Federal Government Partial Shutdown? Huzzah! Huzzah!

Due to the budget impasse, the federal government may experience a partial shutdown like that of 1995-96.

I think a partial shutdown is a good idea. No, a GREAT idea, but only if the parts that stop operating are shuttered permanently pending positive proof that they were providing goods (as opposed to bads) and that the government itself has to provide those goods. Such a shutdown would allow private enterprise and charity to step into the void and show that we don't need the federal government for much beyond homeland defense and federal courts. Leasing of national infrastructure and parks would allow the national government to run a surplus next year and soon after to implement a large, permanent tax decrease that will spark the greatest economic expansion since ratification of the Constitution.

On dentists and dentistry

In Fubarnomics and Broken Buildings, Busted Budgets, I* show how we need to move toward fixed cost contracts if we ever want productivity in construction to improve. No more of this "I bid $3 [thousand, million, billion] but because of X, Y, Z [usually total b.s.] I need you to pay me $6 [thousand ...]" crap!

So when a local dentist advertised a price guarantee, I decided to check it out. That's when I confronted another problem, one of asymmetric information. The dentist said that I needed a filling in one of my molars. That's plausible -- I only brush, floss, and use mouthwash 4x a day, have missed only 1 cleaning in the last decade, and had only 3 small cavities as a child -- but the diagnosis rather took me by surprise. As advertised, the dentist gave me a firm quotation on the proposed work but while driving home from the appointment I heard another local commercial, this one by an auto mechanic who was making fun of mechanics who screw customers by coming up with screwy car ailments. Pretty funny: something about a muffler belt and a flux capacitor, the latter of which I am pretty sure is found only in certain time traveling cars. In any event, I thought what a nice racket this could be: appear to be a "good guy" by offering a firm quotation but do it on unnecessary work! Then an RDH friend of mine confirmed the validity (though of course not the veracity) of my fears.

So I've been musing about how to fix this problem and came to the following solution: instead of relying on "trust," as the dentist and the auto mechanic in question claimed I should, couldn't we devise a system where dentists, auto mechanics, and any other line of business where asymmetric information is heavy anonymously check each other's work? Say all dentists, or at least the ones that want to signal their quality, agree to review each others' diagnoses. (One for every patient of theirs reviewed by someone else in the group.) Upload the X-rays (c'mon, you should all be digital by now ... and if not, buy a scanner!) to a system that would randomly send them to another dentist in the region (or time zone) for review. Lacking any incentive to lie, the provider of the second opinion would be much more "trustworthy" than the first. The ADA or other association could spot check the diagnoses to keep everyone on the up and up and provide a third opinion in cases where the first two disagree.

The same could be done for automobile repair, I suspect, by creating short videos of the car experiencing problems when running, taking pics of the part(s) in doubt, etc. (And then give a firm price quotation, of course.)

Yes, these procedures would consume resources but they would probably pay for themselves with an increased volume of overall business as people learned that even though they can't trust their local service provider they can trust the second opinion system of which they are a part. For now, I'm leaving my tooth untreated and leaving the "check engine" light in my Saturn on for at least another month.

*And my co-authors on BBBB of course.

My Twitter "career"

I haven't been blogging much of late because I've been too busy working on a massive project (that might be going bust soon). :-(

I have been doing a little tweeting though. Here they are to date. Feel free to "follow" if you like but I'm much less committed to it than to this blog, which finally generated some income for me last month! Tweeting is a little like a "quickie": it's better than nothing sometimes but not as satisfying as a good, long blogging. Ya know?


Wrighticism #19: If the measure of a man is earning more money than his wife can spend then I am surely a failure! Happy Valentine Day yall!

robertewright Robert E. Wright
Wrighticism #18: "skippy" = the way to pronounce Skype when the video isn't functioning well. "skyp" = skip; e = y (ee). Get it?

robertewright Robert E. Wright
Wrighticism #17: caveat erus = let the owner (investor) beware

robertewright Robert E. Wright
My textbook publisher is growing http://www.bloomberg.com/news/2011-01-20/bertelsmann-puts-cash-into-college-textbook-publisher-ft-says.html

robertewright Robert E. Wright
Wrighticism #16: homo ereptor = man the thief, in "honor" of the ways that we steal from each other, sometimes openly, sometimes in darkness

robertewright Robert E. Wright
Wrighticism #15: twittersated = to have written and/or read enough tweets for the day/month/year/decade. As in I am twittersated for today.

robertewright Robert E. Wright
Wrighticism #14: twittertwit = ppl hu rite in twitter in such s-hand tht it is freakin impossible to understd what the heck they mean.

robertewright Robert E. Wright
Wrighticism #13: triskaidekaphonia = fake fear of the number 13, not be confused with triskaidekaphiladephia = fear of 13 Phillies/Flyers.

robertewright Robert E. Wright
Wrighticism #12: trannycock = that's not a dead hen pheasant you just shot, that's a rooster that likes to dress up in hen feathers!!

robertewright Robert E. Wright
Wrighticism #11: fourclosure = when not one but four houses on your block are being sold at sheriff's sale in the same week.

robertewright Robert E. Wright
Wrighticism #10: antler (fur, feather, scale) "porn" = those hunting and fishing TV shows w/ only the biggest and best deer, ducks, fish etc

robertewright Robert E. Wright
Wrighticism #9: znorexia = when chubby people see themselves as skinny in the mirror and have another helping of chocolate-covered cumquats

robertewright Robert E. Wright
Wrighticism #8: crybaby capitalism = redistribution to private enterprises that complain loudest rather than create the most economic value

robertewright Robert E. Wright
Wrighticism #7: bailout nation = a country that instead of creating wealth redistributes it to special interests during supposed crises
29 Dec Favorite Reply Delete

robertewright Robert E. Wright
Wrighticism #6: bailoutnomics = the study of the economic effects of government bailouts of private enterprises and other governments

robertewright Robert E. Wright
Wrighticism #5: bailout incidence = the ultimate recipient of bailout funds; analogous to "tax incidence."

robertewright Robert E. Wright
Wrighticism #4: wheatful = fruitful, but in a non-gluten free format

robertewright Robert E. Wright
Wrighticism #3: cornful = fruitful, but in a corny way

robertewright Robert E. Wright
Wrighticism #2: megapocrisy = a grossly large or blatant hypocrisy; a mega-hypocrisy; the lifeblood of most DC politicians

robertewright Robert E. Wright
Wrighticism #1: Wrighticism = a neologism or witticism by Robert E. Wright

robertewright Robert E. Wright
Secession and America's Looming Fiscal Crisis, Daily Caller, http://dailycaller.com/2010/12/21/secession-and-americas-looming-fiscal-crisis/

Dying by Degrees: The Economics of FUBAR

This is the text of a speech that I delivered at Augustana College's Center for Western Studies yesterday (12/01/10).

Dying by Degrees: The Economics of FUBAR
By Robert E. Wright, Nef Family Chair, Augustana College

FUBAR is an acronym that stands for Fouled (ahem!) Up Beyond All Recognition. Many military veterans know it as one of a family of acronyms, like SNAFU, TARFU, and SUSFU, that express anger for, and cynicism and distrust of, the status quo and the powers that be. Movie buffs learned the term FUBAR from films like Saving Private Ryan and Tango and Cash. I used it in the title of my book about the hyper-dysfunctional parts of the American economy because saying FUBAR isn’t cursing according to the word police but it definitely carries the connotation of the f-bomb. Like most folks, I’m a sinner … yep, yep, it’s true … and so I do curse when I’m angry or hurt. And the state of the U.S. economy has me feeling both of those powerful emotions.

But please don’t get me wrong – I’m not trying to cash in on the recent financial crisis … at least not in this book. The subprime debacle and subsequent financial system meltdown wasn’t the cause of America’s current economic plight but rather was a symptom of a much deeper illness, one that is slowly killing our economy. Hence the title of this talk, “Dying by Degrees.”

Given the events of the past couple of years, few people dispute that the financial system is totally FUBAR. Ditto with slavery, another melancholy subject covered in the book. Sometimes, however, people wonder if construction, higher education, healthcare, and Social Security are as economically dysfunctional as I claim. They certainly are if one accepts a simple objective criteria: quality and the price level constant, the costs of built infrastructure, college degrees, healthcare services, and retirement savings have been rising for decades and show no signs of abating. Dollar for dollar, our buildings, transportation infrastructure, and college graduates are no better now than a generation ago, Social Security continues to offer a substandard basket of disability and life insurance and retirement annuities, and our healthcare outcomes, as measured by mortality and morbidity rates and patient satisfaction, have improved relatively little, especially compared with those same outcomes in some other rich nations, like Switzerland. Yet all four services cost a lot more in inflation-adjusted terms than they once did – Social Security tax rates have risen over a dozen times, for example, and everyone knows about the soaring costs of tuition, health insurance, and construction services. As a consequence, those sectors swallow ever larger percentages of our GDP or total national income. Healthcare expenditures, for example, continue to soar towards 20 percent of GDP, or approximately the economy’s arm and leg.

The economy is littered with other trouble spots as well -- like military defense contracting, 401K administration, and automobile manufacturing and repair -- that I just don’t know enough about to discuss at present. But I heartily encourage others to do so using my theory of FUBAR-nomics, or the causes of economic hyper-dysfunction.

The core cause of the economy’s plight, I believe, is our society’s collective inability to first identify and then ameliorate what I call hybrid failures. No, not a Prius that won’t start but rather complex combinations of market failures and government failures that fester for decades until the infected sector or industry functions so poorly that vaguely obscene military acronyms become apropos. To understand my thesis, one must of course know a little bit about both market and government failures. After quickly reviewing some examples of each, I’ll then describe how they combine to suck the life out of some of the most important parts of our economy.

Market failure is the term that economists use to describe 5 situations in which markets do not function in the neat ways described by Adam Smith.

One: market power, or the ability of some sellers -- monopolies and cartels for example -- to make prices, generally by imposing their will on supply, rather than to take prices from the market as competitive firms must.

Two: public goods, or goods -- which is to say merchandize or services with a positive value -- that no seller could profit from by providing. National defense is the classic example but I like to expand the concept beyond the military to the Lockean trinity of protection of life, liberty, and property, the end all of all good governments.

Three: externalities, or situations where some of the costs or benefits of a good are not included in its price. Pollution is the classic example of a negative externality, one where some of the costs of production are not internalized by the polluter, who responds rationally by producing more goods and hence more pollution, than it would have if it had to bear the costs created by the pollution. Education is the classic example of a positive externality because some the benefits of education do not accrue to the student. More on that one later.

The fourth type of market failure is asymmetric information, or disparities in the quality or quantity of information possessed by the buyers and sellers of a good. There are three main varieties, adverse selection, moral hazard, and agency problems. The classic example of adverse selection is the lemons problem, the high probability that the purchaser of a used automobile in the person-to-person market who doesn’t know much about cars will pay too much. The most famous example of moral hazard is burning down the barn or shop for the insurance money. Agency problems are perhaps best exemplified by the shiftless fast food chain employee that we’ve all encountered or, in my case, was, albeit for a brief period.

The fifth and final type of market failure are asset bubbles, or periods when investors pay more for specific assets – sometimes land, sometimes equities, sometimes gold, sometimes Merino sheep, sugar beets, or other agricultural goods – than fundamental variables like interest rates suggest that they should. Some economists dispute the existence of bubbles, or at least definitions of them that assert the irrationality of bubble participants. That reminds me of a joke: “When an economist says the evidence is mixed, she means that theory says one thing and data says the opposite.” Whether they are rational or not, bubbles have certainly existed in the past and there is no indication that they are extinct.

Almost all economists agree that market failures exist but more libertarian slash Republican leaning ones tend to downplay their importance while more socialist slash Democratic ones seem to think that all markets are deeply infected with one or more failures. The opposite reaction occurs with government failures – libertarian-style Republicans see government failures everywhere and uphold them as the key problems to solve while liberal Democrats ignore or at least minimize them.
Government failures come in many different flavors but are most easily understood with reference to competition and incentives. No organization – government, non-profit, or for-profit – is likely to meet its goals in an effective way if it is cloistered from competition AND if the incentives of its employees are not clearly aligned with the organization’s goals. That is because a dearth of competition allows an organization to wax fat and inefficient and employees tend to do precisely what they are rewarded for doing.

Governments rarely face much competition, which is often legislated away. No bank, for example, can compete with the Federal Reserve’s monetary policy or regulatory powers; the Post Office has a legal monopoly on first class mail, which used to be important; in many municipalities it is illegal for anyone but local government employees to collect homeowners’ trash. And so on and so forth. Due to the government’s monopoly or quasi-monopoly power, customers need the government but the government doesn’t need the customers. Agencies like the DMV – those of every state are about equally notorious – are the result.

Compounding the lack of competition is the fact that most government employees are paid a salary based on the number of years that they have been employed. That incentivizes them to do the bare minimum, which they understandably negotiate to the lowest possible level, and also persuades them to NOT innovate because introducing new ideas might be seen as “rocking the boat” and lead to dismissal or undesirable assignments.

Thankfully, we live in the worst form of government except all the others, a democracy. So the public sometimes gets so irate at government inefficiencies that vote-hungry politicians take notice and implement some reforms. Were it not for that, and the occasional public-spirited do gooder, I suspect many government clerks would still be using quill pens. … I’m only half joking.

If you perceive from these comments that I lean toward libertarianism … kudos! … you’re paying attention and are an astute student of the subtleties of language and rhetoric. But I’m far from the anarchic end of libertarianism and in fact embrace so-called “pragmatic libertarianism,” a term applied to my thinking in a review of Fubarnomics that appeared in the Los Angeles Times early in the fall term. I’m not trying to score ideological points but rather am attempting to move public discussion out of the steep partisan ravine into which it has fallen. Instead of blaming market failures for our economic ills as Democrats tend to do, or government failures as Republicans tend to do, I argue that the FUBAR parts of our economy stem from combinations of the two. What that means in practical terms is that both sides hate me. …

Examples taken from the book are the easiest way to proceed next. The recent financial crisis -- you know the one that caused a worldwide recession and that injured the livelihood or savings of almost all Americans -- was caused by both market and government failures. The latter included all the artificial props to home ownership that various parts of the government implemented over the years as well as said government’s inability to see the Frankenstein it was unwittingly building in time to stop it from burning down the neighborhood if not the entire town. The mortgage interest deduction combined with the retirement savings tax structure rewarded people for staying mortgaged to the hilt and using their savings to speculate in the stock market, albeit via favored intermediaries rather than directly. Ironically, that led to LESS homeownership, as measured by the total equity invested in homes rather than the government’s preferred metric, the percentage of households who owned nominal amounts of equity in a house. That, in turn, led to an Alanis Morrissette-sized irony: homeownership was supposed to give people a stake in their communities and governments but the bass ackwards way that home ownership was encouraged actually decreased people’s commitment because they had so little of their own money invested. Instead of paying off their mortgages and owning their homes outright as in the pre-Depression period, most Americans today are essentially renting from the bank in exchange for an equity put option sweetener.

The most obvious market failure in the recent financial crisis was an asset bubble, or rather several of them. Homeowners paid too much for houses and lenders and appraisers were complicit. Please bear in mind that the conclusion that people were paying too much isn’t hindsight: every housing affordability metric, including the Price-Rent Ratio, was setting off more alarms than a high rise fire. Investors, goaded on by paid cheerleaders like the ratings agencies, also paid far too much for fancy securitized mortgage products like mortgage backed securities and collateralized mortgage obligations. Again here, some observers correctly perceived the bubble, arguing that no financial alchemy could turn a bundle of 125 percent LTV loans made to major credit risks into a golden opportunity.

Another major market failure contributing to the financial crisis was the principal-agent problem, though certainly asymmetric information and negative externalities were also present to some degree. In a nutshell, investment banks morphed from private partnerships into publicly traded joint stock corporations in the 1970s, 80s, and 90s but the new owners, mostly institutional stockholders, did not take effective control of the new companies, employees did. Exploiting our greatly weakened system of corporate governance, itself a hybrid failure, those employees compensated themselves both liberally and in a dangerous way. Basically, they created a game of “tails I win, heads you lose” that rewarded them for taking large, short-term bets. If a gamble paid off, they made literally millions of dollars in bonuses. If a gamble failed, they personally didn’t lose anything except maybe a job, one that after several years of large bonuses they no longer needed because they had already made enough to live out their days not just in the lap of luxury but in its very loins.

Sure there were some boneheads on Wall Street who didn’t understand what they were doing or who were fooled by the smoke and mirrors of fancy equations and theories. But most knew that it was not a good long-term business strategy to make adjustable rate loans to so-called NINJAs – borrowers with No Income, No Job or Assets. But Wall Street bigwigs didn’t care because they were not paid to care about next year, let alone next decade, they were paid to create short-term accounting quote unquote profits.

Custom construction contractors, by contrast, are paid to complete homes, office buildings, roads, and other types of built infrastructure. Its close connection to concrete reality, however, does not make custom construction immune to the hybrid failure disease. As you may know, most construction projects are over-budget, late, and/or under-quality. Unsurprisingly, productivity in the sector has been flat for decades, meaning that each inflation-adjusted dollar put into a construction project creates no more building, bridge, or tunnel than it did when I was born in 1969. So far over my lifetime, however, productivity in the manufacturing part of the economy has increased several fold.

The main market failures in custom construction are asymmetric information and market power. Owners and their minions cannot see everything that a general contractor does, or doesn’t do, and the general contractor cannot monitor all of his sub-contractors 24/7. The reasonableness of change orders, essentially increases in project costs, cannot therefore be accurately assessed and even if they could a construction company already on the job can be replaced only at considerable cost. Once a bid is won and a company is on the job, it is a near monopolist. Bids are therefore not an offer of a fair price but rather a strategic game, the sole goal of which is to win the job so that profitable change orders can be submitted. If an owner refuses to comply, profits can be extracted in other ways, by slowing down production or using inferior techniques or materials.
Yes, government officials inspect most buildings during construction but only to ascertain if they are up to code, the local minimum standard in other words. They do not verify that the materials or techniques specified in the contract have been actually utilized. Building inspections and codes are one of the government failures in the construction sector. They tend to be outdated and cause needless delays and their idiosyncrasies from municipality to municipality also help to keep construction firms smaller and less efficient than they would otherwise be. Governments also interfere with construction wages and labor conditions and help to perpetuate the flawed bidding system just described.

Before somebody in a hard hat takes a pot shot at me, I should describe the hybrid failure at the heart of ever rising college tuitions. As mentioned previously, the market failure in education is a positive externality. Specifically, if left to their own devices individuals would acquire less education than is socially optimal. Highly educated people, the standard argument goes, make better citizens and dinner party guests and are also more creative and innovative in ways that often enrich our culture and economy without necessarily enriching educated individuals. Ergo, the government needs to subsidize higher education. As a professor at a college that receives sundry government grants currently speaking at said college, I wholeheartedly endorse the standard argument.

Where I part ways with the status quo, however, is with the payment of educational subsidies to schools rather than to students. By supplying a large portion of higher education themselves, governments actually fail us. By and large government schools are not as efficient as private ones. Instead of investing in undergraduate education, most state schools invest in research, often of the most careerist, least socially remunerative types, and in lobbying legislators for more funds. Like other government entities, in other words, state university systems tend to bloat bigger than South Dakota roadkill … in July!! Private colleges often suffer the same fate, but generally to a lesser degree because they are less assured of receiving subsidies.

One major problem with colleges and universities of all types is that -- from the richly endowed private Harvard University to the public University of Virginia to the for-profit, stockholder-owned University of Phoenix – they all consider professors to be mere employees. That, I sincerely believe, is a major mistake because professors are professionals, the heart and soul of their institutions. Treating professionals as mere employees exacerbates agency problems, leading to bizarre institutions like the current system of lifelong tenure. Many tenured professors continue to work hard but enough don’t to serve collectively as a rather weighty millstone around the necks of their institutions and hence taxpayers and students and their families.

Slavery was – or rather I should say is because it persists in many places in the world – another hybrid failure. The government failure was allowing one person to own another, a clear violation of the enslaved’s natural right to liberty. Had the government failure ended there, slavery in the antebellum U.S. South probably would have petered out, as it did in the North, because slaves were not very efficient workers. Slaveholders didn’t have to pay them a wage but they had to pay a purchase price for them and feed and clothe them, even when they were sick or there was no work for them to do. Even more costly, slaves resisted bondage in a wide variety of ways, ranging from outright rebellion to working soft and dumb instead of hard and smart. As a result, slavery was generally unprofitable unless slaveowners could cajole the government into assuming some of the control costs of their peculiar chattels, which of course they did up until the Civil War. Slavery, then, was in a sense a negative externality, a form of pollution that planter-controlled governments not only countenanced but abetted far too long.

Rapidly rising healthcare costs are also caused by a hybrid failure, one almost completely unaddressed by so-called Obamacare. Health insurers suffer from adverse selection and moral hazard. More specifically, sick and sickly people are more eager to purchase insurance than healthy ones are and people who have insurance are more likely to seek medical attention, and more expensive varieties of medical attention, than uninsured people are.

The health insurance industry was well on its way to ameliorating those problems when the Great Depression struck and mucked things up. Then the government interceded in very damaging ways. First, the government literally regulated an entire genre of small mutual health insurers, fraternal benefit societies, out of business. That was damaging because small mutual insurers were very good at limiting adverse selection and moral hazard by carefully screening insurance applicants and monitoring claimants. Next, the government used the tax code to encourage employers to offer health insurance as a fringe benefit. That was damaging because employer-provided health insurance essentially de-coupled the cost of insurance premiums from the cost of healthcare by encouraging people to seek the best doctors rather than the most cost-effective ones. It also abetted pre-existing condition clauses and, given our extremely flexible labor markets, swelled the number of uninsured individuals. The government also became a little too friendly with the American Medical Association, which restricts the supply of doctors. Because of their artificially limited numbers, doctors have the market power to insist on being paid for seeing patients rather than returning them to health, another major flaw in our post-Depression system of which more a little later.
The government also responded in damaging ways to the retirement savings crisis created by the Great Depression. Social Security, in short, was a permanent solution to a temporary problem. The concept of retirement was more or less unknown until the late nineteenth century. Before then, numerous well-to-do Americans stopped working before they died but there was no widespread expectation that most people’s final years would be spent outside the labor force, except in cases of disability or dementia. As increasing numbers of people began to outlive their ability or willingness to work, families began to save for what came to be known as retirement by purchasing real estate outright and by investing in savings bank accounts, life insurance policies and annuities, and stocks and bonds. As a result, there was no epidemic of impoverished old folks leading up to the Depression. Some of the aged were indigent but most, in fact, were able to live off their savings, inherited wealth, and/or contributions from their children.

The Depression pinched those resources, however, by decreasing the value of real estate, stocks, and riskier corporate bonds, by throwing older people out of work sooner than expected, and by decreasing the ability of their children, many of whom were unemployed as well, to aid them. If the government had simply provided indigent seniors with direct monetary aid and not created Social Security, prudent Americans today would save for retirement at much higher levels than they currently do and would be much more astute about matters of personal finance. Instead, the government took a very different path that threatens to cause tremendous economic and possibly political instability. It strikes me as more than a little un-democratic that long-dead politicians, now accountable only to God or, more likely, Satan, should be allowed to burden posterity with such unnecessary legislation.

In case any of you are wondering, the Great Depression itself was a prime example of a hybrid failure. It began due to a real estate bubble and was exacerbated by the stock market crash of 1929, two clear market failures. But the numerous bank failures that followed were actually government failures caused by regulations that prohibited branch banking in most states. That left most banks small and hence vulnerable to local and national shocks that a wing of the government, the Federal Reserve, did not adequately address even though macroeconomic stability was its stated mission. A single policy, Roosevelt’s devaluation of the dollar, was sufficient to bring the economy out of the Depression. The rest of the New Deal was a mixed bag comprised mostly of government failures like the Agricultural Adjustment Act and the National Industrial Recovery Act. Even the Federal Deposit Insurance Corporation, which stabilized the deeply flawed Depression-era banking system by guaranteeing retail bank deposits, helped to cause subsequent financial crises, most notably the Savings and Loan crisis, by rewarding bankers for taking on excessive risks. The bastard offspring of the S&L crisis, the infamous Too Big To Fail Policy, played a major role in the most recent crisis.

Additional details on the financial crisis and all of the other topics touched on here today can of course be found in Fubarnomics but now I would like to sketch out the book’s recommendations. It is important to note that I do not think that any of these solutions are possible in today’s political climate, although the results of the recent election may have brought us closer to some of them. I offer them in the hopes that they will be discussed, critiqued, and revised so that they may be implemented when politicians get serious about fixing the economy and make the policy changes that will unleash the entrepreneurial energies under girding each recommendation. I should make clear at the outset that all of my recommendations essentially entail reversing or untangling the hybrid failures that cause the economic dysfunctions just discussed.

If we don’t want another gut wrenching financial panic and economic downturn, the government should:

1) abolish GSEs, or government-sponsored enterprises, including Fannie Mae and Freddie Mac. Andy Jackson called the GSE of his era, the Second Bank of the United States, a hydra-headed monster and he was right. Figuratively speaking of course. If an enterprise is profitable, the government doesn’t need to subsidize it. If it isn’t, and we’re sure it involves a public good as previously defined, then the government itself should provide the good.
2) reform credit rating agencies so that they actually assess credit risks again instead of merely pandering to issuers as they have the last few decades. That will entail returning to a subscription-based revenue model and eschewing payments from issuers, a business model that turned into a form of ratings-for-payment bribe.
3) expunge Too Big to Fail Policy from businesses’ expectation set by making it clear that if any company runs into difficulty it will be allowed to fail. Streamline bankruptcy reorganization procedures, especially for financial institutions, so that the threat is credible.
4) learn to learn from past mistakes. The subprime debacle of 2007 was not the first time that a mortgage securitization scheme in America blew up. It was the seventh. No kidding. Fool me once, shame on you. Fool me twice, shame on me. Fool me seven times and … that is, as they say in Boston, “wicked retawded.”
5) reward regulators for regulating intelligently, for discouraging bubbles, and for acting before matters get out of hand. The status quo is to reward regulators for preparing to fight the last crisis rather than the next one, a flaw that also pervades the TSA’s so-called thinking. But that is another conversation.
6) improve corporate governance by mandating deferred compensation or bonus-malus systems where ever and whenever appropriate, which would include at least some positions in most financial services firms.
All of those proposals have been made by others, but no one else, to my knowledge, has recommended all six.

The construction industry can be fixed by moving away from the current system, where numerous small firms compete based on their strategic bidding and change order skills rather than on their efficiency. Governments and private firms should choose the best bidder, not the lowest one. The best bidder could be ascertained more easily if someone had the incentive to track construction company and individual performance over time. Eliminating the bidding system altogether could work as well, as in new construction systems where architects, designers, and contractors are compensated to develop change order proof plans, or in other words are paid by owners to dramatically reduce both asymmetric information and post-contractual monopoly power. A recent book, the Commercial Real Estate Revolution by Rex Miller and others, essentially calls for the same reform, though for a less compelling reason.

Higher education would be vastly improved if professors were allowed to own their own colleges in professional partnership. Instead of being mere employees, they would be professionals akin to attorneys or business consultants and would have long-term incentives to provide students with the most inexpensive, highest quality undergraduate and graduate educations possible. Under such a system tenure would dissolve of its own weight but academic freedom, the right of tenured professors to say pretty much anything they want to without fear of being fired, would be priced in the market. A professor who is a partner in a college organized as a professional services firm could not be dismissed, he or she would have to be bought out by the other partners, essentially pricing tenure and academic freedom.
Other salubrious reforms would include the government allowing more competition in higher education, the creation of a system of standardized exit exams, the payment of subsidies only to students and not to schools, and passage of a GI-like bill expanded to include a wide variety of public service, not just military duties. Again, almost all of these ideas have been proffered by others, but never as a complete package designed to eliminate the hybrid failures at the heart of rising tuition costs.

The cure for slavery is economic development. Ironically, economists have a very poor track record at creating economic growth in poor countries. That is why vast swathes of Latin America, Africa, and Central Asia continue to suffer with per capita incomes not far above the subsistence level. A growing consensus among an interdisciplinary group of scholars who study the wealth question, however, suggests that national wealth is largely a function of institutional quality, particularly whether the government adequately protects life, liberty, and property or not. Where it does not, poverty is certain, even if oil or diamonds are present. Where it does, wealth is certain, even in barren, windswept places like Iceland … and South Dakota.

Of course dictators control most poor nations and most do not behave as enlightened despots and protect life, liberty, and property of their own accord. I suggest in Fubarnomics that dictators can be rewarded for providing such protections through the judicious use of aid and carefully designed long-term compensation schemes. It’s a long-term fix that won’t alleviate the suffering of all people enslaved today but will help to prevent the enslavement of future generations because slavery is highly unprofitable where governments are against it and where wage laborers are abundant and efficient, as they are in developed economies.
Speaking of enslaving future generations, it is now time for the big two, Social Security and healthcare. Seriously, the former might survive intact if the economy grows really robustly. If growth is anemic, as some fear, Social Security could be extended indefinitely by some combination of tax increases and benefit cuts, including raising the retirement age. My recommendation, however, is to simply eliminate it for myself and every younger than me and to pay the promised benefits to everyone older than me out of general revenues. My rationale here is that younger people still have time to save for retirement but older Americans don’t. Moreover, Social Security payroll taxes are highly regressive and the payout structure is distorted towards preferred groups. As a whole, the system redistributes wealth from poor minority men to middle class white women, a rather cruel and ironic outcome especially after, say, 1970. The structure of the system and demographics virtually ensure that poorer Americans, especially those from disadvantaged minority groups, almost never receive even modest inheritances, a leading spoke in the wheel that perpetuates the cycle of poverty. Due to the payroll tax, the poor can’t afford much whole life insurance or other asset building financial products.

I wouldn’t replace Social Security with anything other than the government’s solemn promise that when people my age and younger get old we will be on our own so we had better start saving now. And don’t worry about silly claims emanating from mass media outlets about the negative effects of higher savings rates on consumption. Via the financial system, one person’s savings becomes another’s consumption. We also need a much better, longer, and more comprehensive system of personal finance education, ideally supplied by teachers and professors in professional partnerships of course. I don’t want to hear any of this bull puckey about “privatizing Social Security” or “investing in the stock market.” Proper investing starts with rainy day savings, preferably in low-cost depository institutions like credit unions, then moves on to insurance, and only then moves on to well diversified portfolios of financial securities, derivatives, and commodities, portfolios that become less risky as the investor’s target retirement age approaches.

Finally, we also need much less but much better financial system regulation. The topic is too detailed to delve into during this talk but suffice it to say that pre-Depression historical precedents suggest that intelligently regulated financial markets and intermediaries can provide Americans with solid private security in a much fairer way and at a much lower overall cost than Social Security has done. Recent and current problems with pensions, 401Ks, life and disability insurance, and other private security products are due to relatively minor hybrid failures that could be fixed in fairly short order if desired.

That leaves us with health insurance. As hinted at previously, healthcare costs would stabilize and perhaps even decline if doctors were rewarded for healing people rather than merely treating them. That may sound like a radical idea but the U.S. healthcare system was moving in that direction when the Depression struck and the government sent us down a very different path. They were called prepaid plans. People paid monthly fees when they were healthy and stopped paying when they were sick. Healthcare providers therefore had strong incentives to keep people from getting sick in the first place and to fix them up quickly if they did fall ill. Today, doctors in most parts of the United States have incentives to keep patients sick. And don’t even get me started on pharmaceutical company incentives.
Another salubrious change would entail the creation of large mutual health insurers, under a general agent sales system, that offer joint life and health insurance policies that I call “health for life.” Mutuals are for-profit corporations owned by their customers, in this case their policyholders. Their profits accrue to the policyholders and to their general agents, which like large blockholders in joint-stock corporations serve to keep the companies’ executives on task. The joint policies would commit insurers to providing large sums for healthcare by promising a life insurance payment as well as health insurance. A rational company would pay healthcare costs up to the discounted present value of the life insurance due multiplied by the probability of treatment success. It’s called incentive alignment and it works much better than government mandates likely to spur premium increases or, if that avenue is blocked, exit from that line of business.

In addition, for a given premium level the life insurance benefit would decline as more healthcare was used and increase if relatively little was utilized. That would help to reduce the adverse selection problem by inducing healthy people to buy more health insurance. “Health for life” policies would also force insured persons, especially those near the end of their lives, to decide between living a few extra months and leaving an estate for their heirs, a vast improvement over the current system which more or less rewards people for receiving as many final treatments as they can get insurers or the government to pay for, no matter how expensive or futile. By leaving the final choice to the individual, “health for life” policies would be far preferable to any sort of non-price rationing system, fictional or factual.

Again, most of these ideas are not entirely original but no one else has offered them all and no one else to my knowledge has a set forth such a clear theory of the causes of such a wide range of economic hyper-dysfunction. I therefore encourage you to buy Fubarnomics, read it, and post 5-star reviews of it on Amazon. … But I also encourage you to critique any aspect of it that you think does violence to reality because, again, my goal is to have policies ready if and when politicians are prepared to save our economy from dying by degrees.

Thank you! I’ll now entertain a few questions.

Why won't Jon Stewart of the Daily Show read Fubarnomics???

Don't get me wrong. I love The Daily Show with Jon Stewart and watch it at first airing most nights. And I realize that part of Jon's schtick is to pretend he is less intelligent and more ignorant than he actually is. But why won't he read Fubarnomics, or at least the chapter on the recent financial crisis? I sent him a copy over the summer and understand that he can't have every author on his show, which airs only 4 nights a week and only like 40 weeks a year. But if he would read it for his own edification, he wouldn't have to submit his audience to long rambling interviews like the one last night (11/16/10) and embarrass himself by positing inane hypotheses.

Credit cards for students (and spouses)

Students often ask me for advice about their personal finances, especially credit cards. Henceforth I will point them to this site:
10 Things College Students Should Know About Credit Cards and eagerly await the day they have a site "100,000 things spouses should know about credit cards." ;-)

Kudos for this blog.

The last week was ... wow ... very hectic. I received notice that this blog has been rated one of America's Top 50 American History blogs by History Masters! Check it out, #36.

South Dakota: Not North Dakota but Waaaaay Better than California and Just About Everywhere Else!

I gave this speech yesterday morning at the Westward Ho! Country Club in Sioux Falls, SD at the first annual commercial brokers meeting.

South Dakota: Not North Dakota but Waaaaay Better than California and Just About Everywhere Else!

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana College
As you are probably aware, North Dakota is doing pretty darn well economically. In a sense, it is a much closer, slightly warmer version of Alaska. It isn’t as visually stunning as Alaska and it has many fewer bears, especially of the larger and scarier varieties, but like the Last Frontier state, North Dakota is blessed with ample energy resources. The massive Bakken Oil field, which may hold more oil than in Saudi Arabia, extends into North Dakota as well as Montana and Saskatchewan. Unfortunately, a lot of that black gold is trapped in shale but for now the bigger pockets, some two miles down, are being profitably tapped and technology improvements may help our northern neighbor surge past Alaska in terms of oil production by the end of this decade.

Thanks in part to its western oil fields, and oh yeah its 800 year supply of coal, North Dakota has the lowest unemployment rate in the country, just 3.7 percent in August of this year, the most recent month available as of Monday of this week. South Dakota’s unemployment rate was about 21 percent higher than that but was still second lowest in the country, just a hair ahead of Nebraska. At 4.5 and 4.6 percent respectively, those two states look like employment heaven compared to almost everywhere else. New Hampshire, number 4 on the list, is at 5.7 percent, followed by neighboring Vermont at 6 flat. But it is pretty much all downhill from there, with California, Michigan, and Nevada in the ditch at the bottom of the hill, at 12.4, 13.1, and 14.4 percent respectively. And remember those rates are for people still looking for work. They don’t count people who have given up trying to find work, a number that probably grows exponentially with the official unemployment rate. In other words, those places are much worse off than the government statistics suggest.

The unemployment rate is a good proxy for economic growth, or per capita increases in the output of final goods and services. North Dakota’s economy grew by a scorching 7.3 percent in 2007 and 2008, the most recent years available. Wyoming was second at 4.4 percent and South Dakota third at a respectable, if relatively plodding 3.5 percent. Those were years when the economies of numerous states, including those of Michigan, Indiana, Ohio, Georgia, Florida, Nevada, and Arizona shrank and a slew of others grew anemically at less than 1 percent.
Finally, population growth in both Dakotas from 2008 to 2009, while hardly breakneck, was a respectable 1 percent flat here and .8 percent up there, ranking South Dakota 20th in population growth rate and North Dakota 23rd. Wyoming, by the way, grew fastest of all at 2.1 percent but still remained our least populous state with only slightly over half a million souls. Yes, I do believe that most Wyomingites have souls, probably a higher percentage than many other parts of the country in fact, but the Census Bureau doesn’t track that, just bodies.
But I digress. What I am trying to say is that instead of lamenting North Dakota’s advantages, the denizens of South Dakota ought to first take pride in what they have accomplished already and then seek to make further improvements, partly by intelligently emulating successful policies in North Dakota and elsewhere but also partly by striking off on its own, unique projects.

For example, North Dakota has a government-owned bank that is attracting considerable interest. Even the Minnesota Fed has looked at it. It acts as a correspondent bank that strengthens North Dakota’s network of community banks and it actually contributes to the government’s coffers. Colonial Massachusetts, New York, Pennsylvania, and some others had a similar institution. South Dakota should look into it, than if for no other reason we’ll have a bank capable of issuing fiat paper money when the dollar collapses. I think we should call that money SOTAs and the symbol will be a bison -- with two lines running through it because all the best currency symbols have two lines running through them. [When will I learn to never, ever make monetary policy jokes? -OR- I’m happy to see some of you share my bitterly cynical and sarcastic sense of humor.]

What does South Dakota have going for it? As the title of this talk suggests, its economy is really quite vibrant compared to that of every other state except those of some its immediate neighbors, especially the one to the north. The explanation for South Dakota’s relative success is relatively straightforward. Rob Oliver, Augustana College’s president, likens South Dakota to the tortoise in the famous tortoise and hare Aesop fable. That’s the one where the tortoise wins the race because the rabbit is busy showing off and napping while the tortoise plods steadily along. In slightly more sophisticated parlance, some places take big risks and take seemingly insurmountable economic leads until they inevitably collapse from some malady or misfortune or another brought on by their hubris. Other places, like the Ota states, play it safe and steady and hence don’t suffer when economic calamities strike.

There’s a lot of common sense in taking the slow road. South Dakota was not a hotbed of subprime mortgages or mortgage defaults and most of our banks and other financial institutions held firm. But it might make even more sense to try to develop what I’ll call – extending Rob Oliver’s animal analogy -- a raccoon economy. Yes, I know that dead raccoons litter South Dakota’s highways and byways but that carnage, believe it or not, is an integral part of a successful raccoon economy. Follow me here: the companies that are slow afoot and/or slow upstairs [point to head] need to get run over so as to free up resources for the more nimble and quicker raccoons. Due to that selection process, raccoons as a species are amazingly successful, managing to thrive in a wide range of environments, from forests to prairies to cities. The mischievous critters get into closed garbage cans and chow down, then sneak undetected into heated attics or crawl spaces in winter. In other words, I’m talking about developing an economy that is adaptable and clever, though not nearly as crafty as a Wall Street fox, about emulating a critter that isn’t as fast as a rabbit but works hard and smart and is much faster than a damn turtle and a lot nicer than a Wisconsin badger. We just have to be careful not to turn the economy into a skunk in the process. We have more than enough of those back East, out West, and down South. And in Michigan, the stinkiest of them all.

Fiscal policy is a good place to start. South Dakotans have to keep the state government not “lean and mean” but “nice and lean.” Not having a state income tax is a great feature but only if taxpayers don’t instead get pecked to death by a thousand little duck taxes. It’s not that bad here – yet – but eternal vigilance is the price of liberty as somebody famous – not Thomas Jefferson – once wrote. I have some other suggestions about taxation too but I am not going to make them as I don’t feel like getting shot at today. [Pause] Seriously, tax policy is very important but it’s a political minefield and a very complex area because of what’s called tax incidence. Just because somebody doesn’t get handed a tax bill doesn’t mean that they aren’t ultimately paying the tax. The so-called employer contribution to Social Security, for example, is pretty much pure bunk as most economists agree that workers almost always foot the full bill, half from their explicit contribution and half from a lower wage. Similarly, taxes on large businesses often fall largely on employees and consumers rather than on the owners. So you sometimes find people supporting taxes that will gore their own ox or fighting taxes that will actually be paid mostly by others.

Oliver Wendell Holmes was right when he said that taxes are the price we pay for civilization but most Americans, and almost every South Dakotan I’ve met to date, thinks we’re quite civilized enough already, thank you very much. If so, what we might all be able to agree on is the desirability of government making a credible commitment to limit the size of the state or, better yet, the state and municipal governments, to some percentage of state GDP. That would essentially force South Dakota governments to 1) not pass stupid, growth negative laws and 2) to concentrate their efforts on core areas, like law and order, and outsource the rest to the market.

South Dakota is ahead of the country here but could move even further ahead. I was pleasantly surprised to learn, for example, that private companies can pick up garbage in Sioux Falls. Believe it or not, in some parts of this great nation of ours municipal governments monopolize household garbage collection. It’s totally absurd but so well-entrenched that when I suggested privatizing the system at a public meeting when resident in one of those places many of my neighbors retorted with claims like “that couldn’t possibly work,” or “it would be chaos,” or “Duh, look at me, I’m a dumb ass Socialist.” Okay, I made the last one up but the rest of the story is true.

I broach it because there is a movement afoot to privatize roads in the U.S.A. For more on that, check out Clifford Winston’s new book, Last Exit, published by the Brookings Institution, a Washington-based think tank. Yes, occasionally a good idea comes out of that place, mostly from think tanks. In any event, when people first encounter the notion of road privatization, what most hear is “they want to charge me tolls to drive anywhere” and while that is true what folks tend not to grasp is that the tolls would be lower and fairer than the taxes they currently pay at the pump and elsewhere. Private companies would have incentives to make much better, longer-lasting and less congested roads than the government does so in-kind taxes like construction delays and traffic jams would be much lower too. The first state to privatize its road system – or I should say re-privatize its road system in the case of the eastern seaboard states, which were first crisscrossed by private toll roads -- would of course spawn the creation of start ups that would be eager to expand operations into other states once they too jump onto the privatization band wagon.

Schools are also ripe for privatization. The process here is on-going and taking baby steps with charter schools and vouchers. If South Dakota were to go whole hog and privatize its entire system, K through graduate school, it would foster start ups and also entry by existing for-profits. But again, such proposals must be pitched so that they can be heard by voters as “increased efficiency” rather than “those som’ beeches wanna take away our free schools.” Let’s face it, public schools are not free, they are very costly, especially for what some of them produce, which are people who know little and can’t do much. Others of course do a superb job but they could do an even better job with the same personnel provided with a more robust set of incentives. Among other things, I discuss the rationale and possibilities of privatizing higher education in more detail in my recent book, Fubarnomics.

Speaking of education, I attended a conference called the Innovation Expo last week at the Ramkota Hotel where there was much discussion of leveraging the state’s higher education assets for economic development. North Dakota has a great student-run venture capital outfit called Dakota Venture Group that has already helped to launch at least six new businesses: three software companies, a medical technology company, a furniture manufacturer, and a night club on wheels. And that last one is no joke!

Augustana College is starting something similar. I mean a student-run venture capital fund not a mobile Sodom and Gomorrah. The fund will help in the short term by funding start ups and in the longer term by increasing South Dakota’s human capital venture network. We hope our graduates will stick around and start their own funds in other words.

Many of us are also trying to fire up students about entrepreneurship. I taught a class in the history of entrepreneurship at Augie last spring, for example, and at the Innovation Expo last week many students from USD and SDSU were in attendance and the Enterprise Institute announced the winners of a student idea competition. Encouraging young entrepreneurs is really promising because entrepreneurship suffuses the air and water out here. What it tends to lack is direction. Some explanation may be necessary here. Entrepreneurship is generally great for economic growth but it’s not a monolithic thing. There are bad varieties of entrepreneurship where firms, or “families” or gangs, engage in rent-seeking or illegal activities. You know, the sort of stuff that thrives in Tony Soprano’s part of New Jersey. And Washington DC. Except for the drug trafficking, which apparently mostly takes the form of drug traffic, we don’t have too much of that out here and of course don’t want any more.

Another variety of entrepreneurship, called common or replicative entrepreneurship by some, is the type that thrives in South Dakota and other tortoise-esque economies. You know, micro to small businesses and franchises of regional or national chains. It’s good and it’s important but a raccoon-quality economy requires more, it requires some innovative entrepreneurship that leads to new goods and services, things that South Dakotans can export to other states, regions, countries, or continents.

As I learned at the Expo, we have some of those. There is an outfit selling wine made from South Dakota grapes – that’s not an oxymoron it turns out – South Dakota grapes into a nice business by stressing the marketing rather than the quality of the wine per se, which most people find less than extraordinary until third or fourth glass. Anyway, each bottle sold by this homegrown winery comes with a removable charm around its neck and sports some interesting looking labels, some of which were designed by Augie students I should add. There’s another startup out in Mitchell making fishing rod holders that can be installed without wrecking your nice fiberglass boat. Another dude figured out how to test beef cattle for certain genes that affect the marbling and texture of their muscles within a few minutes, right in the field, so that the ungulates can be sorted and fed accordingly.
That’s all great, even freaking great, but South Dakota could use more. We don’t want a rabbit economy so we don’t need entire warrens of innovators, especially schemers contemplating projects of dubious social merit. Rather, we need a nice steady stream, a Big Sioux rather than a Missouri River of innovators, or at least a Skunk Creek the way it looked after the rains last month. [What, nobody here from the West Siiiide? -OR- I’m happy to see there are others from the West Siiiide here.]

Increasing innovative entrepreneurship is no easy task and I think it a major mistake to try to plan it in any specific way. The economy is just too complex, the connections between industries and individuals too multifarious, for any one person or group to fully grasp it enough to implement a plan likely to succeed for reasons other than pure luck. For example, who in 1820 could have predicted that my hometown, Rochester, the one in New York, would have developed into an optics center, the home of companies like Kodak, which used to make cameras, Xerox, which used to make copy machines, and Bausch & Lomb, which used to make contact lenses? But it did, because it had water driven mills designed for grinding grains and millers and engineers smart enough to figure out how to change up and begin to grind glass. You’re probably all familiar with how Silicon Valley became Internet Valley and how Wall Street stole the nation’s financial center away from Philadelphia’s Chestnut Street back in the 1830s. Oh no? Well I have a book about it you can read sometime called The First Wall Street.

My point here is that even as one industry loses strength it can spawn others in a process that economist Joseph Schumpeter famously called “creative destruction.” When and where creative destruction exists, where slow and dull-witted raccoon companies are allowed to get run over by the Mack truck that is a competitive market, economies experience ups and downs but communities live on because the people within them find new things to do. Pittsburgh is a good example. It used to be all about steel, then stealing, but now it has a nicely diversified post-industrial economy similar to ours: healthcare, education, tourism, finance, and even some ag and some military, at least before their King of Pork, John Murtha, perished. Where creativity is lacking, we’re left with just the destruction and ghost towns -- like Youngstown or Detroit. Unlike those dismal places, South Dakota isn’t reliant on just one industry, just like the raccoon isn’t reliant on just one food source.

But the South Dakotan economy could use yet more diversification. As Nevada learned to its great pain, tourism depends a lot on conditions elsewhere, the credit card business increasingly relies on regulations set in Washington, and agriculture and construction are very fickle pickles. Healthcare and higher education costs have grown year after year but that does not always translate into higher levels of growth. According to Sid Goss, a demographer at the School of Mines out West River, South Dakota’s higher education sector is going to face a serious demographic shock in a few years that could spell trouble not only for local schools and their employees but also for all businesses that cater largely to students.
On the bright side, Obama’s healthcare reform isn’t going to stop healthcare costs from rising. For more on that, see Fubarnomics or Google up some of my op eds on the matter. The gist of the story is that health care costs will continue to rise as long as health care providers are incentivized to treat patients rather than to restore them to health and as long as health care costs are hidden behind employer-provided group insurance.

The really happy news is that potential sources of innovation and growth abound here. Now one of the speakers at the Expo, a college professor and an adherent of extremist urban-philes like Richard Florida and Jane Jacobs, argued that South Dakotans are too few to have a raccoon economy. To that I have only two words: bull puckey. Or is that one word? In other words, I think the notion that you need to be in a big city to be innovative is an idea that passed through the digestive system of male cattle, if you catch my drift. In case I am not being clear here, I’m skeptical of the notion that we can’t lead in at least some areas. The professor’s argument is based on what are called spillovers. People live in cities or technology areas, like the one in North Carolina, because there are dense networks of like-minded people in those places and they cross-fertilize each other with ideas, connections, and money. That is certainly an important point but isn’t the whole story because it’s not necessarily the case that you have contact with others close by or that you can’t communicate with others who are far away. Plus the culture in cities is less open than here. People are not as nice or open – and I know because I lived in such places much of my life. For example, I barely spoke to anyone outside of a narrow circle in my decade and a half in Philadelphia but out here a guy I had never met previously took me out pheasant hunting on opening day, made sure I got my three, and then fed me afterwards. And that was made possible by the fact that my new neighbor -- a man I had just met 5 minutes before -- fixed my shotgun for me, and for free! That sort of interaction just doesn’t happen much east of the Appalachians anymore.

And let’s not forget – I know I never will – that in more densely populated areas even a few miles can be a nearly insurmountable barrier to easy face-to-face contact. I’d rather drive from Sioux Falls to Vermillion or Brookings than from one side of Philadelphia to the other. No joking there. And don’t even get me started on New York.

The egg-headed critic also failed to see that we have comparative advantages over people in more populous places that we can leverage. Besides the fishing boat guy at the Expo there was a fellow selling pickup truck bins with solar panels on them to run coolers, drills, and so forth. Now is a Bostonian going to come up with that? Or some software engineer in San Fran? No siree, says Bob.
And who else but a pheasant hunter who can’t seem to shoot straight would come up with a shotgun that uses optical recognition software to differentiate hens from roosters and that uses radar to direct number 4 steel shot only to the head and neck of the latter? Okay, that one I made up but it would be wicked kewl. In short, we can come up with stuff that we can sell to other rural folk worldwide, not to a bunch of latte-sipping, turtle-neck sweater wearing urban elitists.

Not that we should entirely give up on urban markets. Although South Dakota has little coming in the way of oil windfalls, there is a lot of wind and sunlight here just waiting to be turned into electricity. The big breakthroughs in energy storage and transmission may not come out of South Dakota universities or companies. But then again they might. A South Dakota scientist recently invented a type of paint suffused with an anti-microbial agent that will make the lives of people with compromised immune systems a lot better. But of course we don’t have to invent everything ourselves and we surely will be able to capitalize once somebody, somewhere figures out a cost effective way of transmitting the electricity created with our ample renewable sources. It would be nice if our little prairie breezes and generally sunny disposition could not only light and heat the Twin Cities, KCMO, and “““STL””” but also run the cars of the people in those places. Ours too of course. Then North Dakota can lick our boots. Just kidding, they got a lot of wind up there too.

But that’s somewhere off in the future and conceivably may never take place. In the meantime, we need more tangible routes to further diversification. Even if credit cards go the way of the dodo bird, or rather the way of layaway, the physical infrastructure and human capital employed in the industry here could be turned to other, similar uses, like call centers for other types of financial products, maybe even ones that essentially replace credit cards with less heavily regulated alternatives. That’s one of the big lessons of financial history – regulations can and will be subverted, out maneuvered, and outflanked. With a credible promise from Pierre not to interfere too much, South Dakota could become a hotbed of financial innovation, a testing ground for new ideas. I mention several in Fubarnomics and Yale’s Bob Shiller published some great ideas about 5 years ago in a book called the New Financial Order. And of course it would be natural for any company that developed a new product in South Dakota to keep its headquarters here to take advantage of the local expertise in back office operations and such.
Now I know what you are thinking – how can Pierre promise not to interfere too much? Maybe by decreasing the frequency of its meetings? I’m thinking once every four years would about do it. And oh yeah, to meet no more than one week at a time, once each quarter or season, with a very loud bell that goes off precisely at 5 p.m. each Friday to close the session. No more putting coats over clocks. That’ll give legislators some time to think about bills before they pass them and give their constituents some time to think and chime in too.

Here’s another idea. Let’s pass a constitutional amendment that requires all regulations to be thoroughly tested before being implemented or, where that is infeasible, to have sunset clauses that will automatically repeal any new regulations unless the legislature thoroughly reviews and formally reinstates them? In most states east of the Mississippi, audience members would be laughing hysterically at this point but out here those or similar ideas could stick and become a real competitive advantage for the state.

To attract and retain the innovative entrepreneurs that we don’t grow at home in our colleges and universities, South Dakota needs to be an attractive place to live. Not much can be done about the weather, at least at present, but entrepreneurs could strive to make the place more palatable and make some scratch on the side. For example, many of us ride our bicycles on Sioux Falls’s wonderful trails all summer. But what are we supposed to do with our bikes the other 11 and a half months of the year? … Yes, that’s a joke. Besides cluttering up the garage, say half the year, what about an indoor cycling range that could be used as, I don’t know, an indoor shooting range in the summer when hunters want to zero their scopes without a 30 mile an hour crosswind? An indoor water park might be a big draw too. The sun rides low here in the winter but it’s out a lot and could be magnified to allow those interested in having that “I went to the Bahamas look” to get natural tans. Maybe a retractable glass roof over the Wild Water West? It would be a way to avoid that new tax on artificial tanning booths in the Obama healthcare bill.

Speaking of healthcare, the rise of medical tourism means that Sanford and Avera McKennan could grow to enormous proportions by providing fairly routine procedures on the cheap to people from all over the continent. Yes, even some Canadians might prefer to pay out of pocket rather than wait in a line up there, especially when the looney is strong against the greenback. Of course it would be helpful if it was cheaper to fly from New York to Sioux Falls than to fly from New York to India, which also has a thriving medical tourism industry. I’m not disrespecting the local airport, which has to play the hand it was dealt by distant policymakers. I’m just pointing out a constraint that could be overcome, albeit probably only with much lobbying effort. Or a high speed train line to Minneapolis. Or Omaha. Or maybe Southwest. I mean the airline, not the cardinal direction.

Speaking of Minneapolis, I had to drive there in early September to be on the Dylan Ratigan show for 5 minutes, 5 stinking minutes. No, I was happy to do it as it boosted sales of Fubarnomics for a week or so but c’mon, it is 2010. How will the rest of the world know that there are smart people here in South Dakota if it remains so isolated? When I say South Dakota to my friends back east their responses belie the fact that they believe the entire state remains like Deadwood as depicted in the HBO series. Or at least like Humboldt, that “small town with a big heart.”

The various chambers of commerce do a good job of asserting that all of South Dakota, and not just Ellsworth, is “da bomb” but they need all the help they can get proving that such assertions have a basis in reality. Outside of the Upper Midwest, misperceptions about South Dakota abound and are as difficult to dislodge as an impacted wisdom tooth. On a polecat.

To sum up, North Dakota is up at the ceiling. South Dakota is only here [reach up as high as possible] but California and a lot of other places are down here [point to the floor] with the ant excrement. Although relatively strong at this point, South Dakota’s economy may be under performing its long-term growth potential. It could ramp up from tortoise to raccoon status if one, the government credibly committed to staying as small and inconspicuous as possible and if two, more innovative entrepreneurs can be homegrown or imported and then induced to stay by leveraging the state’s many strengths -- its great faces and open places and its fairly consistently amenable business climate.

For folks in your business, turning our tortoise economy into a raccoon one could mean retiring comfortably at age 50 or 55 instead of at 65 or 70, which I’d hope would be enough inducement to get you interested in these important big picture issues and maybe get a little more involved in state economic policymaking in a positive and proactive fashion.

I thank you for your time and attention and will now entertain questions.

The Fight Against Hospital Infections

I've made no bones about it, America's healthcare system is very FUBAR. I concentrate on rising costs in Fubarnomics but in this post want to stress the quality issue, or rather the lack of it. Under our current system, many people die or suffer serious complications from infections they contract while in the hospital. It's a tragic (and extremely expensive) problem.

There is some hope, however. Today at the Innovation Expo in Sioux Falls an entrepreneurial start-up outfit from suburban Minneapolis, Minn. called Pursuit Vascular won not one but two prizes for a new medical device that promises to significantly reduce catheter-related infections for dialysis patients. Basically, it is an expandable tube coated with an anti-microbial that effectively seals the catheter and kills most of the nasty bugs inside it.

It was also mentioned at the expo that an anti-microbial paint is being developed here in South Dakota. Applied to hospital walls and such, the paint could also work to reduce the infection rate.

My only concern is that private insurers don't seem to have much of an incentive to force HCPs to adopt these technologies and in fact the in-hospital infection rate could be reduced pretty substantially simply by adopting and following better sanitary procedures.

Readers interested in learning more about the fight against hospital infections are encouraged to visit Kimberly-Clark's "Not on My Watch" website.

The Irony of Constitution Day

Every 17th day of September (or adjacent week day), schools across the nation that receive federal monies (to wit, almost all of them) must celebrate Constitution Day or face loss of their federal funding.
See
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_cong_public_laws&docid=f:publ447.108
then search for "Each educational institution"
and http://www.law.cornell.edu/uscode/36/usc_sec_36_00000106----000-.html.

Don't get me wrong, I love the U.S. Constitution. So much so, in fact, that I find Constitution day, well, as ironic as that little ditty by Alanis Morissette. I'm not a Con lawyer (that's slang for Constitutional attorney, btw, not a redundancy) so I won't go so far as to say that the Constitution Day law is unconstitutional but I will assert that the Founding generation would not have approved. I know that because they didn't pass the legislation though they could have. In fact, they were almost all completely opposed to the federal government providing funds to educational institutions. J. Q. Adams tried and failed to establish a national university in the 10 mile square (Washington, DC). Thomas Jefferson established the University of Virginia because government funding of education was supposed to be left to the several states.

Do I want to see the federal government stop funding education? Of course not, dummy, I'm a college professor. But I would like to see the following:
1) the federal government to stop using its money, which is after all OUR money, as a weapon, even if it is for a "good" cause like promoting Constitutional awareness, because it sets a precedent that could be used for darker purposes;
2) more controversially, to stop funding colleges and universities directly. Subsidies should be paid to students just like Adam Smith argued, in 1776 ironically enough.

See my Fubarnomics for details.