Cars are too safe+ tightrope walkers needed

Cars today are far safer than they were 40 years ago.  And that’s a problem — at least in one respect.  Since cars are safer, people drive more poorly.  A reinforcing feedback loop exists as well.  Since I pulled out in front of you and your new, high powered brakes allowed you to go from 60 to 15 in 2 seconds, then I can pull out in front of lots of people like you.  Since I didn’t use my turn signal and no one hit me, why bother to take my hand from my cell phone or double tall latte to use that indicator switch?

It’s really no wonder then that, while cars get safer, highway fatalities remain the same.  Safer cars create bad behavior and bad habits, since there is less cost to getting it wrong.

This is also true of  other social problems in the country, where improving the situation has led to unintended consequences.  We are a wealthy country.  And one of our biggest poverty problem is not starvation, or food insecurity it’s obesity.  “The highest rates of obesity occur among population groups with the highest poverty rates and the least education” according to Drewnoski and Specter.  We have nobly subsidized food, particularly corn and other inputs to factory processed food, and made food inexpensive.  The result is we are the only country that has an obesity problem tied to poverty.  There are over 1 Billion food insecure people in the world, it’s no wonder that some of them struggle to understand us.

There are more examples.  Since it is really hard to starve in this country, it’s no longer that important to get an education.  We are the most successful economy and political system in the world today, but we have a lower percentage of high school graduates than Panama, Mauritius, Korea, and Australia.  While we have yet to realize it on an individual basis, our graduation rates have fallen behind Tajikistan.  I suspect it’s much more difficult to obtain an education in Tajikistan, where 20% of the population lives on less than $1.25 a day, yet more people do it.

A social infrastructure that protects the less fortunate is incredibly important.  Some folks fall on hard times.  Others may never be able to get back on their feet again.  But in aggregate, across the US population, if we lower the cost of adverse behavior, it seems obvious that we will continue to get adverse behavior.  A “social safety net” works best when there are people attempting the tightrope that is above it.  The net catches the missteps, the falls, the injuries.  Then, the system should provide a ladder to access the tightrope again, and an encouraging audience clapping for more attempts.

That system, let’s call it the “Investing in America” system, will generate more tightrope walkers.  And tightrope walkers (or less euphemistically, entrepreneurs, scientists, knowledge workers and service providers) earn lots more money than safety net sitters.  That allows us to reinvest in better safety nets and ladders.  Thus, no tightrope walkers, no money for safety nets.

Education’s customer isn’t students. It’s the fed.

Today’s education challenge isn’t improving teacher performance and training, or improving student outcomes.  It’s getting money from the latest round of federal fiscal stimulus.

I’m a huge fan of education.  Teachers should be the rock-stars of our communities and paid appropriately.  Schools should be monuments to the glory of education.

But the funding for education, in the colloquial of my son, is “whack”.   Because tax dollars are pooled by governments (federal and state) and redistributed to local communities, the needs of local parents and communities are more and more disconnected from the local schools.  And the schools respond appropriately to this funding structure.  They work hard to seek federal funds.  In Colorado, for example,

Colorado has mounted one of the most energetic campaigns [for federal stimulus dollars]. Gov. Bill Ritter Jr., a Democrat, has directed $7 million in [state] stimulus money to programs he hopes will improve Colorado’s chances, and put Ms. O’Brien in charge of assembling hundreds of state officials, mayors, educators and citizens for dozens of public meetings to discuss strategies . . . Colorado’s effort so far, she said, has consumed 5,000 hours of staff and volunteer time.

Since the federal government is the customer, then the school apparatus responds appropriately.  In Colorado, spending $7m to attract their share of $11B in new federal stimulas is a great investment.  It could easily yield $140m, a 20x return on investment.  So the states start implementing education and curriculum programs that will increase the odds of getting money.  They are programs favored by the current Administration.  They curry favor.  Fifteen states have even hired consultants from McKinsey & Co. to couch educational initiatives in “polished proposals” that increase their odds of federal funding.  The educational initiatives may also increase the odds of students getting an education, but McKinsey wasn’t hired to craft that analysis.

Continuing with Colorado as an example, only 1/3 of the dollars for the schools are controlled by the community.  Imagine that more of the remaining $5.4 billion was in the hands of the parents and communities of Colorado.  How would things be different?  Instead of states rushing to design programs that adhere to the top-down beliefs of “Race to the Top” or teaching to the tests of “No Child Left Behind”, the states and schools would be responding to their customers — the parents and students. With 178 school districts in Colorado and 800,000 students, top-down solutions cannot adapt.  To believe every school district and every student has the same situation, needs the same solution, and responds to the same stimuli is clearly false belief.  In my local school district, the needs are different from school to school, which the superintendent and school board understand intimately but the US Department of Education cannot hope to.

Improving education is a crucial priority for the nation, and a 500 variable equation that’s difficult to solve.  It’s important and it’s hard.  We are a nation of entrepreneurs and business-people, struggling hard to find solutions that will prove attractive to customers and successful for the businesses.  Yet we have developed a counter-intuitive belief that education’s solution should be singular in nature, planned from the center, and implemented through a non-economic process of application and review.

State and Federal governments are the largest customer of education.  I hope they think they’re getting their money’s worth — some really well done applications for funding with pet project programs thrown in to sweeten the deal.  Yet the more government programs intrude by funding and distorting markets instead of setting the rules and playing referee, the more our dynamic economy and slowly sagging educational system will fall behind our world competition.

 

 

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The recession is over

A while back I argued for a short recession.  The rationale had to with inventory.  In most recessions, the inventory levels build to high levels, reducing the need for manufacturing and the like.  It takes years to work off that inventory.  When inventory levels get low, then orders start coming in, and factories take an upturn, and jobs follow.

I’m calling the recession over.  And unlike Jim Cramer, CNBC’s “infotainer” who prognosticates both sides of every issue (and was called to task for it on The Daily Show for it), I have data to back it up.

Inventory levels were so low in this downturn that one of the early signs of recovery, the semiconductor industry, is sharply and quickly rebounding.  Capacity utilization, meaning how busy the factories are, dipped during this downturn from 90% to 60%.  It’s back to nearly 80% as of the second quarter of 2009 (according to the Semiconductor Industry Association).

The semi industry is a great proxy indicator for overall output in the economy, because semiconductors are used in more and more products.  It’s a fairly broad based leading indicator.  It does miss a few things though.

First, it doesn’t feel like the recession is over to those who are out of work, because jobs are a lagging indicator.  Notice that the recession started before people started getting laid off, and it’s ending before people are getting rehired.  Not much comfort for those looking for new jobs, except that the end of your pain is near.

Second, the semiconductor industry isn’t too correlated to America’s housing market, and that’s the one area where inventory is going to overhang for a while.  Home ownership increased to nearly 70% in 2007, running up over the decade from around 63%.  Through April of 2008 (the last data that’s available) it had already declined by several percentage points.  That means there are a lot of extra homes today, some being rented, some not.

Health care reform = Bizarro World, part 2

If only health care reform was as easy as comic book heroes can jump tall buildings or stop the earth from spinning.  Superman had to fight Bizarro World, where ugly was pretty and stupid was rewarded and smart punished.

The second Bizarro World happening in the health care debate is the introduction of the “Public Option” as an alternative to private health care.  The NY Times had an interesting article on this topic, pointing out that the debate on whether the Public Option is a good idea is occurring because there are two details missing.

First, will the government’s insurance plan be forced to break even?  While the President has encouraged a comparison of his public insurance plan to the US Post Office, every time the US Post Office runs into fiscal trouble, Congress bails it out.  “We can’t afford to deliver mail on Saturday”, they say.  This leads to obvious pressure on Congress, followed by money to keep such money losing services.

The second, will the government’s insurance plan get special deals with providers?  If it can use it’s leverage to extract special deals, then it’s not competing with the private insurers on level ground.

With these two advantages, the government plan is more likely to force out private insurers.  Without these two concessions, the NY Times argues, the public option will be unattractive enough that no one will use it and it will be a small sideline in the overall reform program.

Without the details, it remains a political football.

Healthcare reform = Bizarro World

The latest round of debate on health care reform reminds me of Bizarro-world.  You know, the reverse world of Superman comics, where ugliness is preferred to beauty, and salesmen do a brisk business in bonds “guaranteed to lose you money!”

The first bit of bizarre comes from an article in the NY Times, discussing regional reforms in the healthcare system:

If the rest of America could achieve the performances of regions like these, our health care cost crisis would be over. Their quality scores are well above average. Yet they spend more than $1,500 (16 percent) less per Medicare patient than the national average and have a slower real annual growth rate (3 percent versus 3.5 percent nationwide).

I hope you can see the flaw in this quote.  No, it’s not that it assumes that regional reforms can be rolled out nationwide to similar effect.  No, it’s not that it uses Medicare patient data instead of the nation’s broader demographic.  It’s that a 16% reduction in costs with a 3% growth rate per year DOESN’T SOLVE the health care cost crisis.  It merely delays it for five years.  After those five years, the costs will be exactly what they are today, and will still be increasing.  And that doesn’t consider the cost of achieving the reforms, which will reduce the savings even more.  Sure, some administrative changes could be made and there would be savings, but let’s not assume that the health care cost crisis will be over.

Part of the dialogue on costs savings is missing, and that’s because they are touchy subjects.  The first is tort reform.  Doctors are afraid of lawsuits, and according to the “Fear of Litigation Study,” conducted by Harris Interactive, (Final Report, April 11, 2002), because of fear of litigation, of doctors surveyed:

• 79% said that they had ordered more tests than they would, based only on professional judgment of what is medically needed, and 91% have noticed other physicians ordering more tests;
• 74% have referred patients to specialists more often than they believed was medically necessary;
• 51% have recommended invasive procedures such as biopsies to confirm diagnoses more often than they believed was medically necessary; and
• 41% said that they had prescribed more medications, such as antibiotics, than they would based only on their professional judgment, and 73% have noticed other doctors similarly prescribing excessive medications.

These costs are incurred because America has a uniquely American legal system.  Reports of the costs of “defensive medicine” vary, but using the oft quoted study by Daniel P. Kessler and Mark B. McClellan, the current $1.4 trillion yearly healthcare spend in the U.S. could be reduced by $143B with no impact on quality of care.

Another source of cost is closely related to the recent discussion on “death panels”.  While the President’s proposals do not include death panels but rather end of life counseling, the Centers for Medicare and Medicaid Services reports that 27% of Medicare costs are spent in the last year of life.  With variations from one hospital versus the other as high as 100% according to Dartmouth Atlas Project (Portland versus Miami), it is clear that there is room for improvement in this politically sensitive area.

Taken together, end of life costs and defensive medicine consume 40% of the US economy’s healthcare budget.  If we avoid these political hot-buttons, we’ve already written off 40% of the budget as untouchable.  And given estimates that the total cost of healthcare could TRIPLE by 2017, nothing can remain off the table.

Second bit of Bizarro World upcoming.

Will Nationalized Healthcare Pay for the Obese?

In an orgy of self-inflicted problems, Americans are becoming more and more obese.  Read more about it here.

23 states saw a rise in obesity rates, with Mississippi the most corpulent at 32% of all adults (and 44% of all children).  The leanest state?  Colorado, with 18% of its citizens obese.  Basically, look to your left, look to your right.  If neither of those folks are over-weight, you’re statistically the one shopping for spandex-panel pants.

With the nation’s very quick dialogue on reforming our health care system, there is little discussion about what is causing the huge increase in health care costs — us.  It’s estimated (in the same article) that those of us who are overweight are costing the healthcare system an extra $1,500 per year.   That’s about $150B per year in avoidable costs assuming that 100 million of the nations 300 million folks are overweight.  And of course, the people who are eating all that extra food don’t have to pay for their extra health care — it’s spread across all of us through the insurance system.

Recognize that insurance is “pooled risk”.  It averages all the costs across everyone, plus some administrative costs and profit.  (In an even further digression, Medicare costs on a per patient basis are higher than private insurers.  This is a different conclusion than when looking at a percentage of total costs.  Medicare patients are older and more expensive, so percentage of all costs is misleading versus private insurance. I’m quoting the conservative leaning Heritage Foundation here, so be forewarned of where they stand)

HHS Secretary Kathleen Sebelius is the surrogate for the President’s “public option” for health insurance.  She’s certainly not talking about reducing any coverage or making patients responsible for their health.

“I think there is a lot of understanding that the private market has really failed to provide affordable coverage to Americans,” Sebelius said. The industry has had “a lot of opportunities” to get rid of coverage restrictions and other unpopular policies, Sebelius said, and really “hasn’t served Americans very well.”

OK, great, Madame Secretary.  Good talking points.  But talking and pointing at the capitalists in a capitalist country is the current pop culture “pin the tail on the donkey.”  The challenge for any reform is “where will cost savings come from”?  There are really just four options:

1)  Pay doctors less.  Whether it’s through “fewer unnecessary tests and procedures” or lower absolute reimbursement payments, doctors and hospitals could get paid less.  Given the shortage of doctors and nurses, this will only exacerbate quality problems and wait times.

2) “Administrative efficiencies”.  Having been involved with companies small and large trying to gain efficiency, I generally believe that dedicated management teams can find 20% efficiency gain.  That’s of course in one company.  Across an industry, this is much harder to find.  But even if we believe there are efficiencies to be gained, efficiency reductions are largely a one time hit.  After you get the reduction (through, say, reducing headcount or reducing paperwork costs), then all the underlying cost drivers keep doing their thing.  Thus, a 20% absolute reduction in health care costs will defray the growth in costs for just 2 years.  Then, it’s back to 6-9% cost increases per year.  New procedures and technologies deliver better results but cost more.  And of course, we’re still eating more calories than we’re burning on a daily basis and storing that as fat.  Not a great long term solution.

3) reduce coverage.  I want to write this here so I can say “I told you so” in years to come.  A public option health care plan will have a risk pool that is, on average, more expensive than others.  To stay competitive, it will have to reduce coverage.  Of course, being the government, there is one other thing they can do:

4) not play fair.  As soon as the government option starts to run into competitive problems, they can change the rules.  By removing the constraints that are placed on private insurance companies, the public option plan can continue to be “competitive”.  The government has a track record of using funny math to make the numbers work, so even if there aren’t competition problems, this could start happening.  (for more on funny math in government, just take a look at California’s current budget crisis)

So, it’s fine to believe in “health insurance for all”.  It’s a beautiful aspirational policy goal for our nation and we should keep trying.  Of course, so is “I want a pony” for a 10 year old girl.  But who is going to pay for it, feed it, and clean up it’s mess?  That’s right, you.  You’re going to pay for it.

And that’s the reason why “ponies for all” is not the parenting policy in this nation.

Michael Jackson dies, kills the internet

Michael Jackson killed the internet, bringing Google News, CNN, LATimes, Twitter, and AOL Messenger to grinding halt.  Details at the link:

http://fairspin.org/read/6911

BTW, fairspin.org is a very interesting website for getting balanced news coverage.  Crowd sourced analysis of the political leaning of stories.

How many schools can a BMW build?

I just replaced my old car with a slightly less old car of similar type and status.  And the intervening 8 years has brought some strange changes.

I now have a rearview mirror that automatically dims, windshield wipers that adjust to the rain conditions, and a passenger side rearview mirror that points down so I can see the curb when backing up.  Oh, and it’s also the world’s most expensive iPhone bluetooth speakerphone.

While I basically wanted a car with less than 150,000 miles, what I got was overkill.  It needs to get me places safely, but there is a lot of stuff to go wrong in this car, like the run-flat tire pressure sensors (originally developed for military vehicles) that are giving me a warning light even though the tires are filled.

I hate it.  But not because it’s a bad car.  It’s a fabulous car.  I hate it because I am, and you are, all attracted to these bells and whistles like moths towards a flame.  A simpler car would be more reliable, just as safe, lighter and more fuel efficient, and less likely to break-down.  It’s a barrier for us, though, in part because that car isn’t on the market.  So to paraphrase Ronald Reagan, “BMW, break down this wall” and build quality AND simplicity.  Save me from myself.

Because I want to use the dollar savings to pay for a school for 30 to 60 under-privileged children.  Check out Room to Read on what you could be doing with your seat heaters and two zone air-conditioning system…

“Double Bottom Line” needs to be retired

“Double Bottom Line” is a phrase that needs to be retired.  Ditto for “Triple Bottom Line”, “Quadruple Bottom Line”.  In fact, every multiple of “Bottom Line” needs to be put out to pasture.  As I stated in my last post, it’s not realistic and leads to muddy thinking.

I suggested, rather than trying to maximize a multi-variable equation, to hold one variable constant and maximize the other.  So, “maximize profit in the helping people space” is a great example.  As long as it benefits society, maximize profit.  With THAT I can figure out how to invest.  (Hey, I also blogged about that on the Accion website, go check it out.)

So, I’m starting a branding campaign.  Feel free to pass it along.  We’re not attempting “double bottom line” businesses.

It’s “Better Bottom Line” businesses.  The goal is to maximize the bottom line that comes from doing good.

“Better Bottom Line”.  It works for multiple reasons:

1) It’s more actionable.  It breaks the tension of maximizing two things.

2) It’s profit-oriented.  This works for a capitalist like me.  But still,  organizations that have no intention of making a profit can use it.  Their “Better Bottom Line”, however, will show a loss — the cost of doing better things in the world.  For them “double bottom line” essentially means reducing their yearly charitable fundraising, so this is the same approach at today’s “double bottom line” for them with a slightly different name.

3) It’s measurable.  Measuring social outcomes is incredibly difficult.  It makes the “double bottom line” calculation of profit versus social outcomes even more impossible. With the “Better Bottom Line” approach, social outcome is a thumbs up or down decision.  It’s much easier to make the binary categorization.  Auditors could audit it.  (Of course, organizations will still want to measure their social impact for fundraising and marketing.  Donors will still care about outcomes.  But let’s be clear, we’re breaking the false trade0ff between doing good in the world and making money)

4) It’s widely applicable.  Every public company, every profit minded entity could report their “Better Bottom Line”.  It could show up on Yahoo!Finance next to the P/E ratio.  Stockholders could make a decision on what stocks they would like to hold by thinking about the percent of a company’s profit that comes from the “Better Bottom Line” versus the regular old “Bottom Line”.

What do you think?

GM – the latest double bottom line business

GM now has to serve two masters — profit and politics.  It’s a great but different example of the problems of “double bottom line”.

In my microfinance class I spend some time talking about double bottom line.  The theory is that an organization, typically one with social goals, tries to maximize both profit and “doing good.”

The bottom line on double bottom line is it’s impossible as a metric.  Here’s the challenge.  Pretend you are an investor or a manager and you are asked to pick between two opportunities.  One generates $100,000 per year in profit and helps 2,000 people.  The other generates $20,000 per year in profit and helps 10,000 people.  Which should you pick?  A strict “double bottom line” goal of maximizing both doesn’t help with this decision.  They are both equally attractive.

And so, repeated many times over, the company under-delivers on both criteria, and the trade-offs start to lose their intellectual rigor in exchange for horse-trading, political favors, or emotional attachment to the ideas.  Not a good way to run a company.

Any companies that serve two goals typically struggle.  Corporate VC, for example, are short-lived.  They try to provide financial return and strategic objectives.  Since they can’t maximize both, at some point the corporate overlords declare failure and close the fund.  (And VCs call them “dumb money” from their purely profit driven perspectives).  Non-profits with “double bottom lines” typically try to do the maximum good while earning enough to reduce their yearly charitable fundraising targets.

And now GM, which will struggle mightily to serve two masters and will fail at both.

There is one wrinkle with GM that bears comment.  The TARP money was a loan.  The original AIG bailout was non-voting preferred stock.  Neither of those investment vehicles provides the investor with any say in the running of the company.  It is only when the government converted the loans to common stock that they gained voting rights and became the true decision makers.  As I tell my VC class – don’t confuse ownership percentage with control.

So GM is getting slammed in the press for this double goal.  This should be a cautionary tale for everyone thinking about “double bottom line”.

The only solution that works for me for “double bottom line” investors and operators is to hold one dimension constant while allowing the other to vary.  So, something like “within the field of investments which will help people, we will maximize profit.” or “As long as it breaks even as an investment, we will maximize helping people.”  The challenge with the latter option, where profit is the static dimension, is that investments are risky.  You’re often wrong, and the operator or investor will probably undershoot the hurdle rate.  So consider that when setting the goal.