Driverless Cars: Part Deux

Recently the Nevada Department of Motor Vehicles to adopt autonomous cars. Wait if we have driverless cars do we really need the DMV? One can only dream. Even as free market as I am, I still think you need rules in the early stages of driverless cars. Google has test driven some of these cars already and before long these cars will only get more experience. One thing people forget is that the longer technology has been out there it will only get better through innovation and by trial and error. The first cars will of course not be perfect. I don’t doubt people might get hurt or could possibly die in the first edition of these kinds of cars. The question will be however will driverless cars be safer than an ordinary human driver? I think the answer is: In time yes driverless cars will be safer than human drivers. Humans are incredibly smart creatures and even robots can’t capture all of our intelligence. However, robots are very good at repeated tasks and doing things much more precisely than humans.

My theory is that driverless cars will not happen over-night, but however be a gradual process. The first stage might be to have the driverless cars with some human assistance. Gradually though the amount of human intervention needed would decrease as cars become smarter and safer. These driverless cars could serve as taxi-cabs if they were truly driverless. Another application might be to have the cars do errands for people. One example could be the car could drive itself to the grocery store and pick up items. The car could park in some type of lane and a clerk from the store could load the food into the car. This sounds like a neat idea but even I know its decades away.

The legislation in Nevada about driverless cars is a step in the right direction. In a earlier blog I went into more detail about the possible benefits from driverless cars and still feel as if they would benefit society immensely.

Economic Freedom & Prosperity

Diabetes "Cure"

A recent study showed that people that only consumed 600 calories for 8 weeks may reverse diabetes. So 11 people were in the study (not very large, usually need at least 30 for a good sample size) and for 8 weeks drank a liquid diet of vegetables. Although, this doesn’t sound pleasant I am sure more people would be interested if this method could reverse diabetes. What is really interesting however is that 3 months after going off the 600 calorie diet 7 of the 11 were free of diabetes (remember they were only on the diet for 2 months). The average weight loss was 33 pounds. Considering the average weight of the patients was 220 pounds this is still a substantial amount of weight loss. What is also interesting is that the fat in the patients’ pancreases decreased in the time of the study. Before the study there was about 8% fat in the pancreas. After the study the level of fat was 6%. Apparently fat is stored in the liver and pancreas when we consume more calories than we burn.

Considering 25 million people have Type 2 diabetes this is interesting news. I doubt whether many people could go through 8 weeks of only consuming 600 calories per day. It would be interesting to see a follow up study where patients would consume either: 600, 700, or 800 calories and then see what affect that would have on the body. Also the real question is how long someone would have to be on this diet to actually reverse diabetes. The body has a system for homeostasis (calibrating things back to normal). Also if the fat is stored in the pancreas and liver what would happen if fat could somehow be removed from these areas? I didn’t even mention throwing in Type II diabetes drugs which could even help the outcome. I am sure more studies will be done in the future and have a feeling there will be no miracle pill for obesity, diabetes, or any other serious illness.

More importantly I think people think of obesity as a bigger problem than it actually is. Some people argue that it is in our genes that cause us to be obese. I wouldn’t deny this, however if genes were the cause how did so many people become obese even when their parents weren’t obese? Food has become more plentiful, cheaper, and easier to access. People also are working fewer jobs that require physical labor. It would be interesting to see a chart of rates of obesity and the percent of people with manufacturing jobs. Also people don’t assume there is any benefit to being obese. If people want to live fewer years of live but consume really tasty food who are we to deny them? People claim that life expectancy will decrease with the current generation. I don’t find this too compelling when drug companies keep innovating and we are just beginning the journey with figuring out the human genome. We will only know more about the human body and food in the years to come not less. The question is whether people do anything with this information.

Market Based Management

Since I have been interested in the Koch family and Koch Industries I recently finished “Market Based Management” by Charles Koch. I was somewhat disappointed to learn that his is really the only book published by any Koch. I would love for Charles Koch and his brother to come out with autobiographies since they are both getting up in age. Also another reason to write an autobiography is not to allow historians to revise history. The first chapter was a mini biography about Koch Industries and Charles but nothing like a true autobiography Market Based Management MBM uses the principles of different fields in order to run a business or organization in a more effective way. The book points out that some of it is common sense and it is but if so many people don’t use common sense isn’t it really uncommon knowledge. Anyone familiar with economics and business would be very familiar with the terms in the book. The book talks about vision, knowledge processes, decision rights, and incentives. People would think that a company like Koch Industries is a command and control organization where Charles Koch delivers orders to his employees. This is the furthest thing from the truth. Employees are given power to look for ways to improve things. Most companies don’t really encourage this because they have bureaucratic layers of only allowing certain people to do certain work. Employees at Koch are rewarded for improving things or creating value. Charles Koch is the first to admit that Koch Industries has had some failures in their business. In the back of the book is a list of business that Koch no longer operates.

MBM seems to be more capitalist oriented than traditional management systems. Having employees understand the big picture along with how they can create value is important. Some employees just see themselves as doing tasks, but don’t really understand how they are impacting the company, shareholders, and the reputation of the company.

Koch is a private company. This means they don’t have to disclose quarterly or annual earnings. One positive to this is that that Koch doesn’t have to comply with burdensome requirements in terms of compliance or requirements that public companies have to comply with. I am somewhat surprised other companies in the investment have not gone from public to private due to the burdensome regulations and rules involved. The only negative downside is that if the company was public individual investors could invest money in the company which would give Koch capital to purchase equipment, invest in new projects, or improve existing plants. Charles Koch has one son named Chase Koch who I have a feeling might take over once Charles passes. The company started with Fred Koch and so far has stayed in the family. It will be interesting to see what happens in the coming years with the company and whether they stick to market based management.

Bravo Dr. Russ Roberts

Great op-ed in WSJ today...

http://online.wsj.com/article/SB10001424052702304070104576399704275939640.html?mod=ITP_opinion_0

Rich Nonsense

In a Gallup poll when asked if America had the “right” number of millionaires. In this poll, 31% of people stated that we have too many millionaires. While 42% of people said that we had just the right amount millionaires. What I find shocking is that people act as if there is a predestined number of millionaires. Wealth is not predestined. If people want to be rich they have to work hard and make something that other people find appealing. What is really maddening is that 31% of people believe that we have too many people with money. Millionaires did not take anything away from anyone. If anything these millionaires made the lives of many people better. The popular belief is that millionaires somehow became successful at the expense of others. Clearly, this is not true. People voluntary are getting out of chairs, drive to a store, select an item, and telling the company that made that product “Look I need your product more than I need x amount of dollars”. This process is an exchange and not coercion of any kind. People get wealthy figuring out what products and services people want. Going back to the study I really believe that this 31% is just envious or jealous of people that make more than they do. We all try to compare ourselves to other people on many different things, but what is not taken into account are the inputs the wealth have to sacrifice. In a way it’s like a song that went “I will do anything but I won’t do that”. The people that become wealth go the extra mile and make sacrifices in order to make sure other people are satisfied. Corporate executives and CEOs often get to work very early (6 A.M.) and stay late into the night. The people making extraordinary amounts of money are not on their behinds watching TV all day. No, these people are making deals, flying around the country, calling people, and creating wealth.

Not only the wealthy creating jobs and increasing the standard of living for everyone but they are also spending a lot of money as well! According to Moody’s Analytics, the top earning 5% of Americans make up 36% of consumer outlays. Note this is income and not net worth which shouldn’t be confused. People can have high incomes but low net worth. So the top 5% makes around $342,000 yet has only a 1.4% savings rate while the rest of the country has a savings rate of close to 8%. Many of the people we believe to be rich really aren’t. People often try to “signal” that they are rich. I would imagine doctors and lawyers have high incomes yet maybe not a high net worth.

To say we have too few or too many millionaires is rich nonsense. In a voluntary market these millionaires can only improve our lives by thinking of better ways to improve their product or service. I don’t see anything wrong with people making money for making our lives easier or more enjoyable. Money isn’t simply distributed by some money man. Income is earned. As Thomas Sowell would say newspapers and not income is distributed. In a sense, we get these great things like computers, televisions, and other products and we really don’t have to do anything to develop them. All we have to do is earn enough to buy them (if we can afford them).

A La Carte Cable?

Something I have been thinking about lately is cable companies and pricing. Cable companies charge people a fee per month to access channels. One problem however is there are so many stations that people don’t even use but they still pay for them. I think of the analogy of going to McDonalds and ordering breakfast and paying for everything on the breakfast menu even though you know there is no possible way to consume everything. In modern times according to Nielsen in the last three months of 2008 people were watching 151 hours of television per month (all time high). This number is somewhat misleading considering Nielson uses video watched online, from cell phones, and traditional televisions.

One underlying theme I think of is we are only able to watch all this TV because we have such a high standard of living. Let’s assume for the moment people in the early 1900’s had televisions. Even if the people from this time period had televisions they wouldn’t have much time to watch them since they would have to be up at 4 a.m. to work on the farm and would be working until the sunset leaving very little time for entertainment.

Technology like DVR’s allow people to watch television and program a machine to record something on a different station. This process allows people to do other things like read, cook, or other tasks so people don’t have to wait around until their program comes on. As mentioned in a previous blog I don’t understand why the major networks don’t open their content vaults and allowing consumers to purchase content from even 5 years ago that only aired once. This would be not only exciting for consumers but add revenue to network corporations.

A la carte cable pricing I believe would only help consumers. Certain networks obviously would not want this arrangement since they make their money from how many subscribers the cable company gets and not by how many people watch their program. Market systems don’t work like this. If a network can’t provide worthwhile content they should be out of business. Consumer groups in the 1990’s complained about television programs not being rated like movies which lead to a ratings system of the content which was ridiculous considering parents should be in charge of what their kids watch and not the government. An a la carte system would solve this problem since parents would only pick stations they felt were suitable for their children instead of getting a bundle of stations they may not want their kids to watch. Although, companies came up with clever technology to have parental locks based of a programs “rating” system. I would be interested to see how many stations the general public watches. What is really bizarre is that the Federal Communications Commission (FCC) actually agrees there should be a la carte pricing but claims cable bills could range from a 13% drop to a 4% increase.

To me I believe people like many options even if they have to pay a little extra for it. This draws on work from the behavioral finance area of people choosing to pay for phone plans that allow unlimited calling rather than charging for each call. Maybe people don’t want to feel tethered to something. Time will tell whether or not we will have a la carte pricing for cable. Perhaps people sometimes believe even though they don’t watch 80%-90% of the stations they get that maybe sometime in the near future a program they will be on station that they never watch. The odds of happening are very unlikely, but people like to be prepared for anything.

Sam Walton: An American Dream

I just finished reading Sam Walton’s biography called “Made in America”. The book is an example how Sam Walton transformed the retail industry. One thing I didn’t realize until I read the book was Sam Walton was in a sense hypercompetitive. In the early years Sam tended to talk people within the industry like James Cash Penney (created J.C. Penney's) to figure out what the most efficient and cheapest way of doing things.

People forget that Sam Walton himself started out as a small business owner. Walton started his career at JC Penny at then opened Ben Franklin Stores in the early 1950’s. In those early days Walton had to borrow money in order to run his stores. The book mentions how scared Walton was of borrowing and worry about debt. One of my favorite parts of the book was when Walton went to Prudential to try to get a loan. Walton showed Prudential his estimates for sales, profits, and number of stores however Prudential said they didn’t know if they could afford to take a gamble of someone like Sam Walton. Perhaps this is one of the worst ex-post (after the fact) mistakes made in business history.

One theme throughout the book was the role of technology that really helped Wal-Mart. Sam Walton realized early on had a hunch technology was important for retailers. Back in the 1980’s Wal-Mart was using satellite links in order to relay information about each individual store to the main headquarters. Although, now this is fairly common now back in those days it was somewhat revolutionary.

In part of the book Walton defends Wal-Mart in explaining correctly how consumers put mom and pop stores out of business. People often forget that Wal-Mart had to start as a mom and pop business. Consumers vote with their wallets. People shop at Wal-Mart because of high quality, low prices, and perhaps a little workout trying to find what they are looking for. Walton was always obsessed about making the customer happy and making sure he was running a great company. Wal-Mart doesn’t only save people billions of dollars a year but also hires a considerable number of people. Wal-Mart currently has 1.2 million employees. Most Fortune 500 companies don’t even have 100,000 employees.

Something else I didn’t realize until I read the book was profit sharing even with “associates” or hourly workers. The profit-sharing plan started in 1971 and the only requirements were working for Wal-Mart for 1 year and worked at least 1,000 hours per year. The amount of profit sharing was related to profit growth and employees could take the profit sharing either in cash or Wal-Mart stock. One of my favorite parts of the book was the stories of regular hourly employees who did fairly well under the profit-sharing plan. For instance truck driver Bob Clark went to work for Wal-Mart in 1972 and by the early 1990’s had over $700,000 in profit sharing. Georgia Sanders who worked as an on an associate not even a manager started out at the minimum wage worked from 1968-1989 and took $200,000 in profit sharing when she left. To me profit sharing gives the employees and management the right incentives. I found out in 2010 Wal-Mart ended the profit sharing and instead matching dollars in employees 401(k) plans. In 2008, Wal-Mart contributed $724.4 million in profit sharing and 401(k) contributions. In 2009, however the company gave employees a $2 billion stimulus since the company had record sales. Every employee got an average bonus of $2,000.

I find it somewhat interesting that people complain about how Wal-Mart is somehow this evil corporation that simply sells cheap things that people don’t need to buy. I would rather have millions of people making their own decisions then people having millions of opinions of how other people should spend their own money. To me Sam Walton represents what people can accomplish if they work hard and have a passion for something. Wal-Mart has helped put more money and hire more people than any government program could have ever done.

Koch Brothers: True American Heros

On Bloomberg last night they had a documentary called Game Changers about the Koch brothers. The documentary had somewhat of a slant to it and mostly only showed the negative side of the Koch brothers (donating, Koch Industries pollution fines, their wealth) and only at the end discussed David Koch’s generous charitable donations.

As I mentioned in a previous blog post the Koch brothers tried to endow a professor at Florida State University for the economics department. I really don’t understand why so many people are offended by this. I wouldn’t say that if George Soros donated money either. If people earn the money they have the right to whatever they want with it. For other people to decide how not even spend their own money is silly. People forget that the Koch brothers are libertarians. This is the best of both worlds because you are fiscally conservative yet socially liberal. The Koch brothers should tell liberals “We are more like you than you think on some issues”.

The documentary brought up about Koch’s safety record and how they had to pay fines. People don’t seem to realize how burdensome EPA regulation is. Sometimes even if companies want to fully comply with the 66,000 pages of regulation written every year they simply can’t. I look at some of the fines Koch Industries paid and most were very minor. Also an important question to ask is “Did Koch Industries really want to pay these fines”? Koch could have used the money they paid out in fines for all sorts of capital projects that would increase shareholder value. I think many people think business want to cheat and cut corners when this is really not the case because businesses reputation means a lot to customers. To this day I still have a negative image of Jack in the Box because of an e-coli incident in 1993.

The Koch brothers have amassed an enormous sum of wealth. Their combined net worth as of 2010 was around $45 billion. Clearly, they have been increasing consumer surplus and not taking it away. One thing I didn’t realize was that the brothers own 84% of Koch industries which gives them a large incentive to make sure things are run properly especially when their net worth is on the line. Koch employs about 70,000 people as of 2009. I wonder how many bills are paid and how much wealth is created because of these two men.

David Koch in particular has been very generous with his money even though he was a playboy back in the day. The man survived prostate cancer has given hundreds of millions of dollars away to charity. For instance he gave $100 million to MIT, $100 million to the New York State Theater, $30 million to Memorial Sloan –Kettering, $25 million to M.D. Anderson, $20 million to John Hopkins School of Medicine and many more. The charitable trusts that the Koch brothers have set up also have supported many programs on PBS.

My takeaway point would be instead of people in the media vilifying the Koch brothers they should also look at the positive things they do. Creating wealth, creating jobs (something politicians never do), creating prosperity, and donating to charitable causes all are positive things. Koch Industries recently bought Georgia Pacific which makes toilet paper used in nearly every public restroom. So it looks like billionaires are doing the dirty work of cleaning up your mess.

U2: Still Haven't Found The Tax Rate Their Looking For

I love how Bono is suppose to be this musician who is charitable and all for anti-poverty. I saw a story of how people in Glastonbury were going to protest when U2 came because Bono has been avoiding taxes.

U2 in 2006 moved part of their business to the Netherlands since they had a lower tax rate. The country that they moved from (Ireland claimed they would pay tax on earnings over 250,000 euros (as opposed to zero before). Even the guitar player for U2 “Edge” says that the band is trying to be as tax efficient as possible. The band earned $108.6 million in 2009. Like I mentioned in a previous post that you have to be careful of tours and gross receipts since they tend to leave out costs (touring equipment, entourage, private jets, etc).

I have heard U2’s Zoo TV was expensive. This was in the early 1990’s (1992-1993). The cost for producing the tour was $125,000 per day which would be around $200,000 in current dollars. To give you an idea of the cost of running a tour during the tour 180 people were required, 12 buses, and a private jet were used. An expensive million dollar stage was made and it had to be transported all over the United States.

The profit margin of the Zoo TV tour was around 4.5% even at though nearly all the shows were sold out. The tour almost bankrupted the band which led the group in their next tour to look for outside sources of financing. Their PopMart (tour after Zoo TV) had revenues of $80 million but cost more than $100 million to make. I guess my point is I am a little confused if artists spend all this time on the road promoting their music yet financially there is no value. In the business world this would be a loss leader and I guess you could make the argument that they go on tour to sell albums which produce money.

How to Fix Healthcare

Lately, I have been thinking a lot about health insurance and health care and thinking about why the costs have risen so much over the past few decades. Something that stands out is the fact that in a market economy we rarely see constant increases in prices while service stays the same or decreases. Also things that have more government interference seem to not to have “real” low prices. By real low prices as in the true not subsidized cost. For instance, computers over the past 20 years have got cheaper and much more powerful yet there is almost no regulation as to the size of computers, the processing power, the price, etc. If healthcare was truly market place prices would fall over time and quality would increase.

One problem is that we have third parties (either insurance companies or government agencies) paying the costs. Individuals have little to no incentive to care about prices when someone else is picking up the tab. If I go out with someone to a restaurant and they let me know they are picking up the tab I might decide to order differently than if I had to pick up the tab. People often complain about the high costs of medical treatment or care yet they don’t have the vaguest idea of why prices are high. Doctors for instance are regulated by the AMA (American Medical Association) and it illegal to practice as a doctor unless you are licensed by the state. I really don’t understand this considering many nurses or other health professionals could take care of minor illnesses people have and one could possibly make the argument that doctors might be overqualified sometimes to treat patients. Letting more people practice medicine wouldn’t be a bad idea. Also given how much information there is online people sometimes research to see what they have even before they go to their doctor. Individuals have a much larger incentive to care about their own health/life than anyone else. Doctor’s I hear sometimes use the internet while people are changing to figure out what the diagnosis is. I wrote in an earlier blog about the time wasted on just filling prescriptions. Although, I don’t ever see the FDA being abolished I would be perfectly okay with more prescribed drugs transitioning to over the counter. For instance, I really don’t understand why someone would argue against not putting some relatively harmless drugs in Walgreens or CVS. People then say “Well we can’t trust people with drugs!”.This assumes people don’t already abuse over the counter drugs which they do. Aspirin is commonly used yet taking one too many can lead someone to serious medical problems yet it’s over the counter. Allowing prescriptions to transition from behind the counter to over the counter is a no brainer since patients today are more informed than ever before and it would free up useless “prescription visits” when doctors could be using their time in productive ways and potentially be saving more lives.

It is also pointless to have laws that bar individuals to buy medical insurance across state lines. The insurance industry is so highly regulated the few new companies can enter the market due to barriers of entry. In the technology world companies new companies are popping up all the time. Although, not all these companies will be successes the idea is to let consumers vote with their dollars.

I love when how people talk about how everyone deserves healthcare as if it is a right. With the ObamaCare mandate decision due to come out this fall in the Supreme Court we will see if the government can in fact require people to purchase something. Even if we were to magically waive a wand and grant everyone healthcare it doesn’t mean that health outcomes improve. I could have healthcare but still not work out, eat the wrong foods, and not get enough sleep. How does merely having healthcare improve outcome?

The medical insurance market really isn’t a market. Medical insurance covers everything (even just visiting a doctor). An analogy for car insurance would be only making a co pay when you have your oil change. The idea of insurance is to pay for catastrophic things and not cover every single item. Car insurance does not protect consumers against buying the wrong color car or gas prices.

Most Useless College Majors

10 Most Useless College Majors (from Daily Beast)

Journalism
Horticulture
Agriculture
Advertising
Fashion Design
Child and Family Studies
Music
Mechanical Engineering Technology
Chemistry
Nutrition

No surprise that the most useless majors are also some of the easiest. The only one I don’t quite understand is chemistry since isn’t that easy. I also wonder where these majors all have similar political viewpoints. I don’t see finance, accounting, economics, engineering, or any other serious subject on here. Don’t get me wrong even within business majors there within business that are a joke (marketing) and I hear civil engineering is the easier of the engineering.

These degrees create very little value and should signal to students that not only would they be wasting four years of their lives majoring in these subjects but even really wouldn’t be able to get a job. Schools in general should focus on teaching job skills that are worthwhile to employers and not worry about having fancy gyms or hotel like dorm rooms. True all of these things look nice but do they increase academic excellence?

The Rich and Reckless

I am always interested in even how people in the very high income brackets can have low or negative wealth. The victim this time is Lady Gaga. Known for her craziness and extreme outfits Lady Gaga is anything but normal. Despite having 5 #1 hit songs and selling over 15 million records and 51 million singles Lady Gaga is still $3 million in debt. According to Forbes, “World’s Most Powerful Celebrities” Lady Gaga earned $90 million in 2010. Note some people don’t make this in an entire lifetime yet alone a year. I would be interested in seeing where all this money went for someone who has been broke four times. I looked up the Monster Ball Tour and found that 1,454,824 tickets were sold (99% attendance rate) with over $227.4 million in revenue. I imagine the rest of the revenue was from merchandise and other related items. The tour consisted of 200 shows.

One problem and something journalist forget to mention is that revenue – costs = profit. Even though the show brought in $200 million in revenue if the cost is even $201 million then that would still be a loss. Lady Gaga’s financial and tour managers probably want don’t agree with what is going on. It is ironic because Lady Gaga would actually be better off not going on tour since she seems to become broke when she does them. Either that or she needs to cut the costs of costumes, expensive equipment, cut labor costs (dancers and backup singers). Even one of the most successful bands of all time U2 in their 360 tour spent $750,000 per day since they had private jets, a production crew of 137, and hired an additional 120 people. Although, U2 is doing 110 shows they are said not to break even until towards the end of the show despite grossing $558 million in tour sales.

My main point in all of this is just because you earn an incredible income doesn’t mean you will be rich. At the end of the day if your costs are more than what you are selling your good or services for then by definition you are not creating value. I wish more people in the music/Hollywood world would understand this concept.