287 (19 October 2016)

Welcome to week 287!  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.

(10 October 2016): “Grass Warfare in L.A.” (https://www.bloomberg.com/features/2016-turf-terminators-grass-war/)

——–The five-year drought in California has many Californians reconsidering the “American dream” of green, well-watered lawn and some governmental agencies have put money behind movement to eliminate grass lawns and replace them with something requiring less water.  One of those agencies is the Metropolitan Water District of Southern California, “the country’s biggest municipal supplier” of water.  However, rebates provided by it and the Los Angeles Department of Water and Power have encouraged the emergence of a variety of businesses that have ripped up lawns and replaced them with gravel and ill-suited plants.  The city controller of Los Angeles, Ron Galperin, has concluded that the rebates for turf replacement were “largely a gimmick.  The turf replacement gave . . . the lowest return on investment [compared to] other conservation programs.”  For example, “water-efficient washing machines or toilets.”

********Given the likelihood that many more municipalities will face droughts like those in California, the experience of Los Angeles is worthy of reflection.

(10 October 2016): “Coke and Pepsi Give Millions to Public Health, Then Lobby Against It” (http://www.nytimes.com/2016/10/10/well/eat/coke-and-pepsi-give-millions-to-public-health-then-lobby-against-it.html)

——–“The beverage giants Coco-Cola and PepsiCo have given millions of dollars to nearly 100 prominent health groups in recent years, while simultaneously spending millions to defeat public health legislation that would reduce Americans’ soda intake, according to public health researchers.  The findings, published on Monday in the American Journal of Preventive Medicine, document the beverage industry’s deep financial ties to the health community over the past five years, as a part of a strategy to silence health critics and gain unlikely allies against soda regulations.”

********At the end of the article, NYU professor of nutrition, food studies, and public health Marion Nestle notes that the soda companies “want to have it both ways—appear as socially responsible corporate citizens and lobby against public health measures every chance they get.”  The publication upon which this article is based is “Sponsorship of National Health Organizations by Two Major Soda Companies” (http://www.ajpmonline.org/article/S0749-3797(16)30331-2/fulltext).  It contains an impressive list of sponsored organizations, as well as a table showing “Lobbying on Soda-Related Public Health Bills, 2011-2015.”  The 11-page article is easy to read, devoid of much of the apparatus of academic research, and can be downloaded as a pdf file.  It is a good example of the invisible foot and the invisible hand at work, suggesting that investments in public health groups may improve, as Marion Nestle indicates, public perceptions while simultaneously decreasing the probability of regulatory action that would affect the revenues, and presumably profits, of donor firms.

********On a related matter, I am now halfway through The Cigarette Century: The Rise, Fall, and Deadly Persistence of the Product That Defined America (https://www.amazon.com/Cigarette-Century-Persistence-Product-Defined/dp/0465070485/), by Allan M. Brandt; Brandt is a professor of the history of medicine at Harvard University.  The book one a slew of prizes and was described by the Times Literary Supplement as “A masterpiece of medical history.”  Among other things, it provides a well-documented and frighteningly clear narrative of how cigarette companies supported research on cancer-related topics while simultaneously doing everything they could to undermine the science relating to the health effects of cigarette smoking.  If we now see such strategies employed by an array of industries now, not to mention politics, it is because they were developed rigorously and with clear intention by cigarette companies in the 20th century.  Perhaps one way to look at this book is that it develops in great detail one of the multiple cases examined in lesser detail by Naomi Oreskes and Erik M. Conway in Merchants of Doubt (https://www.amazon.com/Merchants-Doubt-Handful-Scientists-Obscured/dp/1608193942/).

********One of the “other things” I learned from The Cigarette Century showed up in Part II: Science, p. 148.  There the three domains of medical knowledge—clinical observations, population studies, and laboratory experiments—are related.  What became clear to me in my reading is that depending upon the domain to which a researcher was most closely connected, the assessment of a given research outcome could vary dramatically.  That is why, as the book points out, “Demonstrating that smoking caused disease ultimately required important insights integrating clinical, epidemiological, and laboratory investigations.”  I wonder if medicine is unusual in that regard or if, properly considered, that might be more general and apply, for example, to a disciplines such as economics.

(12 October 2016): “Out With the Poor, In With the Rich: The Landlord’s Guide to Gentrifying NYC” (http://www.bloomberg.com/news/articles/2016-10-12/get-out)

********This is an article about rent-controlled apartments in New York City and the especially determined efforts of landlord Steve Croman to oust tenants living in them.  The motivation is simple—remove tenants currently paying, say, $900 a month, and replace them with new tenants paying, say, $5000 a month.  The tactics are many and are discussed in some detail in the article.  I found the article to be valuable as “rent-controlled apartments in New York City” is one of the staples in economics courses whenever “price ceilings” (http://www.bloomberg.com/news/articles/2016-10-12/get-out) are discussed.  This article, as they say, puts some “flesh on the bones” of the standard example.

(13 October 2016): “Student Loans: Don’t Call It a Crisis” [SR](http://www.wsj.com/articles/david-wessel-reviews-books-about-student-loans-1476302384)

——–[A review of Game of Loan: The Rhetoric and Reality of Student Debt (https://www.amazon.com/Game-Loans-Rhetoric-Reality-Student/dp/069116715X/), by Beth Akers and Matthew M. Chingos, and Student Debt: Rhetoric and Realities of Higher Education Financing (https://www.amazon.com/gp/product/1349949434/), by Sandy Baum.  The reviewer is David Wessel, a former columnist for The Wall Street Journal who now works for The Brookings Institution.]  “Doing something about ‘the student loan crisis’ is a staple in this year’s political campaigns.  Now come three brave economists with a simple message: There is no student loan crisis—if by ‘crisis’ one means that a huge number of Americans are buried under piles of debt for college educations that aren’t paying off. . . . Successfully aimed at non-economists, both books are clearly written.  They are light on people and anecdotes, though, so they’re not exactly engaging.  They are, however, powerful antidotes to the stereotypes and myths that have grown up around student loans.”

——–Sandy Baum, for example, “counts up press accounts like the one about the woman who graduated from Ohio Northern University with $120,000 in loans.  Such stories are accurate and troubling, but not at all typical.  One scholarly analysis of 100 news stories from 2014 showed that the subjects profiled had borrowed more than $85,000 each.  But only 7% of student loan borrowers at the end of 2014 owed more than $75,000, and the vast majority of those had graduate degrees.  Two-thirds of all borrowers owed less than $25,000.”

********As a former colleague noted, the issues raised in the press, as well as in the article, is “an example of trying to set policy based on the outlier cases.”  Coupled with this is the problem of faulty generalization (https://en.wikipedia.org/wiki/Faulty_generalization): “A faulty generalization is a conclusion about all or many instances of a phenomenon that has been reached on the basis of just one or just a few instances of the phenomenon.”  Solving the wrong problem in relation to student loans will likely serve no one.

********One approach to dealing with student loans that is finding some favor bases repayments on the ability of students to repay their loans.  Specifically, to base repayments on future earnings.  Both Hillary Clinton and Donald Trump have indicated slightly different approaches embracing this idea, one discussion of which can be found at: http://www.marketwatch.com/story/donald-trumps-student-loan-plan-appears-to-take-a-page-from-obamas-book-2016-10-14.  Such a plan is currently an option but there are some (easily-fixed) problems with it.  You can learn more by reading “The ‘No-Brainer’ Fix To America’s Student Loan Mess” (http://www.bloomberg.com/news/articles/2016-10-12/the-no-brainer-fix-to-america-s-student-loan-mess).  Contained within the article is a 15-minute “walking” video conversation on student loans.  What struck me especially is that the bankruptcy laws for student laws are more rigorous than loans for tangible goods like automobiles.

(15 October 2016): “The shadow economy: Unregulated, untaxed, unloved” (http://www.economist.com/news/international/21708675-new-technology-may-persuade-informal-businesses-and-workers-become-formal-bringing-light)

——–“Moving from the informal to the formal economy can be . . . simple.  But in many countries the transition remains rare.  Half to three-quarters of all non-agricultural workers in poorer countries (perhaps 2 billion people) fall outside the purview of officialdom and so can be categorized as ‘informal (or ‘shadow’ or ‘grey’).  In rich countries the share is much smaller, though still significant.  One-tenth of Britain’s economy is thought to be informal. . . . Over the past decade the world’s working-age population has been growing faster than the number of people officially employed, implying that there are more and more people in jobs outside the mainstream.”

********As the article notes, one of the factors leading the way to an increasingly formal economy is the adoption of digital platforms for consumer, and presumably other, transactions.  Sweden is well on its way to making paper money a rarity—“Many shops and even bars refuse to accept the folding stuff, and cash machines are hard to find”—but Italians are “lovers of cash.”  So, social and historical forces (the invisible handshake) will play a role in determining the speed with which governments (the invisible foot) can seek to bring more consumer transactions (the invisible hand) into the formal economy.

(17 October 2016): “Do Corporate Leaders Need To Pay Taxes?” (http://daily.jstor.org/do-corporate-leaders-need-to-pay-taxes/)

********Did Donald Trump have a fiduciary duty “to minimize his taxes”?  As Livia Gershon notes, “Individuals like Trump have no legal duty to keep as much money as possible.”  But “for publicly traded companies, the story is a bit different.  Federal and state laws assign corporate leaders a rather vague responsibility to take care of the best interests of the company and its shareholders, which some courts have interpreted as a requirement that companies prioritize earning money for shareholders above else.”  Gershon then goes on to relate an experiment by Jacob M. Rose, a Bentley University professor conducted an experiment “posing ethical questions to 34 active directors of U.S. Fortune 200 corporations.”  He then divided the directors into two groups, “asking 17 of them to address the issues from the perspective of a director of a publicly held company—essentially as they would in real life.  The other 17 were told to imagine themselves as partners in a privately held partnership, a role in where there are no public shareholders for management to be responsible. to.”  When Rose asked them to evaluate two ethically-charged scenarios, the “directors’ responses varied dramatically depending on whether they thought of themselves as corporate directors or company partners.”

*********The article upon which Gershon’s post is based is “Corporate Directors and Social Responsibility: Ethics versus Shareholder Value,” which was published in the Journal of Business Ethics in 2007.  The article can be reached by a link in the post.  This is an excellent example of how an assumption about how firms behave, i.e., to maximize the market value of the firm, has been transformed into a directive as to how firms should behave.  Obviously this is a point that is not made sufficiently strongly enough by those who have taught (and do teach) corporate finance.  (Full disclosure: I am one of those people.)  By the way, this article is quite readable and could be used as a basis for similar, possibly identical, questions.

(17 October 2016): “How the Chemical Industry Joined the Fight Against Climate Change” (http://www.nytimes.com/2016/10/17/business/how-the-chemical-industry-joined-the-fight-against-climate-change.html)

——–“It might seem surprising to find the world’s chemical companies on the front lines of preventing climate change, fighting to disrupt their own industries.  But in a sweeping accord reached on Saturday in Kigali, Rwanda, companies including Honeywell and Chemours, a DuPont spinoff, were among the most active backers of a move away from a profitable chemical that has long been the foundation for the fast-growing air-conditioning and refrigeration business. . . . The chemical industry’s response stands in stark contrast to the foot-dragging, and in many cases the outright obstructions of climate regulations, by the big oil companies.”

********The foot dragging in one case and the active backing in another is consistent with whether or not company interests are aligned with environmental interests, as the article seems to indicate.  The chemical companies seem to have products that are good substitutes for the hydrofluorocarbons that have been targeted but the “big oil” companies seem not to have them for their traditional products (although this seems to be changing).  Environmental experts say that “the Kigali deal was an example of an emerging dynamic, were companies pre-empt environmental policy changes by developing more planet-friendly products, then push for regulation that grows that market.”

(19 October 2016): “Giving Every Child a Monthly Check for an Even Start” (http://www.nytimes.com/2016/10/19/business/economy/giving-every-child-a-monthly-check-for-an-even-start.html)

——–“The percentage of children who are poor is more than three times as high in the United States as it is in Norway or the Netherlands.  America has a larger proportion of poor children than Russia.  So what’s going on?  We may spend a lot of money, but we don’t spend it well.  It turns out that the most generous federal programs for families with children barely help the nation’s unluckiest children.  Rather, they generally push money to their counterparts higher up the ladder of well-being.  The child tax deduction—which allows families to exclude $4,000 a child from their taxable income—avoids the poor almost entirely.  Just over 1 percent of the $40 billion it costs the federal budget every year flows to the poorest fifth of the population.  That works out to an average benefit of $10 a poor family, according to calculations by the nonpartisan Tax Policy Center.”  Although Presidential candidate Hillary Clinton has proposed increasing an existing tax credit to better support poor children, “there is an opportunity for even bolder action.  Why not get rid of the child tax credit and the child deduction entirely, and instead provide a monthly check of $250 for every child in the country, to guarantee a minimum level of well-being?”

********I found the column by Eduardo Porter to be provocative.  The point about the poor deriving little benefit from the child tax deductions is clear, powerful, and obvious once stated (but seldom stated).  I’m not sure I would advocate for the same check to every child, which though equal does not seem equitable.  Still, as Porter notes, we have an opportunity to rethink how our governments deal with the children of the poor, indeed all children.  During a “normal” election year, we might have heard some proposals along these lines.  But it is not such a year.

(19 October 2016): “Nevada Voters Weigh Deregulation of Electricity Market” [SR](http://www.wsj.com/articles/nevada-voters-weigh-deregulation-of-electricity-market-1476792006)

——–“Nevada is the latest battleground in a national political fight over whether consumers and businesses should be able to choose where they buy electricity.  A November ballot measure backed by Las Vegas casinos and other firms would end the monopoly of the state’s largest utility, NV Energy, owned by Warren Buffett’s Berkshire Hathaway Inc., and create a competitive retail power market where customers could choose their provider. . . . If the campaign ultimately succeeds, Nevada would join New York, Texas and about a dozen other states where consumers and businesses can choose their electricity provider.”  According to Kira Fabrizio of Boston University’s Questrom School of Business, “In state after state, regulators are being pushed to revisit some core aspects of utility regulation in order to accommodate the future model of what electric utilities are going to look like.”

********Yet another instance of the dramatic change taking place in U.S. electricity markets.  Gone, it seems, are the days of “knee jerk” thinking about natural monopoly (https://en.wikipedia.org/wiki/Natural_monopoly).



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