Category: Business

Why the stock market keeps going up

by philg

Americans are out of work.  Factory orders are sluggish.  The economic news is grim yet the U.S. stock market keeps going up.  Can this be consistent?  Sure!  It is possible to believe simultaneously that the American people are getting poorer and that the largest American corporations are going to get ever richer.  How could this happen?  Group A and Group B can get richer if they work together to grow the pie.  Alternatively, Group B can get richer by transferring wealth from Group A.


We’ve discussed this already in this blog in the context of airline CEOs who managed to take $billions in taxpayer money and transfer quite a bit of it into their personal checking accounts as salaries, bonuses, guaranteed pensions, etc.  But there are more subtle ways in which corporations can acquire property formerly held by the public.


For example, movie studios (notably Disney) and other corporate copyright holders recently purchased a federal law that extended copyright out to 100 years (the Founders had it at 14; it was 75 years until recently).  There was no way for them to argue that this law would provide an incentive to authors because it applied to works that were created in the 1920s, i.e., whose authors had been dead for half a century or more.  The effect of this law was to transfer public average-Joe property (public-domain works) into the hands of large corporations, i.e., the companies whose shares are going up.


Disney figures in another corporate property transfer.  Ever since the dawn of aviation it has been held that airspace belongs to the public and is to be regulated for the benefit of all by the FAA.  This is what, for example, prevents the owner of a farm in Missouri from demanding that Delta Airlines pay him a tax every time they fly over his farm.  In May of this year that changed for the first time.  Disney essentially now owns the airspace over Disneyworld and Disneyland and they can exclude anyone from overflying.  They’d been trying for years to exclude planes towing advertising banners but Sept. 11th gave them a security rationale (though neither the TSA or the FAA felt there was a security risk or wanted to transfer the airspace into private hands).  Background story: http://www.aero-news.net/news/sport.cfm?ContentBlockID=9601


Let’s hope the comments section will fill up with other examples of this trend.  But the bottom line is that the time seems ripe to invest in the S&P 500.  Look around you at stuff that you believe to be public property.  Very likely it will soon be given away to America’s largest corporations and consequently their stock will go up even if they don’t innovate.

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Wireless Internet in the US = Neo-Feudalism?

by philg

After two days of touring Wales, a country that apparently has yet to discover the mixing faucet, it has become apparent that there is better mobile phone coverage in the remotest sheep pasture or coastal outcrop than in downtown Boston. How can such an otherwise backward place be so far ahead of the U.S. technologically?

Most folks are familiar with the story: in Europe the governments mandated that all cell phone systems be built using the GSM standard. Thus you can make or receive a call any time that you’re within range of any antenna from any provider In practice this means nearly 100 percent coverage of the land area of Europe.

One of the advantages that the U.S. had over Europe in the days prior to European Union was an absence of trade barriers. In feudal times every local duke or prince was able to levy tariffs on goods traveling through his town. Thus it became cheaper to undertake the hazardous sea voyage round the horn of Africa rather than pay all the toll collectors on the land route. Pre-Union Europe retained some of the vestiges of that feudalism and her economic growth was inhibited.

The U.S. by contrast was a model of efficiency. The government built roads from coast to coast and you could drive a truckload of goods from Virginia to California without paying a toll. True free marketeers will argue that it is better to charge road users every time they set their tires on pavement and this may indeed be the case in our congested cities. But most of the time the cost to society of an additional car on the road is too small to bother collecting and the road generates economic growth for all, thus justifying the role of government in paying for it.

Let’s look at wireless Internet for a moment. The ability to send a few packets of information from Point A to Point B without laying expensive cables can spawn a tremendous variety of new computer applications. Using computers intelligently saves energy, cuts pollution, increases security, and generates wealth. What do we see when we open the newspaper? Our politicians trying to figure out how to ameliorate the pernicious effects of feudalism in the Arab world. Occasionally there will be an article about T-Mobile or some other company building an 802.11 network in the U.S. There are going to be lots of competing networks apparently. For any given network you’ll pay $30/month for spotty coverage. While our politicians fret about old-style feudalism in the Muslim world they ignore neo-feudalism springing up in their midst.

Per capita, American citizens pay some of the highest taxes on the planet. 802.11 infrastructure is ridiculously cheap (e.g., $50 base stations). The public is allegedly the owner of the electromagnetic spectrum. Why can’t we combine these facts to conclude that every U.S. citizen ought to be entitled to transmit and receive a certain number of bits per year? Perhaps one’s free entitlement wouldn’t be enough to watch streaming video 24/7. But it would certainly be enough that your car could receive a text message from your wife while you were halfway to the grocery store: “The smoke alarm needs a 9V battery; add it to the list.” It would be enough that your car could notify your apartment that you were on your way home and to turn the heat up. It would be enough that your car could notify your palmtop or wristtop that it was being attacked by thieves. It would be enough that a medical monitor attached to your grandparent at home could transmit measurements and alerts to a doctor.

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Something new from Edward Tufte

by philg

If you visit http://www.edwardtufte.com/ you’ll see a new publication from the great man:  “The Cognitive Style of PowerPoint”.  This is first notable for its format:  a 24-page essay on full-size paper with very high quality color printing.  This is not traditionally a commercially viable format.  Normally one must write short enough for a magazine or long enough for a 200-page book in order to get into the mainstream distribution systems.  High-quality printing is, of course, generally not on the menu except at some university presses.


The most topical item in the essay regards the PowerPoint slides used to guide thinking about the Columbia‘s wing while the shuttle was still up in space.  (A sad echo of the poor presentation materials used to decide whether or not to launch Challenger, a theme discussed in Tufte’s earlier book Visual Explanations: Images and Quantities, Evidence and Narrative.)


Remember how horrified you were at your first slide-based presentation?  The disaffected civil servants who stood up in front of you in public school at least tried to get you to pay attention to them, rather than darkening the room and insisting that you focus on one disembodied sentence at a time.  By now most of us are used to PowerPoint, however, and we need something like the Tufte essay to bring back the outrage.


Slides are useful when you need to show everyone in a room a graph, a photo, or some other item for discussion.  Somewhere in the 1960s and 1970s things went horribly wrong, however, as bullet points began to make their way onto the slides.


A modest step back from the PowerPoint culture is to limit one’s PowerPoint slides to charts and photos.  If you can’t resist some text, limit yourself to an opening outline slide dense with structure and a closing summary to remind everyone of what they heard.


Why not step back more dramatically, though, to an age before the computer and the overhead projector?  Color printing has never been cheaper and society has never been richer.  Why not print up materials in advance of the talk and hand them out?  If you need to refer to a chart or photo during your talk, ask people to “turn to page 3 of the handout”.  You can leave the room lights on, people will focus their attention on you, the discussion and flow need not be constrained by the tyranny of the bullet points.  The one disadvantage of the handout approach is that you can’t use a laser pointer.

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War is Hell

by philg

A favorite quote from today’s New York Times article on Qusay’s $1 billion cash withdrawal from his dad’s personal bank:



“Sometimes they [the Hussein kids] would come in for small amounts, maybe $5 million,” the official said.


One of the theses of my Israel Essay is that every Third World kleptocrat has a doppelganger among the managers of America’s public corporations.  Derrick Jackson identified Qusay’s counterparts as the CEOs of American defense contractors in this Boston Globe editorial.  Here are some comparisons from the article:



“… the average army private in Iraq earns about $20,000 a year, the average CEO among the 37 largest publicly traded defense contractors made 577 times more money in 2002, $11.3 million.


“Since 2000, the 37 defense contractor CEOs … have taken home $1.35 billion. That may not be Bill Gates, but it still means that just 37 men have made enough money in the last three years to, for instance, pay for two years of running the Boston public schools.


(Despite the Federales’s fondness for buying weapons and applying them to recalcitrant foreigners, the shareholders of defense contractors aren’t doing especially well, as evidenced by this five-year comparison of the infamous Halliburton versus the S&P 500, or consider Northrop, Lockheed, and Raytheon.  But if there is pain among the employees or owners it is not being shared by the top managers and Board members…)

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Harry Potter and the $100 million/year manager

by philg

Yesterday’s posting raises the question “if an executive can’t do a good job for $2 million/year, will he do a good job when paid $20 million/year?”  The moribund U.S. economy seems to suggest that paying out huge sums to managers is not effective.  The Israel Essay questions whether our current economic slump may not be due to the fact that companies can’t afford to invest profits in technology and equipment because they’ve paid out all of their profits to senior managers.  Today we’ll try to figure out if, even if cash were free, it is a smart idea to make corporate managers as rich as Rockefellers.


Suppose that you owned a small company and had a money tree in the back yard.  You can now pay your managers as much as you want without reducing profits.  Should you advertise for a CEO at $75 million/year?  On the plus side this is more than most American CEOs earn (see http://www.forbes.com/ceos) and therefore you should be able to recruit someone good.  On the minus side, however, think about how focussed on work you’d be if someone handed you a $75 million check tomorrow.  You’d probably move into a bigger apartment and redecorate.  And wouldn’t it be nice to have a few vacation houses?  You know that you’ll be traveling by private jet from now on, but to which of the 50 fractional jet ownership plans should you subscribe?  You’re going to get invited to a lot of fun charity events so you’ll need a new wardrobe.  In short, living like a rich person is very time-consuming.


Getting back to the owner’s perspective…  perhaps an investment would be best managed by a comfortably well-off manager, rich enough to afford a new car that won’t break down and be a distraction from her duties but not rich enough that she spends several days per week shopping for private islands.


Has this experiment been done?  Absolutely.  Consider the Harry Potter books.  As our friend Jin says, it is a mistake to compare Harry Potter to Shakespeare:  “Harry Potter is a fictional character; J.K. Rowling is the modern equivalent of Shakespeare.”  Unlike the Bard, however, J.K. Rowling was not perennially short of funds.  Let’s look at her productivity:



  • 1997:  Harry Potter and the Philosopher’s Stone published; the American rights are eventually worth enough that Rowling can quit her day job (teaching high school)
  • 1998: Harry Potter and the Chamber of Secrets published
  • 1999: Harry Potter and the Prisoner of Azkaban published; all three books are on the New York Times bestseller list.
  • 2000:  Harry Potter and the Goblet of Fire published, movie rights to first book sold; Rowling ascends to the “movie rich” class of authors.
  • 2003: Harry Potter, Book 5 completed.  Thanks to merchandising, Rowling is now richer than the Queen of England.

One year per book while Rowling’s financial condition ranged from struggling to sort-of rich.  Three years per book after Rowling became rich enough to buy castles, private jets, etc.

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Iraqis running the U.S. airlines?

by philg

American soldiers uncover nearly $1 billion in cash in Baghdad.  Former leaders such as Saddam probably have at least $5-10 billion more in their Swiss bank accounts (even the minor Arab dictators are among the world’s wealthiest people, e.g., Yasser Arafat is estimated to have a personal checking account containing $1.3 billion siphoned from Western aid).  Meanwhile we were told throughout the 1990s that Iraqi children lacked food and medicine.


Is there an analogous situation right here at home?  Hmm… the Board and managers of American Airlines helped themselves back in October 2002 to $41 million to guarantee their personal pensions while CEO Don Carty was stating that “Shared sacrifice has to lead to shared success…”.  Thousands of workers were being laid off, thousands more taking pay cuts from what in some cases were very modest salaries.  In theory you’re not supposed to start spiriting away a company’s assets or giving them to your pals before you file for Chapter 11 bankruptcy protection from your creditors.  In practice the lawyer’s for American’s executives managed to construct a trust from themselves that would be unassailable and to hide the trust from their workers, creditors, and the public until a recent mandatory SEC disclosure.


http://www.governancemetrics.com rates American’s parent company, AMR, as “above average” in corporate governance.


Meanwhile US Airways emerged from bankruptcy.  The creditors got 2 cents for every dollar that they were owed.  The managers who drafted the reorganization plan decided that their shareholders, the folks who’d paid their salary to manage their investment, were entitled to 0 percent of the new company.  They themselves, however, felt that their hard work and dedication entitled them to 8 percent of the shares in the reorganized enterprise.  The theory here is that it is tough for a manager to do a good job if he or she is paid only a straight cash salary of several million dollars; the manager also needs to get an additional $10-20 million per year in stock.  Business school professors who’ve studied this question find that managers who don’t get any stock or stock options do just as good a job as those who transfer a substantial portion of the company into their pockets.


US Airways likes to pay their executives even when they don’t work.  Three top executives offered themselves $45 million in the event that they decided to stay at home instead of working at a merged US Air/United Airlines.  The merger never went through but the guys took home an extra $35 million for failing.  How did the US Airways workers fare by comparison?  Nearly 20,000 have lost their jobs entirely; the rest have taken pay cuts (a US Airways flight attendant earned between $18,000 and $38,000 per year before the cuts).


How is this situation different from other industries in the U.S.?  Isn’t it very common for managers and their cronies on the Board to steal from the shareholders?  Of course.  But the airlines are different because their executives have bludgeoned their shareholders so badly that there is nothing left to steal.  The airline execs are taking hundreds of $millions in salary out of the $6.9 billion in federal aid that has come out of taxpayers’ pockets since September 11.

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