Wednesday, September 28, 2005

Riding a Dead Horse

Has the slow-moving bureaucracy got you down? Here's some entertainment making the rounds on e-mail this week:

The tribal wisdom of the Dakota Indians, passed on from generation to generation, says that, "When you discover that you are riding a dead horse, the best strategy is to dismount."

However, in government (and in corporate America) more advanced strategies are often employed, such as:

1. Buying a stronger whip.

2. Changing riders.

3. Appointing a committee to study the horse.

4. Arranging to visit other countries to see how other cultures ride horses.

5. Lowering the standards so that dead horses can be included.

6. Reclassifying the dead horse as living-impaired.

7. Hiring outside contractors to ride the dead horse.

8. Harnessing several dead horses together to increase speed.

9. Providing additional funding and/or training to increase dead horse's performance.

10. Doing a productivity study to see if lighter riders would improve the dead horse's performance.

11. Declaring that as the dead horse does not have to be fed, it is less costly, carries lower overhead and therefore contributes substantially more to the bottom line of the economy than do some other horses.

12. Rewriting the expected performance requirements for all horses.

13. Promoting the dead horse to a supervisory position

Which of these do you encounter most frequently in your corners of the world?

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Tuesday, September 27, 2005

Hints for the Plains Traveler

I know I complain a lot about the hassles of modern travel. I picked up a pamphlet from a Wells Fargo History exhibit yesterday that adds a little perspective. From the Omaha Herald in 1877:

  1. The best seat inside a stagecoach is the one next to the driver ... you will get less than half the bumps and jars than on any other seat. When any old "sly Elph," who traveled thousands of miles on coaches, offers through sympathy to exchange his back or middle seat with you, don't do it.
  2. Never ride in cold weather with tight boots or shoes, nor close-fitting gloves. Bathe your feet before starting in cold weather, and wear loose overshoes and gloves two or three sizes too large.
  3. When the driver asks you to get off and walk, do it without grumbling. He will not request it unless absolutely necessary. If a team runs away, sit still and take your chances; if you jump, nine times out of ten you will be hurt.
  4. In very cold weather, abstain entirely from liquor while on the road; a man will freeze twice as quick while under its influence.
  5. Don't growl at food stations; stage companies generally provide the best they can get. Don't keep the stage waiting; many a virtuous man has lost his character by so doing.
  6. Spit on the leeward side of the coach. If you have anything to take in a bottle, pass it around; a man who drinks by himself in such a case is lost to all human feeling. Provide stimulants before starting; ranch whisky is not always nectar. Don't smoke a strong pipe inside especially early in the morning.
  7. Don't swear, nor lop over on your neighbor when sleeping. Don't ask how far it is to the next station until you get there.
  8. Never attempt to fire a gun or pistol while on the road, it may frighten the team; and the careless handling and cocking of the weapon makes nervous people nervous. Don't discuss politics or religion, nor point out places on the road where horrible murders have been committed.
  9. Don't linger too long at the pewter wash basin at the station. Don't grease your hair before starting or dust will stick there in sufficient quantities to make a respectable 'tater' patch. Tie a silk handkerchief around your neck to keep out dust and prevent sunburns. A little glycerin is good in case of chapped hands.
  10. Don't imagine for a moment you are going on a pic-nic; expect annoyance, discomfort and some hardships. If you are disappointed, thank heaven.
Not too much gets lost in the retelling. Good advice even today.

UPDATE: Some indication that the above may be fake but accurate.

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Monday, September 26, 2005

Fuel Economy and Safety

Karen Lundegaard has an intereting article today in the Wall Street Journal about new thinking about fuel economy and safety.

The story presents a graph from the EPA showing fuel economy over time for cars, trucks, and then their combination. It makes the point well from an earlier discussion of the CAFE standards (here, here, and here). Even though fuel economy per vehicle may have been flat to increasing for both cars and trucks, the shift of more drivers into the less efficient trucks has caused the overall fuel efficiency to fall.

The main new point in the article is to point out that some new research takes issue with the presumption that improvements in fuel economy would come at the expense of safety:

For decades, whenever the federal government leaned on auto makers to improve fuel efficiency, the industry had a ready response: Research showed that lighter, more fuel-efficient vehicles weren't as safe as their heavier, gas-guzzling cousins. Even shedding as little as 100 pounds could lead to a serious increase in traffic fatalities.

The result has been a virtual standstill in fuel-economy improvements for cars, trucks and sport-utility vehicles over the past 20 years.

Now a wave of new studies and technologies -- strong, light materials, better airbags and smarter designs -- are beginning to break the logjam. The upshot: A big shift in government thinking that is paving the way for regulators to revamp fuel-economy rules for SUVs and pickup trucks for the first time in three decades.
I'm glad for the use of research on the other side of a long-held presumption, but I'm not sure the article gets the argument right. Later, we have:

For years, the accepted wisdom in the car industry held that, all things being equal, heavier vehicles are always safer when two vehicles crash. New studies highlight how other factors -- including a car's size, body design and advanced technology -- can do much to counteract the weight issue.

The newer studies also have homed in on the downside of weight: While a heavy vehicle protects its occupants in an accident, it inflicts more damage to those it hits. That means reducing the weight of the biggest vehicles could yield dividends in both fuel consumption and safety.

All of this has contributed to a rethinking of the fuel-economy regulations from the National Highway Traffic Safety Administration. Last month, NHTSA crafted new "Corporate Average Fuel Economy" rules, or CAFE, for light trucks that aim to balance safety and fuel efficiency. The old rules set an average weight target for an auto maker's entire fleet of cars or trucks, encouraging car makers to sell lots of small fuel-efficient vehicles at sometimes unprofitable prices, so they could keep selling their more profitable gas guzzlers.

The article fails to recognize two issues. First, there is a big difference in safety risks that a vehicle poses to its own occupants and the risks that a vehicle poses to occupants of other vehicles. There is a compelling reason for the government to be involved in the latter, far more than would exist for the former. Without government involvement, drivers of heavier vehicles would not bear the costs they impose on other drivers. (It's not clear that they do so now, apart from states without no-fault insurance requirements.)

Second, the flaw in the old system is the presence of multiple categories for fuel economy standards, with lower standards for some groups. That remains in the new system and can be expected to have the same consequences for fuel economy. Exactly what has changed that would arrest the slide in fuel economy shown in the graph above? Only the increase in the standard for trucks as a whole--not the presence of categories.

Consumers can make their own choices about how much safety they want in their own cars. The government can confine itself to providing accurate information about safety. The continued commingling of irrelevant own-occupant safety concerns with legitimate concerns about fuel economy makes the policy less useful than an ideal CAFE or a gas tax.

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Sunday, September 25, 2005

And Speaking of Which

Sometimes, I just need a name. I need the name of the person employed by United Airlines who thought that this moviewould be suitable in-flight entertainment on a noontime flight. Granted, it was no Prizzi's Honor,but we're not working with the same talent here. Huge explosions? Check. Indiscriminate gunfire? Check. Plenty of nice violent images for the kids making the trip to Chicago ...

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Thursday, September 22, 2005

A Disturbing Inflight Movie

Read the whole story here.

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On Czars and Viceroys

There is excellent exposition on troubling diction to be found at the blog of frequent commenter Nathan Kaufman. His conclusion:

The U.S. should look to words and ideas from U.S. history as guides. The U.S. should not borrow ideas from fallen societies or less-than-ideal situations. I don't know about you... but I want to live in a country with governors, mayors, presidents, elected representatives, competition, freedom and opportunity. A country with "czars" and "viceroys" is not appealing to me.
Read the whole thing.

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Wednesday, September 21, 2005

Congress Shall Make No Law

Last evening, as part of first-year orientation week at Dartmouth, I gave a public lecture on the Constitution with the title, "Congress Shall Make No Law." I am not an expert on the Constitution per se, but I enjoyed the opportunity to meet some new students and discuss the ways that Constitutional principles are relevant to their time at Dartmouth. Slides from the presentation are here.

Some teasers:

  1. You could be forgiven if you thought that “Congress Shall Make No Law” was a mission statement.
  2. There are 297 million Americans and there are 435 Representatives, or 680,000 Americans per Representative. How is that anything but an anonymous relationship with the typical citizen?
  3. (Virtually) nothing gets done when your voice, no matter how divinely inspired, is in the distance or isolated. Turn Vox into Voces if you want to restore the civic health in your society.
The students had two interesting reactions to my remarks. First, they were deeply suspicious of conventional media outlets, reacting to what they perceive as consolidation and corporate interests in the industry. Second, they showed a great unease with institutions that are part of the executive branch but that may function as policeman, prosecutor, and jury--the SEC, the FCC, and the IRS, for example.

The lecture was Dartmouth's formal observance of Constitution Day, a reference explained in more detail in the presentation and in the coverage of the event in The Dartmouth.

It was a good event, but it wasn't even close to being the best speech on campus yesterday.

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Tuesday, September 20, 2005

In Praise of Simon Wiesenthal

Adam Bernstein has published an excellent article on the life of the Nazi Hunter in The Washington Post.

Simon Wiesenthal, 96, the controversial Nazi hunter who pursued hundreds of war criminals after World War II and was central to preserving the memory of the Holocaust for more than half a century, died early today at his home in Vienna, Austria. He had a kidney ailment.
I think this excerpt from the article captures him well:
He never doubted his motivation for working so long against the seemingly impossible odds of righting a genocide. In a New York Times article from 1964, he once described attending Sabbath services with a fellow camp survivors who had become wealthy jeweler. The man asked why Wiesenthal had not resumed architecture, his pre-war trade, for it would have made him rich.

"You're a religious man," Wiesenthal told his friend. "You believe in God and life after death. I also believe. When we come to the other world and meet the millions of Jews who died in the camps and they ask us, 'What have you done?' there will be many answers. You will say, 'I became a jeweler.' Another will say, 'I smuggled coffee and American cigarettes.' Another will say, 'I built houses.' But I will say, 'I didn't forget you.' "
And we won't forget him either. The Center that bears his name in California also has an extensive biography.

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Monday, September 19, 2005

More Links on Katrina and Fiscal Policy

My last post raised a number of interesting questions elsewhere in the blogosphere. Here is a sampling:

Todd Zywicki picks up the theme at Volokh Conspiracy:

One can raise legitimate questions in principle about whether this is the type of activity for which it is appropriate to engage in deficit spending. I think a case can be made that this may be, because of the "lumpiness" and unexpected nature of the liability, that may be appropriate to smooth over a period of time (like fighting a war or investing in capital projects).

But a larger point implied here seems like a sound one to me--one problem with running chronic deficits during ordinary times or on ordinary pork-barrel spending is that it makes it more difficult to justify additional deficits in times where deficit spending is appropriate (arguably such as fighting a war or rebuilding one of the nation's most important cities and ports). To paraphrase Spinal Tap, if you are already on "10" for deficit spending what do you do when you need that extra "push over the cliff"?

He provides a precautionary reason for keeping deficits low when possible--so that they have room to go higher without excessive disruption when disasters strike. Commenter Robert Schwartz also notes that much of the rebuilding goes for capital projects, suggesting some reason for longer term financing. I'll disagree to some degree below--the owners of those capital projects are still the current generation of taxpayers, whether privately or publicly. He goes further to suggest taxes on gasoline to provide current financing.

Jacob, posting at an interesting new blog called "Everyone's Illusion" takes issue with what is becoming my tagline, "If taxes are bad, deficits are surely worse." He makes an argument based on Ricardian Equivalence that is answered quite well by PGL at Angry Bear. There are circumstances under which a higher public deficit would be completely offset through higher saving in the private sector. I've never been convinced that these circumstances apply in practice, even though they closely approximate the behavior of the Samwick household (consumption is set at a level far below permanent income and is unaffected, so far, by changes in tax policy). There are simply too many people not saving enough in the present generation to meaningfully offset the debts we are passing along.

But Jacob certainly has a point--I should not be so ambiguous in my use of that line that I appear to always prefer taxes to deficits. Here is where the line is valid: in situations like the current one, where an administration is considering whether to finance a discretionary expense for the benefit of current generation of taxpayers by raising taxes or enlarging the government's debt, it will seek to make arguments against raising taxes.

These arguments can pertain to efficiency or equity. The arguments against taxes on the basis of efficiency are the generic arguments about the virtues of financing a smaller government. These arguments are not relevant when considering a shift from current to future generations. Taxes are distortionary and reduce economic activity today, and they will have the analogous impact in the future when resources must be found to service or repay the addtional debt issued in their place.

And if we are in a situation, as we currently are, where the expenditures to be financed go directly to benefit members of the current generation, the equity considerations are paramount. When a dollar is spent to rebuild New Orleans, property owners (i.e., those who have ownership of the assets that are rebuilt) will benefit. Future generations will pay them for the future use of these assets through the market for goods and services--commodities that pass through the port, hotel rooms in New Orleans, housing in New Orleans, food in the French Quarter. They should not also have to pay for them through higher taxes.

Brad DeLong sums it up pretty well--calling me an unhappy fiscal camper--focusing on the seeming absence of logic for why we now have to offset some proposed new spending but we did not, so it seems, for other Administration priorities.

But the best is yet to come. From Stan Collender's "Budget Battles" column, dated 9/20/2005. The teaser:
President Bush either is wrong, mistaken, or misleading: The significant additional federal spending because of Hurricane Katrina absolutely will not be offset with cuts to other programs.

There are two reasons.

First, there isn't enough "unnecessary" spending or waste, fraud and abuse in the budget to pay for the federal costs of Katrina, which are now expected to total at least $200 billion in fiscal 2006 alone.


The second reason other spending won't be cut to offset the costs of Katrina is that attempting to do so would significantly slow the process of providing federal aid.
Read the whole thing.

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Friday, September 16, 2005

A Katrina Tax Surcharge

Discouraging news from the President's remarks today:

WASHINGTON (AP) - President Bush on Friday ruled out raising taxes to pay for Gulf Coast reconstruction, saying other government spending must be cut. "You bet it will cost money, but I'm confident we can handle it," he said.

Bush spoke after his advisers warned that Hurricane Katrina relief and reconstruction costs will swell the national debt by $200 billion or beyond. "It's going to cost whatever it costs," he said. "We're going to be wise about the money we spend."

Bush did not put a price tag on the costs or say what government programs will be cut.

Where to begin?

I'll start by noting for the benefit of the folks working on the President's speeches that the sentence, "It's going to cost whatever it costs," gives the audience no confidence in the next statement, "We're going to be wise about the money we spend."

I was a fan of cutting other government spending before Katrina, and I am a fan of it now. I hope that the President is right that "we can handle it." The President will have to sort that out with the Republican leadership on the Hill, who seem to believe (quite counterfactually) that there is no more fat to trim. Leave that aside for the moment, and let's ask the following question:

If we can handle it now, why weren't we handling it before?

Why does rebuilding New Orleans compete favorably with this unspecified set of least useful programs, but not funding Social Security personal retirement accounts? Or the new Medicare prescription drug benefit? Or simply lowering the debt burden on future generations?

But I digress. If we have decided that rebuilding New Orleans to the tune of $200 billion is a national objective (and I haven't seen nearly enough debate on that subject in the Capitol), then we ought to fund it by reducing our consumption of everything else. The simplest way to do that would be to impose an income tax surcharge that funds the rebuilding over a given period. Over the next three years, for example, individual income tax receipts are projected to average about $1 trillion per year. So everyone has to pay a 6.7% surcharge over those years, maybe a bit more, since Katrina's economic impact should lower the projections for taxable income and the surcharge itself will discourage economic activity. Over a four year horizon, the surcharge would be 5%, before those adjustments. These are percentages of the taxpayers' tax bill, not of their taxable incomes.

Taxes may be bad, but deficits are surely worse. What's the explanation for why future generations should have to pay for this one, too?

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Thursday, September 15, 2005

The Return of Free Ice Cream

Brad DeLong remarked a while ago that the overhaul at Technorati seems to have undermined its usefulness as a blog tool. Its newfound slowness and unpredictability caused me to stop putting Technorati links on all of my posts. Via Brad and Barry Ritholtz, we discover that Google is now a purveyor of this free ice cream, and though the storefront is different, the product is quite delicious. Give either link a test run:

Google interface at

Blogger interface at

Has anyone found the code that allows us to link back to the search results for a specific page on a blog?

Tuesday, September 13, 2005

Delta in Cincinnati

Ben Mutzabaugh of USA Today speculates as to the impact of Delta's recent announcement of reduced service from its Cincinnati hub on the possibility of competition by a discount carrier:

Will Delta's Cincy cuts invite low-cost competition? Delta's announcement this week that it would cut flights at its Cincinnati hub by 26% may have been a necessity for the financially strapped airline, but experts say the move comes with a big risk. Delta currently dominates the Cincinnati market, meaning the carrier can typically set fares there without fear of being undercut by rivals. Delta's Cincinnati dominance also has helped scare off low-cost carriers from that market, but the cuts could leave an opening that may make Cincinnati too tempting a target for a low-cost carrier to avoid. "I hope (Delta) thought this through very carefully – downsizing a hub is a very delicate proposition," Aaron Gellman, an economics professor at Northwestern University, tells The Cincinnati Post. "I wouldn't be surprised to see a
low-cost carrier come in." And if low-cost carriers do arrive, Delta would likely be forced to cut its Cincinnati fares to match that of its new rivals.
Presumably, the cuts will come in the least essential parts of Delta's service, and in such a way that best protects its market share in Cincinnati. Another report had this to say:
Delta's hub operations accounted for about 92 percent of the nearly 22 million passengers who went through the Cincinnati airport last year, airport spokesman Ted Bushelman said.

Delta and the Delta Connection operate 599 flights a day, out of about 660 by all carriers. Delta will reduce its 128 flights Cincinnati flights to 94, and Delta Connection flights will be cut from 471 to 348, he said.

Travelers will lose nine destinations served by Delta Connection carriers, Bushelman said. The nonstop flights being eliminated are to Moline, Ill.; Mobile and Montgomery, Ala.; Islip, L.I.; Baton Rouge, La.; and Fort Walton Beach, Pensacola, Tallahassee and Daytona Beach, Fla.

The reduction from 660 to 503 flights represents a 24% reduction for the airport as a whole, but before any additional carriers come in, these reductions still leave Delta 88% (442/503) of the flights--barely down from its current 91% share. If the reductions are concentrated in the cities listed, then they appear not to open up any major markets. But I suspect that the airport authorities will be eager to not have a reduction in activity, and so they may be inclined to seek out new carriers to get back the missing quarter of their current traffic.

The Race To Be the Online Archive

Joe's got it right--the New York Times seems to be throwing in the towel to be the online archive for the ages:

On Monday, September 19th the New York Times' editorial section goes behind the pay wall. Krugmania will no longer sully Memeorandum. Bloggers will stop linking. Traffic to some significant portion of it- will dip.

On Monday, September 19th the New York Times will learn where All of This is heading, and it isn't toward the pharmacy-floor exclusivity model.

Folks at the Washington Post, which has adopted trackbacks, and the Wall Street Journal, which continues to expand its free site, will smile.

For an example, take a look at how well the Washington Post is doing in its Campaign for the Court blog. Read the letter from the New York Times' editors here.

Monday, September 12, 2005

Vandalism (sic) in Gaza

In an article with the title, "Exuberant Palestinians Rush to Gaza as Last Israelis Depart: Some Jewish Synagogues Vandalized In a Day Mostly Free of Violence," The Washington Post provides an account of what occurred to synogagues in Gaza today, after the last Israelis left:

In some of the former settlements, Palestinians scuffled occasionally amid the rubble, prompting police to intervene with batons and warning shots. But the day was largely free of violence, although the former synagogue buildings that the Israeli government decided to leave intact were vandalized with hands and hammers. At least four of the roughly two dozen were set ablaze early in the day.

Take a look, via Powerline, at what happened. To suggest that a picture is worth only a thousand words fails to consider how empty those words can sometimes be.

Chief Justice as Umpire

I liked Judge Roberts' opening remarks, but his analogy comes up short:

Judges and justices are servants of the law, not the other way around. Judges are like umpires. Umpires don't make the rules; they apply them.

The role of an umpire and a judge is critical. They make sure everybody plays by the rules.

But it is a limited role. Nobody ever went to a ball game to see the umpire.


Mr. Chairman, I come before the committee with no agenda.

I have no platform.

Judges are not politicians who can promise to do certain things in exchange for votes.

I have no agenda, but I do have a commitment. If I am confirmed, I will confront every case with an open mind. I will fully and fairly analyze the legal arguments that are presented. I will be open to the considered views of my colleagues on the bench. And I will decide every case based on the record, according to the rule of law, without fear or favor, to the best of my ability. And I will remember that it's my job to call balls and strikes and not to pitch or bat.

Sometimes, when a player or manager behaves so contemptibly and outside the bounds of decency, it is the umpire's job to run him out of the game. The Chief Justice doesn't quite get to do that. That power resides with the fans, as it should.

Louisiana, First District

With hindsight being 20/20, I have been wondering why members of Louisiana's Congressional and Senatorial delegations have not made flood protection in New Orleans a more pressing concern historically. The government funds a lot of pork--why not something that would have been sorely needed? And, particularly in recent memory, there seem to have been plenty of opportunities for individual legislators to hold up the government's business to get what they want. Maybe the issue is that Louisiana's delegations just don't have the seniority and influence.

And then I remembered that Louisiana came close nearly 7 years ago, when Bob Livingston of the First District was unopposed in his bid to succeed Newt Gingrich as Speaker of the House. And then his own marital infidelities got in the way, and we heard from him no more.

Just wondering: If Livingston had managed to become Speaker of the House in January of 1999, would we have seen any improvement in New Orleans' capacity to withstand Hurricane Katrina?

(By the way, the current representative from Louisiana's first district is an ace--I'll put my money on him to be a leader in the national government in the next several years.)

Saturday, September 10, 2005

New Orleans Irrepressible

Via Quantum of Wantum and the Washington Post:

Read more here.

The Homeland Security Industrial Complex

I took a trip to Washington on Thursday and kept feeling like everywhere I looked, there was some new encroachment of Homeland Security enterprise into a new sphere. Advertisements on Metro platforms are a good example. I go to DC maybe a half dozen times a year, and I have never picked up that vibe before.

In his farewell address to the nation, President Eisenhower spoke of an emerging military-industrial complex and the threat it posed to liberty:

Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defense establishment. We annually spend on military security more than the net income of all United State corporations.

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence-economic, political, even spiritual-is felt in every city, every state house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.
Today, the buzzwords are homeland security rather than military, but the admonition should remain the same. As we have watched the problems unfold in the Gulf Coast this month, we have seen a large element of this bureaucracy failing in critical ways to do what it was intended to do. The usual response in Washington will be to make that bureaucracy larger, without necessarily making it smarter.

Maybe not this time. On my trip, I also had the chance to meet with some recent alumni of Dartmouth. It was encouraging to see some of these bright young people finding their way in this new field. But, in a broader sense, their choices illustrate another way to understand the costs of our current struggles--against natural and manmade threats--bright young people are being siphoned off into a field that protects existing assets, rather than building new ones.

Should Airlines Hedge Fuel Costs?

A discussion about corporate hedging developed in the comments to an earlier post on the impact of Hurricane Katrina. It seemed like a useful topic to follow up in a new post. The issue at hand is why Southwest seems to be the only major airline that hedges a large part of its fuel costs. It could be that they are just speculating in the fuel market and got insanely lucky here, but I doubt that. Southwest's management is extremely shrewd--if they were making a bet, they knew what they were doing.

An economic approach to the issue would be to start by identifying the conditions under which hedging would be irrelevant. If trading is costless and markets are completely efficient, then hedging wouldn't add value. Under these assumptions, any transaction that the firm does can be undone by the shareholders outside of the firm at the same relative prices. So we look for market imperfections of one sort or another to explain hedging.

In most cases, the market imperfection is the cost associated with financial distress or bankruptcy. If unexpectedly high operating costs need to be covered by borrowing, and if borrowing is costly when done on short notice, then it makes sense to smooth out the variation in operating costs. Hedging--in this case, locking in a forward price of a key input to production--allows that to happen. This theory cannot explain why Southwest hedges its fuel costs and the other airlines don't, because it is in the best financial shape.

Perhaps we can tweak it a bit (as was being done in the comments) to suggest that Southwest is one of the few airlines mentioned where the stockholders are actually the residual claimants. The other companies are much closer to bankruptcy, when the equity holders get essentially nothing and any assets get assigned to the debtholders. Refusing to hedge in this case is a form of risk-shifting onto a financially weak firm's creditors. It may also be that the weak financial position of the other airlines doesn't allow them to enter into the long-term contracts involved with hedging next year's fuel costs.

Another possibility is that Southwest has a very unusual business model and is a $10 billion company because it rigorously applies that business model and looks for ways to improve it. If they lock in the price of their fuel, then fluctuations in the price of fuel won't interfere with their ability to figure out what routes are profitable, what schedules improve efficiency, or what the next city on their route map should be. Variation in performance month-to-month will better reflect choices they made rather than fluctuations they couldn't control.

But maybe this is overthinking the problem. Two months ago, David Grossman wrote in USA Today:

Southwest reported a profit of $235 million and saved approximately $351 million during the first six months of this year. If Southwest hadn't hedged, that profit would have been a $116 million loss and the first time in 57 consecutive quarters that the company did not report a profit.

Maybe they hedge to keep the streak alive.

This topic comes up any time fuel costs increase. About a year ago, Jim Garven noted most of these points and provided links to empirical and case studies of fuel hedging. Some other good discussions are here and here at the Conglomerate blog.

Wednesday, September 07, 2005

Significant but not Overwhelming

So says the Congressional Budget Office in its preliminary report on the likely economic impact of Hurricane Katrina on economic growth. Quoting from the opening paragraph of the report:

Katrina could dampen real gross domestic product (GDP) growth in the second half of the year by ½ to 1 percentage point and reduce employment through the end of this year by about 400,000. Most economic forecasters had expected 3 percent to 4 percent growth during the second half, and employment growth of 150,000 to 200,000 per month. Economic growth and employment are likely to rebound during the first half of 2006 as rebuilding accelerates.

How do they get these numbers? Start with an overestimate of the affected areas:

The gross state product of Louisiana is about 1.2 percent of U.S. GDP, and that for Mississippi is about 0.7 percent. If half of that product were lost for three months (September to November), the level of real GDP would be lowered by about 1 percent from what it otherwise would be, cutting about 1.3 percentage points from the annualized growth rate for the third quarter and about 2.7 percentage points from the fourth quarter.

They then argue that production of the key industries in those areas will be unlikely to be affected for that long, putting the impact at about 1 percentage point (off an annualized growth rate) in each quarter. They then conduct an analogous exercise to estimate the loss in jobs:

Employment for September will decline significantly—estimates of the impact range from 150,000 to half a million—as a direct consequence of the hurricane. The Bureau of Labor Statistics (BLS) may or may not be able to estimate the size of this effect when it releases the September data on October 7. Employment will increase in subsequent months, as workers return home and businesses reopen and as reconstruction activity gathers steam. The large-scale relocation will generate additional demand for workers in receiving communities; some of those jobs will be filled by the evacuees themselves. Once New Orleans residents are able to return home, the net effect on the level of employment will be positive, as reconstruction activity continues.

A reasonable first pass at the questions they were asked. It is not CBO's fault that rebuilding after a natural disaster is one of the more obvious times when GDP--as a measure of economic well-being--comes up short.

Tuesday, September 06, 2005

Katrina and the Airlines

Mark Tatge and Phyllis Berman pose the question, "Will Katrina Ground Airlines for Good?" in last week's article in Forbes. They argue that Delta is likely to be hit twice--by rising fuel costs and by its dependence on traffic in the affected areas. They judge Northwest to be near the brink, too. The second paragraph below tells us almost everything we need to know about the industry:

Now, the situation is at a breaking point. Not just for Delta, but for the entire industry. Katrina should reduce total refining output by 43 million barrels over the next two months, according to Lehman Brothers. That translates to about a 10% to 15% reduction in the supply of jet fuel. Oil prices, despite falling back slightly in the past day, are expected to stay above $70 per barrel until at least the end of the year.

Both Delta and Northwest have no hedges against exposure to rising fuel prices. AMR's American Airlines and Continental Airlines, although in better financial shape, have no hedges in place either. The only airline with significant hedging is Southwest Airlines, which holds hedges for 65% of its 2006 fuel needs--most of it at $32 per barrel, according to Lehman Brothers.

Checking the stock ticker, Southwest has a market capitalization of $10.9 billion. American is at $2 billion, and the total of Continental, Delta, Northwest, and United is no more than $1.5 billion. Given the thrust of the article, these relative magnitudes should come as little surprise.

Terrorism, Security, and America's Purpose

This conference is excellent. Listen to the live feed on your computer, and you will get one indication of why the New America Foundation is emerging as the think tank for the next generation.

Monday, September 05, 2005

Roberts for Chief Justice

The President announced this morning that he would nominate Judge Roberts for Chief Justice, with confirmation hearings to begin after Chief Justice Rehnquist's funeral. This seems like the obvious choice--there is no coherent opposition to his nomination to the Court so far and this move spares the President a third confirmation hearing. Having newly secured Justice O'Connor's willingness to stay on until a second nominee is confirmed, I don't think much about Roberts' confirmation hearings will be controversial.

Perhaps that is not so with the second nominee, yet to be named. Pressure will intensify to nominate a woman, now that this vacancy is more specifically associated with O'Connor. I think attention will turn to Edith Hollan Jones, Edith Brown Clement, and Priscilla Owen.

With the new position associated with O'Connor, and the now more evident association of Roberts with his mentor, the very conservative Rehnquist, there may be some abatement in the pressure for the President to appoint someone who appeals specifically to the right-wing of his party.

This narrows the field quite quickly to Clement. She's been confirmed for two prior positions by the Senate, each time 99-0. She's known for being conservative, but the issue of abortion--the real lightning rod in confirmations--does not seem to appear among her most controversial opinions. And, not to be overlooked, she has a strong connection to Louisiana, first at Tulane Law School, but more importantly, in her two Senate-confirmed Judgeships.

I would be very surprised if someone else were nominated.

Sunday, September 04, 2005

Good Katrina Blogging

Rivaling the streets of New Orleans in raw sewage and toxicity is the content of most of the partisan commentary I've heard, seen, and read on the aftermath of Hurricane Katrina. I think it is safe to say that there are failures of organization, communication, and mobilization at every level here. The way to channel the frustration we all feel is into good deeds to aid and comfort those in the Gulf Coast and careful preparation for the next threat to our welfare, whether an act of nature or terrorists.

I've been following two new (to me) blogs lately, because I think they are making sense--asking the right questions and doing the right research to point the way to a better outcome the next time a potential catastrophe heads toward the area.

Matthew Kahn of the Environmental and Urban Economics blog is walking us through the decision-making process for how to think about the future of New Orleans and the sensible way to assign responsibility for protecting the city from surrounding water. Great posts and the making of a real contribution to the blogosphere.

Dave Schuler of The Glittering Eye is providing some very thoughtful commentary on how Katrina should change our thinking about base closures, misguided attempts to affix blame too narrowly, and relevant examples of disaster and recovery (and the importance of local control in particular). Quoting from the last of these:

There are several key factors that were present in all of the disasters reviewed above:

* Civil order was maintained immediately (sometimes ruthlessly) even while the disaster was in progress.
*Reconstruction efforts began immediately and were completely under local (and mostly private) control.
*Funding for relief and reconstruction was almost exclusively through private investment and philanthropy.
*Although large parts of all of the cities were destroyed, large parts remained.

None of these factors are true in New Orleans.

New Orleans will be re-built if the people of New Orleans want to re-build it. And if they do it themselves it will be a New Orleans they can be proud of and love. It will be their New Orleans.

If, on the other hand, they wait around for someone else to re-build their city for them, it won’t be the New Orleans they loved. It will belong to somebody else. And New Orleans will be dead.

Maybe the best post on any topic that I've read in long while.

ADDENDUM: I should know better by now--if it's smart commentary on "organization, communication, and mobilization" you seek, the place to go is EagleSpeak. Great analysis of what South Carolina has and has not in the way of hurricane planning, using New Orleans' experience as a template.

Friday, September 02, 2005

August Employment Report

First Friday of the month, so the employment report is out for last month. Despite all of the news about Katrina, there is no impact yet, as the hurricane hit Florida and the Gulf after the survey reference week (the one including the 12th of the month). Following an earlier example, let's break it down, starting with Table A:

1) Top line number: Change in nonfarm employment measured from the establishment (or payroll) survey came in at +169,000.

2) Revisions to the top line number from previous months: Each month, the establishment survey revises its prior two months of data, as more establishments report in. So the last number not revised is for May (reported in last month's release), when payrolls were 133.413 million. Payroll job growth for June and July were revised up, by 9,000 and 44,000, respectively. So the last three monthly numbers (with the last two subject to further revision in the coming months) are 175k, 242k, and 169k, for a total of 133.999 million employed in the establishment survey. A three-month average of 195k per month looks pretty solid.

3) Don't forget the workweek: The employment report also reports the length of the workweek for private production or nonsupervisory workers. This month, it held steady at 33.7 hours. Updating some calculations in my earlier post, a change of one tenth of an hour in the average workweek would be the equivalent of a change in the labor input of about 318,000 workers. That's larger than the typical change in the number of bodies, so always watch the workweek (and it's revisions, which had no effect this month).

4) Earnings growth: The survey also reports the average hourly wages and average weekly earnings for private production or nonsupervisory workers. Since these numbers are revised over the subsequent two months as well, go back to May (in last month's report) to find values of $16.03 and $540.21, respectively. The August figures of $16.16 and $544.59 reflect growth at an annual rate of 3.3% (they are the same because hours haven't changed). That may be a little bit better than inflation--inflation ran at a 3.5% annual rate from January to July but only a 1.9% annual rate from April to July. We won't know for sure until the August CPI estimate comes out.

5) Unemployment Rate: The top line number in the household survey is the unemployment rate, which is reported to have fallen by 0.1 percentage point, down to 4.9 percent of the labor force. (The actual change is 0.08 percentage point, rounded up to 0.1.)

6) Other Ratios from the Household Suvey: The decline in the unemployment rate is due to an increase in household employment of 373k, a decline of 106k in unemployment, and an increase of 1k in those not in the labor force. So this is going to mean good things for the labor force participation rate and employment-to-population rate. Both are up by 0.1 percentage point, to 66.2 and 62.9, respectively.

7) Caveats to the Household Employment measure: Once again, we get a pretty large disparity between the household and payroll measures of employment growth (373k versus 169k). Part of this is due to different samples (e.g., household survey includes the self-employed, establishment survey counts multiple job holders). The rest is that they are both estimates of an underlying population number. In general, the establishment survey is to be preferred for the purpose of counting the change in the number of jobs, because that number is estimated more precisely in the establishment survey (it's a bigger survey and it uses administrative data).

8) Alternative Measures of Unemployment: The full list is given in Table A-12. All but one shared the decline of 0.1 percentage point that the main number showed. We can also construct another one based on reclassifying all of those who are not in the labor force (i.e., not actively looking for work) but who do "want a job." This group fell from 5015k to 4823k between July and August. If we reclassified them as unemployed (and thus in the labor force), this augmented unemployment rate would have fallen by about 0.2 percentage point, from 8.1 to 7.9 percent.

9) Duration of Unemployment: Some commentators also look at the duration of unemployment, reported here. It lengthened over the month, from 17.6 to 18.9 weeks on average and 9.0 to 9.4 weeks at the median. The fraction of the unemployed who have been unemployed for 15 weeks or longer rose from 32.8 to 35.8 percent, and the share unemployed for 27 weeks or longer rose from 18.7 to 19.2 percent. These numbers are all down slightly relative to August 2004. The recent changes reflect a greater share of the short-term unemployed either finding jobs or leaving the labor force than the long-term unemployed.

Plenty of other stuff to look at, but these are the highlights. For Fed watchers, it will be interesting to see whether the anticipated economic weakness due to Hurricane Katrina or these retrospective data on a fairly strong labor market will prevail in the decisions to keep raising short-term interest rates.

Linked at Outside the Beltway Traffic Jam.

Thursday, September 01, 2005

Limited Government

I confess, I was this naive, too:

Brad DeLong's Semi-Daily Journal: I guess I was naive.

I thought that in the wake of Katrina's passing we'd see flotillas of helicopters, fleets of boats, and public health and public safety professionals from all over the country giving booster shots and restoring order within hours. I expected to see rapid, active, and aggressive disaster-recovery response from rescue assets prepositioned nearby but out of the reach of the hurricane.

After all, having a hurricane hit a city is nothing new. New Orleans's vulnerability as a bathtub waiting for the ocean is obvious. Louisiana is crucial to America's oil industry, and New Orleans is--was--an incredibly valuable touristic and cultural jewel.
What does it mean when folks like me aspire to have limited government? We seek maximal freedom for citizens, without the intrustion of government where it is not needed. But we also seek maximal efficiency of the government in those cases where it is essential. On typical days, we argue about where to draw the line between "essential" and "not needed." A Category 5 hurricane making landfall anywhere is so far over that line that we cannot even see it anymore.

Limited should not be misconstrued to mean ineffectual.