Government as a business? A continuing exploration

Matt Yglesias makes an important point about how we think about debt:

This does, however, raise the interesting and oft-neglected point that corporate accounting and government accounting operate along very different principles. If I'm running a modestly profitable burrito company and decide I could be making even more money if I opened even more stores and so go sign some leases and spend a bunch of money building out the new kitchens, we don't register this as suddenly "spending" far exceeding "revenue" and freak out about the deficit. What we say is that the balance sheet now contains both more liabilities (debt to someone who loaned me the money) but also more assets (all the kitchen equipment I bought) and then my challenge is to earn a return on my investment in those assets before they depreciate (i.e., break). But a company that thought it had the opportunity to make a lot of high-value low-cost purchases would never avoid doing so simply because it might involve increasing its outstanding stock of debt.

I think that this viewpoint could be really helpful if applied to the United States government.  There is a lot of potential to invest in infrastructure right now, while prices are low.  Sure, not all infrastructure works out and there is a lot of poor decision making in government process.  But businesses make mistakes too.  The trick is to, on average, make more good decisions than bad.

However, in the long run the stock of public goods (roads, bridges, powerlines, canals, and so forth) have been key to the success of a nation from ancient times.  In the modern world, with the focus on human capital, I think education might have the same status as a good long term investment.  Perhaps this is a case where we should think of government more like a business??

If you read this you'd know who you are

Apple's aspect dominance

When a successful, highly respected business dies unexpectedly, a bit of hyperbole is only natural. That said, the coverage has painted an awfully large picture of Steve Jobs' impact. The phrase "changed the world" has been difficult to avoid. (CNN Money doubled down on the theme following the headline "10 ways Steve Jobs changed the world" with the subtitle "There may never be another chief executive like him. Apple's former CEO and co-founder transformed the world's relationship with technology -- forever.")

We've also heard endless comparisons to Thomas Edison, which provide a useful bit of perspective. When Edison died, everyone with electricity or phone service (and many of those without) had his technology in their homes. Whether you went to the movies or the doctor, the legacy was unavoidable. By comparison, Apple, while a fantastically success company by most metrics, has a small footprint. Most of us don't have a Mac or an I-anything.

Apple's perceived footprint, however, is much larger. Based on news accounts and popular culture, you might get the impression that the typical American owns multiple Apple products. How did Apple manage this?

Some of the credit has to go the company's exceptionally effective branding (but that's a topic for another post). Then there's the kind products Apple makes, what we might call surface technology. Much, if not most, of the technology we use operates behind the scene. Personal electronics are easy to spot and are often used in public.

Then there's aspect dominance. I couldn't fins a good online definition of the concept (and I'm not qualified to write one) so I'll use the example that was given to me: when bitterweeds established themselves in a pasture, they would, from a distance, give the impression that fields were a solid yellow. When you got closer, you saw as much green as you did yellow. If you were a botanist observing those fields from a distance, it would be easy to overestimate the prevalence of that one species.

As you might imagine, shape and size contribute to aspect dominance. The bright flowers on top of relatively tall stalks allowed the weeds to have to effect they had. With social behavior, instead of height, we'd look for factors that make certain people more visible to the society (which generally means more visible in the media).

One obvious factor is a being in the entertainment industry. Apple has a huge presence (I'm writing this in a Hollywood coffee shop and I believe this is the only Dell in the house). Veteran sitcom writer Rob Long observed that it was actually a sign of security for someone in the industry not to use a Mac.

Then there are the demographics. Apple users tend to be upscale. Journalists these days tend to view the world through am upper-middle-class lens. Journalists also tend to be more urban (not many Apple stores in small town America) and, by the nature of their jobs, trendy. Nor, is this profile limited to journalists and entertainment professionals. Most prominent people tend to fall into one or more of these groups. In other words, there's a positive correlation between your visibility and your likelihood of owning an Apple product.

None of this takes away from Jobs accomplishments. It does, however, remind us that the press doesn't always do a good job keeping things in perspective.

Tin-can telephones and Apple's Patent Paradox

From Jon Kolger:

Acoustic telephones or 'string' telephones as they are often called, are misunderstood by many collectors. Since they transmit sound purely by mechanical means, they embody none of the pioneering electrical innovations that many collectors find so interesting. Truthfully though, very early telephones performed poorly; and during these years, the acoustic telephone represented a truly viable alternative for relatively short, private-line telephone systems.

Since they contained no electrical transmitting or receiving devices, they did not infringe on the Bell patents. Thus they were able to enter the telephone industry during the protected years of the late 1870s and 1880s, carving out a small niche for themselves.

The Smithson website has a page on one of these phones:

In a trade catalog entitled Holcomb’s Improved Amplifying Telephone Illustrated Descriptive Circular, the telephone was described as “unquestionably one of the most marvelous and useful inventions of the nineteenth century.”

Holcomb’s mechanical telephones used galvanized steel cable-wire to transmit voice communications over distances of two miles. They were designed to meet the needs of businesses and “enable the busy man to save valuable time, to avoid vexatious delays, and to direct from his office the operations of employees at manufactory, mill, office, depot, or store . . . ”

I was reminded of these phones while I was working on a post about Apple. (If you write about Ddulites, you have to do a post on Apple sooner or later.) It struck me that the lag time between Apple and Apple imitators is remarkably brief. Bell's patents kept competitors at bay for long enough for alternatives like mechanical phones to get a foothold (albeit a small one). I also heard that part of the reason that the film industry moved west (first to Chicago, then to LA) was to put some distance between it and Edison's lawyers.

Patent enforcement has never been stronger (take the 101 north and you'll find the woods lousy with patent attorneys). Patents have never been issued so easily. You might expect competitors to wait years to make a media player or a smart phone, but Apple's patents don't seem to buy them any time at all.

I know we have some technologically astute people in the audience who could explain this but, in the meantime, here are a couple of theories.

The first is the obvious one. Apple, at least the Apple off the past few years, is more of a leading edge company than a cutting edge one. The strategy seems to be to make the best products they can using existing technology rather than focusing on actually developing new technology, and it's hard (though not impossible) to effectively build a wall of patents around existing technology.

The second is less obvious (and coherent) and it may apply better to companies other than Apple, but here goes: When everyone has patents, no one has patents. There are so many patents making such broad (and often overlapping) claims that no one can actually make anything without infringing on something. Though there has always been a market in patents (Edison established Menlo Park with money he got from selling his Quadruplex telegraph to Western Union), there was still a strong relationship between creation and patent application (Edison didn't just patent the idea of sending multiple signals over a single wire) and more often than not the company that held the patents made the product.

That relationship has apparently broken down. These days I suspect that most of those patents that aren't held for extortion are purchased defensively -- Google buys patents because they contain good ideas but as protection against patent trolls. In this system, patents don't do anything to protect the people who actually come up with valuable ideas (anything specific enough to be of value will infringe on someone's sweeping patent). Instead, the system insures that only those with pockets deep enough to buy off the trolls will be able to play.

Ddulite Investors -- IPO editon

I think it's possible that the romance of technology may be influencing some of these investors (From NPR's All Things Considered):

BLOCK: Now, we mentioned those 800 million Facebook users. A lot of people will be wondering in the papers today, do we get a sense of how profitable this company is?

HENN: Well, they had close to $4 billion in revenue, and they have very healthy margins. So, you know, that's a lot of money. But if Wall Street ends up valuing the company at something close to $100 billion, it will still make Facebook an extremely expensive company to invest in. Anant Sundaram is a professor at Dartmouth's Tuck School of Business.

DR. ANANT SUNDARAM: If I was a long-term investor thinking of this as a potential investment opportunity, I would hesitate.

HENN: Sundaram says to justify its price of Facebook shares that Facebook will sell at, it would need to grow at something like 30 percent a year for the next 10 years. And for today's investors to actually make money, it would have to grow faster than that. So to justify these kinds of valuations, Sundaram says Facebook and Google together would need to control something like a quarter of the entire global advertising market by the end of the next decade. So is that possible? Maybe. But he doesn't think it's likely.

Block that metaphor!

Marketplace has been looking for a conservative commentator to replace David Frum. Here's an excerpt from Amity Shlaes' latest audition:

Obama wants to reward companies that create jobs here in the United States. One of the carrots is a tax credit for companies that move operations back here. Another would double tax breaks for high-tech factories making products here.

These are juicy carrots. But the sticks put forward by Obama are hefty. The president wants to eliminate a tax break for moving expenses when a company ships operations overseas. He also wants to close a tax loophole that allows companies to move some types of profits to overseas tax shelters.

The president figures that businesses will tolerate the pain of the sticks for the reward of the carrots. He thinks if he pokes the stick in one corner, they'll hop over to the corner where the carrots are.

But the trouble with this argument is that the U.S. economy is not a rabbit cage. And business people -- entrepreneurs especially -- don't respond well to prods from a stick. Any stick. If they get a glimpse of the rod, they'll leap away for sure -- but it might just be to somewhere outside the United States. Our cage. And the carrots of cheaper labor there overseas might even be tastier.

Maybe the president is forgetting the goal, which is making the economy grow faster. Enough carrots, and businesses will grow. And they'll create jobs. But pick up even just a few sticks, and you won't get recovery. Instead, we'll all be looking at an empty cage and asking: Where are the rabbits?

Putting aside the argument that eliminating "a tax break for moving expenses when a company ships operations overseas" will encourage companies to ship operations overseas (is there a paragraph missing somewhere?), what caught my eye was the way Shlaes tortures this poor metaphor.

It doesn't help that the proverbial carrots and sticks were used to motivate proverbial mules and other large and stubborn beasts of burden. As an old country boy, I can tell you that getting big animals to go where they don't want to go is a challenge. I haven't had that much experience with bunnies, but I have to think it's a bit less daunting. I don't even believe I'd need a stick.

But Shlaes' odd allegorical choice is in keeping with the even odder dichotomy in the way conservative rhetoric has come to treat entrepreneurs and business leaders. Half the time they're bold and decisive figures, the spiritual descendants of our frontier forefathers; the rest of the time they are as delicate as a hothouse flower and as timid as a woodland creature (like, for example, a rabbit).

Shlaes has entrepreneurs leaping away at just "a glimpse" of a rod (and given that she describes closing a couple of tax loopholes as "hefty" penalty, it's fair to say that she really does mean it when she says any stick). Other conservative commentators have speculated that business leaders are slow to invest because they can't deal with the uncertainty caused by a possible return to Clinton era tax rates. We've even heard some argue that the recovery was slowed because the president keeps saying hurtful things about bankers and CEOs.

It's a bit like Dr. Jekyll and Mr. Hyde but with John Galt and Elmo.

Marketplace really needs to get Frum back.

Libertarians in space -- the sequel

Over on Andrew Gelman's site, Aleks Jakulin discusses the latest article on manned space exploration from Reason magazine. Remember, you heard it here first.

The Devil's Candy -- movie bombs and college budgets

The recent discussion of higher education costs got me thinking about other spiraling budgets and about one of my favorite case studies on the subject, Julie Salamon's excellent, The Devil's Candy, an account of the making of the movie adaptation of Bonfire of the Vanities.

Salamon, already a well established journalist, was given almost unprecedented access to the production. I say 'almost' because there is one other similar book, Picture, by Lillian Ross of the New Yorker, which describes John Huston's filming of Stephen Crane's Red Badge of Courage. Huston's film has grown in critical stature over the years, but it was a notorious commercial flop, which should, perhaps, have been a warning to Brian DePalma and the other people behind Bonfire.

Of course, Hollywood is a world of its own, but there are some general lessons in The Devil's Candy. One is that enterprises have a right size and if you try to scale past that size, things can go very wrong. As DePalma (who deserves serious points for forthrightness) put it:

"The initial concept of it was incorrect. If you're going to do The Bonfire of the Vanities, you would have to make it a lot darker and more cynical, but because it was such an expensive movie we tried to humanize the Sherman McCoy character – a very unlikeable character, much like the character in The Magnificent Ambersons. We could have done that if we'd been making a low-budget movie, but this was a studio movie with Tom Hanks in it. We made a couple of choices that in retrospect were wrong. I think John Lithgow would have been a better choice for Sherman McCoy, because he would have got the blue-blood arrogance of the character."

Another lesson is that, viewed individually, each of the disastrous decisions seemed completely reasonable. There's something almost Escher-like about the process: each decision seems to be a move up toward a better and more profitable film but the downward momentum simply accelerates, ending with a critically reviled movie that lost tens of millions of dollars. I suspect that survivors of similar fiascos in other fields would tell much the same story.

Finally there's the way that the failure to control costs in one area limits the ability (or willingness) to control it in other areas. You might that excessive spending on a cast would encourage producers to look for ways to spend less on something like catering, but the opposite often seems to happen when you have this kind of budget spiral. It's a delusional cousin of dynamic scoring: people internalize the idea that anything that might directly or indirectly improve box office performance will pay for itself, no matter how expensive it may be. Pretty soon you're bleeding money everywhere.

Ddulite Investors

[for a definition of ddulite click here]

I started out in the banking industry. My company used to broadly recruit from other banks so we had plenty of chances to compare stories about strategies that different banks used and this particular one stood out to me as an interesting way of handling investor complaints.

The bank in question was in the middle of a very good run, making a flood of money from its credit card line, but investors kept complaining that the bank was making all that money the wrong way. This was the height of the Internet boom but the bank was booking all of these profitable accounts through old-fashioned direct mail. If it wanted to maximize its stock price, the bank needed to start booking accounts online.

The trouble was that (at least at the time) issuing credit cards over the Internet was a horrible idea. The problem was fraud. With direct mail, the marketer decides who to contact and has various ways to check that a customer's card is in fact going to that customer. With a website, it was the potential customers who initiated contact and a stunning number of those potential customers were identity thieves.

The Internet was an excellent tool for account management, but the big institutional investors were adamant; they wanted to see the bank booking accounts online. Faced with the choice between unhappy investors and a disastrous business move, the company came up with a truly ingenious solution: they added a feature that let people who received a pre-approved credit card card offer fill out the application online.

Just to be absolutely clear, this service was limited to people who had been solicited by the bank and based on the response rates, the people who went online were basically the same people who would have applied anyway. From a net acquisitions standpoint, it had little or no impact.

From an investor relations standpoint, however, it accomplished a great deal. Everyone who filled out one of those applications and was approved* was counted as an online acquisition. Suddenly the bank was using this metric to bill itself as one of the leading Internet providers. This satisfied the investors (who had no idea how cosmetic the change was) and allowed the bank to continue to follow its highly profitable business plan (which was actually a great deal more sophisticated than the marketing techniques of many highly-touted Internet companies).

*'pre-approved' actually means 'almost pre-approved.

Nightmare Travel week approaching

There may be light blogging for the next 10 days or so.

California has good universities!

From the Academic rankings of world universities:

1. Harvard University (private)

2. Stanford University (private)

3. Massachusetts Institute of Technology (MIT) (private)

4. University of California, Berkeley (public)

5. University of Cambridge (British)

6. California Institute of Technology (private)

7. Princeton University (private)

8. Columbia University (private)

9. University of Chicago (private)

10. University of Oxford (British)

11. Yale University (private)

12. University of California, Los Angeles (public)

13. Cornell University (private)

14. University of Pennsylvania (private)

15. University of California, San Diego (public)

16. University of Washington (public)

17. University of California, San Francisco (public)

18. The Johns Hopkins University (private)

19. University of Wisconsin - Madison (public)

20. University College London (British)

Some interesting patterns immediately jump out.  Of the top 20 schools,  17 are American, which is pretty impressive given the share of the world population held by the United States.  Of the 17 American schools, six of them are public (which is amazing given how many resources the private schools have).  Of the public schools, 4 of them are in California.

So why are we discussing the need to privatize California higher education, which combines extremely high quality with relatively low tuition?  I mean seriously, is there no other public university system in the nation that we can focus on?  Or is it merely that reformers want to destroy the example of well done public education?

The whole argument strikes me as insane.

Not sure Dean Dad caught the gist

Via Joseph, Dean Dad has the following reaction to recent comments by President Obama:

President Obama has put higher education “on notice” that if we keep raising tuition, we’ll get our public funding cut.

To which I say, huh?

We’ve had our public funding cut already. Since 2008, an uninterrupted series of cuts has been the direct cause of severe tuition increases for public higher ed. If you want to stop the tuition increases, the first thing to do is to require the states to restore and then maintain realistic funding levels. (When referring to a point in time, the usual term is a “maintenance of effort” requirement. Otherwise, it can be set as a “grant in aid.”) When the states have cut back, colleges have turned to the Feds through the indirect means of raising tuition, much of which is funded by Federal financial aid.

The post doesn't include a link but I assume he's referring to this (emphasis added):

Of course, it’s not enough for us to increase student aid. We can’t just keep subsidizing skyrocketing tuition; we’ll run out of money. States also need to do their part, by making higher education a higher priority in their budgets. And colleges and universities have to do their part by working to keep costs down. Recently, I spoke with a group of college presidents who’ve done just that. Some schools re-design courses to help students finish more quickly. Some use better technology. The point is, it’s possible. So let me put colleges and universities on notice: If you can’t stop tuition from going up, the funding you get from taxpayers will go down. Higher education can’t be a luxury – it’s an economic imperative that every family in America should be able to afford.

I don't often find myself defending the President's education policies (too many movement reformers have his ear), but I think he did a good job hitting the main points here and Dean Dad could have done a better job reflecting that.

I think we need to understand college cost structures better

This post (in the midst of a long, long single page blog) was very interesting:

College Costs and Quality? I rather suspect that my experience as a university professor is pretty typical, although certainly there are much more dramatic. Over the past 15 years my real (inflation adjusted - just using the CPI) salary has fallen16.5%, 831/2 cents on the dollar, not counting various costs the universities have shifted to the faculty (and not accounting for the fact, which nobody seems to when considering the situation of seniors in our society, that as one ages medical costs are an increasing proportion of expenditures, and they have been rising sharply). The "special" equipment I need is a decent laptop computer, the provision to our department members of which has enabled them to reduce secretarial support. The courses I used to teach as seminars are now in amphitheaters, and, while the substantial advances in IT (when the equipment works) have certainly improved that teaching environment, it is still most certainly not comparable to the learning in the interaction, and professor attention to individual students, of the seminar format. Moreover, tests are inadequate measures of learning, and abysmal measures of creativity, yet evaluating and commenting on papers and projects in classes of this amphitheater size is simply physically impossible, and beyond the capabilities of teaching assistants, in my field anyway. Indeed, I suspect over emphasis on exams (and standardized tests) may actually stunt creativity (assignments here for psychologists and cognitive scientists). 

 I think that there is a real need to understand why costs of college are escalating.  It seems to be a complex problem and I have begun to suspect that simple explanations are likely to be inadequate.  Some of the issues seem to be related to new services (e.g. information technology, increased reporting mandates, student services).  But it is remarkable that salaries for the most expensive workers can drop at the same time as costs are rapidly rising.

Some of this is likely due to loss of state funding.  But private schools have also grown more expensive with time and this cannot be solely attributed to changes in funding.

I would love to see a time series of university budgets, in real dollars, to try and understand this issue better.

I was surprised by the lack of comments on this

Dean Dad:

President Obama has put higher education “on notice” that if we keep raising tuition, we’ll get our public funding cut.

To which I say, huh?

We’ve had our public funding cut already. Since 2008, an uninterrupted series of cuts has been the direct cause of severe tuition increases for public higher ed. If you want to stop the tuition increases, the first thing to do is to require the states to restore and then maintain realistic funding levels. (When referring to a point in time, the usual term is a “maintenance of effort” requirement. Otherwise, it can be set as a “grant in aid.”) When the states have cut back, colleges have turned to the Feds through the indirect means of raising tuition, much of which is funded by Federal financial aid.

I think we really need to make a distinction between public and private education here.  Public schools, like in California, have had huge funding cuts that led to large percentage increases in tuition.  But, in absolute terms, the increases are small compared to the amount of tuition charged at private schools (like Stanford, which is in the same state).

In public education the finding cuts are causally connected to cost increases.  But I am not sure the University of California is really the problem in terms of unsustainable educational costs.  True, universities are expensive and I have been amazed at the cost increases.  But serious cuts in state support needs to be part of the overall picture to really understand what is going on.  Education (especially affordable education) is a public good and should be treated as such.

Gaming

Mark has a sideline as a professional game designer and I am an avid follower of role-playing games.  So while we rarely do gaming posts, I decided to put a good RPG post collecting blog into the blogroll.

Enjoy.