June 16, 2007
Closing Schools, Churchs and Military Bases
Main line religious denominations are struggling with declining membership in the United States; public school boards are struggling with demographic changes, people are moving from old neighborhoods into new ones; and the federal government still has too many military bases. Try to close a failing church or a school with too few students or a military base that is not cost effective. Bishops, school boards and Congress will each all face irritate and angry protests from local beneficiaries, who pay less than they receive and demand that it stay that way. The incentive of the decision makers (who do not get paid based on cost reductions) is too avoid such controversies and carry the old facilities, bleeding the rest of the system, until the death of the local facility is undeniable. It is very, very tough for not-for-profits and for governments to make reallocative changes once buildings get on the ground. It is another bit of evidence favoring, when possible, capitalism in allocating assets, based on the profit incentive.
Tax Plans and the Election
Astute critics of the current Presidential races in both parties have noted that tax is not high on any candidates list of preferred topics. There is no shortage of ideas for fundamental tax changes but the candidates, by in large, seem content with a few general remarks on tax policy. Yet economists know that government tax policy (and they include tariffs as a tax-- it is one of the oldest) has major effects on economic growth and on business incentives. Increase the tax on dividends and corporations grow internally; increase the capital gains tax and investors buy and hold stock; increase corporate income tax and money flows abroad to tax havens. All tax choices shape and mold business incentives and this shapes and molds economic growth. One wishes the candidates would spend more time debating and discussing their tax programs.
Another Academic Study That Has Caught the Attention of the SEC
A new study by professors Andrea Frazzini of Chicago Christopher Malloy on London and Laurne Cohen of Yale found that mutual fund managers do significantly better when they invest in companies rule by their old college or graduate school classmates. The study, another in a long line of academic studies that find abnormal correlations in stock trading (remember the study that started the options back dating scandal by finding abnormalities in executive option grants??). At issue is the inference -- are the results due to legitimate or illegitimate trading. Some say it is evidence of insider trading; other say it is evidence that fund managers use superior information on their old buddies to pick the good managers. The study confirms in data what the elite business and law schools have known for decades; you go to these schools for the contacts as much as for the teaching.
The Management Style of the CEO of GE, Jeffrey R. Immelt
Joe Nocera published a column in the New York Times on Saturday, June 9th, entitled "Running G.E., Comfortable in His Skin." The column detailed and lauded the management style of the CEO of GE, Jeffrey R. Immelt. Nocera wrote that Immelt is the "prototype of the modern chief executive.. unflappable...a good listener, consensus builder, ambassador to the larger world... comfortable in his own skin..." Trouble is, GE stock price has been stagnant during the entire time of his tenure while the major stock market indexes had all shown increases. The column comes out in a time when "soft skills" are emphasized in hiring and in business school curriculum. We may be overdoing it. Judgment and perspicacity are not "soft skills." Immelt's risky bet on environmental technology will matter more to the stock price over time than whether or not he has -- and this is the new buzz word -- "authenticity." Business leaders in firms that are becoming or staying private are noting the management advantages in not playing the ambassador role to the world -- A CEO that deals with a few focused shareholders can focus more on operations than interviews, deliver better results, and have fewer headaches.