Friday, December 20, 2013

An Antipopulist at!

We were a bit rough on's opinion pages in our last post, but they are back on the right track with with Clive Crook's latest piece
"But modern voters are offended by too much populism. As they should be, because it insults their intelligence." 

Tuesday, December 17, 2013

The Government Subsidy Fallacy - McDonald's Edition

Can you believe the government subsidizes McDonaldsWal-Mart and the Big Bad Banks?

The Bloomberg opinion pages are filled with this nonsense and we’d like to cut through the click-beckoning populist outrage to present the issue fully and logically.

The Bloomberg thesis is that government policies are providing scandalous subsidies to unpopular businesses.  Bloomberg kicked off this movement by noting that subsidies for the Big Bad Banks are vaguely estimated, yet reported as fact, at $83 billion a year.  The takedown of this fallacy has already been provided, and the fact that Bloomberg wrote no fewer than three editorials and two blog posts to defend their stance speaks volumes about its credibility. 

Bloomberg newcomer Barry Ritholtz is the most recent columnist to get drunk on the Bloomberg subsidy Kool-Aid, extending it to McDonalds’s and Wal-Mart, calling them “America’s biggest welfare queens.”  His logic is as follows:  Wages at McD’s are low, and a large percentage of their employees qualify for public welfare programs so it's McD's fault these individuals require public assistance.  When the government steps in with welfare assistance - voila - a “government subsidy” for McD's is created.  The solution?  Raise the minimum wage by 56%.

Let’s unpack this faulty logic, starting with the definition of a subsidy.

Merriam-Webster defines subsidy as “money that is paid usually by a government to keep the price of a product or service low or to help a business or organization to continue to function.”  The government does not pay McD’s, and in fact, the cash flow is reversed as McD’s pays the government 35% of it's taxable income.  Claiming McD’s is the beneficiary of a government subsidy is just fraudulent.

Secondly, McD’s does not force people to work for the minimum wage.  Last we checked we still live in a capitalist society where the market forces of supply and demand determine wages (floored at the minimum wage set by Congress).  Low skill, low experience workers are provided employment at a wage set by the market for low skill, low experience labor.  In fact, if you want to play the subsidy game, you could make a strong argument that anyone paying minimum wage for skills worth less than $7.25 an hour is subsidizing the taxpayer. 

The unspoken assertion is that it’s corporate America’s responsibility to provide all its workers with a living standard equal to the living standards provided for by public welfare programs, regardless of the real market value of that workers labor.  If that is your argument, make it.  Don’t hide behind the populist curtain of “government subsidies” for easy targets like McD's, Wal-Mart and Big Bad Banks.  

Let’s assume for a minute that we agreed with that unspoken assumption (we don’t), and the minimum wage should be set high enough that an employee earning it had no need for public welfare programs.  Yea, happy days, right?  Wrong. 

Let’s peel back the populist rhetoric one layer and think logically about the consequences of a significant rise in the minimum wage.

McD’s is not an employment program, it’s a business.  As distasteful as this might be to some people, a corporation exists to make money for its shareholders.  A rational entity will respond to a mandated increase in the minimum wage, and the impact on its cost base, by either reducing the number of employees or increasing prices to offset the rise in costs.  To suggest otherwise - a popular, if misguided, trend in today’s opinion pages - flies in the face of logic.  

“But corporate profits are at an all-time high!!!”  Perhaps, but margins remain tight, particularly in highly competitive industries like fast food and discount retail.  For example, Wal-Mart's margins are a paltry 5.93%, compared to Apple's margins of 37%.  When the costs of inputs rise, to continue to remain profitable, prices must rise in tandem.

To Ritholtz credit, he accepts this reality in his final sentence – “Raising the minimum wage … effectively shifts the cost of eating greasy French fries and overcooked burgers from taxpayers to fast food consumers -- where they belong.”  

Now we’re getting somewhere…but we're afraid it’s a cul-de-sac.

Ritholtz's solution is to shift the costs of welfare programs from the taxpayer to McD’s through a higher minimum wage.  However, Ritholtz concedes that McD’s will act rationally and just shift the costs back to its customers, who by the way, are also taxpayers.  In fact, it’s circular in the worst possible way.  It transfers this phantom subsidy from the backs of the wealthiest 53% of the population (i.e. those that pay income taxes) to the backs of the population who frequent McD’s (or Wal-Mart, or any other target du jour).  So, the same taxpayers who are supposedly benefiting from the higher minimum wage will give that benefit right back by paying higher prices for goods and services.  Add in the devastating side effects of lower employment, particularly among younger workers, and it's clear that any benefits from a significant increase in the minimum wage do not outweight the costs.  

Friday, October 18, 2013

Fantasy Football + Congress = Compromise

The two hobbies taking up most of our free time these days are keeping up with 1) the political dysfunction in Washington and 2) our fantasy football teams.  

The confluence of the two sparked an idea.

What if we applied the best part fantasy football to help solve the gridlock and lack of compromise in Washington.  What if we held Fantasy Congress drafts? 

Sound ridiculous?  Well, at first glance it might be, but hear us out… 

There are many ways our Fantasy Congress drafts could be organized, but here’s our step by step instructions on how we would implement the Fantasy Congress drafts:

Step 1:  Legislation is written as it is today.  Any legislation that can gain sponsorship from a certain percentage of the members (say 5-10%?) is automatically put to the floor for debate and a vote – i.e. no Hastert Rule.  If it cannot be passed with a 66% supermajority, the bill enters the Fantasy Congress phase. 

Step 2:  The legislation is sent to its respective committee and that bipartisan committee is charged with identifying the contentious items in the legislation, and providing alternative views.  For example, in the Affordable Care Act, one of the contentious items was, and remains, the medical device tax.  Using this example, the committee might develop three alternatives:  1) keep it, 2) remove it, 3) modify as a tax on profits rather than revenue.

Step 3: The contentious items and their alternatives are provided to the members, who then caucus within their own parties to prioritize which issues it deems most important.  After a reasonable timeframe, the Fantasy Congress draft is scheduled, and television rights auctioned to the highest bidder – think Wednesday Night Fantasy Congress Draft, live on CBS! 

Step 4: Hold a Fantasy Congress draft to decide which alternatives make it into the final bill.  The draft will work with the following rules:

  1. The number of picks and the draft order is determined by chamber representation, with the majority party drafting first and all other parties drafting in order of representation until their picks are exhausted.  For example, let’s assume the Senate is made up of 60 Democrats, 30 Republicans and 10 independents.  If the Fantasy Congress draft had 10 issues, the Democrats get six picks, and first draft position, Republicans get three pick, and second draft position and Independents get one pick, and third draft position.  The order would therefore be: D, R, I, D, R, D, R, D, D, D. 
  2. Each party leader, in the order determined above, selects a single alternative to be included (or excluded if removing the clause is an alternative) in the final bill.  
Step 5: The final bill is drafted in committee according to the results of the draft.

Step 6: The final bill is sent back to the floor for an up or down vote.  A bill is passed with a straight majority vote.  If a vote fails, it’s back to the drawing board.    

With this process, everybody gets something they like and everyone is forced to live with something they dislike.  The majority party can’t steamroll the minority party (Obamacare) and a fringe minority can’t frustrate the majority with filibusters or irrational demands (debt ceiling).  This would maintain the representative democracy that we cherish while also serving as an efficient governing mechanism. 

Not as crazy as it sounds, is it?   

Wednesday, October 2, 2013

We Blame Primary Elections

Now that the non-essential portions of government are officially shutdown, every pundit is contractually obligated to apportion blame.  As expected, all liberal pundits blame John Boehner, all conservatives blame both President Obama and Harry Reid, and all other "independent" outlets blame everyone. 

We know the real culprit.

Primary elections.

We've discussed this before, but primaries promote extremism and punish moderates.  There is not a single Republican worried about their next general election, but they are very worried about proving their right wing bona fides in order to garner votes from primary voters. 

Throw out the primary system, permit all candidates, regardless of party, to participate in an open primary election and bring the top three back for the general election. 

This will fix Washington.

Monday, September 30, 2013

An Alternative GOP Strategy

We have a better continuing resolution/debt ceiling strategy for House Republicans:

Pass a bill with two features:

1) Pass a budget and increase the debt ceiling.  In fact, as a gesture of goodwill, increase it more than required so to avoid possibility of another faux-default crisis in the short term. 

2) Require a full and clean implementation of the Affordable Care Act, as written and passed in 2010. The legislation would rescind all waivers and delays provided to businesses, Congress and others by the White House.   

Democrats get the debt ceiling increase they want, and with it, Obamacare in all its glory. 

Republicans avoid a government shutdown, and force Democrats to live with their flawed bill.  It’s a harsh strategy, but it is likely to force the President to reconsider his anti-negotiation stance.  The President and Democrats in Congress would be forced to either double down on a flawed law, or cast a vote of no confidence on their signature piece of legislation.

Democrats voted for Obamacare, and refuse to consider a repeal or delay.  If it’s Obamcare that they want, it’s Obamacare that they'll get. 

There would be no credible way to blame the Republicans for a government shut down if Democrats were unwilling to accept the full impact of their own legislation.     

I’m constantly reminding my children that their decisions have consequences; perhaps Democrats need the same lecture.  

Saturday, September 7, 2013

Syria: There Are No Half-Measures

Full disclaimer:  We have no business commenting on complex foreign policy matters; it could not be further from our core competence or experience.  That said, we have a tidy solution that's not been discussed in the mainstream.

The prevailing wisdom is that we should either 1) drop a few bombs on a few obvious targets or 2) continue to lecture Assad, "in the strongest way possible" until he’s just too tired of hearing our voice.  Two terrible options that achieve nothing.

The first would be a risky and expensive dog and pony show.  Sure, CNN will show all the bombs exploding and the anti-aircraft gun shooting into the sky, President Obama can come on TV from the Oval Office and puff out his chest, but it’s ultimately a futile exercise.  After all, we've already told Assad what’s going to happen, at some point, maybe.  Any evil mastermind worth the title has already sheltered anything of value in the basements of of Syria’s housing complexes, schools or religious buildings knowing that we wouldn't dare drop bombs anywhere near those sites.

Continuing to use strong language urging Assad to stop is just as bad, if not worse.  It emboldens Assad and others to misbehave knowing that they will get stern lecture, but nothing more.  It’s like asking a kid to go to sleep after a visit to Dairy Queen.  Without proving that you will follow through with serious consequences, there are no words that will make them go to sleep.  Maybe we should take away Assad’s iPad?

So what’s the solution?

Jack Bauer.

OK, in reality it wouldn't be a 5’6” CTU agent with a famous dad, but why can’t we assemble the top SEAL’s and CIA operatives and pull Assad and his lieutenants out of bed and straight to Guantanamo?  What would be a better deterrent to future evil masterminds than pictures of Assad in his florescent orange jumpsuit, nibbling on a cracker in a 5 x 5 cell in a US military base in Cuba?

Perhaps we've watched too many episodes of 24, or installments of the Bourne movies, but isn't this why we have SEALs and the CIA?  If our military and intelligence departments are worth the billions we spend on them every year, shouldn’t we be able to get this done?

It’s risky, no doubt, but if Obama pulled this off he’d be a legend.  He and our bravest soldiers would have saved the lives of countless Syrian’s by taking decisive action, all without dropping a single bomb (although we'd probably need to take out some radar installations, etc).  Sure it would involve “boots on the ground”, but not an army, and for hopefully for only a few hours.

We know this is fantasy - not because we don’t have the troops and intelligence to pull it off, but because we don’t have the political courage to authorize it.  There is no way Obama’s political advisers would sign off on the Jack Bauer plan.  The optics of a failed extraction and a handful of captured or dead soldiers would be too risky for the President.  It would be much safer, politically, to authorize some indiscriminate bomb dropping, or blame Congress for doing nothing at all. If we’re serious about helping the Syrian’s, and we should be, it will require courage and resolve.  There are no half-measures.

Wednesday, August 28, 2013

The Problem with Leverage Ratio Requirements

Nothing panders to the masses better than apocalyptic prophecies that banks are on the verge of kick-starting another global financial crisis. 

Anat R. Admati, a career professor of finance and economics at the Stanford Graduate School of Business, and co-author of “The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It” is at it again in the New York Times suggesting that “we’re all still hostages to the big banks.”

No.  We’re not.

The opening paragraph suggests that banks have “blocked essential reforms at every turn” and that “our leaders have caved in.”  The facts suggest otherwise.  Sure, the banking industry, just like all industries, lobbies rule makers to ensure that new proposals achieve the intended goal without negative unintended consequences.  But to suggest that banks have somehow skirted new rules is comical. 

In fact, the Dodd-Frank legislation alone adds over 400 new rules that all financial entities must follow.  185 of those rules have been written to date, totaling over 5,300 pages.  It has been estimated that these 185 rules will cost the private sector more than 24 million man hours each year to comply.  24 million man hours equates to roughly 12,000 full time employees, and given the complexity of the rules, many will need to be highly paid lawyers, accountants, consultants and IT resources.  Assuming a conservative $100,000/yr annual cost (compensation, benefits, office space, etc.) of these additional employees, the 185 new rules alone could sap well over $1 billion a year from the capital bases of the financial industry in direct costs, and multiples of that in opportunity cost.  Extrapolate that out to 400 rules and we’re north of $2.5 billion per year. 

This doesn’t sound like “banking lobbyists have blocked essential reforms at every turn.”

After this whopper of misdirection, the article starts on the predicable trope of suggesting magical regulatory reforms that will save the world from the big, bad banks.  The reform du jour is punitive leverage ratio requirements.  A leverage ratio is simply total equity divided by total assets. 

We’re provided with scary sounding facts like "JPMorgan Chase’s $2.2 trillion in debt represented some 91 percent of its $2.4 trillion in assets” and “healthy corporations rarely carry debts totaling more than 70 percent of their assets” and “the six largest American banks collectively owe about $8.7 trillion.”  

Based on these scary sounding facts, Admati notes that “nothing suggests that banks couldn’t do what they do if they financed, for example, 30 percent of their assets with equity (unborrowed funds) – a level considered perfectly normal, or even low, for healthy corporations.”

We beg to differ. 

The biggest flaw in this solution is that simple leverage ratios (the percentages quoted by Admati) reveal almost nothing useful to assess the risk inherent in an institution.  A bank with $1 billion in equity and $10 billion in assets can achieve the same simple leverage ratio regardless whether those assets are the nothing but the safest US Treasury Bonds or all risky subprime mortgages.  To ignore the riskiness of the assets is nonsensical and renders a simple leverage ratio ineffective in assessing the danger a bank poses to the financial system.

Let's assume it’s possible to convert large portions of the banks debt financing into equity financing.  To meet a 30 percent leverage ratio requirement, the six largest banks alone would need to raise $2.3 trillion of equity capital.  This is roughly equal to 25% of the total market capitalization of the S&P 500, and roughly the size of 150 Facebook IPOs. 

Where is this money coming from?

Could the big banks raise enough equity financing to meet a 30 percent leverage requirement?  Doubtful, but even if they could we need to understand the consequences of this requirement.  Is the “safety” of meeting a draconian leverage ratio requirement worth the costs?  No.

Investors demand a higher rate of return on equity financing (owning a piece of the entity and a claim on future earnings) than they do for debt financing (contractual right to future payments), and rightfully so.  In a world where leverage ratios need to increase by a factor of six, margins must also increase proportionally to maintain shareholder value and remain competitive against investments in other industries.  How can a bank increase its equity base while also maintaining its return on equity? 

Higher margins. 

How can banks increase margins?  They can 1) reduce expenses, mostly by avoiding loan losses –best accomplished by restricting lending to the only the most creditworthy individuals and businesses and/or 2) increase revenues by charging more for services and credit. 

Remember fees on checking accounts?  Fees to use an ATM?  14% mortgage rates?  20% down payment minimums and other strict qualification criteria? 

Given that the health of our banking system is consistently underestimated, and our faith in government regulatory bodies is consistently overestimated, we posit that taxpayers would be hurt more by increased fees, elevated interest rates and decreased credit availability then they would be by the possibility of a repeat financial crisis caused by overleveraged banks.

Once again, half-baked op-ed’s continue to misinform readers by providing populist opinions that fail to consider the real life consequences (often unintended and counterproductive) of such opinions.  

Wednesday, June 12, 2013

Clear-Eyed Facts on School Shootings

Editors Note:  The following was written in the aftermath of the Newtown shootings.  We didn't post this right away as we wanted to ensure we had clear eyes ourselves.  In the meantime, our real, non-blogging life got in the way.  We post this now as we feel it's an important, albiet slightly out-dated, opinion to share.    

If you want to see the results of mass hysteria resulting from a horrible tragedy and fueled by the media and politicians, look no further than a PTA meeting when school security is on the agenda. 

We recently sat through such a meeting and were amazed by how much fear has engulfed parents in the wake of Newtown.  The fear is understandable and can be justified in the abstract – our job is to protect our children, and they spend as much time at school as anywhere else, so school security is paramount.  But at what price?

The two extreme approaches to school security could be:
  1. Using existing safety and security budgets, maintain and steadily improve a schools current safety and security standards.  School security is not a new issue and has been an area of focus in all schools since Columbine in 1999 (and probably long before that).  
  2. Spare no expense and install the latest and greatest in modern security turning each school into a highly controlled and monitored area no different than a minimum security prison.  No bars on the windows, but locks on all doors, gated roadways, Mexican border-style fencing around the entire property, identification and key cards for all students, faculty and parents, security cameras covering every last inch of school property, facial and license plate recognition software, and of course an armed ex-Marine at each entrance.      
After events like Newtown, our media and political forces have created a supercharged movement towards the prison-school extreme by spending enormous amounts of time and effort pointing fingers and proposing “solutions” to avoid another tragedy.  The NRA even suggested that every school have an armed guard at the front door.

We can’t blame any parent for wanting to protect their children at all costs, but we need to understand the real threat and deploy our limited recourses to accordingly.  For older schools not built with the modern day security measures in place, upgrading to the latest and greatest security systems could cost millions of dollars...per school.  That’s a lot of money being diverted away from educating our children to "protecting" our children.  It's not just a monetary cost either, there is a very real and expensive cultural cost to implementing invasive security measures on school campuses.  Do you feel more or less comfortable when you arrive at Grand Central Terminal and see 25 FBI agents in camoflage flack jackets holding assult rifles? 

What’s missing in the public debate is a true reflection of the risk and incident rates for school shootings.  One school shooting is too many, and Newtown and Columbine were unspeakable tragedies, however, such tragedies are rare.  Incredibly rare. 

Another missing piece to the discussion is whether the hundreds of billions required to update security at our schools would even reduce the likelihood of these rare events recurring.  Newtown had a locked front door and a buzzer and intercom system in place.  Columbine had an armed security guard on campus.     

Our schools need to be safe, and many will require additional measures to protect our children.  All we ask is that the security debates, and the ultimate solutions and expenditures, are informed with clear-eyed facts and not inappropriately swayed by the understandable emotional haze produced by a recent and horrific tragedy. 
To help clear our eyes, let’s look at some facts pulled from some quick research on K-12 school shootings in the US since, and including, Columbine in 1999 – a span of almost 14 years:
  • 35 – Total number of school shooting events
  • 63 – Total number of student deaths (another 22 adults were also killed)
  • 26 – Total number of elementary school students killed 
  • 3 – Total number of middle school students killed
  • 34 – Total number of high school students killed
  • 130,000 – Number of K-12 schools, public and private, in the US
  • 180 – Average number of school days in a single year
  • 327,600,000 – Total number of school days since Columbine (130,000 schools x 180 school days per year x 14years)
  • 327,599,965 – Total number of school days where no students were killed by a gun
  • 0.0000001% - Historical probability of a school shooting at your school on any given school day over a 14 year period
  • 0.0000000005% - Historic probability of a single student being killed by a gun on any given school day over a 14 year period
  • 0.000000005% – Mathematical chance that a single Mega Millions lottery ticket wins the jackpot. 
Therefore, statistically speaking, if you buy a Mega Millions ticket on every day you send your child to school, you are 10 times more likely to hit the cash jackpot than to have your child killed by a gun at school.  In fact, you should be much more worried about your child playing on the playground, driving in a car, swimming, or drinking something they shouldn't.  A couple more facts: 
  • Between 1990 and 2000 (a period four years shorter than our study above), 147 children ages 14 and younger died from playground-related injuries.  Said another way, for every student killed by a gunman at school, 3.25 students were killed by a playground.     
  • In 2010 alone, 890 children ages 5-14 were killed in car accidents, 251 drown and 54 died from poisoning.  Each of these single year totals are significantly higher than our studies 14-year totals.  Said another way, for every student killed by a gunman at school, almost 200 died in a car crash, 55 drown, and 12 died from poison.     
School shootings, while incredibly tragic and highly publicized, are incredibly rare.

Should we do everything in our power to prevent tragedy?  Of course.  Should we be spending millions of dollars per school, and hundreds of billions nationwide in an attempt to prevent a tragedy that’s happened on 35 of the last 327,600,000 school days?  Even if we should, would these expensive and invasive measures even stop these tragedies from occurring?  One more interesting fact to consider when thinking about the miniscule numbers above: 
  • 32 – Total number of K-12 students killed by a non-student (i.e. someone who does not attend the school), 25 of which occurred in two events (Newtown and West Nickel Mines Amish School)
Therefore, absent metal detectors and Homeland Security type pat-downs for each student, most of these tragedies would not have been stopped by even the most sophisticated security measures as it was a student shooting the gun.   As for the handful of other incidents, could they have been stopped by not allowing a stranger on campus?  Perhaps, but Newtown had better than average security procedures in place, including a locked front door with intercom and buzzer capabilities.  Would an armed guard have reacted in the split second required to stop the shooter, or would we just have one more fatality to list in our study?  

Let’s consider some less violent, but equally disturbing, statistics:
  • Of all 4th graders in the US, 33% scored “below basic” on the 2009 National Assessment of Education Progress Reading Test.
  • On that same test, 26% of eighth graders and 27% of twelfth graders scored below the “basic” level, and only 32% and 38%, respectively, are at or above grade level. 
  • Our 15-year-olds placed 25th out of 30 countries in math performance and 21st in science performance. 
Can we afford to divert our limited resources from educating our children to trying to "protect" our children?  Do we want to deploy resources that help the 38% of seniors who can’t read at or above their grade level, or do we want to deploy resources in an attempt to reduce the percentage of school days with a student shooting fatality from 0.0000001% to 0.00000005%?

The choice is ours, let’s have clear-eyed facts, not heavy hearts, lead the way.  

Tuesday, June 11, 2013

Defending the NSA

The outrage over the collection of Verizon client data by the National Security Agency is dangerously misplaced. 
In the abstract, it’s reasonable that this activity gives American’s an uneasy feeling.  Nobody should accept government programs that track our every move and listen to our private conversations without probable cause and a warrant. 
Luckily, that’s not happening (at least not that we’re aware of - who knows with this administration). 
The NSA has conceded that it has a huge database with billions of phone call records (only numbers and the duration of calls) and a computer program that sifts through this information looking for very specific patterns or relationships.
This is not a policing or “Big Brother” activity; this is a national security activity with the sole purpose of saving American lives.  The NSA is not worried about building admissible evidence to convict the local pot dealer or even nab a big time white collar criminal; they are focused on preventing the next terrorist attack.  We agree with President Obama when he said "In the abstract, you can complain about Big Brother . . . but when you actually look at the details, I think we've struck the right balance."
In the real world, we have to make real choices, and simple questions should settle this debate.
Is your right to keep your phone records between you and your phone provider more important than our ability to prevent terrorist attacks?  What if this type of intelligence could have prevented  9/11?  How would you explain to a 6 year old who just lost her parents in a terrorist attack that your desire to keep your phone records private was more important than protecting her parents?  Are your pious views regarding the balance between liberty and security more important than the lives of her parents?         
Remember, we’re just talking about phone records – a bunch of numbers on a sheet.  We’re not talking about listening in on conversations or advocating for increased security and surveillance.  We absolutely need constraints on the government’s power, and from what we know, those constraints have held firm.  This program has a very narrow objective – stop terrorist attacks.  If you’re not planning terrorist attack, then you should have absolutely no fear that the government cares about your phone calls.  They don’t.  99.999999% of the time, a phone number will get logged and never get a second glance.   Do we really think the NSA and its relatively light budget has the time, manpower, or desire to listen in to Joe Public’s phone call to his mom?
Spare us the “slippery slope” arguments.  They’re lazy, irrational and unproductive. 
Until such a time that an individual can prove that their life, liberty and pursuit of happiness has been unreasonably limited because their phone number shows up alongside of billions of other NSA data points, we support the NSA’s efforts.   
The IRS scandal and even the AP/Fox News scandal are much worse, both in their chilling effects on liberty, and on their potential illegality.  As far as we’re aware, the NSA has followed every legal construct and has obtained these records in accordance with the law of the land.  One can argue that the law should be different, but based on the above we would disagree.  Knee-jerk responses to the NSA’s necessary efforts to keep us safe is nothing more than populist theatre and ultimately damages our national security. 

Wednesday, February 13, 2013

New Math: B minus C+ = $1.3 million!?!?

It’s not often that our alma mater makes national headlines, but Lehigh University was back in the news today, not because they beat Duke in the NCAA Tournament again, but because a fellow graduate has sued our fine institution for $1.3 million.

Lehigh’s crime is allegedly having the audacity to give Megan Thode a C+ in a counseling and human services fieldwork class when she needed a B.  How dare Lehigh expect its students to meet rigorous academic standards!

Under this premise, should be sunbathing on their own Lehigh-funded island in the Caribbean…

Not only did we receive an “unfair” grade or two (…or ten) in our day, but Lehigh took away our dream of becoming a major league baseball player.  After a respectable freshmen season, Lehigh ignored our potential and cut us from the baseball team.  Lehigh's action made it all but impossible for us to pursue our desired occupation as second baseman for the Chicago Cubs.  In 2012, the average major league second basemen made $3.2 million per year.  Had Lehigh not cut us, we would have continued our baseball career all the way to the major leagues, playing for 8-12 years, plus lucrative coaching and broadcasting opportunities after our playing days were over.  We’re getting lawyered up as we speak, but we think we’re owed at least 20 million bucks.

Damn you Lehigh!!

Seriously, Ms. Thode is a surefire contender for 2013’s most ridiculous lawsuits list.  Add this to the never-ending, and far-to-often frivolous, patent, copyright, medical malpractice and discrimination lawsuits, and it’s clear that our legal system is broken.  Not only do these lawsuits overwhelm our courts and judges, they are killing our economy by siphoning billions out of our pockets through higher prices (legal costs passed along to customers) and reduced productivity (spending time and money on legal proceedings rather than research and development).

Luckily, we have a very simple and elegant solution.  In fact, it’s a tried and tested solution that just about every other legal jurisdiction in the world already has in place.

Loser pays.

Here’s our proposed legislation – the “Fix Our Legal System in One Sentence Act”:

“In criminal or civil legal proceedings, any Defendant who is not convicted of a crime or is not found liable for monetary damages, shall be reimbursed for all reasonable legal costs incurred to defend themselves by the Plaintiff.”

Done.  In one simple sentence, it’s estimated that each American family would benefit to the tune of $3,500 per year.  No new taxes, no increased regulation, no deficit spending required.

For a detailed illustration of these costs, a survey of 36 Fortune 200 companies administered by Northwestern Law School shows that those 36 companies spent over $4 billion in 2008 on litigation costs. This $4 billion is just the cost of litigation – it does not include any settlements or damages awards. Extrapolate this out to the entire Fortune 200 and that’s over $20 billion in litigation costs funneled away from research and development and into lawyers pockets.  Some of these costs will be legitimate legal expenses incurred during the normal course of business, but too much of it will be spent fighting frivolous lawsuits.

How many of these frivolous lawsuits would be avoided if the Plaintiff faced the possibility of paying a significant penalty if they lost (i.e. the Defendants legal costs), and their lawyers faced the possibility of not collecting their fees?  Most, if not all.

But won’t this scare away Plaintiffs who have a legitimate legal gripe?  No.  This proposal does not take away anyone’s right to sue.  If you have a strong case, you shouldn’t be concerned about losing and can expect to settle or win outright on the merits of their case.  Similarly, no lawyer would turn down a pro-bono case that was virtually certain to result in a windfall of fees.

Loser pays takes away the lottery ticket mentality of the legal system as we know it, and it’s about time.  What are the chances that Ms. Thode sues Lehigh University if she’d have to pay their legal bills when her case is thrown out?  Nil.  And that’s the way it should be.  Lehigh should be spending its money on need-based scholarship to eager and accomplished students, not on defending itself from immature and entitled freeloaders.

Friday, February 8, 2013

The NCAA Has Issues, But It's Not Amateurism

Who’s more valuable - the performer, or the owner of the stage on which the performer performs? 

It’s an age old question, but has been at the forefront of the sports world after the recent NBA and NHL lockouts.  It’s also the underlying issue in the professional commentariats ongoing outrage towards the NCAA it's principle of amateurism.  The NCAA doesn’t pay its athletes but makes billions from their efforts.  Isn’t that just terrible?

No, not really.

Did Andrew Luck and Derrick Rose generate megabucks for their respective schools and the NCAA?  Absolutely.  Did Andrew Luck and Derrick Rose get a cut of that revenue during their combined four years “working” for the NCAA and their schools?  Other than free education, no.  Did Andrew Luck and Derrick Rose benefit financially because of their involvement in NCAA events?  Immensely.  

Let’s not cry for Andrew or Derrick, or any other NCAA superstar (the case for paying college athletes can only be made for the elite basketball or football players at a handful of schools – there is no justification for paying a baseball player, a cross-country runner or a field hockey player). 

First and foremost, these superstars, and thousands of non-superstars across all NCAA sports, are compensated for their efforts by receiving a free college education.  What they choose to do with that opportunity is irrelevant - it’s an opportunity nonetheless.  Against the backdrop of the billions being made by the NCAA and big time athletic programs, a scholarship may seem inconsequential, but for the vast majority of NCAA athletes, this represents a huge benefit, and a benefit commensurate with the effort and revenue produced (if any).  

The cost to attend Stanford - all covered by a full scholarship - is almost $60,000 per year.  Therefore, a 19 or 20 year old athlete with a full ride to Stanford is “making” almost $60,000 a year in exchange for their athletic talents.  Sure, it’s paid-in-kind with credits toward a college degree, but it’s still $60,000 less than what their classmate, who is not a star athlete, has to pay (or borrow) for those same credits.  It’s bothersome when some people disregard this fact when complaining about the lack of compensation for NCAA athletes.  What did you make when you were 19?  
Secondly, and much more importantly, these star athletes are given a huge stage from which to advertise their value to future employers.  It’s no different than an intern at a production company, music studio or bank, except that those interns would never make anywhere close to $60,000 per year. They are happy to work for free because they benefit by making themselves more marketable to paying employers.  NCAA athletes should feel the same way.    

Without the exposure generated by starting for Stanford for three years, does anyone think Andrew Luck would have been picked first in the NFL draft, reaping the rewards that come along with that selection – $22 million over four years?  

Without electrifying performances on the huge stage that is the Final Four, does anyone think that a few months after his freshman year Derrick Rose would be the first pick in the NBA draft and would sign a $10 million two-year contract?   

For the sake of argument, let’s assume Rose was allowed to enter the NBA straight out of high school.  Let’s also assume that his amazing year at Memphis and electrifying run to the National Championship game only increase his draft slot 5 spots (Rose was considered the 5th best prospect in the country his senior year at Simone High School in Chicago).  The 5th pick in that draft, Kevin Love, signed a two-year $6.5 million contract.  Essentially, the NCAA, and the exposure it provided Rose, made him $3.5 million dollars richer.  Even if we think he might have been the #2 pick straight out of high school, he still "earned" $1.1 million dollars by playing just a single season for the University of Memphis (the #2 pick, Michael Beasley, signed a two-year $8.9 million contract).

The same logic works all the way down the talent chain, and we would argue that the biggest beneficiaries are actually those who's college careers open the door for a professional contract.  A minimum salary in the NFL or NBA is 10-20 times larger than the starting salary of an average college graduate.  

Amateurism in the NCAA isn't going away, and it shouldn't.  In addition to the principled points above, the practical (who gets paid, how much, and where does it come from) and legal (Title IX) issues make any discussion around paying athletes a waste of time.    

The NCAA is dysfunctional, no doubt, particularly their draconian efforts to enforce amateurism, but this dysfunction is a result of incompetence and arrogance, not the principle of amateurism.

Tuesday, February 5, 2013

A Scene from the Oval Office


Act II, Scene III


THE PRESIDENT welcomes POLITICAL OPERATIVE and they take a seat on a couch.

POLITICAL OPERATIVE:  Mr. President – what if I told you I had a fool proof way of losing fewer independent votes than expected?

THE PRESIDENT:  I’m listening.

POLITICAL OPERATIVE:  We crushed this demographic in 2008 because you were a rock star...that star has faded and we’re going to lose some of those votes.  The key is limiting those losses. 

THE PRESIDENT:  Star has faded?  Really?  

THE PRESIDENT grabs and opens a White House micro brew off the coffee table and gestures to the POLITICAL OPERATIVE offering him one, the POLITICAL OPERATIVE shakes his head and continues.

POLITICAL OPERATIVE:  Yes, and yes.  The truth will set you free, Mr. President.  Current circumstances make it difficult for us to brighten your star, so in order to keep the equation in our favor, we need to dim the Republican star.  You know, cut down their legs to make us look taller?

THE PRESIDENT:  Uh…OK, but how do we do that?

POLITICAL OPERATIVE:  A Republican “War on Women.”

THE PRESIDENT:  A "War on Iran" or a "War on Immigrants"...maybe, but a "War on Women"?  Why would they wage war on half the electorate!

POLITICAL OPERATIVE:  They would never voluntarily start a "War on Women" - so we have to create the illusion that they have.  If you’re an independent voter, what’s the one thing that makes you most concerned with voting for a Republican?
THE PRESIDENT stands up and walks over to the window, and gazes into the dark night, beer in hand.

THE PRESIDENT:  Other than having to lie at cocktail parties?  

POLITICAL OPERATIVE:  Exactly, the root of that shame is voting for someone with out-dated social beliefs.  Scores of independents are fiscally conservative and have a big problem with our progressive economic policies, but they are not registered as Republicans because they are allergic to the highly religious and uber-conservative social views of the Republican Party. 

THE PRESIDENT:  Me too...remember that one time when Boehner was...

POLITICAL OPERATIVE:  I'm sorry Mr. President, but the taxpayers are on the clock and I'm very expensive.  The question is how do we best exploit that tension?

THE PRESIDENT:  Yes, sorry, that is most certainly the question.

POLITICAL OPERATIVE:  The answer is a two prong attack.  First, we pick a fight with religion, specifically the Catholic Church, by issuing a seemingly banal requirement out of HHS that all insurance policies must cover items like birth control pills, abortions, the day after pill - all for free.

THE PRESIDENT:  But doesn't everyone like free stuff?

POLITICAL OPERATIVE:  Yes, but the Church and the far right will object to paying for things that for which they have moral objections.  They will say it’s an attack on their religious freedom.  Fox News will be apoplectic about our "over-reaching attack on religious freedom."  All of this will play right into our hands.  We let the fervor reach a boil and then characterize their objection as a “War on Women.”  It will have no basis in reality, but will sell like hotcakes to the public, particularly those independents who are already weary of the Republican social agenda.   We get women’s groups to shout “How dare a group of old white guys try and control my body!”  It will be beautiful.

THE PRESIDENT:  But I need the Catholic vote, I can’t alienate them!

POLITICAL OPERATIVE:  If the heat gets too hot, you can offer Cardinal Dolan some meaningless compromise that puts the Catholic Church back in line, yet only serves to stoke the fire on the far right.  It’s a win/win.  Then once you’re re-elected, you can just pull back the HHS ruling or provide a blanket exception to not-for-profits.  No harm, no foul.

THE PRESIDENT:  You’re a genius, an evil, evil genius. 

POLITICAL OPERATIVE:  That’s not all, the second prong of the attack is to get our media allies to ask questions about abortion ad nauseam with every far right candidate from the middle America.

THE PRESIDENT:  But hasn’t this been settled law for decades?

POLITICAL OPERATIVE:  Yes, but that won't stop Republicans from talking nonsense on the issue.  With the proper monitoring, we’re sure to find one or two candidates going off script and saying something incredibly stupid.  We can then use those comments as more evidence of the Republican “War on Women” - adding more shame to any independent thinking about voting Republican. 

THE PRESIDENT:  Wow.  I'm impressed.  Done and done.  
THE PRESIDENT stands up and walks over to his phone and dials a number.

THE PRESIDENT:  I'm sending over a friend, do what he says and write him a blank check.  

Tuesday, January 15, 2013

Open Letter to House Republicans

Dear House Republicans –

You need to pass a comprehensive budget and debt ceiling increase ASAP.

Stay in Washington and work seven days a week until a budget and long term debt ceiling resolution is passed.  Disprove your reputation as a bunch of right-wing ideologues and show American that you can step up and make the hard decisions that the White House and Senate have failed to make for years.  In other words, stop the posturing and govern.     

Sitting on your hands while also lamenting how irresponsible it is for the Senate to have not passed a budget in more than 4 years is weak and hypocritical.  Take the lead and put the ball in the hands of the Senate and President.

Take Paul Ryan’s budget that you’ve previously passed, amend it so that it further reduces the deficit through significant spending cuts and slight increases in tax revenue (proving your serious and show compromise), and pass it.  Any budget must significantly reduce deficit growth in order to normalize the debt to GDP ratio to a reasonable percentage (and be scored as doing so by the CBO).  Sell it as the balanced approach that the President wants and call his bluff.

The slight increase in tax revenues should come from tax reform, not further increases in marginal tax rates.  Reforms should reduce complexity in the code and must eliminate the carried interest loophole and reform credits and deductions (get rid of some, limit others in the aggregate).  Corporate taxes should be similarly reformed by eliminating or limiting special credits and deductions in conjunction with lowering our internationally uncompetitive rates.  The rate should be lowered to an amount that significantly offsets any gain in revenue so that the reform is ultimately deficit reductive.  These reforms may not generate huge amounts of additional revenue, but they will deflect any “fair share” and “balance” rhetoric from the Democrats – rhetoric that has proven very successful over the past two years.

The bulk of the deficit reduction could come from rationalizing federal government spending.  Once and for all, cut government programs that are redundant and ineffectual and freeze all other spending at 2012 levels (including defense, entitlements, and other domestic programs).

You will be labeled as slashing funding for teachers, firefighters, policemen, Medicare, Medicaid, the poor, children, Santa Clause and the Easter Bunny, but a clear explanation by Paul Ryan in a press conference should highlight that all programs will continue to be funded at the historically large 2012 levels.  Anytime you’re challenged about cutting programs, there is a simple answer:  “Every dollar that was spent on these programs in 2012 will be spent again in 2013 and 2014.  We are not cutting programs, we’re simply asking them to live within their means until our fiscal situation is stabilized, just like every household in America is forced to do.”   This is a very important fact that gets lost in the public debate on budgets, but if everyone sings from the same hymn sheet - frequently and loudly - the public just might applaud the serious effort to address our problems in a responsible manner.    

Please ignore the primary challengers to your right, and any previous “pledges” and worry about what your voters sent you to Washington to do, and what every American needs you to do.  Kicking the can slowly towards Europe is to betray our children, grandchildren and every vote cast in your name.  Do what’s right, and Americans will thank you at the ballot box.

Not only is this the right thing to do for the country, but it’s also a political slam dunk.  By doing your job, you’ll force the President and the Senate to do theirs.  The Senate hasn’t passed a budget for years because it knows it can’t keep its promises without significantly raising taxes on the middle class or exploding the debt.  Force Harry Reid and President Obama to make the tough decisions required to balance a budget.

There is no alternative and time is running out.  Playing games with the debt ceiling and our borrowing costs by threatening to shut down the government is the wrong approach.  Rise above the fray and govern.  We know that’s a foreign concept in Washington these days, but the first group of people (NoLabels??) who are seen to be solving the problem instead of creating it will get rewarded in 2014 and 2016, and will set the agenda going forward.  

Friday, January 11, 2013

A Problem with Priorities - Redux

We hate guns and have no interest in exercising our Constitutional rights to bear arms.  The odds of an accident occurring with any gun bought for protection, especially in a house with kids, far outweighs the odds that it will ever be needed for protection. 

But we respect the Constitution, and we respect the right to bear arms responsibly. 

Should a family have the right to own a handgun and a couple bullets to protect their families from home intruders?  Yes.  Do we think 30-round clips and GI Joe looking military rifles should be protected under the second amendment? No.  Do we think a ban on such weaponry make sense?  Yes.  Will it reduce the senseless acts of violence we have seen recently?  Doubtful.  

Does anyone honestly believe that if 30-bullet magazines were wiped off the map, that a deranged individual who is inclined to fire off 30+ rounds in a crowded area wouldn't just buy and load three 10 bullet magazines?  It’s like banning 24 ounce sodas – wouldn't a very thirsty individual just buy two 12 ounce cans? 

It’s a very emotional topic, particularly in the aftermath of some horrific events, but let’s set aside emotion for a minute and think rationally. 

For the sake of argument, let’s assume we throw out the second amendment and hover a huge magnet over the entire country and suck up every last gun.  Voila, our 30,000+ gun deaths per year just vanish right?  Perhaps, but it doesn’t mean we’ll have less tragedy.  Almost 20,000 of those deaths are suicides, and I’m guessing the vast majority of those individuals will have just as much courage (or lack thereof) to jump off a bridge or swallow a bottle of sleeping pills as they would have had turning a gun on themselves.  That leaves the remaining 10,000+ deaths which are primarily criminal homicides, most of which a result of gang and drug violence, and a very small percentage of which causes international headlines as “mass murders” of innocents.  Do we really think gang members, drug dealers and deranged individuals will stop being violent because one of their tools has been taken away? 

They won't...and that’s in the fantasy land where guns don’t exist.  That barn door has been open for hundreds of years and there are 300 million guns in homes across the US. When deranged individuals in the real world decide to commit mass murder, the worst of all crimes, do we really think they are more concerned with gun control laws than murder laws?  Will they just sit in their dark basements sulking at the fact that they can’t buy a GI Joe gun and abandon their psychotic thoughts?  Handguns are for all intents and purposes illegal in New York City, yet New York’s Finest still get murdered by criminals with illegal handguns.  Bad people will do bad things.  Legislating against one of the tools used by sick people to commit crimes is treating the symptom not the disease.  We need to treat the sick people.       

In the end, the best possible outcome of gun control legislation would be that shooting deaths will decline marginally, but would homicides decline?  If not, what’s the point?    

It’s also a cost/benefit question.  In 2012 it’s widely reported that roughly 150 people were killed in “mass murders.”  That's 150 too many, and while each innocent life lost is its own tragedy, spending enormous amounts of political capital, time and taxpayer dollars to craft, debate and enforce gun control legislation – legislation that is unlikely to reduce tragedies - is foolish.  

For some perspective on the problem, twice as many people die from falling off a ladder each year than in mass shootings.  Could you imagine Piers Morgan debating a crazy N.L.A. (National Ladder Association) member on Ladder Control or Congress spending enormous amounts of time, effort and money trying to reduce the number of deaths by ladder?  We have incredibly strict drunk-driving laws, yet those laws don’t prevent millions of people from driving drunk, nor do they prevent the 10,000 drunk driving deaths each year. 

Our gun culture is shameful, but we need to pick our political battles.  We have a country that is struggling to pay its debts, has millions unemployed, and millions more under-employed.  We need to focus on improving the economy by addressing the debt limit, spending cuts and our budget.  In fact, there is a strong argument to say that getting our fiscal house in order, growing our economy and lowering unemployment would do more to curb gun violence than any gun control legislation - especially any gun legislation that could pass the Republican and NRA controlled House.

Two years ago we urged Congress to fix their priorities, our concern is unchanged, as we said at the time:

Too many of our elected representatives believe it’s more important to debate and pontificate about issues that affect 0.01% of Americans, rather than focus on the tough issues that affect all Americans (high unemployment, weak economic recovery, exploding deficits and spending, etc.).

The legislative effort required to pass any form of gun control in the current Congress, while admirable, can wait.  

Tuesday, January 8, 2013

Hall of Fame or Hall of Morally Infallible Baseball Players?

Politics is fun, but baseball is our original passion.

With the Cubs continuing their 105 year swoon, we focus our attention on the growing controversy surrounding the impact of the “steroids era” on the Baseball Hall of Fame. The members of The Baseball Writers’ Association of America (BBWAA) have submitted their ballots and tomorrow at noon the Baseball Hall of Fame, Class of 2013 will be announced.
The ballot consists of 13 previously-eligible candidates who received at least 5% of the vote in 2012, and 24 first-time candidates. Voters may cast votes for up to 10 players, and anyone that receives 75% of the votes will be inducted into the Baseball Hall of Fame in Cooperstown on July 28th.

Incredibly, on their first year of eligibility, two of the best, most feared, players of all time - Barry Bonds and Roger Clemens – are unlikely to be elected into the Hall of Fame. In addition to the all-time leader in home runs (Bonds), we also predict that five of the top-50 sluggers of all time - Sammy Sosa (8th), Mark McGwire (10th), Rafael Palmeiro (12th), Jeff Bagwell (36th) and Mike Piazza (44th) - will also get passed over by the holier-than-thou BBWAA.

The only possible explanation for excluding these individuals from the Hall is their alleged (and in some cases confirmed) use of performance enhancing drugs (PEDs) at some point during their careers.

Here is a summary of their statistics, all of which strongly suggest each is worthy of the Hall of Fame:
Career WAR/
Rank by Position*
158.1 (1st)
58.7 (16th)
58.8 (18th)
66.1 (13th)
76.7 (6th)
56.1 (5th)
OPS = On-Base % + Slugging % - know as a better measure of production than batting average.  An OPS of .900 of higher puts the player in the upper echelon of hitters, with league leaders usually around 1.000
WAR = Wins Above Replacement Value - a measure of incremental wins attributable to a single player above that of a replacement player, the rank by position is the all-time rank when compared to other Hall of Famers at the same position.

These players are some of the most prolific hitters of all-time.  #3 on the home run list is Babe Ruth, who was born in the 19th Century and played his first game 99 years ago.  Tens of thousands of professional baseball players have played millions of games, and we currently have 4 of the top 12, and 7 of the top 50 home run hitters of all time on the ballot (Fred McGriff (26th) is the other).  

We realize home runs is not the end all and be all of what makes a Hall of Famer, but each player above is also in the top 20 at his position in WAR, which is a more balanced approach to a players value.  If being one of the twenty best players at your position - ever - is not good enough for the Hall of Fame, what is?   How can we not have these sluggers, and their pitching equivalents like Roger Clemens and Curt Shilling in the Hall of Fame?  

We're not condoning steroid use, but from a practical perspective, Major League Baseball did not test for PED’s until 2004.  How can we possibly exclude players from consideration when no conclusive proof exists that one player was using PEDs and another wasn’t?  Do we assume the entire generation was using and exclude everyone, or does each writer arbitrarily decide whether or not there is enough circumstantial evidence to determine if a candidate used PEDs?  Does one cycle of PEDs forever disqualify you from the Hall of Fame, or must there be long term use?  There are simply too many unknowns from this era for a single sportswriter to know who did what and when.
There is only one rational solution to the problem.  

The Hall of Fame must ignore any and all PED allegations prior to 2004 when determining Hall of Fame eligibility.  The BBWAA should be instructed to judge players from that era on their accomplishments on the field, not their alleged moral character off the field, whether it be PED use (currently deemed a problem by many) or just being a bad guy (not a problem).  The cloud hanging over this generation can be addressed prominently within the Hall itself, noting that it is widely considered that PED use during this period was rampant, but unproven due to a lack of formal testing.  
It's not the Hall of Morally Infallible Baseball Players, it’s the Hall of Fame.  Barry Bonds and Roger Clemens have had some of the best careers in the history of baseball.  In addition to their numbers, McGwire and Sosa’s epic home run battle in 1998 single-handedly brought Major League Baseball back into the public conversation after it was all but left for dead after the 1994 strike that cancelled a World Series.
I’d love to be able to visit the Hall in 40 years with my grandchildren and talk about how ESPN cut into every Barry Bonds at-bat as he approached Hank Aaron's career home run record, about how I was glued to the TV watching Sammy Sosa and Mark McGwire chase after the elusive Roger Maris single season home run record, and how I was in New York for the Subway Series featuring Roger Clemens angrily throwing a broken bat at Mike Piazza.
History is what makes baseball great.  It would be historical negligence to exclude an entire generation of baseball players from the Hall of Fame based on incomplete and speculative information about who may or may not have used PEDs. 

Our ballot, if we had one:
  1. Barry Bonds
  2. Roger Clemens
  3. Jeff Bagwell
  4. Curt Schilling
  5. Tim Raines
  6. Rafael Palmeiro
  7. Mark McGwire
  8. Sammy Sosa
  9. Mike Piazza*
  10. Lee Smith
*       * Who I think will get inducted, along with Jack Morris.  There is also a good chance nobody gets inducted this year.