Coyote Blog

Alex Tabarrok of Marginal Revolution makes a point I have been trying to communicate for some time now:

It's naive to only blame particular people (Bush, Cheney et al.) and
depressing when people at CT claim that if only "our guys" had been in
power everything would have been ok.  When you see the same behaviour
again and again you ought to look to systematic factors.  And even if
you do believe that it is all due to Bush, Cheney et al. it's not as if
these guys came to power randomly, they won twice.  The worst
get on top for a reason.  As a result, government ought to be designed
(on which see further below) so it works when the knaves are in power and not just when the angels govern.

I made a similar point in this post:

Over the past fifty years, a powerful driving force for statism in this
country has come from technocrats, mainly on the left, who felt that
the country would be better off if a few smart people (ie them) made
the important decisions and imposed them on the public at large, who
were too dumb to make quality decision for themselves.  People aren't
smart enough,they felt, to make medication risk trade-off decision for
themselves, so the FDA was created to tell them what procedures and
compounds they could and could not have access to.  People couldn't be
trusted to teach their kids the right things, so technocrats in the
left defended government-run schools and fought school choice at every
juncture.  People can't be trusted to save for their own retirement,
so  the government takes control with Social Security and the left
fights giving any control back to individuals.  The technocrats told us
what safety equipment our car had to have, what gas mileage it should
get, when we needed to where a helmet, what foods to eat, when we could
smoke, what wages we could and could not accept, what was and was not
acceptable speech on public college campuses, etc. etc....

the technocrats that built our regulatory state are starting to see the
danger of what they created.  A public school system was great as long
as it was teaching the right things and its indoctrinational excesses were in a leftish direction.
Now, however, we can see the panic.  The left is freaked that some red
state school districts may start teaching creationism or intelligent
design.  And you can hear the lament - how did we let Bush and these
conservative idiots take control of the beautiful machine we built?  My
answer is that you shouldn't have built the machine in the first place
- it always falls into the wrong hands.

I am particularly amazed of late at the popular leftish criticism of Bush that he was too slow after 9/11 (spending 10 extra minutes with the school kids), too slow during Katrina, and too slow entering the diplomatic fray in Lebanon.  I can't remember who, but someone lately was quoted publicly saying that they were frustrated with Bush taking vacations and that they would never vote for someone with a ranch.  Is that really the dual criticisms that people have of Bush?  That 1) he is evil and an idiot and 2) they want him to get involved faster and more aggressively in more types of problems?

Here's something everyone should know, which I have embodied in Coyote's Second Law (here's the first) which states:

Any person elected to government office has their effective IQ cut in half

I don't know if politicians wake up from this fog when they leave office or not.  I can easily imagine Bill Clinton, a man who is supposed to have a high out-of-public-office IQ, slapping his head and saying "did I really go running into Somalia and running right back out after the first casualties?' or maybe even better "jeez, I can't believe I turned down the chance to take Bin Laden into custody -- what was I thinking".  Whichever the case, governments are always stupid, even those made up of people provably of high IQ in their private lives.  Tabarrok has this humorous but depressing observation:

The Pentagon is the Post Office with nuclear weapons

Like Tabarrok, I think the bar has to be pretty high to send our military into battle, and I never thought the situation in Iraq justified the excursion.  However, perhaps differing from Tabarrok, I am sensitive to historic precedent and thus doubt that defense can always just end at our borders.  While I think the Bush administration is overly optimistic to think that Iraq will become a shining beacon of democracy that will help rally the democratic forces in neighboring countries, I also think Bush opponents are overly optimistic when they say that terrorists and Middle Eastern fascists will leave us alone as long as we just keep our distance.  There are too many historical reminders that the latter is not true.  Sometimes you do have to go over there to kick their ass before they come over here.  Afghanistan probably met this criteria, but I don't think Iraq did - Iraq feels more like the Gulf of Tonkin, a war certain people in power wanted to fight and for which they needed a public excuse.

All this means that I think that the number of times we need to go out and fight wars overseas is greater than zero and less than what we actually do.  I'm not smart enough, I guess, to make a clearer policy statement, but I would be really interested to ask all those who think they would have prevented Israel and its neighbors from going to war for the 47th time if only they had been in office what their coherent policy statement would be.

Today, Microsoft came under fire from a number of activists:

Activists today accused Microsoft of spending all of its time focusing on software.  "All they want to do is write code for operating systems and applications".  Activists were complaining that Microsoft does not invest any of its huge profits into alternatives to software and operating systems.  "They have not invested one dime in trying to come up with computing technologies that don't require operating systems or business applications."  Activists also accused Microsoft of not investing in any alternative computational approaches, such as abacus research or mechanical calculators.

Makes no sense, right?  Well, that's because I made it up.  But I did not make this up, which is essentially the exact same charge, just against a different target:

Unlike
other major oil companies that essentially acknowledge the very real
threat of global warming and the need to transition to renewable energy
and off of a finite, non-renewable resource such as oil, ExxonMobil is
using its profits and its power to continue to keep this country
addicted to oil, as President Bush has noted," Hoover said.

ExxonMobil cares only about drilling for more oil, Hoover alleged

You hear this stuff all the time.  But why are the major oil companies responsible for investing to obsolete their own business?  Why are they obligated to invest in things like wind farms or whatever that they know nothing about?   Did we demand that railroads invest in aircraft research?  Do we require cable companies to invest in DirectTV?  For all of its size, ExxonMobil represents a tiny fraction of World GDP -- if all these alternative energy ideas are such great opportunities, let the other 99.99% of the world economy take it on.  Besides, do these guys who think that XOM is evil incarnate really want them controlling the next generation of energy production?

By the way, I thought this was hilarious:

"We
believe that ExxonMobil -- primarily through its former president and
CEO, Lee Raymond -- has been involved in conceiving of and then
promoting the invasion and occupation of Iraq," Reed said. "When the
Iraq war was being cooked up, we think ExxonMobil was in the kitchen."

I love the "we believe" part.  I am sure that half these folks also "believe" that aliens are alive and well in Area 51 and that George Bush was behind the 9/11 attacks.  Would it be too much to ask to bring some facts to the table?  Or how about even a motive?  I could maybe come up with a motive if the US invaded Nigeria, since Exxon has assets at risk there that are threatened by rebels and general chaos, but Iraq?  Since Iraq's output was limited before the invasion, invading Iraq only served to put more oil on world markets, which would depress rather than raise prices and profits.  In fact, if there was really an evil genius oil company pulling the strings of government to maximize their own profits, UN-sanctioned Iraq would be just about the last oil producing country in the world you would want your government puppets to invade.

Today XOM has its annual shareholder meeting, and if you ever want to see a great parade of barking moonbats, buy yourself a share of XOM and attend.  Lee Raymond caught a lot of grief for his compensation package, and it did seem overly generous to me, but I am not an XOM shareholder right now so its not my concern.  I will say that having seen one of the XOM shareholder meetings and the ridiculous grief the CEO must endure for a day, my guess is that the XOM CEO would likely knock several million dollars off his comp. package if he could call in sick today.

I have already read several commenters who have wondered how Skilling could be convicted of fraud (in the form of obscuring Enron's true financial health) but acquitted of most charges of insider trading.  Larry Ribstein (via Professor Bainbridge) asks

"Does this mean that the jury thought he didn't know enough about what
was happening to bar him from trading, but that he did know enough to
go to jail for fraud?"

Here is how I reconcile it:  The jury decided that Skilling committed fraud, but that it was not for personal gain in his stock.  How can that be?  What other incentive might he have?  Here is my explanation, based on some personal knowledge of Skilling and the Enron business model.

Enron's business model was Skilling's brainchild.  It was nearly 100% his baby.  He invented it at McKinsey and then moved to Enron to make it reality.  The trading model Enron adopted reflected Skilling's ability to handle a lot of complexity and his facility for numbers.  The failure of Enron would be a direct personal failure of Skilling's, perhaps the first and certainly the largest of his life.  Even without holding a single share of stock, Skilling had every incentive to want Enron to survive and in fact thrive.  Enron's failure would be a repudiation of his vision, a forceful proof that maybe he was not as smart as everyone thought he was.

Like nearly every new financial trading business, Enron at first enjoyed large margins on their trading deals.  This has happened throughout history, as the first traders who discover an arbitrage opportunity make lots of money.  However, over time, competition and general knowledge of the arbitrage opportunity tends to erode margins.  Eroding margins are a problem in every business, but particularly in trading.  Here's why:

Trading businesses typically make their money by executing huge transactions at thin margins.  These transactions require a lot of capital, and since margins are narrow, trading companies need to maintain a very low cost of capital.  For a company like Enron, this means maintaining a high stock price and platinum level credit to minimize borrowing costs.

The trap Enron fell into was not a new one.  As trading margins inevitably eroded (as described above) the company had to do more and more volume to maintain profits (it takes twice the volume of transactions when margins are halved to maintain profits at an even level).  But remember, Enron needed a high and growing stock price to keep its cost of capital as low as possible.  So it needed to show ever growing profits, which means in an environment of falling margins, trading volumes had to go up almost exponentially.  But, increasing trading volumes means more capital, much of it in the form of debt.  Borrowing more increased cash demands and put pressure on ratings agencies to downgrade their debt, which would have disastrously increased borrowing costs.  At the same time, falling margins and rising debt meant falling coverage ratios.    Old line trading firms like Goldman Sachs and Soloman Brothers have mostly avoided this trap by carefully husbanding and building their capital over decades.  But Enron tried to build the trading business too fast.

So you see the tiger Enron management was riding.  Any blip in their cost of capital, whether it be a fall in stock price or a downgrading of their debt, would crash the whole company.  But falling margins and a growing need for debt nearly guaranteed that their cost of capital was going to go up.  At first, management sought new growth avenues (e.g. broadband) or windfalls (e.g. California energy crisis) to make ends meet.  Eventually, management appears to have fibbed to bond and equity markets, in the form of false statements and burying the bad stuff in SPE's, trying to keep things from crashing.  Eventually, outsiders figured out what was going on, the commercial paper market dried up, and Enron faced a liquidity crisis that brought the whole thing down rapidly.

In this context, Lay and Skilling's obfuscation of the underlying financial health of the company makes sense.  Enron had reached a point where bad news about the business would do more than just depress the stock price - it could start a chain reaction that would bring the whole company to bankruptcy.  Knowing this, Lay and Skilling apparently sought to hide the true condition of the company, to try to buy time to find some way out.  Skilling, much much smarter than Lay, at some point probably realized that the crash could not be avoided and that's why he suddenly quit.  The tragedy (self-induced, of course) for these men is that nothing was going to prevent the eventual crisis, and Lay and Skilling bought a few months delay in Enron's downfall at the cost of what will probably be their freedom for the next several decades.

So, was Skilling a robber baron intent on nothing more than enriching himself at the expense of shareholders?  Or was he a visionary entrepreneur, who just couldn't accept that his dream and creation of over a decade's work was dying?  I don't really know, even having known the man personally, but the jury's verdict seems to point as much to the latter than the former.  And if it is the latter, has there ever been a visionary who was not the last person to admit his vision was a failure?  I can't tell you how many entrepreneurs I knew in the Internet bubble who were convinced their company was going to be successful almost right up to the day of bankruptcy.  Are we really better off as a society putting all these failed visionaries in jail?

I guess I end up with mixed feelings about the legacy of the case.  I certainly am worried about the prosecutorial abuse.  And cooking the books of a public company is bad and should result in jail time. Having worked once long ago with Skilling, I know for a fact that the man is brilliant and totally detail oriented.  There was no way he could not know about the SPE shenanigans, and for that alone he should face jail time.  My concern is that the other message, beyond just accounting fraud, of this case will be that we are criminalizing CEO's being overly optimistic about their company. And that strikes me as nuts.

Update:  Tom Kirkendall, who has been all over this case, has more here.  Larry Ribstein, whose question started this post, observed:

Many people think that there was so much loss associated Enron that the
guys at the center of it must have been villains. But they weren't
villains. The jury is saying they weren't even insider traders, as if
that would have made a difference. They lost as much as anybody, and
that's what drove them to lie, if they did lie. This doesn't make them
saints, but it should make even the most hardcore antibusiness types
queasy with the denouement of this tragedy. Locking these guys up for
pretty much the rest of their adult lives for being unable to face the
fact that their dream had ended is not the way a civilized society
would deal with this case.

Technorati Tags:  Enron, Skilling

Ken Lay and Jeff Skilling were convicted on numerous counts of fraud but were acquitted on most counts of insider training.  Professor Bainbridge has some quickie analysis.

I worked for Jeff Skilling for a brief period of time at McKinsey & Co.  Jeff was easily one of the smartest men I ever met, as well as the most detail-oriented.  It was this latter quality that forced me to concede that he was probably lying to Congress back when he said "I didn't know any of this stuff was going on in my organization."  Whatever else they did, Lay and Skilling will never be forgiven by my family for sucking in a couple of our family friends who were not business people (doctors and such) onto the Enron board, perhaps as dupes who had no hope of crying foul at the complex business machinations that were taken place.  Whatever the reason, our friends will spend the rest of their lives dealing with Enron lawsuits.

My only regret in this case is that I hate seeing some pretty scary prosecution practices get rewarded.  The guilt of Lay and Skilling does not change the fact that we need to start reigning in heavy-handed prosecutors, and disavowing the Thompson memo would be a good start. Update: Tom Kirkendall has much more on prosecutorial abuse in this case and possible appeal points.

My casual, uninformed observation so far has been that for all of its strong-arm tactics and media advantage, the government's case so far in the Enron trial has been weaker than I had been led to expect in the media and publicity run-up.  Tom Kirkendall agrees, and has been all over this case including this recent update.

Bank of America set a new record today.  It sent me the terms and conditions on their treasury services -- 48(!) full 8-1/2 by 11 inch pages with 10-point font.  Unbelieveable.

Over the last month, blogging has been both light and of lower-quality than I would like because I have been consumed with some growth opportunities in my business.  Frequent readers will know that much of my effort has not been business per se, but completing all the government waste paper needed to start a new business in a new state or industry.  A partial list of some of these tasks are here and here.

I am thinking next summer I may go on campus and find the strongest big government supporter I can find and hire them to do all this government paperwork -- my attempt to create one new libertarian each year.  Not sure how I would find the right person, though approaching local PIRG chapter or Campus Progressives organization might be a good start.

PS- What I would really like to do is hire one Congressman a year into that summer job.

Today's announcement that GM will sell 51% of their GMAC financing arm really brought home to me how bad things are at GM.  I haven't really followed the situation, but I had assumed that GM was facing the same type demographic bomb as the airlines, fat and underfunded pensions and retiree health care benefits promised when times were good and US auto makers didn't face much troubling competition.

Here is what I found interesting:  GMAC is reported to make about $2.5 - 3 billion a year in profits.  This might tend to imply a value of at least $25 to $30 billion, which is confirmed by the fact that GM just sold half for $14 billion.  But GM as a whole has a market cap of just under twelve billion.  This means that their entire manufacturing business is valued in the market at roughtly -$16 Billion.  Yes, negative sixteen billion.  Another way to look at this is that if instead of selling GMAC yesterday, GM had instead sold all of their automotive manufacturing, brands, designs, etc. to someone for $1, and became a pure financing business, GM shareholders would be richer by $16 billion, the equivilent of raising the current stock price from about $21 to about $49.

The recent government pursuit of Enron, Frank Quattrone, Arthur Anderson, and any number of other firms has established one "principal" being followed by the government in all of these cases:  They will let large corporations off the hook with fines but no criminal charges IF the corporation agrees to sell out all of its employees.  A large part of this deal, being cut all over the place (and for which Arthur Anderson was destroyed mainly for not agreeing to) is that the corporation will waive attorney client privelege for discussions between employees and corporate attorneys.  Frank Quattrone has been tried twice and will likely get tried a third time mainly based on evidence of emails he sent back and forth with corporate council.  Tom Kirkendall has other examples.

Ten years ago, I would have naively given the advice "don't break the law."  Still good advice, but nowadays in business its hard to tell just what is the law and what is illegal (antitrust is a great example).  So my new piece of advice is "when in doubt, don't use corporate council."  Get your own lawyer.  If the company will pay for it, all the better but do it even if it's out of your own pocket, because it is clear that corporate lawyers are NOT your lawyers, and they will cooperate with the corporation who employs them to put you in jail if that helps protect their real client who pays their salary.

Per the BBC News:

More than 160 people were arrested after clashes erupted
in eastern Paris following a day of largely peaceful demonstrations
across France.

Vehicles were set on fire and stores were damaged as masked youths clashed with police.

Twenty-four people, including seven police officers, were injured in the violence, which lasted about six hours.

So what is the provocation?  Are youth being drafted to go to war?  Are fundamental civil rights being taken away?  No, the reason for millions of people on the street and outbreaks of violence is...

Protesters are bitterly opposed to the new law, which
allows employers to end job contracts for under-26s at any time during
a two-year trial period without having to offer an explanation or give
prior warning.

The government says it will encourage employers to hire
young people but students fear it will erode job stability in a country
where more than 20% of 18 to 25-year-olds are unemployed - more than
twice the national average.

 Oh my god, its, its....at-will employment.  Head to the barricades!

In reality, what has happened is that Europe has invented a new type of indentured servitude that works in reverse.  If you remember you history, poor Europeans bought their passage to America in the 16th and 17th century by essentially enslaving themselves for a fixed but finite (as opposed to African slavery) period of time.  They got to come to America, but were forced to work for the same employer without the ability to quit for seven years.

The French have taken this same concept, and flipped it on its head.  If an employer hires someone, the employer is prevented by law from ever firing that person.  In effect, an employer enslaves himself to every employee he hires.  Which might just explain why unemployment is so high over there.  I call it indentured employertude. 

These recent riots also turn history on its head.  In the past, many countries with legalized slavery have faced devastating slave riots and uprisings.  In this case, though, it is not the slaves (employers) doing the rioting to be freed, it is the slave holders (ie the employees) rioting to keep the employers captive.

Is France a total loss?

Tom Kirkendall has another excellent roundup of the Lay/Skilling trial.  According to Kirkendall, the prosecution is having some trouble, and in fact have wandered pretty far afield from their original indictment (a document that the prosecution now actually has disowned).  In effect, Lay and Skilling seem to be being tried for different things than they were ostensibly brought to trial for.  Most interesting is this:

On the other hand, the Task Force's case to date has wandered away from
the SPE's, so there is a decent chance that a difficult-to-control
Fastow could end up being a not-so-important witness in the
ever-changing big scheme of this corporate criminal case of the decade.

If Kirkendall is reading the trial correctly, and the SPE's and Fastow's testimony are becoming irrelevant, then the trial has virtually nothing to do with anything we have heard about in the media about Enron.

Barrionuevo and Eichenwald, who have been following the trial for the NY Times, agrees that the government case is shifting but believe it is due to the strength of what has been presented so far.

A steady drumbeat of damaging testimony in the five-week-old criminal trial against the former chief executives, Jeffrey K. Skilling and Kenneth L. Lay,
has led legal experts to praise the government case presented so far.
That has raised questions about the risks prosecutors would run by
putting Mr. Fastow, the former chief financial officer, on the stand as
early as Tuesday.

I haven't followed the testimony in any depth, so I can't choose from these two point of views, except to say that the government tactics of essentially changing the charges mid-trial and suppressing defense witnesses by naming a record number as unindicted co-conspirators may or may not be effective, but strike me as fairly scary abuses of the justice system.

I had a conversation the other day with a person I can best describe as a well-meaning technocrat.  Though I am not sure he would put it this baldly, he tends to support a government by smart people imposing superior solutions on the sub-optimizing masses.  He was lamenting that allowing a company like GM to die is dumb, and that a little bit of intelligent management would save all those GM jobs and assets.  Though we did not discuss specifics, I presume in his model the government would have some role in this new intelligent design (I guess like it had in Amtrak?)

There are lots of sophisticated academic models for the corporation.  I have even studied a few.  Here is my simple one:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it. 

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart.  Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one. 

I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.

* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
** Gratuitous reference aimed at forty-somethings who used to hang out at the mall.  In my town, Merry-go-round was the place teenage girls went if they wanted to dress like, uh, teenage girls.  I am pretty sure the store went bust a while back.

A while back I wrote about the unbelievably egregious price Pitney Bowes charges for the ink cartridges on its mailing machines:

Today I bought what may be the most expensive consumer printer ink available.  We have a small Pitney-Bowes postage meter
that has a little built in ink-jet printer to print out the metered
postage symbol (that sort of red looking stuff that replaces the
stamp).  One of their little print cartridges doesn't last more than at
most a thousand envelopes, which represents at most the
equivalent of 50 pages of text for a normal printer.  For this little
cartridge with its smidgen of ink, I paid $39.99.  At the same time, I
bought two-paks of the HP cartridges I needed (no bargain themselves)
for $25 per cartridge, and these cartridges last for hundreds of
pages.  I can't directly compare the volume of ink, but my sense is
that the P-B cartridge is priced such that it would be over $500 with
an equivalent amount of ink to an HP cartridge.

A reader named Randy Hooker sent me this email, which read in part:

Read your blog post with glee! Almost four years ago I felt the same and developed alternative ink products for many Pitney machines. Our trademarked name is NuPost.
Google that and you'll see there are hundreds of places to buy.

Just as background on the Pitney machines and ink usage: As these meters print "money" rather than images it is critical that the cartridge have ink available at all times.  So, the meter "purges" the print head on a regular basis to insure performance.
This purging uses massive amounts of ink as compared to the printing of a
single indicia.

The Pitney Bowes published output of the cartridge for your machine is 400
to 600 impressions OR 4 months.  If you do not use the meter at all, the purges will exhaust the cartridge over a 4 month period. Infrequent mailers will get very little value from these cartridges, compounding the total cost of ownership.

He was nice enough to send me a sample, which sat on the shelf and I forgot it (sorry).  Then, the other day, I noticed when I ran some mail that the printing looked a lot better than normal - none of bad banding that is typical.  I opened it up and found Randy's cartridge.  This thing is great - its half the price at OfficeMax of the Pitney Bowes cartridge and actually prints better.  Thanks!  (Many online sources of NuPost cartridges here).

Via Marginal Revolution, I thought this was fascinating:  The profits from those airline frequent flyer Visa and Mastercards (like my Citibank Advantage Visa) dwarf those of the airline business itself.  OK, so the profits of my tiny little company probably dwarfed the anemic profits of most airlines last year, just because they were positive.  But the magnitude is staggering:

Juniper bank is contributing $455 million to the merger of America West and
USAirways in exchange for the right to issue its frequent flyer credit card. This was a
huge blow to Bank of America, which had been issuing cards for both airlines,
and BofA is taking the deal to court.

They have several more examples, with credit card companies providing much of the new financing in recent airline bankruptcies.

By the way, why is it that frequent-flyer miles holders, who are a creditor of the airlines after all, are the only major creditor consistently NOT asked to take a haircut in these bankruptcies.  For god's sakes, there are retired workers losing a large portion of their pensions, but I still get to retain all my miles so I can go to Hawaii next year?

Update:  The fact that mileage holders have not taken a hit in bankrupcy does not mean they have not ever taken a hit.  Airlines from time to time devalue miles, by raising redemption rates, as Northwest did last year.

In a remarkable example of an anti-business hit-piece called "Fueling Contempt" on the front page of the AZ Republic, the Republic leads with this line:

Reaction to major oil producers' staggering profits ranges from rage at
the pumps to calls for profits to be reinvested in exploration,
alternative-energy research or simply returned somehow to the public.

The article is mainly focused on the profit announcement at Exxon-Mobil, so I will use their numbers to put "staggering" into context.  E-M announced profits of $9.9 billion on sales of $101 billion.  For those who cannot divide, that is a profit margin of 9.9% of sales.  Since when is a profit margin at a cyclical peak of 9.9% considered "staggering"?  Microsoft makes 30%, in good times and bad, with a fraction of the investment or risk X-M takes.  From this chart, you can see the average for all industry is about 8%, with the oil industry generally below this number in all but cyclical peak quarters and banks, pharma, software, semiconductors, financials, household products and many others all consistently over 10%.  Procter and Gamble makes a margin of nearly 13% of sales selling toothpaste and detergent but we are going to begrudge oil companies 7.6% on average and 10% in their best quarters?

The article does absolutely nothing to put the profits in their proper context, though I was able to do it in one paragraph.  This is the only context the article offers:

The oil companies assert that their profits are no larger than other
businesses and that they just look big because it is a big business.

Exxon Chairman Lee R. Raymond said in a statement that the company
"acted responsibly" in its pricing and said its fourth-quarter profits
would come nowhere close to the $9.9 billion in the third quarter.

That doesn't necessarily wash with Adrienne Valdez of Phoenix.

"I can't afford to buy socks because I am paying twice what I used to
for gas," she said. "It's not right that they should be making billions
at our expense."

In Phoenix, gas prices soared to $3.14 after Hurricane Katrina hit the
Gulf Coast. The average Valley price per gallon, which has been falling
in recent weeks, was $2.72 Thursday, according to AAA Arizona.

Bruce Trushinsky, owner of the former Moon Valley Exxon station at 1901
W. Thunderbird Road in Phoenix, called Exxon Mobil's $9.9 billion
quarterly profit "disgusting."

He became so upset at the $7.6 billion profit posted by the company in
the second quarter that he canceled a longtime branding agreement.

"I ripped down all the Exxon signs and threw them in the garbage,"

he said. Now, after 30 years, Moon Valley Exxon is Carmel Automotive
and Fuel. Trushinsky said the high wholesale prices charged by Exxon
were devastating to his business and that the last straw was when the
company canceled its dealer-incentive program.

"They cut us off, then they announced their (second-quarter) profit increased $2 billion."

This is populist crap, and is the reason the MSM cannot be taken
seriously when they say that they are neutral reporters.  They are not
reporting, they are cheerleading an anti-oil company bigotry that has
existed for decades.  I think that the E-M management should be embarrassed to make such a small return in their best quarter.  Shareholders should take management to the woodshed for investing and risking so much in a cyclical business and making so little.  For gods sakes, they make a lower margin than Jif peanut butter earns.  Is anyone suggesting that we impose a windfall profits tax on Charmin?

I find the title of the article "Fueling Contempt" interesting - I am not sure if it was meant to refer to high oil company profits or if it was just a statement of intent for the article.

UPDATE:

Since 1977, governments collected more than $1.34 trillion, after adjusting for
inflation, in gasoline tax revenues"”more than twice the amount of domestic
profits earned by major U.S. oil companies during the same period

This is just gasoline taxes - it does not include income tax payments, property tax payments, and oil lease royalty payments.

With a hat tip to Cafe Hayek, comes this article from the Las Vegas Weekly:

The shade from the Wal-Mart Neighborhood Market sign is minimal around noon;
still, six picketers squeeze their thermoses and Dasani bottles onto the dirt
below, trying to keep their water cool. They're walking five-hour shifts on this
corner at Stephanie Street and American Pacific Drive in Henderson"”anti-Wal-Mart
signs propped lazily on their shoulders, deep suntans on their faces and
arms"”with two 15-minute breaks to run across the street and use the washroom at
a gas station....

They're not union members; they're temp workers employed through Allied
Forces/Labor Express by the union"”United Food and Commercial Workers (UFCW).
They're making $6 an hour, with no benefits; it's 104 F, and they're protesting
the working conditions inside the new Wal-Mart grocery store.

"It don't make no sense, does it?" says James Greer, the line foreman and the
only one who pulls down $8 an hour, as he ambles down the sidewalk, picket sign
on shoulder, sweaty hat over sweaty gray hair, spitting sunflower seeds. "We're
sacrificing for the people who work in there, and they don't even know it."

The union accuses Wal-Mart of dragging down wages and working conditions for
other grocery-store workers across the nation. "Whether you work or shop at
Wal-Mart, the giant retailer's employment practices affect your wages. Wal-Mart
leads the race to the bottom in wages and health-care," says the UFCW's website.
"As the largest corporation in the world, Wal-Mart has a responsibility to the
people who built it. Wal-Mart jobs offer low pay, inadequate and unaffordable
healthcare, and off the clock work."

But standing with a union-supplied sign on his shoulder that reads, Don't
Shop WalMart: Below Area Standards, picketer and former Wal-Mart employee Sal
Rivera says about the notorious working conditions of his former big-box
employer: "I can't complain. It wasn't bad. They started paying me at $6.75, and
after three months I was already getting $7, then I got Employee of the Month,
and by the time I left (in less than one year), I was making $8.63 an hour."
Rivera worked in maintenance and quit four years ago for personal reasons, he
says. He would consider reapplying.

LOL.  Frequent readers will know that I usually feel the need to restate the moral of the story to insure everyone gets it.  I don't think thats necesary here.  More on Walmart and wages here and here.

Does this make any sense:  It costs us a lot more, for small transactions, to process an ATM / debit card with the pin pad than a credit card.  Bank of America charges a flat 60 cents per ATM card / PIN pad transaction in our stores but charges 10 cents plus 2% on credit cards.  So, on a typical $5 convenience store purchase, BofA charges $0.60 or 12% to process a ATM / debit card but $0.20 or 4% for the credit card.

I understand the difference between value- and cost-based pricing, but in an economy of scale transaction processing business with a lot of competitors, I would think debit would be cheaper to process, even without the credit risk issues. 

Customers give me feedback that I am a neanderthal for not accepting ATM cards with a pin pad at the registers.  This is the reason.  Its cheaper for me to provide an ATM and then have them pay cash - that way they pay the fee, not me.  Also, their fee is lower.  Even if they only take out $20 and pay a $1.50 fee, they are still only paying 7.5% vs. the 12% typical I would be paying.  If anyone knows a company that offers a better deal, the comment section is wide open!

Update:  A couple of notes based on the comments.  First, I do indeed understand that prices are not cost-based.  The notion that pricing should be cost-based is one of the worst economic misconceptions held by the average person (behind the commerce is zero-sum myth).  When prices don't make sense to me, I don't run to the government asking for Senate hearings so corporations can "justify" their pricing, I just don't buy from them. 

Second, to another commenter's point, most card processing agreements and some state laws prevent merchants from passing card processing fees onto consumers in a discriminatory way - ie they can be built into the general pricing but you can't charge one person one price and another a different price for the same item based on what kind of payment they use.

Today I bought what may be the most expensive consumer printer ink available.  We have a small Pitney-Bowes postage meter that has a little built in ink-jet printer to print out the metered postage symbol (that sort of red looking stuff that replaces the stamp).  One of their little print cartridges doesn't last more than at most a thousand envelopes, which represents at most the equivalent of 50 pages of text for a normal printer.  For this little cartridge with its smidgen of ink, I paid $39.99.  At the same time, I bought two-paks of the HP cartridges I needed (no bargain themselves) for $25 per cartridge, and these cartridges last for hundreds of pages.  I can't directly compare the volume of ink, but my sense is that the P-B cartridge is priced such that it would be over $500 with an equivalent amount of ink to an HP cartridge.  Insane.  And its worse because the P-B postage meter has this annoying tendency to announce the cartridge is almost out of ink before it is even half empty.  We have gone weeks with the meter telling us the cartridge had to be replaced soon.

I am not sure I fully understand the relationship Pitney-Bowes has to the US Postal Service, but to all appearances, they have been handed a virtual monopoly for decades.  For years business have been forced to pay egregious rental rates for P-B equipment with long, long minimum lease periods because the USPS does not seem to be comfortable with competition.  Only the advent of Internet postage in the late 1990's forced P-B to come out with a small business postage meter that you could purchase at relatively low cost.  I am flabbergasted that the US government continues to give them this monopoly.  It is ironic to me that several of the abusive monopolistic practices used by Pitney-Bowes and encouraged by the US government are the same practices Xerox got busted (under anti-trust litigation) years ago by... the US Government.

I wrote below that I am not an economist, but I am really, really not a patent lawyer.  However, I find this story totally mystifying:

Apple Computer may be forced to pay royalties to Microsoft for every iPod it
sells after it emerged that Bill Gates's software giant beat Steve Jobs' firm in
the race to file a crucial patent on technology used in the popular portable
music players. The total bill could run into hundreds of millions of dollars.

Although Apple introduced the iPod in November 2001, it did not file a
provisional patent application until July 2002, and a full application was filed
only in October that year.

In the meantime, Microsoft submitted an application in May 2002 to patent
some key elements of music players, including song menu software.

I have already become suspicious that the patent process as applied to software and online concepts (e.g. the Amazon "1-click" purchase patent) is broken.  For me, this is more evidence.  How can a Microsoft patent filed in May 2002 have any validity if it attempts to patent concepts already embodied in a competitive product on the market in 2001?

I once found myself in the middle of one of these patent battles several years ago.  I was on the management team at Mercata, an online shopping site who's bit of uniqueness was that it had three or four day purchase windows for various products, and the price of the product would fall as more people signed up to purchase it.  Kind of a fun, with some interesting viral marketing potential if it had caught on, but patentable?  I mean, doesn't Adam Smith have prior art on this?

Hat tip to Prof. Bainbridge.

My previous post joking about potential union opposition to unmanned military aircraft reminded me of one of my favorite labor relations stories.   Until just the last few years, most railroads continued to pay a "fireman" to ride in the cab of their diesel locomotives, despite the fact that the role of the fireman to shovel coal into a steam boiler was totally obviated fifty years ago by diesel technology.  How this came about is an interesting story.

Railroads were the first heavy or large industry in this country.  For years, if you were to talk about "big business", you were really talking about railroads.  So it is not surprising that when the government succumbed to the pressure of interfering legislatively into the relationship between employer and employee, their first target was the railroad industry.  In a sense, the US has two bodies of labor law.  The first body of law is railroad labor law, and the second is the law that applies to every other industry. 

As much as we can complain about the labor law most of us operate under, it is nothing compared to the hash that the government made of railroad labor law.  From an early stage, details about work days and work rules that would normally be part of a private labor contract between a company and their union or employees were actually embodied in the law.  For example, back in the steam-engine era when trains moved fairly slowly, a full "day" for a train crew was defined by statute as 100 miles (about the distance a steam engine could go without taking on more water).  Once a train crew had traveled that distance, they were owed a days pay.  Other portions of the law gave the unions incredible power, such that the bargaining table at every negotiation with management was always tilted, by statute, in their favor.

Beginning in the late 1930's, but really gaining momentum in the late 1940's, railroads began to replace steam locomotives with diesel engines.  Diesel locomotives were more reliable, easier to maintain, easier to operate (no coal to shovel) and could go much longer distances without service (steam engines stopped frequently for more water).  As this transition occurred, railroad companies very reasonably sought to eliminate the position of "fireman" on diesel trains.  After all, without a boiler and coal to shovel, the fireman role was totally redundant on a diesel engine.  Railroad unions were nothing if not gutsy, and in response they argued that not only would they not accept elimination of the fireman position, but they campaigned for an addition of a second fireman on diesel engines.  Railroads found themselves in the position of actually having to fight a nearly successful effort to increase the number of firemen on crews.  As a result, they ended up accepting the fireman role, and generations of railroad men cruised about the country on engines for the next 40 years, doing virtually nothing for their pay.  Railroads were still fighting to eliminate the fireman in the 1990's.  In some cases, railroads were actually forced to pay "lonesome pay" to some engineers when the firemen were removed from their crew.  LOL.

Other labor statutes and work rules prevented full use of the diesel's capabilities.  For example, the 100 mile rule was now absurd - an inter-modal or other long-distance freight train could cover this in less than two hours.  But US law still insisted that railroad workers be paid a full days pay for 100 miles.  By 1990, after four decades of lobbying and negotiation, the 100 miles had been increased all the way to ... 108 miles.

This article from Regulation is a bit dated, but it still gives a good overview of some of the historical insanities in railroad labor.  An excerpt:

The rail unions deserve the labor equivalent of an Oscar for best sustained performance in reducing industrial efficiency. Restrictive work practices are legendary from firemen on diesel locomotives to train-limit laws. During the 1980s the railroads made minor progress against these practices, but they still have a long way to go. Some crews receive an extra day's pay every time they turn a locomotive around (yard and line haul crews have rigid separations of duties despite identical skills). Carriers are forced to employ three- to five-person crews, while nonunion carriers (Florida East Coast Railway and regional and short-line carriers) use two people. Crew members receive a full day's pay after a train moves 108 miles, even if the trip requires only a few hours. (The current three-member board appointed by Congress may impose a 130-mile rule by 1995.) Some union members have guaranteed lifetime incomes and must only work a few days per month. Some engineers receive "lonesome pay" for giving up the full-time company of a fireman. Until 1987, some Burlington Northern crews received "hazardous pay" for traveling through Indian territory in Montana. Management studies show that work forces could be cut in half, and according to some estimates, labor restrictions cost the industry some $4 billion a year. Despite union concessions on work rules, shippers continue to complain about the carriers' inability to achieve efficient and economical labor contracts. Overall, the RLA and its government-backed unions combine to double labor costs and therefore drive up freight rates from 20 to 25 percent, a very serious handicap in the competition with trucks and barges.

One railroad stood up to the union, and eventually won, but had to withstand a violent 11-year strike, all the while the taking continuous grief in the union-friendly press:

The Florida East Coast Railways, a line long known as "America's most efficient railroad," highlights the woeful labor inefficiencies of the major carriers. Its primary operation is transporting freight from Jacksonville to Miami. When Edward Ball took over the operation in 1961, the unions required the use of three five-man crews-each receiving a day's pay for each 100 miles traveled on the 366-mile trip. Ball failed to see the sense of this scheme and decided to try th change it. Union officials could not see the sense in any change and called a strike in 1963. The violence and vandalism that continued for eleven years demonstrated to other carriers the cost of defying the unions. The railway won, however. The company used two-man crews who were "cross-trained" and paid them a day's pay for eight hours' work rather than for 100 miles traveled. During the 1970s, the railroad's labor costs were 40 percent of total costs compared with 64 percent for all class I railroads, and Florida East Coast Railway earned the highest return of any class I railroad. In addition, the railway consistently won safety awards that fended off another pretext for government control and continues to retain customers while other railroads lose out to trucks.

Read the whole article.  If you have ever read Atlas Shrugged, you will find that a lot of the outrageous legislation in that story that seemed too stupid to be true actually have a basis in the history of US railroad law.  Even the "railroad unification act" that seems totally over-the-top toward the end of the book is based on actual railroad law after WWI:

The Transportation Act of 1920 gave the Interstate Commerce Commission complete control over pricing, issuance of securities, expenditure of proceeds, consolidations, and the construction, use, and abandonment of facilities. The act set up a Railway Labor Board to mediate disputes. Its "recapture" provision required a portion of a company's earnings in excess of an allowable "fair return" to be diverted to railroads with relatively low earnings. Except for the most routine administration, almost everything owners might do was subject to federal regulation or dictation.

More on the transition of steam to diesel here.  I am not very well versed on the subject, but apparently this specialized railroad labor law was later applied to airline pilots, with predictable results.  It is interesting that the two industries covered by the RLA (railroads and airlines) have both seen every major carrier in their industry bankrupted over the last 50 years.

Update:  I have been a fan of railroads for years.  One of my frustrations with my current house is a don't have room for a model railroad layout.  I had one back in St. Louis, where I had a basement, but there are not very many basements in Phoenix.  Here are some photos of that old layout, which was still under construction when I had to tear it down and move.

This is my first and probably last baseball post - read this blog if you want more baseball.

I am fascinated with the psychology of the closer position.  Some background:  The best baseball pitchers start games, and on average get through about 6 innings of 9.  The baseball manager's job is to stitch together a number of less talented pitchers to cover the 7th, 8th and 9th innings.  One would expect that the manager would flexibly match pitcher skills against the lineup he is facing.  For example, if the most dangerous batters for the opposing team are scheduled up in the 8th inning, he might send in his best relief pitcher in that inning.  One would not expect to see any particular emphasis on one inning or another:  after all, a game lost in the 7th counts the same as a game lost in the 9th.

This, however, is not how most managers operate.  Most managers have one very highly paid and more talented relief pitcher they call the "closer" that they pitch solely in the 9th inning.  Why?  Why is the 9th more important and deserving of a valuable player than the 8th?

The answer is part baseball conventional wisdom, which is as strong as in any old-line industry.  However, the other part of the explanation must lie in metrics.  If a manager loses a game in the 7th, it is just a loss.  If a manager loses a game in the 9th, the game was "blown".  Newspapers and talk shows keep and publish stats on games blown in the 9th, but not games lost in the 7th and 8th.  Games lost in the 9th are in a sense portrayed as more of a management failure than games lost in the 7th, and this is made worse by the fact that a game lost in the 9th is somehow more psychologically devastating for fans and media.  Managers are not dumb - recognizing that they get dinged on their performance rating more for a game lost in the 9th than the 8th, they have invented the closer role.  General managers take a disproportionately large part of their salary budget for relief pitching and dedicate it to this closer role.

A guy named Theo Epstein a couple of years ago, as a general manager, challenged this conventional wisdom.  He observed that more games were lost in the 7th and the 8th than the 9th, so hypothesized that relief pitching emphasis and salary dollars should be spread more evenly across the three innings.  One of his consultants was the famous Bill James, who has challenged baseball conventional wisdom with facts for years.  Epstein was roundly criticized by media and local fans alike for his "Closer by Committee" approach.  Eventually he was forgiven, when in the following year he brought his town its first world championship in 86 years.

For more on this and similar baseball topics, the book Moneyball is fabulous, and tells this story of the clash of fact-based analysis and baseball conventional wisdom, in a way that might be familiar to change agents in any number of Fortune 500 companies.

I missed it last week, but apparently the CEO's of a number of major US airlines took the PR offensive last week to beg for more government subsidies and pension bailouts.  Reason's Hit and Run has the roundup.  They observe that the Senate was open to their pleas:

But luckily for the money-squandering dullards, there are enough members of
the Senate Commerce Committee who apparently believe certain businesses are too
colossally incompetent to fail:

The Commerce Committee's ranking Democrat, Sen. Daniel Inouye of
Hawaii, agreed: "If we do not begin to solve the problems plaguing the air
carriers, we will see more failures in coming months and certainly more jobs
cut."

Because what is the federal government if not a
guarantor of full employment at lousy companies?... If Inouye and his fellow
hacks were serious, they could start by privatizing airports, allowing vigorous foreign
competitors to own more than 50 percent of U.S.-based airlines, and letting
the failures actually fail, for starters. But that would take a belief in free
airline markets we haven't really seen since the Carter Administration.

It has always been hard to get airlines to just go away.  Pan Am hung around forever, as did TWA, through bankruptcy after bankruptcy.  My guess is that politician's unwillingness to let airlines fail has only increased with the advent of frequent flyer miles - no congressman wants all of his well-healed constituents calling the office and complaining about the 300,000 United miles they just lost.  By the way, have you ever noticed that frequent flyer mile holders are the only creditor of airlines who consistently come out of bankruptcies whole?  Even the worker's defined benefit pension plans get a haircut before frequent flyer mile holders.

Legacy airlines are really backwards in their practices - for example, many of their supply chain processes are reminiscent of the auto industry in the 60's and 70's, in part because airlines are sheltered from foreign competition while auto makers for the most part aren't.  I used to work in the aviation industry, and the opportunities there are tremendous, but no one in the industry will even listen.  The "not invented here" attitude was invented in the airline industry.

And while the management of these firms is backwards, you also have to deal unions a share of the blame.  Union supporters often accuse companies of "union-busting".  I have never heard the term, but in the case of airlines, one might be able to accuse the unions of "company-busting".  Unions hold out and strike for outrageous salaries and benefits and work rules that far outstrip what similarly skilled people make in other industries.  By the way, unlike conservatives, I don't have some deep seated hatred of unions.  In a free society, workers can try to organize to increase their bargaining power.  I do have problems with the way the US government, through legislation, tilted the bargaining table in the unions' favor, but that is a different story. 

For some of these reasons, and others, I was flabbergasted that local company America West would purchase USAir.  When there are so many planes and gates for sale on the market, and cities are begging for new competitors to enter their airline market, why would you buy yourself a load of trouble in the form of legacy union contracts and frequent flyer obligations?  It is noteworthy that Southwest has never bought another airline, and prefers instead just to buy assets out of bankruptcy.

When I first heard the GM ad campaign to give consumers access to the same discounts their employees get, I had two reactions:

• I sure hope that they have some alternative employee incentive lined up.  I remember when I applied to GM as an engineer, this car discount was high on the list of how they sold the job.  Now what are employees thinking, since their employment buys them nothing on this dimension?  They are probably thinking they weren't getting much of a discount if GM can offer that discount to everyone
• If I were a stockholder, I would be selling, because it sure smacks as desperation.  If you think of all the incentives GM has offered over the years, if they are offering an incentive that is unprecedented in their 80+ year history, then you know there must be some panic in the boardroom

Only GM could come up with a program that makes both employees and shareholders upset.  George's Emploment Blawg has more thoughts along these lines.  This all assumes that "same pricing as employees"  means just that -- remember that this is the industry where "invoice pricing" means nothing of the sort.

Many people have analyzed GM's problems.  It is tempting to say that their main problem is that they have not good cars, but I want to be careful not to substitute my preferences for market research.  So, instead, I will point out a couple of facts:

• GM makes most of its profit from SUV's
• All the profit in a car line, given high fixed costs, come from the last 10-15% of the cars produced.

So, as gas prices rise and silly tax loopholes are closed [thanks Mark], SUV sales only need to fall 10-15% to wipe out most of GM's profitability.

After my earlier post on Walmart, I got to thinking about a number of Walmart-related topics.  My brain is a bit too fried on Friday night to organize these thoughts too much, so here they are, roughly following my stream of consciousness:

Exxon may have finally handed off the Great Satan title

The socialists of this country (who now generally call themselves progressives but its pretty much the same thing) usually need a company they can focus their attention on.  In the 1960's, this was probably General Motors, though defense contractors in the Vietnam War made a run at the title.  After the oil embargo of 1972, that title clearly moved to Exxon. I remember in one month in the early 1970's, the head of Exxon got called into Congress twice in a few weeks, once to combat the urban myth that oil companies were greedily holding oil off the market to drive up prices, and once to explain to Congress why they were greedily trying to expand oil production in Alaska.  My family and many of my friends worked for large oil companies, and we had several friends who were injured by letter bombs from domestic leftist terrorists (though the media did not call them terrorists then).

Exxon held the great Satan title for a long time.  It probably could have shed the title with low oil prices in the 80's, but the stupidity of the Valdez mess in the mid-80's and the vociferous opposition to the politically correct Kyoto accords in the mid-90's help them retain the title for a record number of years.

Finally, however, it appears that a new contender is at hand.  Walmart, so recently the most admired corporation in America, has become the new socialist whipping boy and lawsuit magnet.  Just search for Walmart in Google and you will get pages and pages of Wal-mart bashing sites.  Its kind of an amazing story how the former blue collar low-price hero of the working man trying to make ends meet has suddenly become a class enemy.  However, coming from a family that had many members who worked for Exxon, it comes as some relief to pass the Great Sata title on.

I wish everyone at Walmart could make $100,000 per year

In this, I am exactly in the same boat as Walmart detractors.  I would love for everyone at Walmart to make a ton of money.  Whether this is realistic is another story.

In America, people take jobs voluntarily

I would generally class this as a blinding glimpse of the obvious, but it appears that it has to be said.  And, if you accept that people are operating in their own rational self-interest (by the way, this is not a given -- many on the left do not think the average American is smart enough to make decisions for themself and that they need smart technocrats to look after them).  Anyway, were was I?  Oh yes, if you accept that people operate in their own rational self-interest, then by definition the job for Walmart employees is their best option, and any other option is worse.

This is the logical fallacy of those who attack Walmart (or offshore companies) for paying too low of wages.  Their concern is that these wages are lower than they, as an outside obviously smarter than everyone else observer, think they should be.  The reality is that these wages are higher than that employee's other options, and therefore is an improvement over that job not existing at all.  Note this story I told in an earlier post:

Progressives do not like American factories appearing in third world
countries, paying locals wages progressives feel are too low, and
disrupting agrarian economies with which progressives were more
comfortable.  But these changes are all the sum of actions by
individuals, so it is illustrative to think about what is going on in
these countries at the individual level. 

One morning, a rice farmer in southeast Asia might face a choice.
He can continue a life of brutal, back-breaking labor from dawn to dusk
for what is essentially subsistence earnings.  He can continue to see a
large number of his children die young from malnutrition and disease.
He can continue a lifestyle so static, so devoid of opportunity for
advancement, that it is nearly identical to the life led by his
ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but
certainly no longer than he worked in the field) for low pay (but
certainly more than he was making subsistence farming) and take a shot
at changing his life.  And you know what, many men (and women) in his
position choose the Nike factory.  And progressives hate this.  They
distrust this choice.  They distrust the change.  And, at its heart,
that is what opposition to globalization is all about - a deep seated
conservatism that distrusts the decision-making of individuals and
fears change, change that ironically might finally pull people out of
untold generations of utter poverty.  (update:  good post in the Mises blog on Taco Bell and wages here)

It's Wages vs. Prices, not Wages vs. Profits

In aggregate, because they have so many stores, Walmart makes about $10 billion a year in pre-tax net income.  Which is a lot.  But when looked at as a percentage of sales, it is pathetic.  Given its nearly $300 billion in sales, this is about a 3.5% return on sales, which while not unusual for retailers, in the grand scheme of American business is pathetically low.  I would have to shut down my business tomorrow if I only made 3.5% of sales -- I couldn't support the investments I have to make.

Its illuminating to compare this to all those small family owned boutique
businesses that Walmart supposedly shuts down.  So here is a little
example.  Lets say that the alternative to Walmart in Smallsville, USA would be a series of boutique stores, like
the mythical Nan's Clothing Shop.  Lets
say Nan does $250,000 a year in sales,which
would actually make her shop more successful than average, particularly for smaller town mid-America.  If Nan had to live with Walmart's profit margin of 3.5%, she would end up with an annual profit of  ... $8,750.   And, if Nan is working full-time trying to make the store work, and assuming 2300 hours a year, which is probably low for a small business person, she would be making a whopping  $3.80 an hour running her store, such that she would be much better off (leaving out the personal satisfaction of running your own business) working for Walmart at the average wage there of $6.50 an hour. 

While socialists and progressives are programmed in the deepest recesses of their DNA to blame everything on profit, the wage savings Walmart may get are not going to profit.  Their profit margins are low, in fact lower than most of the smaller stores they are replacing.  If there is a wage trade-off going on, it is between lower wages and lower prices to consumers.  Which obviously makes socialist demagoguery a bit less compelling, since it means that in some sense consumers and not Walmart are to blame if wages are too low, since presumably it is consumers who make the choice to switch from the higher cost traditional boutique alternatives to Walmart.

Walmart detractors have one good point - Walmart gets far too much preferential tax treatment

I don't know why it is, but Walmart is a magnet for taxpayer subsidies.  Not only does the government love to hand out tax breaks to Walmart, it local governments go so far as to use eminent domain to put together land parcels for them.  If I was a local retailer and had my tax money used to subsidize a new competitor, or worse got my land siezed to hand over to Walmart, I would be pissed off too.

I have not really studied Walmart's tactics in this, but my sense is that they have gotten good at getting neighboring communities competing with each other.  This is a crock and a waste of taxpayer money, and nearly as bad as subsidizing sports teams.  I have a long post on the sad practice of subsidizing business relocations here.

A final thought on the most unpublicized economic miracle of the last century

Since many of Walmart's attackers focus on their treatment of women, in part due to numerous accusations of discrimination in pay and promotions, it led me to a final thought about a great economic miracle that occurred in this country in the last decades of the 20th century.

Check this data out, from the BLS:

• In 1968, the unemployment rate was 3.8%.  22.9 million women were employed in non-farm jobs, accounting for 34% of the work force.
• In 2000, the unemployment rate was 4.0%.  62.7 million women were employed in the work force, accounting for 48% of the total
• In these years, the number of women employed increased every single year.  Even in the recession years of 1981-1983 when employment of men dropped by 2.5 million, women gained 400,000 jobs

This is phenomenal.  After years of being stay-at-home moms or whatever, women in America decided it was time to go to work.  This was roughly the equivalent of having 40,000,000 immigrants show up on our shores one day looking for work.  And you know what? The American economy found jobs for all of them, despite oil embargos and stagflation and wars and "outsourcing".

I would love to see women at Walmart making more money, and some day they probably will.  Even so, though, the fact that so many have found work there is a miracle unto itself. Remember that the alternative to a $6.50 job at Walmart if the left is successful in eliminating these jobs is probably not new $15.00 jobs - it is no job at all.  Just ask the French.  Also see my recent post on the minimum wage.

Update:  This is some pretty smart PR by Wal-Mart to deflect the sprawl argument often used against it.  By the way, I challenge someone to define sprawl adequately for me in the context it is used by people who are decrying it.

This a pretty funny story from Zug about just how little security the signature on a credit card slip provides.  Hat tip: Instapundit