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.

I am confused about carried interest

Does anybody have a good reason for the carried interest tax exemption?  It seems to entirely benefit a group that already has very large incomes and doesn't really seem to be in the same class as investment capital that was risked in the marketplace.  Paul Krugman notes how much benefit a retired investment adviser can reap from this exemption:

 First, $13 million of the total was carried interest, which gets taxed like capital gains but is really just commissions that receive special treatment for no good reason. No profits taxes were paid on that income; right there, a minimally defensible tax code would have levied $2.6 million more in taxes on Romney.

I am completely agnostic as to the identity of the person in question -- it would be just as concerning if Barack Obama had millions in carried interest in his tax forms.  The real question is how this exemption (which is commissions) can stimulate economic growth.  I understand the argument for preferential treatment of capital gains.  I even understand how capital gains can end up making moving between houses expensive for no really good reason.  So I comprehend how this can be a matter of academic debate.

But can anyone explain why commissions should get preferential tax treatment?

Admittedly an extreme case

One of my biggest objections to the wildly popular contrarian school of journalism is the way that, rather than following a line of reasoning to an unexpected conclusion, many writers obviously start out with an absurdly counter-intuitive position then try to come up with a list of reasons to justify it.

You know the sort of thing I'm talking about, stories with titles like:

Newt Gingrich's three marriages mean he might make a strong president -- really

Student Loans and Emergencies

From the Incidental Economist's comment section:

As a resident manager of David’s House , a beautiful private nonprofit home away from home for families of sick children at Dartmouth Hitchcock Hospital , like a Ronald McDonald House, one of the saddest and most frustrating things I saw was student loan collectors that would not work with parents who had run out of forbearance time to reduce or temporarily waive student loan payments despite their medical emergencies. Even the federal government will operate this way when a student loan goes into collections. Will not work with the debtor at all. We had collection agencies tracking down parents at our facility because, of course, parents who were living there temporarily needed to make the phone number known instead of keeping it confidential. The student loan crisis: another problem that you economists should address.

The decision to make student loans immune to bankruptcy is going to be a problem in the long run, at least so long as the totals become so high.  I meet a surprising number of students with > $100,000 in debt.  It's one thing to allow large debt to occur as part of developing human capital.  But the punishment meted out to people when their lives go wrong seems way disproportionate to the decision to borrow.  This is even more true when you look at the employment rate among Americans without a college degree.

It makes education into a high stakes gamble (at for those who are not already wealthy) instead of a public good that we provide to improve human capital.

Tax Reform

I am normally not the biggest fan of Greg Mankiw as I am concerned that his anti-tax stance reduces the focus on how we can use a strong taxation system to build a strong economy.  But this post is one that I found myself agreeing with more than I disagreed with.  In particular, note:

Consider the tax on gasoline. Driving your car is associated with various adverse side effects, which economists call externalities. These include traffic congestion, accidents, local pollution and global climate change. If the tax on gasoline were higher, people would alter their behavior to drive less. They would be more likely to take public transportation, use car pools or live closer to work. The incentives they face when deciding how much to drive would more closely match the true social costs and benefits.

And this:

Consider the deduction for mortgage interest . . . Subsidies to homeowners are, in effect, penalties on renters — after all, someone has to pick up the tab. But there is nothing wrong with renting. And once one acknowledges that renters are poorer, on average, than homeowners, the mortgage interest deduction becomes even harder to justify.

These are the sorts of places that tax reform might make a significant difference in building a better system.  It is true that tax reform in these areas would be politically unpopular.  But, in the long run, it might make for a much better and more transparent tax system.

Why I believe in safety nets

Megan McArdle argues:

Who among the parents fighting so hard to get their kids into a good school is going to volunteer to have their kid give up the slot in the upper middle class? People are willing to accept a certain amount of slippage, but only as long as it comes with added job security (government) or special fulfillment (the ministry, the arts)--and even in the latter cases, Mom and Dad will often be strenuously arguing against following your calling. But how many doctors and lawyers would simply glumly accept it if you told them that sorry, junior's going to be an intermittently employed long-haul trucker, and your darling daughter is going to work the supermarket checkout, because all the more lucrative and interesting slots went to smarter and more talented people?

The lack of a safety net makes falling in social status a serious problem.  When basic medical care is linked to being a productive member of the middle class, people are willing to make enormous sacrifices to protect themselves from falling in social class.  If we mitigate the problems and torments of extreme poverty then maybe it won't be seen as terrible to have people shift around in social class.

Now it is true that my focus is on absolute levels of deprivation.  But if the you can be poor with dignity and have basic needs met then maybe that will make us a little more willing to address inequality in general.

Copyrights and patents are intrusive government regulations

They are monopolies that restrict the rights of businesses to make and sell certain products. What's more, they're built around non-rival goods with origins that are often difficult to trace (since virtually all 'creative' works are derived from other earlier ones).

This doesn't mean intellectual property laws are bad. They aren't. Society could not function well without them. What this does mean is that these laws have a cost. They distort markets, raise prices, divert resources from productive areas to legal departments and inhibit creative destruction and the founding of new businesses. We have to balance these costs against the social benefits of encouraging creation and dissemination.

Recently, though, we've lost sight of that need for balance, in no small part because those costs are born by consumers and small companies that lack the wherewithal for PR and lobbying. In the area of copyrights (patents are a subject for another day), we've allowed ludicrous extensions, let lawyers grab works from the public domain, retroactively granted copyrights to works whose creators have been dead for decades, and tried to greatly restrict the concept of fair use.

It's important to remember that the very notion of owning an idea is a useful absurdity. Ideas are intangible and indistinct with no real demarcation from other ideas. It is tremendously useful for a society to encourage creativity and give creators a protected period to disseminate their works, but if we start thinking of protecting intellectual property as an end to itself, all we have left is the absurdity.

Works moved out of the public domain?

Seriously?

The Supreme Court on Wednesday upheld a federal law that restored copyright protection to works that had entered the public domain. By a 6-to-2 vote, the justices rejected arguments based on the First Amendment and the Constitution’s copyright clause, saying that the public domain was not “a category of constitutional significance” and that copyright protections might be expanded even if they did not create incentives for new works to be created. The case, Golan v. Holder, No. 10-545, considered a 1994 law enacted to carry out an international convention. The law applied mainly to works first published abroad from 1923 to 1989 that had earlier not been eligible for copyright protection under American law, including films by Alfred Hitchcock, books by C. S. Lewis and Virginia Woolf, symphonies by Prokofiev and Stravinsky and paintings by Picasso.

 How exactly does this act to promote the creation of new works?  Any possible incentive to the creaters is long past.  Notice that this period ends in 1989 -- how many people would have created more works jsut in case they could get copyright protective in a foreign market 23 years later? 

I am not against intellectual property rights (rather the converse) but I question is need for such long term protection for pieces that are decades old.  At some point the public domain is the right place for these older works, as it gives them a chance to be rediscovered by people looking for inexpensive content.  That is probably a better legacy for the creators than any minimal stream of royalties could be at this late date.

Another post on Unions

Erik Loomis is distressed by a piece in the Atlantic asking about the plastic surgery benefit for teachers in Buffalo, New York. Erik focuses on the fact that the teachers union is willing to give up the benefit if a new contract settlement can be reached and that there are many legitimate reasons to have reconstructive surgery available (e.g. a child who had serious facial damage after a car accident).

Jordan Weissmann, the author of the Atlantic article, focuses on the salaries of the teachers (mean of $52K) and the deadlock on contract negotiations. In some ways, I think everyone is missing the big picture. Teachers are professionals who work for a contract. We do not micromanage the compensation packages of hedge fund managers, either. It is true that teachers are paid directly by the government. But the carried interest exemption (which sets tax rates at 15%) is just as much of a decision to spend money.

After all, selectively taxing one group less is the same as a subsidy.

Put this another way, we could pay teachers less if we made their salaries exempt from income tax. Now this does not mean that specific benefits can't be renegotiated. Nor do I want to deny the reality of increasing health care costs (which are a problem everywhere in the United States right now) which can make benefits that were once reasonable seem excessive. But is it really constructive to focus on whether the teacher's health care plan is correctly designed as a matter of public policy. Or should be be looking at the long term drivers of malaise in our society.

Of course, looking at the long term drivers of malaise means facing up to our low tax rates (guarenteed to be a painful discussion) and dealing with the rate of growth in medical costs.

Reading assignments

Busy week but I wanted at least to throw out a few links to things I'd like to be writing about:

Felix Salmon's take on a subject is always appreciated, particularly when he's focusing on a topic we try to keep an eye on (like for-profit schools).

And staying on the education beat, Dana Goldstein collects almost two centuries worth of teacher-bashing.

The last few news cycles have brought lots of pieces about Bain. A few of them have been really interesting.

I've come across a site for the truly hardcore pop culture nerds, particularly those obsessed with stand-up comedy. There's even an intellectual property angle.

And I have got to make time for this.

Worthwhile Canadian Post

Go and read. The implications for long term care in Canada and the United States is a scary prospect given the retiring baby boom and the need to find ways to care for older adults.

Frontiers in Car development

Some interesting legal questions:

All told, the changes may not best the leap from horses to cars, but they are big enough to undermine many of the legal systems we rely on for things like insurance, not to mention criminal law. If a car doesn't require a driver, can a 12-year-old "drive" to his friend's house? Can a drunk person drive home from a bar? How will insurance work if people share driverless cars? Courts and legislators will be sorting those out for years to come.

Actually, I kind of like the idea of cars that can take home intoxicated people safely. Living in a community with a lot of college students, sub-urban road planning, and a lot of bars, I see a lot of accidents. I worry that some of them might have been prevented with better transportation options. Now, obviously, my preference would be improvements in public transit. But driverless cars might well be a good alternative for people who would like to go out but have limited options for coming home.

Tyler Cowen on Health Care

Tyler Cowen points out a potentially serious issue with health care costs.

The U.S. median wage for 2010 was $26,363. The average health care insurance premium today is over $15,000 and by 2021 it may be headed to $32,000 or so (admittedly that estimate is based on extrapolation). Therein lies the problem

Of course, to me this number just argues for single payer health care (which can bend the curve) and innovation to try and bring cost controls to the medical profession.  Now is it not contradictory to argue for both innovation and greater government  control?  In a sense it is, except that the market has formidable barriers to entry that cannot be easily be navigated.

So, for example, a team of nurses and a pharmacist could not form a company to treat twenty and thirty years for their minor health issues.  Nor do we have a clear distinction between major medical insurance (what if I end up in the ER) versus standard health care insurance (which removes the cost from the patient and is subsidized by the government).

On the other hand, maybe I am discounting the possible benefits of the exchanges?

Health Care on Nights and Weekends

Aaron Carroll has a smart point about the limitations of the current office visit model of health care.  He looks at the percentage of people who have trouble getting care on nights and weekends. It seems that we don't do especially well, even on international standards:

Yeah, we beat Canada. But we lose to almost every other country. Almost two thirds of Americans have trouble getting care on nights, weekends, and holidays. You know what? A significant amount of the week is filled with nights, weekends, and holidays. Especially if you don’t want to miss work. It’s fine to believe that people should try and see the doctor in the office. But if you want that to happen, then you need the office to be available. If retail clinics do a much better job in that respect, you can’t complain when people make use of them

I think that there are two points of interest here.  One, while Canada has a laudable health care system, it has flaws too and so a straight out effort to clone it might overlook opportunities to do better.

The second is that these visits don't even have to be expensive.  Nurses in small retail clinics (you do not even have to have a medical doctor) could diagnose a lot of minor conditions, refer patients to emergency rooms in a crisis, and give instructions for minor care.  Now consider that Pharmacies are open 24 hours in a lot of places.  They have a medical professional with a doctorate behind the counter who is an expert on medications.  Why could pharmacists not prescribe based on the Nurse's diagnosis.  Both pharmacists and nurses are cheaper than medical doctors, used to shift work, and highly trained professionals.

Why could they not do a lot more to simultaneously reduce costs (as clinics are inexpensive, provide an alternative to hyper-expensive emergency rooms, and could get patients seen faster) and improve service (would you spend $75 to get easy treatment for an infection at 11 pm on a Saturday night?).

Why aren't me trying out these sorts of innovations?

Thinking about past and future

while listening to an Austrian techno-musician do dance mixes of the great Lil Hardin Armstrong.

I thought I was done with IP stories for a while

But I can't let this one pass unnoted. From Propublica (via Felix Salmon):

Right now, if you want to read the published results of the biomedical research that your own tax dollars paid for, all you have to do is visit the digital archive [1] of the National Institutes of Health. There you’ll find thousands of articles on the latest discoveries in medicine and disease, all free of charge.

A new bill in Congress wants to make you pay for that, thank you very much. The Research Works Act [2] would prohibit the NIH from requiring scientists to submit their articles to the online database. Taxpayers would have to shell out $15 to $35 [3] to get behind a publisher’s paid site to read the full research results. A Scientific American blog said it amounts to paying twice.

Things I wish I had time to write about -- the growth fetish

Felix Salmon has an excellent post that uses Bain as a jumping off point to raise points like this:

Private equity is by no means unique in this respect: it happens at pretty much every public company, too. John Gapper, today, has a column about the way it destroys values at struggling technology companies:

Most public companies are run by people who hate folding ’em, and instead keep returning to the shareholders and bondholders for more chips…

Few senior executives, when debating options for a technology company in decline, admit defeat and run it modestly. Instead, they cast around for businesses to buy, or try to hurdle the chasm with what they have got. Sometimes they succeed but often they don’t, wasting a lot of money along the way.

It goes against their instincts to concede that the odds are so stacked against them that it is not worth the gamble. Mr Perez would have faced a hostile audience if he’d admitted it to the citizens of Rochester, Kodak’s company town in New York, but its investors would have benefited.

At many companies, then, both public and private, the optimal course of action is a modest one — run the business so that it makes a reasonable profit, and can continue to operate indefinitely. If you chase after growth, you often end up in bankruptcy: that’s one reason why the oldest companies in the world are all family-run. Families, unlike public companies or private-equity shops, don’t need growth: they’re more interested in looking after their business over the very, very long run.

If I had time, I'd really like to explore the connection between this and an earlier OE post on the growth fetish:

It's obvious that our economy is suffering from a lack of growth but for a while now I've come to suspect that in a more limited but still dangerous sense we also overvalue growth and that this bias has distorted the market and sometimes encouraged executives to pursue suboptimal strategies (such as Border's attempt to expand into the British market).

Think of it this way, if we ignore all those questions about stakeholders and the larger impact of a company, you can boil the value of a business down to a single scalar: just take the profits over the lifetime of a company and apply an appropriate discount function (not trivial but certainly doable). The goal of a company's management is to maximize this number and the goal of the market is to assign a price to the company that accurately reflects that number.

The first part of the hypothesis is that there are different possible growth curves associated with a business and, ignoring the unlikely possibility of a tie, there is a particular curve that optimizes profits for a particular business. In other words, some companies are better off growing rapidly; some are better off with slow or deferred growth; some are better off simply staying at the same level; and some are better off being allowed to slowly contract.

It's not difficult to come up with examples of ill-conceived expansions. Growth almost always entails numerous risks for an established company. Costs increase and generally debt does as well. Scalability is usually a concern. And perhaps most importantly, growth usually entails moving into an area where you probably don't know what the hell you're doing. I recall Peter Lynch (certainly a fan of growth stocks) warning investors to put off buying into chains until the businesses had demonstrated the ability to set up successful operations in other cities.

But the idea of getting in on a fast-growing company is still tremendously attractive, appealing enough to unduly influence people's judgement (and no, I don't see any reason to mangle a sentence just to keep an infinitive in one piece). For reasons that merit a post of their own (GE will be mentioned), that natural bias toward growth companies has metastasised into a pervasive fetish.

This bias does more than inflate the prices of certain stocks; it pressures people running companies to make all sorts of bad decisions from moving into markets where you don't belong (Borders) to pumping up market share with unprofitable customers (Groupon) to overpaying for acquisitions (too many examples to mention).

As mentioned before we need to speed up the growth of our economy, but those pro-growth policies have to start with a realistic vision of how business works and a reasonable expectation of what we can expect growth to do (not, for example, to alleviate the need for more saving and a good social safety net). Fantasies of easy and unlimited wealth are part of what got us into this mess. They certainly aren't going to help us get out of it.

Things I wish I had time to write about -- the future that was

Check out this fascinating series of predictions from the Saturday Evening Post circa 1900:

Photographs will reproduce all of nature’s colors… [They will be transmitted] from any distance. If there be a battle in China a hundred years hence, snapshots of its most striking events will be published in the newspapers an hour later.

Wireless telephone and telegraph circuits will span the world. A husband in the middle of the Atlantic will be able to converse with his wife sitting in her boudoir in Chicago. We will be able to telephone to China quite as readily as we now talk from New York to Brooklyn.

Man will see around the world. Persons and things of all kinds will be brought within focus of cameras connected electrically with screens at opposite ends of circuits, thousands of miles at a span.

Rising early to build the furnace fire will be a task of the olden times. Homes will have no chimneys, because no smoke will be created within their walls.

Refrigerators will keep great quantities of food fresh for long intervals.

Fast-flying refrigerators on land and sea will bring delicious fruits from the tropics and southern temperate zone within a few days. The farmers of South America… whose seasons are directly opposite to ours, will thus supply us in winter with fresh summer foods which cannot be grown here.

Once again a knowledge of obscure pop culture saves the day

Impressionist Will Jordan used to do a routine built around the idea of a threat, an actor kept under contract because of a resemblance to one of the studio's stars. The point of a threat was two-fold: to give the studios a ready replacement if a star dropped out and to let the stars know that they could be replaced.

I was reminded of threats when I came across this section of Felix Salmon's latest instalment of the adventures of Ben Stein:

But my favorite bit of the complaint is where he complains that the ad which did end up running, featuring Peter Morici, is “an explicit misappropriation of Ben Stein’s likeness and persona, which is an explicit violation of Ben Stein’s rights of privacy and of publicity, barred by California law”.

In other words, this ad, while it might look to all the world as though it features a real economist who’s much more qualified on such matters than Ben Stein, is in fact an illegal violation of Ben Stein’s privacy, which uses the likeness of Ben Stein. Maybe Stein thinks that Morici should wear a long blonde wig, or something, to make him look less Stein-esque?

According to most science fiction shows, androids of the future should have no problem with "seven minutes"

Nice Observation

This post was hoisted from the comments in Megan McArdle's website and it makes a point that we often forget: the eventual chance of death is 100% and the hazard of death is tightly associated with how long you have lived so far.  Once you make it out of childhood, many people live their 20's and 30's free of serious health concerns.  It's not atypical to find such people, at least.  One the other hand, how common is it for 80 year olds to not have at least one health issue that effects either risk of death or quality of life?

With this special offer, you can watch the Super Bowl on your laptop absolutely for free!!

Well, free is a small stretch. You will need an HDTV tuner stick, but those are cheap (you can probably find one for thirty and change) and most come with a small but surprisingly effective antenna. Plug it into your USB port and you're good to go.

I recently heard a technology reporter talking about how big it would be when someone finally figured out a commercially viable way for people to watch the Super Bowl on their computers. It struck me as a perfect ddulite moment, gushing over an anticipated technology while ignoring an existing one that had all the same essential features.

This tendency to prefer next year's toy to this year's tool is one of the ddulites' costliest traits because it leaves good, useful technology under-recognized and under-utilized. Waiting for the next big thing (like hydrogen fuel-cells or geo-engineering) can cause us to put off implementing existing technologies (plug-in hybrids, ground-source heating and cooling, etc.).

What I don't like about this graph

Don't get me wrong. This Wikipedia graph carries a lot of information -- I use it all the time -- but there's a counter-intuitive quality about it that bothers me and I have no idea how to fix it.

The problem is that changes in the x-axis mean more or less the opposite of changes in the y-axis. Smaller intervals between new laws and larger jumps in duration both indicate increased copyright protection.

This wouldn't be a problem if we were plotting these with a line -- with lines we're used to thinking in terms of slope -- but here the natural impulse is to think in terms of area, thus making the 1976 and 1998 laws look like fairly minor changes.

One more complaint, all but one of the states had copyright laws before 1790 so the law passed that year was more of a formalization than an extension. For most of the states, there was a period of almost fifty years without a major extension. The twenty-two year interval before the 1998 act really was exceptionally short.

Intellectual property and business life-cycles

A while back, we had a post arguing that long extensions for copyrights don't seem to produce increased value in properties created after the extension, but what about the costs of an extension? And who pays it?

New/small media companies tend to make extensive use of the public domain (often entailing a rather liberal reading of the 'public' part). The public domain allows a company with limited resources to quickly and cheaply come up with a marketable line of products which can sustain the company until it can generate a sufficient number of original, established properties.

Many major media companies have gotten their start mining the public domain, none more humbly than Fawcett. At its height, the company had magazines that peaked at a combined circulation of ten million a month in newsstand sales, comics that outsold Superman, and the legendary Gold Medal line of paperbacks. All of this started with a cheaply printed joke magazine called Captain Billy's Whiz Bang


Of course, Wilford Fawcett couldn't have reimbursed the unknown authors of those jokes even if he had wanted to. Disney, on the other hand, built its first success on a a title that was arguably still under copyright.

Mickey had been Disney's biggest hit but he wasn't their first. The studio had established itself with a series of comedies in the early Twenties about a live-action little girl named Alice who found herself in an animated wonderland. In case anyone missed the connection, the debut was actually called "Alice's Wonderland." The Alice Comedies were the series that allowed Disney to leave Kansas and set up his Hollywood studio.

For context, Lewis Carroll published the Alice books, Wonderland and Through the Looking Glass, in 1865 and 1871 and died in 1898. Even under the law that preceded the Mouse Protection Act, Alice would have been the property of Carroll's estate and "Alice's Wonderland" was a far more clear-cut example of infringement than were many of the cases Disney has pursued over the years.

In other words, if present laws and attitudes about intellectual property had been around in the Twenties, the company that lobbied hardest for them might never have existed.

Another company that went from near bankruptcy to media powerhouse was a third tier comics publisher that had finally settled on the name Marvel. The company's turnaround is the stuff of a great case study (though MBA candidates should be warned, Stan Lee's memoirs can be slightly less credible than his comics). Not surprisingly, one element of that turnaround was a loose reading of copyright laws.

Comic book writer and historian Don Markstein has some examples:

Comic book publisher Martin Goodman was no respecter of the property rights of his defunct colleagues. In 1964, he appropriated the name of a superhero published in the '40s by Lev Gleason, and brought out his own version of Daredevil. A couple of years later, he introduced an outright copy of a '50s western character published by Magazine Enterprises, Ghost Rider. It wasn't until late 1967, possibly prompted by a smaller publisher's attempt to do the same, that he finally got around to stealing the name of one of the most prominent comics heroes of all time, Captain Marvel. And this delay was odd, because the name of Goodman's company was (and remains) Marvel Comics."

(That would, by the way, be Fawcett's Captain Marvel so what goes around...)

(Fans of fantasy art should find the covers of the old Ghost Rider familiar)




This is how how media companies start. A small music label fills out a CD with a few folk songs. An independent movie company comes up with a low-budget Poe project. An unaffiliated television station runs a late night horror show with public domain films like Little Shop of Horrors and Night of the Living Dead. Then, with the payroll met and some money in the bank, these companies start getting more ambitious.

Expansion of the public domain is creative destruction at its most productive. Not only does it clear the way for new work; it actually provides the building blocks.

Behavioral Economics for Firms

On Friday I read this piece by Karl Smith on Apple and this piece by Matt Yglesias on Barnes and Noble.  I was struck by how both of these examples showed firms actually in the best interest of the executive (who get perks from working at the firm) and not the shareholders (who want to maximize return on investment).

I wonder if there is a limit to how well firms adhere to economic models>  We already have decent evidence that people don't necessarily respond rationally (or else why would they buy Apple shares?).  But the executives in the company create a principal agent problem, which may also cause issues at the level of the company itself.

This is not to knock economic models.  Epidemiology has many of the same limitations and we have to rely on some pretty challenging assumptions.  Rather it is to be careful, with any model, to recall the limitations and exceptions inherent in modeling a complex process.

Astronauts and aquanauts

I don't want to push this analogy too far (there are important differences) , but this NPR story got me to thinking about the exploration of the oceans and the exploration of space.

To take the pictures, researchers deployed a tethered robot from their research ship. About the size of a four-wheel-drive truck, the robot was outfitted with an array of high-definition video cameras and still cameras. The researchers would watch a bank of screens of pictures that the robot beamed up from the seabed.

Fifty years ago, exploring the oceans meant sending down manned bathyspheres and bathyscaphes and establishing undersea habitats like SEALAB and Tektite. Now exploration is done pretty much entirely by tethered robots and remote-controlled submersibles. For other than military purposes, manned deep water vehicles seem to have almost disappeared. Based on a good fifteen minutes on Wikipedia, it appears that serious bathyscaphe-based research ended with the Sixties. (the record for deepest dive has stood since 1960.)


We've all gotten used to the idea of exploring the oceans through a video screen rather than a portal and it's been ages since I've heard anyone talk about colonizing the seas. The cold, hard economic fact is that in extreme environments, machines can do more, and do it more cheaply than humans. That holds for space exploration as well.

It is possible to argue for manned exploration programs but those arguments invariably have to come down to a question, not of science, but of intangibles like what we want to accomplish as a nation. I'm actually sympathetic to these arguments but they have to be made in these terms. This really is something you do not because it's easy but because it's hard.

Stock Markets and Beta

Regular readers will know that I have a pet interest in personal finance.  One thing that I have thought a lot about is the contrast between structured saving vehicles (like the 401(k)) and government pension plans (like the Canadian Pension Plan).  One worry that I have had about government pension plans is that they seem to be under attack when times are bad (thus bearing political risk).  However, the last 12 years seem to suggest that it has not been a good time to invest in the stock market:

This means that historically, the stock market more than doubles your money in real terms every 12 years, but over the last 12 years, it’s down 20%.

That is a great deal of risk to bear as an individual investor.  Leaving the market in 1999 and purchasing an annuity (leaving the job market 12 years early) would produce a better retirement than saving for an additional 12 years.

Now add in the losses due to management fees and it can be a tough slog to put together a retirement account. Of course, you can't easily avoid the management fees as taxes are worse than these fees (which mostly seem to be a rather substantial subsidy to wall street).  So saving in personal accounts is also hard.

That leaves two possibilities -- a entity that can smooth out risk over decades (e.g. a government) or simply making more income.  Since it is not trivial to generate large pay increases, the former does seem like the only realistic way to mitigate time period risk for retirement.

Or am I missing something?

Doing something for non-traditional students

A few years ago I did a stint as an instructor at a large state school (fun work, terrible pay). Most semesters I taught at least one night course which meant lots of non-traditional students. They always impressed the hell out of me. Most were working full time jobs, many had kids to take care of, but somehow they always were the ones who got all their homework in, showed up for study sessions and managed to maintain the best attitudes.

I always felt that the university was not serving these students well, that we should have been finding ways to work around their schedules to make their lives easier and the path to graduation quicker. With that in mind, I liked a lot of what I heard in this NPR report on Western Governors University, a nonprofit online school designed to help adult students finish college.

Shackleford can also keep her costs down by finishing her coursework early. The average time to get a degree at Western Governors is much shorter than at a typical school, where students have to put in a set amount of "seat time."

But the truly unusual thing about this computer-driven system is that it provides a lot of one-on-one attention. Throughout her time at Western Governors, Shackleford will have her own personal student mentor — a combination guidance counselor, career coach and best buddy.

Shackleford has never met her mentor in the flesh, even though she lives about 90 minutes away, just north of Indianapolis. Her name is Stormi Brake, and she also works out of her home office, in a house filled with kids and pets.

When I show up for a visit, Brake is wearing a headset and talking on the phone with one of her 90 students. She is organized and energetic, jumping from student to student to head off any problems. She tracks their progress on a computer dashboard the school uses. She shows me that students who are completing required tasks on schedule show up in green, while those who are behind show up in red, a sign that the mentor needs to get in touch.

Brake has a strong background in science and teaching, but her job is to make sure her students get their degree. Students with questions about course content can turn to another kind of mentor — a course mentor — who's considered an expert on the subject.

Cash for Citations

Mark sent me this piece entitled Cash for Citations?. The title was a bit misleading when you click though and read the actual offer:

An astronomer at King Abdulaziz University (KAU) in Jeddah, Saudi Arabia, was offering him a contract for an adjunct professorship that would pay $72,000 a year. Kirshner, an astrophysicist at Harvard University, would be expected to supervise a research group at KAU and spend a week or two a year on KAU’s campus, but that requirement was flexible, the person making the offer wrote in the e-mail.

I am actually not sure that this rises to the level of a "scam" by modern standards.  The professor would, after all, work with the students at KAU and be residential for at least part of the year.  Sure, the salary is a bit high for two weeks worth of work but access to a top researcher can be worth a lot if he contributed remotely.  To rise to the level of an actual scam, the flexible requirement would have to be negotiable to no duties.

Now, the concern is that the astronomer would have to list the KAU affiliation on all of their papers.  On the other hand, if they are a salaried adjunct professor then that would actually be pretty normal.  Several of my colleagues have positions cobbled together from multiple places and the requisite need to list multiple affiliations.

The real issue is the ability of universities to purchase reputations.  It has long been true that extremely gifted and creative researchers have better employment options at least partially because of the prestige they bring to the hiring institution.  In a world with flexible work locations (consider MITx), these issues are likely to become larger over time.

But the idea of "cash for citations" is really a salary for research productivity.  The real question is how residential does a professor need to be to count as affiliated.