Tuesday, March 31, 2009

Must read from Nate Silver on GM


GM's Problems are 50 Years in the Making

by Nate Silver @ 7:45 AM

Let's take something of a 30,000-foot view on the condition of General Motors. The chart below details GM's operating margin -- its profits divided into its revenues -- over the past 50 years:



I haven't provided the dates on the chart because they aren't important. The auto business is highly cyclical because consumers are buying expensive assets that last for years at a time. Nobody ever really has to buy a new car (they can buy a used one if their car breaks down), and therefore consumers are willing to hold on to their existing vehicles and wait out economic slumps. You can't do that with, say, a loaf of bread, or even something like a cellphone, which has a much shorter lifespan.



But you knew all of that already. The remarkable thing is that, once you account for the economic cycles, the trend for GM is exceptionally steady -- an exceptionally steady trend downward. There were still bad times thirty years ago -- but they weren't bad enough to threaten GM's survival, and conversely, the good times were much better. These are General Motors' operating margins by decade:
Average Annual Operating Margin, General Motors
1960s: 8.7%
1970s: 5.5%
1980s: 3.0%
1990s: 1.3%*
2000s: -0.5%
* Excludes one-time $20 billion accounting charge for retiree health benefits in 1992.
If I were an alien beaming down from Rigel-3 looking at this pattern -- an alien with an MBA degree -- my first guess is that it would reflect some sort of systemic problem, some chronic imbalance that magnified over time. Something, in other words, like the costs of GM's retiree pension and health care programs. It's difficult to get a precise figure on these so-called legacy costs, but they averaged about $7 billion per year between 1993 and 2007 and are probably at least $10 billion per year now. Considering that GM has never made as much as $10 billion in profit in a year and that its entire operating lossses in 2008 were $13.8 billion, you can see why this is a significant problem.

Of course, GM benefited by promising its employees access to lucrative retirement programs -- it benefited by being able to pay less to those employees in the form of salary. But whereas the benefits to GM came long ago, the costs come now. This, indeed, is the entire crux of the problem, as is cogently explained by this Washington Post article from 2005:

GM began its slide down the slippery slope in 1950, when it began picking up costs for medical insurance, pensions and retiree benefits. There was huge risk to GM in taking on these obligations -- but that didn't show up as a cost or balance-sheet liability. By 1973, the UAW says, GM was paying the entire health insurance bill for its employees, survivors and retirees, and had agreed to "30 and out" early retirement that granted workers full pensions after 30 years on the job, regardless of age.

These problems began to surface about 15 years ago because regulators changed the accounting rules. In 1992, GM says, it took a $20 billion non-cash charge to recognize pension obligations. Evolving rules then put OPEB on the balance sheet. Now, these obligations -- call it a combined $170 billion for U.S. operations -- are fully visible. And out-of-pocket costs for health care are eating GM alive.

GM was willing to cut its employees some very attractive deals in the 1950s through the 1980s -- provided that they took them in the form of retirement benefits rather than salary, which wouldn't hit GM's books until much later and which until 1992 weren't even required to be carried on its balance sheets all, making its financial statements (superficially) more appealing to its shareholders. That health care costs have risen so substantially in the United States have made a bad matter worse.

This issue is wrongly portrayed by both the liberal and the conservative media as one of management versus labor, when really it is a battle between General Motors past and General Motors present. In the 50s, 60s and 70s, everyone benefited: GM and its shareholders got the benefit of higher profit margins, and meanwhile, its employees benefited from GM's willingness to cut a bad deal -- for every dollar they were giving up in salary, those employees were getting a dollar and change back in retirement benefits. But now, everyone is hurting.

Nor does this provide for much in the way of solutions. The retirees might have benefited from GM's short-sightedness -- but they also worked hard Monday through Friday every week of in expectation of receiving the benefits that GM had promised them. From the standpoint of fairness, it would be much better to require GM to take the hit -- but there isn't much of GM left to punish, as its outstanding retiree obligations exceed its market capitalization many times over, and as the decision-makers who led GM into this position left the company decades ago. Today's employees at GM, and the unions that organize them, likewise don't have anything much to do with the problem -- most of the excess costs it requires to produce a Buick versus a Toyota come in the form of legacy costs, not what those employees are receiving in salary and benefits today. And the taxpayer is bound to to get screwed either way, either picking up the tab to bail out GM, or bearing the costs of the pension programs, which are guaranteed by the government (although the legacy health benefits aren't guaranteed).

Policy-makers, finally, share in the blame too. General Motors might be the latest casualty of the distorted incentives created by our employer-based health care system. Meanwhile, the government would probably improve incentives by providing a more generous Social Security guarantee in lieu of guaranteeing private pension programs. The whole idea of Social Security is that people do an inadequate job of saving when left to their own devices. But companies, even companies as big and proud as General Motors, are overly concerned with the present as well.

Dynamics like these have played out in miniature in the past few years, with GM and other domestic automakers borrowing future sales by offering extremely attractive financing and low prices in order to meet their present debt, pension and health care obligations. At some point, "the future" was bound to become "the present." These behaviors are exactly what rational markets are supposed to prevent. GM shouldn't have been able to fool rational investors by shifting labor costs to the future (by shifting payments from salaries to pensions) and revenues to the present (by borrowing future sales). But GM was trading at $40 a share in 2007, whereas it's worth $2 a share now -- a price much closer to the true value of a company involved in these shenanigans. Further evidence that equity market rationality is a myth.

Posted via web from Aught he has to know it with.

Wednesday, March 25, 2009

Mzungu Circles


This post is also up at Liz's blog about her trip to Uganda:
www.kvachinuganda.blogspot.com
 
We have just returned from Lake Bunyonyi, a lake in the southwest
corner of Uganda formed by volcanic eruption only 10,000 years ago.
Free from crocodiles, hippos, and schistosomiasis, it’s safe for
swimming, both for us and for the otters that hunt crayfish. Along the
shores live a variety of birds, including weavers and the crested
crane, Uganda’s national bird. Over twenty islands dot the lake, and
in the early morning they are interspersed with clouds of mist rising
from the water. Because of its high altitude, the area is cooler than
Kampala.
 
Liz and I spent three nights and two days at two different locations
around the lake. The first, the Bunyonyi Overland Resort, is a popular
stopover for enormous overland buses, on their way to or from gorilla
trekking. Each evening, tourists spill out and fill the restaurant and
bar, cheering football and rugby matches beamed in by satellite. The
incompetent, mustachioed restaurant manager hovers near tables,
berating the waiters when service seemed to slack. Not exactly a
peaceful scene.
 
On our first morning on Bunyonyi we decided to escape the other
tourists and take one of the dugout canoes out onto the lake, with the
goal of paddling to Punishment Island. A desolate piece of local
history, Punishment Island is a small flotilla of reeds with a single
tree where women impregnated outside of wedlock were brought to either
starve, or be picked up by any opportunistic man who could not afford
to pay a bride price. (Many Ugandans, even those who live on the lake,
have never learned to swim and the pregnant women would flounder in
the few hundred meters from Punishment Island to the shore.)
 
As it turned out, paddling the dugout canoe was much more difficult
than it appeared from the shore, where we had watched locals
crisscrossing the lake with ease. Heavy, long and wider at the front
than at the back, they were very different from the aluminum canoes we
were used to. Paddle on the left, and the canoe would, as expected,
turn to the right. However, gain too much rightward momentum and
paddling on the right to straighten the canoe would only accelerate
its rightward turn. Savage backpaddling could, eventually, straighten
the boat out – and bring it to a halt. So we meandered our way happily
enough, tracing a curlicue course out into the lake
 
But then the rain came up. It appeared over the hills behind us,
wrapping the lake in grey curtains with the sound of a waterfall. Liz
and I looked at each other, each without a raincoat, and suddenly, our
inability to chart a straight path wasn’t so funny. We made for the
nearest shore to beach the boat and get under a tree out of the rain.
Liz, piloting, did her best to keep us on course, but we couldn’t
avoid a thorough soaking.
 
While we waited out the rain under a eucalyptus tree, I decided I
would try my hand at piloting on the return trip, confident I had
learned from watching (criticizing) Liz’s technique. Not so. We didn’t
make it to Punishment Island that day but we did, eventually, make it
back to the restaurant. Eating lunch, we laughed as two canoes left
the dock, filled with American tourists, to make wide, unintentional
circles in the bay. Our waiter told us that these were “Mzungu
circles” – the expected outcome when white tourists paddle the dugout
canoes.
 
One of the surprises I’ve had here in Uganda is how infinitely
forgiving Ugandans are of foreign tourists. While so much of getting
around Uganda is completely unintuitive to me, Ugandans are always
happy to help point in the right direction, or explain the way things
work. (Luckily, I have Liz as a guide, so I don’t have to ask very
often.) Mzungu tourists can be loud, arrogant, demanding, and
oblivious. But as we make Mzungu circles around the country, Ugandans
seem ever willing to straighten us out with a helping hand and a
smile.
 
That afternoon, we walked to the Heart of Eridrisa, a commune where
foreign volunteers and local employees run a nursery, a primary
school, and a rudimentary, three-room clinic. The manager, who
repeatedly invited Liz, the soon-to-be-doctor, to come back and
volunteer, gave us a tour of the facilities. The seven-classroom
primary school hosted nearly 600 pupils, and the nursery another few
hundred. Like most Ugandans, the manager was mostly nonplussed with
the beauty of the lake; unlike tourists who can see the countryside
while sheltered from want, for the locals, the beauty of the region is
of a piece with its remoteness, its poverty, its lacks. Tourists value
remoteness while the locals curse it, and our compliments must seem
deeply ironic.
 
The next morning, we planned to transfer to a camp on Bushara Island,
more secluded and quiet than Overland Camp. But before leaving, we
wanted to hike one of the hills along the shore to get a better view
of the lake. While ascending on a local footpath, we ran into 14-year
old Lucky and his younger brother, Christophe. Lucky immediately
demonstrated his very skilled English, and asked if we wanted a guide
up the hill. When we told him we were only on a short walk, he offered
to paddle us out to Bushara in a dugout canoe. We negotiated a price,
and he ran the few hundred yards to his house to collect his paddles.
 
Liz and I, meanwhile, returned to Overland to checkout. Lucky and his
friend Moses paddled up a half-hour later, helped us into the canoe,
and provided me a paddle. As we made our way to Bushara, a trip that
took about 45-minutes with Moses piloting an arrow-straight course,
Lucky told us about himself. He is a Manchester United supporter, and
a fan of Christiano Ronaldo. He attends the primary school at
Eridrisa, which we had visited the day before. His father died before
he was old enough to remember him, and his mother farms to support
him, his younger brother, and three older sisters. Two of his sisters
were in secondary school, their school fees paid by sponsors, and he
was currently working to save the 100,000 shillings ($50) he would
need to take his tests for the term. So far, he had saved 65,000, and
would need the balance by early April. Upon reaching Bushara, we paid
Lucky and made arrangements to have him pick us up the next morning
before school to paddle us to Rutinda village for transport back to
Kabale to catch a bus to Kampala. Lucky asked us to give him our email
addresses, and we said we would have them for him the next day.
 
Our stay on Bushara was very restful. We read, watched the rain, and
made the trip to nearby Punishment Island late that afternoon,
catching a glimpse of two pairs of otters. Liz demonstrated what she
had learned from watching Moses; I still couldn’t paddle straight.
 
The next morning, it was 45-minutes back to Rutinda. Liz and I decided
to pay Lucky double what we had given him the day before, and throw in
the rest of what he would need to pay his school fees that term. When
we reached Rutinda, Liz handed him the money and our email addresses,
and we waved goodbye.
 
Our ten-hour bus ride back to Kampala featured mid-journey repairs and
a live chicken in the overhead luggage rack. Along the way, we passed
stores in every village selling mobile phone credits, painted pink
(Zain), turquoise (Uganda Mobile), yellow (MTN), or white (Warid). As
a student of economics and business, I found myself thinking about
development – why it had moved so quickly in some directions (mobile
phones), and so slowly in others (absence of free secondary
education).
 
And so it seemed to me that the story of African economic development
is a massive Mzungu circle. Western governments gave large loans to
newly independent countries for development in the ‘60s and ‘70s, and
then forgive the debt, sometimes, thirty years later. American policy
propped up brutal dictators during the Cold War, and today the World
Bank punishes countries for corruption and bad governance. The World
Bank spends billions digging tube wells and building dams with dreams
of development at a grand scale decades ago, and then the Nobel
committee awards the Peace Prize for the development of microfinance.
Western policy-makers still don’t really know how to guide
development, and we have just taken another turn in our great Mzungu
circle to try and fix our own broken economies. Hopefully we’ll find
someone who can paddle this thing straight ahead.

Posted via email from Aught he has to know it with.

Thursday, March 19, 2009

Out of the country Re: Posterous | Re: A few quick Uganda pics


Hello,
 
I am currently traveling in Uganda with very limited email access. I
will be able to respond to your emails on March 27th.
 
Thanks,
Nathan

Posted via email from Aught he has to know it with.

A few quick Uganda pics


Still in Uganda, but wanted to share some quick pictures, all from a trip to Murchison Falls in north western Uganda, near the border with Congo. Back in Kampala now, and leaving early tomorrow morning for Lake Bunyoni.






See and download the full gallery on posterous

Posted via email from Aught he has to know it with.

Monday, March 9, 2009

Conservatives reveal themselves to be heartless assholes, shocking no one


Do Lawyers Work Harder Than Movers?

I’m just now getting to read Lisa Schiffren’s contribution on the Corner to the growing overclass revolt taking the American right by storm:

longisland_ny_lawyers_1.jpg

The doctors, lawyers, engineers, executives, serious small-business owners, top salespeople, and other professionals and entrepreneurs who make this country run work considerably harder than pretty much anyone else (including most of the chattering class, and all politicians). They are not robber barons, or trust-fund babies, or plutocrats, or even celebrities. They are mostly the meritocrats who worked hard in high school and got into the better colleges and grad schools, where they studied while others partied. They pushed through grueling hours and unpleasant “up or out” policies in their twenties and thirties at top law firms, banks, hospitals, and businesses to earn salaries in the solid six figures (or low seven) today — in their peak earning years. Their work ethic is prodigious, and, as Tigerhawk points out, in their spare time they sit on the boards of most of the complex charities and arts institutions that provide aid and pay for culture in America. No group of people contribute more to their community. And now the president, who followed a path sort of like that, and who claims that his wife’s former six-figure income was a result of precisely such qualifications and efforts, is demonizing them. More problematically, he is penalizing their success and giving them very clear incentives to ratchet back on productivity.

When Lisa Schiffren was born, she received one of the rarest winning tickets in the genetic-geographic-historical lottery -- she lives in the United States in an era of incredible wealth and luxury, is well-educated, and, apparently, was able to find a job where you get paid to write staggeringly ignorant crap. There is so much so wrong with what she wrote that criticizing it is a little like playing Supermarket Sweep -- so many options, yet so little time! But here goes.

The first point I'd like to make has to do with how you evaluate how "hard" people work. Unlike Schiffren, I think it's worthwhile to differentiate amount and cost of effort, and then consider the benefits received for effort expended. I think work is hardest when you get the lowest payoff for the total cost of your effort (payoff - (units of effort * cost of effort)). I think it really sucks to do mind-numbing work (high psychic cost of effort) for low pay. Now let's consider a critical factor that shifts this equation significantly in meritocrats' favor.

Lawyers, doctors, engineers, other "meritocrats" are not merely compensated for their work with money. Most of those people are intrinsically motivated to do the work they do. They get some psychic benefits from waking up every morning and lawyering or doctoring or engineering. Sure, being an entry level lawyer in an up-or-out firm involves long hours, but you're looking ahead to more control over your work and tasks that are more personally rewarding. The middle- and upper-classes, especially as you move up the pay scale, are not only concerned with pay but whether they enjoy what they do. This makes the cost-benefit differential between lawyers and movers even greater. Not only do lawyers make more money, they also enjoy lawyering, or at least enjoy it more than movers enjoy straining backs to move sofas. Meritocrats get dollars and psychic benefits; movers get fewer dollars and a lifetime of back pain.

My other big criticism has to do with entitlement. There's this sense that if you're in a position to earn a high salary, you've earned it. Bullshit. As I suggested at the outset, the productivity our labor is largely due to a random draw upon birth. Some of us are gifted with parents who can afford education and mind that can make use of that education. Sure, we make investments of effort and time to reap the rewards, but it's still mostly luck. I studied hard in school, but not as hard as others who will earn less than I will in less fulfilling jobs. I worked student jobs, but never had to wait tables, mow lawns, or donate sperm to pay for school. I am profoundly lucky, though not profoundly deserving.

Conservatives need to check themselves before they wreck themselves. This whole, "I work harder than you" thing needs to stop. People making more than $250,000 can afford to pay like 5% higher taxes on every dollar they make beyond $250,000. They can afford that more easily than the poor can afford no health care, or the residents of Florida can afford global warming. And no one can afford more of this inane bitching.

Posted via web from Mhm.

Friday, March 6, 2009

Correlation is not causation


I laughed as I read this comic, but was it funny?

Posted via web from Mhm.

Tuesday, March 3, 2009

Rich does not equal smart


Imaginary notches

Oy. No, your income tax doesn’t suddenly shoot up if your taxable income rises one penny into a new bracket. To belabor the obvious, the tax code specifies marginal rates: your rate rises from 33 to 35 percent if your taxable income exceeds $372,950, but only the income above $372,950 pays the higher rate.

Further evidence that it doesn't take a genius to make a lot of money. I'm in luck!

Posted via web from Mhm.

'Bad Bank' Funding Plan Starts to Get Fleshed Out - WSJ.com


[Bad Bank Funding Plan Starts to Get Fleshed Out]

These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.

The public-private partnership grew out of the "bad bank" concept, an idea popular among some economists that would have required the government alone to buy up the troubled assets.

The Obama administration jettisoned that idea after running into the thorny issue of pricing. To help banks, the government must pay enough so that firms don't have to suffer additional losses from selling or writing down the value of other similar assets. But there is little public tolerance for overpaying with taxpayer money.

Okay, so the government no longer has to pay banks directly for toxic assets, but has to subsidize other people until it becomes economically viable for them to buy the assets at a price high enough that banks don't have to write the assets off. So we still have a price floor -- the price at which banks can sell their assets without write offs -- but now the government won't have to pay that full price. Instead, investors will contribute some of the necessary capital in exchange for a crack at the upside. But how much risk will the government have to take on to induce them to enter?

Posted via web from Mhm.