Coyote Blog

For years, a significant critique (mostly from the Left) of health care costs has been that over-investment by private hospitals in premium facilities (e.g. ICU beds, MRI scanners, etc) is part of the reason health care costs have been rising so rapidly.  This is why the response to a study like this from several years ago was not "wow, how fortunate the US has so many ICU beds" but instead "wow, this is what is wrong with US healthcare."  This is why per capital healthcare cost is in the next column, implying a link between more beds and higher costs.  And, this is why the "life expectancy at birth" is included in the chart.  The conclusion was supposed to be "see, the US spends all this money on ICU beds and gets nothing for it."  (Obviously this conclusion would be absurdly narrow-minded even before COVID-19, as US life expectancy is lower than that of many other countries due to lifestyle choices and other factors -- a better comparison would be US life expectancy at 65, where US looks much better).

As a result, many states and municipal authorities have Certificate of Need (CON) processes that require hospitals and other health care providers to get government permission before adding certain types of capacity/infrastructure.  Many of these government agencies actually delegate these decisions to a board populated with representatives of the current local incumbent hospitals, meaning one must get permission from one's competitors before adding capacity (permission unlikely to be given).

This sort of regulation has had acute consequences in the age of COVID-19.  John Phelan has an example from Minnesota.

With the extra time, Minnesota will work desperately to expand its ICU capacity. Local stadiums and hotels will be converted to temporary hospitals. “The attempt here is to strike a proper balance of making sure our economy can function; we protect the most vulnerable; [and] we slow the [infection] rate to buy us time and build out our capacity to deal with this,” Gov. Walz said....

Until 1984, Minnesota operated what were called Certificate of Need (CON) laws. These require government permission before a facility can expand, offer a new service, or purchase certain pieces of equipment. While Minnesota has not operated CON laws since 1984, along with two other states—Arizona and Wisconsin—it maintains several approval processes that function like CON laws.

In 1984, Minnesota enacted a hospital construction moratorium. This prohibits the building of new hospitals as well as “any erection, building, alteration, reconstruction, modernization, improvement, extension, lease or other acquisition by or on behalf of a hospital that increases bed capacity of a hospital.” Whenever hospitals or provider groups propose an exception to the moratorium, the Minnesota Legislature requires the Department of Health to conduct a “public interest review.”

Researcher Patrick Moran explains:

In its review, the Department must consider whether the proposed facility would improve timely access to care or provide new specialized services, the financial impact of the proposed exception on existing hospitals, the impact on the ability of existing hospitals to maintain current staffing levels, the degree to which the facility would provide services to low-income patients, as well as the expressed views of all affected parties. [Emphasis added]

Moran continues:

These reviews must be completed within 90 days of the proposed project. However, the public interest review is not binding. The Minnesota Legislature ultimately decides which exceptions are allowed to go forward. Except for the fact that the Legislature makes the final determination about each project, the public interest review process for new hospitals and hospital beds closely resembles CON statutes in other states. [Emphasis added]

Indeed, it is incredible to note that, as with CON laws, the purpose of this system is to make it harder to provide hospital beds in Minnesota. Moran says: “Policymakers hoped that the moratorium would be more effective than CON in reducing the growth of hospital beds.”

They appear to have been successful. In the twenty years from 1984 through 2004, 16 exceptions were granted permitting just 94 additional licensed beds. As the chart below shows, between 1996 and 2016, the number of licensed beds in Minnesota actually fell by 921 while the population increased by 810,000. Exactly how “the Minnesota Department of Health has concluded that the moratorium is largely ineffective in restraining bed capacity”, as Moran says, is something of mystery.

The reason for this sort of thinking has in part been based on misunderstandings on the Left about markets (similar to Bernie Sanders and his too many deoderants statement).  But it is part based on the reality that the US healthcare system is stuck between two different regulatory models.

• In model 1, which we will call free market, investment by private actors increases supply.  In such a market with a lot of fixed investment, prices are driven down as competitors vie to fill excess capacity.  This is close to the model the US has in veterinary medicine and some non-insurable surgeries like eye correction and plastic surgery, but is far from the model we have in most patient care
• In model 2, which I will call the public utility model, a small number of private companies operate with heavy regulations of services and prices in exchange for a guaranteed return on assets.  Since the size of the asset base drives profits, private players have the incentive to add lots of assets while regulators look on asset additions skeptically

The US patient healthcare system is stuck between these models, which may be a worse spot than either alone.  Dominance of third party payers or even a single government payer tends to drive the system towards model 2.  But model 2 is notoriously bad at producing innovation, often results in poor capital allocation decisions, and sub-optimizes costs compared to model 1.

Sigh -- here is your update:  Human beings are still being detained by the US government in Guantanamo without any due process.  I was writing about this 15 years ago, but with the loss of some of my early content the earliest I can find is this from 2006.  The problem always was our using US POW rules from past wars in this very different war.  In the past, wars actually ran for what now seems like a limited time (though folks living through WWII would be surprised at that perspective).  POW's for most part were captured in uniform and on a battlefield (or floating in the water after their ship sank).  Nobody really had due process concerns as a) being in a German uniform in a Normandy pillbox on June 7 was pretty persuasive evidence one was an enemy combatant; b) the detained combatant was likely headed to Arkansas to harvest crops for a year or two, which was a FAR better place to be than where they were captured; c) when the war unambiguously ended, they went home.

But in our current AUMF and the "war on terror," where does it end?   There are no uniforms.  The battlefield as defined is the entire world.  The power to detain human beings for the duration of the war allows the Administration to detain roughly anyone they way, without having to defend that decision, and keep them however long they want because only the Administration (or perhaps Congress if it had a spine) decides when the "war" is over.

I had hoped that the Supreme Court would take the opportunity to review this practice after so many years had passed.  I think there were real reasons to ban this practice in 2004 when the Court reviewed this the first time, but at that time the war was relatively fresh and the detentions still shorter than other wartime POW internments.  But what about now?  Unfortunately, the Court declined to rethink their earlier position, despite hints in the original decision that matters might change if the "war" dragged on.

Today the Supreme Court declined an opportunity to examine whether it's still acceptable to hold enemy combatants in Guantanamo Bay at a time when Washington's interventions in Afghanistan and Iraq no longer resemble anything the U.S. was doing in the direct wake of 9/11.

Moath Hamza Ahmed al-Alwi, a Yemeni citizen, has been imprisoned in Guantanamo Bay since January 2002, when he was captured in Pakistan fleeing Afghanistan. He was initially accused of being a veteran terrorist combatant and a former Osama bin Laden bodyguard. Much later, in 2015, officials concluded he was most likely not a former bodyguard; while he was affiliated with Al Qaeda and the Taliban, it's unclear whether he was engaged in any sort of combat against the United States. He's one of 40 prisoners still detained there.

He's been sitting in Guantanamo Bay for 17 years, but the U.S. government has not charged him with any crimes. It doesn't appear to intend to charge him with anything, but it also refuses to release him, because the Authorization for Use of Military Force (AUMF) to wage war in Afghanistan and against the Taliban and al Qaeda remains in force.

In 2004's Hamdi v. Rumsfeld decision, the Supreme Court ruled that the AUMF authorized such detentions with an understanding that this authorization ended at the conclusion of the war. But even in 2004, the majority was cognizant of the possibility that this amorphous "war on terror" was likely to change over time. In the ruling, written by then-Justice Sandra Day O'Connor, it notes: "If the practical circumstances of a given conflict are entirely unlike those of the conflicts that informed the development of the law of war, that understanding may unravel. But that is not the situation we face as of this date."

I find Conservative support for these detentions frustrating in light of recent events.  People across the political spectrum, but particularly Conservatives, were outraged that Harvard would terminate a dean merely because as a lawyer he chose to represent an unpopular client (Harvey Weinstein).  They rightly argued that due process demands representation of every client, and that to make that work an attorney's moral standing can't be conflated with that of his clients.  Or put another way, what a defendant allegedly did or did not do is irrelevant to  what we owe them for due process.  I think the same can be said of the folks left to die in Guantanamo.

But Coyote, they aren't American citizens!  We don't owe them due process.  Wrong.  We do.  Read the first words of the Declaration of Independence.  Rights belong to all human beings -- they are not grudgingly granted by the Constitution to US Citizens only.  There is nothing in what I call the extended Bill of Rights (including 13-15) that does not apply to everyone who walks the Earth and interacts with the US Government.  Otherwise, as an extreme example, grabbing Africans and enslaving them would still be Constitutional.

But Coyote, no one wants these guys.  Well, that is a different point and is NOT the current legal underpinning of their detention.  I do understand it is politically impossible, and perhaps even unethical, to drop these folks in the US.  If we free them all and no one will take them, then they may stay as our guests to try to live some kind of life at Guantanamo.  But that is not the status they have today.

But Coyote, one of these guys may kill again.  In general, the argument in favor of confining or keeping at a distance any group that probably contains future criminals is bankrupt.  The argument exploded in popularity on the Right a while back with the Skittles immigration meme.  The meme said something like if you had a thousand Skittles and knew one was poisoned, would you eat from the bag?  And if not, why would you let in immigrant populations that likely include some future criminals.  The problem with this is that if this argument really had moral weight, we would be equally required to ban sex or at least all births since some percentage of babies born will be criminals.  At a higher level, our whole legal system is based on the presumption that it is better to err on the side of not punishing an actual criminal than on the side of punishing the innocent (which we still do a lot of nevertheless).  This presumption of innocence is one of the key markers that separate us from totalitarian governments.

A prior version of this article was published accidentally before it was complete.

I know I swore not to write about Tesla here and to confine myself to talking about Tesla on Twitter, but I can't help myself.  This is the company that is going to spawn a thousand business school case studies.  It is Enron but in the Internet Age with more transparency (or at least less sophistication in hiding their problems).

Over the weekend I re-read "The Smartest Guys in the Room" about the collapse of Enron.  I will admit I was an Enron fanboy at the time -- I drank the Kool-Aid and totally overlooked the problems.  I knew Jeff Skilling a little and worked for him on Enron when we were at McKinsey.  I believed he was brilliant and was doing what he said he was doing.  The crash of Enron took me years to accept, and only on my recent second reading of that book did I have the distance and objectivity to really understand it.  And I realized something else -- I was the same guy back then that I criticize today.  Skeptics of Tesla (including me) make fun of Tesla fanboys and their cult of Elon Musk and their belief of everything he says and their certainty he is the smartest guy in the room.  I understand them because I was that guy with Enron and Skilling.  Maybe Tesla is my chance to correct my past gullibility.

Anyway, just when I thought the story couldn't get any more dramatic (or weird), Elon Musk raises the bar.  Apparently Tesla is now only tangentially and largely irrelevantly an automobile manufacturer.  Instead, it is an autonomous ride-sharing company:

Citigroup and Goldman Sachs, who are underwriting Tesla’s latest effort to raise $2 billion in new funds, held a “broad investor call” on Thursday, where CEO Elon Musk and CFO Zach Kirkhorn answered brokers’ questions about their plans for the electric vehicle maker.

According to two invitees who attended the call, CEO Elon Musk talked up Tesla’s self-driving strategy right off the bat, expanding what he and other execs said at a recent event for investors that the company dubbed “Autonomy Day. ”

Musk confidently told investors on the call that autonomous driving will transform Tesla into a company with a $500 billion market cap, these people said. Its current market cap stands around $42 billion. He also said that existing Teslas will increase in value as self-driving capabilities are added via software, and will be worth up to $250,000 within three years.

This call was in the context of Tesla's offering this week of about $2 billion in new stock and convertible bonds.  The really interesting thing about the call:  Virtually 100% of the discussion on the call was about ride-sharing and autonomy, while neither word was even mentioned in the official written prospectus for the offering.

Before we can understand what the hell is going on here, and why Tesla is going all-in on a business it was barely talking about 60 days ago, we need to do some review.  I want to review where Tesla was last time I wrote about them, and also discuss new Tesla news and actions over the last 3-4 months.  From there, we will try to dissect what Elon Musk is doing.  TL;DR: I believe Musk is doing exactly what Jeff Skilling did at Enron, chasing new business strategies based on what stories he thinks will most likely goose the stock in the short term, rather than which strategies make the most sense in the long-term for his investors.

Where I was on Tesla at year end 2018

I had a lot of criticisms about Tesla's strategy towards the end of last year (here and here, for example).  But let me summarize some of the key points

• Tesla has taken what was already a risky entry into a capital-intensive industry and has made it even more expensive and risky by choosing to own both the dealer network and fueling networks for its cars -- this means it has to invest not only in auto manufacturing capacity but also in a world-wide network of sales and service centers and in a global network of charging stations
• Inexplicably, just as its production volume began ramping up in mid-2018 with the introduction of the mid-priced model 3, Tesla ramped down on its capital spending, R&D, and SG&A spending.  By the first quarter of this year, capital spending was no longer even keeping up with maintenance needs.  This was absolutely inexplicable for a growth company that has promised many new products in the near future (new coupe, semi truck, model Y crossover), all of which will need a plant and equipment to produce.  Further, Tesla slowed investment in its sales, service, and charging networks at the exact time its fleet size exploded, leading to a lot of customer dissatisfaction
• The decrease in these expenditures was likely tied to Tesla's hard to fathom (I seem to be searching for a lot of synonyms for "inexplicable")  decision not to raise capital last year.  Its stock was over $350 a share and it had huge momentum from its first two profitable and cash flow positive quarters.  By almost everyone's analysis, they should have raised $5 billion or more, which might have only created 10% dilution.  (Instead they waited until this week after a terrible quarter and after the stock had fallen to about $235 to raise just $2 billion, barely enough even to fill their accounts payable hole).
• Tesla and Musk claimed that the growth and performance of the 3rd and 4th quarters of 2018 were harbingers of the future and he extrapolated hockey sticks from these data points.  Skeptics like myself believe that this was merely a one-time bulge, that Tesla had sold through 2-3 years of demand in their order book in just 2 quarters, and that the first quarter would be a disaster now that the tank was dry.  In addition, Tesla has culled its order book of all the highest margin variants where it could actually make money, leaving what remained of the unfilled orders as low-margin variants it was barely worth selling.  [By the way, I figured none of this out on my own, and owe a lot to the great folks at $TSLAQ on Twitter, who bring a lot of free research to bear that made it easy to see these patterns].
• My admiration for Musk as having really shown the automobile world that electric cars can sell at high price points (and not as little sh*tboxes) and for his space entrepreneurship really ended with the SolarCity deal.  In that deal, Tesla shareholders overpaid for a failing business simply to bail out Musk and his family from a sinking ship.  The acquisition made absolutely no strategic sense and Tesla has done zero to try to develop it, and in fact has been slowly shutting it down from the moment it was purchased.
• Elon Musk has steadily lost any credibility he might have had by initiating product launches of products he claims are nearly ready for sale but never get introduced.  Tesla got a higher level of subsidy from California based on a single suspicious battery swap demo that has never been repeated or even discussed since.  Musk sold SolarCity to Tesla in part based on a flashy reveal of a solar shingle product that still has not seen the light of day.  Musk had a big reveal of the Tesla semi and started taking customer deposits but there are still no clear plans for its production.

What has happened at Tesla this year

• The first quarter of 2019 was a disaster, with deliveries down despite initiation of Model 3 sales in Europe.  Worse, since the Model 3 seems to be cannibalizing Model S and X sales, Tesla was not only selling fewer cars but its mix shifted to lower priced less profitable cars.  It lost an enormous amount of money, and only after the conference call with analysts about first quarter results did Tesla reveal that this loss would have been far worse without a huge sale of government EV credits
• Tesla burned a staggering amount of cash in the first quarter, and was forced to pay off nearly a billion dollars in debt when the stock price did not remain high enough for the debt to convert.  While Tesla's cash balance at the end of the quarter looked OK, there were two huge red flags. First, the cash barely covered a huge hole Tesla had in its net working capital.  Second, given the large number of vehicles Tesla sold in its end of quarter push in the last 2 weeks of the quarter, it appears that Tesla was nearly out of cash in Mid-March and perhaps days away from a default (analysis below).
• The Tesla financial statements still include a number of unexplained oddities, including a billion dollars of accounts receivable, or about 20% of quarterly revenues.  How does a company that demands payment in advance before delivery have 20% of its quarterly revenues tied up in receivables?
• Tesla announced, out of the blue, that it was closing all its retail stores and going online only.  Given the drop in demand for the quarter, it was a head-scratcher as to why eliminating the sales force was going to help.  The decision seemed to be almost off the cuff, as Tesla seemed surprised that they would still have to continue paying their expensive long-term mall leases.  After this was revealed, Tesla partially reversed the closure decision, but no one -- including their own retail folks -- seems to know what the plan is now.
• Tesla constantly fiddled with its prices and model lineup.  It cut prices several times, but also announced a small raise as well.  It eliminated certain options for cars, added new ones, and then reintroduced eliminated ones.  Even long-time Tesla watchers are confused about the model lineup today.
• Tesla continued to see an outflow of executive talent, including the exit of their very well-respected new General Counsel after just over one month on the job  (Mr. Buttswinkas returned to his old law firm and purged Tesla from his resume).  This seemed to parallel the rapid exit of an outside chief accounting officer last year who gave up millions of dollars to exit in just 60 days.
• April car deliveries stayed on the same pace as the first quarter -- ie, way worse than Tesla's guidance
• Elon Musk continued to get in trouble with the SEC, firing off production and sales guidance on Twitter that was different from Tesla's official published guidance.  Mr. Musk and Tesla are still guiding to a total delivery number for the next year that is well in excess of what most anyone else looking at the first four months believes is possible
• Tesla announced a reveal of their Model Y crossover that will not go on sale until at least the end of 2020.  Unlike past Tesla reveals, this one seemed hastily set up and the prototypes shown were weird.  They looked more like the existing Model 3 with a few modifications than a promised crossover that could incorporate a third row of seats.  Tesla asked customers to start making deposits (skeptics will argue that the whole point of the reveal was just to get some free financing from Tesla fanboys) but unlike past reveals, this one fell flat.  There was apparently little interest in making deposits, though Tesla (unlike with past products) has not revealed the deposit numbers.
• Lyft went public for over $20 billion and Uber is planning a $70+ billion IPO, despite having a history of negative earnings and promising investors they may not make money for 10 years (more on this in a minute)
• After the Model Y went nowhere, Tesla set up what they called "investor autonomy day."  Tesla outlined their strategy for creating a fleet of self-driving cars, and promised fully autonomous cars by the end of 2020.  With these fully autonomous cars, Musk promised that Teslas would become an appreciating asset in that they earned income for their owners as autonomous taxis when the owners were sleeping.  He also said Tesla would own a fleet of taxis itself, using off-lease model 3's for this purpose.
• As described at the top of the article, Tesla raised over $2 billion on verbal promises by Tesla (not echoed in the deal prospectus) that Tesla was soon to be a $500 billion autonomous taxi company

So what is Tesla doing?

Having written all of the above, I realize I have left so much out -- the product quality problems, the worker lawsuits, the autonomous driving deaths, the spontaneous car fires -- but I only have so much time.  If you are interested, @teslacharts on Twitter is a good place to follow Tesla from the skeptic side.  But given all this, what the hell is going on?  The following is my theory.

I think in the 3rd quarter last year, Elon Musk honestly believed that the huge ramp in sales and profits at Tesla represented Tesla permanently turning the corner.  He extrapolated from that growth and believed it would continue for years -- he did not see it as simply the one time working through of years of pent-up orders and demand.  As a result, he put off the capital raise he should have been doing, and instead had dreams of taking the company private and getting away from all the scrutiny by analysts and shorts that seem to irritate him.  Thus was launched the ill-considered "420" tweet when he claimed he had funding secured for a go-private transaction at $420 a share, when in fact this was an outright lie.  Once the SEC stepped in to investigate, a new funding round was almost impossible.

Then, in the first quarter, reality hit Tesla in the face.  For all their public optimism, Musk had to see that the demand he expected was not there and Tesla was likely running low on cash.  I think Musk had convinced himself the convertible bonds due in the first quarter would surely convert (and would have at the third quarter stock price) but now Tesla was doing the opposite of raising capital, it had to pay off debt.  Cash was going out the door and demand was weak.  What to do?

Musk has a demonstrated pattern that whenever he needs the stock price to be higher, or he needs to sell stock, or he needs some other kind of favorable financial outcome, he will do a new product demo. It worked for battery swap and the solar shingle and the model 3 and the semi, so it would work again.  The model 3 reveal had collected hundreds of millions of dollars of cash in the form of deposits.  That's what he needed now.  The problem is, they didn't have a prototype to show.  I believe Musk had the company hastily create a Model Y prototype built on top of a model 3.  It did not really have to work, it just had to be something he could talk about.  Interestingly, his VP of engineering quit at exactly this time, for reasons unknown -- was their some internal dissention about this Y prototype?

Anyway, the Model Y reveal was essentially a flop, and likely garnered few deposits.  Certainly not enough to fill in Tesla's growing cash hole.  And by Mid-March, Tesla may have been almost out of cash.  Tesla says it delivered half its vehicles for the quarter in the last 10 days of March, so about 31,500 were delivered in those hectic days.  At an average price of $50,000 each that would mean Tesla brought in nearly $1.6 billion in cash those last 10 days (this is conservative, may have been more if the average price was higher).  But they only had $2.2 billion at the end of the quarter, meaning Tesla was scraping bottom in mid-March, particularly since hundreds of millions of that cash is restricted and not supposed to be spent.

Somewhere in this period of March-April, after his usual product reveal trick with the Y did not work, I think Musk came to the conclusion that the Tesla car business as currently defined was not going to work.  Or, more accurately, it was never going to make enough money to support its sky-high stock valuation.  I have always said that Tesla would make a fine $10 billion niche car company, but nothing about it justifies a $50 or $60 billion valuation.  But at this point Musk can't accept a $10 billion company, even though that would ostensibly still leave him a very rich man.  But like Ken Lay at Enron, Musk has borrowed against at least half his Tesla stock and a falling stock price could lead to financial death by margin call (Musk, for some reason, also mortgaged all his multi-million dollar homes last December). His other investments are also struggling -- SpaceX has been unable to attract the capital it needs of late and Musk has poured a lot of money into the Boring company, an absolute embarrassment of a company that helps refute, in my mind, his "smartest guy in the world" rep.

As Musk looked around for a way to save the stock valuation, the Lyft and Uber IPO's must have had an influence.  Uber is losing as much money as Tesla and folks are talking about it IPO-ing at a market cap of $70 billion.  What if Tesla could call itself a ride-sharing company, only better.  Wouldn't that garner Tesla an even higher valuation?

So I see investor autonomy day and Musk's autonomy soliloquy on the capital raise call the other day as evidence that Musk has, in his mind, capitulated on auto manufacturing and has decided the way to keep Tesla's stock price up is to promise it will -- in just 20 months -- sell fully autonomous vehicles and be making tons of money selling taxi rides.  In other words, it is a robotaxi company that happens to be backward integrated into manufacturing the taxis.

I am skeptical for a number of reasons.

• This reeks of desperation and capitulation.  If Dell says they are going to reinvent themselves as a search engine, it's time to sell the company
• There is no evidence that Tesla can achieve full autonomy by end of next year and a lot of reasons to think they can't.  Most experts think full autonomy is decades away, and when they rank companies on their progress on autonomy, Tesla is usually near the bottom (e.g here).  Waymo and GM, the leaders, often go thousands of miles between driver interventions.  Tesla is hundreds of times worse.   Even over the short course at Investor Autonomy Day (where Tesla likely trained and practiced in advance) investors reported a driver intervention was needed.  Now imagine the same car with no driver.  In snow with the road markings obscured.  Driving through construction where new routes are confusingly marked off with cones.
• The basic business numbers Musk throws around are absurd.  Just as one example, he extrapolates from current ride-share prices and assumes Tesla will make a ton of money because they will get the same price but not pay the driver.  But this is crazy.  If Tesla suddenly throws a million taxis into the rideshare supply equation, rates are going to fall.  Already, since 2012, Uber reports its average fare per mile has been reduced by over half.  If everyday folks are having their cars drive autonomously at night to earn extra money, the fee per mile is going to be competed down close to the cost per mile of operating the vehicle (or even lower, since most folks underestimate their all-in cost per mile on their vehicle).  Musk is basically proposing to commoditize the market but still reap premium margins.  Not going to happen.

Warning

Note that this article is simply my analysis and in some cases my guesses.  I think the story holds together but I can be wrong.  I am short TSLA via put options but note that this is a modest investment that is a small percentage of my portfolio.  Tesla is a dangerous stock to short.  Right through the bad news, individual investors at RobinHood have been loading up on the theory they are buying the dip.  20,000 people added TSLA to their portfolio at RobinHood just AFTER the horrible first quarter report.  Be very careful

Bonus -- Tesla's Largest Mistakes

No matter what happens, Tesla will always be remembered as the company that brought EV's mainstream.  But like any tragedy, they have made some fatal mistakes.  This is my attempt to get out ahead of future business school cases and rank their largest mistakes:

1. The Model 3.  Tesla could have been a profitable luxury car maker but with the Model 3 tried to go for the low to mid end of the market.  But it does not have the manufacturing expertise or cost position (it assembles in California, for God sakes) to pull it off.  The quality problems it encountered have reduced its brand luster, and the volumes of cars have overwhelmed its service and charging networks.  Investments in the Model 3 have distracted it from real refreshes of its S and X and in fact the Model 3 has cannibalized those more profitable cars.  A higher end crossover would have been a better choice
2. No third party dealers.  Tesla chose to bring the sales and service function in house.  This was a mistake.  Not only did it eat up capital, but it robbed it of valuable marketing partners such as Penske that could have really helped its sales ramp.
3. No 2018 capital raise.  Rather than tweeting 420, Musk should have been raising capital based on its third quarter results.  The money was there to be had and Tesla needed it.  $5billion at least could have been raised with little dilution effect
4. SolarCity Purchase.  This was a complete sham to bail out the Musk family and friends.  Did absolutely nothing for Tesla except drain billions of valuable capital
5. In-house Manufacturing.  Musk often says he wants to be like Apple, but Apple is a design company.  It does not manufacture and for quite a while did not do its own retail.  Tesla would have been better off finding a manufacturing partner rather than manufacturing itself in the highest cost location in the country
6. No Charging Partner. I think Tesla had to build out its charging network at first to eliminate one of the greatest consumer barriers to purchasing an EV.  But they should be partnering to share the costs.  Instead, Tesla still thinks of its charging stations as a competitive moat.  But as other car makers form consortia for charging networks based on faster charging technologies, Tesla is stuck with an expensive network that needs upgrading.  Its more of an anchor now than a moat

2nd Bonus -- Another Musk parallel if you are tired of Enron comparisons

Even more than Skilling and Enron, the person Musk most reminds me of is Ferdinand de Lesseps, whose attempt at building a French canal in Panama ended in spectacular failure.  I highly recommend the book "Path Between the Seas" for folks who want the whole story.  When I have time, I may post on the parallels. I presume Tesla critic @ElonBachman would agree since he uses de Lesseps' picture as his twitter icon but I have never seen him discuss it.

In the aftermath of the two Boeing 737MAX crashes:

For years, the FAA has allowed plane manufacturers to self-certify parts of the oversight process for new planes, called Organization Designation Authorization. This process, in which the aircraft manufacturer’s employees perform some of the safety tests and inspections with FAA oversight, reportedly saved the government body time and money.

That practice was examined at Wednesday’s Senate hearing.

Department of Transportation Inspector General Calvin Scovel III, who testified at the hearing, said the FAA will significantly change the oversight process for new aircraft by July. Speaking in vague terms, Scovel said that the changes would include new ways for the FAA to evaluate the self-certifying process.

Sen. Richard Blumenthal said that putting manufacturers in charge of their own safety audits was like putting “the fox in charge of the henhouse.” Saying he would introduce regulations to ban the practice of companies self-certifying, Blumenthal stated that “the fact is that the FAA decided to do safety on the cheap, which is neither safe nor cheap.”

A few reactions:

1. The fox in the henhouse analogy is not apt.  The fox wants to eat the chickens, whereas Boeing does not want to have airplane failures.  In fact Boeing is going to be paying out on a bunch of really big lawsuits, not only to families of the folks that died and the airlines that lost their planes but also to airlines that have had to change their flight schedules due to these issues.  Airbus sales people will use this story in their pitches until the end of time.  Regulation is not the only, or the most important, check on Boeing's behaviors.
2. That being said, aircraft regulation is a dumb hill for libertarians to die on.  This is just not that big of a deal.  Regulation and capital intensity has pretty much reduced choice in large aircraft to two companies and that will not likely change no matter what extra regulatory hoops are added.  Aircraft are a bit more expensive and spare parts are way more expensive due to our regulatory regime, but I don't think there is a public constituency for making a different trade-off.
3. Whatever the regulatory environment, it is unlikely to actually catch more failures of this sort in the future.  Regulators are notoriously bad at this sort of thing (see: US financial system).
4. I did engineering failure analysis early in my working career and my experience is that this sort of multiple stacked failure -- lack of pilot training for a bad software response based on a failed piece of instrumentation that was not reported as needing maintenance -- is hard to predict.  What will happen now in addition to some software fixes will be more mandatory training on this particular subsystem and likely a requirement that the specific piece of instrumentation involved needs to have redundancy.  At best we should hope they will also do a review of other instrumentation failures that might lead to a flight control issue and consider redundancy or software changes.  But there's always the problem of failure of imagination, the best dramatization of which is in the fabulous From the Earth to the Moon episode on Apollo 1.

This story from Alex Tabarok on a study by Cui, Li and Zhang come to remarkably similar results to a previous study on ban the box laws in hiring

We conduct four randomized field experiments among 1,801 hosts on Airbnb by creating fictitious guest accounts and sending accommodation requests to them. We find that requests from guests with African American-sounding names are 19.2 percentage points less likely to be accepted than those with white-sounding names. However, a positive review posted on a guest’s page significantly reduces discrimination: When guest accounts receive a positive review, the acceptance rates of guest accounts with white-sounding and African American-sounding names are statistically indistinguishable.

This is modest good news.  It means that the original discrimination observed against people using Airbnb with black names had more to do with perceptions or stereotypes of unknown black people (e.g. "maybe they are more likely to be a criminal") than an out-and-out attitude of not wanting to have blacks set foot in their house.  The former is not great but a hell of a lot easier to combat than the latter.  I would argue the breakthrough in attitudes on gay marriage had a lot to do with so many people coming out of the closet over the last decade or two that almost everyone ended up having friends or family who were gay, and who they knew first hand to be good people.  This overcame past attitudes about homosexuality which for many were based wholly on stereotypes within their local circle.

As I linked above, this result in the Airbnb study was similar to a study on how ban the box had the perverse effect of reducing hiring of African-Americans because it reduced information:

Jurisdictions across the United States have adopted “ban the box” (BTB) policies preventing employers from asking about job applicants’ criminal records until late in the hiring process. Their goal is to improve employment outcomes for those with criminal records, with a secondary goal of reducing racial disparities in employment. However, removing criminal history information could increase statistical discrimination against demographic groups that include more ex-offenders. We use variation in the timing of BTB policies to test BTB’s effects on employment. We find that BTB policies decrease the probability of employment by 3.4 percentage points (5.1%) for young, low-skilled black men.

In that case as well, when no information is available, people fall back on stereotypes.  Employers recognized that stereotypes about criminal behavior were weak information and readily overcame them when better information (e.g. background checks) were available.

She highlighted a new Amazon book called Live Camp Work: How to make money while living in an RV & travel full-time, plus 1000+ employers who hire RVers.  I have not read it yet but I just bought it and may post a review.

Our company hires about 350 RVers every year.

Years ago the Forest Service wanted to eliminate car traffic in popular Sabino Canyon near Tucson, AZ, so they closed the road and asked companies for proposals to run a tram service to various stops in the canyon.  While a bit unusual at the time this service started, this is now a very common response to overcrowding in popular natural areas.  These services are typically leased as concessions, with the operator charging some sort of fee or fare from passengers, paying all expenses, and then paying the government an agreed rent in the form of a percentage-of-revenue concession fee.

In my world of campground operations, these concession fees are typically competitively bid and thus variable, but in the world of services like this one, there is a fixed list in the regulations of services and the percentage to be paid.  The problem here started because there is no item on the list for "tram operator".  So the government, in this case the local Forest Service, picked a logical equivalent from the table and told the tram operator what the percentage would be.  The tram operator set his fares based on this and his other costs and went on with business.

Flash forward many years.  The tour operator does a good job and has great reviews but the owner is a crusty guy who sometimes rubs the Forest Service staff the wrong way.  The Forest Service decides at the end of his term to compete the contract (called a permit by the FS) and give it to a non-profit.  Its not clear by the rules the FS can do this -- there are supposed to be protections built in for good-performing concessionaires who have invested a lot in the operation -- so the old permit-holder sued but the courts backed the Forest Service.

That is all back story.  This is what happened next though:

The Forest Service recently and retroactively imposed a 150% increase in a permittee’s fees for the period 2011-2015.  The Forest Service decision was based on the views of outside third party auditors it had hired to audit the agency’s fee assessments during that period.  The permit involved shuttle operations and fees were established under the Graduated Rate Fee Structure (GRFS) which sets fees based on the type of operations.  Because GRFS does not contain a classification for shuttle operations, the agency had previously categorized the operations as “Outfitting/Guiding.”  When the third party auditors reviewed the agency’s prior fees, they believed that the shuttle operations should have been classified as “Rental and Services” by the agency.

In 2016, the auditors completed their review of the prior five years of fee assessments and issued their final audit.  The permittee had paid fees totaling $99,231 for the period 2011-2015.  After changing the classification of the operations under GRFS, the auditors asserted that the permittee owed an additional $148,305 for that period.

This is really outrageous.  The mistake made was by the government -- the private operator logically trusted the numbers on his signed contract and assumed that those were the numbers he was operating under.  To retroactively charge this poor guy an enormous amount of money for a government mistake he had nothing to do with and couldn't even know about is just absurd.  Had he known the government wanted a higher fee before he actually started operations, he could have charged a higher fare to make up for it but now he can do nothing because it is all retroactive.  Its all the worse because this decision has a whiff of retribution about it given that this concessionaire took the government to court earlier over the loss of his permit.

This penalizing of a private company for a government mistake is not atypical in a government audit.  Years ago I had the Forest Service tell our company to do X and Y maintenance projects for them and that they would reimburse us for the costs (it was their responsibility but we were closer and and cheaper so it made sense).  Years later an auditor said that the FS should not have asked us to do the project that way, and that the FS had violated their internal rules.  So instead of just fixing their internal procedures or punishing those guilty in their agency they ... judged I was at fault and told me I had to refund all the money we were reimbursed for the project.  I obviously cried foul -- I told them I was authorized in writing, that I could not un-spend the money, that I had no responsibility for their internal compliance to their internal procedures, and that the error was theirs and I should not be the one punished for it.  As logical as this seems, it took me a surprisingly long time to get them to stop demanding this money back.

For some reason, Yelp has invested in a massive spamming infrastructure and has become easily my most frequent and persistent source of spam calls and emails.  I went through my email trash (unfortunately it clears itself out every few months) but I still found a dozen different Yelp people contacting me.  Each of them tends to contact me with at least 2 calls and 2 emails before they go way, but if I respond (even to tell them to get lost) they take that as an invitation to contact me more.

Perhaps I have a unique problem -- I actually operate over 150 sites that could potentially be reviewed, and my gut feel is that each of these has been assigned to a different person and they all feel the need to call me without any cooperation between them.  For someone who is looking for more ways to consolidate an already complicated mass of reviews on the web, a review company that cannot coordinate its contacts with a single company is unnerving.  Further, I have to say that I have a distrust in what is essentially an online advertising platform that resorts to cold-calling to advertise their business.  If they don't trust their own platform to get the word out adequately, why should I?

There are other problems, but here is a sample of my communications with them when I made the mistake of actually responding:

Yelp:

Hi Warren,

I am sorry to hear this [I told them to stop spamming me], you actually have 3 amazing reviews on your page for Honeycomb Campground. I am sorry you have been contacted by many different Account Executives from Yelp.

The reason we keep reaching out is because we have consumers every day on Yelp in Grant looking for a campground and see this as a great opportunity for you to fill your spots. All I am asking for is the chance to show you how we can generate more traffic onto your page.

Again if you really would like to be removed from out call list I can do so, and I am sorry to hear that.

Those of you as old as I am may remember in the 1970's when a few last surviving Japanese soldiers from WWII were discovered or coaxed to surrender after hiding for decades in some Pacific jungle.  No one was looking to punish these guys -- the war was won and over -- we were just trying to get them to come out and try to live a normal life.

I am reminded of these stories upon reading that Colorado is yet again going after the same baker for not baking someone a cake:

On the same day the high court agreed to review the Masterpiece case, an attorney named Autumn Scardina called Phillips’ shop and asked him to create a cake celebrating a sex transition. The caller asked that the cake include a blue exterior and a pink interior, a reflection of Scardina’s transgender identity. Phillips declined to create the cake, given his religious conviction that sex is immutable, while offering to sell the caller other pre-made baked goods.

In the months that followed, the bakery received requests for cakes featuring marijuana use, sexually explicit messages, and Satanic symbols. One solicitation submitted by email asked the cake shop to create a three-tiered white cake depicting Satan licking a functional 9 inch dildo. Phillips believes Scardina made all these requests.

Scardina filed a complaint with the civil rights commission, alleging discrimination on the basis of gender identity. The matter was held in abeyance while the Supreme Court adjudicated the Masterpiece case.

I have supported gay rights for as long as I can remember and briefly ran an Arizona campaign to legalize gay marriage.  But this looks to me like sending an entire army into the jungle to try to hunt down and kill that last Japanese soldier.  Isn't it enough that we have complete legal tolerance of homosexuality, de facto tolerance by the majority of Americans, and commercial tolerance in that 99+% of all businesses gratefully accept business from gays?  There can't be that many businesses denying accommodation to gays and trans-gendered when they have to keep harping on the same one example of non-conformity.  One of the features Hannah Arendt used to distinguish totalitarianism from run-of-the-mill authoritarianism was that in the latter, authorities need everyone to act in accordance with their wishes, in totalitarian governments they require people to believe in accordance with their wishes.  This need to seek out and harshly punish tiny infractions against social justice strikes me as totalitarian.

As an aside, I would challenge anyone to say that there is no message they would refuse to put on a cake.  I can think of a number I would say no to, starting with this one.

Mandated accommodation laws are a tough thing.  Libertarians tend to be suspicious of them because they tend to tread on several first amendment rights (speech, association).  But I could envision cases where I would support them, for example in the 1960's South during the dismantling of Jim Crow.  I really do not think we are there for gay wedding cakes.

I had dinner last night with my old college roommate Brink Lindsey and he even sort of rolled his eyes about my recent Tesla obsession, so I really really will try to make this the last post for a while.  However, I have to count coup on a few accurate predictions I made last week here and here.

First, I said, in reference to how Musk can bail himself out of his "funding secured" tweet when it has become clear this is not the case:

So what can Musk do?  Well, the first defense might be to release a statement like "when I said funding secured, I was referring to recent conversations with ______ [fill in blank, maybe with Saudis or the Chinese, call them X] and they told me that if we ever were looking for funds they would have my back."  This is probably the best he could do, and Tesla would try to chalk it up to naivete of Mr. Musk to accept barroom conversation as a firm commitment.  Naivite, but not fraud.   I don't have any experience with the Feds on this kind of thing but my guess is that the SEC would expect that the CEO of a $50 billion public company should know the rules and legally wasn't allowed to be naive, but who knows, the defense worked for Hillary Clinton with her email servers.

Today Musk writes:

Recently, after the Saudi fund bought almost 5% of Tesla stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. During the meeting, the Managing Director of the fund expressed regret that I had not moved forward previously on a going private transaction with them, and he strongly expressed his support for funding a going private transaction for Tesla at this time. I understood from him that no other decision makers were needed and that they were eager to proceed....

I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving. This is why I referred to “funding secured” in the August 7th announcement.

Of course the Feds probably expect "funding secured" to mean a signed term sheet (which does not exist) accompanied by an 8-K (which STILL has not been issued).  I then said in my prediction:

But this defense is MUCH MUCH better if, in the next day or so, Tesla can announce a deal with X on paper with signatures.  Then Musk can use the same defense as above but it has much more weight because he can say, see, they promised funding and I believed them when they said they had my back and here they have delivered.

And today we learn:

But was the funding really secured? Apparently not, because in the very next paragraph Musk writes that "following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements."

Hmmm.  So basically Musk had a chat with the Saudis that did not include any due diligence, any percentages, or anything about the structure of the transaction and nothing has been submitted formally to the Saudis for the required review and approval.  The Feds would never accept this BS from an unpopular CEO like, say, Jeff Skilling.  It remains to be seen whether they will really go after cultural icon Musk.

Finally, I predicted the odd and relatively unprecedented transaction that Musk likely envisioned:

Here is what I think Musk wants -- he wants an LBO without any actual change in ownership. Basically he wants to create Tesla New, which will be private and not trade on the markets. He is hoping that all his current fanboy shareholders will exchange a share of Tesla for a share of Tesla New. Musk has already said he will do this with his 20%. In the extreme case, if every current shareholder wants in on the new private company, then no capital at all is needed for the LBO. Musk might admit that perhaps a billion or two are needed to buy out the few recalcitrants at $420, and then all the Tesla fanboys can enjoy short-seller-free illiquidity

There was no way that Musk could expect to raise $70-$80 billion ($420 times the float) or to run an already cash-starved business with that much debt.  The only way to imagine this is if the buyout was only of a small percentage of owners.  And sure enough, here is Musk this morning:

Therefore, reports that more than $70B would be needed to take Tesla private dramatically overstate the actual capital raise needed. The $420 buyout price would only be used for Tesla shareholders who do not remain with our company if it is private. My best estimate right now is that approximately two-thirds of shares owned by all current investors would roll over into a private Tesla.

I won't comment on whether this is possible because I don't know enough about security laws.  I have been told that the SEC would likely frown on a private company with no public disclosures that has thousands or even millions of individual shareholders, but again, I don't know.

I find it amazing that anyone would want to stay in on this basis, but like Musk, the Tesla fan-boys seem to care more about burning the shorts than the quality of their own long investment in Tesla.  How can moving your small (percentage-wise) investment in Tesla from being exchange-traded to being locked up in a private company possibly be an improvement?  Today your investment has total liquidity (you can sell any time), it has massive 3rd party scrutiny and accountability, and it has real-time price discovery.  You would lose all of that in a private company.  You can only sell when Musk lets you sell and at the price he chooses to give you based on whatever company information he chooses to release.  Choosing the private option as a minority shareholder is like saying that you would rather hold non-refundable airline tickets than fully refundable ones.

Postscript:  I am new to the world of short-selling fights, as I am not really an active investor and just got sucked into watching Tesla because I found it interesting.  But wow, the tribalism of politics sure has leaked into the investment world!  In tribal politics, we see people more motivated by hatred of the other tribe than by making progress on their own tribe's goals.  This same kind of "reasoning" seems to dominate a lot of the Tesla long-short battle.

Update:  Here is a new prediction.  For a while Elon Musk has claimed he will not have to raise capital this year.  Everyone basically looks at his numbers and thinks he is nuts.  What's more, given his $50 billion equity valuation currently, he SHOULD be raising capital now while his stock is high and thus his cost of capital is low.

But one way to look at this is if he raises $20 billion in equity to buy out the 1/3 he thinks will want the cash rather than the new stock, he could easily just make that $22 billion so the company has an extra $2 billion in operating cash and thus raise capital this year without it looking like he violated his promise not to raise capital.

I have written the cover story for the Summer 2018 issue of Regulation magazine, titled "How Labor Regulation Harms Unskilled Workers."  The link to the Summer 2018 issue is here and the article can be downloaded as a pdf here.  I meant to be a bit more prepared for this but it was originally slated for the Spring issue and it (rightly) got kicked to the later issue to add a more timely article on tariffs and trade.  The summer publication date sort of snuck up on me until I saw that Walter Olson linked it.

FAQ  (I will keep adding to this as I get questions)

How did a random non-academic dude get published in a magazine for policy wonks? This piece started well over  a year ago, back when my friend Brink Lindsey was still at Cato (he has since moved to the Niskanen Center).   I had told him once that I was spending so much of my personal time responding to regulatory changes affecting my company that I had little time to actually focus on improving my business.  I joked that we were approaching the regulatory singularity when regulations were added faster than I could comply with them.

Brink asked that I write something on small business and regulation.  After about 10 minutes staring at a blank document in Word, I realized that was way too broad a topic.  I decided that the one area I knew well, at least in terms of compliance costs, was labor regulation.  After some work, I eventually narrowed that to the final topic, the effect (from a business owner's perspective who had to manage compliance) of labor regulation on unskilled labor.

Once I finished, I was ready to just give up and publish the piece on my blog.  I sent it to Brink but told him I thought it was way too rough for publication.  He told me that he had seen many good published pieces that looked far worse in their early drafts, so I buckled down and cleaned it up.  My editor at Regulation took on the heroic task of getting the original monstrosity tightened down to something about half the length.  As with most good editing processes, the piece was much better with half the words gone.

The real turning point for me was advice I got from Walter Olson of Cato.  I "know" Walter purely from blogging but I love his work and had been a substitute blogger at Overlawyered in its early years.  At one point, I was really struggling with this article because I kept feeling the need to address the broader viability of the minimum wage and the academic literature that surrounds it.  But I am not an academic, and I have not done the research and I was not even familiar with the full body of literature on the subject.  Walter's advice boiled down to the age-old adage of "write what you know."  He encouraged me to focus narrowly on how a business has to respond to labor regulation, and how these responses might effect the employment and advancement prospects of unskilled workers.  As such, then, the paper evolved away from a comprehensive evaluation of minimum wages as a policy choice (a topic I have opinions about but I don't have the skills to publish on) into a (useful, I think) review of one aspect of minimum wage policy, a contribution to the discussion, so to speak.

Update:  Eek, I forgot since I started this so long ago.  I also owe a debt of gratitude to about 8 of our blog readers who own businesses and volunteered to be interviewed for this article so I could make sure I was being comprehensive.

There are many positive (or negative) aspects of labor regulation you have excluded!  Yes, as discussed above this paper is aimed narrowly at one aspect of labor regulations -- understanding how businesses that employ unskilled workers respond to these regulations and how those responses affect workers and their employment and advancement prospects

Everyone knows employer monopsony power means there are no employment or price effects to minimum wage increases.  Some studies claim to have proved this, others dispute this.  I would say that this statement has always seemed insane from my perspective as a small business owner.  It sure doesn't feel like I have a power imbalance in my favor with my workers.   I address this with a real example in the article but also address it in much more depth here.  The short answer is that for minimum wages to have no employment or price effects, a company has to have both monopsony power in the labor market AND monopoly power in its customer markets.  Without the latter, all gains from "underpaying" a worker due to monopsony power get competed away and benefit consumers (in the form of lower prices) rather than increase a company's profit.

The costs of these regulations are supposed to come out of your bloated profits.  Perhaps that is what happens at Google, where compliance costs are a tiny percentage of what their highly-compensated employees earn and where the company enjoys monopoly profits in its core businesses.  For those of us in highly-competitive businesses that employ unskilled workers, our profit margins are really thin (as explained in more depth here).  When profits are close to the minimum that supports further investment and participation in the business, then labor regulatory costs are going to get paid by consumers and workers.

Then maybe the best thing for workers is to create monopolies.  Funny enough, this idea was actually one of the centerpieces of Mussolini's corporatist economic model, a model that was copied approvingly by FDR in the centerpiece New Deal legislation the National Industrial Recovery Act (NRA).  The NRA sought to create cartels in major industries that would fix prices, wages, and working conditions, among other things.   The Supreme Court struck the legislation down, a good thing since it would have been a disaster for consumers and for innovation and probably for most workers too.  As a bit of trivia, this year's Superbowl winner the Philadelphia Eagles was named in honor of this law.  More here.

So do you think minimum wages are a good policy overall or not?  Hmm, mostly not.  For a variety of reasons, minimum wages are a very inefficient way to tackle poverty (and also here), and tend to have cronyist effects that help one class of worker at the expense of other classes (this latter should be unsurprising since many original supporters of the first federal minimum wages were explicitly hoping to disadvantage black workers competing with whites).

Why are you opposed to all these worker protections?  Or, more directly, why do you hate workers?  This is silly -- I am not and I don't.  However, this sort of critique, which you can find in the comments below, is typical of how public policy discussion is broken nowadays.  When I grew up, public policy discussion meant projecting the benefits of a policy and balancing them against the costs and unintended consequences.  In this context, I am merely attempting to air some of the costs of these regulations for unskilled workers that are not often discussed.  Nowadays, however, public policy is judged solely on its intentions.  If a law is intended to help workers (whether or not it will every reasonably achieve its objectives), then it is good, and anyone who opposed this law has bad intentions.  This is what you see in public policy debates all the time -- not arguments about the logic of a law itself but arguments that the opposition are bad people with bad intentions.  For example, just look in the comments of this and other posts I have linked -- because Coyote points out underappreciated costs to laws that are intended to help workers, his intentions must be to harm workers.  It is grossly illogical but characteristic of our post-modernistic age.

I will retell a story about Obamacare or the PPACA.  Most of my employees are over 60 and qualify for Medicare.  As such, no private insurer will write a policy for them -- why should they?  Well, along comes Obamacare, and it says that my business has to pay a $2000-$3000 penalty for every employee who is not offered health insurance, and Medicare does not count!  I was in a position of paying nearly a million dollars in fines (many times my annual profits) for not providing insurance coverage to my over-60 employees that was impossible to obtain -- we were facing bankruptcy and the loss of everything I own.  The only way out we had was that this penalty only applied to full-time workers, so we were forced to reduce everyone's hours to make them all part-time.  It is a real flaw in the PPACA that caused real harm to our workers.  Do I hate workers and hope they all get sick and die just because I point out this flaw with the PPACA and its unintended consequence?

I've heard that raising the minimum wage increases worker productivity so much that businesses are better off.    I know there is academic literature on this and I am frankly just not that familiar with it.  I can say that I have never, ever seen workers suddenly and sustainably work harder after getting a wage increase.  What I see instead is employers doing things like cutting back employee hours and demanding the same amount of work gets done.  This could result in more productivity if there was fat in the system beforehand but it also can result in things like lower service levels (e.g. the bathrooms get cleaned less frequently).   Without careful measurement, these changes could appear to an outsider to be productivity gains.  In addition, as discussed in the article, with higher minimum wages employers can substitute more skilled for less skilled workers, which can result in productivity gains but leave unskilled workers without a job.

Workers are human beings.  It is wrong to think of them as "costs" or "resources".  The most surprised I think I have ever been on my blog is when I got so much negative feedback for writing that the best thing that could happen to unskilled workers is for someone to figure out how to make a fortune hiring them.  I thought this was absolutely obvious, but the statement was criticized as being heartless and exploitative.  My workers are my friends and are sometimes like family.  I hire hundreds of people over 60 years of age, people that the rest of society casts aside as no longer useful.  They take pride in their ability to continue to be productive.   You don't have to tell me they are human beings.  Just this week I have helped modify an employee's job responsibilities to help them manage their newly diagnosed MS, found temporary coverage for a manager who needs to get to a relative's funeral, found a replacement for a manager that wants to take a sabbatical, and loaned two different employees money to help them through some tough financial times.  From a self-interested point of view, I need my employees to be happy and satisfied in their work or they will provide bad, grumpy service.  But at the end of the day I can only keep these people employed if customers are willing to pay more for the services they provide than the employees cost me.  If the cost of employing people goes up, then either customers have to pay more or I can hire fewer employees.

You probably support child labor too.   Child labor laws are an entirely reasonable zone of government regulation.  The reason this is true stems from the definition of a child -- a child is someone considered under the law to lack agency or the ability to make adult decisions due to their age.   We generally give parents, rightly, a lot of the responsibility for protecting their children from bad decisions, but I am fine with the government backstopping this with modest regulations.  In other words, I have no problem with the law treating children like children.  Instead, I have a problem with the law treating adults like children.

Aren't you just begging to get audited?  Hah!  That's what my wife says.  To me, the logical response of a regulator should be, "wow, this guy knows the law way better than most of the business folks we deal with, so he probably is not a compliance risk" -- but you never know.  Actually, we have been audited many times on many of these laws.  So much so that practically the first series of posts I did on this blog, way back in the blog pleistocene era of 2004, was 3 part series on surviving a Department of Labor audit.  Looking back on the series, everything in it (which included experience from a number of different audits) still seems valid and timely.

My agent has always signed me up for a persona umbrella policy, pretty much without even discussing it much.  The costs have always been nominal compared to my other insurance and I got it to handle liability issues that might exceed the limits of other policies, like a really bad car crash or a slip and fall suit around my house.

It turned out that I got a lot of value out of the policy, but not in the way I had planned.  I was once sued, pretty hard and seriously, by a company over a negative review I wrote.  I won't talk about the details but if you are really interested Mr. Google will help you find it pretty quickly.   But here is an example of a similar case in the news:

A Manhattan woman has found herself in a world of legal troubles after posting a bad review of a local doctor online.

Michelle Levine tells CBS2 she’s already spent close to $20,000 fighting the million-dollar suit which accuses her of defamation, libel, and causing emotional distress.

The plaintiff is Dr. Joon Song, a gynecologist Levine says she visited once in August for an annual exam.

“After I got a bill for an ultrasound and a new patient visit, whatever that means, and it was not billed as an annual I wrote a review about it,” she told CBS2’s Lisa Rozner.

I was determined to fight my case in the name of all those (like Ms. Levine) who could not afford to fight these overt attempts to suppress and intimidate perfectly legal speech.  I was ready to take a substantially loss in legal fees to defend myself but it turned out I was covered for all my defense costs by my personal umbrella.  Note, I am not an insurance expert nor a lawyer, so before you buy such a product I would be sure you know what it does and does not cover.

Postscript, to all you businesses who keep suing over bad reviews:  GET OVER IT.  I get dozens of reviews every day on multiple platforms.  Most of our locations sit at an average rating just over 4.5 stars out of five so perhaps one in 20 are negative and maybe one in 100 are grossly, absurdly unfair.  Sure, all of us service business owners gripe about unfair reviews when we get together, but we all deal with it.  Every review platform has ways to respond to bad reviews, and most have a way to challenge reviews that violate their terms of service.   Often times if you actually do have a good business, the best defense is to encourage all your customers to review so all the good reviews drown the bad ones.  This is not 1996 when customers have never seen a review site.  Customers know EVERYONE gets bad reviews.   The Mandarin Oriental in Bangkok had some of the best service I have ever experienced, but it gets 1-star reviews.  The movie Casablanca has one-star reviews on Amazon.

Sometimes the bad reviews are perfectly understandable.  For example, at one beach we run there used to be a high place where kids would jump off into the water.  Despite having a lifeguard there, we had too many close calls and too many kids did not heed the lifeguard, so the jumping area was closed.  We got bad reviews for months about how awful it was the kids could not jump.  Each time we took the opportunity to explain that yes the jumping wall was closed and if that is the experience customers are looking for, they need to explore other options.  Eventually we got customer expectations to match the services we provided and things improved.  As much as businesses hate to have bad reviews, these were useful to us because they communicated changed services to the public and helped make sure that customer who come are coming for the right reasons.   Having people expecting the Ritz show up at Holiday Inn Express does not help the Holiday Inn Express at all.

Sometimes one does get totally unfair reviews and there is an art to writing responses to bad reviews.  You want to explain why many customers might consider the review unfair without seeming defensive or seeming to throw the customer under the bus, which will lose you a lot of sympathy in the community.  I am still learning.  Here is a tough one we had:

I will need go back to Juniper Spring it not the forest or the camping grounds but the workers are really not friendly at all I’m black and I hope people who’s from my race trust me it not a good place to take your family you can feel the eyes and I know please know racism is strong in Ocala and I’m sorry to bring a nasty review but I owe it to myself if I was to read this I would know what to expect if I choose to go. But the camp grounds are very clean tho and the bathroom have hot water but the works are very nasty ways I see so to all people other then whites Ijs check it out and be sorry like I did. The water looks great but it cold ass ever but when you get used to it you would be ok I guess.

Obviously that is horrible, it makes us out to be a bunch of racists.  This customer did get special attention, but more because we had to work hard -- and often -- to get compliance with a number of rules we are required by the government to enforce.  After a lot of thought, this is the response I finally went with:

We are really sorry you did not have a good visit. We have a racially diverse group of employees in our company and all of them are trained and motivated to provide quality service to everyone. However, given that this is a campground in the Forest Service and adjoining a Federal Wilderness Area, we are tasked by the Forest Service to enforce a number of rules which are different than those in private campgrounds and can sometimes be surprising to new visitors. In this case, I am really sorry we obviously did a poor job of trying to courteously explain the rules.

For other readers considering a visit, I will take the opportunity to highlight some of these rules:

• Firearms are not allowed in the Ocala National Forest (except in hunting season)
• Dogs are not allowed in the day use area or at the canoe run
• Alcoholic beverages are not allowed in the day use area or on the canoe run
• Food and food waste must be properly stored in campsites when not actively being consumed (in order to avoid attracting bears)

I have seen several web sites where folks looked at the neighborhoods getting devastated by lava in Hawaii and asked "why did the government let them build their homes there?"  I have three responses:

First, nature is hard to predict.  And even if it were, it tends to operate on really long cycles that are longer than most of our attention spans.  This style and location of eruption  has not happened in recent memory so folks treat it as impossible.  For a good example of this phenomenon see:  stock market.

Second, I laugh when I see the "why does the government allow homes built in dangerous areas" question.   In fact, in many cases, the government subsidizes construction of homes in dangerous areas.  Federal flood insurance is notorious for continuing to rebuild people's homes practically for free on dangerous coasts and in known flood plains.

Third, there are private entities who do take a hand in preventing construction in dangerous areas:  mortgage lenders and insurers.  Lenders do not want a lien on an asset that is underneath 20 feet of new rock, and insurers do not want to take on expensive risks in known danger areas (particularly if there are no federal guarantees as in #2).

I actually own some land on the Big Island, a long way away on the Kohala Coast.  And in the process of getting a mortgage and insurance, we had to go through a lava risk review.  There are apparently maps of risk zones similar to flood plain maps.   Obviously, these neighborhoods that are being consumed slowly (see:  Deadpool Zamboni scene) likely cleared this hurdle.  I am not sure how.  Perhaps the developer used pull to get the maps changed.  Perhaps the people who made the maps just predicted risk incorrectly (see #1).  Perhaps lenders ignored the maps and took on the mortgages anyway despite the risks (see: 2008).

A while back I wrote that automobile dashboard design in modern cars sucks.  I drive many different cars as I am frequently renting cars on the road and I concluded:

If car designers are getting rid of physical buttons in favor of multilayered menu systems because it saves them a bunch of money, fine.  Bad trade-off in my mind, but there is at least a reason.   But if they are getting rid of physical buttons because they think that modern users prefer navigating multiple screens to access commonly used functionality, this is simply insane.  No one can top me for pure technophilia, but technical wizardry should not come at the expense of reduced usability.

No one listens to me but they do listen to Consumer Reports, and that magazine dinged the new Tesla Model 3's for exactly this problem:

"Another major factor that compromised the Model 3’s road-test score was its controls. This car places almost all its controls and displays on a center touch screen, with no gauges on the dash, and few buttons inside the car. This layout forces drivers to take multiple steps to accomplish simple tasks. Our testers found that everything from adjusting the mirrors to changing the direction of the airflow from the air-conditioning vents required using the touch screen."

Postscript:  This is not really the point of this post, but how is this even possible in a small car like the Model 3?

"The Tesla’s stopping distance of 152 feet from 60 mph was far worse than any contemporary car we’ve tested and about 7 feet longer than the stopping distance of a Ford F-150 full-sized pickup," reads the review based on tests on different Model 3s.

I will confess that somehow I never really learned pivot table mechanics in Excel, so I struggle with three dimensional data.  One example might be a spreadsheet with individual tabs where each tab is a different corporate division, and on each tab is a P&L by month (so three dimensions:  Month, P&L category, Division).  Let's assume the P&L is arranged the same on every page, with, for example, one divisions June's total revenue number in the same cell number as the June total revenue number on every other divisions' tab, ie this field is in cell c8 on every worksheet tab.

Long ago I created a simple way to get a total of a particular cell across all spreadsheets.  I would add a spreadsheet tab in the workbook before all the division tabs and another after all the division tabs.  Let's say I just name these tabs "Posta" and "Postb".  Then the sum of all cells C8 that are located on a spreadsheet tab between tabs "Posta" and "Postb" would be

=SUM(Posta:Postb!C8).

The problem comes when one wants to create a summary worksheet tab that doesn't sum all the values for C8 but summarizes them in a table.  Imagine a table where column A is the division name (that matches the name of the tab for that division) and column B is that division's June revenue, ie the value of cell C8 for that division from its individual spreadsheet.  The only way I knew how to do this before was manually and tediously.

But laziness is the mother of invention, and I finally encountered a workbook that was so tedious to summarize manually that I had to find another way.  I had a spreadsheet of 150 tabs, each worksheet tab being one of our locations containing online customer review scores formatted the same way into the same cells.  That is when I found the INDIRECT function.  Basically it allows one to craft a custom cell reference in a text string, feed that to the indirect function, which will output the contents of that cell.  So if our location names in the first column exactly match the worksheet tab names, then we can write

=INDIRECT("'"&$A3&"'"&"!C$8")

The ampersand symbols are basically text string concatenation operators, and are there to create the text string of a cell reference in the format excel expects.  The funny triple quotes is just to add a single quote mark before and after the tab name.   This particular string will give us the value of cell C8 that is in the worksheet tab with the name that is in cell A3.

You can also use this cell value from the INDIRECT function in more complicated formulas.  For example

=COUNTIF( INDIRECT("'"&$A3&"'"&"!$B$3:$B$500"),D$4)

would look in the spreadsheet tab whose name is in A3 and on that tab count all the values in the range B3 to B500 on that tab that have the value given in cell D4.  For example, if D4 is equal to "5" we could be counting all the reviews that had a score of "5".

Postscript:  This may be my record for the blog post with the niche-iest audience.  Mainly it is aimed at my son, who has the enviable job of being an analyst for a craft beer company in La Jolla.  He has learned not to complain much to me about his job, as my first job was in an oil refinery in Baytown, Texas, so my sympathy level is maybe lower than it should be.  Anyway, as part of a geeky family, he and I compete on Excel knowledge so this post is mainly my way of counting coup on him.

Update:  I totally agree with the comments that a relational database is needed.  Unfortunately, at the time I did this work, we had only within weeks been given access to the review data from the government recreation reservations database, and it was all in excel.  Faster to do the analysis in excel than to figure out how to read the sheets into something like mysql (of which I am positive there are a million simple tools for doing so).  But I will accept it as a challenge for this year.

I have gotten three calls in three days with an automated voice message telling me that, in essence, the IRS is seriously pissed at me and I need to call a certain number in 24 hours to resolve it.

The message in some ways is reminiscent of the old Nigerian email scams in that the English sounds like a really bad translation of another language.  I wish I had a recording.  Some of it uses stilted English, as if it is trying to emulate bureaucratese.  But some of the message hilariously uses slang in ways that the IRS would never do in its official communication, most memorable of which was the admonishment that if I did not respond immediately, the IRS would "send the local cops to arrest me."  The IRS would never use the word "cops".  I can't remember an agency every using the word "police" even.  Government officials almost always use the term "law enforcement".

Suffice it to say, the IRS does not generally make calls like this.  If you think it might be legit, ignore whatever number that was left in the message and call the IRS customer support line on their web site.  This latter is always good advice for almost any collection or customer support call.  I get a number of calls and emails, for example, from credit card companies that say they suspect fraud and want to review some transactions.  I always ignore whatever number they leave me, or if they reach me with a live person tell them I will call back, and then I call the number printed on the back on the credit card.

From Engadget, apparently the EU has banned retailers for adding a surcharge on credit card purchases.  Since it is an absolute fact that credit card sales cost retailers at least 3% more (due to merchant processing fees) than cash sales, I likely would have written about this story something like "EU knuckles under special interest lobbying from credit card processors and forces non-customers (ie those paying in cash) to subsidize credit card purchases."  Of course, given the consistent and predictable economic ignorance of Engadget, that is not how the story actually was written:

Thanks to new EU regulations, you won't have to put up with irritating card surcharges for much longer. Unfortunately, minimum card spends you come across in small shops and such will stick around, but from January 13th, the Payment Services Directive comes into play. This stops retailers from charging you more for, say, using a credit card than a debit card, or generally just passing the transaction fee onto the customer. It won't, however, make your Just Eat delivery any cheaper. That's because yesterday, ahead of the new EU rules being implemented, Just Eat did away with its 50p fee for paying by card, and instead created a new 50p "service charge" that applies to all orders.

What's particularly cheeky is pay-by-cash customers now also have to fish between the sofa cushions for an extra coin -- a move Just Eat calls "fairness for all" (lol) -- meaning it's making even more moolah while sticking a middle finger up to the spirit of the EU directive. Just Eat told the BBC it had previously thought about tweaking charges, while also totally confessing that "the change to legislation did play a part in prompting the review." A spokesperson also said, predictably, that it'll enable the company to keep providing its stellar services: "The 50p charge simply means that along with our restaurant partners, we can continue to deliver the best possible takeaway experience."

The law essentially forces cash customers to subsidize credit card customers.  I know what retail profits look like (think small single digits) and the lost surcharge is not coming out of profits, it is going to be covered by establishments in generally higher prices paid by everyone, including cash customers.  In my mind, this retailer is a hero, by actually making this legally-mandated cross subsidy transparent.

I must say I was tremendously surprised when a reader sent me this interview and book review, which is summarized thus:

In her powerful new book, “Nomadland,” award-winning journalist Jessica Bruder reveals the dark, depressing and sometimes physically painful life of a tribe of men and women in their 50s and 60s who are — as the subtitle says — “surviving America in the twenty-first century.” Not quite homeless, they are “houseless,” living in secondhand RVs, trailers and vans and driving from one location to another to pick up seasonal low-wage jobs, if they can get them, with little or no benefits.

The book seems to be mostly focused on Amazon, at least from what I can glean from this interview, and I will say that I am pretty much totally unaware of working conditions at Amazon or how happy their employees are, so I cannot comment on them.  I do know that Amazon seems to be starting to eclipse even Walmart as the new target for progressive teeth-gnashing about working conditions.

However, the author seems to be painting with a pretty broad brush here, and is trying to apply her comments to all "workampers," or folks who have given up a settled lifestyle and live a quasi-nomadic lifestyle in an RV.  I am very familiar with this basic concept, as my company hires about 350 of these folks every year to live and work in the campgrounds and recreation areas we operate (this is how the camp host job works).

The article was surprising because I get about 25,000 applications every year from these workampers for about 50 open job positions.  It seems like something people really want to do.  People call me begging me for a job, which includes both physically easy tasks (e.g. checking in campers) and physically more difficult tasks (e.g. cleaning bathrooms and raking).  Most of our employees love the experience, and articles like this one about our hosts and how much they like the work are not uncommon.

Anyway, I wanted to offer a few random thoughts on this interview:

1.  It is really common, especially among progressives, for folks to say some sort of employment is objectively bad mainly because they would not want that particular job.  This has been a feature of "sweatshop" criticism for years.  Underlying much of the critique is the feeling that "I could never imagine working for $2 a day" so it must be bad.  Of course you can't imagine it, and neither can I -- as Americans we fortunately have many better choices.  But for someone in Vietname whose family has been subsistence farming for generations for less than a $1 a day in back-breaking work where harvests can fail and the whole family perish from starvation, a $2 a day factory job might seem like a gift from heaven.
2. It is not clear to me why the employers of these older folks are at fault.  The author asserts that no one else will hire these folks, that this is their only choice -- "Few have chosen this life."  If this is so, why place the blame on the only folks willing to hire these people?  I can understand if Amazon were luring people out of comfortable professional jobs on false pretenses that this would be unethical, but why are they to blame if they hire the otherwise unemployable?  I would think that makes them a hero.
3. It strikes me that 20 years ago, authors like this one were writing pieces about age discrimination and how terrible it is that no one will hire old people.  Now we learn the opposite, that companies are terrible for hiring them.  Forty years ago the author might have been writing about how stultifying middle American suburbs and corporate life were, but now we learn that folks who choose to be nomadic and try some alternative need to go back to the suburbs.
4. I honestly have no idea what this even means: "We live in a culture where if your number didn’t come up, you’re a bad person, you’re lazy, you should be ashamed of yourself. It eats away at people. It makes them more exploitable."  Let me tell a story.  I do not hire managers from the outside -- everyone I promote to manager has to have worked for me at least a year as a front-line camp host.   Some of the folks that get promoted were managers in their former careers, but most never were.  In fact, I have many managers who never even considered that they could ever manage people, and suddenly discover at the age of 65 or 70 that they can do it.  Seeing this happen is the greatest joy in my job.  I don't know how to reconcile this with the author's statement.
5. The author wants to blame this all on the 2008 financial crisis, but I guess that is confusing.  I know it took a long time for folks to get jobs back who lost them, and I don't want to minimize the pain of that, but she implies this is a lot about people losing all their savings.  "I talked to one couple, Barb and Chuck. He had been head of product development at McDonald’s before he retired. He lost his nest egg in the 2008 crash and Barb did, too."  I have no doubt this sort of thing happened, but frequently?  All our investments took a hit in 2008 and 2009 but almost everything is higher now than in 2008.  It would have taken some heroically bad choices (or a lot of leverage) to lose absolutely everything,
6. The one thing I think the author and I would agree on is that the current retirement system is unsustainable.  However, I think we would come to vastly different conclusions.  She says, "We saw in the 1980s a shift from pensions to 401(k)s; that was a raw deal for workers. These retirement plans were marketed as an instrument of financial freedom, but they were really transferring risk from the shoulder of the employers to the backs of the workers."  This is only partially true.  If one is working at Sears with a traditional pension, one likely has way more risk right now (with Sears teatering on bankrupcy and your savings effectively invested all in one company) than if one had a 401(k) invested in the S&P500.  However, I would argue that what is broken in the retirement system is the assumption that everyone has a right to a 30 year mostly-healthy end-of-life vacation.  When pensions were first started, people did not live much longer than they worked.  Now they do.  Good!  But our retirement system and our expectations for it have not changed.  One only has to look at the State of Illinois to see the end game of these mismatched assumptions.
7. (added as an update):  To the point about "exploitation".    Imagine a person in a small town with a home and she works in the local factory, really the only major employer in that small town.  If she thinks she is getting hosed at work, what can she do?  She can certainly quit, but then she likely must sell her house, find a new place to live, move to a new city, etc.  Basically, she has high job switching costs and thus probably would have to put up with more cr*p before she would leave.  Now imagine our work campers.  I once had an employee tell me that I had to treat him well, because he had wheels on his home and could leave any time.  And he was right.   Work campers, being more mobile, have much lower job switching costs.  Economically, doesn't this make them less, rather than more, vulnerable to exploitation?
8. Note, when asked to point to true exploitation (rather than just less-than-ideal jobs) who is the one example she can think of:

You write that sometimes the Nomads are exploited. How? 

I filed a Freedom of Information Act request with the Forest Service and learned that some of their workers aren’t getting paid for all their hours. They weren’t allowed to invoice.

A few years ago one branch of the Federal government, the Department of Labor, decided that it was a morally urgent to make sure everyone working in a Federal campground operated by a private company like mine should make at least $10.15 an hour, and imposed this special minimum wage.  And we complied.  But then another branch of the Federal government, the US Forest Service, decided that it could now run the campgrounds cheaper themselves because they could staff it with volunteers and not pay this minimum wage.  Apparently it is not morally urgent for them to pay the minimum wage.  While the USFS sometimes pays hosts a stipend, this stipend, as the author notes above, is well below even state minimum wages and certainly well below the campground concessionaire minimum wage set by the DOL.  I find it not at all surprising the best example of true exploitation comes from the government.  However, how much do you want to bet this author asks that we rely on government to eliminate imagined exploitation in the private world?

Postscript:  It reflects classic middle class snobbery to call these folks "homeless".  I have hired nearly thousands of work campers over the years and have yet to meet one who considers themselves to be homeless.  They would say they have a home -- and it has wheels on it.

My last phone was a Droid Turbo (or some variant of that).  It was a tank (and btw the battery was so large it would last a week).  It was also butt-ugly, but you could drop that thing from an airplane and it would probably keep working.  I never bothered with a case.

My new phone is a Galaxy S8.  It is probably, looks-wise, the acme of phone design right now and the polar opposite in attractiveness from the Droid Turbo.  But it is literally almost all glass.  The front is glass.  The back is glass.  The sides, dues to the curved bezel, are mostly glass.  If you drop this thing you are going to hit -- wait for it -- glass.  I was changing cases on it and dropped it from a height of no more than three feet and both the front and back glass shattered.  So you MUST put this expensive phone in a relatively bulky case.  You can have a slim case that may or may not protect the screen and sort of retains some of the feel of the curved bezel or a bulky case that probably will protect the phone but makes the entire phone design moot.

My point is that companies seem to be designing phones for how good they look and feel in the Verizon store**, rather than how they will actually look bundled up in a large case in real life.  Once you provide reasonable life-protection for the S8, all its expensive design features are covered up.

One thing I have learned during this experience is that the vast majority of the millennials who rate cell phones on review sites like Engadget are wildly over-influenced by aesthetics.  For example they all seem to downgrade phones that have larger bezels and metal rather than glass packaging, irregardless of reliability. I am still looking for a site that publishes a good list of drop test results and ratings.  I don't think I will buy another phone without seeing these results (I was considering a pixel 2 until I saw is horrible drop results).  I would also like to see someone who grades phone aesthetics in the sort of cases we are all going to put on them.  Honestly if I had time I would probably start my own review site focused on real-world use, emphasizing characteristics like reliability, repair costs, drop test results, and battery life.

** For a long, long, long time, TV manufacturers ruined TV pictures so they would look better in a store.  Every TV you could buy, at least in the pre-LCD era, had super-high color temperatures shifted way up into the blues.  The colors looked like crap in a dark room watching a movie, but the picture appeared brighter in the TV showroom.  Back in the day, one of the first things one would do with a good TV if one was a movie snob was to get the TV color calibrated or look for a TV that had a color temperature setting.

Despite having a lot of respect for the intellect and the insane eclecticism of its author Tyler Cowen, I have never read the Complacent Class.  The title really did not intrigue me, and frankly from that title probably had the wrong vision of what the book was about.  That is, until I read George Will's recent review, in which he said in part:

In 1800, McCloskey says, the world’s economy was where Bangladesh’s economy now is, with no expectation of change. Today, most of the jobs that existed just a century ago are gone. And we are delighted that this protracted disruption occurred. Now, however, the Great Enrichment is being superseded by the Great Flinch, a recoil against the frictions and uncertainties — the permanent revolution — of economic dynamism. If this continues, the consequences, from increased distributional conflicts to decreased social mobility, are going to be unpleasant.

Although America is said to be — and many Americans are — seething about economic grievances, Tyler Cowen thinks a bigger problem is complacency. In his latest book, “The Complacent Class: The Self-Defeating Quest for the American Dream,” Cowen, professor of almost everything (economics, law, literature) at George Mason University and co-author of the Marginal Revolution blog, argues that the complacent class, although a minority, is skillful at entrenching itself in ways detrimental to the majority....

For complacent Americans, a less dynamic, growth-oriented nation seems less like an alarming prospect than a soothing promise of restfulness. In a great testimonial to capitalism’s power, “The Communist Manifesto,” Karl Marx wrote: “All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air.” Complacent, because comfortable, Americans have had enough of that.

Hmm, I suppose I should read it.  I don't want to judge the premise of the book from a few lines of a 3rd party review, but the themes here are strikingly similar to something I wrote 13 years ago (!) on this blog in a post titled "Progressives are too Conservative to Like Capitalism".  I still agree with much, though not all, of what I wrote there so I will pare it down a bit:

Most "progressives" (meaning those on the left to far left who prefer that term) would freak if they were called conservative, but what I mean by conservative in this context is not donate-to-Jesse-Helms capital-C Conservative but fearful of change and uncomfortable with uncertainty conservative.

OK, most of you are looking at this askance - aren't progressives always trying to overthrow the government or something?  Aren't they out starting riots at G7 talks?  The answer is yes, sure, but what motivates many of them, at least where it comes to capitalism, is a deep-seated conservatism.

Before I continue to support this argument, I must say that on a number of issues, particularly related to civil liberties and social issues, I call progressives my allies.  On social issues, progressives, like I do, generally support an individual's right to make decisions for themselves, as long as those decisions don't harm others.

However, when we move to fields such as commerce, progressives stop trusting individual decision-making.  Progressives who support the right to a person making unfettered choices in sexual partners don't trust people to make their own choice on seat belt use.  Progressives who support the right of fifteen year old girls to make decisions about abortion without parental notification do not trust these same girls later in life to make their own investment choices with their Social Security funds.  ... [this would also make a good example:  Progressives oppose school choice because they don't think the poor capable of making good education decisions]

Beyond just the concept of individual decision-making, progressives are hugely uncomfortable with capitalism.  Ironically, though progressives want to posture as being "dynamic", the fact is that capitalism is in fact too dynamic for them.  Industries rise and fall, jobs are won and lost, recessions give way to booms.  Progressives want comfort and certainty.  They want to lock things down the way they are. They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount.  That is why, in the end, progressives are all statists, because, to paraphrase Hayek, only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave.

Progressive elements in this country have always tried to freeze commerce, to lock this country's economy down in its then-current patterns.  Progressives in the late 19th century were terrified the American economy was shifting from agriculture to industry.  They wanted to stop this, to cement in place patterns where 80-90% of Americans worked on farms.  I, for one, am glad they failed, since for all of the soft glow we have in this country around our description of the family farmer, farming was and can still be a brutal, dawn to dusk endeavor that never really rewards the work people put into it.

This story of progressives trying to stop history has continued to repeat itself through the generations.  In the seventies and eighties, progressives tried to maintain the traditional dominance of heavy industry like steel and automotive, and to prevent the shift of these industries overseas in favor of more service-oriented industries.  Just like the passing of agriculture to industry a century ago inflamed progressives, so too does the current passing of heavy industry to services.

In fact, here is a sure fire test for a progressive.  If given a choice between two worlds:

1. A capitalist society where the overall levels of wealth and technology continue to increase, though in a pattern that is dynamic, chaotic, generally unpredictable, and whose rewards are unevenly distributed, or...
2. A "progressive" society where everyone is poorer, but income is generally more evenly distributed.  In this society, jobs and pay and industries change only very slowly, and people have good assurances that they will continue to have what they have today, with little downside but also with very little upside.

Progressives will choose #2.  Even if it means everyone is poorer.  Even if it cuts off any future improvements we might gain in technology or wealth or lifespan or whatever.  They want to take what we have today, divide it up more equally, and then live to eternity with just that.   Progressives want #2 today, and they wanted it just as much in 1900 (just think about if they had been successful -- as just one example, if you are over 44, you would have a 50/50 chance of being dead now).

Don't believe that this is what they would answer?  Well, first, this question has been asked and answered a number of times in surveys, and it always comes out this way.  Second, just look at any policy issue today.  Take prescription drugs in the US - isn't it pretty clear that the progressive position is that they would be willing to pretty much gut incentives for any future drug innovations in trade for having a system in place that guaranteed everyone minimum access to what exists today?  Or take the welfare state in Continental Europe -- isn't it clear that a generation of workers/voters chose certainty over growth and improvement?  That workers 30 years ago voted themselves jobs for life, but at the cost of tremendous unemployment amongst the succeeding generations?

One of the best innovations on the web has been customer review scores.  I use the reviews of products at Amazon.com, Tripadvisor, Yelp, and Opentable all the time to aid in my buying.  Sure they can be frustrating -- some reviewers will petulantly give 1 star reviews for absurd issues or failings.  And I know that as much as reviews on Tripadvisor, Google Places, and Facebook can drive me crazy, they help me improve my business.

But these systems only work when they are run with integrity. I once had to get a Tripadvisor review deleted because it was fraudulent (made up claims from a disgruntled employee rather than a customer).  It was a long, uphill battle to get that one review deleted, as it should be.

Unfortunately, VRBO and HomeAway (I think they are the same company now) have abandoned this integrity.  For those that do not know, these sites feature rental of vacation homes and apartments.  We love this travel option - often we can get a nice 2 bedroom condo with kitchen and living room for the same price as a hotel room.  On this site there are often hundreds or thousands of options for rentals, and so customer reviews can be an important source of information in choosing.  Does it really look like its pictures?  Was everything there that was promised?  Are there any location or noise issues?  Essentially, reviews make sure the landlord cannot try to hide issues from travelers.

It used to be you could just log in and review the location, just like one does with a product on Amazon.  I think there was some testing to make sure you had actually rented it, but this is easy and Amazon has the same thing where it tags reviews with something like "confirmed buyer" or whatever.  But VRBO has now gone to a system where the landlord can essentially opt out of the review process.  If they don't send you a review link, you can't review.  In other words, you can't review without the owners permission.  And, as you may guess, owners with properties that have flaws that would readily be pointed out by reviewers do not allow one to review.

To compound the problem, VRBO hides all this.  For example, we rented this flawed beach home in San Diego.  It was wonderful in every way except for one -- the properties below and around it seem to be preferred destinations for loud groups of frat boys partying.  We pretty much got no sleep.   I wanted to warn future customers of this potential issue, but that is impossible because the landlord will not send me a VRBO review link, and that is the only way I can review it.  VRBO hides this because the listing says "This property doesn't have any reviews yet!"  That sounds far more innocent than the more accurate statement, which would be "This property does not choose to participate in the review process."

Some time ago I was sued by a large corporation over a negative review I posted on this site.  The case was eventually settled, and I am not allowed to talk about the terms or mention the company's name any more.  But I will say the review is still up and unchanged and sits on the first page of results on Google for that company's name, so draw what conclusions you may.

But the case generated over $50,000 in legal expenses for me.  I probably would have paid that out of pocket just because I am curmudgeonly and was not going to back down, but in fact the legal costs were 100% covered by my personal liability and umbrella insurance.  Basically an umbrella means that if anything goes over the coverage limits of your policies, or slips through the cracks of your policies' various coverages, the umbrella kicks in.  The cost for the umbrella is close to a rounding error on my other insurance costs.   I am not even sure I asked for it initially, my helpful insurance guy just threw it in there for a few extra bucks.

A lot of people have to knuckle under to bullsh*t legal threats from corporations and the wealthy (think about all of Donald Trump's silly libel suites) because they can't afford to fight.  Arm yourself with the financial tools to fight such things.  Now, there may be (as with most insurance) good versions of this policy and bad ones.  I am sure we have some insurance folks in our readership who can say more in the comments.

A key thrust of Nancy MacLean's book on the great Koch / Buchanan / libertarian conspiracy to destroy democracy is that public choice theory is all about protecting and cementing elite privilege under the law.  This is actually exactly opposite of how I have always viewed public choice theory -- public choice theory tends to show how well-intentioned "public service" programs tend to get co-opted by a few powerful people for their own benefit.  See "ethanol mandates" or "steel tariffs" or "beautician licensing" or any number of other programs.  But I am not conversant enough to really make this case well.  Fortunately, Steven Horwitz (pdf) has done it in his powerful critique of MacLean's book.

The intellectual error that is most frustrating, however, is her understanding of the relationship between public choice theory and questions of power and privilege. As Munger (2018) points out in his review, MacLean is an unreconstructed majoritarian. She genuinely believes, at least in this book, that the majority should always be able to enact its preferences and that constitutional constraints on majority rule are ways of protecting the power and privilege of wealthy white males. That’s the source of Democracy in Chains as her title and her argument that public choice theory is a tool of the powerful elite. As Munger also observes, normally such a view would be seen as a strawman as no serious political scientist believes it, not to mention that no democracy in the world lacks constitutional constraints on majorities. In addition, one must presume that a progressive like MacLean thinks Loving v. Virginia, Roe v. Wade, and  Obergefell v. Hodges, not to mention Brown, were all decided correctly, even though all of them put local democracies in chains, and in some cases, thwarted the expressed preferences of a majority of Americans.

For public choice theory, constitutions protect the citizens from two forms of tyranny: tyrannies of the majority when they wish to violate rights and tyrannies of coalitions of minorities who wish to use the state to redirect resources to themselves by taking advantage of the logic of concentrated benefits and diffuse costs. Buchanan’s political vision is, in Peter Boettke’s words, a world without discrimination and domination. Constitutional constraints, for Buchanan, are a central way of ensuring that democracy actually protects rights by preventing the powerful from exploiting the powerless and that political decisions involve the consent of all. Constitutional constraints make democracy work for all citizens – they do not put it in chains.

When MacLean argues that public choice is a tool to protect privilege, she gets it exactly backward. Public choice shows us how those with the power to influence the political process can use that power to create and protect privilege for themselves at the expense of the rest of the citizenry. Public choice’s analysis of rent-seeking and politics as exchange enables us to strip off the mask of bogus “public interest” explanations and see a great deal of political activity as socially destructive exploitation of the least well-off. To borrow a bit from the left’s rhetoric: public choice is better seen as a tool of resistance to oligarchy than a defense thereof. It helps us understand why corporate welfare remains so common even as so many see it as a problem. Public choice also helps to understand the growth of the military-industrial complex and challenges public interest explanations of that growth. One can tell similar stories about immigration policy and a number of other issues of that concern modern progressives. Public choice theory sees the battles over Uber and Lyft as the powerful government-licensed taxi companies fighting to protect their monopoly privileges and profits against upstart entrepreneurs better meeting the wants of the public. This provides an excellent illustration of how public choice theory can explain political outcomes, and why the theory is useful in understanding how the powerful can victimize the less powerful. Public choice theory, properly understood, is a tool of critical thinking that enables us to deconstruct political rhetoric to see the underlying forces at work that are allowing those with wealth and access to power to use politics to acquire and protect their privileges and profits

As Arnold Kling might say, and Horowitz himself posits in different words, libertarians spend so much time obsessing over the freedom-coercion political axis that they miss out on ways to engage those on the Oppressor-Oppressed axis.  Public choice theory has a lot to offer Progressives, as it explains a lot about how well-meaning legislation with progressive intent is often co-opted by powerful groups to enrich themselves.  Sure a lot of public choice theory is used by libertarians to say, essentially, burn the whole government to the ground; but there is a lot from my experience in public choice literature that should speak to good government progressives, academic work using public choice to think about better designing programs to more closely achieve their objectives.

I have written before about the absurdity of folks who demand cultural apartheid by hoping to ban what they call "Cultural Appropriation."  Of all the stupid sh*t the is circulated around a deeply broken academia nowadays, this is probably the stupidest.

Take note of this entirely reasonable editorial from an author in Canada.  I think he actually has a great idea:

Hal Niedzviecki, editor of Write — a publication for the union’s members — published an opinion piece in the spring 2017 issue titled “Writer’s Prompt.” In the article, in an issue dedicated to indigenous writing, Niedzviecki wrote: “In my opinion, anyone, anywhere, should be encouraged to imagine other peoples, other cultures, other identities.

“I’d go so far as to say there should even be an award for doing so — the Appropriation Prize for best book by an author who writes about people who aren’t even remotely like her or him.”

He went on to argue that Canadian literature remains “exhaustingly white and middle class” because writers are discouraged from writing about people and places they don’t know.

A sociological term, cultural appropriation is used to describe the adoption of elements or practices of one cultural group by members of another.

This is really a good idea.  I find it amazing that ethnic minorities simultaneously want sympathy for their various victimizations while at the same time don't want anyone imagining what it is like to be them.  So of course the response was to run him out of town on a rail

On Wednesday, the Writer’s Union of Canada issued an apology for the piece, announcing Niedzviecki’s resignation and pledging to review the magazine’s policies.

“The Writer’s Prompt piece offended and hurt readers, contributors to the magazine and members of the editorial board,” said the statement. “We apologize unequivocally. We are in the process of contacting all contributors individually.

My company serves nearly 3 million visitors a year.  Though we always try for 100% satisfaction, some customers are going to slip through the cracks and be dissatisfied.   Each year, I get maybe 10 visitors who are severely dissatisfied, think they were mistreated, want to call their Congressman, are going to sue me, etc. I would say that these complaints eventually land on my desk but I actually look at every single comment card and letter and review that we get from customers and personally am involved with every single complaint of any sort.  Anyway, 10 or so are severe issues with a very upset customer that get to me without having been resolved in the field.

Folks who are involved in customer service will tell you that of these complaints, there will likely be a range of blame.  In some cases we screwed up.  In some cases no one screwed up but there was a mismatch of expectations.  And in some cases the customer was acting like a total asshole and was entirely to blame for the whole affair.  Sometimes it is hard to parse out after the fact which case is which -- something I wrote about here.  When these major complaints get to me, here is my guide to how I respond:

When we screw up:   "I am very sorry we did a poor job and you had a bad experience.  I am going to personally investigate immediately and we are going to make changes so this does not happen again -- but in the mean time, I want to refund your money and give you a certificate for some free camping so you can come back in the future and give us another chance to serve you well."

When the customer broke the rules and acted like a total jerk:   "I am very sorry we did a poor job and you had a bad experience.  I am going to personally investigate immediately and we are going to make changes so this does not happen again -- but in the mean time, I want to refund your money and give you a certificate for some free camping so you can come back in the future and give us another chance to serve you well."

When the exact situation is unclear:    "I am very sorry we did a poor job and you had a bad experience.  I am going to personally investigate immediately and we are going to make changes so this does not happen again -- but in the mean time, I want to refund your money and give you a certificate for some free camping so you can come back in the future and give us another chance to serve you well."

In any of these cases, if the customer describes poor behavior by my employees, I will tell them that "the behavior you are describing is absolutely unacceptable and, as I said, I am going to investigate personally as soon as we get off the phone."  You don't have to admit the behavior.  It is common that angry customers will dress up a story with a few added descriptions of outlandish employee behavior that may not actually be what happened.  You will try to figure that out later in the investigation.   But give the customer as much as you can.  If the customer said the employee used profanity, then it is perfectly fine to say "you are right, ms. customers, use of profanity by our employees is absolutely unacceptable" even if you suspect the employee did no such thing.

Giving this very positive response to customers who may have been bad actors or may be exaggerating can be hard because my local managers want to get very mad at me -- "Warren, don't you understand, he was a BAD customer.  You can't reward him for being a BAD customer."  To which I will say:  "First, you and I have not talked so I don't know yet if he was truly a BAD customer.  We may be the ones who screwed up.  But second, even if they were bad in some way, I am not rewarding a bad customer, I am trying to avoid a bad Tripadvisor review which will sit there on the Internet forever like a turd you can't flush.  And third, you seem to be trying to teach this customer a lesson, and make them realize they have been bad.  Even if the customer is really a jerk, this is never, ever ever ever going to happen.  You will never ever convince a jerk that they are a jerk, because almost by definition jerks last self-awareness, so stop trying."

We do a lot of training on this.  I tell folks all the time that if we have a customer like this who gets to me, I AM going to apologize and AM going to give them a refund and AM going to give them some free camping.  It doesn't mean that I am undermining the folks in the field, it means that this is smart business practice, particularly in this age of Internet reviews.  I tell my managers that they are letting their ego and pride stand in the way of having a customer walk away more satisfied, and if they refuse to check their ego, they are delegating the task of being humble upwards to me.  And over time, the good news is that most of my managers have gotten the message and have started emulating me so fewer and fewer of these ever reach me, they are solved much earlier in the field.

Postscript:  The first reaction I get from other business people is -- "don't you get taken advantage of and give out refunds to people who are just posturing about bad service just so they can get a refund?" And my answer is "yes".  But recognize that we have had over $100 million in revenues in this company since I started it, and we have perhaps paid $500 or $1000 is false refunds, or about .001% of revenues. I don't think .001% is very much to pay for the very high customer satisfaction rate we have.  But you would be surprised at the number of people that just can't let it go.  I don't know what this is called psychologically, but I will give another example.  We have a number of sites where the entrance station is not staffed on certain days and payment is on the honor system.  I have people who work for me who really get upset with me, telling me I simply HAVE to staff that gatehouse because some people are not paying.  You are being CHEATED!  I say that I am perfectly aware people are not paying, but it costs, all-in, probably $120-$150 to have a person sit in that gatehouse for 8 hours.  In that time perhaps 15 cars will come in.  At $6 apiece, even if every single one of them is cheating (and they do not, we have very good compliance in most honor system locations) I would be paying $150 to collect an extra $90 of revenue.  That would be insane.  But somehow the thought of lost revenue just makes some people crazy, no matter how expensive it is to chase it down.