Bureaucrats and innovators

There are always tensions between these two types of folks.  There are a couple main sources of this tension.

The first source comes from how they view the world.  Bureaucrats focus on intentions and inputs, on how you do things.  Did you do them they way the bureaucrat liked?  Were your intentions good?  Did you put in maximum effort?

Innovators see all that stuff as nonsense.  They’re more interested in what resulted.  Did customers like that product?  Did it increase sales?  Did it make a significant impact? They care less about how it was done.  They don’t care if the person tried hard or not, as long as it was done right.

The second source of tension between bureaucrats and innovators comes from the bureaucrats’ inability to understand that they rely on innovators.  They don’t realize that their livelihoods depend on the results that innovators have produced, past or present (and sometimes, dangerously, future).

Bureaucrats don’t start successful companies.  They come after the company has been established.  They rarely add value to the company.  They live off the income that’s produced by the innovators who started the business.

Bureaucrats in government tax individuals of the income they generate in innovative activities and spend it on government programs (after taking their cut).

All wealth and income was generated by innovators.  As the previous two paragraphs demonstrate, usually that wealth is generated by the innovator first and then consumed by the bureaucrat at some later date.

Bureaucrats who don’t realize they are living off the wealth of past innovations may make the mistake of borrowing from potential future innovations.  That’s when things go bankrupt.

First Mover Myth

Occasionally I run into someone who trots out this smart-sounding post hoc ergo propter hoc fallacy that many b-school student learn about.

A post hoc ergo propter hoc fallacy is a fallacy of false cause.  Someone sees a business that started something become successful, while competitors seem to languish, and they attribute this to some fanciful idea of a “first mover advantage”.

Recently someone brought this up to me while discussing a new product trial.  This product trial is in a highly untested space.  Many people think there’s a huge potential with this product since nobody is in this space “yet”.  (Though there may be good reasons for that, which they don’t seem to consider.)

They rattle off that this product will get a huge “first mover advantage”.

I ask, do you think there’s anything to that?  Like how Microsoft was the first to word processors, spreadsheets and graphical user interfaces?  Or Netscape was first to web browsing? Or Google was first to online search?  Or Facebook was first to social networking?  Or how Apple was first to the portable digital audio market? Or better yet, like the 8 out 10 new businesses and products that fail trying to get a first mover advantage?

I don’t think it’s being the first.  I think success has a lot to do with offering products and services that customers want, for whatever reason (and sometimes those reasons are mighty elusive).  First movers can and do win, but it’s not because of the illusory first mover advantage.  It’s because they have good products.

School Choice Exists

In most debates and discussions about school choice, what is usually overlooked is that a good deal of choice already exists in education.

Choice exists at many levels in our education “market”.  Folks who have enough money can choose to pay to send their kids to private school.  Folks who have a little less dough and can’t afford, or don’t wish to pay, for private schools also exercise choice.  They have enough flexibility* to choose where they live and, by and large, choose to live in school districts that are known for quality education.

*By flexibility, I mean they can afford transportation and longer commutes to work.  They don’t have to rely as much on public transportation routes.  They can choose to live in communities with higher priced homes.

The middle market education choice drives local real estate cycles.  Suburban areas with plenty of land to develop have an incentive to provide quality schools to attract new families to develop the land and increase the tax base.

These suburban areas tend to continue to provide quality education as long as there’s land to develop.

However, once these areas run out about develop-able land, watch out.  School boards and administrators become complacent.  Why provide quality education?  The tax base is there.  If families won’t occupy the homes, maybe empty-nesters will.  Or better yet, once the tax base is funded from a good portion of businesses, who needs families?

This is based on observations in my own area.  The urban school district has been a corrupt and incompetent wreck for decades.  Why not?  It still gets funded.

Looking back 25 years, the hot suburbs of those days had the top school districts.  They used those school districts to attract middle income families from the urban core and new growth to the area to increase their tax base.

Now, those top-notch school districts from 25 years ago, with a few exceptions, have been superseded by school districts in the new suburban growth areas. Those 25-year-old suburbs have been nearly fully developed and the quality of their school districts are on a slow decline.  No longer are they the top notch districts.  They have very little incentive to maintain that status.

So, to a certain degree, school choice already exists for wealthy and middle-income families who can choose private and quality public schools.  It’s no surprise to me that these are typically known as the better schools.

Poor, urban families, on the other hand have less choice on where to send their kids to school.  They may not have the flexibility to live where they want.  They may rely more on public transportation to get them to work.  And they can’t afford private school.  It’s no surprise to me that these aren’t considered the best schools.  Why would they be?  They take the kids whose parents have little or no choice.  The parents don’t have many options.

So, wealthy and middle income families already have a certain degree of choice about where to send their kids.  Poor families don’t.  I’ve won a few folks over on the idea of vouchers by simply explaining this and asking them why they are against giving more choice to poor people?

Letting people have more choice on where to send their own kids to school seems to make sense, even if you or I disapprove of their choices.

When we try to assess the quality of a charter school (or any school) based on test scores, I think we miss something.  The fact that when given a choice, a parent chose something other than traditional public schools, is enough evidence for me that something went right.

My “choice” observations are based on what I see in my metro area.  Do they line up with what you see in yours?

Policy by anecdote

At the 9:30 mark of the Peter Schiff video in this post, Mr. Cummings of the Congress on Jobs Committee says of “stimulus” spending:

You can say what you want about the stimulus bill, but I can bring in a room full of people who would say if it were not for the stimulus the would not have had jobs.  I know it has an effect.

I believe even the staunchest Keynesian (people who actually believe government stimulus works under certain conditions) may advise Mr. Cummings that his anecdote does not actually address the key point made by critics of so-called stimulus spending.  The key point was made by Frederic Bastiat in 1850.

It says that while it’s easy to see the beneficiaries of any specific spending or program, it’s not so easy to see what might have happened without that spending or program, and to determine if the spending helped or hurt on whole.

While we tend to credit that spending amount as 100% beneficial, we don’t consider what would have happened anyway.  Bastiat called this the broken window fallacy.  We see a broken window and say, the silver lining is that the window maker will benefit by selling an additional window.  We easily forget (or are easily distracted) that the money spent to replace the window could have been spent on something else, something even more productive and valuable than replacing something that you already had.

Unfortunately, neglecting what would have happened anyway permeates political and business decision-making.  We focus on what is easily seen and set policy by it.   I call this management-by-anecdote.

Anecdotes are powerful political tools.  If a picture is worth a thousand words, then anecdotes are worth ten thousand.  And, if you can mention the name, place, or show the face of the person in the anecdote, that ups the value of anecdote another 10 fold.  Notice all the anecdotes that sit in the balcony during the State of the Union address.

It concerns me that we have so many people in leadership roles, like Mr. Cummings, in business and government in this country that so easily succumb to the anecdote.

“Stupid in America”

Check your FoxNews lineup and set your DVR to record John Stossel’s recent education special, Stupid in America.  If you know when it will next air, let me know and I’ll provide an update.

It originally aired last weekend.  I watched it tonight.  It’s worth watching.  He covers teachers unions, union bosses, firing teachers, the Washington DC school district, charter schools and Khan Academy.

In an interview, one union boss, who represented a district with bad student test scores, assured us that he knows his kids are learning because “he can see it in their eyes.”  Now that’s compelling stuff.  I certainly think there are numerous issues with test scores as a measure of teacher performance, but I much prefer those over what this man sees in his students eyes.

This same union leader defended bad teachers from being fired (I’m paraphrasing): It would be a tremendous cost and a major adjustment for the teacher. We need to seek professional development opportunities for that teacher.

lol?  I did.

I find it strange that we should have to train teachers to be teachers (isn’t that what they were supposed to do before they became a teacher?) to prevent them from not being a teacher. I also find it strange how a trade that’s based so strictly on credentialing (e.g. education certification), would then want to take on the expense of the training the teacher what he or she apparently didn’t learn before.  With that logic, why require credentials at all?  Just let anyone come in and they will be trained.

Of course, this union boss believes training will be the antidote.  What if the teacher doesn’t want to teach?  Why not free up the spot for someone who does?

Another union boss proclaimed that he would try to physically prevent people from going to charter schools in “our” (meaning teacher union) buildings.  Excuse me, aren’t those the taxpayers’ buildings? I didn’t realize that the teachers union now owns their buildings as well.

As Stossel so aptly put it in the show, much of what is wrong with education is that we have “adult fools” running things.

Stossel also showed lots of signs of progress education.

  • Charter schools where the kids love to come and learn.
  • Kids digging math because they’re watching Salman Khan videos.
  • Teachers in charter schools that say things like (paraphrasing again), why shouldn’t they be able to fire me?  If I was a bad doctor, I wouldn’t have any patients.
  • A charter school where the principal actively watches and coaches her teachers to improve their teaching (many businesses can learn from this).
  • A post-Katrina, charter school-based rebirth of education in New Orleans.  One founder of the Sci Academy started with just himself in 2008 and now has a “school” based in trailers and his students are testing well.  He said, if you hear someone in education talking about having top notch facilities, that’s a sign they’re not putting education first.

Government is an expense

In this post, I wrote about how government is overhead.

If you believe this view of government, then you shouldn’t use GDP (Gross Domestic Product) as an indicator of the health of our economy.

Gross Domestic Product is calculated by adding consumer, investment and government spending.  If consumer and investment spending decline, as usually happens in a recession (and usually for good reasons), people believe that boosting government spending is a good thing because it helps offset the declines in the other components of GDP.

What’s wrong with that?

GDP tells us how much economic activity there is.  It doesn’t say if that activity is healthy or not.  But we assume it does.  We assume GDP is like to our income.  We assume (and I think we are taught) that it’s the “income” of the economy, so more of it is good and less is bad.

But it’s not really income of the economy.  It’s the total economic activity of the economy.

Let’s say you made $50,000 in income, spent $40,000 and invested $10,000.  Your GDP, or total economic activity, was the sum of the three or $100,000.

$5,000 of your income came from a part-time job that you decide to quit.  Your income drops to $45,000 and your total economic activity drops to $95,000.

Confusing your total economic activity with your income, you decide to borrow $5,000 and spend it to keep your economic activity at $100,000.

Many people will instantly see the problem with using economic activity in this fashion and advise against borrowing the money.  They would also likely point out that your income level and how much you have left to invest after spending are better measures of your economic health.

But if you cloak such words as income, spending and investment with other words like GDP, consumer, investment and government spending, we lose our senses and start to believe it’s okay to borrow $5,000 to keep GDP at $100,000.

If we recognize that consumer and investment spending is the better estimate of the economy’s income and view government spending as an expense, we will make better decisions.  For example, when economy’s “income” declines, we will want to reduce our expense, rather than increase it.

Not quite convinced?  Here’s one more way to look at it.

Again, the three components of GDP are consumer, investment and government spending.  Where does each of these come from?

Consumer and investment spending are the result of value created in society.  Chipotle makes a burrito, I buy it.  We both come out ahead (or we wouldn’t have traded).

Government spending also comes from this value creation process.  Your expenses are enabled by the value you create at your job or with your business.  I do something for my employer, they pay me.  We both come out ahead.   I spend some of that income on a Chipotle burrito.

As an expense, government spending comes from our income.  Without income from our productive pursuits, we would not have government.  As our productive pursuits have become ever more productive over the centuries, we’ve been able to afford bigger governments.  Increase government spending and that leaves less income to spend on other things.

Since government spending comes from our income, it makes no sense to increase it in response to a decline in income.  Rather, we should reduce it and look for ways to increase our income.

And, the secret to increasing our income is by encouraging, rather than discouraging, market-based innovative pursuits, just as it has been since humans have been evolving.

‘…a devalued government’

Peter Schiff explains it well (HT: Carpe Diem) in his testimony before the Congress on Jobs Committee:

In fact, some of what he said is very reminiscent of this most excellent video of Daniel Hannan from 2 years ago, dressing down then British Prime Minister for trying to spend his way out of the recession:

It may be hard to believe after watching the video, but Hannan supported Obama and still supported him through the first stimulus package.  I wonder if he has changed his mind? What he says at about the 2 minute mark would aptly apply to Obama’s latest jobs bill proposal.

Prime Minister, you cannot carry on forever squeezing the productive bit of the economy, in order to fund an unprecedented engorgement of the unproductive bit.  You cannot spend your way out of recession or borrow your way out of debt.  You know and we know and you know that we know that its nonsense.

Addendum:  At the 12:35 mark of the first video, Schiff asks a question that I like to ask my liberal friends who want to raise taxes on the rich:

What percentage of my income do you think would be fair to take?

The hemming and hawing that goes on after that is priceless.  No answer was given.  Just airs of indignity, which often masquerades as argument, to shame Schiff for asking such a question.

Like Schiff, I’d like to know.  I want anyone who would like to raise taxes to tell me what they want to raise it to.  That way when we get there and we won’t have to keep hearing that we should pay more.  When they run out of our money, we can remind that they told us that X% would be enough so they now need to figure out how to get spending under control.