Thomas Sowell: A Closer Look At Discrimination from Firing Line

Charles Koch: William E. Simon Prize Acceptance Speech Video

Charles Koch is a true american hero...I am suprised MSNBC or the New York Times have not a hold of this video yet...

Mitt Romney: How Private Equity Works

Recently in the news Mitt Romney has been criticized for his tenure at Bain Capital. The common thing you hear is that Romney amassed great wealth by taking companies leveraging them with debt and selling them reaping millions in profits. People should understand how a company like Bain Capital works before making such statements.

Companies like Bain Capital are known as private equity firms. Usually, a company like Bain will look at companies that are under-valued, in trouble, or help companies go from being private to public traded. Identifying under-valued companies and improving them creates shareholder wealth. Texas governor Rick Perry claimed Mitt Romney was a “vulture capitalist”. I would regard vulture capitalist as a compliment personally. In essence, Warren Buffett is a vulture capitalist when he invested in companies he believes a company is undervalued. Private equities companies don’t get paid unless they meet certain benchmarks. Also private equity firms have their own money on the line so they can’t be too foolish with it. The idea of private equity companies is to come and improve the company. Sometimes, this means firing workers. Firing people is not a bad thing considering some of those people probably shouldn’t have even been hired in the first place. Critics of Romney talk about the job layoffs however don’t talk about the success stories like Dominos Pizza, Staples, and Sports Authority. Yes, Mitt Romney had to fire people but I would argue this is a good trait for the future President to have given the large size of government. Businesses can fire people in the short term. However, no company is successful in the long term by continuing to fire people. New employees increase productivity and profits which make the company more valuable.

Critics argue that companies still went bankrupt since Romney “likes to fire people”. There is no guarantee that when a private equity company helps out a troubled company there will be success. In fact, more often than not there are more failures given the fact that private equity companies take on companies with the most problems. It would like looking at two different doctors with different patients. If one doctor always takes on the sickest and most ill patients we would expect the mortality rate to be higher. However, if the other doctor took on average healthy patients the mortality rate should be comparatively lower. Bain did take on companies with major problems however they did create value. From 1984-1994 Bain was involved in 77 deals. During this time Bain made $2.5 billion while only investing $1.1 billion. So Bain was making an annual compounded annual growth rate of 8.55% per year.

In the process, Mitt Romney also made money for himself. Romney himself is estimated to be worth over $200 million. This is impressive given he spent $54 million to run to eventually become governor of Massachusetts. According to an article entitled “Two Mitt Romneys: Wealth Man, Thrifty Habits” Romney for most of his life has lived like a middle class American. He likes flying JetBlue, while at Bain Capital ate brown bag lunches at his desk, and couldn’t justify spending money on a private jet. Also Romney was required to do chores even on Saturdays. In high school he didn’t even have a car even though his father was an executive at American Motors.
Many people want to criticize Mitt Romney and his ties to Bain Capital. However, when you look closer at what he actually did the record it would show that Romney and Bain Capital in the long run created jobs, wealth, and progress. As economist Dr. Walter E. Williams would say “the rich didn’t get rich by being stupid”.

Hostess Bankruptcy: Was CEO a Ding Dong?

2012 seems to have started out with many bankruptcies. First, we had Kodak and now Hostess Brands is filing Chapter 11 for the second time. Hostess Brands is responsible for making Wonder Bread, Twinkies, Ding Dongs and other assorted goodies. It seems surprising that a snack company is going out of business given the rising obesity problem America faces. However, in business if your costs are more than your revenues you are out of business. Hostess filed for bankruptcy in 2009 and still owes $860 million to creditors. In their most recent fiscal year the company lost $340 million despite selling $2.5 billion worth of goodies. Rising input costs like sugar and flour have also been blamed for the bankruptcy. Of course government quotas artificially sweeten the price of sugar for a handful of American farmers.

One of the major problems with Hostess seems to be the number of union contracts that they have. Around 80% of all Hostess employees are unionized which would inevitably bring problems if a company wants to restructure anything. The company has 372 separate union labor contracts. Most companies don’t have a union. Employees come and go as they please. I never understood the argument of unions. Essentially, unions are created to protect the unproductive. Why do employees need an organization to negotiate for them? If employees had marketable skills and were good at their job the employee would have the bargaining power not the employer. In union jobs only certain people are allowed to perform certain tasks. For instance, for instance union contracts at GM in the old days only allowed certain employees to change light bulbs. Anyone with a brain will realize how unproductive this is. In the case of Hostess Brands only certain trucks had to deliver bread and cake products. The labor contracts also present another problem of numerous pension obligations. Since there are so many union contracts there are also many different pension plans. Hostess has 40 pension plans they have to work with. Managing pension funds is expensive and has burdensome paperwork. Considering most companies just have one (their own) pension plan it would make sense to consolidate this.

Whether or not Hostess Brands emerges from bankruptcy is a question only time will answer. The company brands however might not disappear. Various companies could come in and look at buying individual brands that the company owns and try to integrate them into their snack portfolio mix. This of course would happen if Hostess was unable to restructure their obligations and debts in bankruptcy court. So the question remains was whoever running Hostess a ding dong?

Apple Steve Cook Highest Executive in 2011?

Apparently, Tim Cook could be the highest paid person in 2011. The Associated Press is reporting that Tim Cook could stand to receive $378 million in compensation. It should be pointed out that $376 million of this is in the form of restricted stock. Companies give employees restricted stock in order to reward long term productivity from employees. The shares usually can’t be sold for a number of years. The earliest Mr. Cook can sell these shares is August 2016. Not only does he have to wait five years to sell these shares but he can only sell half of the shares receives at that time. He will be able to sell the other half in August 2021. In essence, the idea of restricted stock is to incentivize employees (usually executives) into creating shareholder wealth. If employees are highly productive and make decisions that create wealth for the company it will usually be reflected in the share price. I say usually only because in the short term the market can gyrate for various reasons but the long run is a good measure of a company’s true value. Profits are created by fixing problems.

People complained that executives were getting paid too much of a salary so then corporations began giving executives (and regular employees) options. Even to this day people complain when executives receive large amounts of compensation because of stock options. If you look at Tim Cook 99.4% of his compensation will be based on how well Apple stock does. True his options today are worth $376 million however if Apple takes an iTumble in the market Cook could stand to lose lots of money depending on the stock price in 2016. In 2016, when Cook has the right to buy the stock he will pay ordinary income of that money. Assuming he is in the highest tax bracket, tax laws don’t change, and Apple stock is around $500 per share cook would pay around $78 million in taxes when he has the right to exercise (buy the stock). Not only will Cook pay ordinary income but also pays capital gains when he ultimately sells the stock.

Executive compensation is a hot topic. Often people who have never paid or been a CEO seem to know how much a CEO is worth. What people seem to fail to realize is how much of net worth any executive has tied up in stock options. True the executives get a salary but often used to pay their taxes from exercising options. If anything these executives have much more to lose than the average employee so much of their net worth relies upon how well the company does.

Hopefully, Tim Cook will lead Apple to create insanely great products that satisfy millions of people. With Steve Jobs now gone we can now test to see how “innovative” Jobs really was. If Cook is successful the value of his stock options will rise. Of course he won’t be able to cash out his stock options until 2016.

1980-2010 Government Spending Receipts and Outlays

Spending data from 1981 to 2010 is now in. The data shows that the U.S. is now spending $3.45 trillion per year. To put this in perspective the United States government spends over $100,000 per second. The next logical question should be what is this money spent on? First spending is separated into mandatory and discretionary spending. This is language is mysterious since you could argue all spending is discretionary. The largest expense for 2010 was Social Security which cost $695 billion. The next largest expense was the Department of Defense which spent around $664 billion. Next on the list is unemployment/welfare/other spending coming in at $571 billion. Clearly, running a government isn’t cheap the question should be are we getting our what we pay for?

Despite what people say the government doesn’t have a revenue problem it has a spending problem. Looking at the data from 1981-2010 it is crystal clear that the annual increase in revenue was 4.52%, however the annual increase in spending was 5.89%. Spending has on an annual basis been 30% higher than revenue. People and politicians talk about taxing people their fair share, but isn’t the government already spending more than its fair share? There is absolutely no amount of money politicians cannot outspend. The annual deficit seems to have exploded in the past few years. In 2008 the annual deficit was only $454 billion. By 2010 it increased to $1.25 trillion.

One solution people have is to tax the rich. Let’s put this into perspective. Essentially what these people are saying is we should tax the most productive people because certain elected people spent too much money. This to me does not make any sense. Why should the rich be punished because politicians spent more than they had? We could tax everyone who made over $250,000 (the new millionaires and billionaires according to President Obama) at a 100% tax rate and this would only raise $1.97 trillion. This number is unrealistic because if the government taxed anyone 100% there would be no incentive to work. If the government wanted even more money they could take all the profit from Fortune 500 companies which would amount to $400 billion. Of course if Congress ever announced this you would see 500 companies and millions of people flee to other countries.

The solution is to just spend what we have. Individuals and families create budgets that they have to follow. If Congress were able to freeze spending for a few years (without any gimmick legislation to remove the freeze or else they would have to resign) we would slowly start to see surpluses. In addition to this, if we lowered the corporate tax rate, eliminate taxes on dividends and interest, got rid of many burdensome regulations we would start seeing money from all over the world flow into the United States. In addition to all this the government has 650 million acres (around 30% of all the land in the United States) Clearly, some of these assets along with other assets like buildings could be sold to raise money. Not only would selling land to the public raise money it would also increase revenue since people do have to pay property taxes every year. If someone tells you we don’t have enough revenue you should ask them well how much is enough?

Relationship Debt and GDP Growth

This chart is from a paper in the American Economic Review from 2010 by Reinhart and Rogoff. The study followed countries over a 200 year period and looked at the relationship between debt and GDP growth. Seems pretty clear that more debt does lower GDP growth.

War on Cancer Failure

In 1971, President Richard Nixon declared a war on cancer or what is known as the National Cancer Act of 1971. I hate when politicians say things like we have a “War on Poverty” or a “War on XZY”. The only thing this really means is a massive amount of money will be used to fund whatever the war is for. It isn’t as if people didn’t get cancer before the 1970’s the government just decided we should use more tax dollars to fund it.

A recent report from the American Cancer Society found that the death rates for all cancers decreased 1.3% per year from 2001-2006. This is of course after a 21% decrease between 1990-2006. The five year survivial rate for all cancers has increased from 45% in 1975 to 68% currently. One cancer that has seen a large increase in survivial rate has been prostate cancer. The survival rate in the 1970’s was 67%. Today the five year survivial rate is 99.9%. Some cancers have made very little progress in finding any treatment. For instance, there is very little that can be done for pancreatic cancer. The one year survivial rate is only 25% while the five year surivival rate is a miserable 6%.

After looking at this data one might thing well things are getting better. However, one could make the argument that things could be greatly improved. The greatest enemy in the war against cancer is the FDA. It currently takes hundreds of millions of dollars and nearly a decade of research to bring any drug to market. In the meantime while drug companies are trying to get their drugs approved hundreds of thousands if not millions of people suffer as a result. Once a drug is approved however the FDA can’t tell doctors or patients how to use those drugs. This leads to what is known as off-label usage. Off-label usage occurs when a drug is approved for a certain ailment, however doctors experiment and prescribe the drug for a different ailment. A study from Mark Ratner and Trisha Gura in 2008 showed that 50%-70% total usage of cancer drugs are off-label use. It would make sense cancer drugs would have probably the most off-label use since these people have the most to lose. The number of patients just to run trials for the drugs has increased. In the late 1970’s only 1,600 patients were needed. By the 1990’s this number increased to 4,200. This has substantially increased the cost of trying to bring the drug to market which decreases the number of people that can benefit from the drug. People often complain about greedy drug companies. This if of course looking at the effect without looking at the cause. The reason why drug companies charge high prices is because their costs are high due to regulation. The business of creating drugs is based on failures. Drug companies know they will have many of failures which is reflected in the price of blockbuster drugs. The reason drug companies have failures is because the FDA overzealously is obessed with the safety of a drug. The FDA needs to understand that there is no thing as a perfectly safe drug. The question is how to improve the quality and quantity of live in individuals. Of course, there will be trade-offs but let patients and doctors decide. One no brainer solution is once a cancer (or any drug) has passed the first phase of FDA to allow it to be used in the market. The purpose of the first phase is to determine whether or not a drug is safe. Once a drug is determined to be safe by the FDA patients and doctors can run their own experiments to see whether or not it works. Different patients will of course react differently to drugs. By allowing more experiementation there would be more data and knowledge about the drugs which would help drug companies, patients, and doctors. If drug companies were worried about liability they could have patients sign waiver forms or enter into some type of contract that would say if the patient is harm the drug company has to compensate them.

The FDA is creating chronic inflammation in the drug discovery process. Today, patients often have better and more information than doctors of yesteryear. Decentrailizing power and allowing patients and doctors to make their own choices will only improve things. I personally don’t think “cures” exist given one important rule of economics. In life there are no solutions just trade-offs.

Richard Rainwater: The Billionaire and His Battle

A few weeks ago I read a story about Richard Rainwater and his battle with a potentially fatal disease. Rainwater is probably most famous for managing the investments of Bass family. The Bass family earned most of their money though oil and then diversified into investments. According to an article in Fortune, in 1988 the Bass family was the fourth richest family. The family is responsible for the Sundance Square in downtown Fort Worth, Texas, and the Bass Performance Hall. Rainwater helped the Bass family amass enormous wealth. From the period of 1970-1986 Rainwater turned $50 million into $5 billion or around a 26% annual return. In the process Rainwater himself was able to create a fortune for himself. In 2011, Forbes listed his net worth at $2.3 billion. All of this is now in the past as Richard Rainwater is faced with incurable and fatal brain disease.

Rainwater has a disease known as progressive supranuclear palsy or PSP. The disease itself is very rare but fatal. The average life expectancy is around four and half years. In trying to do something about his disease Rainwater organized his own medical and research team trying to try to come up with some solutions. These days Rainwater has around the clock nursing care and his speech has become incomprehensible.

In addition to all of this, there will no doubt be an issue with Rainwater’s estate. Rainwater planned to give most of his money to his own charitable foundation. He plans to leave each of his children $5 million although one of his sons already has $50 million. Rainwater’s wife Darla Moore who was a former Chemical Bank executive will receive approximately $60 million (this was decided by Darla picking a random figure out of baseball cap). There will be no doubt there will be an estate battle here.

The tragic thing however is how an energetic billionaire can rapidly transform into someone who needs 24 hour care help. Although, the odds don’t look good for Rainwater hopefully with him self-financing his own disease may be able to benefit other people or at the very least shed light onto PSP which seems to be related to dementia and Alzheimer’s. I had been hoping that Rainwater would publish a memoir but now I think that is out of the question given his condition. Money at this point doesn’t matter to someone like Rainwater. For Richard Rainwater his most scarce resource is time.

Airplane Safety: Safer Than Ever

Despite what people may believe it seems that airplane travel has become very safe. For 2011, only one life was lost for every 7.1 million passengers. According to the data, between 1991-2001 you were ten times more likely to get in a plane accident than today. I would point out during this period I don’t remember planes falling out of the skies or crashing into one another. People often feel safer driving to the airport. However, the mortality rate of motor vehicles is eight times that of planes (it should be noted the mortality rate of motor vehicles has also dramatically decreased over the same time period).

If we attribute anything to the drop in deaths it would have to be technology, experience, and information. Technology in the cockpit has vastly improved over the last few decades. Electronic displays give pilots much more detailed information than ever before. Pilots can now train in simulators that put them through scenarios that they would never see in the sky. Also the fact that we know what caused previous crashes impacted how future airplanes were designed.

In essence, we are now safer in the friendly skies than ever before. People claim that this is because of government regulations. People forget the impact of the private sector in creating the tools that made everyone safer. The last thing airplane manufactures and suppliers want to see is their company name posted on the evening news or paper because they took shortcuts that created lost lives. Companies in pursing profits can’t help do the socially responsible thing and keep us all safer.