Self Made

I just read Malcolm Gladwell’s new book Outliers. His theme is personal success and the predominance of situation over ability. His opening section deals with the odd fact that most professional hockey players in Canada have birthdays in January, February, and March. The process of becoming a pro hockey player in Canada seems entirely merit based. All kids have the same access to school hockey programs starting at an early age, and kids are promoted based on athletic ability from the Pee-Wee leagues up through college into the professional level. The secret is in the cutoff date for participation: January 1st. An unfortunate kid with a December 31st birthdate will end up facing off against some kid with a January birthdate in the same year. He will be almost a year younger at an age where even six months means a huge difference in size, strength, and motor skills. The early year kids dominate the later year ones and advance to the higher level leagues, where they get more and better coaching, more ice time, and more support. The vast majority of late year kids never catch up.

Gladwell goes on to explore the birth years and unique high school experiences of Bill Gates and Steve Jobs, the cohort of young men who ended up dominating the law firms of Manhattan, and the birth years of the robber barons of the 19th century. His conclusion is that talent is a necessary condition for success, but that the accidents of birth and youth are just as influential. His other observation is that pure intelligence or raw talent is less important than endless practice. Well, not endless – the number he cites is 10,000 hours, on average, to achieve mastery. The catch is that someone needs to have the opportunity to put in those 10,000 hours, unencumbered by other responsibilities and having access to the necessary facilities for 10,000 hours. You can’t become another Dave Brubeck if you can’t get your hands on a piano every day. Or, in the case of Bill Gates, access to a free computer terminal.

I now forget where I read it, but a poll showed that Democrats are more likely to believe that the circumstance of a person’s birth are a major determinant of success and Republicans are more likely to believe that personal ability is a major determinant of success. The more I read on the subject, the more it seems to me that circumstance dominates.

A number of researchers have done studies with duplicate resumes. In one study, resumes with African American sounding names on them got half the calls for interviews compared to identical ones with WASP sounding names. Another study used attached photographs to the same effect.

Your native country has an influence as well. Studies of social mobility, comparing changes in peak income by generation, show that a poor person in France has a better chance of out-earning his or her parents that a poor person in the U.S. or U.K. In fact, most European countries exceed the U.S. in upward social mobility.

This would all be just interesting fodder for sociological treatises, except that the belief in the triumph of individual talent informs government policy. The last thirty years of policymaking in this country has been based on an iron-fisted social Darwinism. Supply side economics, welfare “reform,” educational “reform,” tort “reform,” and the whole gamut of puritanical legalism we have endured assumes that personal virtue overcomes all. In a few spectacular cases it does, but for each John Edwards working his way up from poverty there are hundreds of George W. Bushes who got handed the whole package at birth.

The myth of pure meritocracy needs to be debunked, along with its partner, the myth of the self-made individual. We are all part of a deliberately structured society, restrained by it and dependent upon its benefits for our personal success. Understanding this, we need to set aside our egotistical American exceptionalism and observe how other countries structure their social, economic, and tax policies. We can pick the best cases and synthesize policies that allow all of us to achieve greater individual opportunity and social mobility.

A friend of mine told me how as a child he and his sisters would chorus “That’s not fair!” and his mother would respond “Life’s not fair.” At the time he thought it was a harsh thing to say, but now, he says, he realizes it was a blessing.

Northwest Passage

“Through cruel hardships they vainly strove
Their ships on mountains of ice were drove”

(From “Lady Franklin’s Lament,” a traditional British folk song)

The Northwest Passage has been pursued like the Holy Grail by mariners for centuries. Cabot, Hudson, Vancouver, Franklin, and others all tried and failed to find a water passage north of the American continent. The reason for failure was simple. Much of the water north of Canada is covered in ice year round. The reason for pursuing it was also simple. Prior to the Panama Canal the only way to get a boat around the continent was via the far southern tip of South America. Even with the Canal, freight from the northeastern U.S. or Canada had a long haul down into the Gulf of Mexico.

Note that I wrote, “had a long haul.”

Back in 1969 a specially equipped tanker rammed through the ice at an optimal time of the year, but that was a one-time experiment. Just this September an ordinary cargo vessel made the trip from Montreal out the St. Lawrence, north around Newfoundland, and west across the top of the continent to several towns in Nunavut. It wasn’t a government-sponsored experiment, but a scheduled commercial cargo delivery. There was an icebreaker standing by, but according to the captain they didn’t see “one cube of ice.”

This is novel and ominous. The water north of Canada has been impassable for eons and the Northwest Passage merely wishful thinking since Europeans first explored the Americas. The ice thwarted, trapped, and killed hundreds of sailors led by hopeful navigators. Now it’s just a boat ride.

Can we stop screwing around now and get serious about global warming?

Stimulus with payback

I recently received a call from Vermont’s congressional representative, Peter Welch. It was a robocall – Mr. Welch doesn’t kibitz with the Minor Heretic. The call invited me to participate in a telephone town hall discussion of economic stimulus and related issues. I couldn’t stay on the line, but I wrote Mr. Welch a letter on the subject. Here is the gist of it:

The most important thing I recommend is to invest in stimulus programs that pay back.

The best example is energy efficiency. Here in Vermont our efficiency utility saves us about $7 for every $1 we invest. Right now we are bleeding cash to oil exporting countries. Industrialized countries in Europe average about 40% lower energy use per person and maintain a standard of living as good as ours or better. We can do that. Even a 10% drop in oil use would save us over $27 billion a year. Add to any direct savings the follow-on savings in declining pollution and resulting health effects. Residential and commercial building retrofits would employ construction workers now being laid off by the housing bust. Those who study the economics of labor will tell you that the energy business is capital intensive, while the infrastructure business is labor intensive. Every million dollars we can redirect from energy expenditures will net us more jobs.

Part of that energy picture is transportation improvements. The present dip in motor fuel prices is a temporary reprieve. Trucking will not be an economical mode of cargo transport ten years from now. We desperately need to upgrade our rail system to replace road based transport for both cargo and people. Regional air transport is dying a slow death, and I’d wager that Burlington Vermont would be among the first to feel the axe when jet fuel prices jump again. It may seem archaic, but the New York State canal system, which extends into Lake Champlain, could move cargo between the Great Lakes and the Hudson River and along the Champlain/Hudson corridor at about 1/8th the energy expenditure of trucking.

Another example is addiction treatment. Law enforcement professionals will tell you that addiction treatment is ten times more cost effective than law enforcement and drug interdiction in lowering crime rates. Addiction treatment would offer dramatic long-term reductions in expenditures for law enforcement, public health, prisons, and public assistance.

Addiction treatment could, in turn, be part of a program of preventative health care. Ask anyone in health care and they will tell you that 90% of the pathologies they see are lifestyle related. It takes labor intensive, ongoing, personalized primary care to work on problems such as smoking, obesity, and poor nutrition.

As long as I am being prescriptive, I’ll offer some action items:

1. Establish an energy efficiency utility in every state, authorized to work on electricity, heating, and transportation.
2. As part of the 50-state efficiency program, establish grants and revolving loan funds to pay for efficiency upgrades. (Financing is a necessary condition for success)
3. As part of the above program, establish training programs for contractors in efficiency retrofitting.
4. Offer railroads a long property tax holiday on rail electrification, double tracking, and upgrades to existing railbeds for passenger service. (This option is essentially revenue positive because it sacrifices low-probability future revenue to expand an industry.)
5. Offer the Big 3 automakers loans to retool closed plants for self-propelled light rail vehicles, buses, and passenger vans.
6. Help municipalities design and build appropriate local transit systems. Public transportation starts at the local level.
7. Revitalize the New York State Barge Canal system with dredging and infrastructure upgrades, including intermodal terminals and financing for the construction of container barges.

8. Establish a national network of affordable/free addiction treatment centers. Treatment should be local, repeatable, and offer follow-up support.

9. Establish a national network of primary care centers, including the support of existing centers, to provide wellness programs, preventative care, and early-stage treatment for illness.

This list is, of course, far from comprehensive. There are plenty of opportunities for what the technical world calls value engineering – finding the least expensive modification that gives the biggest result.

So far the focus has been on supply side solutions in the form of infusions of capital into distressed financial institutions. This is inefficient and ultimately ineffective. We should be using demand side solutions that put money in the hands of ordinary people. Our focus should be the redirection of money from capitol intensive to labor intensive industries, reforming our regressive tax structure, and empowering labor to get its long-overdue bonus for the productivity increases of the past few decades. Take care of Main Street and Wall Street will take care of itself. The reverse is not true.

Another important point to remember when planning stimulus packages is that the financial industry isn’t really an industry. It doesn’t accomplish anything useful in itself, it only enables other industries to provide us with the goods and services we need. As such, any profit it makes is a drag on our real economy. The financial sector has expanded from a service function to an end in itself. It has ballooned into a combination casino and Ponzi scheme. It needs to go back to its socially useful function as a supporter of real industry. That will be a hard fight, because billions of (phony) dollars are at stake. Someone has to start by calling it what it is and pointing out where it should end up.

“What is good for America is good for GM”

The title of this piece is the actual quote from Charlie Wilson, the CEO of General Motors, testifying before the Senate in 1955. The second half was “…and what is good for GM is good for America.” The second half of the statement became immortal, and the first was forgotten. Policy makers seem to have adopted only the second half, as well.

A friend just emailed me a reminder of the Clinton-era program called Partnership for a New Generation of Vehicles, or PNGV. Under PNGV, the government plowed money and research resources into a joint effort with the big three automakers to develop a marketable sedan that could get 80 miles per gallon. Several years and hundreds of millions of dollars later, GM, Ford, and Chrysler had each developed 5-passenger prototype hybrids that achieved 70-80 mpg. They presented their new concept cars at the 2000 Detroit Auto Show, and then quietly abandoned them. Their public reasoning was that nobody wanted a high mileage sedan. Their public cover was that they were going to develop an even better, higher-tech line of hydrogen powered vehicles through the FreedomCAR program, with no fixed deadline. In the meantime they continued to fight increases in gas mileage standards.

Toyota and Honda took the concept seriously, and in order to compete with this soon-to-be imaginary line of American-made hypercars, developed the 60 mpg Honda Insight and the 45 mpg Toyota Prius. The rest of the automotive ass-kicking is history.

Why did Detroit keep on producing Stupid Useless Vehicles the size of armored personnel carriers? Simple short term economics. The material cost of a Ford Escalade, the size of a cottage and weighing three tons, was not that much more than that of a compact car, at least in comparison to the sale price. The cost of steel is generally less than $1500. The cost of the sales and marketing effort is the same and the healthcare and pension costs are the same. The cost of making a weld or driving a bolt into a huge car is about the same as performing the operation on a small one, and it is those labor costs that rule. The difference comes in the value proposition to the consumer. Use some extra steel to enclose more space and the buyer is willing to pay $30,000 to $50,000 for a box on wheels to get down to the grocery store. The automakers were netting $10,000 per unit for these behemoths. Let the future take care of itself, because they were minting money.

Then the supply and demand curves on the oil production graph got close enough to kiss, and the price per barrel quintupled in a few years. I’m sure that at some point the automakers noticed that even as they were discounting their urban assault vehicles to try to move them that there was a three to six month waiting list for Priuses. They had the technology in their pockets to make cars that could surpass the Prius and the Honda Civic Hybrid, but in their pockets the technology stayed. Perhaps their executives thought that if everybody in the audience clapped and believed in fairies, then newly discovered oil would fountain out of the ground and people would flock back to those highly profitable wheeled dirigibles.

Another friend just saw an ad by GM that said, “In a time of global financial crisis, supporting a loan to the U.S. auto industry is in America’s best interest.” What is good for GM is good for America. My friend commented, “GM's moved from commercials about rugged trucks bouncing around the landscape with pretty girls driving them to ads begging to be saved.”

Should they be saved, and if so, how? If not, what should we do instead?

We should look at this in terms of long term investment and geological inevitabilities. Even the Pollyannas at the International Energy Agency are presenting numbers that, if one reads them carefully, predict that world oil production will peak below 90 million barrels per day, compared to a production rate of 87 mbpd right now. They are predicting a decline in oil production on the order of 5% a year after 2015, if we don’t plow hundreds of billions into oil exploration and development. Which we won’t.

We won’t because of the short planning horizon of investors and corporate executives and the sawtooth oil price swings we are starting to experience. The price goes up, induces a recession and a collapse of demand, and the price of oil plunges. The economy slowly recovers, demand goes up as supply shrinks, and the price surges again. Repeat, with increasing price and decreasing supply. The problem is that the volatility discourages long term investment in expensive oil development projects. The new deep offshore fields and unconventional heavy tar-like crudes require prices in the $70-$90 range to break even. Oil development bankers won’t invest if they don’t know that they will get that price.

So this means that we’ll need more Priuses, right? As a stopgap, yes, but long term, even medium term, the ubiquitous personal automobile is doomed. It’s not about personal preference, virtue, or public policy – it’s just geology. We’ll need widespread public transport, different zoning, and the localization of our lifestyles in general.

What this means for the Detroit automakers is that we could pour endless money into their accounts and in the long run they would go under. We should follow the old military adage, “Don’t reinforce failure.” It would be an absolute waste of our (borrowed) money to patch up GM so it could totter along for a few more years making unsellable SUVs and pickup trucks. In the short run, it would be cheaper for the taxpayer to let GM go bankrupt, beef up unemployment benefits for its workers, and invest in post-peak industrial development.

The restructuring of GM would have to involve more than administrative adjustments. If we really want it to thrive, it would have to refocus its production on vehicles for a post peak oil world. We need streetcars to replace the streetcar lines that GM bought up and burned over half a century ago. We need passenger railcars and high efficiency electric rail engines. We need high efficiency buses and passenger vans for flexible public transit. And yes, in the short term, high mileage sedans like the GM Precept and electric cars like the criminally abandoned and crushed GM EV-1. We don’t need an industrial dinosaur, managed by dinosaurs, gorging on our resources as it staggers towards extinction.

Make the Titans Battle

The victory of Barack Obama has given me, like many Americans, a sense of relief. In a couple of months our Sock-Puppet in Chief and his neocon handlers will be off cutting brush somewhere. I suppose war crimes trials would be too much to ask.

Even so, as a friend once warned me after Clinton’s election, “The left wing of the Capitalist Party has won.” President-elect Obama will have all the usual suspects chattering in his ears about how to benefit big business at the expense of the general public. We need to hold him to account, push him to do the right thing, and propose policies that benefit the general populace.

There are two big issues facing the president-elect that can be approached synergistically. One is economic stimulus, and the other is health care finance. The poster child for economic stimulus is the U.S. auto industry. After spending a decade or two profitably and short-sightedly building 3-ton SUVs, they are facing declining sales and, in the case of GM, impending bankruptcy. The big three need to redesign, retool, and refinance. They are asking for $25 billion from the government to do so. I am reluctant to reward these corporate dinosaurs for their greed and pinheaded behavior, but I don’t want to see hundreds of thousands of autoworkers joining the unemployment lines, either.

On a parallel track, health care costs continue to climb and 47 million Americans have no health insurance. In poll after poll, two-thirds of Americans say that the U.S. government has a responsibility to ensure health care for all. Two thirds say that they would pay higher taxes to achieve universal health care. Three quarters say they would pay more taxes to ensure universal health care for children under 18. And yet the subject of government sponsored health care isn’t even on the agenda in Washington. Both Obama and McCain proposed healthcare plans that enshrined the private health insurance companies. The reason is, of course, that the health insurance companies have near infinite money and the political clout that comes with it. Between soft money, bundled contributions and the health insurance industry’s multi-million dollar propaganda machine our (?) Congress faces inevitable defeat.

The two subjects connect if you realize that car companies spend more per vehicle on health insurance benefits than on steel, roughly $1500. Given that the U.S. spends about twice as much per person for health care compared to industrialized nations with national health coverage (with worse outcomes), you’d think that with national health insurance we could knock $750 off the cost of manufacturing an automobile. Let’s be conservative and put the savings at $500 per unit. With about 7.6 million passenger cars coming off the line every year, there’s $3.8 billion a year, or $38 billion over a decade.

President Obama and the progressive caucus of the Democratic majority need to make the case for universal health care to the carmakers. To Ford, GM, and Chrysler, private health insurance is a huge cost driver. Rather than fight the health insurance lobby directly, the Obama administration should pit the auto lobby against them. Not just the auto lobby – every major industry is struggling with health care costs. Get them all to gang up on the insurers and beat them into the ground. It is the manacles of fiduciary responsibility that cause the insurance company executives to strive to extract all they can from us. This same motivation can drive other industries to fight on our side.