Welcome to week 304!  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.

(7 February 2017): “The ‘Slow-Motion Terrorism of Pirate Capitalism’” (https://www.bloomberg.com/news/articles/2017-02-07/glass-house-the-slow-motion-terrorism-of-pirate-capitalism)

——–[A review, by Justin Fox, of Glass House: The 1% Economy and the Shattering of the All-American Town (https://www.amazon.com/gp/product/1250085802/), by Brian Alexander.]  Glass House is the “melancholic but gripping account” of the author’s “13-month stay, from December 2014 to January 2016, in the troubled, drug-ravaged city” of Lancaster, Ohio, “where he grew up.  There are tales of a heroin deal gone bad, an annual music festival fighting to survive, and people struggling to build a future in a place with a happier past.  But it’s the Anchor Hocking saga at the heart of it all that makes this book more than another elegy for good times in Middle America.”  In Alexander’s telling of the decline, but continued existence, of an iconic glass maker, what changed “wasn’t competition from Mexico or China—or at least not just that.  ‘Corporate America is what happened,’ a local policeman tells the author.  Alexander narrows that down, blaming it on ‘the slow-motion terrorism of pirate capitalism.’”  The names of Carl Icahn, Newell, Cerberus Capital Management, and Monomoy Capital Partners figure in this story.  Although “There are those who argue that leveraged acquisitions and restructurings of the sort that Anchor Hocking has endured make companies more efficient and steer capital to better uses. . . . Alexander makes a persuasive case . . . that from the perspective of Lancaster, it’s been one big fleecing.”

********This book looks like a good companion for Boom, Bust, Exodus: The Rust Belt, the Maquilas, and a Tale of Two Cities (https://www.amazon.com/Boom-Bust-Exodus-Maquilas-Cities/dp/0199765618), which I have read.  The story of Boom, however, was one of decline in Galesburg, Illinois driven by Nafta.  So, perhaps the story of Galesburg was also one of leveraged acquisitions and restructurings, a perspective I don’t recall from reading the book.

********Economic decline is, certainly, more complex than “just Nafta” or “just leveraged acquisitions.”  This seems like a good place to lay out the distinction between “wicked problems” and “tame problems.”  I ran across this distinction over the weekend while chasing down a sequence of links that led me to a post by media critic and journalism professor Jay Rosen.  The specific post is “Covering Wicked Problems” (http://pressthink.org/2012/06/covering-wicked-problems/).  Is the problem of economic decline in Galesburg, Illinois and Lancaster, Ohio a wicked problem?  If it is, treating it as a monocausal tame problem will not lead to its solution.  In drawing attention to wicked problems, I am reminded of the growing field of complexity economics, a relatively painless introduction for which is provided by Complexity and the Art of Public Policy: Solving Society’s Problems from the Bottom Up (https://www.amazon.com/Complexity-Art-Public-Policy-Societys/dp/0691169136/), by David Colander and Roland Kupers.

(8 February 2017): “Wonkblog: The business lobby’s hypocritical, one-size-fits-all answer to regulation: No” (https://wpo.st/zoHb2)

********Despite the title, this article make some general points that are worthy of consideration, discussing the role that cost-benefit analysis has played (is playing) in the analysis of federal regulation.

——–A contentious aspect of the presidency of Ronald Reagan was his “executive order requiring the government to perform cost-benefit analyses for every federal regulation.  The business community had long complained that government officials focused only on the benefits of regulation, while ignoring the costs to businesses and the economy as a whole.  Liberal interest groups—unions, consumer advocates and environmentalists—went bananas. . . . Any estimates of the benefits of regulation, they argued, were too squishy and too subjective—and downright immoral. . . . Ironically, today it is the business lobby and its cheerleaders in the Republican Party who are the skeptics.  They are only too happy to tote up every conceivable cost for those ‘crushing,’ ‘job-killing’ regulation, but resist toting up the benefits because—like the liberals of old—they view such estimates as too squishy and subjective.”

********The thrust of the article is to compare the “all benefit-no cost” approach once, supposedly, held by government officials, to the “all cost-no-benefit” approach now, supposedly, held by the business lobby, with the subjectivity, squishiness of the cost or benefit being ignored—effectively be set to zero—playing a pivotal role.  This is all-too-easy to understand: stress what advances your argument and ignore what does not advance your argument.  What is easy to understand, though, is not necessarily admirable.  The article winds up with a valuable point, i.e., that cost-benefit analysis “really is squishy and it often relies on subjective assumptions, whether it is done by regulators who want to find huge benefits from regulations or industry executives who want to find none.  That said, it is still [an] exercise . . . worth doing—not because of the precise answers it generates but because of the fact-based discipline it imposes on thinking about whether and how to regulate.”

********The use of costs and benefits in assessing federal regulation was put in place by Executive Order 12291, signed on 17 February 1981.  You can learn more about it at: https://en.wikisource.org/wiki/Executive_Order_12291.  There are five requirements set out in its Sec. 2. General Requirements.  Most relevant to this article are:

(b) Regulatory action shall not be undertaken unless the potential benefits to society from the regulation outweigh the potential costs to society;

(c) Regulatory objectives shall be chosen to maximize the net benefits to society;

Here is one recent book that deals with cost-benefit analysis as applied to environmental regulation: https://www.amazon.com/Costs-Benefits-Environmental-Regulation/dp/1784712116/.

(9 February 2017): “Trump Wants More American Cars in Japan.  Japan’s Drivers Don’t.” (https://www.nytimes.com/2017/02/09/business/trump-japan-american-cars.html)

——–“Detroit pines for a day when the sight of an American car on a Japanese street is not so notable.  Even as Japanese cars have taken a wide portion of the United States market, American brands are barely visible in Japan, a situation that has long frustrated American auto executives and trade negotiators and has become a renewed source of political friction under President Trump. . . . Such talk is alarming in Japan, where the auto industry is a pillar of the economy.”  Few American cars are sold in Japan.  “Of the nearly five million cars and light trucks sold in Japan last year, just 15,000 were American, or 0.3 percent.”  Although trade barriers are sometimes advanced as a reason for the dearth of American cars sold in Japan, there are others.  “Ingrained skepticism about American cars’ reliability and fuel efficiency is one problem.   Another is price.”  Supporting that notion is the fact that European brands like Mercedes-Benz and BMW have been relatively successful.  Kenji Kobayashi, the executive director of the Japan Automobile Importers Association, sees “a difference between European and American efforts to woo Japanese car buyers.  European brands advertise aggressively and have done more to customize their products for Japans, for instance by producing right-hand-drive versions of their vehicles—a seemingly obvious selling point, in a country where the driving lane is on the left, that American producers have long been criticized for ignoring.”

********The article makes clear that American cars, generally, do not have the product characteristics that Japanese consumers want, e.g., fuel efficiency, reliability, and relevance.  The failure to advertise doesn’t help, of course, but perhaps there is no reason to do so given the situation.  It is hard to avoid the conclusion that American automakers think that the Japanese market isn’t worth pursuing seriously.   As it stands, the Japanese buyers of American cars, which are overwhelmingly men, are “a bit unusual.”

(10 February 2017): “The surprisingly heated political battle raging over the word ‘milk’” (https://wpo.st/xDHb2)

——–“Chances are you’ve never stopped at your grocery store’s dairy case, baffled by the difference between ‘soy’ and ‘2%’milk.  But the dairy industry says consumers are confused—and it’s launched a war to clarify the facts for them.  Industry-backed bills in the House and Senate have recently sought to ban the makers of plant-based products from using the terms ‘milk,’ ‘cheese’ or ‘yogurt.’ . . . Now, as plant-based product sales continue to soar, Big Milk is ramping up its lobbying efforts against the companies that it says has misappropriated milks’ good name.  And the fledgling plant-based food lobby—arguably the David to milk’s Goliath—has promised to do the same.”

********As the article notes, “The showdown between dairy and nondairy milks has been a long time coming.  Consumption of conventional milk has been cratering since the 1950s, a product of both modern concerns about fat and the explosion of consumer beverage options after . . .  World War II.”  As we know, as the number of substitutes for a product increases, the demand for the product of the substitutable good will decrease, all other things being equal.  Dairy producers, presumably, believe that the removal of the word ‘milk’ will make products like almond milk and soy milk seem like poorer substitutes for the real thing, thereby increasing the demand for “real” milk.  Non-dairy producers, presumably, have beliefs that are somewhat similar, although affecting the demand for their products in the opposite direction.

(15 February 2017): “Is the Chicken Industry Rigged?” (https://www.bloomberg.com/news/features/2017-02-15/is-the-chicken-industry-rigged)

——–In a December 2016 earnings call, Sanderson Farms CEO Joe Sanderson reassured bank analysts “that the company’s recent profits weren’t about to disappear, as the chicken industry’s usual business cycle dictated they would.”  But Sanderson told them “that the industry had learned from its mistakes.  There wouldn’t be a bust this time.  Then he said something rather extraordinary: His competitors weren’t planning to ramp up production.  He knew this because it had been communicated to him by a virtually unknown company.  ‘I see a lot of information from Agri Stats the tells me nobody’s going to ramp up’ . . . Sanderson was right.  The following year, Sanderson Farms reported that its profits had surged 64 percent.  For the next six years, production cuts and skyrocketing profit margins were the norm in the $90 billion chicken.”  Although “puzzled industry watchers . . . speculated that a merger spree during the 1980s and 1990s were responsible” for increased profit margins, “Sanderson’s conference call suggested another source for the shift: Agri Stats, a private service that gathers data from poultry processors, produces confidential weekly reports, and disseminates them back to companies that pay for prescriptions.”  Access to highly detailed data about “the internal operations of the nation’s biggest poultry operations, including bird sizes, product mixes, and financial returns at participating plants” is very unusual.  Agri Stats “gathers information from more than 95 percent of U.S. poultry processors.”  Minneapolis law firm Lockridge Grindal Nauen has “filed a class-action lawsuit against more than a dozen of the nation’s largest chicken companies, alleging that they colluded to inflate chicken prices from 2008 to 2016. . . . The suit says that Agri Stats “acted as an agent and/or co-conspirator” of the defendants.

********Agri Stats (http://www.agristats.com/) was founded by Jim Cox, who was born in the Great Depression, in 1985.  The broad outline of his early years is related in the article; Cox worked up to 80 hours a week on a dairy farm while paying his way through Purdue University.  The article shows convincingly the value of highly detailed production information, information that Agri Stats is now trying to bring to hog production.  Three more things caught my attention:

  • Clients of Agri Stats “submit their sales invoices in real time—when someone sells a truck of chicken to the Kroger grocery chain, for example, the invoice goes to Agri Stats soon after.”

 

  • Then there is the influence of industry analysts. When veteran stock analyst Timothy Ramey of Pivotal Research Group “downgraded shares of Tyson from ‘buy’ to ‘sell’ and slashed his valuation of the company shares” in the wake of the filing of the lawsuit, Tyson issued a statement dismissing his speculations on the same day.  Nonetheless, “its stock fell about 9 percent that day.”  Since his note, the “company’s stock is down 12 percent.”

 

  • Finally, there is the judgment of University of Wisconsin law professor Peter Carstensen, who notes that: “Getting detailed information is a particularly useful form of collusion . . . because it allows conspirators to make sure they’re all following through on the agreement.” Having this kind of information generates trust that firms are not cheating.

An article worth reading in its entirety.

May you have a good week!

Bruce

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