Be Afraid. Be Very Afraid.

In high school (a long time ago), I took a class in Science Fiction as Literature. One of the themes of the course was the Frankenstein story.

Victor Frankenstein, a brilliant scientist, builds his creature without considering the consequences of creating artificial life. Once animated, Frankenstein is unable to control his monster, which goes on to destroy everything that Frankenstein holds dear. Finally, Frankenstein himself perishes in the attempt to destroy his creation.

At the heart of the Frankenstein myth is the fear of the unintended consequences of new and developing technologies. The Terminator movies are a version of the myth. Jurassic Park, and most of the other novels of Michael Crichton, merely ring changes on the theme.

I’m put in mind of Frankenstein by watching news coverage of the BP oil spill disaster. Seeing live video of that dark, mysterious cloud billowing out of the pipe, a mile under the surface. Watching satellite photos of the spreading oil slick in the Gulf of Mexico, spreading its tentacles further and further. The oil pouring up from the bottom of the sea is the monster.

Filling the role of mad scientist, BP’s drilling crews created the monster. And with every failure to stem the flow of oil, the lack of control over what they have created becomes more apparent.

In every good horror story, the real fear comes from the anticipation of what is going to happen, not the action itself. Life copies art in this respect as well. As of this writing, no one knows how much oil is eventually going to leak into the Gulf, or what the final environmental tally will be. We just know that it is going to be bad.

The biggest sinkhole ever.

Holy Cow!

This is an image of the sinkhole that opened up in Guatemala City over the weekend as a result of a tropical storm.

It looks like something out of a science fiction movie. Like the one where aliens burn a hole in the crust of the planet from space. Or maybe like the one where the supervillain activates his seismo ray device and chews up the heart of a city. Or maybe like the one where the hero realizes that all of what he thinks is real is actually a computer generated illusion.

Astonishingly, no one was killed when the sinkhole opened up, although it did swallow part of a building.

Violence vs Non-violence

I just watched the video of Israeli commandos rappelling onto one of the ships of the Gaza relief convoy. It looks like the commandos and the passengers on the ships are working off two different scripts. The Israelis are working off the standard non-violent resistance script. The Israeli role is to play the heavy, intercepting a peaceful humanitarian mission in international waters. The “activists” on the convoy, by peacefully resisting, establish the moral high ground, and focus international attention on the justice of their cause.

The folks on the convoy were apparently not working off that script. They were attempting to repel enemy boarders. There is nothing non-violent about clubbing someone to death with a metal bar, which is clearly what the passengers were attempting to do.

The Israelis were clearly surprised by the ferocity of the reaction to their boarding. Near the end of the video you can see one of the commandos pointing a paintball gun at the passengers. I’m thinking they wouldn’t have been carrying paintball guns if they had planned on things turning as ugly as they did.

Of course, at some stage of the proceedings the commandos declined to be swarmed and beaten to death. They pulled out the real guns they were carrying and used them. The escalation of the violence caused ten times the international reaction that a non-violent incident would have engendered.

This has become an public relations disaster for Israel.

Turning the Cards

At work we are still in hiring and training mode. The hiring is now not being driven by an expansion of our business, or even the turnover of experienced personnel from retirement or relocation. No, we are now hiring trainees to replace the trainees who washed out.

One guy found a better job, and we determined that a couple of others were not going to work out long term. From management’s point of view, it is always best to cut ties as early as possible, once you have decided that you have an unsatisfactory candidate. Why continue to invest training dollars in someone who is not going to make it?

Despite our best attempts at interviewing and upfront testing, hiring is largely a blind process. I know of no way to determine is someone is truly going to perform in a job, prior to having them start in our unique environment. With some people, it is apparent early on that they will excel, going far in our organization. Sometimes it’s an absolute disaster: the person who creates a quality problem, or breaks equipment, or gets someone hurt. But they all look pretty much the same coming in the front door.

It is also a linear process. When I say that it is linear, I mean that we can only try out one candidate at a time for a position. It would be tempting to hire multiple candidates simultaneously, and then select the best one at the end of training. You retain the star, and drop the others.

A Darwinian selection process would probably be more cost effective than working with one candidate at a time. But that approach strikes me as fundamentally flawed and unfair. We make hiring decisions in good faith. Hiring multiple people, with the intent of cutting some of them, breaks that faith. If a person can do the job, they get to keep the job. I will forego the possibility of finding someone even better.

So, hiring is both, blind, and linear. The metaphor I use to describe this process is playing solitaire. You can shuffle the deck all you want, but eventually you’re going to have to turn over a card. Most of the time you get a number card, a three, or an eight, or a ten. And that’s how many days they last. Then you have to turn over a new card, and try again.

You’re hoping for an ace, you’ll settle for a face card, and you’re praying you don’t get the joker.

Cell Phones for All

I discovered a fresh outrage this weekend. Unusually for me, I was glued to the tube, watching the series finale of Lost. Four minutes of show, three minutes of commercials. Anyway, from sheer repetition, commercials for Assurant Wireless began to penetrate my consciousness.

Assurant Wireless offers a free cell phone, along with 200 minutes of free nation-wide calling every month, as long as you qualify. The primary qualification is to be receiving food stamps, or to have income below 135% of the Federal poverty level.

The first problem with this is that the “free” cell phone service is not free, of course. It is being paid for out of the taxes attached to the paying customers’ phone bills every month. So I’m being taxed, not to pay for a common good like police or fire protection, but for someone else’s specific good. But the irritation doesn’t stop there.

I can kind of wrap my mind around the concept of food stamps. No one should starve in a nation full of food. But when was it decided that cell phone service is a right, not a discretionary expense?

Then there’s that 135%. The whole point of having a Federal poverty level is that is supposed to be the line demarcating the poor (who presumably need help from the government), from the not-poor, who should be able to fend for themselves.

Those are all bad enough to give me dyspepsia. The part that really frosts me, however, is the television commercials. The contract to provide the “free” cell service is so lucrative that the company (a division of Virgin Mobile) can afford a primetime TV ad campaign. They want to reach anyone who might be qualified, and get them to sign up. There used to be at least a little bit of a stigma associated with government assistance. You were supposed to have enough pride to take care of yourself. Not any more. Don’t be embarrassed to get free cell phone service. You’re entitled to feed at the government trough.

This whole situation irritates me, but in reality, it is only an irritant. The taxes that pay for this program are not unduly onerous. But I wonder how the folks who earn 140% of the poverty line feel. If they want cell service, they have to choose what to sacrifice to afford the luxury of a cell phone. I’ll bet this makes them just wild.

Synthetic Life

This was a big week for molecular biology geeks. Craig Venter and his team at the Venter Institute in Maryland announced that they had successfully created what they call “synthetic life.” Like Dr. Frankenstein, we have now created life from non-living material. Surely designer organisms that eat carbon dioxide and secrete oil are not far away, thereby solving both global warming and the energy crisis!

Well, maybe not.

When you get beyond the hype of the press release and examine what Venter’s team really did, it boils down to three things. 1) They completely decoded the DNA of an existing bacteria. This is known as sequencing the genome. 2) They artificially created a copy of the sequenced DNA, starting with the nucleotide bases that are the building blocks of the DNA molecule. As part of that process they modified some of the nonfunctional sections of the DNA to insert what are called “genetic watermarks.” 3) They took a different bacteria, removed the genetic material that was native to the germ, and implanted their prebuilt DNA. The newly implanted DNA then took over the machinery of the cell and began making copies of itself in the normal process of cell division.

These are all neat tricks, to be sure, and incredibly difficult to boot. But I think they fail two key tests for the claim of truly creating artificial life. First, true artificial life will have a genetic code designed from scratch. Venter borrowed the genetic code from an organism that had developed over a billion years of trial and error evolution.

Second, to be truly synthetic, they would have to combine their novel DNA with both a lab grown cellular membrane and built from scratch cellular metabolic machinery. If that assembly then began to grow and reproduce, then they could truly claim to have built an artificial life form.

We’re still a long way away from gleefully cackling “It’s alive! My creature lives!,” as we rub our hands together with glee. Consider: the bacterial DNA Ventner synthesized consisted of a little over one million base pairs, combined to make a single chromosome. Human DNA includes over three billion base pairs, spread out over 46 chromosomes. That’s three thousand times more genetic code.

Those caveats aside, it is still an astonishing technical achievement. Clearly with some fine tuning, they will soon be able to use their techniques to do the kind of design work mentioned above.

Educational Qualtiy Control

I want to build on my concept of testing as educational quality control that I started in my last post.

Quality control, or quality assurance, as it is sometimes called, is a core function in every manufacturing plant I’ve ever seen. We continuously check product at every stage, from incoming raw material to assembly to final audit before shipping. The question is always the same: does the product meet specifications? Put another way, what we are doing is verifying that the manufacturing process is generating the desired result.

If you check parts, and find you aren’t getting the correct result, then there is a problem with the process. But until you do your quality checks, you don’t know what you are producing. Also, one of the key guidelines of quality control is to check your quality as early in the process as possible. It makes no sense to wait until after you have finished final assembly to test the product and discover there was a problem with the first step in the assembly process. Finally, a good quality control program relies on objective evidence. If a good part has to be round within .004”, everyone agrees on that, and everyone agrees on how to measure the part. There is never any discussion of “the parts look round enough to me.” It is either round within .004”, or it is not. If not, then there is a problem, and we have to fix the problem.

In education, standards and standardized testing take the place of quality control. That’s why I can never understand why the educational establishment fights so hard against standardized testing. Actually, that’s not true. I completely understand why teachers fight so hard against testing. If I had a complete lack of accountability for producing the desired result in my job, I would want to protect that too.

What I don’t understand are the lame excuses offered as to why we shouldn’t use standardized tests to evaluate the performance of our education processes. For example, “all we do is teach to the test.” If the test is a representative sample of what we want students to know, than test scores should accurately show the students’ mastery of that body of knowledge.

Conversely, without testing, there is no way to establish that the student has learned anything. And based on my experience trying to employ a number of high school graduates, many of them really haven’t learned anything.

Training the Trainer

We’ve gone into hiring mode for the first time in a couple of years. This is due to two factors. First, business continues to strengthen, necessitating more workers to get the job done. Second, some of our people have moved on to greener pastures. When somebody leaves, it creates an opening for somebody else. The end result is that we’re not just calling back former employees who were laid off. We’re bringing new people into the organization.

Since it has been a couple of years since we have done that, we are relearning lessons on training new people. Our usual method of training is OJT or job shadowing. We assign the trainee to follow an existing employee for a few weeks. In theory, the trainer shows the trainee all of the ins and outs of the job. Anything the trainer doesn’t teach, can be picked up from the work instructions and operating procedures.

At least, that’s the theory.

We had one guy training for five weeks at one position. When we gave him a written test at the end of that time, he failed miserably. It turns out he couldn’t read the questions, either on the test paper or the work instructions that contained the answers. We had to let him go. Oh yeah, we’re supposed to test for literacy on the front end. So now we’ve reinstalled that part of our hiring procedures.

Another lesson we’ve relearned is to provide milestone tests to be administered during the training period. We fell into the lazy trap of waiting until the very end of training, and then testing everything at once. We had one person fail all of the tests. It turned out the trainer had used the “monkey see, monkey do” technique to have the trainee go through the motions of the job. But the trainer had never bothered to explain what the individual actions meant, or why they were included in the job.

It’s possible that the trainer had tried to explain these things. But this was the first time that particular trainer had ever trained anyone, it is very loud out on the shop floor, and the trainer was not particularly articulate in the first place. However, we realized that by virtue of hindsight. The bottlenecks to successful training could have been removed weeks earlier if we had enforced a testing regimen on both the trainee and trainer.

In our training model, testing performs a quality control function. If you want to know if your training is effective, than you devise a test that covers the material being trained. If the trainee can pass the test, then the training is effective. If they cannot pass the test, then your training is ineffective.

Obviously, if your training is going to be ineffective, you want to know as early in the process as possible. That way you can take steps to improve your training (maybe replace the trainer, maybe replace the trainee) before too much cost has been expended.

Because the testing is a pain in the butt, the trainers tend to push it off as long as possible. It’s up to management to enforce the testing regime. And as this whole incident has shown, everybody needs refresher training every now and again.

A New Passion: Off Topic Post

In the last couple of weeks a have discovered a new area of interest: molecular biology.

It started last year when I bought The Teaching Company course on Big History: The Big Bang, Life on Earth, and the Rise of Humanity. Fourteen billion years condensed into 48 lectures on CD. Woo-hoo!

One of the critical thresholds discussed in Big History was the origin of life on Earth. So a couple of months ago I bought the course The Origins of Life. To talk about the research into the origin of life, you have to talk about biochemistry. There is also a chicken and egg type of problem with the origin of life. To be recognizable as life, the organism has to have both metabolism, a way of extracting energy from the environment, and inheritable reproduction, a way of making copies of itself. Which came first, and how did they combine? Nobody knows ... yet.

One of the lectures in The Origins of Life course covered the basics of genetic coding, how RNA is built out of DNA, and how proteins are assembled by RNA. I was hooked. I know we can splice DNA, and I know we have sequenced the human genome, but I don't know what that means. So I'm on a journey to find out.

My current Teaching Company course is on fundamentals of biology, which includes a number of lectures on cellular mechanics. After listening to a couple of lectures, I went online and did some searches for molecular biology. I found a Berkeley molecular biology course, and listened to a couple of lectures. Different perspectives, but not as well structured as The Teaching Company course.

Then, on a whim, I went to YouTube and typed in "DNA Replication." I hit the mother lode. It turns out there are tons of animations for all kinds of biological processes: DNA replication, translation, and transcription. Under metabolism, there are animations for glucolysis, the Krebs cycle, the citric acid cycle, and ATP synthase.

The animations run the gamut from block diagrams to real time scale reproductions of cellular processes. What is most amazing to me is that we now actually know the shapes of the various large molecules in these processes.

This is a whole new area of human knowledge for me to explore, and I can totally get my geek on doing so. I foresee hours of fun chasing down the minutiae of various biochemical processes.

Yeah, I'm a nerd. You got a problem with that?

Greece's Problems

Greece’s fiscal problems have been much in the news recently. Essentially, the country is bankrupt. They have bond payments coming due this month, and they don’t have enough euros in the treasury to pay back the bond holders.

There is nothing unusual about that. Most governments don’t actually pay off their bond holders when the note comes due. What they do is issue new bonds, and just keep rolling the debt over. Greece’s problem is that they have hit their credit limit. The international financial markets are so nervous about how much debt has already been issued that they don’t want to allow Greece to continue digging the hole deeper.

This is not the first time a sovereign nation has run into this problem. Nations can’t handle their credit cards any better than the average American. The nation state playbook says that in a circumstance like this, you devalue your currency. Devaluation makes your exports cheaper, imports more expensive, and pays back the bond investors with a cheaper currency than they loaned you. The inflationary effects make everyone poorer, including the bondholders, who have to take a haircut on the value of their investment.

This isn’t an available option for Greece, because the Greeks don’t have their own currency anymore. They use the common European currency, the euro. If Greece defaults on its bonds, all of the countries in the Euro zone are in the splash zone. Hence the incentive for the other European Union countries to bail Greece out.

The other European nations, notably France and Germany, along with the International Monetary Fund, have agreed to be the lender of last resort to the Greek government. But there are conditions. They are requiring Greece’s government to reduce the government budget deficit from 13.9% of GDP to 3.9% over the next three years.

With their back against the wall, the Greeks are agreeing to the plan. They are cutting pensions, cutting salaries of government employees, and raising the retirement age. On the revenue side, consumption taxes are being increased one tenth, from 20% to 22%.

How big a cut is this going to be? Government spending makes up about 43% of the total Greek economy. The proposed austerity package of tax increases and budget cuts aims to get that down to about 35%. The government in Greece is going to have to shrink by about 20%. Overall, the average man on the street is going to get 10% poorer over the next couple of years, but the effect will be concentrated for government employees and retirees.

No wonder they’re protesting.

Social Utility

Eliot Spitzer, the disgraced former governor of New York, has written a piece attacking the investment bank Goldman Sachs for the on-line magazine Slate. In the column Spitzer raises the concept of “social utility.” He challenges Goldman Sachs to prove that the firm is socially useful by answering a series of questions regarding their internal trading operations.

The clear implication of the article is that Goldman Sachs is not “socially useful,” and therefore, should be eliminated, or at least reduced, by government fiat.

What a load of rot! That Spitzer can pronounce this pernicious twaddle with a straight face establishes that he hasn’t the faintest conception of how a free society functions.

You can deplore that the casino-like trading activities of Wall Street firms have swamped their traditional capital raising and capital allocation functions. You can be concerned that the lack of regulation of credit default swaps and other arcane financial instruments allowed some financial firms to pile up so much risk that they almost crashed the worldwide financial system. You can even argue that Goldman Sachs should not be allowed to sell securities that they have taken short positions against.

But banning or prohibiting activities because they lack “social utility”?

You would have a hard time providing an argument for the “social utility” of baseball cards, or beanie babies, Hummel figurines, but markets exist for all of those. The essence of a free market is that sellers offer something for sale, buyers offer payment, and a bargain is made between two willing parties. At no point does anyone have to meet a standard of serving a hypothetical greater good.

The essence of a free society is that you don’t have to justify your actions. You do have to take responsibility for them. If I wanted to light my farts on fire, and post the video on YouTube, I could do it, and I can’t think of anything of lower social utility than that.

And yet, a surprising number of people have chosen to spend their leisure in exactly that fashion.

Beware the Ides of April

April 15 is Tax Day, the last day for filing your income taxes withourt incurring a penalty. The media has been full of stories about the run up to today. The thrust of most of the stories has been don’t be late, the deadline is looming.

The implication is that there are hordes of people out there who have not yet filed their taxes. The funny thing is, I worked as a paid tax preparer for H & R Block this year, and I was finished doing taxes in early March. As a matter of fact, 75% of the customers are handled during the first peak, from mid-January to early February.

After the first peak, the balance of the clients fall into three categories:
People with insanely complicated tax returns, who take months to get their paperwork in order.
Congenital procrastinators, the kind of folks who would be late to their own funeral.
People who still owe money to the IRS, over and above any withholding or prior payments.

If you’re going to get a refund, you will want to file as early as possible. After all, why leave a pile of money sitting in the government’s hands when it could be sitting in yours? And the vast majority of filers do get a refund.

First of all, almost half of all households pay no Federal income tax. The tax arm of Deloitte and Touche estimated that a married couple with two small children would have to have an income exceeding $50,000/year before they generate the first dollar of income tax liability. They will get all of their withholding back.

Many of those in the lower half of the income scale not only owe no money for taxes, but they also get significant income from the government, due to refundable credits such as the Additional Child Tax Credit and the Earned Income Credit. Of the returns I processed, most fit into this category. Only a handful actually paid income tax, and even those had a tax liability less than their withholding, so even they got a refund.

In the interest of full disclosure, I also got a tax refund, due to overwithholding on my part. I didn’t do a single return this year where the taxpayer had to send additional money to the IRS.

I guess my point is that the media shouldn’t make such a big deal about what the last day for filing your taxes is. Instead, they should run stories on February 1, the due date for employers to send out the W-2 forms needed to file your taxes. For most households, that is the primary, or even only, document they need to get their refund.

Now that would be news you could use.

Changing the Rules of the Game

Obamacare has been passed into law and signed. Despite fulminations from conservatives, it is unlikely to be repealed or found unconstitutional. All we can do now is wait for the unintended consequences to show up. Yet, like a moth to the flame, I am still drawn to write about the intertwined issues of health care and health insurance.

At the root of Obamacare is a profound shift in the understanding of what health insurance (or any insurance) is designed to do. The core concept driving any insurance plan is risk management. Basically, the lucky are subsidizing the unlucky.

If a tornado blows away your house, your neighbors who were missed are paying for your rebuilding through their policy payments. “Wow,” they think, as they write out the check, “that tornado just missed my street.” Or let’s say you beat the actuarial odds and die young. Your beneficiaries are taking advantage of all the other policy holders who didn’t die that year. “Gosh,” they think, sitting at the funeral, “that could have been me that got hit by that freak meteorite strike.”

The thing about the lucky subsidizing the unlucky is that you can never know in advance in what category you’re going to end up. So you pay your premiums, and you’re grateful if you never have to use the insurance.

At the heart of Obamacare is a radical conceptual shift. Instead of the lucky subsidizing the unlucky, the basic principle is now going to be the healthy subsidizing the unhealthy. Hence the push to require younger, healthier people to buy insurance, at the same time lifetime limits on care and exclusions for preexisting conditions are dropped. If you are sick, you are going to get all of the medical care your doctors want to give you, and the people who are well are going to have to pay for it.

The thing is, lucky or unlucky is pretty much a random event. For healthy versus unhealthy, there is not so much randomness involved. If you see someone who smokes, it is predictable that heart disease and breathing problems are in their future. Looking at someone who is grossly obese, you know they can plan on developing type II diabetes, followed by back pain, followed by joint replacement surgery. These tend to be chronic conditions. They can be managed, but somebody’s going to have to pay for them. The healthy are being asked (well, actually told) to foot the bill.

The thing about most insurance is that it is inherently fair. That’s why I willingly pay the premiums. But as someone who likes to eat, but has the self discipline to push away from the table, as someone who sweats it out at the gym several times a week, as someone who has never taken up smoking, I look at many of the unhealthy and question how fair it is that I’m being asked (well, actually told), that I am responsible for paying for the consequences of other people’s behavior.

Those of us who work hard at managing our risks should not have to subsidize the reckless. Frankly, I’ve got better ways to spend my money.

Positive Problems

Last January, late in the month, it was like somebody turned a switch. All of a sudden the phone started ringing with customers expediting their orders and increasing their release quantities. Ever since we've been playing catch up. The biggest issue has been getting enough raw material in house to support the increase in production.

This is an example of what I call "positive problems." These are the problems caused by growth in your business. Although stressful, they are drastically superior to the other kind of problem. For example, I'd rather spend my day wrestling with the question "how I am going to get raw material here to keep production going?" as opposed to the question "what am I going to do with all of the workers and not enough orders?" Or worse yet, "where is the cash coming from to meet payroll?"

The turn in the economy is beginning to look like a broad based phenomena to me. I spoke with one of our customers today, and she told me that her whole day had been spent expediting suppliers to cope with increases in customer demand. Upstream in my supply chain, lead times are moving out from both the steel mills and brass mills with whom I do business.

This increase in activity probably won't show up in the official government statistics for another quarter, but from where I'm sitting it looks like the growth cycle has picked up steam. I'm even hiring a couple of new people. In the meantime, we're considering working some overtime. That hasn't happened for well over a year.

Starbucks Begins Paying Dividends

Last week Starbucks announced a big change in their financial policies.  For the first time, the Seattle based company will begin paying dividends to stockholders.  The company is touting this as proof that their turnaround plan is working.  I’m skeptical.  The management team may be turning the company around, but the fact that they are starting to pay dividends indicates to me that the company may have its best days as an investment behind it.

 

Think of it this way: Imagine that you have a business that is profitable.  You have a decision to make.  What are you going to do with the profits?  You basically have two choices.  One choice is to take the money out of the business, and give the profits back to the owners of the company.  The alternative is to take the profits, and reinvest them back in the business.  With the alternative of reinvestment, your hope and plan is to grow the business, and thereby make future profits even larger than they are now.

 

As an investor, a growing company provides a better return than an equally profitable company that is not growing.  Picture two businesses.  One business is going to earn a dollar a share this year, next year, and the year after that.  The other business is going to earn a dollar a share this year, $1.50 next year, and $2.00 per share two years out.  Which business would be worth more to you?  You pay more today to capture the larger future cash flow.

 

The anticipation of larger future profits results in a higher multiplier between the current earnings and the price of a share of stock.  Growing companies command a higher price/earnings ratio.  As the manager of a business, you want to grow your earnings, because that makes the business more valuable, providing the highest return to the owners, the stockholders.  Besides, most senior corporate execs have a large chunk of their compensation in stock options.  Increasing the value of the shares benefits them personally.

 

But there is a risk with this model.  What if you reinvest your profits in the business, but you fail to grow your earnings?  Well, the technical term for this process is “pissing your money away.”  The market hammers you for that.

 

If you think you have lots of opportunities to grow your business, you should reinvest your profits back into the business.  If you don’t think you have as many chances to grow your earnings, then it becomes time to start pulling money out and giving it back to the owners.

 

The fact that Starbucks is going to start paying a dividend, returning profits to the stockholders, indicates to me that the management of the company thinks the days of their fastest growth are behind them.  Which means as an investment, it is time to look for the next company that has the potential to grow quickly.

 

Starbucks.  I love the coffee, but I’m not so wild about the investment.

No Jobs to be Had?

An interesting situation has developed at the company where I work. Sales have picked up, though not yet to the pre-recession level. At the same time, one of our machine operators gave his notice this week. He’s moving on to a better job, and we wish him well.

But the impending vacancy means I have to go out and hire someone to take his place. The first place we decided to look was people who had worked for us in the past, but who we had laid off in the last year. After all, they would be known quantities.

Here’s where the interesting part starts. The first two people we called were working for $6 an hour, considerably less than what we would pay. It’s also less than the Federal minimum wage of $7.25 per hour. Both of these women were working cash jobs. Their employee was either treating them as subcontractors, but not submitting Form 1099 to the IRS, or else taking unreported cash income and paying their employees out of that stream of money.

Either one is tax fraud, of course, pure and simple. But no one is surprised that people cheat on their taxes. That’s dog bites man stuff.

What struck me is that both women turned down the job offer, even though the aftertax money from our position was greater than the $6 per hour. Why would you turn down a job that pays more than your current position? It turns out I had left out a factor in my calculations: extended unemployment benefits.

Although both women had been laid off from our company over a year ago, both were still drawing unemployment checks, courtesy of the Obama stimulus package. The combination of their unemployment benefit and their $6 an hour job exceeded the amount we were willing to pay. As rational economic actors, they were maximizing the utility of their work.

Conservatives will tell you that continuing to extend unemployment benefits provides a disincentive to work. Why take a job if you can continue to draw a check? Liberals will tell you there are no jobs available, so we have to keep providing benefits to people who have been laid off.

Based on my sample of two, I would argue that the conservatives are winning this argument.

Health Care: What Now?

Well, Obamacare was signed into law today, so I guess we just have to react to the new reality. The first thing we did on Monday was to ask the obvious question: "How does this affect our insurance program?"

Bona fide wellness programs are still allowed, so we can continue to provide incentives to our employees who control their weight, cholesteral, blood sugar, blood pressure and smoking. That's good.

The amount that can be contributed to Flexible Spending Accounts (FSA's) is limited to $2500. We're not sure if that includes the employer's contribution or not. Right now, the company matches the employee's pretax contribution on a dollar by dollar basis, up to a maximum of $3000. Most of what I've read so far indicates that I'm going to lose that $500 of tax benefit.

Our company uses a high deductability health insurance plan. The first $5000 of medical care is the responsibility of the employee. Blue cross/blue shield doesn't cover any of the bills until that limit is reached. I like it that way because it keeps the premiums low, freeing up money for other purposes (like bonuses), and I don't consume much in the way of healthcare. After 2014, it is not clear if that type of plan will continue to be on the market. Based on the rhetoric, I'm afraid that high deductible plans will be outlawed once this legislation gets ramped up.

It's interesting that children can be carried on their parent's health plans until age 26. Tax law says that you lose the dependentcy deduction at age 24, and even then you lose it at age 19 unless the child is a full time student. With our current premium structure, adding family coverage to the employee's coverage adds less to the premium than the cost of adding another employee to the policy. It's easy to see how people will begin gaming the system under those rules. Once this becomes widespread, look for dependent coverage to rapidly rise in price to compensate.

I wonder whose idea it was to remove the lifetime caps on medical spending. Because, you know, going through a million dollars of medical care wasn't enough. Maybe if you get another million dollars of someone else's money, they'll find a way to cure you.

You can't help noticing that the unpopular parts of this legislation, like the requirement to buy health insurance, and the fines for not doing so, are timed to all take effect after the next presidential election is over in 2014.

I haven't yet seen when the surcharge on unearned income (interest and dividends) starts up, but from what I have read so far, that only impacts high income individuals. Like the people who decide whether to pay my bonus or keep the money for themselves. I'm probably going to be stung on that one.

Break Out the Bulldozers

The Obama administration and Speaker of the House Nancy Pelosi are determined to shred every procedural roadblock standing in the way of their massive restructuring of the health insurance industry in this country.

At first, it was only reconciliation. Normally, the House passes legislation. Then the Senate passes their own version of the same bill. Then a conference committee of Senators and Representatives negotiates a compromise version of the bill, that is voted on again by both Houses of Congress. When that passes, it goes to the President for signature to be enacted into law.

The problem with that system (at least from Obama and Pelosi’s point of view), is that the compromise legislation has to pass the Senate again. With the election of Scott Brown from Massachusetts to fill the seat of the late Edward Kennedy, there are now 41 Republicans in the Senate. With a united front, they can filibuster the bill until it dies a natural death.

Hence the reconciliation maneuver. Under Senate rules, passage of measures affecting the budget can have the compromise, or “reconciled” version passed through the Senate on a vote requiring only a majority of 51 votes. Since the filibuster does not apply, sixty votes are not required to cut off debate.

Pelosi’s reconciliation plan then becomes to push through a House vote on the original Senate version of the health insurance restructuring. The House will then pass a series of amendments to the Senate version, making it more to their liking. This package of amendments will then be presented as a budgetary reconciliation, which can avoid the filibuster. The fig leaf covering this end run around the rules is that Obamacare is intended to reduce the deficit.

I have been watching television for well over forty years. I have been exposed to millions of commercial messages. I have become quite adept at knowing when I’m being lied to.

I know that the fast food hamburger will not be plump and juicy like it shows on screen. I know that if I spray on a cheap cologne, women will not leap out of the woodwork, seeking to have their way with me. And I know that the current package of health insurance reform will not reduce the deficit.

Obamacare is not a budget reconciliation bill, it is a policy bill, and using the process of reconciliation to get a around the procedures of limited government stinks to high heaven.

Rising Productivity

I don’t expect reporters to have much in the way of business literacy. Strategic planning and discounted cashflow analysis are difficult subjects, and it doesn’t surprise me that they aren’t part of the normal journalism curricula. But algebra? I had algebra in the 8th grade.

The source of my ire is a report that has been put out by the Labor Department, and the interpretation thereof by the media.

The gist of the report is that productivity grew at an unusually rapid rate in the fourth quarter last year. Labor productivity grew at an annual rate of 6.9% during the last three months of the year. At the same time, the report stated that unit labor costs dropped t a rate of 5.9%.

The commentary I have seen on this report so far makes it out to be bad news. The viewpoint seems to be that rising productivity means income is dropping. Also, if employers can increase output without hiring more workers, that doesn’t help the unemployed. This ignores the reality that increasing productivity is what increases standards of living. Without increasing productivity, we’d all be stuck at the hunter-gatherer stage, which doesn’t strike me as too much fun at all.

But what really gets me is the assumption that when labor costs fall, that means households have less money to spend. This is a complete misreading of the statistics.

What the report actually says is that unit labor costs have fallen. That does not mean workers are getting paid less. It means that workers are producing more product for the same amount of money. In point of fact, falling unit labor costs are just the same thing as rising productivity, expressed in a different way.

Let’s take an example. Assume that in 2008, a worker getting paid $10 per hour produces 100 units of product in an hour. The unit labor cost of that product is $.10, the $10 the worker got paid divided by the 100 units produced.

In the fourth quarter of 2009, the same worker would have produced 107 units of product in the same hour of production. To figure out the increase in productivity, we divide the 4th Q 2009 output by the 2008 output to get 1.07. Productivity increased by 7%. In this same example, the unit labor cost drops to $.0935. This is a 6.5% drop in unit labor costs. But the worker still gets the same $10 income he got before.

The real news is that productivity growth of over 6% cannot be sustained. That red hot pace is an artifact of starting from a lower base level, due to the recession induced drop in demand. Once demand started to pick up, the workforce that businesses kept on in anticipation of an upturn went from coasting along to serious work. A big jump in production was the result. It probably doesn’t hurt that most businesses, given any kind of a choice, will keep their most productive workers on the payroll, dropping the less than stellar performers.

This sharp jump in productivity is a sign that demand is picking up again. Once businesses have wrung all the benefit out of the existing workforce that they can get, the next step is to start hiring more employees.

Increasing productivity is good news, not bad news.

Chile's Hour of Need

The government of Chile is still restoring order after the magnitude 8.8 earthquake that struck the southern half of the nation last week. After some initial confusion, they have requested international aid. According to an interview with the US ambassador to Chile, the confusion was because Chile does not have a history of receiving international aid. In fact, Chile is a donor nation.

Still, the devastation is widespread, and they could use a hand.

So I'm going to go out and buy some grapes, and grape by-products.

Located south of the equator, Chile's seasons are the reverse of ours. Their summer is just ending, and their winter takes place during our summer months. This shift in growing seasons means Chile is in an ideal position to supply fresh fruit and vegetables when fresh produce is in short supply from our own growers. Ordinarily I try to buy American to the greatest extent possible, but due to the emergency I'll make an exception and stock up on Chilean grapes for the next few weeks.

And the grape by-products? I plan on picking up a case of Chilean cabernet.

I just figure it's better to help the Chileans by trading with them, then by giving them some kind of handout. If we help Chile's businesses, those businesses will take the lead in rebuilding the country. If we give handouts, we only encourage dependency.

Of course, I feel the same way about charitable giving in this country as well, and for the same reason.