295 (14 December 2016)

Welcome to week 295!  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.

(9 December 2016): “Sears Transformed America.  It Deserves to Die With Dignity.” (https://www.bloomberg.com/view/articles/2016-12-09/sears-deserves-to-die-with-dignity)

——–“Listening to a Sears earnings call in 2016 is like realizing that the twinkling light you’re admiring in the night sky is from a star that died 50 years ago.  Sears Holdings Corp. lost $748 million last quarter amid falling sales, an even worse performance than the dismal losses of the period a year earlier.  There is no obvious reason that the business might improve.  And yet executives are still discussing how important its shopper loyalty program is ‘to the future and growth of the company,’ as if the company were going to have growth, and shoppers and a future.”

********The author of this column is Megan McArdle, who has written on a wide variety of topics for Bloomberg.  You can see that variety at: https://www.bloomberg.com/view/contributors/AQjVOcPejrY/megan-mcardle.  As someone who occasionally goes to K-Mart but almost never goes to Sears—both decisions are location driven—here emphasis on the role of location for Sears financial woes rang true, although there have certainly been other factors at work.  McArdle notes that Sears twice revolutionized American retail, once through its catalogs and once through its anchoring of malls.  But the future of Sears isn’t bright.  The rise and fall of another iconic American firm is related in Marc Levinson’s The Great A&P and the Struggle for Small Business in America (https://www.amazon.com/gp/product/0809051435/).

********Businesses like Sears might be able to extend to extend their life by adopting the so-called “dark store loophole” to lower their property taxes, an approach that is now being used by firms such as Lowes, Target, and Walmart (https://www.bloomberg.com/news/articles/2016-12-08/how-big-box-retailers-weaponize-old-stores).  Growing out of a court ruling in Detroit, Michigan, the “dark store” approach is being used in Marquette, Michigan by Walmart to argue that the tax value of a “bustling store should be assigned about the same value for tax purposes as one that’s been vacant for years, hundreds of miles away. . . . The dark store tax argument has been gaining use since a Michigan court accepted it in 2010. . . . Two-thirds of Michigan’s counties have lost more than $75 million in property taxes since 2012 as a result of the ruling.”  The article is accompanied by a five-minute that makes many of the same points.

(9 December 2016): “How ‘Islands of Honesty’ Can Crush a System of Corruption” (http://www.nytimes.com/2016/12/09/world/asia/south-korea-brazil-argentina-impeachment.html)

——–“For over a year, a global mystery has been growing: Why are so many governments around the world collapsing amid corruption scandals?”  Whether it be South Korea, Brazil, South Africa, Guatemala, or Argentina, “the story is familiar: a corruption scandal rocks a nation, reaching the highest levels of government and provoking a political crisis.”  Professor of behavioral economics Raymond Fisman of Boston University claims that a focus on individual wrongdoing in these cases is misleading, finding it more useful to focus on systemic corruption.  He noted that “Once systemic corruption takes hold . . . it can quickly infect an entire system, encouraging or even forcing bad behavior—even by those who would, in another context, remain honest.”  Fisman argues that “the most accurate way to think of corruption is as an ‘equilibrium’—the result of people acting rationally within a flawed system, not just individual moral lapses. . . . “if most people are honest . . . paying a bribe is a risky endeavor. . . . But ‘if everyone around you is paying bribes, the cost-benefit tradeoff flips’  As more and more people engage in corruption, you’re better able to find willing partners in crime.  And the benefits of staying honest decline.”

********The article provides an excellent example of economic reasoning as it relates to the relevance of culture on human behavior—the invisible handshake—and how culture might change under certain circumstances.  Fisman and UCLA political scientist Miriam Golden have written about corruption in their forthcoming (April 2017) book Corruption: What Everyone Needs to Know, which you can learn more about at: https://global.oup.com/academic/product/corruption-9780190463984.  The notion of “islands of honesty” is due to political scientist Christoph Stefes, of the University of Colorado.  He notes that it is possible to disrupt a corrupt equilibrium through such islands, noting that the although investigations into corruption originating from them cannot eradicate corruption on their own, “they certainly can make a difference as soon as they start spreading, especially when they can connect with civil society.”  All this reminds me of the justly famous book The Evolution of Cooperation (https://www.amazon.com/Evolution-Cooperation-Revised-Robert-Axelrod/dp/0465005640/), by Robert Axelrod.  It seems like Stefes is arguing toward something like the evolution of trust, maybe even the evolution of morality.  The concept of ‘islands of honesty’ appeared in the 2006 book Understanding Post-Soviet Transitions: Corruption, Collusion and Clientelism (https://www.amazon.com/Understanding-Post-Soviet-Transitions-Corruption-Clientelism/dp/1403936587/).

********The above reminded me of the recent book by Samuel Bowles, The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens (https://www.amazon.com/Moral-Economy-Incentives-Substitute-Citizens/dp/0300163800/).  It is on the top of my next-to-read list.  One can change incentives quickly, of course, but over the long haul it is the character of the people matters fundamentally.  Perhaps Bowles provides a guide, of sorts, to nurturing the formation of islands of morality and facilitating their spread.

May you have a good week!

Bruce

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