‘Our Philosophy’ Category

A Busi­ness Man­age­ment Tool

Busi­nesses Are Miss­ing a lot of Opportunities

Because of the per­ceived costs of devel­op­ing and the per­ceived dif­fi­cul­ties of man­ag­ing a full-​featured web site, many own­ers and man­agers at small– and medium-​sized firms want only a sim­ple ‘web presence.’

Often that ‘pres­ence’ con­sists of a sin­gle page that announces, “we exist, here is our tele­phone num­ber,” or it con­sists of a few pages with not much more information.

Clearly, such sites are very cheap to develop and main­tain although per­haps ‘not main­tain’ is a more apt descrip­tion. How­ever, such sites do lit­tle or noth­ing to gen­er­ate rev­enue or cre­ate long-​term value.

In this post, we dis­pel a few of the myths regard­ing pre­sumed high costs and explain a few of the ben­e­fits of a full-​featured site.

Web Sites Shouldn’t Be Yel­low Page Ads

There’s a good chance that if your busi­ness isn’t web, infor­ma­tion, or technology-​related, then you are not famil­iar with the ease-​of-​use and capa­bil­i­ties of mod­ern, infor­ma­tive, well-​managed web sites. In fact, if all you know is “it’s some­thing with com­put­ers,” then you may believe that main­tain­ing a site is much more dif­fi­cult than it really is — or than it could be with a well-​designed site.¹

If the para­graph describes you, then you may think that some­thing that is the equiv­a­lent of a Yel­low Page adver­tise­ment is a suf­fi­cient web presence.

It’s not.

If your fam­ily is like ours, the Yel­low Page book never makes it into the house. It goes straight from the curb or the front porch into the recy­cling cart.

That’s not very dif­fer­ent than how web vis­i­tors, who don’t already know you, treat your min­i­mal web presence.

Now, we don’t fault site own­ers for believ­ing that a sin­gle page or a bare bones site is suf­fi­cient to gen­er­ate rev­enue. They may not know any better.

Out-​of-​sight, Out-​of-​mind or Out-​of-​site, Out-​of-​mind

In fact, on occa­sion their prospects and cus­tomers may have men­tioned, “we found you from your web site.” How­ever, those own­ers have no idea of ongo­ing lost profit oppor­tu­ni­ties because unseen, poten­tial cus­tomers can’t find the infor­ma­tion they seek (and so, never call).

Those missed oppor­tu­ni­ties arise because most own­ers and oper­a­tors of small– and medium-​sized busi­nesses don’t spend their days surf­ing the web; so, they may not real­ize that many cus­tomers and prospects find web sites to be vital and inex­pen­sive (and in some case, irre­place­able) sources of infor­ma­tion (about prod­ucts, ser­vices, and orga­ni­za­tions). So, those own­ers and man­agers may be unaware of the lost oppor­tu­ni­ties to con­vert web vis­i­tors into actual, pay­ing customers.

For­tu­nately, we think that lack of that aware­ness can be over­come by ask­ing those indi­vid­u­als a few questions:

1. When you, your­self, are look­ing for infor­ma­tion about a prod­uct, ser­vice or orga­ni­za­tion and you find a site that con­sists of a sin­gle sta­tic page, how often do you con­tact the site’s owner?
2. How does your sin­gle page dif­fer­en­ti­ate your firm or orga­ni­za­tion for your com­peti­tors, whether they are local, national, inter­na­tional, or on-​line?

While it is pos­si­ble to (psy­cho­log­i­cally) ratio­nal­ize a jus­ti­fi­ca­tion to the first ques­tion, that’s much more dif­fi­cult to do with the sec­ond. If your sin­gle page or unin­for­ma­tive site doesn’t seem to hurt you now, then you bet­ter hope that your com­peti­tors don’t start lever­ag­ing the web to their advan­tage. (Of course, we would argue that an unin­for­ma­tive site is already hurt­ing sales more than you know.)

Also, note the homo­graph in the above sub­ti­tle, because that’s often what hap­pens when cus­tomers leave an unre­mark­able ‘web pres­ence.’ They for­get that you exist.

“We Can’t Afford it.”

Oh really?

When we hear that sen­tence, we won­der: how can you not? Espe­cially for firms where a sin­gle addi­tional sale (gen­er­ated) from an enhanced pres­ence would pay for the entire site.

For many firms, such myopic per­cep­tions per­sist far beyond web site and mar­ket­ing deci­sions; so, it’s worth empha­siz­ing that cost min­i­miza­tion does not imply profit max­i­miza­tion. In other words, min­i­miz­ing expen­di­tures doesn’t max­i­mize prof­its when the mar­ginal amount spent would gen­er­ate greater mar­ginal ben­e­fits. It’s the very def­i­n­i­tion of being penny-​wise and pound foolish.

We under­stand that for projects like web sites, the mar­ginal costs are incurred imme­di­ately, and they are more pre­cisely known than the ben­e­fits, which seem to be less cer­tain and amor­phous, but still it is 2010, after all, and there are sev­eral hun­dred mil­lion PCs in the USA and (we’re guess­ing) tens of mil­lions of cell phones with web brows­ing capabilities.

For rel­a­tively expen­sive goods or ser­vices a sin­gle addi­tional order can recover all upfront design and devel­op­ment costs, and that is true for indus­trial firms, swim­ming pool builders, and many other types of prod­ucts and services.

That’s a sin­gle new order over the life of the site that could eas­ily, eas­ily last for five-​to-​ten years.

Now, we could cre­ate a full-​fledged, cost-​volume-​profit analy­sis and assume cer­tain con­tri­bu­tion mar­gins (roughly, rev­enue — vari­able costs) and cal­cu­late break-​even points and prob­a­bil­i­ties of achiev­ing those points, but if your busi­ness needs only one or two addi­tional (i.e., mar­ginal) sales over five-​to-​ten years then it seems rather obvi­ous. (For lower priced items, the break-​even num­ber of mar­ginal orders increases but then the upside poten­tial is much greater, too.)

More­over, in cer­tain cases, our argu­ment becomes sub­stan­tially more persuasive:

1. Rep­u­ta­tional effects & (what we would call) high ser­ial cor­re­la­tion): If your busi­ness or orga­ni­za­tion serves a mar­ket where rep­u­ta­tion mat­ters – where a sat­is­fied cus­tomer is likely to rec­om­mend you to a friend, neigh­bor, or col­league – then one addi­tional web-​generated sale could eas­ily lead to many addi­tional ones. So, given that you pro­vide excel­lent ser­vice, one new cus­tomer who found your firm via the web could eas­ily turn into a neigh­bor­hood or com­mu­nity of non-​web-​based customers.
2. Avail­abil­ity of a New Mar­ket­ing Ini­tia­tive: many suc­cess­ful and long-​standing firms with­out sig­nif­i­cant web pres­ences often ignore this oppor­tu­nity, espe­cially indus­trial firms. Sup­pose your orga­ni­za­tion has a rel­a­tively con­stant cus­tomer base, and those cus­tomers are well-​served by the usual, per­sonal sales tech­niques. Often sales man­agers and own­ers or mar­ket­ing man­agers ignore the oppor­tu­nity to sell to a new mar­ket seg­ment, and an inex­pen­sive but effec­tive way to test new mar­kets is via a web-​based campaign.

For exam­ple, due to recent high energy prices and to gov­ern­men­tal reg­u­la­tions, many man­u­fac­tur­ers have had to make their prod­ucts more effi­cient (con­sider just about any­thing that con­sumes power in an office or fac­tory). Exist­ing cus­tomers may or may not be con­cerned with such advances or changes, but poten­tial new cus­tomers that have new sus­tain­abil­ity or green ini­tia­tives might be. So, a web site, which doesn’t alien­ate exist­ing cus­tomers, but addresses the needs of green and sus­tain­able firms offers a huge oppor­tu­nity to cap­ture sales and reach (or cre­ate) new mar­ket segments.

We can imag­ine a reader protest­ing that our analy­sis con­sid­ers upfront costs but ignores recur­ring costs. For a nor­mal small or medium-​sized busi­nesses, a well-​designed, self-​managed site can have recur­ring costs as low as $150 PER YEAR. (With a full-​fledged web store that processes trans­ac­tions on-​site – rather than, say, at Pay­Pal – recur­ring annual cost increases to between $500 — $750.) Yeah, it’s that cheap.

Ancil­lary & Oper­at­ing Benefits

A well-​designed site offers more than mar­ket­ing ben­e­fits. It can pro­vide bet­ter ways to con­duct busi­ness, and those meth­ods can lead to improved effi­cien­cies and more real­is­tic cus­tomer expectations.

With easy-​to-​create password-​protected pages, one can show actual cus­tomers more infor­ma­tion than generic, web-​site vis­i­tors. So, cus­tomers can receive answers to frequently-​ask ques­tions or have access to ref­er­ence mate­ri­als with­out inter­rupt­ing your day or one of your employ­ees. (Or, with­out requir­ing you to answer the same ques­tion for the 1,400^th time.)

For long-​term projects, a site that explains the process – the num­ber of steps, the time-​frame, and the usual rea­sons for delay – cre­ates more real­is­tic cus­tomer expec­ta­tions and per­mits them to find answers to their ques­tions. We think that it is often lost on small-​business own­ers that dur­ing, day, a con­struc­tion process, cus­tomers have almost as much aver­sion to mak­ing calls as you do to answer­ing them. So, why not try to elim­i­nate those calls by pro­vid­ing an alter­na­tive source of information.

Forms: a site with well-​designed con­tact forms per­mits you to know some­thing about your prospects before the first tele­phone call, includ­ing: who they are, where they are from, what they seek, and which pages they have vis­ited. Such forms can be very short, like our con­tact page or a sim­ple request for infor­ma­tion or they can be long and multi-​paged, like a sports reg­is­tra­tion form. Regardless of their size and scope, there is only one answer to the (lead­ing) ques­tion: isn’t it bet­ter to know some­thing about prospects before mak­ing that call?

Upon sub­mis­sion, good form soft­ware for­wards web vis­i­tors to rel­e­vant web pages, and it also per­mits cus­tomized, auto­matic e-​mail replies. Almost all form soft­ware will send an e-​mail to some­one within the firm when­ever there is a new sub­mis­sion, and that recip­i­ent can depend upon the data that were col­lected. (By the way, many of the form gen­er­a­tors that we use are free. The most expen­sive one is $125.)

Cal­en­dars: for busi­nesses that require appoint­ments, why waste your’s staff time sched­ul­ing ses­sions when many cus­tomers are will­ing to make their own reser­va­tions on-​line. (So, let’s get this straight: you can buy an air­line ticket or a hotel reser­va­tion on-​line, but you can’t make a hair-​cut appoint­ment with­out call­ing someone?)

With full-​featured cal­en­dars, it is quite easy to show avail­abil­ity and per­mit web vis­i­tors to make requests. That’s a con­ve­nience for your cus­tomers who desire it, and it let’s staff mem­bers focus on value-​added ser­vices. For other types of firms, shared resources can be more effi­ciently used with pri­vate ver­sions of the same cal­en­dars. In fact, one cal­en­dar instal­la­tion can pro­vide both types of sched­ules: pub­lic or pri­vate, password-​protected or not.

On-​line Trans­ac­tions: mod­ern web stores are secure, rather inex­pen­sive, and very easy to main­tain; so, it is sur­pris­ingly sim­ple to sell goods and ser­vice on the web; how­ever, your orga­ni­za­tion does not need a store to pro­vide and ben­e­fit from on-​line trans­ac­tions. With Pay­Pal, it is quite easy to send e-​mail invoices and per­mit cus­tomers to pay on-​line. As we fre­quently say, 97% of some­thing is bet­ter than 100% of nothing.

Caveat Emp­tor

Of course, not all web sites are cre­ated equal. So, when choos­ing a site designer or builder or devel­oper, be sure that you are get­ting the ease-​of-​maintenance of a well-​designed con­tent man­age­ment sys­tem. Oth­er­wise, you’ll get a web pres­ence, which may or may be inex­pen­sive to main­tain, but you will not get an effec­tive, ada­p­at­able busi­ness man­age­ment tool. To see what it avail­able, visit our web design cen­ter at Design​.Spe​r​o​Con​sult​ing​.com.

As always with our longer posts, we’ll likely update and edit this dur­ing the next few days.

In E-​mails & on Web Sites

As Dreaded E-​mail Attachments

Each week the ele­men­tary school sends at least one e-​mail with a vari­ety of PDF files attached. Those files remind us of noth­ing more than elec­tronic bar­na­cles that cre­ate fric­tion on the inter­net and waste space on hard dri­ves. (It’s not the only vio­la­tor, just the most recent.)

Usu­ally those sep­a­rate files – which must be saved and opened, or at least opened – are sim­ple announce­ments from the school or from one of the par­ents’ asso­ci­a­tions. There is no com­pelling rea­son why those sim­ple, text announce­ments could be eas­ily incor­po­rated into the e-​mail mes­sage. That action would save each of the 300-​or-​so fam­i­lies at the school a decent amount of time every week.

Now, such a change might seem triv­ial – if you are not the one open­ing the PDFs. In addi­tion, such a change might be inef­fi­cient if it overly-​burdened the sender, but elim­i­nat­ing most or all of the PDFs requires noth­ing more that one per­son open­ing the file and copying-​and-​pasting the text into the mes­sage. In this case, the process is so easy that for each attached file, the cost:benefit ratio is about 1:300, and that is a nice effi­ciency gain.

Actu­ally, that minor cost could be com­pletely elim­i­nated if the e-​mail sender requested that the announce­ment be sent to them as e-​mail mes­sages, rather than as PDFs.

Of course, if such files are more than infor­ma­tional, if they are elec­tronic ver­sions of paper forms, then it may be incon­ve­nient to incor­po­rate those forms into the message’s body. BUT, if those forms are rou­tine, then rather than hav­ing each recip­i­ent open, print, and fill-​in the paper form, the sender could direct the reader to an on-​line form to complete.

In this case, forc­ing 300 fam­i­lies to print a page isn’t par­tic­u­larly green, cheap or con­ve­nient. It is not green because it wastes paper and ink. It is not cheap because it wastes paper and ink. It is not con­ve­nient because it requires print­ing, walk­ing to the printer, retriev­ing the form, com­plet­ing it, and, in this case, ensur­ing that the child returns it to the school. (In other cases, a stamp and enve­lope are required.)

On a well-​designed web-​site, such forms can be eas­ily replaced with their elec­tronic equiv­a­lents: sim­ple; easy-​to-​use; click, click, click, and you’re done. They sur­pris­ingly afford­able to gen­er­ate and edit.

When we have men­tioned sim­i­lar phe­nom­e­non to other orga­ni­za­tions and clients, we usu­ally get a response, like, “you don’t under­stand, we have 30 dif­fer­ent forms.”

Not-​so-​close inspec­tion usu­ally reveals thirty sheets of paper in dif­fer­ent fonts and lay-​outs col­lect­ing about 95% of the same infor­ma­tion. Often, all of those forms can be com­pressed into one or two on-​line ver­sions with dif­fer­ent drop-​down sub­jects, etc. Of course, like just about any other com­puter file, once an on-​line form is cre­ated, it can be copied and edited to cre­ate a sim­i­lar, deriv­a­tive form.

At one orga­ni­za­tion we were able to nearly elim­i­nate the need to print paper ver­sions of reg­is­tra­tion forms. Besides improv­ing the cus­tomer expe­ri­ence, that change has sub­stan­tially improved the effi­ciency of col­lect­ing and aggre­gat­ing data. No need to retype the data into an Excel spread­sheet when it can be down­loaded from an on-​line data­base or can be auto­mat­i­cally sent (via email) to rel­e­vant parties.

By the way, in Decem­ber we wrote about the prob­lems with using e-​mail as the firm’s or organization’s cen­tral infor­ma­tion sys­tem. You can read about it here: Inex­pen­sive but Valu­able Web-​base MIS.

On Web Sites

There are times when only the PDF ver­sion of a file will do. How­ever, being forced to click a link on a web site to read text through a PDF viewer or browser add-​in or to down­load a form is very inef­fi­cient for web site vis­i­tors and nei­ther effec­tive nor effi­cient for the site’s owner.

It’s cheap, it looks that way, and, most impor­tantly, it turns away vis­i­tors. That’s because many vis­i­tors won’t down­load or open such files so, they never see what you have to say. More­over, for those per­form­ing web searches, many poten­tial vis­i­tors don’t become actual vis­i­tors because as soon as they see “PDF” in the search result, they start scan­ning down­ward for the next result.

Except for cer­tain spe­cial mate­ri­als, like, say, mate­r­ial that you are only allowed to dis­sem­i­nate as a PDF file – e.g., some aca­d­e­mic jour­nal arti­cles or legal doc­u­ments – any­thing that can be com­mu­ni­cated within a PDF file can also be com­mu­ni­cated in a web page, and no knowl­edge of html or any other com­puter lan­guage is required.

If you can do it in MS Word, you can do it with a good con­tent man­age­ment sys­tem. Not only are you likely to get more hits from within search results, but you are also likely to have an increased poten­tial for hits because it is much eas­ier to search-​engine-​optimize con­tent on web pages rather than in PDFs.

Of course, if PDF file con­tent is con­verted into web page con­tent, there is no rule that pro­hibits post­ing the PDF file, too. (In addi­tion, there are a num­ber of free web plu­g­ins that allow vis­i­tors to con­vert web pages into PDF files – if you like that kind of thing.)

While some (obsti­nate) read­ers, may not con­sider this to be the most press­ing of causes, it is one that is sim­ple to imple­ment and ben­e­fi­cial to all par­ties involved.

If you would like exam­ples or demon­stra­tions of on-​line forms, please down­load this PDF form, com­plete it, and mail it to us. Just kid­ding, please con­tact us, instead.

Or, The High Cost of Subsidies

A few weeks ago there was an arti­cle in The Wall Street Jour­nal, What’s a Degree Really Worth. In it the reporter Mary Pilon dis­cussed the esti­mated dif­fer­ence in the aver­age life­time earn­ings between indi­vid­u­als with and with­out the col­lege diplo­mas, and she men­tioned a few prob­lems – but only a few of the prob­lems – with some of those calculations.

We don’t have much to say about those bad cal­cu­la­tions other than the esti­ma­tion meth­ods aren’t very sophis­ti­cated. The one method involved mul­ti­ply­ing some over­all dif­fer­ence in aver­age annual earn­ings by 40 years – the pre­sumed length of one’s work career. Among other things, that sim­ple prod­uct doesn’t include oppor­tu­nity costs – e.g., wages lost while not work­ing dur­ing time in col­lege – or dif­fer­ences in growth rates of com­pen­sa­tion through time or time-​value-​of-​money considerations.

So, while we don’t have much to say about the cen­tral idea in the arti­cle, we do have (1) a com­ment about tuition infla­tion and (2) a related cri­tique about col­lege as white-​collar, vo-​tech train­ing (and the impli­ca­tions of that).

1. All things equal, gov­ern­ment sub­si­dies to con­sumers increase prices – in this case tuition – which can then spi­ral upwards.
2. All things equal, higher tuition costs induce stu­dents to become more professionally-​oriented, and that has sev­eral impli­ca­tions, includ­ing a de-​emphasis of the lib­eral arts, and that per­mits anti-​social and silly behav­ior and the­o­ries to per­sist in what has become the fig­u­ra­tive back­wa­ter of the academy.

(1) Gov­ern­ment Sub­si­dies & Tuition Increases

In the arti­cle, Ms. Pilon briefly men­tioned that aver­age, annual, under­grad­u­ate tuition and fees at pri­vate col­leges increased from $15,518 to $26,273 dur­ing the past ten years.

That 70% increase is twice as great as the change in con­sumer prices– of about 35% – and that’s noth­ing new. This table at http://​www​.finaid​.org/​s​a​v​i​n​g​s​/​t​u​i​t​i​o​n​-​i​n​f​l​a​t​i​o​n​.​p​h​tml shows that tuition infla­tion has been greater than gen­eral infla­tion for at least the past 50 years.

Hmm, now what other indus­try has shown per­cent­age price increases greater than the rate of infla­tion for a long period of time? You know, that indus­try that com­prises about 16% of GDP? Could it be health-​care? Why, yes, it could – although to be pre­cise, health-​care infla­tion has been sub­stan­tially less than tuition inflation.

So, is it a mere coin­ci­dence that two of the indus­tries that have his­tor­i­cally been the most-​subsidized in the U.S.A. are also two indus­tries with very large and sus­tained price increases over a long period of time? We don’t think so.

Here is an exam­ple of how sub­si­dies increase prices.

We recently had a con­ver­sa­tion with the par­ent of a high school senior. He told us that he had bud­geted a cer­tain amount for his child’s tuition next year; let’s say it was $7,500.

Any tuition cost above that amount would have to be funded with grants, loans, work-​study pro­grams, and scholarships.

By the way, the reader should think of schol­ar­ships from col­leges as noth­ing more than dis­counts from list prices. Often, they are awarded based upon merit and are called aca­d­e­mic schol­ar­ships, but that’s not always the case. Col­leges have much more pric­ing flex­i­bil­ity than most par­ents know, and for what­ever arbi­trary rea­son, col­lege recruiters can con­sider some stu­dents more desir­able than oth­ers and offer those prospects price con­ces­sions.¹

Any­way, con­sider some­one like our acquain­tance who has $7,500 per year to spend on col­lege. To keep it sim­ple, assume no other sources of funds – no sub­si­dized loans – except a pos­si­ble fed­eral grant of, say, $2,500.

With­out the grant, the max­i­mum that any col­lege could get from the fam­ily is $7,500 per year. With the grant, the max­i­mum is $10,000.

With­out the Grant

Let’s con­sider our acquain­tance as an aver­age par­ent. If on aver­age, fam­i­lies have up to $7,500 to pay for col­lege expenses, then on aver­age, col­leges have to find ways to oper­ate (as going con­cerns) with $7,500 per stu­dent. Actu­ally, due to their abil­ity to price dis­crim­i­nate, col­lege would charge more and then have to offer schol­ar­ships to more stu­dents. That’s because stated tuition rates are noth­ing more than list prices, and one would expect the list price to be greater than $7,500. In that way, the col­leges can find ways to charge higher prices to wealth­ier fam­i­lies with above-​average bud­gets and offer dis­counts – err, we mean schol­ar­ships – to every­one else.

Regard­less, col­leges wouldn’t be able to get more than $7,500 from our aver­age parent.

With the Grant

Now, it’s quite pos­si­ble that an aver­age par­ent could say to his college-​bound child, “we had $7,500 to spend for col­lege but luck­ily you have a grant for $2,500; so, we’ll only spend $5,000 of our own money, and your tuition bud­get remains the same: $7,500.” It’s pos­si­ble, but it seems unlikely. Unless tuition is less than $10,000, we’d expect that fam­i­lies who com­mit $7,500 would be will­ing to spend that amount under many circumstances.

So, if the fam­ily spends any­thing above $5,000, then the col­lege gets more than with­out grants. If par­ents com­mit their entire $7,500, then the col­lege gets $10,000. That increases the incen­tive for the col­lege to raise tuition to extract the entire amount avail­able from the fam­ily. So, it seems rea­son­able to con­clude that the tuition rates would be higher than they would be with­out sub­si­dies. Clearly, the col­lege would still try to get as much as pos­si­ble from wealth­ier fam­i­lies (and from every­one else, too).

In those instances, where the fam­ily com­mits the entire $7,500, it is no bet­ter off, but the col­lege cer­tainly is.

How­ever, it’s worse than that when the gov­ern­ment “attempts to help make col­lege afford­able” over time. Imag­ine the first year after the gov­ern­ment begins offer­ing grants, if our think­ing is cor­rect, then one would expect col­leges to increase tuitions. That means that the dif­fer­ence between tuition rates and parental bud­gets – say, a con­stant $7,500 – would grow. If that dif­fer­ence causes Con­gress and the Pres­i­dent to offer larger grants, then we have the begin­ning of an infla­tion spi­ral. The fam­i­lies that con­tinue to spend $7, 500 are no bet­ter off than with­out sub­si­dies. The fam­i­lies that spend less ben­e­fit some­what, but we’d expect that they would be in the minor­ity. The col­leges are def­i­nitely better-​off (and fat­ter) and tax-​payers are strictly worse-​off (as usual).

From each family’s per­spec­tive, given that grant pro­grams exist, then receiv­ing a grant is obvi­ously ben­e­fi­cial because it pro­vides more flex­i­bil­ity and capac­ity to meet high tuition pay­ments. How­ever, col­lec­tively, if every­one – or enough stu­dents – receive grants, than no one is better-​off because tuition demanded by the col­lege is higher only because those grants are avail­able, and the col­leges get fatter.

(2) Spec­u­la­tion on High Tuition Costs, Career Train­ing & their Unin­tended Implications

Or, Does Out­ra­geously High Tuition Doom the Lib­eral Arts to a Ghetto of Anti-​social Silliness?

Note up-​front that like much of what we write this cri­tique is rather spec­u­la­tive and requires sev­eral assump­tions. Admit­tedly, we ignor­ing many impor­tant gen­eral eco­nomic and demo­graphic fac­tors, and we make sev­eral, very gross gen­er­al­iza­tions, but (obvi­ously) we think our analy­sis is com­pelling nonetheless.

Note also that:

• From this site, one can see that government-​provided finan­cial aid began in the 1940s for vet­er­ans and was revised in the 1950s. It then expanded to seg­ments of the gen­eral pop­u­la­tion in the 1960s and ‘70s and expanded beyond grants to include sub­si­dized and guar­an­teed loans.
• From the link near the top of this post, the reader can notice that tuition infla­tion has out­paced gen­eral infla­tion for at least fifty years.

As we explained above, we think that the sec­ond point is an impli­ca­tion of the first. So, we’ll assume that such sub­si­dies increase the cost of higher edu­ca­tion. (It would be truly remark­able, would it not, if sub­si­dies to fam­i­lies reduced tuition rates and made col­leges more effi­cient than they oth­er­wise would be – whether that sub­sidy is via a grant or a cheap, guar­an­teed loan. In many ways, the long-​term phe­nom­e­non is no dif­fer­ent than the early 21^st cen­tury hous­ing price bub­ble cre­ated by Fan­nie Mae and Fred­die Mac’s loose and sub­si­dized credit standards.)

So, what could be the unin­tended con­se­quences of very high tuition costs? We have two in mind, though the sec­ond one depends upon the first one.

Col­lege as White-​Collar, Vo-​tech Training

We think that it is pos­si­ble to argue that higher col­lege costs, along with the asso­ci­ated large sac­ri­fices and bor­row­ings by house­holds and stu­dents, have induced many of them to take myopic, careerist approaches to higher edu­ca­tion, e.g., “we’re spend­ing a lot of money and bor­row­ing a lot of money, so you bet­ter get a good job when you’re done.”

If that per­spec­tive is ram­pant and con­sumers of edu­ca­tion over-​emphasize career train­ing, then col­lege is not a place – or is less-​of-​a-​place – where one can gain gen­eral knowl­edge and the abil­ity to think clearly about a vari­ety of prob­lems and pos­si­bly – just pos­si­bly – a bit of wis­dom. In fact, if that is the case, then col­lege becomes lit­tle more than white-​collar, voca­tional train­ing that requires a few other required courses and elec­tives.²

That’s not a new com­plaint and per­haps we’re just pro­ject­ing our own youth­ful moti­va­tions and expe­ri­ences as an under­grad and MBA stu­dent – so we imag­ine that every­one is as money-​hungry as we were – but there does seem to be a ter­ri­ble empha­sis on how “use­ful” a course will be, where “use­ful” is usu­ally defined as some­thing related to some task that one hopes to per­form for some prospec­tive employer.

Unfor­tu­nately, (1) the une­d­u­cated – i.e., stu­dents – by the nature of their igno­rance are usu­ally not in good posi­tions to deter­mine what’s use­ful or not (or what should be taught or not), and (2) “rel­e­vant” or “prac­ti­cal” white-​collar voca­tional train­ing often reverts to a kind of monkey-​see, monkey-​do mimicry.

Such thought­less mim­icry isn’t nec­es­sar­ily opti­mal for stu­dents, their prospec­tive employ­ers, or soci­ety. For exam­ple, con­sider the very bad finan­cial mod­el­ing that helped cause the world­wide finan­cial cri­sis in 2008. Many col­leges taught – and con­tinue to teach – tech­niques and algo­rithms that were in use, but weren’t/aren’t par­tic­u­larly use­ful (or appro­pri­ate). So, rather than empha­size strengths and weak­nesses of dif­fer­ent tech­niques and abstrac­tions, the empha­sis was on teach­ing tech­niques because that’s what stu­dents and employ­ers wanted – but not nec­es­sar­ily what soci­ety needed (or needs): yet another form of myopia.

So, read­ers sym­pa­thetic to our posi­tion may read­ily accept our sup­po­si­tion. For those unper­suaded we have a ques­tion: of every for­mer, cur­rent, and prospec­tive col­lege stu­dent (and their fam­ily) that you know, how many have men­tioned a rea­son other than salaries or careers as their rea­son to attend­ing col­lege? Be hon­est and con­sider the percentages.

Note that all things equal, given the fixed num­ber of cred­its that need to be earned to grad­u­ate, an over-​emphasis on sup­pos­edly “prac­ti­cal” career train­ing almost always means an under-​emphasis on other courses that could increase gen­eral knowl­edge and help develop think­ing skills as well as (per­haps) help stu­dents acquire a bit of wis­dom.³

And what are the costs of that careerist, vo-​tech approach to col­lege study? Many are well-​known and frequently-​made com­plaints about MBAs and engi­neers and other pro­fes­sion­als: short-​sighted, lack the abil­ity to learn and adapt and syn­the­size, etc., but we don’t want to focus our atten­tion on stu­dents who become employ­ees. Instead, let’s con­sider what that careerist per­spec­tive does within col­leges and universities.

First, we’ve already men­tioned – or at least insin­u­ated – it “dumbs-​down” stud­ies within par­tic­u­lar fields, par­tic­u­larly in pro­fes­sional schools and for pro­fes­sional degrees where the focus is often on what’s done (or what’s to be done) rather than what is known (and unknown) about the world or a phenomenon.

The Irrel­e­vancy of Lib­eral Arts

Sec­ond, the enhanced inter­est in sup­posed prac­ti­cal, job-​oriented train­ing has led to an under-​emphasis on non-​professional courses and areas of study. (You know, those required courses that enter­pris­ing stu­dents view as the col­le­giate chaff of the pro­fes­sional , vo-​tech wheat that they seek.)

To us, that lack of inter­est and the view that such course­work is a “nec­es­sary evil” of get­ting a degree (and a job) means that (many) stu­dents take those courses less seri­ously and view par­tic­i­pa­tion as a cost min­i­miza­tion prob­lem to solve, rather than as a value max­i­miza­tion prob­lem. In oth­ers words, they pre­sume such courses are worth­less and attempt to find the eas­i­est ways to sat­isfy require­ments and other con­straints (while attempt­ing to main­tain a high GPA, because, you know, “that’s what employ­ers like to see”).

That has a num­ber of impli­ca­tions, includ­ing a desire by pro­fes­sors to pan­der to stu­dents via the offer­ing of silly and worth­less courses, which, of course, turns the stu­dents’ ini­tial per­cep­tions into self-​fulfilling prophe­cies and per­mits the such profs to (cor­rectly) view most stu­dents as short-​sighted, money-​grubbers with no intel­lec­tual curiosity.

But those oppos­ing neg­a­tive opin­ions are not the only con­se­quences of the bad equi­lib­rium. Worse is that such indif­fer­ence (by stu­dents and oth­ers, includ­ing employ­ers) per­mits rad­i­cal­ized and poorly-​trained fac­ulty to flour­ish and hire oth­ers with sim­i­lar tastes and predilec­tions. They’re not chal­lenged within the acad­emy, because, frankly, other than a few crit­ics on the right, nobody cares. (Did you hear JP Mor­gan is on cam­pus today?) That’s true of admin­is­tra­tions that empha­size careers, stu­dent ameni­ties, and NCAA Divi­sion I sports teams.

In our mind, that’s why so much thought­less, knee-​jerk rad­i­cal­ism has thrived within (that por­tion) of acad­e­mia since World War II.

Such rad­i­cal­ism and silly inquiries and teach­ings are come at quite a cost to soci­ety; how­ever, we think that their effects are over­stated, and, again, that’s because the vast major­ity of stu­dents are too busy seek­ing career train­ing and sum­mer intern­ships. (Did you hear GE is on cam­pus today?)

And, that’s the true tragedy. The high cost of col­lege – par­tially to due gov­ern­ment involve­ment – induces stu­dents to obsess about career fac­tors, so they don’t get the edu­ca­tion that they deserve. Well, they don’t get the edu­ca­tion they could have received in a dif­fer­ent real­iza­tion of the world, and that edu­ca­tion would include, well, an edu­ca­tion, includ­ing exten­sive expo­sure to the clas­si­cal, lib­eral arts.

P.S. Like many of our longer posts, we’ll likely edit the errors and typos and pos­si­bly expand our analy­sis as we think more about the issues.

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Foot­notes:

Ear­lier in the week, it was announced that First Lady, Michelle Obama, plans to fight child­hood obe­sity. See, for exam­ple, First Lady Girds to Fight Fat.

It seems like a wor­thy cause, but we’re not sure what she can do from the White House. If she isn’t home with the over-​weight kids, nag­ging them to go out­side and play or prac­tice their sports or walk the dog(s) or ride their bikes or not to eat too much junk food or not drink too much soda, then we doubt that her cam­paign will be very suc­cess­ful. (Yeah, being a scold, we think nag­ging and over­sight are crucial.)

Look at the table of state-​by-​state obe­sity rates that accom­pa­nied the above-​referenced arti­cle. There are a cou­ple of pat­terns worth mentioning.

First, notice the his­tor­i­cal trend across the table. In thir­teen years the national obe­sity rate – the per­cent­age of indi­vid­u­als with” too much” mass for their respec­tive heights has increased about 60%. That’s a huge increase in the num­ber of peo­ple who are huge: an increase of about 30 mil­lion peo­ple in a lit­tle more than a decade. (The table notes that about two-​thirds of the pop­u­la­tion is over­weight, and a trip to just about any shop­ping mall pro­vides all-​too ample empir­i­cal evi­dence of that fact.)

Sec­ond, sort the above-​mentioned table by any year, say, 2008, and com­pare that col­umn to this per-​capita income by state table from Wikipedia. (That one is sortable by columns, too.) Notice that the most obese states – the ones with the high­est per­cent­age of obese cit­i­zens – tend to have the low­est per-​capita income, and vice versa. We haven’t run any sta­tis­ti­cal tests, but our casual obser­va­tion, alone, seems suf­fi­cient to notice a rather strong inverse rela­tion­ship between per-​capita income and the obe­sity rate.

We wrote about some­thing sim­i­lar last Sep­tem­ber in No Fat Kids, which could have been more descrip­tively enti­tled, The Absence of Fat Kids, and in that respect, there are a cou­ple of facts worth mentioning.

There’s no obvi­ous rea­son why poorer chil­dren should be fat­ter than wealth­ier chil­dren. In the his­tory of the world, we’d argue that is a very, very recent phe­nom­e­non. It is evi­dence of a very, very finely-​meshed social ser­vice net that pro­vides almost every­one with (at least) what they need, but it goes beyond that.

We hypoth­e­size that, all things equal, the rela­tion­ship between income and body mass index is an arti­fact of some­thing else, and among other things that some­thing else involves parental super­vi­sion and time, espe­cially in single-​parent fam­i­lies – par­tic­u­larly fam­i­lies headed by sin­gle mothers.

Fam­i­lies headed by sin­gle moth­ers tend to have sub­stan­tially less income than fam­i­lies with two par­ents. So, we won­der whether the like­li­hood of child­hood obe­sity is related to the parental sta­tus of the house­hold. In other words, sin­gle par­ents imply lower income and sin­gle par­ents imply more child­hood obe­sity; so, at least for those chil­dren in single-​parent house­holds, lower income means more obesity.

Now, we are not say­ing that sin­gle par­ents are bad par­ents. Not at all. Instead, we are say­ing that keep­ing kids thin may be a task that’s too dif­fi­cult for one par­ent to man­age. We are say­ing that being a good, nag­ging, atten­tive, avail­able par­ent takes a lot of time, energy, and dis­ci­pline. With­out suf­fi­cient sup­port from a spouse or other fam­ily mem­bers or friends, try­ing to keep chil­dren active and healthy, is very difficult.

Look at the types of nag­ging we men­tion in the sec­ond para­graph, con­sider the amount of energy required, and real­ize the amount of time required to trans­port kids to phys­i­cal activ­i­ties (and to attend those activities.) Of course, we’re ignor­ing a host of hered­i­tary or genetic fac­tors, e.g., slow metab­o­lisms, etc., but is there a more par­si­mo­nious expla­na­tion than it seems to require at least two adults to mon­i­tor diets and get the kids away from tele­vi­sions, com­put­ers, cell phones, PS2s, Xboxes, etc.?

Finally, and we men­tioned this above, is it not truly remark­able that obe­sity is more preva­lent among the poor than among the middle-​class or the wealthy in the United States? (So much for Obama’s “fat cat bankers.”)

Regard­less of how much or how lit­tle, you, dear reader, know about world his­tory, con­sider that fact. Can you name any other era or place in his­tory when or where that has occurred? Where the poor have been heav­ier than the wealthy? It’s not just the near-​elimination of star­va­tion and hunger in the U.S., but an over-​abundance, an excess, of calo­ries that per­mits many of the poor to be obese (to the point where their health suf­fers). Think of the equal­ity of power – through the Rule of Law – and the advanced tech­nol­ogy in agri­cul­ture, trans­porta­tion, stor­age, refrig­er­a­tor, hygiene, food safety, etc. and con­sider the innate gen­eros­ity of the cit­i­zen­ship that per­mits such con­sump­tion – to the point of dys­func­tion­al­ity. That’s one of the rea­sons we con­sider the fol­low­ing ques­tion to be noth­ing more than a rhetor­i­cal one: despite all the trou­bles and prob­lems and con­flicts, has there ever been a bet­ter time (for so many peo­ple) to be alive, espe­cially the poor?

Mere Spec­u­la­tion

We’re read­ing a new book about the finan­cial cri­sis that is very thought-provoking. We’ll write more about the book in the com­ing days and weeks, but while read­ing it, a rather depress­ing thought kept pop­ping into our head.

If after Scott Brown’s elec­tion vic­tory – and as some pun­dits pre­dict – the Obama admin­is­tra­tion plans to veer towards more pop­ulist posi­tions and actions, we wouldn’t be sur­prised to see more indict­ments of investors and traders who were respon­si­ble for large losses at both large banks and at hedge funds dur­ing the finan­cial crisis.

The Pres­i­dent and his staff already demo­nize Wall Street, and while some of the rhetoric is jus­ti­fied as it per­tains to moral and eth­i­cal fail­ings, crim­i­nal­iz­ing poor judg­ment and greed and hon­est error is an entirely dif­fer­ent issue. (We wrote about that before, but can’t find the link today.)

Nonethe­less, we could imag­ine such tri­als as showy diver­sions away from the administration’s prob­lems with health care, ter­ror­ist tri­als, bud­get deficits, job­less­ness, etc. (Other than get­ting out-​of-​the-​way, we don’t think the admin­is­tra­tion can do much about job­less­ness, the prob­lem is that they think they can and when they can’t, they may try to divert fur­ther atten­tion away from their self-​perceived fail­ings onto oth­ers, includ­ing “greedy fat cats.”)

More­over, at firms that sur­vived the cri­sis we could see cyn­i­cal man­age­ments – in par­tic­u­lar, cyn­i­cal new man­age­ments – act with the gov­ern­ment against indi­vid­u­als, pri­mar­ily for­mer traders and struc­tur­ers, and pos­si­bly risk man­agers, as ways to (1) per­son­al­ize (rather than insti­tu­tion­al­ize) the losses, and (2) sep­a­rate them­selves from the old guard, i.e., attempt put the behav­ior of the past behind them.

Indeed, we see it is as a threat espe­cially if the admin­is­tra­tion can’t pass new leg­is­la­tion and pro­posed finan­cial reg­u­la­tions through Congress.

Per­haps we are overly-​influenced from watch­ing Dr. Zhivago the other night, but as we said, it’s a rather depress­ing thought.

Actu­ally, a New Idea to Mit­i­gate the Problem

Update: after pub­lish­ing this post very late Sun­day (or very early) Mon­day, we noticed the col­umn, Toward a Dif­fer­ent Fis­cal Future, by Glen Hub­bard. His essay is sub-​titled, tax increases can’t plau­si­bly address the com­ing enti­tle­ment cri­sis, and that fits very nicely with our pro­posed mitigation.

We admit that the title is a bit over­stated, because we don’t know if any sin­gle and fea­si­ble idea can solve the bank­ruptcy prob­lem; so, we’ll look to mit­i­gate it a bit with a few long-​term recommendations.

We’ve heard for years that Social Secu­rity and Medicare will go bank­rupt within the next sev­eral decades. To the best of our mem­ory – i.e., with­out search­ing the web – we recall read­ing that with­out fur­ther changes in laws, Social Secu­rity will become insol­vent some­time between 2020 and 2040, or maybe it was a few years later.

Let’s take those pro­jec­tions as given because the exact year is far enough away that it doesn’t affect our pro­posed mitigation.

So, we ask: besides rais­ing pay­roll taxes, which are already out­ra­geously high, what other solu­tions exist?

Well, ben­e­fits could be cut, but any bill propos­ing such cuts would be unlikely to pass Congress.

That means that get­ting the great­est num­ber of cit­i­zens work­ing (and not col­lect­ing ben­e­fits) is the best way to stave-​off bank­ruptcy. You may have already heard how when the pro­gram began in the 1930’s there were more than ten work­ers for every recip­i­ent and now that ratio has dras­ti­cally shrunk (to some­thing like four:one or three:one today).

Already, the age to col­lect full ben­e­fits has been pushed back from age 65 to 67 for those of us born after 1960. (Actu­ally, it’s a grad­u­ated scale that you can see here.) All else equal, that forces older folks to con­tinue work­ing (and pay­ing taxes) while delay­ing receipt of their checks.

We sus­pect that laws will be passed to fur­ther delay full-​retirement age – for us and for those born after us. (We can’t imag­ine retir­ing any­way; so, those changes won’t affect us.) How­ever, unless the full-​retirement age is increased to 80-​or-​so (a com­pletely wild-​a** guess on our part) that exten­sion alone won’t elim­i­nate the problem.

So then the ques­tion becomes: once full-​retirement age is max­i­mized at an age greater than 67, say, at age 70, what other solu­tions exist?

Some folks call for more immi­gra­tion as a way to increase the ratio of workers-​to-​recipients, but there are other ways to increase the size of the work­force with­out per­mit­ting an influx of new­com­ers. (By the way, our solu­tion to ille­gal immi­gra­tion–well, actu­ally to what to do with ille­gal immi­grants – would help with the social secu­rity prob­lem, too.)

Now, the gov­ern­ment could imple­ment pro-​family poli­cies that, at the mar­gin, would induce par­ents to have more chil­dren. (That can’t hurt, and we see no rea­son to wait until the USA is fac­ing neg­a­tive pop­u­la­tion growth – like Japan and cer­tain coun­tries in Europe now face – before imple­ment­ing such policies.)

With­out any cal­cu­lat­ing any­thing, we doubt that pro-​baby poli­cies would be suf­fi­cient to grow the nation out of the Social Secu­rity prob­lem. (How­ever, we do have a quick ques­tion: if the esti­mated 30 mil­lion or so aborted babies had been born since the early 1970’s, how many more work­ers would be avail­able to sup­port those cur­rently receiv­ing ben­e­fits and how much further-​off could insol­vency be put?)

So, what else can our soci­ety do?

If the sup­ply of poten­tial work­ers is fixed (or already max­i­mized) and it’s not fea­si­ble to get them to work to an older age, then the only option left is to get them to…start work­ing earlier.

We don’t mean per­mit­ting child labor as some other nations do. We do mean: (1) motivating par­ents to have their child(ren) start kinder­garten at a younger age so that they can grad­u­ate from high school a year ear­lier. That would move the aver­age start­ing age back closer to five than six, and means that many stu­dents would grad­u­ate an entire year ear­lier than they oth­er­wise would have. That pol­icy can be eas­ily imple­mented by chang­ing state laws, which can be “influ­enced” by fed­eral laws and grants.

We also mean pro­vid­ing incen­tives to induce those in col­lege (and grad­u­ate school) to begin their careers – or at least begin work­ing full-​time – at a younger age. There are sev­eral ways to do that. We’ll men­tion a few and prob­a­bly add more through time.

One way would be to limit under­grad­u­ate loans and grants from the gov­ern­ment to four con­sec­u­tive years begin­ning the year of high school grad­u­a­tion (with sim­i­lar types of restric­tions for grad­u­ate schools).

Another would be to (a) induce more stu­dents to attend col­lege part-​time, espe­cially for grad­u­ate school, and (b) simul­ta­ne­ously induce grad­u­ate schools to offer more degrees on a part-​time basis. One way to do that would be to make tuition ben­e­fits for col­lege and grad-​school com­pletely tax-​free when paid by employ­ers or com­pletely tax-​deductible when paid by work­ers (with earned income).

A third way to reduce the aver­age time spent in col­lege would be to pro­vide more rig­or­ous ele­men­tary and sec­ondary edu­ca­tions so that stu­dents are better-​prepared for col­lege, and one way the fed­eral gov­ern­ment can (indi­rectly) do that is to make fed­eral grants and loans for col­lege – like aca­d­e­mic schol­ar­ships – con­di­tional upon test scores and/​or grades.

A fourth way would be to pro­vide a tax credit (or a per­ma­nent reduc­tion in pay­roll tax rates) for cit­i­zens who enter the full-​time work­force at a younger age.

The gen­eral idea is to get twenty-​somethings in col­lege to grad­u­ate and mature ear­lier than they do now so that they seek gain­ful employ­ment at an ear­lier age and, there­fore, begin pay­ing taxes sooner. We don’t see how that is harm­ful to any­one. In fact, hav­ing them grow-​up sooner seems ben­e­fi­cial to everyone.

P.S. Like many other top­ics that we write about for the first time, we’ll likely revise this post as we think more about it.

After shov­el­ing sev­eral hun­dred cubic feet of snow for the Basen­jis this late night/​early morn­ing, we didn’t attempt to go to sleep.

Instead, we did what we often do when work­ing on a project late into the night; we turned on Red­eye on Fox News.

If you haven’t heard of it, it’s on at 3:00 AM Mon­day — Fri­day (actu­ally Tues­day through Sat­ur­day) and hosted by blog­ger Greg Gut­feld, of TheDai​lyGut​.com.

It is by far the fun­ni­est show on tele­vi­sion: top­i­cal, irrev­er­ent, acer­bic, teas­ing, and some­times mean-​spirited.

Besides Greg, there are two other reg­u­lars, pan­elist, Bill Schulz, and ombuds­man, Andy Levy.

Each night, at least two other panelists-​guests appear, and most of those guests are reg­u­lars – appear­ing every week or every cou­ple of weeks. A few of those guests are Fox News anchors and reporters and a few are come­di­ans and a few are from other pro­fes­sions, e.g. a priest, a coro­ner, a Con­gress­man, etc.

We’d describe the show anal­o­gously in two dif­fer­ent ways. Nei­ther which may make sense to oth­ers, but then it’s our little-​read blog; so, we don’t care.

First, if tele­vi­sions shows were like peo­ple, it’s what the early, ado­les­cent Sat­ur­day Night Live would grown into had it matured and stayed funny. Note that we use the word ‘matured’ very pre­cisely. We mean had the show’s for­mat matured from skit-​based to news pan­elly, and had it’s world-​viewed matured, from some­thing for teens and twenty-​somethings to some­thing for forty-​somethings who have been mugged a bit by reality.

We cer­tainly don’t mean mature with respect to the behav­ior or demeanor of the hosts and many of their guests. That gen­er­ally remains ado­les­cent and juve­nile but in a good way, and that’s the sec­ond way we think about it. If you, dear reader, hung-​out with smart, witty, funny, and occa­sion­ally mean kids in high school – you know, before those kids became self-​conscious or seri­ous or moody or thought that oth­ers cared about what they thought – then you may like it for the same rea­son. It’s what hang­ing out with those kids would be like if those kids grew up, became edu­cated, learned a bit about the world, and (gen­er­ally) had some­thing worth say­ing, but didn’t lose their sense-​of-​humor or rudeness.

So, if you hated those kids in high school, you’ll hate the show; how­ever, if you were one of those kids in high school, you’ll likely love the show. If you won­dered where some of those kids went, well it seems that few are on tele­vi­sion at 3:00 AM and haven’t changed very much. If your sched­ule isn’t as flex­i­ble as ours, you prob­a­bly won’t want to stay awake for it, but it is def­i­nitely worth record­ing and then watch­ing the next night when the sup­posed come­di­ans are on television.

Check out var­i­ous seg­ments on the show’s web site. The robots are con­sis­tently hilar­i­ous, and the priest, Father Mor­ris, gives amaz­ing answers to very dif­fi­cult and per­ni­cious the­o­log­i­cal ques­tions. Lately, those ques­tions have been posed by the robots. (Don’t ask.)

Today is the show’s third anniver­sary, so to Greg, Bill and Andy, con­grat­u­la­tions on your suc­cess and on your new table and keep up the good work.

P.S. The Daily Gut web site really sucks. We could do much better.

And So Is ‘Gay’

In fact, stu­dents of his­tor­i­cal lin­guis­tics could tell you that many other words are homo­graphs, too, and those stu­dents could also explain seman­tic change, includ­ing the pejo­ra­tion and recla­ma­tion of words. (Don’t be a fool, you know where this is head­ing.)

We doubt that we have much in com­mon with Pres­i­dent Obama’s Chief of Staff, Rahm Emanuel, but we do sym­pa­thize with him for the grief he is tak­ing for using ‘retarded’ as a pejorative.

Was it poor judg­ment? Sure. Should he have known bet­ter? Of course. Are we ital­i­ciz­ing homo­graphs? You know it. (Actu­ally, because we are lazy and didn’t major in lin­guis­tics, only the homo­graphs that are easy to iden­tify and only the first time, but we’ll stop now.)

So, while polit­i­cally we tend to agree with his crit­ics like Sarah Palin, in this case we think that she and all the other cyn­i­cal or pious grievance-​mongers should grow-​up, shut-​up and go away.

If you are aggrieved by some­thing that a stranger said about some­one else in a place where you weren’t approx­i­mately six months ago, then you, dear reader, are either a cyn­i­cal, politically-​motivated d.b. or you are a humor­less scold – pos­si­bly a bit too sen­si­tive and pos­si­bly with deep emo­tional problems.

In fact, it would do every­one – indi­vid­u­ally and col­lec­tively – much good to remem­ber that on occa­sion, every­one behaves like a butthead, but there is a huge dif­fer­ence between mali­cious behav­ior and sim­ply mak­ing a mis­take in the heat of the moment.

In our mind, that dif­fer­ence is nearly anal­o­gous to Saint Fran­cis de Sales’ dis­tinc­tion between sin and imper­fec­tion; how­ever, in this case we have a dif­fer­ent ‘Fran­cis’ quote in mind. That would be one spo­ken by Sargeant Hulka in the 1981 movie, Stripes. When one of the recruits states, “… Any of you guys call me Fran­cis, and I’ll kill you,” the good sergeant replies, Lighten Up, Francis.”

So, lighten up, Sarah and posse. There are too many impor­tant issues where he is on the wrong side to worry about a silly one like this one.

Inno­v­a­tive Man­age­ment Solu­tions ~ Cre­ative Web Design

We have changed our site’s and the firm’s motto to bet­ter reflect our broad busi­ness mix. We have dropped the nar­rower “Thought before Cal­cu­la­tion” for the more gen­eral “Inno­v­a­tive Man­age­ment Solu­tions.” Inno­va­tion isn’t always thought­ful, but in our case it is.

Plus, we have added “Cre­ative Web Design” to rec­og­nize a large part of our prac­tice. Through sheer serendip­ity, we design and develop the kind of web sites that “every­body wants.” Our sites are good-​looking, orga­nized, easily-​self-​managed, and search-​engine opti­mized. What’s not to like?

There is a short arti­cle about sus­tain­abil­ity in ‘The Jour­nal Report’ sec­tion of today’s edi­tion of The Wall Street Jour­nal. We think that is worth men­tion­ing, espe­cially to small busi­ness own­ers and man­agers of small, not-​for-​profit agen­cies and organizations.

The arti­cle is enti­tled, How Green Should My Tech Be? It Depends on the Tech. The author, Robert Plant, lists and pri­or­i­tizes four cat­e­gories of tech­nol­ogy projects from ‘no-​brainers’ to ‘distractions.’

We are writ­ing to men­tion a ‘no-​brainer’ that he doesn’t. Small and medium-​sized busi­nesses should con­sider out­sourc­ing their server oper­a­tions to shared host­ing accounts (and/​or ded­i­cated servers).

“What’s a shared host­ing account” you ask? It’s a lease of server capac­ity – usu­ally with lim­its on monthly band­width and on hard drive stor­age. Like cell phone com­pa­nies, web host­ing firms offer tiered pric­ing pack­ages based upon expected usage, but many very small busi­nesses need only with the cheap­est packages.

For small busi­nesses with small infor­ma­tion sys­tem needs – web server, e-​mail server, etc – the energy costs of oper­at­ing their own server 24 hours a day, 365 days per year, are likely greater than the annual cost of a shared host­ing account.

Depend­ing upon the con­fig­u­ra­tion and age, elec­tri­cal con­sump­tion can cost between $200 — $400 per year for a sin­gle server, and many small busi­nesses can obtain an appro­pri­ate shared host­ing account­ing for well less than $200 per year. Like we said, it’s a no-​brainer: no (sep­a­rate) hard­ware costs; gen­er­ally no soft­ware costs, espe­cially for those using open source web appli­ca­tions and servers; and no repair costs.

Now, of course, lower util­ity bills aren’t nec­es­sar­ily bet­ter if other costs are higher or if the real­iz­ing sav­ings requires one to assume addi­tional risks, but shared host­ing accounts are, in fact, less risky than run­ning a server from a back office or closet. Among the benefits:

• Reli­a­bil­ity and uptime are greater and aren’t affected by local power, cable or tele­phone outages.
• Through a rep­utable host­ing com­pany, your server will be located in a well-​managed, well-​maintained and well-​designed server farm with redun­dan­cies, back­ups and speeds of repair that you could not rival with­out a large invest­ment and near obses­sive atten­tion to it.
• There is little-​to-​no risk of fire or theft of equipement, and your server man­age­ment con­soles can be accessed from anywhere.
• Depend­ing upon the num­ber of employ­ees, your firm’s poli­cies and pro­ce­dures, and you dis­ci­pline adher­ing to those pro­ce­dures, data may be safer.
• If required for web-​based trans­ac­tions, sta­tic IP addresses and SSL cer­tifi­cates are avail­able for shared host­ing accounts, too.

While it is out­side the scope of this post, medium-​sized firms with greater infor­ma­tion demands should con­sider leas­ing ded­i­cated servers at such server farms via the same types of web host­ing accounts: annual cost approx­i­mately $5,000 or so.

One note of cau­tion: like any­thing else, the cheap­est host­ing ser­vice isn’t always the best. Get a rep­utable one that replies quickly to inquiries and ser­vice requests, prefer­ably in Eng­lish. For that we whole-​heartedly (and with­out com­pen­sa­tion) rec­om­mend Fused Net­work.

P.S. For small net­work backup needs, con­sider some­thing energy-​efficient like the Acer Aspire Easy­S­tore AH340. We love ours.

FWIW: we say no to a sec­ond term.

This week­end there are many reports and com­men­taries regard­ing the U.S. Sen­ate vote to con­firm Ben Bernanke to a sec­ond term as the Chair­man of the Fed­eral Reserve. For exam­ple, see the arti­cle Back­ers Rally to Bernanke in The Wall Street Jour­nal.

Mr. Bernanke nei­ther deserves a sec­ond term nor can we, as a nation and econ­omy, afford it.

Don’t Blame Him for any Bubbles

Many com­men­ta­tors, ana­lysts, and econ­o­mists blame Mr. Bernanke’s (and his pre­de­ces­sor, Alan Greenspan’s) easy money poli­cies for cre­at­ing a sequence of bubbles.

We don’t. As far as we can tell, prior to 2008, Mr. Bernanke did not force a sin­gle per­son or firm to bor­row an addi­tional dol­lar or invest in assets and secu­ri­ties that they did not under­stand. See our post The Low Inter­est Rates Made Us Do It: Oh, How Lame! from August, 2008. Note that Com­mu­nity Rein­vest­ment Account (CRA) poli­cies were not his dik­tat. In fact, their ini­tial imple­men­ta­tion in 1977 far pre­cede his involve­ment at the Fed.

His Flawed Poli­cies Aren’t Disqualifying

In addi­tion, as much as we dis­like his sta­tist pol­icy pre­scrip­tions to end the liq­uid­ity cri­sis that began in the Fall of 2008, we don’t think that alone is rea­son to deny his confirmation.

How­ever, every TARP-​addled, self-​congratulatory politi­cian, bureau­crat, and reg­u­la­tor wish­ing to take credit for staving off a new depres­sion, should note that dur­ing the “The Great Depres­sion,” the Dow Jones Indus­trial Aver­age gained 63.74% in 1932. HOWEVER, it took an addi­tional 20 years – that’s 20 years – for the Dow to reach its pre-​crash highs of 1929.

Thus, if you, dear reader, con­fi­dently “know” or strongly believe that because the Dow has ral­lied since last March, that nec­es­sar­ily means that the cri­sis has ended with lit­tle or no chance of return­ing, then you are, indeed, a short-​sighted fool (with lit­tle aware­ness of history).

So, if (1) we don’t blame him for the con­sumer and investor behav­ior that led to the mort­gage débâ­cle that led to the liq­uid­ity cri­sis and (2) we don’t think that his pol­icy response to the cri­sis, in and of itself, is dis­qual­i­fy­ing, then what is it?

His Panic & Ter­ror Were Unconscionable

It was his pan­icked response to the mort­gage débâ­cle that helped turn it into a liq­uid­ity cri­sis and severe reces­sion. It wasn’t his pol­icy pre­scrip­tions, it was the way he tried to sell them. He wasn’t alone. For­mer Pres­i­dent Bush, Con­gres­sional lead­ers, and ex-​Treasury Sec­re­tary Hank Paul­son also deserve much of the blame, and we gave it to them, but he should have known bet­ter. (See, for exam­ple, Well, This Is a Fine Mess You’ve Got­ten Us into.… or just about any­thing else that we wrote from Sep­tem­ber — Decem­ber, 2008.)

Dur­ing the spring and sum­mer of 2008, we asked on sev­eral occa­sions: why are the losses so con­cen­trated this time? See, for exam­ple, this search or this tag or this one. (There’s some overlap.)

The rather con­cen­trated mort­gage débâ­cle informed investors and cred­i­tors that bank man­agers were far less capa­ble than had been believed. As con­fi­dence in the banks shrank, our pub­lic ser­vants pan­icked and eeked and squeaked like lit­tle girls.

Their col­lec­tive panic and ter­ror destroyed pub­lic con­fi­dence – not just in the banks – that was jus­ti­fi­able – but in the econ­omy as a whole. Their threats and over­state­ments became self-​fulfilling, and per­mit­ted cyn­i­cal man­age­ments at non-​financial cor­po­ra­tions to lay-​off employ­ees. Those actions imme­di­ately deep­ened the down­turn and destroyed con­sumer and investor con­fi­dence. It still has not recov­ered. (By the way, by non-​financial, we don’t mean that hope­less and hap­less auto man­u­fac­tur­ers. Given their pre­car­i­ous states, they were doomed to fail when­ever a reces­sion occurred.)

Per­haps by 2008, he had spent too much time in Wash­ing­ton and had for­got­ten that words and state­ments have real impli­ca­tions. There are sound rea­sons why it is ille­gal to shouts “Fire!” in a crowded the­ater (and risk a pub­lic cat­a­stro­phe). In our mind, that’s what Mr. Bernanke and his cronies did. Words are not merely “throw-​away” rhetoric used to attempt to influ­ence unde­cided sen­a­tors and rep­re­sen­ta­tives to sup­port a hastily-​composed bill, espe­cially when done publicly.

Clearly, we don’t believe that “if you don’t have any­thing nice to say you shouldn’t say any­thing at all.” If we did, we would have pub­lished a total of about fif­teen posts since we started writ­ing on April 1, 2008.

We do, how­ever, think that if one have a posi­tion of respon­si­bil­ity, then one should act and speak respon­si­bly, and Mr. Bernanke did not do so when it mat­tered the most. We can for­give such behav­ior, but we can’t for­get it, so we don’t trust him. So, for what it’s worth, we rec­om­mend that Mr. Bernanke not be reconfirmed.

He Went out with Grace.

Iron­i­cally, the last quar­ter of Conan O’Brien’s last episode on The Tonight Show may have been his best fif­teen min­utes in television.

It started with Neil Young play­ing and singing “Long May You Run,” which is one of our favorite songs and reminds us of our long-​dead Basenji bitch, Vidalia, and her chrome heart shin­ing in the sun. That song had to be about a dog.

It ended with Will Far­rell, dressed as a south­ern rocker, singing Free Bird, while Conan and many of his musi­cians jammed in the back­ground. Excellent.

How­ever, the best part was the mid­dle when Conan addressed both his stu­dio and tele­vi­sion audi­ence with part­ing mes­sage of grat­i­tude and thanks to many parties.

In par­tic­u­lar, he men­tioned that NBC had per­mit­ted him to say any­thing that he wanted dur­ing the show, and he used the time to gra­ciously thank NBC for the oppor­tu­ni­ties the net­work gave him dur­ing his more than twenty years there. He also men­tioned his incred­i­ble good for­tune of hav­ing had many of his dreams real­ized, espe­cially his child­hood dream of host­ing The Tonight Show.

For almost every cit­i­zen of the United States, when one sees the con­di­tions in Haiti – either before or after the quake – and places like that, one needs to appre­ci­ate his or her good for­tune of being born here or hav­ing been able to migrate here. Com­pound that good luck with the rel­a­tive ease of hav­ing all basic needs met along with our sub­stan­tial free­doms and seem­ingly unlim­ited oppor­tu­ni­ties for edu­ca­tion and enter­tain­ment, etc., and one can only (rea­son­ably) con­clude that we are truly blessed and very, very lucky.

In addi­tion to those bless­ings and oppor­tu­ni­ties that we all enjoy, Conan was able to take advan­tage of his chances and real­ize his dream. So, it is good to see him both gra­cious and grate­ful and real­is­tic about his good fortune.

Despite that good for­tune and his $40 mil­lion sev­er­ance pack­age, there is some­thing par­tic­u­larly sad about his short tenure at The Tonight Show. Truly money isn’t every­thing and doesn’t com­pen­sate for everything.

That makes us won­der. Given his seven-​month affair with his metaphor­i­cal child­hood love, does he agree with Ten­nyson that,

“I feel it, when I sor­row most;

Tis bet­ter to have loved and lost

Than never to have loved at all.”

A few clos­ing notes:

• For our young read­ers under twenty, note that there was a time when Jay Leno was actu­ally funny. He doesn’t seem to be a bad per­son, he’s just not been very funny for quite a long time.
• We do hope that when Mr. O’Brien returns to tele­vi­sion, he stops with the “Bush is stu­pid” “jokes.” In fact, he and his late night brethren should begin to seri­ously tease Pres­i­dent Obama. That would be good for late night audi­ences, late night hosts, and for Mr. Obama, too. (Maybe their gen­eral lack of tar­get­ing Mr. Obama as the butt of their jokes betrays a lack of con­fi­dence in him.)
• Imme­di­ately after watch­ing the end of Mr. O’Brien’s stint as the The Tonight Show host, we switched to Craig Ferguson’s show. He tends to be the fun­ni­est of the late night hosts. One of his jokes involved a state­ment about sta­pling his scro­tum to his leg. That’s when we real­ized, he’ll never be allowed to host at show at 11:30.

…To Pro­pose a Ban on Prop Trad­ing at Insured Institutions

We applaud Pres­i­dent Obama’s pro­posal to elim­i­nate pro­pri­etary trad­ing at insured insti­tu­tions. In fact, long-​time read­ers will recall that we first rec­om­mended a ban on this site on Octo­ber 1, 2008 – near the height of the finan­cial panic.

Our rea­sons are simple.

One can argue about the need for fed­eral deposit insur­ance, but if such insur­ance exists, we see no rea­son that tax pay­ers should sub­si­dize risk-​taking at insured insti­tu­tions. If one wishes to ben­e­fit as a ward of the state, then with those ben­e­fits and sub­si­dies come oblig­a­tions and restric­tions. That’s as much a moral and eth­i­cal argu­ment as any­thing else, but there are com­pelling eco­nomic rea­sons, too.

With­out restric­tions the government’s guar­an­tees exac­er­bate the quite seri­ous moral haz­ard prob­lems that already exist because the banks are limited-​liability cor­po­ra­tions. As it seems to cur­rently stand, not only do bank share­hold­ers not have to cover losses, but they get to retain some per­cent­age stake in their firms despite bail-​outs.¹ Thus, banks share­hold­ers have an even bet­ter call option than for most other cor­po­rate share­hold­ers: all on the upside, none of the down­side, and some or much of any future upside (after the downside).

As we have men­tioned in the past, at the mar­gin, there’s not much dif­fer­ence between cer­tain types of cus­tomer trades, prop trades, or asset/​liability man­age­ment trades/​tactics. So, all things equal, we’d expect that if firms want to main­tain a high risk pro­file, a ban on prop trad­ing would lead to higher risk char­ac­ter­is­tics in both their cus­tomer trad­ing books and their bank asset-​liability management/​treasury func­tions (than cur­rently reported).

In that vein, we pre­fer bank reg­u­la­tors to have a nar­rower focus on better-​understood, more-​standardized prod­ucts than be forced to over­see the addi­tional prop trad­ing books, where it seems that (1) more inno­va­tion occurs and (2) rules are more dif­fi­cult to inter­pret, which usu­ally leads to (3) even more rules, inter­pre­ta­tions, and uncer­tainty. In other words, all things equal, make the bank reg­u­la­tors’ jobs as easy and as well-​understood as possible.

In addi­tion, there seems to be no short­age of wealthy firms and indi­vid­u­als will­ing to invest in unreg­u­lated trad­ing oper­a­tions, i.e., hedge funds et. al. So, we see any such lim­i­ta­tions on banks as boon to (most) hedge funds and traders – unless those funds are “picking-​off” the banks.

We sus­pect most traders would be hap­pier (and better-​compensated) at unreg­u­lated firms; so, what’s not to like? [2.Alternatively, if we’re wrong on that count, customer-​trading might become more com­pet­i­tive, which would be ben­e­fi­cial to bank cus­tomers. Also, such a ban doesn’t elim­i­nate expo­sure to prop trad­ing because many large banks pro­vide prime bro­ker­age ser­vices to hedge funds, etc. So, those banks would still be exposed to risks asso­ci­ated with the prop trad­ing indus­try, i.e., they would still face credit risk that is a func­tion of market-​risk and can be very dif­fi­cult to mea­sure, but in some way those risks seem to be once-​removed and dif­fer­ent tools are avail­able to mit­i­gate them.]

We sus­pect that some com­men­ta­tors and ana­lysts will com­plain that the pro­posal is gov­ern­ment intru­sion into mar­kets and “free enter­prise.” At best, such com­plaints are very silly. Ban­ning prop trad­ing at insured insti­tu­tions isn’t intru­sive. Deposit insur­ance (and other guar­an­tees) intrude into mar­kets. As we men­tioned above, one can debate the effi­cacy of such pro­grams, but if the gov­ern­ment is offer­ing insur­ance, it has every right to demand that its cus­tomers behave in par­tic­u­lar ways. If the cus­tomers don’t want the restric­tions then they need not buy the insur­ance. While our cur­rent sys­tem is far from free enter­prise, there’s no rea­son it should be about “free” losses.

No won­der banks stocks declined yes­ter­day. If there is a chance that mas­sive losses will no longer be sub­si­dized, then the implicit option in com­mon equity is – jus­ti­fi­ably – worth less.

We ask our title ques­tion not as some­one who thinks that the United States should take-​over Haiti.

Instead, we ask as some­one who thinks that it is in the best inter­ests of the cit­i­zens of Haiti to ask to become part of the United States of Amer­ica – as a ter­ri­tory with the long-​term con­sid­er­a­tion to become a state, and with U.S. citizenship.

We under­stand that Haiti is a sov­er­eign nation, but watch­ing the news dur­ing the last three days, con­firms its abject fail­ure. Regard­less of the his­tor­i­cal causes of its poverty, despair, and fail­ure, the Hait­ian gov­ern­ment could not care for its cit­i­zens before the earth­quake; had no plans or abil­ity to deal with such a dis­as­ter; and does not have the resources to inde­pen­dently recover from it.

We ask the ques­tion out of com­pas­sion and gen­eros­ity. In fact, it seems to be the best answer to everyone’s prayers for help for the unfor­tu­nate souls who live there – their best hope to alle­vi­ate their short-​term and long-​term misery.

In our mind, allow­ing Haiti to become part of the United States is the humane thing to do.

Given that, we won­der what per­cent­age of Haitians would vote to become cit­i­zens of the United States? We sus­pect that the sev­eral hun­dred thou­sand ille­gal aliens already in the U.S. would likely vote “yes.” They’ve already voted with their feet.

P.S. We know it was once a ter­ri­tory dur­ing the early 20^th century.

The Government’s Response to the Finan­cial Cri­sis of 2008

A con­flu­ence of events dur­ing the past few days reminded us of how the fed­eral gov­ern­ment failed the nation dur­ing the finan­cial cri­sis of 2008. At the time, we men­tioned that our pub­lic ser­vants pan­icked, but now we think that we can offer a bet­ter expla­na­tion of why that occurred. Bank reg­u­la­tors, includ­ing the Fed, the lender of last resort, were utterly unpre­pared for it.

The news the past two days shows how utterly unpre­pared the nation of Haiti was to face any type of large scale dis­as­ter. After this week’s earth­quake, noth­ing on its half of His­pan­iola seems to be work­ing, and inter­na­tional res­cue and human­i­tar­ian are sti­fled by the lack of access. For exam­ple, the main (prob­a­bly the only) port is destroyed, and there is only one air­port with one run­way with no lights and no fuel sup­ply (for return flights). While the injured and hun­gry suf­fer, planes cir­cle or wait on tar­macs in the U.S. and the Caribbean. (May God bless those unfor­tu­nate souls and all of the inter­na­tional efforts and vol­un­teers who are attempt­ing to help.)

Now, Haiti was a dis­as­ter before the earth­quake; so, it is under­stand­able that the nation did not have the resources to develop and fund con­tin­gency plans.

In some ways, and despite the after­math of Hur­ri­cane Kat­rina, it seems that our great nation is much better-​prepared to han­dle emer­gen­cies and dis­as­ters. Many fed­eral, state, and local agen­cies have indi­vid­ual and coör­di­nated con­tin­gency plans and train­ing exer­cises to pre­pare for a vari­ety of man-​made and nat­ural disasters.

It is also true that many fed­eral and state agen­cies and reg­u­la­tors require busi­nesses and orga­ni­za­tions in a vari­ety of indus­tries to per­form stress tests and sce­nario analy­ses and develop con­tin­gency plans to deal with extremely bad hypo­thet­i­cal events. Arguably, the most famous of these exer­cises was last spring’s Super­vi­sory Cap­i­tal Assess­ment Pro­gram (SCAP), which we wrote about (and crit­i­cized) a few times.

As many of our read­ers will recall, via SCAP, fed­eral bank reg­u­la­tors required the nation’s 19 largest banks to per­form a series of stress tests and sce­nario analy­ses to deter­mine weak­nesses and iden­tify cap­i­tal inad­e­qua­cies. Other than requir­ing cer­tain insti­tu­tions to raise cap­i­tal, we’re not sure if that pro­gram required the banks to iden­tify and main­tain con­tin­gency plans.

Note that except for the coör­di­nated nature of the pro­gram – requir­ing all the banks to per­form their analy­ses simul­ta­ne­ously – and the impli­ca­tions of the analy­ses – the fact the some firms were required to raise cap­i­tal – there was not much new about the process.

For sev­eral years, large banks have been required to per­form mar­ket and credit-​related stress tests and sce­nario analy­ses as well as develop con­tin­gency plans for liq­uid­ity prob­lems and crises, and those analy­ses were reviewed by the appro­pri­ate reg­u­la­tors. Those analy­ses weren’t stan­dard­ized, and – given the lack of uni­for­mity in assump­tions, method­olo­gies, and sce­nar­ios – the results could not be con­sol­i­dated in any mean­ing­ful way. So, it would have been very dif­fi­cult to iden­tify any sys­temic risks from the results of such exercises.

Given that fact, one would hope that reg­u­la­tors, includ­ing the lender of a last resort, would have per­formed their own stress tests and sce­nario analy­ses to deter­mine poten­tial threats to the finan­cial sys­tem. How­ever, we do not recall read­ing or see­ing any report that men­tioned that the Fed or the Trea­sury Depart­ment had per­formed any such analy­ses. (We’re too lazy to do a thor­ough web search today.)

Thus, one can explain the government’s and Fed’s near com­plete panic as result­ing from a total lack of pre­pared­ness as the cri­sis unfolded. (Since Sep­tem­ber 2008, it has been our con­tention that their behav­ior and rhetoric – to jus­tify pas­sage of the TARP bill – exac­er­bated the crisis.)

So, with­out any evi­dence to refute our spec­u­la­tion, we con­clude that our pub­lic ser­vants and reg­u­la­tors had no idea what to do when things went bad because they had never con­sid­ered the pos­si­bil­ity of that things could go bad in such a way and to such an extent. (We mean the nearly com­plete dis­so­lu­tion of con­fi­dence in the nation’s largest banks as a result of their ter­ri­ble mort­gage invest­ments.) We sus­pect that lack of con­sid­er­a­tion was true prior to when Bear Stearns failed in the spring of 2008 and that noth­ing changed in the inter­ven­ing six months.

Now, we have only two things to say about that: (1) com­pare their behav­ior in the fall of 2008 to the brave first-​responders on 9 – 11 or at any num­ber of other dis­as­ters and tragedies, and (2) these are the same folks who now want to “reg­u­late sys­temic risk.”

*We don’t mean the human suf­fer­ing. We mean the government’s incom­pe­tent response.

The Out­rage Makes Them Larger

Recently, much has been writ­ten about “Wall Street” bonuses. Almost all of those arti­cles men­tion the same two things: (1) pop­ulist and gov­ern­ment sen­ti­ment against the bonuses, and (2) the com­po­si­tion of the bonuses towards long-​term, restricted stock and away from cash. At least some of the drive towards a more stock-​heavy com­po­si­tion seems to be management’s attempt to appease the gov­ern­ment and the pub­lic. In this post, we argue that such moves are need­lessly costly, which means inef­fi­cient and larger than need be.¹

In a pre­vi­ous post, Gov­ern­ment Whin­ing and Bailout Fees, we dis­cussed the out­rage and men­tioned that cit­i­zens have a right to be angry – at the gov­ern­ment. In this post, we ana­lyze the reported com­po­si­tion of many of bonuses. In par­tic­u­lar, we think the insis­tence on long-​term, restricted stock grants is inef­fi­cient for sev­eral rea­sons that we dis­cuss below.

How­ever, before con­tin­u­ing, it is worth re-​mentioning that much of the con­tro­versy could be elim­i­nated by elim­i­nat­ing pro­pri­etary trad­ing at insured insti­tu­tions. As we have repeat­edly writ­ten, we have noth­ing against pro­pri­etary trad­ing or traders, but see no rea­son why we or other tax-​payers should sub­si­dize trad­ing losses. Note, too, that there are other good rea­sons to elim­i­nate such activ­i­ties at insured insti­tu­tions, includ­ing the fact that they diverts man­age­r­ial atten­tion away from (bor­ing and mun­dane) every­day activ­i­ties of run­ning com­mer­cial banks. We know that at the mar­gin, there’s not much of a dif­fer­ence between a bank’s trea­sury (asset-​liability) man­age­ment and cer­tain kinds of prop trad­ing, but we’d pre­fer that reg­u­la­tors keep a nar­rower focus. Finally, to get, in a sin­gle edi­tion of The Wall Street Jour­nal, Thomas Frank, Jonathan Macey, and James B. Stewart to agree with us is mind-​boggling. It indi­cates the abject per­ver­sity of the sta­tus quo.

Now, hav­ing said that, we hope that every­one receiv­ing the much-​discussed bonuses get max­i­mum enjoy­ment and sat­is­fac­tion from them. We cer­tainly don’t blame any­one for try­ing to max­i­mum his or her com­pen­sa­tion in an attempt to max­i­mize their sat­is­fac­tion, their family’s sat­is­fac­tion and well-​being, and their con­tri­bu­tion to the less for­tu­nate. The prob­lem is that there are likely cheaper ways to pro­vide the same level of sat­is­fac­tion and reward.

Aside: note that for the remain­der of this post, we’ll use the word “expected,” as in “expected com­pen­sa­tion,” in a very loose, non-​mathematical way. That’s because we are rather pedan­tic and like to empha­size the dif­fer­ence between uncer­tainty and risk. Like oth­ers, we define risk as mea­sur­able uncer­tainty, and that means that risk is a spe­cial type of uncer­tainty or unknow­ing can be (appro­pri­ately) described as a prob­a­bil­ity dis­tri­b­u­tion. Not all prob­a­bil­ity dis­tri­b­u­tions have means or expected val­ues, and that seems to be the case in finan­cial mar­kets. So, try­ing to cal­cu­late one’s expected bonus as a func­tion of mar­ket per­for­mance might not be tech­ni­cally fea­si­ble if the dis­tri­b­u­tion of returns is unknown or its moments don’t exist.²

So what’s wrong with bonuses in the form of long-​term, restricted stock?

Well, they are long-​term so they defer con­sump­tion, they are restricted so they’re are expen­sive to con­vert into con­sump­tion, and they in sotck so they are risky (uncer­tain) because they are only very weakly tied to an individual’s performance.

Delayed Grat­i­fi­ca­tion:

Are there good rea­sons for long-​term com­pen­sa­tion schemes? Yes, there are.

When employ­ees take actions or make deci­sions that have long-​term impli­ca­tions, then sig­nals from mul­ti­ple peri­ods can be used to infer whether the employee behaved appro­pri­ately – back when the the deci­sion was made.

Gen­er­ally, the use of mul­ti­ple sig­nals improves the pre­ci­sion of the infer­ence, and that means that less risk is imposed on the employee.³ For risk-​averse employ­ees, that means a lower risk pre­mium is required to ensure his or her par­tic­i­pa­tion, which means a smaller expected bonus is required.⁴ So, the key to reward­ing long-​term per­for­mance is clas­si­fy­ing cur­rent period results into the time peri­ods when deci­sions were made so that one can make bet­ter infer­ences about the deci­sions made in a prior period. It’s not as easy as it sound, but it is pos­si­ble to do.

So, yes, most traders that make long-​term bets should be rewarded on long-​term per­for­mance, and fea­tures like claw backs should be used, but in the spe­cific way that we wrote about in Claw­backs: the Good, the Bad, and the Ugly and Incen­tives at UBS and in Gen­eral.

How­ever, requir­ing some­one to wait five years to receive stock in a mega-​corporation is not the same thing. That’s because:

1. Five years is arbi­trary, and may have lit­tle to do with the length of the employee’s invest­ment deci­sion. More­over, it is a long-​time to wait for a pay-​off.
2. If we’ve learned noth­ing else dur­ing the past few years, we have learned that, in gen­eral, share prices are very volatile, which means that employ­ees who must wait five years for their reward must bear a sub­stan­tial amount of risk.
3. Other than pos­si­bly a few senior exec­u­tives, no sin­gle employee has very much antic­i­pated or expected influ­ence on share price in five years. Ex post they may have, but not ex ante.

So, it seems rea­son­able to con­clude that impa­tient, risk-​averse employ­ees would sub­stan­tially dis­count the expected value of such stock grants.⁵ That means that all things equal, it means that if they can, employ­ees will demand larger bonus grants to com­pen­sate for the delayed grat­i­fi­ca­tion and the risk.

Restric­tive:

We imag­ine that the only peo­ple who pre­fer that bonuses be in the form of restricted stock are folks who aren’t get­ting them and the envi­ous types: please see The Chil­dren who Have Eaten their Cake…

Usu­ally, there are ways to bor­row against such grants and/​or hedge the value of such grants, but not all firms per­mit such actions. More­over, they’re not cheap and they can be time-​consuming.

That means that employ­ees will bear costs of con­vert­ing the awards to nearer-​term con­sump­tion and, if pos­si­ble, will demand larger bonuses to cover those costs.

Risky and Uninformative:

For some reason,many folks (and politi­cians) believe that when employ­ees own shares, includ­ing restricted stock, incen­tives are some­how mag­i­cally aligned – kind of like Lucky Charms.

How­ever, except for pos­si­bly a small hand­ful of very senior man­agers, that’s very silly. Con­sider that Bank of Amer­ica has nearly 300,000 employ­ees, Cit­i­Group has about the same, and even smaller firms like Gold­man Sachs have more than 30,000. So, the effect of any sin­gle employee is usu­ally very small. (More­over, the pre­dicted effect is usu­ally very small. In fact, when it is large, it is often due to the firm’s fran­chise and rep­u­ta­tion and not that par­tic­u­lar person’s actions.)

Do note that attempt­ing to link the effects of a par­tic­u­lar action, deci­sion, invest­ment or trade to share price today or any point in the future is extremely dif­fi­cult. (Maybe not in finance class, but it is in real life.)

Just as impor­tantly, and as we men­tioned above, even if it can be done (in expec­ta­tion) the firm’s stock price is a par­tic­u­larly noisy mea­sure of a par­tic­u­larly person’s per­for­mance. So, it’s quite pos­si­ble to con­clude that employ­ees will ignore the impli­ca­tion of their deci­sion of share prices, which is com­pletely ratio­nal, and do what’s best for them­selves. That very much reminds us of that quote of Huck­le­berry Finn that we always used when we taught: “Well, then, says I, what’s the use you learn­ing to do right when it’s trou­ble­some to do right and ain’t no trou­ble to do wrong, and the wages is just the same?”

For more on this gen­eral topic, we refer inter­ested read­ers to our essay in the Fal­lacies sec­tion of the web site: One Per­for­mance Mea­sure to Rule Them All.

For more on this topic as it per­tains to trad­ing, we encour­age vis­i­tors to read the last half of the above-​mentioned, The Chil­dren who Have Eaten their Cake…

In sum, we argue that (1) the long-​term nature that delays con­sump­tion, (2) the restricted nature that is costly to bypass, and (3) risky nature fur­ther reduces the value (think in terms of expected util­ity or cer­tainty equiv­a­lent) make such bonuses worth sub­stan­tially less than their face value. If employ­ees have any bar­gain­ing or nego­ti­at­ing power, firms will have to increase the stated value of the bonuses to sat­isfy them.

Those extra costs would be worth bear­ing if they aligned incen­tives, but unless you, dear reader, believes in magic, there is no rea­son to believe that any future actions by those employ­ees will be coöper­a­tive in nature.

So, it seems that long-​term, restricted stock awards are inef­fi­cient ways to moti­vate employees.

We’ll likely proof­read this post and edit it in the near future.

P.S. Our New Year’s res­o­lu­tion is to write more about finan­cial mat­ters, the indus­try and the cri­sis than we did dur­ing last half of 2009. Last fall’s drought occurred for a vari­ety of good rea­sons, but two related ones are worth men­tion­ing: (1) while many of our posts tend to be long, we hate being repet­i­tive, and in our mind there was lit­tle new to say, and (2) with lit­tle new to say, we found many of the events and pro­ceed­ing to be quite bor­ing. For writ­ing blog posts, “bor­ing” means too many ref­er­ences to old mate­r­ial – like above – but we’ll try to write more in 2010.

Copy­right © 2010 Spero Consulting

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