Like Lisa, I participated in this excellent discussion group at the SEALS conference co-organized by Joan Heminway. As I told co-organizer and friend-of-Glom Mike Guttentag, for a week I had a Word document open with the titular question at the top. Participants were supposed to submit a 2-3 page paper before the meeting. I totally lamed out. I kept trying to write, but couldn't come up with anything coherent.
I do have an answer to the question, though: Yes, the public/private divide does make sense. But it's gone, daddy, gone.
As I said at the conference, I think I'm essentially a conservative person: I'm resistant to change. And when I learned the world of securities, it seemed to me that there was this Grand Bargain. If you wanted to go public, you got many benefits, most notably a high degree of liquidity and access to public capital markets. But you had to take the bitter with the sweet: mandatory disclosure and increased liability risks. If you stayed private, your equity was far less liquid, and you couldn't make use of general solicitation. Your capital raising was much more circumscribed. But within those limitations you were free to order the firm more or less as you saw fit. Other substantive areas of law of course constrained private firms--environmental law, labor law, etc.--but in terms of corporate and securities law, they were relatively free. I realize this is a simplification, but in broadstrokes I think it's true.
No more. The Grand Bargain is gone. General solicitation for private firms. Conflict minerals rules. Emerging growth companies. Disclosure of executive pay ratios. Private secondary markets. Dodd-Frank, the JOBS Act, and technology have made a hash out of it. Or at least, the line between public and private is blurred.
This blurring makes me uneasy. I feel like there's a disruption in the natural order of things. But I can't tell if that's my innate conservatism talking, or if there really was something we lost with the Grand Bargain.
Rachel Maddow's WaPo op-ed yesterday sings the praises of the "dogged local press corps" that uncovered Chris Christie's Bridgegate and other local corruption. She ends with a ringing endorsement of the local press:
Our democracy depends on local journalism, whether it’s a beat reporter slogging through yet another underattended local commission meeting, or a state political reporter with enough of an ear to the ground to know where the governor might be when he isn’t where he says he is, or a traffic columnist who’s nobody’s fool.
It’s annoying to pay for information — I know. But if you don’t subscribe to your local paper or pony up to get behind its online paywall, who’s going to pay reporters to cover the news where you live? A free press isn’t that kind of “free.” An accountable democracy doesn’t work without real information, gathered from the ground up, about people in power, everywhere. Be inspired by the beleaguered but unintimidated reporters of Chris Christie’s New Jersey: Whatever your partisan affiliation, or lack thereof, subscribe to your local paper today. It’s an act of civic virtue.
I'm just not buying it. Not the merits, but the remedy. I'm all for a vibrant local press, but the business model of the local paper was built on ads and classifieds. From where I sit, all the virtuous citizens in the world are just not going to save the Athens Banner-Herald.
Interestingly, before her conclusion Maddow mentions another potential model:
When Mayflower, Ark., learned the hard way last March that an aging ExxonMobil pipeline ran under it, the Arkansas Times’s dogged reporting included a crowd-funding effort to pay for its reporters to team with journalists experienced in covering pipelines to get to the bottom of what ExxonMobil did and whether other communities with buried pipelines should feel protected by existing regulations.
I'm no press expert, but Maddow seems to be the little Dutchboy in this scenario. If we need a vibrant local press, we need to find another way to pay for it.
So my July is a disaster. 5 trips, no daycare the last 2 weeks of the month. I'm expecting general insanity and probably not a lot of serious blogging for the month. So I'll settle for a rant. It was a minor happening from an early July trip, but it still rankles.
The trip planners put me in a boutique hotel that seemed nice enough. You may know the type: euro chic design, assured staff that somehow manages to mix friendliness with the barest hint of condescension for the stray bedraggled academic that their earpiece-wearing doormen happen to usher in. They answer the phone with awkward taglines like, "How I can I surprise you today?"
So I check in, have dinner with a friend, and am back at the hotel a little past my bedtime, only to discover to my dismay that I've forgotten my toothbrush. I call down to the desk and am told that they do have toothbrushes. For a $2 charge.
Two dollars? Really?
Honestly, it's not the money, which is clearly de minimis. It's the fact that a hotel would expend so much effort to cultivate an air of "urban sophistication and style", exclusiveness, and "whatever/whenever" and then nickel and dime a guest at 11 pm at night over a toothbrush. I'm not the most seasoned business traveler, but this choice seems obviously wrong from a business perspective.
How can you surprise me, indeed.
This statement, sent to all annual meeting attendees, alerts those "who are either unmarried but have a partner, married but in a marriage that would not be recognized by Louisiana Law, or who have a family member in one of these categories" about potential trouble at the annual meeting. Apparently, the concern is over "hospital personnel who will not allow same sex partners visitation accorded family members, or who may even attempt to make the exercise of a health care power of attorney difficult."
This is a serious concern, and one that should not be taken lightly. So, what is going on here?
Option 1 - New Orleans health care workers are discriminating against same sex couples and others living outside of some traditional conception of marriage. This conclusion is implied by the AALS letter. However, I have not been able to track down any evidence that such discrimination is in fact occurring. I've spoken to people in the medical and legal community in New Orleans who ought to be aware of these things. I e-mailed Susan Westerberg Prager (the author of the statement) on Friday night but have not heard back. I've done the typical internet searches. Nothing. In fact, even the statement itself does not claim to be aware of any instance of discrimination in New Orleans, much less a risk that going to New Orleans increases the chance of being discriminated against (if it is just a societal risk, and not one increased by traveling to New Orleans, there is no need for the warning). It does not seem that Option 1 explains the statement.
Option 2 - The AALS is extremely risk averse and is protecting its members against hardship, no matter how remote. Even if this discrimination might not be happening, it could happen. Out of an abundance of caution, maybe the AALS just wants its members to be prepared. The AALS may be genuinely concerned here, even though the risk seems very remote. In fact, a number of highly unlikely possibilities would need to converge for this statement to to be useful at all, to impact even one conference goer. This sort of discrimination occurs how often in New Orleans? Once this month? Once this year? Once in the last five years? (and, whatever the frequency, is this more often than elsewhere?) How likely is it that one of the AALS conference-goers will require hospitalization? That the hospitilization would require the use of a medical power of attorney? That this particular conference goer is in a relationship where the discrimination would be an issue? We need one of our empiricists to figure out the likelihood of this combination coming to pass, but it appears exceedingly small.
Also, severe risk aversion does not explain why the AALS chose this particular issue to warn us all about. There was a security breach at Newark airport yesterday, and someone was caught on a plane with explosives within the last two weeks. Where is our statement about airline safety? Unfortunately, New Orleans has a stubbornly high crime rate. Where is the statement about personal safety? If the AALS is indeed hyper-risk averse, it is inconsistently so.
Option 3 - The Hierarchy of the AALS is upset that Louisiana has passed a Defense of Marriage Act. This explanation seems most plausible to me. Why do I believe that this issue advocacy is the point of the AALS letter? First, the opening line of the statement acknowledges that the AALS put these "precautionary measures" in place because Louisiana passed a defense of marriage law. Then, the message goes on to note that the reports of this discrimination occur "[e]ven in states that do not have such a law," and does not discuss whether more instances of discrimination occur in jurisdictions with such a law, or whether any of these reports come from New Orleans. In addition, the AALS has already expressed its concerns to the leadership of Tulane Medical Center, who confirmed that they do not discriminate in this manner. Finally, it appears as if the AALS has a history of this kind of thing.
I want to be clear - I do not have any interest in defending the substance of Louisiana's defense of marriage law. Totally apart from that debate, I have independent problems with the AALS statement. First, I think the AALS message is unfairly insulting to health care workers in New Orleans. Second, I am generally uncomfortable with AALS advocating on political and social issues, particularly ones where its membership has expressed divergent views. But, if the AALS and its membership want to lobby for gay marriage or any other cause, it should do so directly instead of issuing this sort of passive-aggressive statement.
Finally, I am concerned that the AALS is merely trying to appease a faction of its membership who feel strongly about this issue. This weaselly middle ground is the most distressing scenario. AALS members may, and I'm sure some do, object to the defense on marriage law on principled grounds. They may choose to avoid jurisdictions with such a statute, and may properly lobby this and other organizations to take similar action. Instead of taking similarly principled action (in either direction), the AALS seems to have taken the expedient route - pressing on with its meeting, but insulting its hosts to extract a pound of flesh that it hopes will quiet those complaining. I hope this is not the case.
I believe the AALS should either issue an apology to New Orleans health care workers or produce data demonstrating a heightened risk of discrimination at their hands. I'm not holding my breath.
Full disclosure - I am married to a physician in New Orleans. I know and admire many local health care workers and have a great deal of respect for their talents and professionalism.
Managers: There are two types of schedule, which I'll call the manager's schedule and the maker's schedule. The manager's schedule is for bosses. It's embodied in the traditional appointment book, with each day cut into one hour intervals. You can block off several hours for a single task if you need to, but by default you change what you're doing every hour. When you use time that way, it's merely a practical problem to meet with someone. Find an open slot in your schedule, book them, and you're done.
Makers: But there's another way of using time that's common among people who make things, like programmers and writers. They generally prefer to use time in units of half a day at least. You can't write or program well in units of an hour. That's barely enough time to get started. When you're operating on the maker's schedule, meetings are a disaster. A single meeting can blow a whole afternoon, by breaking it into two pieces each too small to do anything hard in. Plus you have to remember to go to the meeting. That's no problem for someone on the manager's schedule. There's always something coming on the next hour; the only question is what. But when someone on the maker's schedule has a meeting, they have to think about it. For someone on the maker's schedule, having a meeting is like throwing an exception. It doesn't merely cause you to switch from one task to another; it changes the mode in which you work.
I'm sure that for a law professor in the summer, this resonates well for us! Great, 10:30 a.m. meeting? My day is shot. I'm trying to also apply this to law practice. I remember that senior associates and partners hated long meetings, whereas I didn't really care. I think there the distinction is that senior folks go home when their work is done, so the longer an afternoon meeting is, the longer a senior attorney has to stay at work. But as a junior attorney, I always had work. If that were my rule, I would have never gone home. So I usually stayed late no matter what. A lengthy meeting, especially one where I did very little of the talking, was sort of time when the billing was easier.
I don't buy things very often. When I do, I trust they'll last forever.
Our household is the opposite of the early adopter. We're of the "if it works, why replace it?" and "we've lived years without it--who needs it?" school. So we were, until last week, one of those weird households without a flatscreen television. I bought my old faithful, a 25" Samsung, when I moved out to Madison for grad school in 1995, and it worked just fine, thank you very much.
You know how this story goes. Things fall apart, much as I might rage, rage against it. Our Samsung started emitting these strange crackling noises and the picture would jump. A neighbor christened it "Zappy." It still took us about 6 months to replace, despite hazard to hearth and home. It was the tyranny of choices: plasma or HD? How many Herz? Wall-mount or buy furniture? Confronting each question compounded the helpless consumer feeling of being forced to buy something when you'd really rather just keep what you had.
Which brings me to Dyson. We live with 2 big dogs, along with assorted guest dogs. (Today, for example, we're petsitting a third and have a fourth over to entertain the third). So we have hair issues. We also have a fancy Dyson vacuum that works great. Except, apparently, when one inadvertently gets too close to one's daughter's tiny little frog t-shirt.
As with the TV, I waited for quite a while to take action. It might fix itself, right? Maybe it just needed a break. And who to call? The phone book offered an array of small electronics repair shops, but all sounded vaguely shady. AAA Ability Appliance Repair? Mr. Appliance?
Finally my husband suggested calling the number on the vacuum. OK, I thought, they can at least direct us to an authorized shop. Multi-tasker that I am, I was getting ready for work as I dialed. But after only 1 minute of Muzak, I was talking to a live person. Who was asking me to--what? Go to the vacuum? Find a coin and flip it over and take off the bottom plate? Turn it on and test the suction? He didn't think we were going to be able to fix this over the phone, did he? Didn't he know I was getting ready for work?
It took about 20 minutes, but I got the vacuum apart, and he diagnosed the problem. The vacuum was still under warranty, and so he sent the replacement parts out to us free of charge. Done.
What surprised me most was how empowered I felt by the experience. I'd actually fixed the problem, without going to a shop or having to buy a new one. But it strikes me that it's hard to advertise a selling point like Dyson's customer service. When buying the New Shiny Thing that will make your life better, you don't want to hear about it breaking down. Just like my Virginia realtor scoffed when I listed, among our house's many wonderful features, that its basement didn't flood in Hurricane Isabel when everyone else's did. That particular asset didn't make it into the brochure, but it will sure make the occupants happy one rainy day.
Usha's post below, with its reference to Ronald Gilson's 1984 article on value creation by lawyers, prompts me to a short rant, not about Usha's post, but about the article, which Usha rightly calls a "classic" and "the reigning academic account of what business lawyers actually do." Honestly, with all due respect to Professor Gilson (who joined the Stanford faculty the year I left as a student), the article has bugged me since I read it a couple years ago; indeed, I have a comprehensive list from a Lexis search I did a while back of every article that had cited it, because I was trying to do a literature search to see if anybody else had said what I'm about to say here. Since I haven't followed up on my list, I don't know, and I therefore apologize if I'm repeating a critique somebody has already written. I also apologize for the stream of consciousness approach that follows.
What about the article bugs me? Let me count the ways:
1. If I were taken with law and economics in 1984, but had no way of showing empirically that the reams and reams of hours that lawyers spent doing deals actually produced anything with intrinsic value (which Professor Gilson forthrightly admitted, at pp. 247-48 of the article), but was inclined to hope that they did, with an interest in justifying their existence (as again Professor Gilson forthrightly admitted at footnote 149), this is, I suppose, exactly the article I would write. What we have here is an attempt to make sense of the world, by way of scientific (or quasi-scientific) theory, but it is "over-determined" in the sense that the theory selected happens to be rational actor economics, rather than, say, the theoretical view Clifford Geertz applied to Balinese cock-fighting.
2. The theory is capsuled as follows. All transactions occur because buyers value an asset more than sellers. The difference between the two values is surplus. Haggling over the split of the surplus is of no interest generally to economists; that is mere strategic bargaining. Each party, being rational, would know that hiring a lawyer to grab a bigger portion of the surplus won't work, because the other side will respond in kind, and the lawyers, not the parties, would get the benefit of the surplus. So, in the long run, rational actors being what they are, it must be the case that "[t]he increase must be in the overall value of the transaction, not merely in the distributive share of one of the parties. That is, a business lawyer must show the potential to enlarge the entire pie, not just to increase the size of one piece at the expense." That's a rational actor trope, and one that I have criticized in another context here.
3. As I said in a comment to Usha's post, if I were to apply an economic model to lawyers in deals it would be the Prisoner's Dilemma. Both clients would be better off cooperating by throwing all the lawyers out of the room for most of the issues in the deal, hence eliminating the transaction cost of arguing over myriad reps and warranties and other contract niceties that don't make any difference anyway. So imagine a Prisoner's Dilemma matrix with Party A and Party B, and the choice for each is "Lawyer" or "No Lawyer." The payoff for each side choosing "No Lawyer" is a huge reduction in costs (say, 5, 5) compared to both sides choosing "Lawyer" (say, 10, 10)" But both sides keep their lawyers, for fear of the (1, 20) or (20, 1) outcomes in the Lawyer/No Lawyer boxes that are akin to one prisoner confessing but the other one not.
4. There are places where lawyers reduce transaction costs, say, by mediating between two positions to reach a solution, but there's nothing particularly lawyerly about that. That's a negotiating skill. Moreover, lawyers may well be necessary to getting the deal through the regulatory thicket, whether it is Hart-Scott-Rodino pre-merger notification or CFIUS review. But that hardly seems fair, because lawyers created the regulatory thicket.
5. We have a neighborhood association in northern Michigan. A lot of people in the association are rich. When something happens that they don't like, they say things like, "if you do that, I'll have 10 lawyers from the Humungous Law Firm, who I have on retainer, up here the next day." Since I'm a lawyer, and I used to be a partner at the Humungous Law Firm, I laugh at that, but it's an effective club when wielded against non-lawyers. I rarely hear non-rich people say this, which goes to my next point.
6. Professor Gilson's "empirical" testing of this theory is to walk through the most heavily lawyered of all documents, the typical business acquisition agreement. If lawyers really created value accordingly to the theory, we ought to be able to test it not in mega-million or mega-billion dollar deals, but in little deals that happen all the time. But the reality there is that most transactions occur without lawyers. Sometimes there is boilerplate that lawyers had a hand in. But if a lawyer being involved in a transaction necessarily made the pie bigger, why don't lawyers appear in almost all transactions?
7. Professor Gilson spends many pages on the information-exchanging value of representations and warranties, and puzzles over the lack of any indemnification mechanism in public company deals (the representations and warranties expire at closing largely because once the proceeds in stock or cash are distributed to widely dispersed shareholders, there's no putting Humpty-Dumpty back together again). He acknowledges that indemnification may be partial or limited in time (there's also the "basket" or deductible, but I don't think that gets mentioned), but the real question, it seems to me, is whether the actual instances of acting on the indemnification clauses warrant the investment in the reps and warranties. My guess is they have some amount of in terrorem effect, but neither of us have a whole lot of data to go on. (The one empirical study of which I'm aware on this subject is by Steve Schwarcz, and it is based on surveys of clients who hire transactional lawyers. To quote Steve's abstract: "Contrary to existing scholarship, which is based mostly on theory, this article shows that transactional lawyers add value primarily by reducing regulatory costs, thereby challenging the reigning models of transactional lawyers as 'transaction cost engineers' and 'reputational intermediaries.'")
8. My equally non-testable theory is that lawyers sometimes add value to deals, sometimes subtract value, and appear most of the time during the deal for the same reason neckties do: it's part of the ritual. There is no intrinsic reason they have to be there. Lawyers, like neckties, have value, not because they necessarily make the pie bigger, any more than neckties make the pies bigger, but because somebody values the lawyer enough to pay more for her to be there than it cost for her to get there (marginally speaking, of course). That's the reason we buy $75 neckties and Rolex watches as well. But we don't feel a need to justify the presence of the necktie or the watch as a "transaction cost mechanism."
9. I am persuaded by years of observation that great lawyers (like Jim Freund, who Professor Gilson cites repeatedly) help make deals, but that there is nothing particularly lawyerly about it. It is, as Vic Fleischer suggests, quarterbacking, or as David Zaring suggests, closing. That strikes me as an aspect of leadership, something business schools teach, but with which law schools and law (qua law) struggle immensely.
10. Mostly, though, I step back and see the process as something akin to a Balinese cockfight, a ritual or ceremony that gives us some limited assurance of certainty in a highly uncertain and contingent world. I find it equally plausible that the presence of all those lawyers doesn't do a damned thing to make the pie bigger - but they are necessary, and they do have value, just as the accoutrements to the cock-fight have value to the participants. Their value is in what they do to give us the courage to overcome fear, panic, seller's remorse, buyer's remorse, and risk averseness. Again, as I said over in the comments, lawyers provide an alternative model for resolving disputes about the deal that is better than pistols at twenty paces, but the idea that the contract language provides certainty in anything other than trivial cases is a self-justifying illusion for lawyers. I suppose what really bugs me comes from my intuition that the Gilson thesis is theory-laden in the sense that Ian Shapiro criticized in The Flight from Reality in the Human Sciences. What comes first is the economic model and its assumptions about value and rationality, which is then imposed on a linguistic exercise, which is itself an imperfect model of a complex world.
My six year-old is stomping around the house changing, "I hate United Airlines." I'm sure he's not the first person to have said this, but he is forming at a young age a hatred toward a major airline. We all know that fares are higher this summer, and that in recent years airlines have begun charging for things that seemed to have included at one time: meals, then tickets bought by talking to an actual person instead of online, then luggage. So, what was the straw that has broken our family's back?
For years, grandma has been suggesting that when our older two were of age, that they should fly unaccompanied to see her. In the summertime, this seems like a great suggestion, giving the kids longer time there without parents who otherwise need to be working, etc. Our kids are now 9 and 6 1/2 (5th grade and 1st grade). We all agreed to try flying them nonstop from Chicago to Roanoke, Virginia. Well, first, nonstops to small markets don't come cheap these days, so getting there nonstop is double what a one-stop ticket would be. Ouch. But, nonstop it has to be. But, we can't reserve unaccompanied minors online, so we have to call, realizing there will be a $25 per ticket "ticketing fee." Smaller ouch. But the big shocker is that unaccompanied minors will be charged a $99 each way fee (we call that the $200 fee). And that means that the kids will not be flying to see grandma and that Luke will continue chanting his song.
Out of curiosity, I looked around the Internet, and it seems that American charges an amazingly similar fee ($100 each way), but Southwest, which seems to serve a lot of unaccompanied minors, does not. I understand that unaccompanied minors require extra attention, just like some other groups of passengers. (My grandmother always requested a wheelchair when traveling, even though she was ambulatory for normal, short distances. I wonder if there is a charge now?) Besides just normal monitoring, if there is a problem, such as the plane being diverted enroute, then the headaches with unaccompanied minors may be larger and the costs of housing/rerouting greater. I can see the desirability of an additional fare. However, as we all know now, airlines are very concerned with weight and fuel costs. Children weigh less. A plane full of children will cost less to fly than a plane full of adults with their adult luggage. All this aside, I wonder why Southwest determined that they would market themselves to the unaccompanied minor market? Southwest probably has less downside risk -- their flights are shorter, for one thing. If your child is rerouted on the Houston-Dallas flight to Austin, at worst you drive to go get him, I guess. But not all flights are shorter.
Anyway, unless grandma flies to a Southwest destination, I guess Luke's unaccompanied minor dreams are deferred to another day.
Happy First Day of School! Today is the first day of Fall classes at the College of Law, and also at my kids' school. Everyone was excited and happy, and I am relieved to have a stable schedule for awhile! Preparing for the first day of school always gets me a little feisty, though, especially now that we have moved to Illinois. In Wisconsin, enrolling children in school required a lot of forms, most of them duplicative, and of course the required physician/immunization form. Although our children were immunized (actually over-immunized, because we had come from Texas), I was relieved that parents that did not want to immunize could at least check a "conscientious observer" type box and still send their kids to school. (Of course, there are some negative effects of this policy, including an outbreak of mumps in MIlwaukee public schools, etc. But this post is not about the cost/benefits of an individual choice to immunize one's children or on the cost/benefits of mandatory immunization policy. I'm sure there are many other blog fora for that conversation.)
However, in Illinois, vaccinations are mandatory and so is (drumroll, please) a dental exam. Children enrolling in kindergarten and other selected interval grades must have a dentist sign off on a recent dental exam. OK, this reallly bothers me. Not because I don't send my kids to the dentist. My kids have gone to the dentist since they were three, gotten sealants on baby teeth, gotten fillings on baby teeth because a laser showed a "weakening" of the enamel, etc. This is my choice, and I fortunately have the wherewithal to pay for it. I also sign them up for sports programs, feed them 100% fruit juice and organic milk, and pay for music lessons. These are things that I think might make them healthier but that I know come at a cost. I'm willing to pay the cost. However, I don't think the state should mandate expensive dental care for baby teeth or even for adult teeth.
When I've ranted about this to other Illinoisans, they have countered that because the dental exams are mandatory, government programs provide them for free. So, I have been watching the paper for these free programs. I have seen both public programs and private ones run by dentists in private practice. These exams are free for children on Medicaid and children without dental insurance. Well, I pay for dental insurance for my kids, but my bill for 2 examinations was $130 and change. So, this mandatory requirement creates an indirect taxpayer cost and a direct out-of-pocket cost for me. And for what? What are the benefits? Some individual dental benefits -- I do believe in dental hygeine, I'm not a caveman. But societal benefits that would support the costs? Unlike communicable diseases, a kindergartener who has never been to the dentist isn't going to create a cavity epidemic in Champaign-Urbana. What's next? The dermatologist lobby is going to get the legislature to approve mandatory dermatological exams to enter middle school?
OK, I'm just seeing if anyone else has some problems with this survey: As highlighted in Inside Higher Ed, a recent survey shows that out of 9.464 adults polled, 58% of those adults agreed that political bias on campus is a "somewhat serious" or "very serious" problem. In addition 65.3% agreed with the statement that "a professor who does not have tenure is more motivated to do a good job that one who does have tenure."
My problem with this survey is that it asks people who may have zero knowledge of the subject matter of the question to opine. What percentage of these respondents went to college at all? Graduated? Went to college in the last ten years? Have family members who have gone to college in the past ten years? I'm not sure that I care how my grandma, who might answer a telephone survey, answers a question about whether she thinks unknown college professors at unknown colleges are politically biased. And, according to the article, only 55% of adults have even heard of tenure, so they must be experts on incentives and disincentives created by tenure.
I understand that to the extent that taxpayer money is spent on public higher education we might care what non-college attending persons and non-college tuition paying persons think about higher education. We might ask whether respondents think that professors whould be allowed to speak about political opinions, but not factual questions about whether they do or whether it creates problems. I pay taxes, and I suppose those taxes fund our military efforts, but I can't imagine answering a poll about officer candidate school:
Q: "Would you agree or disagree with the statement that drill sergeants at officer candidate schools are unnecessarily harsh on new recruits?"
A: "Well, based on my review of Louis Gossett, Jr.'s portrayal of a drill sergeant in An Officer and a Gentleman, I would have to disagree with that statement."
[Warning, Santa spoilers to come.]
Our family is at the end of an era, or at least the beginning of the end. Our older child, a third-grader, confessed to me that she knows there is no Santa Claus. She seemed fine with the truth, and I was happy to be done with the charade. Personally, I hate Santa Claus. Correction: I'm fine with Santa Claus the character, just like I'm fine with Superman, Scooby-Doo, and maybe SpongeBob SquarePants. What I hate is the legal fiction of "believing in Santa Claus." I would be happy to have a mascot for Christmas, one who embodies everything that's good, wholesome and selfless about Christmas, but why should we all pretend that this mascot is real?
I'm a religious person, and I believe a lot of things one can only classify as "supernatural" or "beyond scientific fact." Because I do have religious beliefs, I like to police the boundary of things that I tell others I "believe." I hope to instill my true beliefs in my children, but I think that goal is subverted when before my child is eight years old, she finds out that I lied to her about Santa, the tooth fairy, etc. We have tried to keep the imaginary creature belief systems out of our house (Easter Bunny, St. Nick, whatever that is). I would prefer to tell her that I believe in the power of the resurrection, but I don't believe that a bunny in a plaid vest leaves us plastic eggs and candy. I believe in latter-day miracles, but I don't believe that an ageless chubby man can alter the laws of physics by delivering presents to every child in the world in one evening. I believe that God hears us when we pray, but I don't believe that the man on the other end of the 1-800 number. . . .well, you get the picture.
What I hate especially about this Santa religion is that in the movies, if you don't believe in Santa, you're either evil or misguided. You're a robotic, cynical, frigid single mom who works at Macy's or maybe the really evil neighbor next door who hates kids. No one is ever depicted as loving, selfless, idealistic and altruistic who does not believe in Santa. What I want to see is the made-for-TV movie about the third-grader who realizes that there is no Santa but finally realizes the true meaning of Christmas and is a better person for it. I realize the merchandising tie-ins will be small, but just maybe. . . .
In today's W$J, a story on Bush's plan to increase the tax benefits associated with health savings accounts (HSAs). If you're like me, you might say, ok, what the heck is that HSA again--is that the one where you can set aside as much as you want in pre-tax earnings, but if you don't use it for health care costs you lose it at the end of the year? Oops, no, that's not an HSA, that's an FSA-a flexible spending account. That one's been around for about 40 years, but even so only a small percentage of people eligible to use them actually do so.
Then there's the MSA (medical savings account), the HCRA (health care reimbursement account), the DCA (dependent care account--also one of those subject-to-forfeiture plans) and don't even get me started on the variations of IRAs (individual retirement accounts) and that new-fangled college savings account, the 529. What bugs me about all of these is the time one must invest to figure out (1) if one is eligible for one or more of these accounts (2) what the limitations are and (3) what the penalties are if one messes something up. The case for rational ignorance seems pretty strong here.
I mean really, a corporate tax break is a corporate tax break, but when it comes to providing tax breaks as incentives for particular behaviors in individuals, it's almost as if Congress went out of its way to make it as difficult and confusing as possible, so that they could get accolades for granting tax breaks but not actually have anybody benefit from them (gee, this sounds a lot like another famous tax acronym...the AMT (alternative minimum tax)).
Why have so many different types of "accounts" and "plans" with different requirements, caps, floors, penalties? And FORFEITURE?! Name one corporate tax break that requires a set-aside in advance based on an estimated outlay that, if not made, results in forefeiture of the set-aside. That one really makes me mad, and I suspect it is the reason lots of people don't use those FSAs even though arguably the tax break could more than compensate for the forefeiture in many instances. But it's the principle of the thing!
Incidentally, the HSA, created only a few years ago, like the FSA and the MSA, is an account in which you set aside some of your pre-tax earnings to use for meeting medical expenses. Here's an article that explains some of these different accounts--now don't all go out and rush to read it, we don't want to crash their server or anything. Unlike the FSA but like the MSA, with an HSA you don't forefeit the unused portion after a year-you can roll it over and use it forever, even into retirement. You only get to do this if you have a high-deductible health-insurance policy that meets certain criteria. Got one of those? I have no idea. And that really annoys me.
Sunday, the NYT ran a piece on the lifestyle of the suburban and not-so-famous in Frisco, Texas, described as an "exurb" of Dallas. (Who invented this word?) When reading the piece, I got this "How Can People Live Like That?" feeling. To believe the NYT, Frisco has exploded in the past few years to become a sprawling center of suburban angst where Dads spend hours on the freeway to get to downtown Dallas and never get to see their kids. There's more than one high school now (gasp!) and traffic (gasp! gasp!) My cousin lives in Frisco, and we have two sisters in Plano (a plain ol' "suburb"), so I was surprised to read that Frisco had gone to heck in a handbasket like that. Well, today I visited ground zero of the urbania known as Frisco, Frisco Mall. Frisco is just the same as it ever was and just the same as almost every other Texas suburb I know. Gasp! I think the take-away lesson is that Frisco is nothing like NYC, and can you believe that people live like that??
Vic has posted some interesting comments (here and here) on hedge funds. Since (a) investments in hedge funds have grown exponentially, (b) the SEC recently enacted new rules for this investment vehicle, and (c) there is a paucity of scholarly literature (at least by legal academics), hedge funds represent a terrific opportunity for young scholars looking for a research niche.
Vic raises the question, “What if the defining characteristic of hedge funds is the compensation scheme, not the underlying portfolio? What are the normative implications?”
According to a detailed SEC Staff Report (Sept 2003), most hedge funds have two financing components: (1) a 1 to 2 percent asset-based investment management fee (similar to mutual funds), and (2) an incentive allocation, which tend to be “20 percent” of “the hedge fund’s net investment income, realized capital gains and unrealized capital appreciation.” Re #2, “high water marks” and “hurdle rates” are contractual terms that reduce the likelihood that a hedge fund manager will profit from poor performance. The SEC Report suggests (and James Cramer’s entertaining book, Confessions of a Street Addict, corroborates) that the “20 percent / high-water mark” are fairly standard. So I think that Vic is correct that compensation scheme is “a” (or “the”) defining characteristic of hedge funds.
Regarding the normative implications of that observation, I will take off my academic hat and speak only as a concerned citizen.
Just like there are good and bad lawyers or doctors, there are good and bad money managers. It is now obvious that the best money managers are running hedge funds. Last month, the N.Y. Times reported that the top money managers for Harvard University quit because their annual compensation would be capped at $20 to $25 million—far below what professionals with similar performance records would earn if they were managing hedge funds (their current jobs). There are countless other stories documenting the migration of the “best and brightest” to hedge funds.
That said, absence a Long Term Capital Management problem, the compensation schemes of hedge funds is an issue that only affects rich people. (SEC rules like Reg D generally prohibit low-net worth people from investing in hedge funds; and regardless, most successful hedge funds require very high minimum investments.) Most of us are stuck in the lackluster world of 401K’s and mutual funds.
I’ll never forget the SEC roundtable discussion in
which David Swensen, Chief Investment Officer of Yale University
[W]e've got thousands and thousands of mutual funds. On average, the experience of individual investors is quite poor there. They would be far better off with an index fund than with the high cost active management that they've got in the mutual fund world. Of the thousands of mutual funds, there are probably several dozen that are worthy of investment.
Okay, Dave, just tell me the top dozen—or better yet, manage my money.
To my mind, the academic debate on the Efficient Capital Market Hypothesis was settled when I saw the gleaming marble floors of Citadel Investment Group, one of the nation’s leading hedge fund managers (note that I was not permitted past the lobby because of airtight security). The longstanding success of hedge funds like Citadel—and there are many others—is clear evidence that supra-normal returns are possible over the long term. Of course, fund managers have zero interest in sharing their trading strategies in order to settle academic debates.
So what is my normative bottom-line?
I worry that the retirement of most Americans depends upon “B” quality money managers at mutual funds. At least with defined benefit pension plans, managers have—in theory, anyway—sufficient resources and negotiating leverage to tap into truly talented investment advisors. Unfortunately, many of these plans are being shed in bankruptcy proceedings (e.g., airlines, steel industry). With the ascendancy of 401K plans and talk of privatizing social security—so more of the Wall Street “B” crowd can collect management fees—I fear we are headed for an economic and political train wreck.
As I was driving to pick up my sons from their half-day basketball camp I heard an item on NPR on scented bowling balls, developed by a Utah business called Storm Bowling. As I was about to go into a Gym full of young and older boys who had been playing basketball all morning I thought for a moment that perhaps scented basketballs might be a good idea. But then again this story is an example of why I am sceptical about how markets allocate resources. Who needs scented bowling balls? Or scented crayons, markers and play-doh? Even scented basketballs?