206 (1 April 2015)

Welcome to week 206!  The articles below caught my attention this week.  Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by a title search.

You can find a pdf of this issue, a cumulative pdf for issues 1-156, and a cumulative pdf for issues 157-present at: https://sites.google.com/site/brucedeanlarson/the-invisible-forces.

(27 March 2015): “Balance of Power Shifts in Groceries” (http://www.wsj.com/articles/balance-of-power-shifts-in-groceries-1427414817)

——–“Orders for organic burritos, Thai stir-fry and other frozen products from Amy’s Kitchen Inc. have been growing so quickly that late last year the company bought a second factory—an Idaho plant J.J. Heinz Co. had just shut amid shrinking demand for its frozen food. . . . Amy’s and other smaller companies focused on natural and organic foods are feasting on shifts in tastes among consumers distrustful of established food giants’ products and ingredients.  The rise of these smaller companies, helped by growing interest from big retailers, is eating into demand for brands that for decades were commonplace in American kitchens, like Kraft Foods Group Inc.’s macaroni and cheese and Kellogg Co.’s breakfast cereals.”  The recent announcement of the acquisition of Kraft by Heinz, in a deal worth $49 billion, is an illustration of the tumult in the food industry, driven in part by consumer desire to buy local and on a smaller scale, as well as “the mounting distrust of Big Food.”

(28 March 2015): “Push for Private Options in Education Gains Momentum” (http://www.wsj.com/articles/push-for-private-options-in-education-gains-momentum-1427457602)

——–“A growing number of statehouses are considering measures that would allow school districts, parents and students increasingly to use taxpayer funds to explore alternatives to traditional state-backed public education. . . . So far this year, at least 34 states are considering proposals to create or amend programs that offer private education options, up from 29 last year, according to the National Conference of State Legislatures.  The number of states considering educations savings accounts has doubled to 16 since 2014.”

********Education policy, in particular school choice, continues to capture the interest of the public and legislators.  This brief article provides a glimpse at the intricate and complex legislation that is being developed to create vehicles to expand the use of public money to fund private education in the spirit of school choice.  All this suggests to me, consistent with the invisible forces, that there is much legislation, i.e., invisible foot, that goes into creating the “free” market.  Simply put, the attractive abstraction of the free market is just that, an abstraction.  Real markets are highly dependent upon legal and political forces, as well as social and historical forces.

********The article is based, in part, on work done by the National Conference of State Legislatures (NCSL), a bipartisan group about which you can learn more at: http://www.ncsl.org/.  You can see a list of all of the areas covered by NCSL, with a focus on education, at: http://www.ncsl.org/research/education.aspx.  More specific information about school choice policy, which provides some real perspective on alternative legislative approaches, can be found in the 40-page pdf accessible at: http://www.ncsl.org/research/education/comprehensive-school-choice-policy.aspx.

(28 March 2015): “How Wall Street Middlemen Help Silicon Valley Employees Cash In Early” [SR](http://www.wsj.com/articles/how-wall-street-middlemen-help-silicon-valley-employees-cash-in-early-1427474284)

——–In up-and-coming firms that haven’t gone public, like Airbnb, Snapchat, and Uber, “almost all of their stock is owned by venture-capital investors and employees, who face tight limits on selling their shares.”  Some of these early investors, however, would like to “cash in now” and “middlemen are designing derivatives that deliver payments to employees based on a stock’s perceived value.”  Such “shadowy trading marks a dramatic shift in how wealth is being created during the continuing technology boom compared with the dot-com bubble of the 1990s.  Back then, the biggest gains came after companies went public.”  The rise in the valuation of non-public companies “is fueling runaway demand from investors who want a piece of the investment profits before companies go public—and an opening for hedge funds and other financial firms to create a lucrative market in the illiquid securities” of nonpublic firms.  It is estimated that $10-$30 billion in stock changed hands in pre-IPO trading last year.

********$10-$30 billion doesn’t sound like much but it is suggestive of the activity taking place in the “so-called secondary market for shares of private companies that are held by employees and other investors.”  I am impressed, but not surprised, by the creativity of the financial engineers developing these alternatives.  You can view a ranking for Master of Financial Engineering programs at: https://thefinancialengineer.net/rankings/.  The site for The Financial Engineer also provides “the most comprehensive list of Master of Economics programs in the United States” at: https://thefinancialengineer.net/economics-programs/.  You can find a ranking of those Masters programs at: https://thefinancialengineer.net/economics-rankings/.  You can learn more about financial engineering and quantitative finance at the home page for the International Association for Quantitative Finance at: http://www.iaqf.org/.

********The article is accompanied by a dynamic graphic of “The Billion Dollar Startup Club” (http://graphics.wsj.com/billion-dollar-club/).  The graphic shows the monthly value of the universe of firms “in the club.”  Most dramatic for me was the emergence of Uber, but especially of Chinese smartphone maker Xiaomi.  Watch it and you will see why.  Each firm is accompanied by clickable information about it.  This is a good chance to take a look at businesses that will be in the news when they go public.

(28 March 2015): “Privatisation: Mix and match” (http://www.economist.com/news/special-report/21646991-both-provision-and-funding-higher-education-shifting-towards-private-sector-mix)

——–[This article is part of a Special Report in The Economist on Universities: Excellence v equity.]  “In most European countries the state pays 80-100 % of the cost of the costs of tuition.  The main advantages of this model are equity and cost control.  Where it works well—in northern Europe—graduate education levels are uniformly high.  Where it works badly—in southern Europe—they are uniformly low.  American uses mixed funding, with individuals paying most of the costs of tuition and the government helping out with loans and grants.  In some countries with similar models, such as Japan and South Korea, individuals and families pick up the tab.  These systems tend to be better funded and more expensive than the European ones . . . because people fork out readily, and costs are harder to control.”  As it turns out, the American “mixed-funding model” is spreading.  What to do, though, about “Baumol’s disease, which increases the relative cost of labour-intensive industries, such as health and education, as technological change lifts the productivity of capital” elsewhere?  There are three options.  One is “to allow quality to deteriorate.   That has happened in many European countries. . . . Another option is to make individuals pay more.  In America, retrenchment in state budgets has pushed up tuition fees. . . . Another source of private funds for universities is philanthropy.”

********The reference to “Baumol’s disease” stems from William J. Baumol, The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t (2012).  It is a book of words, graphs, and tables (no math) and should be widely accessible.  Pp. xvii of the book simply states that “The cost disease asserts that the costs of health care, education, the live performing arts, and a number of other economic activities known as the ‘personal services’ are condemned to rise at a rate significantly greater than the economy’s rate of inflation . . . This is so because the quantity of labor required to produce these services is difficult to reduce.”  You can learn more about the book at: http://www.amazon.com/Cost-Disease-Computers-Cheaper-Health/dp/0300179286/.  You can learn more about how the disease relates to the arts in the works collected in Ruth Towse, ed., Baumol’s Cost Disease: The Arts and Other Victims (1997) at: http://www.amazon.com/Baumols-Cost-Disease-Other-Victims/dp/1858985080/.

********The Acknowledgments of Baumol’s book state that the idea of the cost disease stemmed from work Baumol did with William (Bill) Bowen; Bowen is a well-known and highly regarded figure in higher education, having (among other things) been the president of Princeton University.  Although I don’t know that the connection has been made explicitly, it could be thought that greater application of technology, e.g., online education, could be a (partial) solution to the cost disease.  In relation to that the brief discussion of online learning in the Special Report is worth reading.  You can find it at: http://www.economist.com/news/special-report/21646986-online-learning-could-disrupt-higher-education-many-universities-are-resisting-it-not.  The cost disease is specifically addressed and discussed in Bowen’s recent book Higher Education in the Digital Age (2013), which you can learn more about at: http://www.amazon.com/Higher-Education-Digital-William-Bowen/dp/0691165599/.

(30 March 2015): “Soybeans and Corn Locked in Food Fight” [SR](http://www.wsj.com/articles/soybeans-and-corn-locked-in-food-fight-1427667816)

——–“U.S. farmers increasingly are eschewing ‘King Corn’ in favor of planting soybeans . . . The move comes as growers grapple with a roughly 50% decline in the price of corn . . . since 2012.  The U.S. department of Agriculture on Tuesday will forecast corn and soybean plantings in a key report based on farmer surveys.  Analysts on average expect soybean acreage to rise 3% from last year to 85.9 million acres, while corn will fall 2% to 88.7 million acres.”  The prices of both corn and soybeans have been under downward pressure, but “Farmers are turning to soybeans for a few reasons: Prices [for soybeans] have fallen less sharply than for corn, demand has been strong and producing the oilseeds costs less.”  Furthermore, as Indiana farmer Del Unger notes, “most growers can easily switch between planting” corn and soybeans.

********A clear and concise discussion of some of the factors affecting land-allocation decision of two crops.  Relative prices matter, as do relative costs, and the ease of switching from one crop to another (before planting) is important, too.  The article puts all of this on a global scale, referring to record soybean harvests in Argentina and Brazil.  Just a great piece of economic analysis—agricultural commodity markets provide a great opportunity to see all of the invisible forces in action.

(30 March 2015): “It’s Really Here: TV for Babies” [SR](http://www.wsj.com/articles/tv-for-babies-born-of-a-reality-1427671277)

——–“In the ultracompetitive children’s-TV market, most networks don’t target viewers any younger than four years old.  One channel is now testing that boundary.  BabyFirstTV . . . is aiming its programming at children as young as six months.”  The business launched in 2006 “and now reaches more than 50 million U.S. households.”  Although the American Academy of Pediatrics “recommends no television for children under the age of two, arguing that children learn best by interacting with people . . . that may be wishful thinking.  A Kaiser Family Foundation study found that most babies are watching some television.  So then the question turns to what kind of television babies see.”  According to Sharon Rechter, who co-founded the BabyFirstTV with her husband Guy Oranim, “What is important is what we put our kids in front of and we think we are offering the cleanest, safest alternative.”  The programming of BabyFirst “is mostly low-cost animation made in Israel.”

********You can find the TV recommendations for “Median and Children” can be found at: https://www.aap.org/en-us/advocacy-and-policy/aap-health-initiatives/pages/media-and-children.aspx.  The article provides an interesting graphic from Nielsen showing screen time for children ages 2-4 during the fourth quarter of 2014.  It shows that they watch each week: 25 hours and 25 minutes of traditional TV; 3 hours and 4 minutes of time-shifted TV; and 5 hours and 36 minutes before other screens.  If we add them together, we get 34 hours and 5 minutes before screens each week, mostly before traditional TV.  Time spent watching TV is, for the most part, time not have an adult talk to you and this would seem to have development consequences.  In relation to this, see the “The Talking Cure” in The New Yorker, which you can find at: http://www.newyorker.com/magazine/2015/01/12/talking-cure.  It notes that “The poorer parents are, the less they talk with their children” and relates the work that is being done in Providence, Rhode Island to close the “word gap.”  Evidently the “word gap” literature stems from the work of Betty Hart and Todd R. Risley in 2003.  You can find a summary and reference of their work at: http://centerforeducation.rice.edu/slc/LS/30MillionWordGap.html.

********This article and the one immediately preceding both concern the allocation of a fixed resource between two alternative uses.  With regard to land allocation, presumably, the farmer makes decisions with an eye on profit.  What is the object of the adult supervising the baby’s time?

(30 March 2015): “Why Do White-Collar Criminals Do It?” (http://daily.jstor.org/white-collar-criminals/)

——–“Former Tyco CEO and infamous white-collar criminal L. Dennis Kozlowski—they guy who once threw a $2 million birthday party while committing all manner of corporate fraud—recently ended his parole and claims to be thoroughly rehabilitated after spending more than six years in jail.  What would lead someone to do the kinds of things Kozlowski did?  James William Coleman explored that question in a 1987 paper for the American Journal of Sociology.”  Although the motivation for white-collar crime seems simple—making money—“Coleman suggest we look more closely at the ‘culture of competition’ that emphasizes individual achievement and the pursuit of wealth and status.”

********You can read an article on Kozlowski’s release and incarceration at: http://www.nytimes.com/2015/03/02/business/dealbook/dennis-kozlowskis-path-from-infamy-to-obscurity.html.  The article points to the invention of “the idea of white-collar crime” by sociologist Edwin Sutherland in 1939.  His object was “to expand the concept of criminality beyond that era’s focus on illegal acts among immigrants and the working poor and apply it to the powerful.”  The work in question is Edwin H. Sutherland, “White-Collar Criminality,” American Sociological Review 5,1 (February 1940): 1-15.  A contemporary book covering the landscape of white-collar crime can be found at: http://www.amazon.com/Understanding-White-Collar-Crime-Opportunity-Perspective/dp/0415704030/.

(31 March 2015): “West Seeks Tighter Curbs on Trade in Antiquities Looted by Islamic State” [SR](http://www.wsj.com/articles/west-seeks-tighter-curbs-on-trade-in-looted-antiquities-1427761561)

——–“A coalition of Western nations is seeking new powers to curtail the trade of illicit antiquities after an explosion of looting in Syria and Iraq raised fears that the plunder finances Islamic State militants.  Authorities in the U.S., U.K. and Germany are trying to push through legal packages to bolster customs powers and make it easier to prosecute those suspected of antiquities theft. . . . The bid to curb the trafficking faces huge challenges.  Looted antiquities are ferried along a dizzying number of legitimate and clandestine channels that are notoriously difficult to police.”

********Closer to home, the article notes that at Fort Bragg, North Carolina, the U.S. Army is working to revive the Monuments Men, “a group of academics and cultural professionals in uniform tasked with protecting and preserving cultural artifacts at risk.  Program director Brig. Hugh Van Roosen said the effort will initially enlist some 25 cultural professionals available to deploy world-wide.”  You can learn more about what the Army is looking for at: http://www.theartnewspaper.com/articles/Wanted-a-new-generation-of-Monuments-Men-for-US-army/36935.  I hadn’t realized that the recent movie “Monuments Men” (http://www.imdb.com/title/tt2177771/) had a historical basis.

(31 March 2015): “The Environment and the Bottom Line” (http://www.wsj.com/articles/the-environment-and-the-bottom-line-1427773182)

——–[An interview with Jean Rogers, the chief executive and found of the Sustainability Accounting Standards Board (SASB).]  The SASB “through research and by working directly with stakeholders, helps define what is likely to be material for a given company in a given industry and seeks to have that information report to investors.”  Rogers notes  that a good deal of what now passes for sustainability disclosure by corporations in their mandatory 10-K filings “is done with boiler-plate information.”  The SASB is “trying to move the needle to high-quality disclosure using metrics on known trends and uncertainties that are related to how these issues affect the financial condition and the operating performance of the company.”

********You can learn more about SASB at: http://www.sasb.org/.  The article has a four-minute video interview with Rogers that is worth watching.  She likens the formation of SASB to the formation of the Financial Accounting Standards Board (FASB) in 1972, which came about because the filings of corporations at the time were insufficiently trustworthy.  The SASB Materiality Map is especially interesting: http://materiality.sasb.org/.

********On a somewhat related note, the article “How Being a Worrywart Helps at Work” (http://www.wsj.com/articles/worry-can-help-at-work-1427842365); a three-minute video interview with the article’s author accompanies the article.  For those attuned to strengths-based approaches to work and life, the notion that a careful eye and a mind searching for “what’s wrong” can be very useful for many areas of life, and can help facilitate critical thinking.

(1 April 2015): “Wal-Mart Ratchets Up Pressure on Suppliers to Cut Prices” [SR](http://www.wsj.com/articles/wal-mart-ratchets-up-pressure-on-suppliers-to-cut-prices-1427845404)

——–Wal-Mart Stores Inc. “is increasing the pressure on suppliers to cut the cost of their products, in an effort to regain the mantle of low-price leader and turn around its sluggish U.S. sales.  The retailing behemoth has been telling suppliers to forgo investments in joint marketing with the retailer and plow the savings into lower prices instead.”  Although lower prices “may help Wal-Mart draw more customers, it gives suppliers less control over how their products are displayed or promoted, and less ability to make them stand out against store brands or other rivals.”

********As the article goes on to note, “Financial arrangements between suppliers and big retailers aren’t just a matter of coming to terms on volumes and a wholesale price.  They often also bundle in a host of extras including slotting fees, funds for special promotional discounts and money to pay for shared marketing.  The latter is particularly important for makers of branded consumer goods.”  In brief, what’s good for Wal-Mart may not be good for firms selling branded goods at Wal-Mart.

May you have a good week!

Bruce

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