255 (9 March 2016)

Welcome to week 255!  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 an Internet title search.

(4 March 2016): “How ‘pay for performance’ compensation really pays off—for companies at tax time” (https://www.washingtonpost.com/business/economy/how-pay-for-performance-really-pays-off–for-companies-at-tax-time/2016/03/04/37a9e538-dff3-11e5-8d98-4b3d9215ade1_story.html)

——–The overall compensation of corporate executives is increasingly being based upon “pay for performance,” for example, on how well a company’s stock performs relative to some standard, rather than the so-called “pay for pulse,” for example, on length of service.  One of the reasons for this change is the way these different types of compensation are taxed.  By changing overall compensation schemes “companies can quietly take tax deductions that would not be available under ‘pay for pulse compensation practices.”  This development is taking place at the same time that there has been increasing interest by stockholders in having a “say on pay.”

********Great expressions: pay for performance, pay for pulse, and say on pay.  Evidently “say on pay rules” are included in the Dodd-Frank Wall Street Reform and Consumer Protection Act (https://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act).  This is another clear instance where the invisible foot has a powerful effect on corporate behavior.  Currently I am reading Act of Congress: How America’s Essential Institution Works, and How It Doesn’t (http://www.amazon.com/Act-Congress-Americas-Essential-Institution/dp/0307744515/), by Robert G. Kaiser, who has held many important positions with The Washington Post.  The book is a case study of the legislative process based upon the Dodd-Frank Act.  Kaiser was given unprecedented access to all parties while the legislation was being developed, thereby providing an insider’s view of “how the sausage is made.”

********I am currently about halfway through Act of Congress.  One thing that has stood out (p. 177) is the statement: “Members [of the House of Representatives] almost never personally write the amendments they offer; either they are prepared by staff in consultation with ‘legislative counsel,’ the team of lawyers employed by the House to perform this function, or they are written by interest groups or their lobbyists.”  The necessity of raising funds for the next election cycle, as noted by Kaiser in So Damn Much Money: The Triumph of Lobbying and the Corrosion of American Government (http://www.amazon.com/Damn-Much-Money-Corrosion-Government/dp/0307385884/), is consistent with this notion.  There are only so many hours in the day.

(5 March 2016): “Schumpeter: A rust-belt revival” (http://www.economist.com/news/business/21693944-new-businesses-are-breathing-life-some-americas-old-industrial-cities-rust-belt)

——– “Three powerful forces are breathing life into bits of America that had looked as if they were permanently left behind.  First, old industrial skills are acquiring new relevance thanks to such things as advances in materials science.”  Two areas that demonstrate this are Akron, Ohio, in polymer sciences, and North Carolina, in textiles.  “Second, old industrial towns are realizing that they have a vital asset: cheap property.  Disused mills and warehouses, with their high ceilings and exposed bricks and beams, can make attractive homes and workspaces for knowledge workers.”  Third, there is a trend that combines “elements of the first two: the rise of manufacturing entrepreneurs.  Startups are beginning to transform manufacturing just as they transformed service industries like taxi-hailing and short-term room lets.”

********This article takes off from the raging pessimism of this political season to lift up two recent works that point out that American “has not lost the ability to revitalize itself.”  The first is an article by James Fallows in The Atlantic, “How America Is Putting Itself Back Together,” (http://www.theatlantic.com/magazine/archive/2016/03/how-america-is-putting-itself-back-together/426882/), which reports on a three-year journey in a single-engine plane.  The second is the soon-to-be-released (3/29) book The Smartest Places on Earth: Why Rustbelts Are the Emerging Hotspots of Global Innovation (http://www.amazon.com/The-Smartest-Places-Earth-Innovation/dp/1610394356), by Antoine van Agtmael and Fred Bakker.  At a time when political emotion is running wild, will economic rationality prevail?

(5 March 2016): “Economics: A far from dismal outcome” (http://www.economist.com/news/science-and-technology/21693904-microeconomists-claims-be-doing-real-science-turn-out-be-true-far)

——–The relatively recent development of experimental economics and related methods has provided an opportunity for replication that previously did not exist.  A recent study by Colin Camerer, et al., “repeated 18 laboratory experiments in economics whose result had been published in the American Economic Review and the Quarterly Journal of Economics between 2011 and 2016.  For all of the 18 papers . . . Dr Camerer and his colleagues found a broadly similar effect to whatever the original authors had reports.  That is below the 92% replication rate they would have expected had all the original studies been as statistically robust as the authors claimed—but by the standards of medicine, psychology and genetics it is still impressive.”

********You can learn a bit more about the study at: http://www.sciencemag.org/news/2016/03/about-40-economics-experiments-fail-replication-survey.  Citation information, including an abstract, can be found at: http://science.sciencemag.org/content/early/2016/03/02/science.aaf0918.  It is clear that economics is moving beyond the time where being scientific simply meant a display of mathematical virtuosity.

(6 March 2016): “Was a USDA scientist muzzled because of his bee research?” (https://www.washingtonpost.com/lifestyle/magazine/was-a-usda-scientist-muzzled-because-of-his-bee-research/2016/03/02/462720b6-c9fb-11e5-a7b2-5a2f824b02c9_story.html)

——–“Jonathan Lundgren is buying a parcel of land—a scrubby, 30-acre plot just north of Brookings, S.D.—from which he hopes to lead a revolution.  An entomologist in the U.S. Department of Agriculture’s Agricultural Research Service, based in a South Dakota lab, Lundgren plans to start two businesses: Blue Dasher Farm, a for-profit enterprise he describes as a model for sustainable farming; and Ecdysis, a nonprofit science lab for independent research.”  A couple of years ago Lundgren was “running a government lab, winning awards from both his agency and President Obama” but things have changed.  He has been suspended twice from his position, once “for conduct unbecoming a federal employee” and another time “for violating travel regulations.”  Lundgren “believes the problem began in 2012, when he published findings in the Journal of Pest Science suggesting that a popular class of pesticides called neonicotinoids don’t improve soybean yields.”  Subsequently, he “published a paper suggesting that a new genetic pest treatment, dubbed RNAi pesticides, required a new means of risk assessment.”  His and a related paper on the “dangers of neonics” drew media interest, including an interview with an NPR affiliate.  It was then that Lundgren was included in a conference call with his supervisor and an area director higher up, the thrust of which was to not “talk to the press anymore without prior approval.”  The Lundgren dispute “shows how complicated the intersection of government, science and industry can become when billions of dollars are at stake.”

********This is one of those instances where it is hard to sort out, on the basis of one article, the wheat from the chaff, the true from the not true.  Still, it points out to me the importance of academic freedom when money is involved.  This is likely to become a larger, rather than a smaller, issue in the event that universities are called upon to focus more on disciplines and activities that have a direct monetary value.

(6 March 2016): “Trade Group Lobbying for Plant-Based Foods Takes a Seat in Washington” (http://www.nytimes.com/2016/03/07/business/trade-group-lobbying-for-plant-based-foods-takes-a-seat-in-washington.html)

——–“The trade associations representing the beef, pork and poultry industries are among the most powerful lobbies in Washington.  And they are about to get some company.  A new trade group, the Plant Based Foods Association, has been established to represent makers of proteins derived from peas, soybeans and other nonmeat sources.”  The founder of the new group is Michele Simon, a public health lawyer and food policy advocate.  Twenty-three companies are involved in the group, “including old-times like Tofurky and newcomers like New Wave Foods that all make protein products from plants.”  Representing the Association in Washington will be Elizabeth Kucinich, “wife of the former congressman and presidential candidate Dennis Kucinich.”  She has said that the Association will “represent a range of companies, not just those whose entire product line is built on plant proteins.”  It is expected that the Association will lobby, “for instance, for federal subsidies for plant-based milks to be served in school lunchrooms. . . . And it will take on the Food and Drug Administration’s ‘standards of identity,’ which prescribe what ingredients and in what quantities are needed to, say, call chees ‘chees’ on packaging and labels.”

********Every industry group needs a lobbyist in Washington, it seems, so this is a “natural” development.  As a consumer of almond “milk,” I am curious about what the FDA’s standard of identity has to say about it.  You can learn more about the Association at: http://www.plantbasedfoods.org/.

(7 March 2016):Odd Lots: How an Obscure Government Report Launched a $3 Trillion Industry” (http://www.bloomberg.com/news/articles/2016-03-07/odd-lots-how-an-obscure-government-report-launched-a-3-trillion-industry)

——–“In 1987, investors watched in horror as the Dow Jones Industrial Average plunged 22 percent in a single day, an even that became known as ‘Black Monday.’  Months later, the U.S. Securities and Exchange commission published an 840-page report into the incident.  Buried deep within was a seed that would eventually sprout into the $3 trillion market for exchange-traded funds.”

********This post from the Odd Lots feature of BloombergBusiness is an entry into a variety of resources built upon the reporting of Eric Balchunas, the ETF analyst for Bloomberg.  First, there is the somewhat lengthy article by Balchunas, “The ETF Files: How the U.S. government inadvertently launched a $3 trillion industry” (http://www.bloomberg.com/features/2016-etf-files/).  A 29-minute podcast on “The Obscure SEC Report That Spawned A $3 Trillion Industry” that contains a good deal to technical detail can be heard at: https://soundcloud.com/bloomberg-business/episode-18-the-obscure-sec-report-that-spawned-a-3-trillion-industry.  Finally, Balchunas draws upon his ten years of experience covering ETFs for Bloomberg in his March 2016 book The Institutional ETF Toolbox: How Institutions Can Understand and Utilize the Fast-Growing World of ETFs (http://www.wiley.com/WileyCDA/WileyTitle/productCd-1119093864.html).  What is most striking to me is the point, clearly made in the articles and the podcast, that financial regulators saw that there was an opportunity to create a new financial product that would reduce the probability of events like Black Monday, and mentioned it in one paragraph of an 840-page report.  Because two people, maybe just one, read the report carefully and had the insight to see “an opening we could drive a truck through” a huge financial industry was developed.  Let’s hear it for close reading!

(8 March 2016): “Why the poor pay more for toilet paper—and just about everything else” (https://www.washingtonpost.com/news/wonk/wp/2016/03/08/why-the-poor-pay-more-for-toilet-paper-and-just-about-everything-else/)

——–“There are several ways to save money on, say, a roll of toilet paper.  You can reach for the cheaper version: the store brand, or the single-ply TP, or the stuff that feels like packing paper.  Our you can buy in bulk, saving on each roll per unit.  Or you can stock up when the deal is good, like when the corner store offers two packs for the price of one.”  According to University of Michigan professor Yesim Orhun and Ph.D. student Mike Palazzolo, “The poor, who need all of these strategies, are much less likely to use the last two” saving strategies.  Although this sounds like “a subtle discovery about minor household goods . . . it supports a larger point about poverty: It’s expensive to be poor.”

********The research upon which this article is based is “Frugality is hard to afford” (http://yesimorhun.com/wp-content/uploads/sites/18/2015/01/Orhun_Palazzolo.pdf).  An earlier summary of the article can be found at: http://michiganradio.org/post/research-suggests-poor-may-pay-more-store#stream/.

(8 March 2016): “Does More Education Mean Higher Pay?” (http://daily.jstor.org/does-more-education-mean-higher-pay/)

——–“Across the political spectrum, there’s a push to get more young Americans to graduate from college.  The reasoning appears obvious: college-educated workers make more money and are much less likely to be unemployed than people with just a high school diploma.  But if the rate of college graduation jumped enormously, how much better would individuals’ employment prospects actually be?”  Claudia Goldin, an economist at Harvard University, examined a similar question when looking at “The spread of high schools between 1910 and 1940.  She found that the results were not as clear a win for individual diploma-holders as we might imagine.”  The big question remaining is “what happens when more young people finish college and enter the job market”?  It is explored by Goldin and Lawrence F. Katz in The Race Between Education and Technology.

********The post contains a link to Goldin’s article “Egalitarianism and the Returns to Education during the Great Transformation of American Education,” where the expansion of secondary school education was explored.  You can learn more about The Race Between Education and Technology at: http://www.amazon.com/Race-between-Education-Technology/dp/0674035305/.  Although the JSTOR Daily article provides a publication date for the book of 2015, it appears to have been published in 2008.

(8 March 2016): “Meet the People Who Sell Used Clothing to Rihanna, Amal Clooney” (http://www.bloomberg.com/news/articles/2016-03-08/the-best-vintage-clothing-stores-are-booming-just-ask-rihanna)

——–“Veteran retailer Seth Weisser is in the middle of construction for his largest, most ambitious store to date: a 3,8800 square-foot flagship just off Rodeo Drive in Beverly Hills, Calif.  It will sell designer clothes, accessories, and jewelry; he plans special stores-within-a-store for Chanel and Hermès. . . . There’s one crucial difference between Weisser’s newest boutique and those nearby, such as Louis Vuitton or Valentino: It will sell used clothing.”  Weisser’s business and others, such as Fashionphile, “are prime examples of the new retail sector of luxury vintage, in which barely worn bags or designer dresses are sold at discount to women who might have shopped straight from the runway.”  At a time when fashion editors Instagram new fashions from the front row of a runway resulting to multiple views and thousands of likes, there is an increasing attraction for styles that have stood the test of time.  Still, though “the rise of luxury vintage is unstoppable, . . . a danger looms that could derail the entire industry: fakes.”

********Weisser’s chain of businesses, now numbering five, is called What Goes Around Comes Around.  You can learn more about it at: http://www.whatgoesaroundnyc.com/.  I like the term ‘luxury vintage’.  Perhaps it is a broader phenomenon than just clothes.

(9 March 2016): “Colorado’s $1 Billion Pot Industry Saves Towns as It Sows Mayhem” (http://www.bloomberg.com/news/articles/2016-03-09/colorado-s-1-billion-pot-industry-saves-towns-as-it-sows-mayhem)

——–“Taxes generated by Colorado’s $1 billion marijuana industry are keeping some struggling towns solvent even as growing numbers of high-schoolers are getting stoned at lunch, police are coping with a doubling of cannabis-related traffic deaths and doped-up tourists flock to emergency rooms.”  With 938 dispensaries, more than the number of Starbucks in the state, state taxes and fees on pot yielded $135 million, up 44 percent from the previous year.  “Yet as the market enters its third year after voters legalized retail sales in 2012, officials question whether the newfound income outweighs the escalating social costs.”  Part of that social cost is that legal pot is hard to contain and tends to spill over into neighboring states, “burdening law-enforcement agencies” there.  Still, “some cities and counties are counting cannabis-tax revenue as a windfall, using it to avoid borrowing for infrastructure upgrades and to prop up economies hammered by downturns in the oil and gas markets.”

********It is hard to believe that Colorado’s laws are almost three years old.  It occurs to me that this is another case of a “sin” being “cleaned” by using the revenues raised by taxing it for pro-social purposes, repairing infrastructure in Colorado and supporting education in North Carolina.  Of course, the tendency would be for state legislatures to spend less on the activity once the lottery income stream begins, in effect crowding-out some of the funds previously provided in the budget.  That strikes me as common (economic) sense.  Unsurprisingly this has given rise to a lot of economic (and other) research, of which my knowledge is limited.  I did turn up, however, one article that addresses the question and provides a clear answer—“Fungibility of Lottery Revenues and Support of Public Education,” Journal of Education Finance 28,2 (Fall 2002): 301-12, by O. Homer Erekson, Kimberly M. DeShano, Glenn Platt, and Andrea L. Ziegert.  In their Conclusion, they note: “This study has offered evidence that, regardless of a state’s relative wealth, population, debt pressures, or tax burden, increases in lottery revenues negatively affect support for public education.  Clearly, lottery revenues are fungible, and general fund revenues that otherwise would be devoted to education are diverted to other uses” (p. 311).  This article is now 14-years old.  I wonder what an updated version would reveal?

May you have a good week!

Bruce

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