millions of livelihoods in the process."

The worst coporate governance imaginable

What would you expect from a firm with:

• no competitors;
• diffuse, small shareholders;
  
• who cannot sell or buy shares;
  
• run by managers exempt from securities laws, like Sarbanes Oxley,
• with no disclosure requirements, so shareholders learn only what managers choose to tell them;

In the case of Electrical CO-OPs, managers amass huge pools of money by over-charging for lousy service, pay themselves big salaries, and then refuse to tell the customer/owners how much money they have for fear that the owners would want their money back.

When Congressman Cooper held hearings trying to force the coop managers to disclose information about their assets, they tried to intimidate him. For good reason

The hearing focused on the lavish spending by and large salaries of leaders of the Pedernales Electric Cooperative in Texas, the largest electric cooperative in the country.

Top Recent Articles from McKinsey

Here are the ten most popular articles from this quarter's McKinsey Quarterly.

Supremes 'dis sponsored research

The knock on academics is that they work on problems that no one cares about and then publish the results in journals that no one reads. But when academics stray from the government-suubsidy model of research to work on real problem, they get punished. Today's Supreme Court decision limiting punitive damages in the Exxon Valdez case has the following footnote. Read to the bottom.

17 The Court is aware of a body of literature running parallel to anecdotal reports, examining the predictability of punitive awards by conducting numerous “mock juries,” where different “jurors” are confronted with the same hypothetical case. See, e.g., C. Sunstein, R. Hastie, J. Payne, D. Schkade, W. Viscusi, Punitive Damages: How Juries Decide (2002); Schkade, Sunstein, & Kahneman, Deliberating About Dollars: The Severity Shift, 100 Colum. L. Rev. 1139 (2000); Hastie, Schkade, & Payne, Juror Judgments in Civil Cases: Effects of Plaintiff’s Requests and Plaintiff’s Identity on Punitive Damage Awards, 23 Law & Hum. Behav. 445 (1999); Sunstein, Kahneman, & Schkade, Assessing Punitive Damages (with Notes on Cognition and Valuation in Law), 107 Yale L. J. 2071 (1998). Because this research was funded in part by Exxon, we decline to rely on it.

thanks to Tim Brennan for pointing this out.

Agricultural subsidies vs. the Everglades

Most economists would applaud the purchase of land for environmental concerns as it assures, through market mechanisms, that the land is moving to a higher-valued use.

The dream of a restored Everglades, with water flowing from Lake Okeechobee to Florida Bay, has moved a giant step closer to reality after the largest sugar cane producer in the United States agreed to sell all of its assets to Florida and go out of business," reports the International Herald Tribune. "Under the proposed deal, Florida will pay $1.75 billion for U.S. Sugar, which would have six years to continue farming before turning over 187,000 acres, or about 75,500 hectares, north of Everglades National Park, along with two sugar refineries and other assets."

The irony, in this case, is that the purchase price would have been a lot lower, perhaps even zero, but for the US Department of Agriculture sugar import quotas and price supports.

Daniel Griswold, director of Cato's Center for Trade Policy Studies, writes: "[T]he deal is yet another cost Americans continue to pay for our misguided agricultural programs. ...The company selling the land, United States Sugar, has for decades benefited from a federal program that guarantees a minimum price for United States Sugar's crop through a system of loan guarantees and strict import quotas. This means American families and sugar-consuming industries are typically paying two to three times the world price for sugar."
- "U.S. Sugar Program Costs Another $1.75 Billion," Griswold's full response
- Cato Handbook on Policy: Agricultural Policy, by Chris Edwards

During this 1999 trip to the Everglades, I learned that my wife is afraid of alligators after the one in the photo began hissing at us.

Economics of bad decisions

It is easy to teach economics by making fun of bad decisions, and that is the approach we take in our textbook. McKinsey has discovered this as well, and they grouped five of their articles into a "special collection" of bad decisions.

• Learning to let go: Making better exit decisions (Guest passed until July 8)
  
  
• Distortions and deceptions in strategic decisions (Premium)
  
  
• The human factor in strategic decisions
  
  
• Beating the odds in market entry (Premium)
  
  
• Hidden flaws in strategy (Guest passed until July 8)

Bad news for bad drivers

In car insurance, the problems of adverse selection (high risk drivers more likely to buy insurnace) and moral hazard (once you have insurance, you are less careful) are due to information asymmetry. Now technology has allowed car insurance companies to "see" how risky you are and how poorly you drive, and charge you accordingly.

Drivers who participate in these plans have devices installed in their cars that, depending on the technology used, can track the number of miles driven, the speed at which cars are driven and even how often and how hard the brakes are used. By allowing their habits behind the wheel to be monitored, drivers get lower insurance rates -- or pay higher premiums if they're lead-footed road hogs.

Good drivers (about 2/3 of us) would pay about $270 less each year. These devices also pave the way for a carbon tax.

With pay-as-you-drive insurance, drivers in the U.S. would reduce their mileage by about 8%, with $51.5 billion in social benefits mostly from reduced congestion and accidents, according to the Hamilton Project.

Why does Castro own an American-made track suit?

Former student John Tamny charges that the candidates are repeating one of Napolean's many mistakes by assuming that an embargo will prevent Cubans from indirectly trading with the US.

Napoleon “did not realize until it was too late that the only closed political economy is the world economy. Britain could not be starved into submission by blockade unless she were totally cut off from the world. As long as Britain could trade with any nation outside France, it was thus trading indirectly with France.”—Jude Wanniski, The Way The World Works ...

Both John McCain and Barack Obama have said they’ll maintain the five decade long embargo on Cuba. ... The silliest policy of all is to impose embargos in the first place. So long as anyone in the world economy wants to buy, there will be a seller.

To find out Napolean's biggest blunder, watch the "battle of wits" from the Princess Bride (answer at 2:45 minutes).

Candidates differ on 4 key issues

Here is a nice characterization of the differences between Senators McCain and Obama on four big issues that wont go away.

The budget deficit. The U.S. government has made promises to pay health and retirement benefits that will cost far more than projected taxes will yield. Neither candidate talks much about how -- or even if -- he'd try to fix this; most voters don't want to hear about it.

• Sen. Obama leans toward bigger government (more taxes, more spending)
  
• Sen. McCain leans toward smaller government (less taxes, less spending.)

Health care. The system is so complex it's hard to describe; same applies for proposed solutions.

• Sen. Obama offers a mix of changes, many but not all involving government money, and argues the best solution will emerge from some experimentation.
  
• Sen. McCain would, instead, make the market for health insurance more like the market for computers or cars, relying more on individuals shopping for insurance to create competition now largely absent in health care.

Inequality. The gap between economic winners and losers in the U.S. is growing. ... There is significant disagreement among politicians and voters about how hard the government should restrain market forces that are widening the income gap, particularly how much the tax code should redistribute income.

• The differences between the candidates are sharp: Sen. Obama would wield the tax code more aggressively than Sen. McCain.

Globalization. It isn't going away. But for all the benefits it brings American consumers (and Chinese workers), the toughening competition is frightening to Americans, both as workers and as parents. ...The solution ... probably lies in assuring Americans that they aren't fending for themselves in an increasingly competitive economy -- that their health insurance won't evaporate if they lose a job and that the U.S.'s schools are preparing their children to succeed.

• Sen. McCain [extols] the benefits of free trade,
  
• Sen. Obama, ... the costs.