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Economics

April 20, 2015

Among the reasons to study economics, this is one of the best

See "The Problem With Satisfied Patients" wherein HHS was apparently shocked to learn an important economic idea: you get what you pay for but often not in the way you expect.

When Department of Health and Human Services administrators decided to base 30 percent of hospitals’ Medicare reimbursement on patient satisfaction survey scores, they likely figured that transparency and accountability would improve healthcare. The Centers for Medicare and Medicaid Services (CMS) officials wrote, rather reasonably, “Delivery of high-quality, patient-centered care requires us to carefully consider the patient’s experience in the hospital inpatient setting.” They probably had no idea that their methods could end up indirectly harming patients.

I used to regale my MBA students with examples of this. Here are a few of my favorites.

In its early years Gateway Computers needed to save money on customer telephone support, so it told its customer service reps they would lose bonuses if they averaged more than 13 minutes per call. Saved money, right? No: the reps starting doing things to get people off the phone quickly including pretending the line wasn’t working, hanging up, and quickly offering to send replacement parts or new machines for free. That last was expensive. And customer satisfaction fell. Friends and relatives stopped recommending Gateway: referrals fell from 50% of orders to 30%. 

A large bank rewarded its branch managers based on customer satisfaction. But this encouraged branch managers to raise deposit interest rates and to make loans cheap Customers were the most satisfied at the least profitable branches. (Richard McKenzie and Dwight Lee.)

Lincoln Electric--a company renowned in MBA case studies for its management prowess--once decided to monitor the keystrokes of its typists and pay them per stroke. Result: secretaries typed meaningless output during lunch hours. (Richard McKenzie and Dwight Lee.)

L.A. city trash collectors were thought to be working too slowly, so their supervisors told them they could leave work as soon as they finished their designated routes. Two results ensued: 1) Collection sped up enormously, but 2) the trash collectors disabled the speed controls on the mechanical arms that lifted cans and dumpsters. The dumpsters were practically catapulted into the trucks, leading to much accelerated wear and higher repair costs.

"[S]ome companies have adopted a policy where at the end of some predetermined period each team evaluates everyone and drops the bottom 10% or 20%. In response to this policy, a smart manager who has a good team hires extra people who can be thrown overboard without damaging the team. I think I know someone to whom this happened at Novell. It's not a good policy; in fact it's abusive and eats away at company morale from within." 

Finally, this one: Jack Welsh at G.E. was the greatest CEO of his generation, and supposedly one of the greatest ever. The foundation of his management philosophy: a firm should be first or second in the market or get out. But he revealed (NY Times, 3/18/01) that after 1995, he didn't really push this. Why? “What this bureaucracy of ours had been doing was simply redefining markets narrowly enough to make sure we came out No. 1 or No. 2.”

Four summary quotes:

Goodhart's Law: ". . . when you attempt to pick a few easily defined metrics as proxy measures for the success of any plan or policy, you immediately distract or bait people into pursuing the metrics, rather than pursuing the success of the policy itself. The mythical example is Soviet factories: 'When given targets on the basis of numbers of nails produced many tiny useless nails, when given targets on basis of weight produced a few giant nails.'" 

Economist Glen Whitman: "With just an iota of economics training, most people catch on to the importance of incentives. . . . [But] [p]eople don’t always respond to the incentives in the ways you might predict. What distinguishes good economic thinking from bad is the recognition of the subtle, creative, and often unforeseen ways that people respond to incentives.”

Joel Spolsky, summarizing work by Harvard Business School professor Robert Austin: "His point is that incentive plans based on measuring performance always backfire. Not sometimes. Always. What you measure is inevitably a proxy for the outcome you want, and even though you may think that all you have to do is tweak the incentives to boost sales, you can't. It's not going to work. Because people have brains and are endlessly creative when it comes to improving their personal well-being at everyone else's expense.”

“I think it was Andy Grove who said that for every goal you put in front of someone, you should also put in place a counter-goal to restrict gaming of the first goal.” 

"No, Farmers Don’t Use 80 Percent of California’s Water"

Since I've seen the "80 percent" figure used in a number of places, this piece is timely and useful.

To be clear, whatever the figure, California farmers are using too much water, water whose costs exceed their benefits. But that is because of government subsidies and those subsidies are obtained partly through the farmers' political clout. It's another example of how government often actually works, as opposed to the Liberals' fantasy of how it always works.

 

April 16, 2015

"Europe accuses Google of antitrust violations and launches a massive investigation into Android"

Sadly, what has been long forecast here--see, for example, "It's coming, I tell ya," and "One more time, for now: Google and antitrust"--has now happened.

(To be clear, I predicted the US antitrust authorities would do it. I underestimated the power of Google's political pull. And it may still yet come.)

Oh and note the main source of the complaint

And most of the people doing the complaining are NOT Europeans — they are other American tech companies (and their lobbyists) whose international businesses have allegedly been screwed over by Google.

This is all too typical of antitrust complaints. The customers don't seem to mind, but the competitors of very successful companies do.

UPDATE: Clyde Wayne Crews, Jr. offers this sharp, concise formulation:

Antitrust is predatory corporate welfare policy. Firms do get large and powerful, but never as large and powerful as governments that collude with rent-seeking firms to forcibly channel customers to the latter.

Antitrust’s goal is to absolve lawyered-up firms of the need to competitively respond to the new market regimes brought into being by the dominant firm; it artificially secures less-competitive firms’ survival by forcibly denying consumers the choices they otherwise would have been free to make.

April 14, 2015

"How to Rack Up $18 Trillion in Debt and How to Pay It Down"

The small blue bars on the graph are a reminder that circa 2000, the Fed was holding meetings and staff were writing papers about the looming problem of how the Fed was going to conduct open market operations after surpluses had retired all the federal debt.

Hilarious or tragic, you decide.

Here's a suggestion for something that would help (at least in partial equilibrium): "Time to End the Federal Subsidy for High-Tax States".

"The impending surge for the University of Everywhere"

George Leef reviews Kevin Carey's The End of College.

I don't know about all college courses, but having both taken and taught large lecture sections, I'm sure that online courses can easily replace them.

"A Sociology Prof Proves that Studying Econ is Morally Bad"

Yeah, right. Sociologists should stick to sociology.

April 13, 2015

"The Prescience of Daniel Patrick Moynihan"

It's been late coming, but Senator Moynihan is now widely recognized for being, in 1964, absolutely right.

See also "The Last Sane Liberal," "Moynihan’s Mistake and the Left’s Shame," and two earlier posts here, "Terribly sadly, 45 years ago Pat Moynihan was right," and "Fine paragraph".

Professor Amy Wax at Penn argues that the problem Moynihan identified is deep-rooted and there is a sharp limit to what government can do about it. See, for examples, "Engines of Inequality: Class, Race, and Family Structure" and "Diverging Family Structure and 'Rational' Behavior: The Decline in Marriage as a Disorder of Choice".

Michael Barone and Megan McArdle have some hope for improvement.

"How Chicago has used financial engineering to paper over its massive budget gap"

Read this and be amazed. Amazed, not at how awful Chicago's finances are and the damage that years of political malfeasance will likely cause, but amazed at why all American big cities have yet to copy it.

Yet.

"We Are Ready to Believe You!"

John Podhoretz uses simple economics to explain an important part of what's happening in today's colleges: if you pay good money to people to solve problems, they have a vested interest in making the problems bigger

Ed Driscoll drolly sums this up by referring to their interest in protecting "their phony-baloney jobs". If you don't understand that reference, see this clip

"California Government Is The Big Water Management Problem"

Hank Campbell, Science 2.0:

Why not allow more water to be stored in the south or build more reservoirs in the north instead of dumping fresh water into the ocean? Californians know water is important, we have agreed to water bonds totaling $22 billion in recent years, but the money has ended up going to environmental projects rather than things that help the people paying interest on those bonds.

Most of California is actually desert, the green parts are all watered to be that way, and we know droughts will happen - this is the fourth one in 50 years - so it would make sense to store more water, a literal anti-rainy day plan. But environmentalists block all efforts to create more reservoirs even though we know this sort of thing has always happened and will continue to happen.

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