REPOST: Lincoln Electric succeeds by organizing as a sweat shop

Nice example of a company that has learned to align the incentives of employees with the goals of management. My favorite quote "only 1/3 of the people out there could survive doing piecework." Think "adverse selection."

REPOST: John Stossel's Greed

REPOST: America's top chef uses marginal analysis

America's top chef uses marginal analysis

Alinea, which opened in 2005, was named the best restaurant in America by Gourmet Magazine in 2006. The restaurant's co-founder and head chef, Grant Achatz, said his 23-course meal is motivated by what any econ student would recognize as marginal analysis:

So there's something that we call the law of diminishing returns in our cooking. That's why the steak is only two ounces, because by your fifth bite you're really, you're done. You're done with that steak. You know what it's going to taste like. The actual flavor starts to deaden on the palate.

If we were to make you take 10 more bites, by the time you got to bite 15, the steak's just not that compelling anymore. So if we have a series of 23 small courses, where it's a burst of flavor on the palate, and then you move on to something completely different and then completely different, that helps us set up a more exciting meal, and it's something that is easier to kind of be compelled to go through a 23-course menu.

RESPOST: for those of you who get queasy during economics class

Economists are really good at figuring out the consequences of various policies, like selling pollution permits.  By placing a price on pollution, you also create an incentive to reduce it.  If the policy goal is less pollution, this is one of the best ways to reach it.

This kind of analysis leads naturally to the moral ethic of consequentialism, where a policy is judged "good" if its consequences are good, i.e., the ends justify the means.

So why does this rub so many people the wrong way?  Perhaps the biggest objection to consequentialism is that by using markets to allocate goods and services, we turn personal relationships based on love or affection into arms-length commercial relationships based on the pursuit of profit.  Philosophers call this "commodification."

This can make a difference if, for example, the "means" of trading pollution permits, changes how we feel about the "ends" of reducing pollution.  Specifically, by allowing people to trade pollution permits, we may reduce the stigma of pollution, and make it more acceptable.

So, if some of you get queasy during economic class, you are not alone:

What Money Can’t Buy – which must surely be one of the most important exercises in public philosophy in many years – examines a wide variety of cases in which goods that in the past were believed to be outside the market have been turned into commodities. Surrogate motherhood, paying others to queue for you to attend a Supreme Court hearing, buying the right to immigrate into a country or shoot endangered wildlife, purchasing the insurance policies of ailing and elderly people to collect death benefits and charging fees for a better class of prison cell are just a few of the examples that Sandel deals with.

The problem with this critique, of course, is that we need something to replace economic relationships. And, as the author points out,

...in a highly pluralistic society such as ours, there is not much consensus on the content of the good life. As a result, there is little prospect of agreement on the moral limits of the market. Sandel points out: “We disagree about the norms appropriate to many of the domains that markets have invaded.”

This reminds me of something that Winston Churchill would have said, "markets are the worst way to allocate goods and services, except for every other method that has been tried."

HT:  Daniel C.

Tennessee forces Nashville and Memphis to fund their pensions

Two cities in Tennessee manage their own defined-benefit pensions, and it is no coincidence that both are majority Democratic, and both are underfunded.  We have discussed the reasons for this in past  blog posts.

Efforts at pension reform have been slow because voters in these cities do not seem to understand or care much about the future pension liabilities, which means that it is not a high priority for politicians.

For example when Nashville went to a more realistic discount rate, from 8.25% down to 7.5%, the city also changed the assumptions on pension growth so that the net effect was no additional savings.  So Nashville gave the appearance of change, without the substance.    

Also, for underfunded pensions, this kind of discounting creates an incentive for fund managers to go into riskier assets.  Indeed, Nashville's pension manager has adopted a riskier investment strategy.  Cross your fingers.   

And we still save nothing for medical pensions.  That is the elephant in the room.  

The obvious solution is a defined contribution schedule, like the Swedes, or  a more reasonable rate linked to the 30 year treasuries, adjusted for tax free status, e.g. 6.5%.

The latest development is a new state law, designed to force these cities to fully fund their pensions.  It does not force cities to make up for past underfunding.  

How the internet is changing the worlds oldest profession

WARNING: We rarely feel the need to alert readers to explicit content. But our discussion of the online sex trade requires frank language, and some may find the topic distasteful.

The Economist has an article on how the Internet has changed the worlds oldest profession.

Now specialist websites and apps are allowing information to flow between buyer and seller, making it easier to strike mutually satisfactory deals. The sex trade is becoming easier to enter and safer to work in: prostitutes can warn each other about violent clients, and do background and health checks before taking a booking. Personal web pages allow them to advertise and arrange meetings online; their clients’ feedback on review sites helps others to proceed with confidence.

Labor mobility is discouraging price fixing:

Twenty years ago most prostitutes in Norway were locals who all aimed to charge about the same, says May-Len Skilbrei, a sociologist at Oslo University. Today, with growing numbers of sex workers from the Baltic states and central Europe, as well as Nigerians and Thais, such unofficial price controls are harder to sustain.

The wealth of online data allows industry participants to make better pricing and investment decisions:

going from flat-chested to a D-cup increases hourly rates by approximately $40, meaning that at a typical price of $3,700, surgery could pay for itself after around 90 hours. 

Unocal holds up California

Every state has their own summer gasoline formula to reduce pollution. After California Air Resources Board decided to use Unocal's formulation--and after the refiners sunk billions of dollars re-tooling to produce CARB gasoline--Unocal said "Oh by the way, we have patent on the formula" and charged them a royalty of five cents/gallon.

The FTC sued Unocal for illegally acquiring monopoly power, but a judge dismissed the complaint in 2003 basically because the patent laws "trump" the antitrust laws, and allow a patentee to do what they want with their patents (this is NOT true in the EU and is changing in the US).

But the FTC got the relief they wanted when Chevron put the patents in the public domain as a condition for approving the Chevron/Unocal merger.

REPOST: Larry the Liquidator

STAKEHOLDERS


VS. SHAREHOLDERS

REPOST: Stossel on Vanderbilt's GREED

Europe's troubles are microeconomic

Nice article in the Financial Times about the path to growth in Southern Europe: "good" deleveraging, then new equity capital to buy up the failed companies.

Good deleveraging is when balance sheets are restructured and bad debts written off. This way, viable businesses and creditworthy households should be able to borrow from healthy banks to fund productive investment. The economy grows and the burden of debt falls. 

But good deleveraging requires clear legal rules to restructure debt:  

...insolvency regimes across Southern Europe are too weak and borrower-friendly, and judicial systems too cumbersome, to enable the swift resolution of bad debts. In Italy, Greece and Cyprus, for example, it can take 10 years for a bank to get its hands on its collateral through the bankruptcy courts.

And finally, once the loans get restructured, the assets must be sold off to new owners.  New owners have been taking control of real estate, but not the smaller family owned companies:

The snag is that this problem may be largely cultural—and therefore more difficult to fix. Many businesses in Southern Europe are family-owned and family-run. These family shareholders may be reluctant to bring in outside capital, preferring to walk away rather than hand over control to financial investors. 

At the same time, many equity providers may be wary of taking control of businesses in parts of Europe where governance may be weak and success can often depend heavily on close personal relationships with politicians, officials, banks and suppliers. The alternative is to share control with the existing owners, which private equity is typically reluctant to do.