craschworks

An interesting idea…

Barbara Harris' webiste: http://www.cashforbirthcontrol.com/

A Salon article:

http://dir.salon.com//mwt/feature/1998/07/cov_10feature.html

Cracking down

Barbara Harris pays addicted mothers $200 not to have children — ever again.

By Jeff Stryker
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June 30, 1998 | “They're having litters. They are literally having litters.”

Barbara Harris is not talking about puppies or kittens, but about addicted women who have given birth to five, 10 or 15 drug-exposed children, despite being unwilling or unable to care for them. And Harris is not just mad as hell — she is trying, almost single-handedly, to do something about it. Last year, she founded CRACK (Children Requiring a Caring Kommunity), a nonprofit organization in Anaheim, Calif., that offers $200 to any drug-addicted or alcoholic mother who agrees to be sterilized or have Norplant implanted, or to any male drug addict or alcoholic who has a vasectomy.

“I'm not saying these women are animals,” she hastens to add. Nevertheless, her words can't help but evoke images of animal shelters that offer pet owners a few dollars to encourage them to spay or neuter their animals. The idea also seems uncomfortably close to population control efforts such as Peru's program to sterilize poor women by offering them small gifts as bait. Harris' proposal is certainly in a similar vein: Why not see if money will convince parents addicted to crack, heroin, alcohol or speed not to bring any more children into the world?

“I've never taken on anything else like this,” says Harris, an engaging woman in her mid-40s, as we sit in her office at CRACK's utilitarian headquarters, a couple of rooms in a medical office building nestled in a vast expanse of strip malls. “When I was in high school, I wouldn't even get up in class to give a report, I would rather get an 'F' — that's how shy I was. People who know me can't believe I am doing this.”

Harris got involved when she and her husband, Smitty, parents of a blended family of six boys, decided they wanted a girl and opted for the one sure-fire method: foster care. That is how Destiny, the 8-month-old daughter of a crack-addicted mother, came into their lives. Destiny soon had a new baby brother. Would the Harrises be interested in taking him in too? And so it went until Barbara and Smitty Harris had adopted Destiny, Isiah, Taylor and Brandon — babies No. 5, 6, 7 and 8 from the same mother.

The idea that Destiny's mom “was allowed to just visit her local hospital yearly and drop off her damaged babies and nobody would even give her a slap on the hand” rankled Harris, who says that several of the children were born addicted and had to suffer through withdrawal as infants. Harris never met Destiny's birth mother, but as she took more and more of the woman's children into her home, the plight of babies such as Destiny became her cause.

In a flannel shirt and jeans, this day Harris looks more soccer mom than working mother, although her life gives new meaning to the phrase “second shift.” On a typical business day, she fields press calls, raises money, juggles a board of directors and plays social worker, all between the hours of 8 and 10:30 in the morning, then bolts home to take care of the children.

Harris began her crusade by asking nurses, police and social workers if she could do something, anything, to break this cycle of despair — even if it meant making a citizen's arrest. When she was told there was nothing she could do, she became a “faxing fool.” Shy no more, she convinced a California state Assembly member, Phil Hawkins, to introduce a bill to make it a crime to give birth to a drug baby.

When the bill died in committee, she took her plea to the media, making her case in the Orange County Register and the Los Angeles Times. She appeared on “Oprah” and became a darling of talk radio hosts and newspaper pundits across the nation — among them San Diego radio personality Rick Roberts, now a CRACK board member, who had gained national attention for reading the names of Megan's Law sex offenders on the air, and Dr. Laura Schlessinger, who has donated $5,000 to the CRACK coffers and frequently touts the program on her radio therapy show.

In the center of an emotionally charged issue, Harris is an effective advocate, all the more so because she has “walked the walk” with her adopted family. The reaction of Orlando Sentinel columnist Kathleen Parker is typical. “Everybody complains … Then one day, somebody actually does something,” Parker wrote in her syndicated column last December. “Not a bureaucrat, not a politician, not a social worker. Just somebody who is sick and tired of watching the tragedy unfold while everybody else comes up with reasons why we can't do anything. Barbara Harris of Stanton, Calif., is my hero.” Conservative radio host and Denver Post columnist Ken Hamblin was equally impassioned. “[Harris'] words of wisdom and tough love seem to be lost on the bleeding heart feminist liberals,” he wrote in December. “I say 200 bucks is a minuscule sum to spend if it will prevent a junkie from contributing another baby to the junk heap of urban poverty and human misery.”

Yet while Harris may have touched a nerve with the public, critics question whether her solution is effective, much less ethical. So far, CRACK's numbers are sufficiently modest to border on the symbolic. There have been 13 drug-addicted clients, all women, who have chosen sterilization over the less permanent Norplant option. Prior to being sterilized, these 13 women had given birth to 78 children: Six were stillborn, two died after birth and 64 are now in foster care — “being supported by taxpayers,” Harris is quick to note. With about 6 percent of all newborns exposed in utero to illegal drugs (according to the National Institutes of Drug Abuse's estimate for 1992, the last year for which statistics are available), Harris' program has thus made a tiny dent in a big problem.

But it is a big enough dent for some to question who Harris is to play God. “To have somebody out there doing these kinds of things that have to do with creation of life or termination of life is way too presumptuous,” says Melanie Blum, an Orange County attorney who specializes in reproductive rights and infertility cases. “To sterilize part of the population because you can afford to do so, it is just not her decision … to make.”

For Blum, it doesn't make much difference that it is a private citizen and a nonprofit organization — not the government — offering the incentive. If paying people not to have children is legal, Blum suggests, perhaps it shouldn't be: “We prevent certain private contracts in this country — you can't buy and sell children, for example. We prevent certain things because it is against public policy.”

“The $200 is just a bribe,” adds Jon Dunn, the CEO and president of Planned Parenthood of San Bernardino and Orange counties. “Drug-addicted women are effectively being coerced because of their desperation for money for drugs. It is using their circumstances to exploit them.” Rocio Cordoba, a staff attorney with the American Civil Liberties Union of Southern California, agrees. “She is targeting a very discrete, vulnerable population of women who have few options.”

To Harris, however, obsessing too much about women's reproductive rights is what got us here in the first place — and that singular focus has obscured the needs of the real vulnerable population, children. “We have more compassion for animals than we do for kids,” Harris fumes. “What about the babies that are dying? Don't get me wrong, it is nice to live in America, but we are messed up. Our rights are going to be our biggest downfall.” Harris makes no bones about her own singular focus, however: Her program is about the children, not women or their rights.

This aspect of CRACK strikes many as cynical, both in its conception and execution — an image that is not redeemed by the unvarnished message on the program's flyers: “Don't Let Pregnancy Ruin Your Drug Habit.” The payment is a one-time offering, with no provision for follow-up. “We would be more supportive of a program that would actually address the underlying problems,” says Cordoba.

Harris readily admits that some of her clients might use the $200 to buy more drugs. But she does not subscribe to the conventional wisdom that addiction is a disease — a fact that raises the ire of equally outspoken critics on the left and has cost her support from some in medicine and public health. Next to Cordoba, who describes the women Harris is targeting in a way that makes drug addiction seem like a visitation, Harris sounds callous. “If they are drug addicts, they are drug addicts by choice,” Harris says. “People say it is a disease, fine. But it is a disease of choice — however they got there and whatever their background and however screwed up their life is. The babies don't have a choice.”

Harris' simple — some would say facile — solution has also raised charges of racism. Dr. Xylina Bean, chief neonatologist at Martin Luther King Jr./Drew Medical center in Los Angeles, told the L.A. Times that she believes the program focuses on minority communities, feeding “latent racism” — although about half of CRACK's clients have been white. And while Harris is white, her husband, Smitty, is African-American, as are their adopted children.

Harris' critics also warn about the slippery slope. “Today it is targeting and criminalizing drug abuse, but what will it be tomorrow?” asks the ACLU's Cordoba. “If you take it to its logical conclusion, you could have a program or policy that monitors the kind of food a woman eats while she is pregnant, or whether she exercises enough, or whether she has a glass of wine or a cup of coffee.” Blum voices similar concerns. “Where does it stop? Next do we start sterilizing people who don't take their multivitamins?”

Harris dismisses the naysayers, laughing off the idea that discouraging crack addicts from having babies will inevitably lead to jailing pregnant coffee drinkers. A more valid concern, however, is whether the program really addresses the problem. “Crack moms” may be a convenient and sensational target, says Deborah Mathieu, author of “Preventing Prenatal Harm: Should the State Intervene?” (second edition, 1996), but alcohol probably poses a much worse threat to the fetus. And alcohol and tobacco use during pregnancy are far more widespread — according to the National Institutes of Drug Abuse, 18 percent of newborns have been exposed to alcohol in utero and 20 percent to tobacco, nearly four times the number exposed to illegal drugs. In addition, says Mathieu, recent research suggests that the impact of in utero drug exposure may not be as dramatic, or as long-term, as was once feared. “Crack itself is not the main danger,” says Mathieu. “The main danger is being brought up by an addict.”

Harris' critics complain that the decision-making capacity of the women her program targets is so impaired by drug use that any consent to undergo sterilization is suspect. Harris' answer is CRACK client Sharon Adams.

“I am not ashamed of how many kids I've had,” Adams tells me when we talk. “I am not ashamed to tell anyone I was on dope. I hit bottom, rock bottom. I've been raped, I've been shot, I've been to prison. I was close to death.”

Herself the 14th of 14 children, Adams had given birth to 13 children, all of whom have ended up in foster care, in prison or dead. She is hard pressed to say why the 14th was a charm, but when she became pregnant again, she decided she would try to stop “chasing the rock” and get clean. She did.

A nurse at the hospital where she was due to deliver her son encouraged Adams to be sterilized and gave her a CRACK flier. “I didn't care. Money or not, I still wanted my tubes tied,” says Adams. She used most of the $200 to buy things for her baby. “I told him, 'Kendall, you're the last button on Gabriel's coat and I'm going to use this on you.'”

Although Adams is not exactly the target CRACK client — she had already made her decision, and the $200 was just a little more incentive — she has become a veritable poster child for the program, appearing with Harris on radio and TV. And she has no regrets about her decision. “It is possible that you could regret it,” she admits, “but I tell women to have a level head and do it for yourself, nobody else.”

Ironically, if the law Harris had lobbied for two years ago had passed in California, Adams might now be behind bars instead of raising her son and doing public relations for Harris' program. Yet that solution may not be so far-fetched: In May, the U.S. Supreme Court let stand a 1989 South Carolina statute that made drug use by pregnant women a crime. With that kind of momentum, Harris is making plans to go national with CRACK, predicting that the nation is ready for her $200 solution. “Nobody should have a problem with it,” she says. “Not anyone who has a heart, anyway.”

salon.com
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About the writer
Jeff Stryker is a writer in San Francisco.

http://www.mercatus.org/democracy.pdf

SOME THOUGHTS ON THE PROBLEMS OF DEMOCRACY Gordon Tullock March 15, 2002

Democracy is frequently referred to as a system of majority voting. Granted, the last election in the United States the opposing candidate received more popular votes than the winner, and neither received a majority of popular votes because of the existence of other candidates, it is surprising that our system is called that.” Of course the winner did get a majority both in the Supreme Court and in the electoral college. The loser got a majority in the Florida Supreme Court.1Why do we call it “majority voting” when . . . The failure to get a majority in the popular vote is not particularly uncommon. Lincoln, for example, got only 35 percent of the popular vote and if one of the three of his opponents in the election, Douglas, had met him in a 2 candidate election, he would have won. The 1912 election, once again, had a winner who received less than half the popular votes. In Wilson's case he had two opponents, either one of which could have beaten him if the other had not been present. The current government in Canada received less than half the popular vote and, except in wartime, no British government has been elected by more half the voters since 1920. In both of these cases, of course, the winner had more than half of the representatives in Parliament. During its long reign in India, the Congress party never received a majority of the popular vote. Normally it received less than 45 percent. Another and interesting case is the election of 1960. Nixon had more popular votes than Kennedy but lost in the electoral college. The fact that Nixon had more popular votes, although not a majority of all votes, is almost a secret2. 1The Florida Supreme Court, solidly Democratic, voted 4 to 3 for Gore. Seven of the United States Supreme Court voted to overturn the Florida Supreme Court decision, but two of them wanted to send it back to Florida for further consideration. Hence the common newspaper reference to decision as 5 to 4. 2For an explanation of the actual situation see my letter to the editor of The New York Review of Books; Nov. 10, 1988 “Did Nixon Beat Kennedy? and the “Reply” by Francis Russell whose article I was criticizing. He accepted my criticism.

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The election of 1960 is interesting and here I foreshadow the major part of this article in that the two strongest candidates for the final election were eliminated in the selection processes of the two parties. It is reasonably certain that Johnson could have beaten Nixon in both popular and electoral votes and that Rockefeller could have beaten Kennedy . All of this does not indicate the system is inferior, but it does suggest that we stop calling it majority voting. The problem of more than two alternatives As on my readers will know, there are two general types of democracy, one originating in England long ago in which the voters directly select individual candidates. The other, which originated on the continent in the 19thcentury, is called proportional representation and I will to a large extent leave it out of the discussion below. Actually, I rather prefer proportional representation, but it is a different subject and requires different analysis. But to return to my main subject, the reader will have noticed that in each of the cases with a winner who did not have a majority of the votes, more than two alternatives were presented to the voters. With only two candidates or proposals before the voters these problems do not occur. Unfortunately, there are many people who would like to be the president and many ways which the government income could be spent. In the real world, it is likely that the system is confronted with more than two alternatives and it must either cut them down to two by some means or be willing to accept a candidate or proposition chosen by less than a majority. Of course it may happen that although there are three candidates or proposals one of him gets more than half of the votes. But we should not have a system which depends on that chance. The paradox: from Condorcet to Black and Arrow This problem has been known for a very long time and procedures to either simply take the one that has the most votes or reduce the number of alternatives to two and then vote on the those two are orthodox. Unfortunately, none of these procedures really overcome the problem. Shortly before the French Revolution two French aristocrats, Condorcet and Borda, looked into the problem and Condorcet found what is now known as Condorcet Paradox while Borda produced system which avoided that Paradox but introduced another. This was of course the period of the great expansion of democracy and, perhaps as a result of the enthusiasm for democracy, the problem was largely forgotten although some mathematicians seem to have known about it. In the mid-19thcentury, Lewis Carroll rediscovered the paradox and did considerable work on it without finding a solution. He too was largely forgotten and the problem was rediscovered by Black who also discovered that he had predecessors lost in the obscurity of minor mathematical publications. Black succeeded in reviving interest in the issue which is a little paradoxical since it is obvious he did not like the idea of democracy having paradoxes. Working with Newing he produced a proof that this paradox could not the avoided if there were more
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than two alternatives.3Notably he did not put out his work as a criticism of democracy because he was a firm believer in democracy. Nevertheless careful reading of his book with Newing shows the impossibility of avoiding the Paradox except in special cases. While Black and Newing were working, Arrow produced a general proof that the paradox cannot be avoided in the general case.4This was his famous general impossibility theorem. Notably it was only a remarkably long delay in the refereeing process which prevented the Black and Newing paper from being published before Arrow. In the early days of research in public choice, papers dealing with the paradox were a major component of papers submitted to me as editor of the journal. I think that most of these papers were inspired by desire to avoid the paradox or at least to minimize it. If this was the inspiration, it failed. The paradox continues and indeed I have invented a much simpler although less elegant proof.5After considerable delay I discovered a proof that the problem was not nonexistent, but of less importance than had been thought. If the voting preceded in the usual way of legislatures with anyone free to introduce an amendment is, it would precede to an outcome very close to the center of the cloud of individual optima. A dictatorial chairman, however, could lead the votes to almost anywhere he wished. Since the usual procedure is not involving a dictatorial chairman, this meant that the voting normally would lead to a more or less satisfactory outcome. Professor Arrow, in a very kind letter, accepted in the bulk of my reasoning but pointed out that the latter part was not really mathematically strict. He was right, but the reasoning was very strong even if not perfect, mathematicians standpoint.6What are fans of democracy to do? The end result of all of this work is most disappointing for proponents of democracy. Since the author and all of the readers of this paper are such proponents of democracy we should all the unhappy about it. As far as I can see, however, the usual response is not to be sad, but to sweep the problem under the rug. Psychologically this is no doubt an optimal response, but it seems to me that scholars should busily search for some better way of dealing with the paradox. I frankly admit I have not found one, but the point of this article is to attempt to interest other scholars in a revival of voting problem, so important in the early days of Public Choice, but normally today not even mentioned in the average issue or, indeed, in the average 10 issues. 3Black, Duncan and R.A. Newing. Theory of Committees and Elections. [2d Edition] Boston: Klewer Academic Publishers (1998). 4Arrow, Kenneth J. Social Choice and Individual Values. [2d Edition] New York: Wiley (1963). 5See” Some Simple But Confusing Mathematics” in my On Voting Edward Elgar, 1998 Cheltenham, UK, paperback, Locke Institute, Fairfax Va, 2001. 6 Tullock, Gordon. “The General Irrelevance of the General Impossibility Theorem”. The Quarterly Journal of Economics Vol81, Issue 2 (May 1967) p.256-270
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This is particularly surprising granted that intellectuals are currently vigorously producing arguments for democratic governments, and hence would be one would think particularly interested in eliminating paradoxes in democracy. The new arguments for majority voting, and the authors normally refer to majority voting rather than simply democracy fall into two categories. The first is the allegation that democracy's tend to produce capitalistic economies and hence are prosperous. Dictatorships are allegedly less efficient in the economic field. Democracy and economic progress In the first place, economists have long known for (or at least many of them have) that a capitalistic system is a better method and of producing prosperity than a centrally directed one. In the last few years most intellectuals have adopted this idea. Note however, that except for a certain number of “reactionary” economists this idea was not popular among intellectuals 50 years ago. Warren Nutter undertook a major research project in communist statistics and decided that the rate of growth of the Soviet Union was not in any way remarkable. Indeed it was about that of United States and markedly lower than that of Japan. As a result he was practically drummed out of the economic profession. Note that efforts to duplicate his research turned out to be surprisingly similar although the CIA which funded them never overtly admitted that. It was however not just the CIA which disagreed. To repeat, Nutter's career was more or less terminated in the economic profession. The University of Virginia did not give him significant pay raises and moved him to an inconvenient office. He could not go anywhere else because other universities also thought that he was following his ideology and not his science. This was a personal tragedy for Nutter and a policy tragedy for many governments. The view that economic progress required central control by someone not hampered by democratic mechanisms was widely held. Many of the people who felt this way remained in favor of democracy for reasons other than its economic effects. Nevertheless, the recent view sweeping intellectuals that democracy works better in economics than a communist dictatorship is recent. Further, as far as I can see, like the earlier enthusiasm for communist dictatorships in the economic field, it was based on nothing more than one of the waves of enthusiasm that tend to sweep the intellectual classes, although the collapse of the old order in Russia undoubtedly contributed If we look at the real world, Japan, Germany, France, and India are all democracies and doing very badly in their economies while Singapore and Hong Kong continue to be prosperous with dictatorships and China, a clear-cut dictatorship and a rather impressive one, currently claims the highest rate of growth of any significant country. Speaking for myself, I tend to distrust communist statistics, but observation on a recent trip to China indicates it is very much better off than it was not too long ago, at the end of the great proletarian cultural revolution. Democracy and peace Another recent argument for democracy is that democracies are relatively peaceful. This began with view that democracies did not engage in aggressive wars.
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Apparently, after a while, some intellectuals read the history of 19th-century in which democracy's conquered much of the world, and the claim was reduced to one in which democracy's do not fight other democracies. The original claim was particularly surprising since many of the intellectuals who made it were American citizens and therefore should have been aware that United States had seized is present geographic area by a series of minor but certainly aggressive wars. Consider the reduced claim that democracies rarely fight other democracies. During a rather long period in which democracies were rare and hence had little opportunity to fight each other this was undoubtedly true. Still it should be kept in mind that in 1914 it could easily have been argued that both England and Imperial Germany were democracies, indeed the major undemocratic country in the war was Russia. Of course at that time all the monarchies were moving toward democracy and England and Germany were much farther along than Russia. The end product of the war was that what progress Russia had made towards democracy was canceled and one of the world's worst autocracies put in its place. The dissolution of Austria-Hungary was disastrous by any standard. The history of the fragments was complicated, but on the whole a setback for democracy. Since shortly after the war Italy became a dictatorship, albeit a rather mild one as compared to Russia, it is not very obvious that the allied victory expanded democracy. World War II had a very nasty dictatorship, the Soviet Union, on the same side with United States and England. Indeed it did most of the fighting. Japan had an elected legislature and the Emperor's powers were very modest. It seems likely that they should be regarded as a constitutional monarchy rather than as a dictatorship. The end product of the war was of course the great expansion of the Soviet dictatorship so that Europe in 1945 was less democratic than it had been in 1930. Once again to refer to the war as a war for democracy is misleading Better alternatives? I have been presenting all of this material which could be regarded as an attack on democracy, not in order to run down democracy but indicate that the enthusiasm for democracy in the last 10 years and for communist dictatorship in the early '50s were simply examples of the instability of intellectual opinion. Personally I prefer democracies, but I must admit that the arguments for a democratic state are much weaker than those for a capitalistic economy. Further, when you look around the world you realize that Prince Bismarck's invention, the welfare state is largely dominant in democracies. Since the long run prospects of that system are poor, this could be an argument against democracy. It is however quite possible to feel as I do that in spite of its defects, democracy is better than the currently known alternatives. So far this paper has not had any dominant theme except that it shows little enthusiasm for democratic methods of government. I have to admit that I am not enthusiastic about democracy. Like Churchill, I favor it over its current competitors, but it seems to me that we should be looking for something better. The purpose of this note is first to deal with certain popular arguments for democracy, which I think are false, as a preliminary to encouraging my listeners to look for new forms of government.
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I find when talking to people about improvements in government the first response with respect to any idea is to ask, “Is it more democratic than our present methods?” If it were it would have the same defects. It could be, however, that there is another form of government which has all of the advantages of our democracy but adds something on to it. I have no suggestions at the moment but I believe that seeking a better form of government then democracy is sensible policy. It may be of course that the better form is a modification of our present democracy. If we look around the world we observe some democratic governments that are more successful than others. In my opinion the Swiss government is not only the best democratic government in the world but also the best government. Thus copying it would be an improvement even though I am great admirer of our Constitution. Melding the two might be an excellent idea. But I hope that the public choice scholars can do better. But let me return to my main theme which is problems with our present democracy. I will begin by once again turning to either the Arrow theorem, or the Black Newing proof that the voting process has paradoxes. Back to the voting paradox Roughly speaking, simple majority voting works very well if they're only two alternatives. When there are more the outcome may be close to random. In general, in democracies there are more than two people who would like given job and they're more than two policy suggestions for any given problem. In most functioning democracies these multiple choices are winnowed down to two which are then voted on. It is not obvious that one of the alternatives eliminated in the winnowing down process could not get a majority over whoever wins in the election limited to the two survivors. Of course the winnowing down process does not always get the final choice pattern down to two alternatives. I above mentioned cases in the American system in which no one got a majority because there were more than 2 alternatives which attracted significant votes. If one looks at policy choices we once again find a number of alternatives offered which are then winnowed down to two by successive votes in accord with the procedural rules in use in that particular voting body. Granted the prospect of paradox, it is by no means obvious that one of the other alternatives which lost earlier could not be the winner selected by the operation of the rules of order. To take a simple and artificial set of choices, suppose that the various alternatives actually offered as amendments in the Senate are: A, B, C, D, E, and F. Note that these are only a set of amendments offered on the floor of the Senate. If we considered those offered in committee, the set of amendments to the House version and what was done in the conference committee, probably at least 25 or 30 possible variants are proposed at one or another stage in the process. One of these numerous alternatives could be capable getting majority against the winner in the formal vote. Suppose for example that the votes are taken F against E, the winner against D. and so forth. This leads to B winning, but that B as never been offered against E, so it's perfectly possible that E could beat B but not beat D. This is simply an example of the standard possibility of circular majorities. We
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have no real measure of how often it happens. The first effort to find out how often was a joint article by Colin Campbell and myself which generated random preferences for a large body of synthetic voters in the computer memory and then tested them for cycles. The method is obviously crude but the only improvements on our design have been based on the same method but with larger collections of random numbers assigned to voters. Obviously, we need improvements but it is clear that the cycles are reasonably common. In this paper, I will make no effort to find out how common they are. I simply assume that they sometimes happen, and when they do, the outcome is not one we should respect. Of course, if they were rare we could regard the possibility as a minor defect, and go ahead. If they were common they would not be a minor but a major defect. Unfortunately we do not know. The effect of the paradox on Congressional elections But let us go on to the candidates selected by election. In addition to the paradoxes mentioned above, in the United States there is another very serious problem. In the 2000 election year, 31 members of the House of Representatives chose not to run — presumably mainly in order to retire. Of the remaining to 394, all but 11 were re-elected. It is sometimes said that the security of tenure held by members of the House of Representatives is greater than that held by members of the House of Lords. The basic reason for this security is that the members of the House are able to get the federal government to expend great resources for their re-election. They have large staffs, considerable free travel, access to a free television studio in the basement of the capital, and many other advantages. There doesn't seem to be any exact accounting for this money, but I asked a professional lobbyist how much he thought it was worth and he gave a figure of two and half million per congressman per election. It's obvious why they are so secure and obvious why they want to restrict campaign expenditures by potential opponents. Senators do not have as firm a grasp on their offices as the members of the House and a President probably even less. In the case of the President resources spent by the federal government to get him re-elected are immense. It is probably true that resource expenditures have the highest payoff when there is little other information. Thus, the value of these large government expenditures would be highest for the House. It should be noted that in the 19th century when these expenditures were not as large congressman normally served only one term. This leads us perform a mental experiment. There must be several thousand people who would like to be President and who think at least a little bit of running. Most of them drop the idea almost immediately, but some will give it further consideration and talk to people about the possibilities. At this stage we're down to something like the 50 possible candidates. They “test the water.” There was a senator unknown to me who recently visited Washington to a give a speech to an organization which he thought might support him. The Washington Post reported him as ” testing the water” and said he received an enthusiastic response. This put him a bit above many of the above 50, perhaps in the top 10 or 20.
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At this point he would begin trying harder to get support from one of the parties, from special-interest groups, etc. he would also begin trying to raise money. Eventually he would either be nominated or not. Whether he became President would depend on who else was nominated and, in particular, how many were nominated. The prospect that somebody who could beat the eventual winning candidate was eliminated early in the game is certainly good. In other words the paradox exists here as well as in the choice of issues. Indeed it appears to even stronger here. Some suggestions for improvement This rather lengthy essay has raised a number of difficulties of a fundamental nature with democracy. They do not prove that democracy is inferior to any other given system, but they do indicate that we should substitute hard research for enthusiasm. In recent years there's been very little effort to solve these problems. I would like to encourage my audience to go back to the fundamentals. As a sort of study aid for people looking for improvements in the structure of government I should like to list some suggestions that already been made. This is not intended to be a complete list of possible changes, but only a set which have been made but have received little or no attention. I think they should be given more attention by students in this field, but I hope that someone will invent even better ones. I begin with Clarke's demand revealing process. This has had more attention than the others including a complete issue of public choice devoted to it. As the reader may know, I have done some work in this area and am an enthusiast for the system. It permits the voter to express not only which alternative he prefers, but also how much he prefers it. The outcome might lead to a minority of intense voters defeating a majority of near indifferent voter. My second proposal is Earl Thompson's suggestion to put individual policy changes up, in essence, to a bid. Among other things this permits compensation of the losers. The third proposal is Hanson's betting procedure in which the voter may be rewarded for favoring a decision for certain proposals if ex post an impartial commission finds that it adds to the national welfare. All three of these methods are radically different from our current voting procedures. Indeed, it could be argued that they're not really voting at all. Nevertheless they are a start. Note that all three permits a minority to win over a majority. Also, all three of these suggestions are subject to the Arrow, Newing and Black problem. If there are more than two alternatives, the order in which they are taken up may lead to different outcomes. Voting on all alternatives at the same time may also lead to different outcomes. As in other cases where these problems arise, voting on the order of taking them up to also leads to paradoxes. Still these are a start in investigating radically different ways of making decisions, and they're not monarchical. Alternative voting procedures These are variants on the actual voting procedure. Other possible changes involve the problem of who can vote. Dennis Mueller suggested that voters to given a short
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examination before being permitted to vote. The intent, of course, is to restrict the voting to people who at least know some elementary facts about the government. I, myself, perhaps influenced by my knowledge of China, have suggested an examination for the candidates. Following the Chinese precedent the examination for different offices would be of different degrees of difficulty. A man who would fail the president's exam might well pass that for alderman. Again following the Chinese precedent the examination would leave several candidates for each office to be selected by the voters. They would remain in control but the number of alternatives would be reduced. If the examination were well-designed the alternatives would also be improved. It is not obvious that one man one vote is ideal. Corporations give different people different votes depending on how many shares they own. As an aside, this system was originated by Lord Clive. He not only started the British Empire in India by his victory at Plassey, but he also, in an unsuccessful effort to control the Honorable Company, caused changes from one man one vote to one share one vote. It's not at all obvious which is the best system. I find, however, that most people are strongly opposed to, let us say, the one vote for every dollar in taxes paid. Whether this is merely opposition to a new idea or a rational position, I do not know. When I talk to people about it their objections normally are not well reasoned. Indeed they normally offer no reason at, all, merely opposition. There are other proposals for giving different people to different numbers of votes. Nevil Schute wrote a whole novel, In the Wet, devoted to this idea, and one of the richest men in United States ­ Hunt — also produced a book on it. The additional votes could be distributed in terms of payment for services. For a modest example, suppose any war veteran who actually got shot at gets an extra vote. Another radical idea is to permit people to hold their votes in abeyance. I could, for example, decide not to vote for president in 2004 and then cast two votes in 2008. Or perhaps I could have credit, testing two votes in 2004 and none in 2008. Perhaps to charge interest, I might be prohibited from casting votes for Senators in 2008. Undemocratic governments and conclusion But let us consider some undemocratic ideas. Gibbon thought the period of the adoptive Emperor's in Rome was the happiest in human history. Mexico used a somewhat similar system from 1931 to 1987. It also had a reasonably good government by the rather moderate standards of Mexican government's. For a list of other governments which are not democratic, I suggest my forthcoming “Undemocratic Governments”. The reader should keep in mind that it is not necessary for the government form to be suitable for a nation state. It may be suitable only for use in individual governments which form only a part of the nation. If these were undemocratic, they would nevertheless be subject to popular control because of the possibility of moving. Note that some government functions cannot conveniently be broken up. In military matters economies of scale require large government units. There are other areas where breaking up government is unlikely to be successful. As an obvious example consider the regulation of the electromagnetic spectrum. No doubt the reader can think of many others. Nevertheless, pre-1870 Germany seems to have been pretty well governed
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Page 10
although none of the constituent monarchies were democratic. I do not claim that any of the alternative governments I have listed is ideal. Nevertheless, I think they should receive careful study. Further, I think we should look for other forms of government. There is no natural law which says we cannot invent new forms of government which are better than the current sample. It is to encourage the reader to engage in such radical thought that this essay is dedicated. 3301 N. Fairfax Drive, Suite 450 ~ Arlington, Virginia 22201 703-993-4930 ~ www.mercatus.org ~ [email protected]

http://www.econlib.org/library/Enc/GovernmentSpending.html

Government Spending
Gordon Tullock

In most countries government spending has grown quite rapidly in recent decades. Chart 1 shows U.S. federal spending as a percentage of gross national product from 1790 to 1990. Chart 2 shows Sweden's central government expenditures as a percent of GNP.

Chart 1

Chart 2

Although not many countries have such long data series, these countries apparently are typical. As the charts show, the central government's share of the economy was remarkably stable for nearly 150 years but grew quite rapidly throughout the latter two-thirds of the 20th century.

Chart 1. U.S. Government Spending
Enlarge in new window

Chart 2. Swedish Government Spending
Enlarge in new window
In the past, government spending increased during wars and then typically took some time to fall back to its previous level. Because the effects of World War I were not totally gone by 1929, the line for the United States from 1790 to 1929 has a very slight upward slant. But in the second quarter of the twentieth century, government spending began a rapid and steady increase. While economists and political scientists have offered many theories about what determines the level of government spending, there really is no known explanation for either part of this historical record.

The data contradict several prominent economic theories about why government spending as a percent of GNP grows. One such theory is presented by British economists Alan Peacock and Jack Wiseman, who suggest a “ratchet effect.” If a war, say, raises expenditures, expenditures after the war will not fall all the way back to their prewar level. Thus the name “ratchet effect.” This theory cannot explain the long period of stable government expenditures before 1929. Nor can it explain the steady growth since 1953.

The “leviathan” theory holds that governments try to get control of as much of the economy as possible. Obviously, the leviathan theory is inconsistent with the early decades of stable government spending. Moreover, this theory also would imply sharp increases in government spending followed by leveling off when the maximum size of government has been reached. But this is not what we see after 1945. Wagner's law—named after the German economist Adolph Wagner (1835-1917)—states that the growing government share of GNP is simply a result of economic progress. Wagner propounded it in the 1880s. However, the forty years of stability after that time would seem to rule out his theory.

Another theory, propounded by William J. Baumol, is that productivity in the private sector increases, but public-sector productivity stagnates. Therefore, says Baumol, for the government to maintain a suitable level of services per person, government spending must grow as a percent of GNP. Even granting his view of relative efficiency, Baumol's theory certainly does not explain the nongrowth of government spending before 1929. Indeed, all theories of growth to date fail to explain either the many early decades of stable government spending or the growth of government spending after 1953—or both.

The relatively smooth growth of government after 1953 is particularly hard to explain. We would anticipate that if the government took on new responsibilities, government spending would rise sharply and then stay level after these responsibilities had been fully absorbed. But in fact, spending did not rise sharply, nor did it level off.

Considering what governments spend money on may help. Government spending on so-called public goods, national defense and police, for example, is sometimes blamed. But American military expenditures have shrunk as a share of the GNP—from 13.8 percent in 1953 to 6.3 percent in 1988. Spending on police is mainly a local expenditure and, at under 1 percent of GNP, is too small in any event. Expenditures on most other public goods have also grown slowly. Of the 1991 federal budget, 43 percent is direct benefit payments to individuals, 14 percent is for interest, and 25 percent is military spending. This leaves only 18 percent for general public goods. Further, two-thirds of the remaining 18 percent is grants to local governments. This leaves only 6 percent for the rest of the federal government. Clearly we must look elsewhere.

It is frequently asserted that the government spends much in helping the poor. Although the government does do so, the bulk of all transfer payments go to people who are relatively well off.

Economists trying to explain government spending have recently attributed it to special interest coalitions lobbying the government to transfer wealth to them. The term economists use to describe such lobbying is “rent-seeking.” Rent-seeking certainly has grown. The farm program, for example, did not even exist in 1929. It now absorbs about $30 billion a year. The elaborate water control projects in the West cost the general taxpayer a high multiple of the benefits to the relatively small groups of beneficiaries. Both are the result of rent-seeking.

“Rent-seeking,” therefore, may explain the long, more or less steady rise in government spending as a fraction of GNP. Political rules may limit the government's ability to hand out money to more than a few new pressure groups in each session of Congress. If so, we would expect the long, gradual increase in government spending that we observe. It cannot be said, however, that the data prove this particular theory; in fact, it cannot even be said that this particular theory is a very good one. It certainly does not explain the long level period from 1790 to 1929.

The bottom line is that governments have grown in recent decades, that they did not do so earlier, and that economists do not really know why.

About the Author
Gordon Tullock is a professor of law and economies at George Mason University. Together with James M. Buchanan, he pioneered the field of public choice economics.

Further Reading

Baumol, William J. “The Macroeconomics of Unbalanced Growth: The Anatomy of the Urban Crisis.” American Economic Review 57 (June 1967): 415-26.

Borcherding, Thomas, ed. Budgets and Bureaucrats. 1977.

Higgs, Robert. Crisis and Leviathan. 1987.

http://www.mckinseyquarterly.com/article_page.asp?ar=1198&L2=21&L3=33

Companies can do much to avoid falling victim to sudden national
financial emergencies. Although the tally of such events is rising,
many businesses remain unprepared for them.

Preparing for a Financial Crisis

Dominic Barton, Roberto Newell, and Gregory Wilson The McKinsey
Quarterly, 2002 Number 2 Risk and resilience

One of globalization's most sweeping effects has been to transform
closed, government-controlled financial systems into free markets open
to foreign investors. Over the past two decades, surging capital flows
have reduced funding costs for corporations and enabled investors to
reap higher risk-adjusted returns. But unfettered capital markets have
a downside: increasingly frequent economic breakdowns, particularly in
emerging economies. More than 65 serious financial crises have erupted
over the past ten years-almost one and a half times the number
recorded during the 1980s.1

Last year alone, Argentina suffered a bank shutdown and a severe
devaluation when it defaulted on its government debt, and a
long-smoldering crisis flared in Turkey after one of the country's
largest banks went under, causing confidence to
crumble. Industrialized countries are also vulnerable, as Sweden found
in 1992, when a real-estate-market bubble burst, plunging banks into
the red and causing the value of the krona to plummet.

Yet no matter how real the threat of national financial meltdown might
be, and no matter how devastating the consequences, many companies
seem disinclined to safeguard themselves-even though, in our
experience of dozens of such events over the past 15 years, managers
can take many precautions. Obvious measures include monitoring
potential warning indicators, maximizing cash, and restructuring
debt. To be more thorough still, companies can minimize their key
operational risks, run crisis scenario analyses, and devise explicit
plans for crisis management.

The better prepared a company may be, the more likely it is to survive
a crisis. It might even position itself to prosper from the chaos.
Consider the case of the Ayala Group, one of the oldest conglomerates
in the Philippines. Ayala has traditionally been more fiscally
cautious than its peers, keeping larger amounts of cash on hand and
holding less debt than might seem efficient (exhibit). But this
prudence has enabled the company to withstand numerous difficulties in
its 165 years. During the 1997 crisis that swept through Asia, for
example, while competitors were putting the brakes on their capital
expenditures, Ayala went on aggressively building out the country's
first digital wireless network on the Global System for Mobile
Communication (GSM) standard. The Ayala subsidiary Globe Telecom is
now the top wireless company in the Philippines. In the banking
industry, Ayala acquired one of its major competitors (which was in
distress), thereby boosting its own Bank of the Philippine Islands
from the country's fifth- to second-largest bank in terms of assets.

Readiness has a price, however: management not only must constantly be
ready to engage in battle but also must moderate the usually intense
focus on quarter-to-quarter financial results. In strong economic
times, analysts have chided the Ayala Group for its conservative
balance sheet. But in most cases, careful planning greatly improves
the odds of surviving financial crises, though the worst of them-those
that spark political furors, such as the 1998 crisis in Indonesia and
the 2001-02 crisis in Argentina-can bring down the best-prepared
companies.

See the warning signs

Amid the instantaneous and fickle movements of information and money
in borderless capital markets, corporate executives can rely on no one
but themselves to spot the next crisis welling up. Stanley Fischer,
former first deputy managing director at the International Monetary
Fund, once commented wryly that “The IMF has [privately] predicted 15
of the last 6 crises. If we went out and started predicting
[publicly], we would bring on many crises.”2 Indeed, the problem of
self-fulfilling prophecies puts severe constraints on all public
watchdogs, and managers thus cannot depend on the IMF or ratings
agencies to sound the alarm.

The good news, though, is that warning signs can be spotted well in
advance if managers take the time to look. Most observers focus on
macroeconomic variables such as exchange rates and fiscal
deficits. Macroeconomic conditions certainly matter-smart managers
regularly review the country reports put out by bank analysts and
well-informed journals-but these signs are usually the last to flash
red before a crisis breaks. It is in the real economy and the banking
system, where the roots of crises develop, that the first indications
of trouble to come can be seen.3

Indeed, warnings abound: companies fail to earn their cost of capital
or to maintain enough cash flow to cover interest payments
comfortably, for example, while commercial banks go on lending sprees,
often doling out funds to increasingly unstable corporations (see
sidebar, “Signs of crisis”). Ultimately, these problems show up in the
banks' profitability and nonperforming-loan portfolios. Foreign
lenders may add to the credit binge with short-term foreign-currency
loans.4 Asset price bubbles, often in real estate or the stock market,
inflate collateral values and put banks at risk. When several of these
indicators start heading in the wrong direction at once, trouble is
sure to be brewing.

Symptoms of Argentina's crisis, for example, were visible long before
it erupted in December 2001. The economy of Argentina had been
shrinking for the past four years, and its companies' return on
invested capital for some time had been lower than the cost of
capital. Depositors had been moving funds offshore for more than a
year and stepped up the pace sharply in the six months before the
crisis erupted. Meanwhile, Argentina's fiscal deficit had ballooned,
placing the country on an unsustainable borrowing binge. The writing
was on the wall.

Conserve cash and restructure debt

When the storm breaks, revenue streams and credit lines dry up and
interest rates skyrocket. After Brazil's sharp devaluation in 1998,
interest rates soared to 65 percent and stayed there for more than
three months. In Argentina, interest rates rose to 74 percent in
November 2001-just before the government froze deposits and banks
stopped lending money altogether. Under such circumstances, companies
that lack adequate cash flows or bear a heavy burden of indebtedness
soon develop liquidity problems and often descend rapidly into
insolvency.

To protect against this kind of shock, companies must put their
balance sheets and income statements in order as early as they can,
before it becomes impossible to find creditors and revamp cash
flows. Two important indicators of a company's ability to withstand a
storm are the amount of free cash flow5 it generates and its interest
coverage ratio, or ICR (the ratio of cash flow to debt payments over a
specified period). Our experience of working with companies in
emerging markets suggests that many such organizations don't fully
understand their cash flows and are liable to make the fundamental
mistake of believing that profits equal cash flow. It is also not
uncommon for companies to have an ICR of less than 1, meaning that
they stay afloat only by using new loans to repay old ones. In South
Korea in 1999-well after the chaos of the region's 1997 crisis had
subsided-40 percent of listed companies were in this acutely unstable
situation, and a further 20 percent were only slightly less at risk.
Fortunately, the situation in South Korea has improved significantly
over the past three years.

Companies blessed with more farsighted management will maximize their
cash flows by divesting cash-consuming business units and optimizing
their working capital. Aurrerá, a Mexican supermarket chain, honed its
cash-management skills after the country's 1982 economic breakdown. It
negotiated special terms with suppliers that granted it 60 to 90 days
on accounts payable and shortened accounts receivable, thereby
producing a negative working-capital position. This spread enabled
Aurrerá to finance its own growth during the remainder of the 1980s,
when the rest of the Mexican economy stagnated, and into the 1990s. In
1996 Wal-Mart acquired the chain in a deal that was highly lucrative
for its private owners.

Samsung Corporation, a business within the Samsung Group, also learned
a valuable debt lesson during hard times. Just before South Korea's
economy nose-dived in 1997, the company had almost two-thirds of its
$2.1 billion total debt due for repayment in less than a year. About
20 percent was denominated in foreign currencies. When corporate bond
rates leapt from 12.6 percent at the beginning of November 1997 to
more than 30 percent by the end of the year, Samsung Corporation's
debt payments took off too. The company survived and within two years
had brought the level of its short-term loans down to less than 20
percent of its total debt.

Of course, reducing debt levels (to no more than 50 percent of equity,
for example) and lengthening loan maturities will increase the cost of
borrowing. But the premium can be regarded as insurance for stable
funding through thick and thin. Companies should also hedge their
currency risk on foreign loans even if the exchange rates of their
countries are supposed to be fixed; in every crisis over the past
decade, fixed or managed exchange rates collapsed. But hedging
currency risk is expensive (if not impossible) when currency forwards
and derivatives markets are lacking. In this case, companies can, for
example, establish a natural currency hedge or try to earn
dollar-based revenues to offset dollar-based interest payments.
Companies that lack a natural hedge or access to currency forwards
shouldn't borrow foreign currencies, no matter how tempting it may be
to do so, and may even want to prepay foreign-currency
liabilities. Currency depreciation may average more than 100 percent
during the first two quarters of a crisis.

Finally, chief financial officers can diversify and strengthen their
funding sources. While times are good, backup lines of credit must be
established. When they are in place, companies-even large
conglomerates with as many as 100 different lending sources-should
continue to monitor the health of each lender. To maintain a solid
funding base, Doosan, one of the oldest conglomerates in South Korea,
rates the financial health of each of its lenders by examining their
quarterly reports. Any lenders that show signs of weakness are
identified early and replaced by stronger banks.

Minimize operational risks

Contingency planning should extend to suppliers, wholesalers, and
retailers as well as transportation. In a crisis, domestic suppliers
could file for bankruptcy or stop shipments to conserve cash, while
foreign suppliers might worry about a buyer's creditworthiness or find
themselves hamstrung by interruptions in the international payments
system. Sudden consumer demand shifts that occur when people lose
their jobs and savings could damage wholesalers and retailers, and
liquidity problems among shippers could make transportation grind to a
halt.

Understanding these risks and planning for them can make the
difference between surviving a crisis and succumbing to it. In 1997,
one South Korean automaker saw many of its parts suppliers go
under. Without backup suppliers, it couldn't increase production for
export when the won was devalued. While foreign distributors begged
for more cars to sell, production lines were idle back at home for
lack of critical parts. The company weathered the storm but never
fully recovered its market position and was eventually acquired by
another domestic automaker.

The message for managers is that they should identify their most
important suppliers before trouble starts. For specialized,
noncommodity inputs, companies would be well-advised to establish
reserve suppliers and to keep an eye on the financial situation of
each. For more general inputs, it makes sense to diversify a supply
base a bit more than usual from the outset. Increased purchasing costs
and some management inefficiencies are a price worth paying to ensure
continued operation at all times.

A similarly watchful eye should be kept on the profitability and
financial stability of wholesalers and retailers. During Russia's 1998
financial crash, Roust, a large consumer goods distribution company,
was particularly effective at limiting losses, because it kept tabs on
its distributors' health. Within days, the company retrieved 90
percent of its stock of alcoholic beverages from wholesalers. Although
Roust suffered losses on inventory, the company then resupplied goods
in limited quantities on a prepaid basis to its most solvent
distributors, thereby preempting defaults on accounts receivable.

Furthermore, in the midst of chaos, transportation can't be taken for
granted. For one thing, companies can find their just-in-time supply
chains disrupted. In Mexico in 1982, for instance, the
cash-distribution logistics chain of Banamex, a leading bank, became
so strained that executives feared that branches would run out of
cash, sparking a bank run. The ingenious response was to hire off-duty
ambulances to help the company's armored cars distribute cash, thus
averting chaos. Other banks were less successful.

Conduct scenario planning

Minimizing financial and operational risks can vastly improve a
company's chances of survival. The use of scenario analyses and
contingency planning can put a company on an even higher level of
alertness. Thus many consumer goods companies now routinely study
Johnson & Johnson's classic, speedy, and successful response to the
1982 Tylenol crisis, in which seven people died after swallowing
tablets laced with cyanide. Anticipation and familiarity with crisis
situations-even simulated ones-pay off when the real thing erupts.

Scenario planning typically centers on a financial model that shows
how a company's cash flow and balance sheet change in response to key
variables. At the very least, changes in the following variables
should be tested: demand (both volume and price), supply chain
disruptions, external funding conditions (including interest rates,
stock prices, and a liquidity crunch), macroeconomic conditions
(exchange rates), and the competitive landscape (the health of
competitors or the possible arrival of global ones). For each
variable, companies must consider a broad-and perhaps previously
unthinkable-range of outcomes. In the crises we studied, we have seen
exchange rates plunge by 50 percent in weeks, interest rates triple,
lines of credit and new loans dry up completely, and demand for
consumer durable goods fall by up to 70 percent almost overnight.

Simply conducting such an exercise helps to prepare management
mentally for an actual crisis. But the real value of the exercise lies
in following it up with contingency planning. Which assets could a
company most easily divest to raise cash, for example? Which plants or
offices, if closed, would cut costs most sharply or preserve the
largest amount of cash? Which products or services are least
profitable and could be jettisoned? Conversely, what critical
business lines and customer relationships must be preserved at any
cost?

Again, earlier is better. It takes time to compile data and run
analyses, but in a crisis, decisions must be made within hours or
days, not weeks. By putting contingency plans in place, senior
executives will be able to delegate responsibility for specific
actions quickly, freeing up their own time to think about strategy; to
communicate with customers, suppliers, and creditors; and to monitor
operations.

Prepare crisis leadership

Most companies fail to act decisively, though the initial days of an
emergency are critical. The postcrisis landscape is littered with the
corpses of survival programs that weren't implemented in time. Almost
as important as what to do is how to do it. Planning specific
management responses ahead of time can prevent crippling paralysis and
delays.

The first step is to plan who does what when a crisis erupts. For a
large conglomerate with many business units, it would not be
unreasonable for the CFO and CEO to spend all of their time monitoring
the situation and making decisions in real time. Fifty or more junior
people might be needed to do the legwork. Knowing in advance who is
going to serve on the crisis-management team and how responsibilities
will be divided can save time and enable a company to stop the
bleeding quickly.

One approach that we have found useful is the creation of specialized
teams to lead key activities. A cash team might measure and report on
the company's cash flow every day and maximize working capital. A
funding team would monitor upcoming debt payments and the health of
creditors. And a divesture team would sell noncore assets to raise
cash. These teams would typically report to the CFO every day and
update the CEO at least several times a week.

For the CEO, a crucial task in the first few days is to lead a
communications team that maintains the trust of key shareholders,
suppliers, and customers by reaching out to them frequently and
straightforwardly. A company will have to issue broad announcements
about the status of its business and key assets, and top executives
will probably have to supply a few crucial investors, creditors,
suppliers, and customers with more (or more detailed)
information. Contradictions, obfuscations, and partial disclosures are
almost always judged negatively and can compound the crisis.
————————————————————————

National financial crises are becoming a permanent fixture of the
global economic landscape. Companies that ignore this truth and carry
on with business as usual are likely to be part of the wreckage left
after the event. Those that plan for any contingency raise their
chances of survival and might even turn adversity into advantage.
Signs of crisis It takes a blend of art and science to see the warning
signs of a financial crisis. Listed here are eight key indicators that
managers should monitor; both the level and the trend are
important. When several of these indicators start heading in the wrong
direction at once, a crisis could be brewing.

* Value destruction by the private sector: In every crisis we
* have witnessed, the private sector's aggregate return on
* invested capital (ROIC) had been less than its weighted
* average cost of capital (WACC) for several years before the
* crisis. Example: In Colombia, 90 percent of the 500 largest
* companies failed to earn their cost of capital during the two
* years preceding the 1998 crisis. Interest coverage ratio: The
* ICR of a company is the ratio of its cash flow to its interest
* payments. When ICRs are decreasing and fall below 2 for many
* companies, the economy is vulnerable to widespread
* bankruptcies. Example: In 1999, 40 percent of the listed
* companies in South Korea had an ICR below 1. Profitability of
* banks: If the banks' return on assets (ROA) falls below 1
* percent and net interest margins below 2 percent, a crisis may
* well be coming. Similarly, an increase in the rates of
* interbank loans could indicate profitability
* problems. Example: The ROA of Colombia's banking sector was
* -1.03 percent before its 1998 crisis. Rapid growth in the
* lending portfolio: We have found that when the loan portfolios
* of banks grow by upward of 20 percent annually for more than
* one year, many of those loans turn out to be bad, which can
* fuel a financial crisis. Example: In Colombia, commercial
* loans grew by 25 percent a year before its 1998 crisis.
* Shrinking deposits: Beware when depositors start pulling their
* money out of local banks. Shrinking deposits for more than two
* quarters mean trouble. Central banks and bank balance sheets
* report data on deposits. Example: Last year in Argentina,
* depositors moved 22 percent of the banking system's deposits
* offshore to protect their value from further erosion after the
* new government abandoned the 1:1 peso-to-dollar conversion
* rate that had been in place previously. Nonperforming loans:
* A crisis could be on its way when nonperforming loans exceed 5
* percent of total bank assets. The reports of private analysts
* are often the best source of information on nonperforming
* loans, since banks can be tardy in acknowledging the true
* extent of the problem. Example: In Thailand, nonperforming
* loans rose as high as 22.5 percent of bank assets in 1997 but
* then soared following the crisis, reaching a peak of 54
* percent in 1998.1 The growth and term structure of loans from
* foreign banks: Borrowers should beware when loans from foreign
* institutions are on the rise and the majority of these loans
* have maturities of less than one year or are denominated in
* foreign currencies. The Bank for International Settlements
* (BIS) provides such data. Example: In Thailand, foreign
* liabilities increased by 45 percent annually for three and a
* half years before the 1997 crisis, and 37 percent had
* maturities of one year or less. The percentage of short-term
* maturities reached a high of 50 percent in 1995.2 Asset price
* bubbles: Several years of more than 20 percent annual growth
* in asset prices can indicate a bubble that is waiting to
* burst. Watch the real-estate and stock markets closely, since
* assets of this kind are used as bank collateral. Example: In
* Thailand, property prices rose by no less than 395 percent
* from 1993 to 1996.

Notes: 1Thailand: Selected Issues, International Monetary Fund,
Country Report Number 01/147, 2000, August 20, 2001. 2Bank of
Thailand.

Return to reference

Notes: Dominic Barton is a director in McKinsey's Seoul office;
Roberto Newell, formerly a director in the Miami office, serves on the
McKinsey Advisory Council; Greg Wilson is a principal in the
Washington, DC, office. This article is adapted from their upcoming
book, Dangerous Markets: Managing in Financial Crises, New York: John
Wiley, 2002. 1Gerard Caprio and Daniela Klingebiel, Episodes of
Systemic and Borderline Financial Crises, The World Bank, October
1999. In this article, 45 crises during the 1980s are identified.
2″IMF splits over plan for global warning,” Washington Times, May 2,
1998, p. A11. 3For more on the causes of financial crises, see
Dominic Barton, George Nast, Roberto Newell, and Gregory Wilson,
“Surviving an economic crisis,” The McKinsey Quarterly, 2000 Number 4
special edition: Asia revalued, pp. 48-63. 4For more on the
volatility of foreign funding, see Martin N. Baily, Diana Farrell, and
Susan Lund, “Hot money,” The McKinsey Quarterly, 2000 Number 2,
pp. 108-19. 5Free cash flow is defined as net operating profit less
adjusted taxes (NOPLAT) less the net change in invested capital. It
also equals gross cash flow minus gross investment.

(Below is exactly how I felt about the Matrix. However someone on Slashdot posted this nifty solution…

Neo: But it makes no sense! It takes more energy to feed humans than you could possibly get out of them. It violates the laws of physics.

Morpheus: And when did you learn the laws of physics, Neo?

Neo: In the fourth grade, in Mr. Jameson's….oh. )

http://intuitor.com/moviephysics/matrix.html

Movie Physics

The Matrix (1999)
Rated: [RP] (R for Retch)
Starring: Keanu Reeves, Laurence Fishburne, Carrie-Anne Moss, Hugo Weaving,
Joe Pantoliano
Directed by: Andy Wachowski, Larry Wachowski
Written by: Andy Wachowski, Larry Wachowski

Humanity has been imprisoned by an evil computer system. People now live
their lives confined to clear slime-filled bathtubs inside a giant tesla
coil tended by gargantuan mechanical spiders. However, imprisonment isn't
all bad. Everyone's connected to a sophisticated computer simulation of the
late 20th century. This certainly beats a life of contemplating slime.
Unfortunately, people are still restrained by the same old societal norms,
petty rules, and laws of physics, that is except for a few enlightened
hackers who've discovered reality, and are trying to free the rest of
humanity. It's hard to argue with the physics of a movie like The Matrix.
Considering the action takes place mostly in a computer simulation, flaws
in physics can usually be dismissed as bad programming.

It's positively diabolical. We're forced to accept gung-fu B-movie physics
and can't argue because the action takes place in a computer simulation.
Even so we can't resist a few comments. For instance at the beginning of
the movie Trinity (one of the hackers) jumps five feet off the ground and
pauses in mid air before kicking a policeman just below his neck. The
policeman is swept off his feet and translates straight backwards into
another cop. The two continue translating until they slam into a wall. A
kick this far above the policeman's center of gravity would have caused him
to rotated backwards. The slightly downward direction of the kick would not
have swept him off his feet. What's more, since Trinity was about half the
cop's mass and the collision of her foot with him was largely elastic (it
didn't stick to him) Trinity should have bounced backward to conserve
momentum. Okay, okay, we are forced to admit that Trinity is one of the
enlightened hackers who can bend a few laws of physics inside the
simulation. But the cop was just a regular joe and should have rotated.

We could go on with minor criticisms of simulated events but our chief
objection is not the simulation. We just can't buy the explanation of why
the computer system bothers to maintain not only the simulation but
humanity. Supposedly, the computer system needs people as a power source.
This makes no sense. The food fed to humans would have far more energy
content than the meager power available from humans. It would require even
more energy to run the food delivery system not to mention maintain the
slime tubs. Why would the machines bother? Surely there'd be a more
effective way to extract energy from the food. But wait! It gets worse.
Liquefied dead humans are fed back to the living ones. The movie comes
dangerously close to implying that the computer/energy system is a giant
perpetual motion machine. This is clearly impossible according to the
second law of thermodynamics and likewise impossible for us to dismiss
lightly.

To cover itself, the movie throws in a quick mention that the human energy
source powering the machines is combined with a source of fusion. This is
like getting on a 747 and having the captain explain in great detail that
the plane is rubber band powered, then add that it also has four jet
engines. Guess which power source gets it off the ground, duh.

The Matrix had real potential as a cerebral thriller. The pacing, suspense,
and sense of tension in the first half are masterful. We would have
preferred less oracle mumbo jumbo. We'd have also been more excited at the
start of the great rescue scene if the characters had said they needed a
bajillion terabytes of RAM and a case of K-7000 processors to fight the
evil computer system instead of saying they needed lots of guns. We do
concede that shooting and gung-fu are more fun to watch than keyboarding
but isn't the point of sci-fi to push the boundaries of science? The Matrix
fails to meet its potential because it just can't leave the artificial
science in the computer simulation along with the artificial intelligence.
It had a great start which unfortunately evolved into another mindless
action piece.

Chris Leithner is an Australian investment manager. He writes a investment newsletter with value-oriented, Austrian-influenced perspective. I quite enjoy it–here's a sample:

http://www.leithner.com.au/newsletter/

Recession is a dirty word, and that's understandable. But recessions are necessary. People have to sleep, and businesses and households have to rebuild their liquidity. What the Fed is doing now it was doing in the 1970s. It's trying to paper over a recession.

James Grant
Grant's Interest Rate Observer (15 March 1991)

So the U.S. economy will recover soon? Really? It has a massive current account deficit and equally huge household debt, both of which are still rising, record corporate debt, negative private sector saving and an overvalued dollar. All the elements of an overblown economy are still there, unremedied by recession, which seems to indicate that the U.S. hasn't had its recession yet.

Recessions wind back debt and rebuild savings – that's what they're all about. Debt is still climbing in the U.S. and savings are still negative. The U.S. will have a recovery in due course, but not until after it has had its recession, ands that hasn't happened yet. No pain, no gain.

Tyler Kelly, Bribie Island, Queensland
The Australian Financial Review (8 February 2002)

Leithner & Co. Pty Ltd is a private company that adheres strictly to the Graham-and-Buffett “value” approach to investment. Its goal is its method: to undertake investment operations which are based upon thorough research and cautious assumptions; to provide reasonable safety of principal and offer an adequate return; and to inform shareholders regularly, fully and in plain language about these investment operations. Like most Australian corporations, its financial year begins on 1 July and ends on 30 June. The winter is therefore an appropriate time to conduct two exercises. The first is to contemplate the twists and turns, triumphs, trials and tribulations of the financial year coming to a close; and the second is to subsume these events within broader principles, revisit these principles, learn one's lessons and adjust one's sails for the next twelve months.

Letter 24-25, dated 26 December 2001-26 January 2002, stated that “in many countries, including Australia, Britain, Canada and (especially) the U.S., the boom of the late 1990s sowed the seeds of bust. Australia's boom ended in 2000 (see Letters 11-12) and signs of bust gathered pace throughout 2001 … [Our] plans for 2002 are based on the premise that many of the excesses of the 1990s remain unrecognised and therefore unpurged, and that the bust may be extended and sharp”.

Underscoring its dour tone, the Letter 24-25 also stated that a “renewed misallocation of resources … may manifest itself in 2002 through a 'recovery'. Whatever the euphoria it incites in financial circles, such a recovery neither causes economic growth nor creates wealth. Rather, it misdirects Australia's small and eroding pool of funding and thereby weakens the potential for longer term and sustainable prosperity. During 2002, then, Leithner & Co. will be in no hurry to sing 'Happy Days Are Here Again'”.

Six months later, this cautious and cheerless assessment is unrevised, unrepentant – and possibly vindicated (“Stock Slump Is Casting Doubt On Slight Economic Recovery: 'Double Dip' Recession Worries Some; Others See Adjustment From '90s Bubble” The Wall Street Journal 10 June). Yet far from crimping our fortunes, this severe and disbelieving stance has helped us to achieve our most adequate results (in absolute terms and relative to others) since inception.

The Consequences of 1.75% and 4.25%

Underlying and encompassing the myriad events of the 2001-2002 financial year is a single, overarching, venerable and seemingly forgotten principle. As detailed in The Robinson Crusoe Ethic Versus the Distemper of Our Times, interest rates, when not manipulated by a central bank, are determined by individuals' time horizons (or “time preference”) and the rate of return on investment tends to equal the rate of time preference. In the absence of interference, in other words, interest rates efficiently co-ordinate the actions of – and convey accurate signals to – borrowers and lenders. Under these conditions, to use the apt phrase of Roger Garrison (Time and Money: The Marcroeconomics of Capital Structure, Routledge, 2000, ISBN: 0415079829), interest rates “tell the truth about time” (see also Steven Horwitz, Microfoundations and Macroeconomics: An Austrian Perspective, Routledge, 2001, ISBN: 0415197627).

Conversely, and as detailed in two circulars (Interest Rates, Corporate Debt and the Business Cycle and Inflation and Deflation: Some Dissenting Thoughts for Value Investors), interest rates fixed by central banks not only tend to deviate from the truth about time and money (i.e., the natural rate of interest): in retrospect it is clear that at critical junctures subsidised bank rates have unintentionally but nonetheless repeatedly imparted damaging falsehoods about these phenomena. As James Grant has noted (The Trouble With Prosperity: The Loss of Fear, the Rise of Speculation and the Risk to American Savings, Random House, 1996, ISBN: 0812924398), the sin of central bankers is not just that they create credit backed by thin air rather than hard savings. More fundamental is their pretence to knowledge. They pretend to know what no single person or small group of people, no matter how diligent and intelligent, can possibly know: the appropriate rate of interest at which credit (in the form of bank reserves) should be lent and borrowed.

The greater the departure of subsidised from natural rates of interest, the more egregious the misinformation transmitted to borrowers and lenders. From this perspective, the lowest and most artificial rates of interest in a generation are no cause for celebration. Quite the contrary: it is likely that they have induced further “malinvestments” in addition to those undertaken during the mania of the late 1990s.

If so, then in the 2002-2003 financial year the unpalatable consequences of 1.75% (in America) and 4.25% (in Australia) may begin to dawn upon yet another class of speculators-who-thought-they-were-investors. Under these circumstances the anguish of debtors, hand wringing of politicians and babble of analysts will fill the air; and vast volumes of verbal fog will distract attention from the causes of the distemper. It is therefore important to bear in mind that increases of artificially-low, bank-imposed interest rates do not cause problems; rather, they reveal them. Increases of artificially-low rates, in other words, are the consequences of patterns of error set in train by central banks and committed by speculators-who-thought-they-were-investors.

An Incomplete Correspondence of Excess and Retrenchment

One of the most pervasive sets of events of the 2001-2002 financial year was a hand-me-down from previous financial years. Despite the “tech wrecks” of 2000 and 2001, many of the media, technology, telecommunications and other malinvestments of the 1990s remain incompletely liquidated. “Clusters of error”, as Murray Rothbard called them and whose realisation defines the bust which is caused by the boom, continue to percolate to the surface.

Consider the number and extent of the corporate errors (together with the shameful paucity of executive apologies, resignations and sackings) that have recently been confessed (“Firms That Lived By the Deal Are Now Sinking By the Dozen”, The Wall Street Journal 6 June). Most notably, AOL Time Warner, the world's biggest media company, conceded in April that it paid a modest $US54 billion ($A96 billion) too much for its epochal betrothal of old and new technologies. Plus ça change. As noted contemporaneously in Corporate Mergers and Acquisitions: a Contrarian Case for Caution (II), “like all other aspects of business, corporate mergers and acquisitions are inherently risky propositions. The stark truth is that many and perhaps most fail to achieve what their highly-remunerated creators confidently claim that they will achieve. Disturbingly, corporate deal makers are seldom in doubt and often in error. In Warren Buffett's words: 'the sad fact is that most major acquisitions display an egregious imbalance: they are a bonanza for the shareholders of the acquiree; they increase the income and status of the acquirer's management; and they are a honeypot for the investment bankers and other professionals on both sides. But, alas, they usually reduce the wealth of the acquirer's shareholders, often to a substantial extent'”.

This write-down of AOL Time Warner's balance sheet constitutes the biggest single loss in American corporate history. Much smaller in relative terms, but still colossal in absolute terms and just as painful to their shareholders, are the losses confessed by Qwest ($20-30 billion), WorldCom ($10-20 billion), NorTel ($12.3 billion) and Lucent ($8 billion) in the fourth quarter of 2001 and the first and second quarters of 2002. For those 350 or so American companies whose managerial débâcles First Call has been able to quantify, write-offs will total roughly $US48.5 billion; adding AOL Time Warner and the aforementioned “major players” to the pyre will, according to The Australian Financial Review (26 April), “probably push the final figure into hundreds of billions of dollars”.

The craze of the late 1990s was largely but not exclusively a new economy (as James Grant has noted, this label is no longer dignified with upper-case script) phenomenon. Accordingly, attention has been diverted from a closely related, equally significant but perhaps even more insidious development: in a significant number of companies shareholders' equity – a company's assets less its liabilities – is shrinking dramatically. AOL Time Warner's write-down, for example, comprised no less than 36% of its equity. Equivalent or even more severe (in percentage terms) haircuts have been fashioned recently by the executives of Clear Channel Communications (56%), General Motors (32%), Gemstar TV Guide (68%) and AETNA (30%).

At the 2002 AGM of Wesco Financial Services Charles Munger identified an important and hitherto anonymous contributor to these repeated catastrophes. “There's a lot wrong [with American universities]. I'd remove three-quarters of the faculty – everything but the hard sciences. But nobody's going to do that, so we'll have to live with the defects. It's amazing how wrongheaded [the teaching is]. There is fatal disconnectedness. You have these squirrelly people in each department who don't see the big picture”.

Generalising his point, Mr Munger continued: “this doesn't just happen in academia. Companies can get balkanised. Look at what happened at Arthur Andersen and Enron. They weren't all bad people, but their cultures were dysfunctional. It's easy to create such a culture, in which you have good people but terrible results. Many areas of government are dysfunctional. Universities are complicit. They don't feel guilty about the product they're producing … We have the best universities in the world. They are strong in the hard sciences, but if you go to business, law, sociology…”

“Deflation” and the Supply Hangover of the Noughties

The mania of the 1990s also distracted attention from development whose presence was felt increasingly, and sometimes forcibly, in Australia during the 2001-2002 financial year. For a decade or more, thanks in no small part to artificially-low interest rates (remember that cash rates in America fell to 3% in the early 1990s) and the consequent orgy of malinvestment in particular higher-order goods, more and sometimes vastly more of some primary resources, and of not a few secondary ones, has been supplied than has been demanded. (This cause of this phenomenon can by no means be laid exclusively at the door of central banks: the collapse of Soviet Communism and the consequent large-scale export of minerals and oil from ex-Soviet republics, together with the vast increase of China's manufacturing abilities and the explosion of its foreign trade, have done much to increase the supply of many primary and secondary goods. So too has the torrent of subsidies from the world's two most important bastions of Soviet-style agriculture: Brussels and Washington. In Western countries, increases in the productivity of various links of the structure of production may also have played a modest role).

This surplus of supply relative to demand has caused the prices of many goods and services to stagnate – and in many instances to decrease. Hence (and as detailed in Inflation and Deflation: Some Dissenting Thoughts for Value Investors) one of the defining delusions of our age: we live in an era of high inflation whose major consequences – pervasive malinvestment in many capital goods, consequent oversupply of many higher-order goods and stagnation of many prices – is not only ubiquitously and erroneously hailed as “low inflation”; to the extent that the prices of oversupplied goods and services fall, the consequences of high inflation are mistakenly dubbed “deflation”.

Accordingly, if the predominant condition of many industries around the world is glut; if glut compresses profit margins and earnings and thereby discourages efficient capital investment; and if governments seek to attenuate the downward leg of the business cycle and thereby to constrain the ability of busts to liquidate poor businesses, reallocate their assets to better ones and thus rebuild profit margins; then the predominant response of many companies in these industries is simultaneously to consolidate and cut costs.

Governments thus face increasingly clamorous commands to allow cartels to (re)develop so that margins and market shares can be fattened and labour and other costs pruned; large mining companies are merging and aggressively acquiring other mines in the hope that the supply of minerals and the costs of production can thereby be curbed; and perhaps most notably, a mammoth imbalance of supply vis-à-vis demand in telecommunications and IT (the epicentres of the mania of the late 1990s) will require several more years of retrenchments, liquidations and reconfigurations in order to return to some semblance of balance.

If this interpretation corresponds even roughly to reality, then neither demand nor capital investment (both of which are constrained by various but usually large loads of debt) will rise sustainably; accordingly, unless prices fall corporations and individuals cannot absorb the present excesses of supply. If demand will be subdued, in other words, then supply must adjust. In aviation, to give one extreme, the period of adjustment was drastically compressed by the attacks on 11 September into an unprecedented demand-side shock (and then aborted by mammoth handouts from governments). At the other extreme, the adjustment in IT and telecommunications has been and may well continue to be far more extended and even more painful.

Bust Denied Is Recovery Delayed

Booms can be artificially generated, market prices can for a time be suspended and rational calculation temporarily impeded. But as time passes the cumulatively pernicious consequences of erroneous and irrational calculations become ever more apparent; and to the extent that central banks, commercial banks and governments allow them to become apparent contemporaneously rather than retrospectively, or are unable to prevent their appearance, a necessary and salutary process, i.e., a bust, purges the excesses and absurdities of the artificial boom. Unfortunately, during the 2001-2002 financial year it became clear that America's and Australia's busts have been tentative and woefully incomplete. Indeed, over the past year governments and central banks – cheered to the rooftops by most economists, journalists and market participants – have moved heaven and earth in order to abort any restorative purging and to maintain and indeed extend the boom's misallocations and excesses.

Each country's present administration is the most profligate in its history. Well before 11 September the U.S. Government commenced its biggest spending spree since the 1960s. The domestic welfare budget has expanded by almost twice as much in the first two years of President Bush's administration ($96 billion) as during Bill Clinton's first six years in office ($51 billion). More generally, federal discretionary spending has grown by 41% and non-military expenditure by 35% since 1998. According to The Wall Street Journal (16 May), “although many economists portray this surge in expenditure as a stimulus to growth, the opposite is true. The runaway federal budget, which is up nearly $300 billion in just the last two years, and the parallel hike in taxes and debt needed to finance this spending binge, is America's single most ominous domestic economic danger sign”.

Similarly, Australia's Liberal-National coalition boasts its conservative pedigree but spends as if there will be no tomorrow. The key phrases are “big spending, big taxing. That is the Howard-Costello government in a nutshell. The size of government in Australia has surged under the six-year stewardship of the Howard Government to the point where overall government spending and taxing have reached record levels as a share of GDP … But it is not just the size of government that is a concern. It is also troubling that the mix of the massive spending spree is generally poorly directed” (The Australian Financial Review 13 May).

According to a former senior Treasury official (AFR 12 December 2001), the Commonwealth has hitherto “preached prudence even though it has balanced its own accounts by raiding ours … In a recession the automatic stabilisers will push the Budget further into deficit. Any more discretionary spending and we will start to rebuild the public debt mountain we have so painfully paid off”. Peter Walsh (Confessions of a Failed Finance Minister, Random House Australia, 1995, ISBN: 0091829992), unheralded pillar of what was arguably the best (i.e., least worst) Commonwealth government: your country once again needs you. Lord Mayor Jim Soorley: Brisbane, Queensland and the country as a whole continue to need you.

Governments can grow only if they capture or co-opt resources owned by individuals, and individuals grow richer not by spending more but by accumulating more (and more productive) capital goods. In Canberra, the Treasurer and a phalanx of analysts and commentators are pointing towards “business investment” as a bulwark of prosperity in coming months and years. According to The Australian (16 May), Mr Costello “is pinning his hopes for continued strong economic growth on business investment and has singled out nine diverse projects as examples of the bullish investment climate”.

Two equivocations lurk in this statement. First, lost in the excitement is the fundamental distinction between investment and consumption (see Part V of The Robinson Crusoe Ethic Versus the Distemper of Our Times); second, also obscured is the dependence of the “investment”, much of which is actually consumption, upon government subsidies. It follows that a significant amount of today's “business investment” is actually disguised and possibly misdirected government expenditure.

The $1.3 billion Adelaide to Darwin rail project, for example, a boondoggle no previous Commonwealth government has been willing to underwrite, has received $200 million of direct support from Canberra and more from South Australia; Rio Tinto's $1.5 billion aluminium refinery in central Queensland has received a $137 million interest-free loan from the Commonwealth and $150 million from the Queensland Government; Australian Magnesium Corp.'s $1.3 billion plant, also in central Queensland, has secured at least $250 million of government loan guarantees; the Commonwealth will extend $356 million of support to the $1.5 billion Western Sydney Orbital Road, and on and on. From these equivocations spring misconceptions and malinvestments. A typical example (The Australian 16 May): “Mr Costello said the $300 million redevelopment of the Melbourne Cricket Ground, which will be given $90 million by the Federal Government, would help drive growth”.

It is worth noting, whilst reflecting upon the state of contemporary public finance and the thinking that presently underlies it, not only that little of value has been learnt in recent decades: even worse, much of great value bequeathed to us by our forebears has been unlearnt and consigned to the dustbin. According to John Stuart Mill (Essays On Some Unsettled Questions of Political Economy, 1844), “the utility of a large government expenditure for the purpose of encouraging industry is no longer maintained. Taxes are not now esteemed to be like the dews of heaven, which return in prolific showers. It is no longer supposed that you benefit the producer by taking his money, provided that you give it to him again in exchange for his goods. There is nothing [to commend the doctrine] that the more you take from the pockets of the people to spend on your own pleasures, the richer they grow; that the man who steals money out of a shop, provided that he expends it all again at the same shop, is a public benefactor to the tradesman whom he robs; and that the same operation, repeated sufficiently often, would make the tradesman a fortune”.

John Quiggin (The Australian Financial Review 6 June) summarises the present situation: “… fiscal and monetary stimulus is a drug that must be used with care if habituation and addiction are to be avoided. If a temporary recovery is used as a reason for dodging necessary reforms, it may do more harm than good in the long run. Japan provides a cautionary example, [and there] is little sign that the need for reform in the U.S. has been recognised … The longer the necessary adjustments … are delayed, the greater will be the eventual pain”.

Soft Expectations and Hard Experiences

During the latter half of the 2001-2002 financial year, economists' and analysts' soft expectations and capitalists' hard experiences told ever more divergent stories. This disjuncture hints that the market prices of equity and debt remain greater, and in some instances much greater, than their intrinsic value. In America, according to The Wall Street Journal (26 January), “based on stock valuations, expectations for a rebound in corporate profits this year are pumped up like they are on steroids, with the price-to-earnings ratios for S&P 500 companies almost two times the average … But wait a minute! Corporate executives, an often optimistic bunch, aren't seeing a silver lining in the theories of economists, who are predicting an impending turnaround in the economy … In the hundreds of earnings reports that hit the market last week, there was little chest-thumping from corporate leaders about the outlook for profits”.

Alan Wood (The Australian 22 January) put this disparity into a particularly insightful perspective: “the economists forecasting this recovery are the same ones who failed to see the recession coming and failed to understand the nature and extent of the bubble that preceded it. Stock markets are still overvalued and the impact of the bursting bubble is still working its way through corporate America. The extraordinary case of the collapse of Enron raises the prospect that many more cases of bubble accountancy will be flushed out, with a corresponding effect on corporate and bank balance sheets, of the sort we saw in Australia in the late '80s and early '90s”.

Mr Wood continues: “if this proves to be the case, the extent of stock market overvaluation will increase as the earnings side of projected earnings ratios deflates. Further falls in share prices will have an effect on household balance sheets and spending and U.S. recovery will prove both feeble and drawn out”.

Mr Wood concludes that “there is probably not much more that Greenspan can do about these risks via monetary policy, even if he cuts rates further. If there are grounds for labelling this the Greenspan recession, it is not because of his failure to cut interest rates far enough or fast enough. If he has made a mistake it is his failure to burst the asset price bubble earlier, when he correctly recognised it in December 1996 as irrational exuberance. Instead he became the leading promoter of the new economy …”

Regression to the Mean

The last of the most noteworthy sets of events of the 2001-2002 financial year was also a hand-me-down from previous financial years. In Alan Sloan's words (“Get Used to It: The Wall Street Party Is Over”, The Washington Post 4 June), “sorry to be a party pooper, but the bull market that defined a generation and linked Main Street and Wall Street more intimately than ever is over, and it won't be back for years and years – maybe not in our lifetimes … The 30 percent S&P decline and the 70 percent Nasdaq decline from their peaks in March 2000 are a return to reality, not a passing hangover that will vanish tomorrow night when the party resumes”.

This latter point alludes to something that is presently discombobulating many market participants. In the words of Barrie Dunstan (The Weekend Australian Financial Review, 4-5 May), “what is happening is probably a drawn-out phase during which overpriced stocks of all types are coming back to earth … Forget about projections of economic growth in the United States or elsewhere. Stock markets at the moment aren't about business prospects; they're about the excessive valuations investors have been placing on shares. These valuations went far too high until early 2000. Now they are in the process of adjusting in what the experts call 'reversion to the mean'”.

If so, and if (say) the DJIA reverts to its average rate of levitation of 8.4% per annum during the past fifty years, then it would either tumble to 7,250 by the end of 2002 (an implied and garishly unfashionable haircut of minus 28% from its level at the beginning of the year) or post zero gains for the next 4.5 years. According to Robert Fuller, cited by Dunstan, “you won't hear much about reversion to the mean from investment managers – one never does when they are on the wrong side of it – but the process is one of the most logical and predictable long-term cyclical developments in markets”.

It is also imperfectly understood. According to Edward Kerschner of UBS Warburg, described by USA Today (2 January 2002) as “Wall Street's leading cheerleader” and “the most optimistic forecaster” of 2002 (at the beginning of 2001 he predicted that the S&P 500 would rise by 29% during the year, versus its actual decline of 13%, and at the beginning of 2002 he forecast that it would rise 37% and end the year at 1,570), the notion of reversion to the mean is naïve. To demonstrate his point he pokes fun at himself: “my average body weight in my life is [72 kilograms]. I'm not going back there!” Alas, and seemingly unbeknownst to Kerschner, reversion to the mean is a group phenomenon that refers to an inverse correlation among roughly normally distributed observations that are drawn from a non-random sample and made repeatedly over time. An individual's body weight does not have these attributes; but a large body of evidence indicates that the prices and results of financial market transactions do. A new series of circulars to shareholders, entitled Regression to the Mean and Value Investing, describes the provenance and implications of this fundamentally important notion.

The Road Ahead

Value investors, as custodians of capital, seek at all times to buy quality assets at reasonable or bargain prices. Leithner & Co. therefore likes gloom, doom, pessimism and despondency – not for their own sake but because they help to make good businesses available at good prices. Accordingly, and for the reasons outlined in this Letter, the strong disbelief outlined in circulars such as Reasoned Scepticism vs. Irrational Exuberance and A New Financial Year and a Renewed Case for Caution, which have served us very well since 2000, will remain undiminished during 2002-2003.

At the same time, however, reasonable investment opportunities appeared sporadically during the 2001-2002 financial year and underwrote our results for the year. The hope is that similar or better opportunities will appear in 2002-2003; and the test is whether the decisions taken in response to any such opportunities will produce reasonable results.

A transcript of an interesting BBC Q&A by Dr. Helen Fisher

http://www.bbc.co.uk/health/body_chemistry/livechat_transcript.shtml

Live Chat Transcript
with Dr Helen Fisher
(15 February 2000)
BBC Host: Thanks for logging on for Body Chemistry's live chat with Dr Helen Fisher. We hope you enjoyed the Body Chemistry series. Tonight, the subject of love. Here is the first question…

Charlie Baker: If I'm questioning whether or not I'm in love am I in love?

Dr. Helen Fisher: Love means different things to different people. But let me list some basic characteristics of romantic love. First, your partner takes on special meaning. They seem to become the centre of your universe. Second, you think about them obsessively, often continually. Third, you focus on tiny little things they said or did and replay these memories. Fourth, you feel real elation when things are going well between you and real despair when you're not getting along.

Rebecca Evans: How did researchers arrive at the figure of 30 months as the normal length of time the feeling of love lasts in a relationship?

Dr. Helen Fisher: Scientists do not believe that love lasts only three months. In the only study of romantic love so far, those individuals who were in love maintained that obsessive thinking and elation for about eighteen months.It can last much longer if there's a real barrier to the relationship – for example, if one of the partners is married to somebody else.

Andy: Can someone fall in love more than once? If so will it ever be as powerful as the first time?

Dr. Helen Fisher: Yes, I think the brain evolved to fall in love over and over again. I know a seventy-eight-year-old who just fell head over heels in love. Romantic love is a brain circuit – it can be triggered at any age.

Dawn McGowan: What about gay people? Do the rules differ for us? Do gay women, for instance, have higher levels of testosterone?

Dr. Helen Fisher: Very little is known about hormonal levels in gay women. I have a student who is studying testosterone levels in gay women right now. In America, there seem to be two kinds of gay women – what we call butch and femme. Butch women do tend to show indications of higher levels of testosterone. But this doesn't have to do with romantic love. Testosterone is associated with a different emotion – lust, or the sex drive.

John Wilson: If sexual arousal is defined in terms of a chemical reaction between two people, why are people aroused by pornography? Doesn't this imply that there is a 'secondary' process going on?

Dr. Helen Fisher: In the beginning of this chat I divided love into three varieties: lust, romantic love and attachment. I think lust evolved to get us out looking for anybody. It can be triggered by a lot of different stimuli. Men are particularly turned on by pornography – a visual image.

Michele Lockwood-Edwards: When someone falls in love are the chemical reactions so strong that they forget about any previous love partners

Dr. Helen Fisher: Wonderful question. I think that depends. If you were really hurt by somebody in the past you won't forget that experience, nor will you forget partners that you truly loved. But the chemistry of infatuation is so strong that these memories will seem rather unimportant to you as you focus on the new one.

Kerry Acheson: As a Final Year Undergraduate taking Pharmacology, I am interested to know how far we are away from finding the answers relating to 5-HT and Dopamine etc in the process of falling in love.

Dr. Helen Fisher: Sophisticated question. New work by scientists in Italy show that obsessive romantic love is associated with low levels of serotonin, and scientists in America have discovered that high levels of dopamine are associated with partner preference in prairie voles – little field mice. I myself have just begun to put infatuated people into a functional MRI machine. Maybe next year I can tell you more.

Jess Mookherjee: The programme tonight focused on brain chemistry. But what about the behavioural and ecological strategies that drove the brain chemistry to evolve? Could any answers be found from ecomonic game theory – regarding love and co- operation?

Dr. Helen Fisher: I think that all of the mammals have a basic brain chemistry for romantic attraction. I think this emotion circuit evolved in the brain so that animals could choose between potential partners, conserve their mating energy and focus their attention on the best available partner. I think ecological circumstances vary dramatically. Attraction in some creatures lasts only seconds. In humans, it can last months or years, due to many evolutionary factors.

Tiggy Tiger: How can people fall in love over the Internet without any chemicals passing between them?

Dr. Helen Fisher: Over the Internet you can communicate quite easily and in a very relaxed fashion. It's an intimate way to talk to somebody. It's probably quite easy to become attracted to somebody just through love letters. An important moment comes, however, when you actually see them. Many love affairs end when you actually see the person!

Jonathan Bishop: My horoscope says I will meet someone this week. Couldn't this just cause a placebo effect?

Dr. Helen Fisher: I hope your horoscope is true. Timing is important. If you're looking for love, you'll probably do more of the right things to find it. Good luck to you.

Andy: If a pill cannot be made to make people fall in love, can a pill be made to quench your desires?

Dr. Helen Fisher: I think pills can be made to reduce levels of dopamine so that you feel less elation. And we already have pills that help reduce obsessive thinking. But you also have to do some things yourself – most important, stay away from the person so the brain chemistry can decrease naturally.

Jon Anon: I am a 14 year old guy and recently I have been infatuated, then I got kind of obsessed with a girl I know at school. I really want to know how to stop this because it's disrupting my life, and the girl isn't a particularly nice person. To end my feelings towards her do I have to intravenously take Seratonin, or will this end soon?

Dr. Helen Fisher: Taking serotonin can help – but more important, stay away from her! Don't call her or write to her and go to the places where she goes; avoid her friends and anything that reminds you of her. Eventually your feelings will recede.

Adele Lievesley: Is it down to genetics that we fall for a particular type of person? I also read that people we fall for are usually a bit like ourselves?

Dr. Helen Fisher: There's many reasons for falling in love. Sometimes the timing is just right and you fall for the first person who comes along. If you're looking for a long term partner, people tend to choose people who are from the same background, same educational level and many of the same interests, values and goals. Anthropologists call it positive assertive mating.

Jerry Sinclair: I watched your programme with interest, but is love all a chemical process or is their more to it than that?

Dr. Helen Fisher: Love is much more than chemistry. Love can be spiritual, it can be full of memories and experiences and adventures – but the actual feeling that you have as you are in love is produced by chemistry.

Hugh Lynch: What about hate? Where does that stem from?

Dr. Helen Fisher: Nobody knows the brain's circuitry and relationship between love and hate. Some day I hope to discover that connection. I think they are closely connected because when people are disappointed in love, their love can turn to hate. The opposite of love is not hate but indifference.

Wendy Vaizey: Do you think there could be a chemical antidote to falling in love?

Dr. Helen Fisher: We don't yet know a chemical antidote to falling in love. But we will some day know the chemicals involved in falling in love. Even then they will be very hard to control. Men and women were built to fall in love. This emotion evolved millions of years ago.

Adrian Amstead: Would it follow that if a man were to engage in, shall we say, solo sexual activity, instead of pursuit of the object of his desire, the the release of hormones would lead him to misplaced obsession and attachment. Could this be a reason for the stalking phenomenon?

Dr. Helen Fisher: It is true that there are connections between these hormones. For example, when you make love to somebody, at orgasm, levels of oxytocin and vasopressin go up. These chemicals are associated with attachment – that's why you can feel so attached to somebody you just made love to. Stalking, I think, is associated with different chemicals. People stalk when they've been romantically rejected. It is my guess that dopamine and norepinephrine are involved.

Brid Duane: Hypothetically- can a deaf, dumb and blind person fall in love?

Dr. Helen Fisher:Certainly. This emotion system in the brain evolved in all of us. I think you can fall in love at any age. I think you can fall in love under almost any circumstances.

Kristen Timpson: What about love for our family, is that something separate all together?

Dr. Helen Fisher: I think love of family stems from the brain chemistry for attachment, the third of these emotion systems.

Clare Wright: Is there any reason why it may be difficult for a woman to fall in love with a male transvestite?

Dr. Helen Fisher:I can think of a lot of reasons why it might be difficult. From a Darwinian perspective, women evolved a preference for falling in love with heterosexual men who could help them rear their young. This is an unconscious drive. Most women will look for a heterosexual, straight-dressing man. There is great human variation.

Wendy Vaizey: If falling in love is two people simultaneously having separate chemical reactions, is it known what initiates the process?

Dr. Helen Fisher: Wonderful question. Of course it doesn't take two people – alas, many of us fall in love with somebody who's not in love with us. But what triggers love is not chemistry but your childhood experiences. In child hood we built an unconscious list of what we're looking for in a mate. Then if that person comes by who fits within that love map, that person may trigger your brain chemistry.

Toria Leeds: I was stunned to learn of the effects of Congenital Adrenal Hyperplasia (CAH) on 'Body Chemistry' tonight. As a child I disliked dolls and loved playing with toy cars and anything with wheels really. Physically I am a completely 'normal' woman, but mentally I have always behaved more like a male. Could this somehow be related to CAH and possibly why I find it difficult to be dependent on my partner?

Dr. Helen Fisher: You would have to go to a medical doctor and find out how high your levels of testosterone are and whether they are associated with CAH. But all kinds of women do have high levels of testosterone who were not CAH babies.

Nick Frank: What about people who have never had a serious relationship, never fallen in love? Could the reason be ascribed to a chemical imbalance or is it more likely to be psychological?

Dr. Helen Fisher: There's always a psychological component to any behaviour. We do know there are a few people who seem to have a chemical composition such that they tend not to fall in love. But generally, I would guess, the psychological component is even more important.

Ramesh Paranjpe: I found that my parents did not give me any love and therefore I feel incapable of loving anyone. Is it possible to love even though I was not loved?

Dr. Helen Fisher: Wonderful question. I think it's very possible to love even though your parents didn't love you. I think that brain chemistry is there and the day may come when you fall in love. This is a primitive, basic, powerful emotion. Most people do end up falling in love. No matter what their childhood was like.

Kristen Timpson: Is it possible a woman to fall in infatuation and obsessive love after her menopause?

Dr. Helen Fisher: Very definitely. I think this is a basic brain circuit, just like the brain circuitry for fear and anger and surprise. It can be triggered at any age. But the circumstances have to be right.

Paul Roy: What is the difference between love and lust in terms of brain regions involved?

Dr. Helen Fisher: Love and lust are very different emotion systems. The primary hormone of the sex drive is testosterone in both men and women. The brain system is quite different from that of romantic love. In fact, we all know these are not always connected. You can make love to somebody you are not romantically in love with and you can be romantically obsessed with somebody you've never slept with.

Tina Livingstone: Could I pick up on the love map theory having been married twice and being happy in my third partnership I can say that my choices appear to have precious little similarities; do you think my map was too big or that my hormones are simply firing off independently of it?

Dr. Helen Fisher:Love maps are very unconscious, often quite unknown to the person who has them. Partners can look and act very different but they may have some real similarities. For example, both men might be caretakers – something that you like – or they might be flamboyant – but in very different ways. Plus you have changed in the course of your life and your love map has changed, too.

Molly Wells: Is falling in love is good indicator of compatibility? Should you always go with it, assuming you have a choice?

Dr. Helen Fisher: Falling in love is not always an indicator of compatibility! Sometimes we fall for totally the wrong person. That other emotion -attachment, often comes with real compatibility.

Tony Mowbray: Can thinking about love in such a scientific way affect your psychology about love, and can your psychology affect the hormones?

Dr. Helen Fisher: It hasn't with me, in spite of everything I know about love – I'm the same sucker everybody else is. Just like fear – you can study fear for twenty years and still be scared when a taxi cab rushes towards you.

Clare_de: What happens chemically when people fall OUT of love?

Dr. Helen Fisher: I don't know yet, but if the relationship evolves into attachment, I suspect levels of serotonin go up, levels of dopamine and norepinephrine go down and levels of oxytocin and vasopressin increase, gradually moving you from romantic love to attachment.

Tally Rogalla: Where can one buy a love map?

Dr. Helen Fisher: You can't buy a love map. Somewhere between ages five and eight you begin to develop an unconscious list of what you are looking for in a mate. Your love map depends on subtle things in your childhood like the amount of chaos in the house, other peoples' interests and values. You already have a love map – you just probably want to buy a different one!

Clare Wright: What chemistry is involved with a broken heart and depression?

Dr. Helen Fisher: I don't know yet but I think that romantic rejection drives levels of dopamine up so high that you feel tremendous anxiety and fear, and it drives levels of serotonin down so low that you obsessively think about the problem.

Maria: my friends can't understand how I can fancy desperately, a guy who is older, fatter and uglier than my current boyfriend. Neither can I in the cold light of day but given a choice I know who I'd go to bed with. Why do I fancy him?

Dr. Helen Fisher: Because love is blind, as Chaucer said. Once you fall in love with somebody you can list what you don't like about them but the rational brain is swamped by feelings of love. Besides, he may be funnier and smarter and better in bed.

Brid Duane: Basically is it just our DNA trying to replicate the species that makes us fall in love to procreate, and could a time come when in the future through some accident that effects that part of our DNA the human species could be wiped out.

Dr. Helen Fisher: Good question. Yes. The mating game is the most important game in town. We evolved much of the brain to direct us to form pair bonds, mate and have children. I don't think that those genes or that brain physiology will ever be tamped down. We will be wiped out by external forces or through war.

Jon Anon: Is there anyway of enticing girls into liking me, since I am 14 and haven't been kissed by a girl?

Dr. Helen Fisher: Yes. Girls like boys who listen to them and talk to them and do things with them and laugh with them. You just have to start to flirt with girls.

Ron Dutch: My wife and I are really looking for something to increase her sex drive, do you think some of that testosterone cream will work for anybody?

Dr. Helen Fisher: Testosterone cream does enhance the sex drive in both men and women. I know several people who use it. It increases sexual thoughts, sexual energy and even increases the number of orgasms. But there's more to the sex drive than testosterone. People are excited by novelty. Why don't you try doing something different ?

BBC Host: Thanks for all your excellent questions for Dr Helen Fisher. We'll be finishing in 5 minutes, so if you have any questions you'd like answered, please send them now.

Chris: Is anything understood about why the different hormones have the psychological effects they do?

Dr. Helen Fisher: No, we don't really know. That's almost a metaphysical question. We know how the body works to some extent but how feelings are interpreted is a larger issue.

Roy: Is it more common for women to be bi-sexual than men?

Dr. Helen Fisher: There is evidence that women are more bisexual than men. Men seem to be orientated either one way or the other more regularly. I think this gender difference evolved. Males needed to inseminate; females needed to have a mate to rear their young. If they couldn't catch a male, maybe an older female would do. Female bisexuality was an adaptive mechanism. This flexibility helped them rear their young.

Anton Kali: Why do I love someone who hates me? The programme seemed to suggest only that people turned each other's chemistry on mutually.

Dr. Helen Fisher: I'm sorry the programme suggested that people turn each other on mutually. Most of us have loved people who didn't love us at some time. In fact, adversity can heighten love – when someone doesn't love you, you love them more.

W.D Wells: Help me! I’m 74 years old and a senior citizen. I think I’m in love with this woman at my bingo club..can a person of my age fall in love?

Dr. Helen Fisher: Absolutely. Go and love her – you'll feel fifteen again.

BBC Host: Just time for one more question…

M.K: A year ago, I ended a relationship of 10 years but I still love the person and it hurts. People say time heals all wounds but I still feel awful. Will I ever stop loving him?

Dr. Helen Fisher: Yes, you will. But sometimes it can take two or three years. Find some hobbies, make new friends, throw out his love letters and sit it out. Love will come around again – we're an animal built to love.

Thank you very much – they were really interesting questions. I am very positive about love. Women are more interesting than they've ever been and better educated. I think that men and women have a tremendous opportunity to find love in this century.

BBC Host: Our Body Chemistry live chat time is over for this evening – but many thanks for your overwhelming interest and excellent questions. Many apologies if your question didn't get answered; there just wasn't enough time to cover them all. Thanks again for being with us tonight.

Wall Street Journal editorial 2/11/2002

REVIEW & OUTLOOK

Bush and Asbestos

“Through no great failing of his own, Vice President Dick Cheney may not have been the best investment for his former employer, Halliburton. As CEO, he led the company to a much-applauded merger with Dresser Industries, but now Halliburton finds itself engulfed in a red tide of asbestos litigation. And his new job could be interfering with the Bush Administration's willingness to help.

Halliburton has been hit by four asbestos verdicts totaling $152 million in recent months. It faces 250,000 other claims and counting, most originating from the Dresser side. In this the company is like much of American business, for which asbestos suits have become the new plague.

Alert people up to and including the U.S. Supreme Court have been arguing for years that asbestos litigation has swollen to such ungainly proportions that the court system can no longer sensibly handle it. Congress needs to act, creating a nonjuridical process that would speed compensation to the truly injured and preserve the option of those who were exposed to asbestos to collect someday if they develop a related illness.

It would help if the Bush Administration, which owes nothing to the plaintiffs' bar, would lend a hand. And sure enough, our sources say that tort reform was in early drafts of Mr. Bush's State of the Union address. But it got pulled — some say for reasons of time, but others say because some White House myrmidon remembered that Mr. Cheney had worked for Halliburton, and Halliburton had been in the news for asbestos.

We can understand the political sensitivity, but it's a sad precedent if an administration can't address an urgent problem because one of its members actually knows something about the issue. The idea that private-sector experience is by definition delegitimizing is of great service only to career politicians who are able to make a virtue of their lack of contamination by reality. We hear a tort reform task force is still percolating inside the Bush Administration, and we hope its work sees the light of day.

Enron is the panic du jour, but more jobs and pensions are under threat from asbestos than from 10 Enrons. A study by the Rand Institute of Justice last summer estimated that the 500,000 claims filed so far represent less than half the eventual total, and even this probably underestimates the trial bar's ingenuity in scaring up “victims” to claim they were exposed.

The problem has become more urgent since the study was published, with nine more companies driven into bankruptcy and liability spreading to firms that had nothing to do with making asbestos stuff or concealing its danger. On Friday, Honeywell , an asbestos virgin, found itself among 48 defendants walloped for a $53 million verdict on behalf of a former brake mechanic and Coast Guard engine-room worker.

As Paul Harvey would say, “Now here is the rest of the story…”

Also on Friday, the Big Three U.S. carmakers lost a bid to transfer some 20,000 brake-related asbestos suits from state courts to a single federal claim. The car companies are in the line of fire only because one of their suppliers, Federal-Mogul, filed for bankruptcy in October after asbestos claims piled up against smaller companies it acquired in the 1990s.

Resolving all of these claims under the present system could end up costing $275 billion. More than 1,000 companies have collected lawsuits, and every day some new, unsuspecting defendant gets hauled into court. Once or twice Congress has pretended to grapple with the problem, but the trial lawyers yanked the contributions chain and Senate Democrats scuttled the effort.

The vast majority of asbestos claimants, by the way, aren't sick and won't become sick. But lawyers are happy to stir up their fears anyway, because masses of these “exposure” claims are what bring companies to the table with settlement cash — or to Chapter 11. So the lawyers rope the claims together to defy any realistic attempt to evaluate them or find out if the exposure really happened and which company's products were responsible. The auto claims, for example, are mostly from gas station workers who claim chronic exposure to asbestos dust from, of all things, brake linings.

The primary beneficiaries are lawyers and their armies of medical and expert hangers-on, who consume 50 cents of every dollar paid out. Meanwhile, people truly ill, for instance those with the horrible asbestos-related lung cancer mesothelioma, often die without compensation thanks to the backlog of cases.

The first President Bush had the savings-and-loan mess, which previous administrations had booted but the White House knew it had to address before the economy could recover in the 1990s. George W. Bush would be doing himself, the economy, suffering victims — everybody but the asbestos lawyers — a similar service by taking a lead on resolving the asbestos disaster before it puts thousands more Americans out of work.”

Continued discussion with regarding animal experimentation. Read the initial discussion.

Portia–thanks for the response.

Points I agree with:

1. I have no problem with moving to computer models for high school students.

2. Yes, many illnesses would be greatly reduced if humans stopped smoking, eating Whoppers, and so on, thereby reducing the need for animal research.

And I heartily support ending tax subsidies for scientific research so that you can spend your money to support education and prevention efforts, if you so desire. That way you wouldn't have to support research you felt was useless and/or immoral.

On to the points where we have greater differences:

Yes, I realize animal testing has helped in the past and can continue to help for MEDICAL purposes. Cosmetic testing is completely unnecessary in my opinion.

O.K. So would you support animal research for legitimate medical purposes? If so, what would constitute legitimate, in your mind?

However, most medical labs do NOT practice “good science” (as evidenced by the never-ending stories of abuse being reported) and continue to treat the animals in an inhumane manner.

What percentage of laboratory animals do you believe experience unacceptable levels of inhumane treatment?

Keep in mind that animal rights organizations have to keep the money flowing in too. Which is more likely to garner support: a) claims that inhumane treatment of animals is done by small fraction of labs b) claims that animal abuse is rampant in the industry and therefore requires your support now.

If the gov't would eliminate animal tests that have no benefit to humans, I'd be happier. I'm talking, for example, about some researcher who has applied for a grant to see what will happen to a cat if you place it over a barrel of water on a small railing, in the dark, and implant electrodes in it head… how long does it take to fall in the water? Cruel, useless and just a way for some asshole to spend gov't money in “the name of science.” No benefit to humanity whatsoever. Those are the kind of tests that I find the most horrific. And that kind of stuff is happening all of the time.

I agree with you–I'm all for eliminating cruel, useless experiments that are of no benefit to humanity whatsoever. How could anyone be for such experiments?

But don't many animal rights activists want to stop all animal experimentation regardless of its possible benefits to humans?

If you're not part of that camp, what medical experimentation on animals would you allow?

What is so wrong with expecting those so-called good “men of science” to not be cruel bastards? Apparently it is too much to ask since anti-animal rights individuals get so upset when we ask them to stop their cruel treatment of animals. I wonder why that is?

There's nothing wrong with expecting scientists to be humane. However, imagine for a moment that you are a scientist. Wouldn't you get upset if someone

…implied that you were a cruel bastard who killed and tortured innocent animals just so you could get rich.
…implied your work was useless, horrific, and of no benefit to humanity.
…wanted to pass laws that would make it effectively impossible to pursue research that you believed might extend or save the lives of millions of people.

I personally do not want to take a drug that was proved to be safe on animals.

No drug can be proven safe. The safety of a drug depends upon dosage, timing, co-mingling with other drugs, hormonal levels, and a myriad of other factors. There's so many variables, you can't test them all.

It's all about risk reduction. And as I admitted, animals are not perfect models. But suppose I have two untested treatments for a disease you have. I give each to a rabbit. One of the rabbits dies; the other lives. Wouldn't you want to know what drug the dead rabbit got?

Take another example. Crash test dummies. They're made out of wood, plastic, and steel. They're not perfect models–they aren't living at all. But they tell us a lot about the safety of cars.

In other words, there would be a lot more Thalidomide-like tragedies if we didn't do animal testing.

Animals are not there just to be eaten and experimented on.

Yes, they make great little fur hats too.

Sorry. But how do you know that animals are not there to be eaten/experimented upon? Killing other animals for food(survival) seems to be quite common among mammals.

A car, a computer, dairy products–none of them you need to live. Someone who doesn't own a car, or use a computer might regard them as luxuries, frivolities even. Yet you're willing to tolerate the death and suffering of some animals so that you can enjoy them.

Likewise, I'm willing to tolerate the death and suffering of animals because I believe that it will help save the lives of myself and the people I love.

http://mit-smr.com/past/2001/smr42310.html

What’s Wrong With Management Practices in Silicon Valley? A Lot.
To prevent high turnover, burnout and loss of employee commitment, learn to avoid four practices that are undermining some high-profile companies.

Jeffrey Pfeffer

Everyone seems enamored of Silicon Valley. It has certainly spawned much new technology and created vast wealth. As a consequence, many executives visit Silicon Valley companies, read books about them and seek to copy the Valley’s approach to management. But as high-tech commentator Esther Dyson has perceptively noted, although Silicon Valley is good at generating new technologies quickly, it has been much less successful in building sustainable organizations or in using sound management practices. So, before you rush to copy the Silicon Valley approach to management, a word or two of caution seems in order.

Silicon Valley’s Approach to Management
What is Silicon Valley’s approach to management? In general, it encompasses four practices. First is the free-agency model of employment, featuring relatively little commitment on the part of companies to their people or vice versa. Individuals are expected to watch out for themselves (the term at Sun Microsystems is “career resilience”) and move on at a moment’s notice. Labor mobility and limited attachments are expected and accepted.

Second is the extensive use of outside contractors, even for hardware and software development. The Valley may be the home of the virtual or almost virtual company.

Third is the use of stock options as an important form of compensation. Stock options are used even by companies in relatively staid industries, such as the manufacture of tamper-evident bottle caps. If the company is located in San Jose, California, it feels obliged to offer options as part of the pay package.

Finally, long working hours are typical. Indeed, they seem to be a badge of honor. The feeling is, if you aren’t working constantly, you must not be essential to the success of your enterprise — a suspicion that is hard on the ego.

The Consequences
There are predictable and observable consequences for each of the four practices. The free-agent mentality, for instance, generates high turnover. Estimates range from 20% to more than 30% annually. The cost of recruiting and training replacements is enormous, particularly when combined with less direct costs: the productivity costs of positions going unfilled; the disruption to relationships with customers who must continually deal with employees in training; the costs to the product-design and development functions as knowledge walks out the door. And then there is the cost of building up one’s competition, as former employees take positions with established competitors and startups.

But isn’t high turnover inevitable in high-technology companies? In a word, no. SAS Institute, the largest privately owned software company in the world, with 1999 sales of more than $1 billion, had a turnover of less than 3% in the 12 months from June 1999 to June 2000 in its Cary, North Carolina, headquarters. MTW Corporation, a small, rapidly growing software- and computer-consulting company based in Kansas City, Kansas, has a turnover rate approaching 5% and falling. Cisco Systems has a turnover of about 8%, and there are some startups in Silicon Valley that have almost no turnover at all. If you tell people when they come to work for you that you don’t expect them to stay, and if you treat them accordingly, they’ll move on. Turnover has become an accepted way of life. It doesn’t have to be.

Nor does contracting everything out and using lots of temporary help always make sense. What sustainable competitive advantage can a company have when much of its core technology is in the hands of people with little loyalty? What kind of service does a customer get when talking to people who don’t even work for the company from which the customer has made a purchase?

The use of contractors has several predictable effects. First, contractors generally leave faster than permanent employees, exacerbating high turnover. In fact, in order to avoid problems with U.S. labor law and tax regulations defining who is a contractor, many companies now limit temporary and contract employees to a term of one year, necessarily guaranteeing 100% turnover in that portion of their labor force. Second, most contractors have less commitment to the company and its products and customers than employees do, with obvious implications for performance. Third, contracting out does not always save money. That’s an illusion. Few companies, if any, evaluate the full cost of using contract labor or outside contractors. They see the direct cost savings, but they don’t see the costs added through diminished customer retention, reduced productivity and fewer chances for developing internal intellectual capital.

Illustrating those problems is a recent study by Stanford University Ph.D. candidate Laura Castenada on the use of temporary help and contract labor at Applied Materials, a company based in Santa Clara, California. Most temporary employees there wanted to become permanent employees. When they knew they would not and saw their one-year term at the company drawing to a close, they held back from sharing their knowledge and skills with others, including their replacements — and spent many of their last days on the job looking for work. The loss in tacit knowledge and effort under such circumstances can be damaging.

Many of the Valley’s compensation practices, particularly the use of signing bonuses and stock options, inadvertently help fuel the high turnover. Giving a signing bonus that vests over four years rewards people for leaving. After earning the bonus, they simply move to another company to collect another signing bonus.

And what about options? Employee ownership is a great thing — it helps employees think like owners. But options are not ownership. In real employee stock ownership, employees purchase shares and thus have, to use the colloquial phrase, “skin in the game.” They are committed. Options are given to employees, not purchased. When the stock price goes down, the options are repriced or, now that repricing has become less acceptable to institutional investors, companies issue more options at the new, lower price, as Microsoft and Amazon.com have done. The potential dilution to earnings is enormous, even if accounting conventions do not yet fully capture the hit.

Moreover, as technology columnist and venture capitalist William Gurley has observed, options encourage a gambling mentality. Go for broke. If there’s a big win, fine. If there’s disaster, move on and try again. That is not the mentality of real ownership.

And finally, there are the long working hours. The practice of having people work until they are exhausted leads to both turnover and burnout. How many years or even months can you work 80-plus hours per week at the expense of friendships and social life? Why would free agents work endlessly for an institution for which they have little or no feeling? They won’t. They’re there because of the money or the network- and résumé-building — not because they care about the company or its customers, products and services. As soon as the money is earned or appears unlikely to materialize, they leave.

More fundamentally, there is a confused notion that being productive is the same thing as working long hours. It isn’t. As Jim Goodnight, the wise co-founder and CEO of SAS Institute, has said, “If you’ve put in a full day, by 6 o’clock, you shouldn’t have anything left, so go home.” Amazingly for the software industry, SAS thrives on a 35-hour work week. Long hours also are partly responsible for the defect-filled products we have come to expect and accept. People who work when they are exhausted make mistakes. And as the quality movement taught us, it is more expensive to find and correct errors than it is to prevent them.

Silicon Valley’s success has not repealed the basic rules of business. Your profits come from loyal customers who do business with you for reasons other than just price. Customer loyalty is a consequence of loyalty from employees who produce great products and offer great service. In the short run, with enough venture money and enough product demand, any business model may appear feasible. In the long run, those companies that actually run their businesses efficiently and produce sustainable results will be the ones you keep reading about.

Jeffrey Pfeffer is a professor of organizational behavior at the Graduate School of Business at Stanford University. Contact him at [email protected].