Business & Economics: December 2003 Archives

Speaking of movie scripts, Aaron Haspel has a nice disection of how Hollywood protrays the business world.

The anti-business movies deal overwhelmingly with schlock purveyors: yellow journalists (Citizen Kane), swampland peddlers (Glengarry Glen Ross), penny stock hustlers (Boiler Room), shady aluminum siding salesmen (Tin Men), and out-and-out gangsters (The Godfather). It's a Wonderful Life gestures half-heartedly toward the notion of quality as good business, as in the scene where Mr. Potter's rental agent lectures him on how all the nice houses in Bailey Park are killing his real estate business. But mostly it's more people vs. profits hoo-rah.

In a "pro-business" movie like Executive Suite, our hero, William Holden, is the research chief for the furniture company, and in his big speech, as he ascends to the chairmanship, he tells the board that the company will never sacrifice quality, profits be damned. That it might actually be more profitable to manufacture good furniture does not cross the screenwriter's mind.

Incidentally, if I ever hear an executive of a company I own stock in say "profits be damned", I'm going to immediately sell.

Most people don't understand capitalism, and think profits are evil. The root of the misunderstanding is that many people want companies to be "nice", but companies don't exist to benefit humanity any more than you as an individual do. Companies consist solely of the assets of people who have invested (shareholders), and those people expect their money to be used for their own benefit, just like you expect your money to be used for your benefit. As Neal Stephenson hammers home in his excellent
Cryptonomicon, people who invest in corporations are interested in one thing: increasing shareholder value. Every corporate executive should realize that increasing shareholder value is the only moral use of company assets.

Individuals should be charitable and generous with their own money, but no one has any business giving away money that belongs to other people.

Update:
Plus, the very existence of profit (absent monopolies and other market distortions (which are never entirely absent)) demonstrates that a company is providing a beneficial service to its customers as well as it's shareholders. As I explained here, trading in a free market is generally profitable for both parties -- otherwise one of the parties would refuse the trade. The economy isn't a zero-sum game; wealth is created through trading by redistributing resources to those who value them most.

Update:
Director Mitch notes that there just aren't any good bad guys left. But there's always someone richer than you to be jealous of!

I have an acquaintence -- let's call him "T" -- who had been receiving diability payments from his "job" for over a year because he found a psychiatrist to write him a note claiming he had a psychological malady called "stress" that prevented him from working. I don't know the exact nature of T's "stress", but seeing as how it stemmed from managing a retail clothing store I find it hard to believe that it kept him from doing any sort of work for over a year. Nevertheless, due to California's absurd workers' compensation system, his employer had no choice but to continue paying T while he sat at home drinking and playing video games.

This type of forced coverage of nonsensical claims is part of what makes California so unattractive to employers, and refomring the workers' compensation system was one of Governor Arnold's top campaign priorities. Republican state Senator Ross Johnson is introducing a bill to implement some changes, and is particularly targeting intangible psychological claims.

Claiming a psychological injury is already the most-difficult kind of disability to prove. But Johnson says because the pain is literally all in the workers' mind, they should have to offer better proof that their employer caused it.

Psychiatrists don't like the sound of that. They say it smacks of discrimination against their field.

Uh, yeah. I'm not a psychologist, but I play one on TV and I've taken a good number of graduate-level psychology classes. The field is 50% BS and 50% "we don't know what it means, but when we do A we get B". Heck, maybe that makes it 100% BS. Anyway, the point is that I have no problem discriminating against a field that has just about as much legitimacy in my mind as palmistry. I'm exaggerating, but you get my point.

His bill would also restrict the reasons for which a worker might claim a stress disability. Pressures that are common to all fields of employment, for example, would not be allowed as cause for a psychological injury. A worker also could not be compensated for a psychological illness that arose from the stress of disciplinary action, job transfer or being fired.

"It is equally sensible to ensure that the everyday stresses we all experience in the workplace do not give rise to a claim for benefits," Johnson said.

Well, duh. It's an unfortunate sign of the decadence of our culture that this even has to be said and coded into law.

Strangely, the California Psychiatric Association doesn't approve of the bill, which would drastically reduce their prestige and clientele.

"We felt that it would create an incentive for an intrusive investigation of patients that would increase costs without benefiting the worker," Hagar [the director of government affairs for the California Psychiatric Association] said. "Psychiatric injury already has a higher burden of proof. And the bill seems predicated on the assumption that there is some sort of evidence of over-utilization of psychiatry, which is absolutely untrue.

"And, it is discriminatory against the field and against the patients who have legitimate injuries."

The problem is that workers are being unfairly benefitted at the moment; this bill tries to level the playing field, and reduce the cost to businesses of absurd claims. Hopefully, those with "legitimate injuries" will still be able to get treatment. However, people like T who get stressed out from folding clothes and adding up numbers should be prevented from leeching off the system.

Lots of politicians blasted the proposed terrorism futures market last summer, mainly because they didn't understand it. But if there's one thing even harder to predict (and more expensive to get wrong) than terrorism, it's the weather -- and weather futures are proving very popular among weather-dependent industries.

The weather futures market allows companies to hedge against weather that will adversely affect their business. For example, a company that sells heating oil will have a bad year if the winter is warmer than normal, but they can offset those losses by buying warm-weather contracts that pay off as the temperature rises. In a sense, it's a form of distributed insurance without all the overhead of dealing with an insurance company. The net effect is that when the weather is good you make less profit (because you get stuck with losing contracts), but when the weather is bad you lose less money. This serves to smooth out the cash-flow of your company, which any businessman will tell you is a Good Thing.

Apparently, weather futures are also accurate predictors of the weather:

Energy companies often have access to in-house or private weather forecasters, and a futures market gives them incentive to act on, and thereby reveal, such information in weather futures pricing, natural gas futures analyst Vishu Kulkarni said in a report.

Now imagine some possible uses for a terrorism futures market. The owners of a high-profile potential target could buy contracts that pay off if their property is destroyed, thus saving their business and helping them rebuild. This would relieve a lot of pressure from the public (which is otherwise left holding the bag), and will serve to "insure" against events no insurance company would want to touch. The costs and payoffs would be entirely market-driven, and could operate with very low overhead.

What's more, by giving people with inside knowledge a way to make money off their information, they'll have an incentive to reveal it. That may sound macabre, but the government offers rewards for information on terrorist activities already, and this would be no different. Of course, once a contract for a particular date and location went up in price, law enforcement could begin working to thwart the threat, thereby reducing the odds the contract would pay off. That effect would lead to some interesting interplay, and I'm not sure how it would shake out.

Here's a spiffy chart that tells us how much each state gets in federal spending for every dollar its citizens pay in federal taxes.

The federal tax burden falls much more heavily on some states than others, according to a new analysis of federal fiscal operations. Comparing the federal tax burden by state with an adjusted set of the Census Bureau’s most recent data (2000) on federal expenditures by state, Tax Foundation senior economist Scott Moody has ranked states in order of which got the best deal in 2000 from Uncle Sam’s tax and spending policies. ...

Factors influencing the shifting of federal dollars include the location of people who receive Social Security, Medicare and other substantial federal entitlements, the location of federal employees, federal procurement decisions, and grants to state and local governments.

"Federal employees" also includes military personel, which probably explains why New Mexico has the best ratio of any state, receiving $2.03 from the feds for every $1 its citizens pay in federal taxes. Connecticut -- the richest state in the Union, if I remember correctly -- has the worst ratio, receiving only $0.62 for every $1 sent to Washington, DC. The capital itself gets a whopping $6.49 in spending for every $1 paid, but that's not surprising considering that it's the center of government.

My own state of California was ranked 38th in 1990 and 40th in 2000, receiving only $0.89 and $0.86 per $1 in those years respectively. In 2000, Vermont was the median state, receiving $1.08 per $1 taxed; that the median is over $1:$1 indicates that more than half the states are getting more out of the system than they put in... a phenomenon strangely similar to how the income tax hits individuals. (HT: The House of David.)

Here's a table showing what percentage of income tax comes from various groups of earners, along with what percentage of total income is earned by that group (data gathered from the IRS via Rush's website, 2001).

Income Group	% of Total Income Earned	% of Total Income Tax Paid	Earned:Paid Ratio
Top 1%	17.53%	33.89%	1.93:1
Top 5%	31.99%	53.25%	1.66:1
Top 10%	43.11%	64.89%	1.51:1
Top 25%	65.23%	82.90%	1.27:1
Top 50%	86.19%	96.03%	1.12:1
Bottom 50%	13.81%	3.97%	0.29:1

Of course, these numbers only reflect taxpayers; there are probably millions of low-earners who don't file taxes at all. How much do you have to earn to be in the top 50%? If you're filing jointly, you and your spouse need to earn a combined $26,000 or more to be in the upper half -- and have the privilege of subsidizing the lower half of the spectrum to the tune of approximately 4:1.

I've written before about how some of President Bush's poor economic decisions have bothered me, but it's good to see that he's planning to eliminate the tariffs he imposed 20 months ago against foreign steel.