Bottom up links

In this Freakonomics podcast, Steven Levitt discusses his work with companies whose managers resist experimentation to test their beliefs.

In one example, he couldn’t convince a company to stop running newspaper ads in any market to see if that would have an effect on sales. But, they discovered that an intern neglected to buy ads in Pittsburgh one summer. It had no effect on sales. But, the company still buys ads.

In this EconTalk podcast, Yuval Levin made what I expected to be a dull conversation about Edmund Burke and Thomas Paine, very interesting. On this, especially, I agree:

I think that there’s a way in which the Left takes for granted a thriving economy that just comes in the background and the question is how to distribute the goods. We have to make the argument that that thriving economy–which makes possible the thriving life of this society–has to be sustained. And it’s a function of certain attitudes toward law and order, of certain kinds of rules, certain kinds of liberties that have to be defended, both because they are right and because they are good. Conservatives are nowhere near good enough at making that kind of case.

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Consultants and Mass Transit

I recommend listening to these Freakonomics podcasts, I Consult, Therefore I Am and Mass Transit Hysteria.

Over the years, I’ve had the pleasure of working with management consultants from some of the biggest names in the business. Based on those experiences, I agree with much of what was said in this podcast.

I was amused at how a former consultant interviewed on the podcast relayed how the consulting gig was described to him by fellow consultants:

50% of the job is nodding your head at whatever is said. 30% of it is just sort of looking good and the other 20% is raising an objection, but if you meet resistance, then dropping it.

Steven Levitt described some lessons from his young consulting days. One lesson he learned was that the answers can’t always be found in the data and he said:

I [now] have this incredibly deep appreciation that the people in the middle and bottom of the organization absolutely know what’s going on and a lot of time the people at the top have no idea what needs to be done.

The show host, Dubner, explored the key question: Why hire management consultants? Especially when many of them are inexperienced recent grads, their recommendations are often obvious (or dumb) and there’s limited (actually none beyond low-hanging fruit) evidence that consultants actually help.

Why? Executives may want to gain legitimacy for stuff they want to do anyway or they may want to buy plausible deniability.

In my experience, it has been the latter. Being an executive is rough because every decision carries a job-costing risk. Paying McKinsey or Boston Consulting Group a million bucks to tell you what to do gains you a bit of finger-pointing potential when the Board of Directors start hammering about your lackluster performance.  “But these smart guys told me to do it.” The scapegoat doesn’t last long, but it often buys the exec one or two more shots. Of course the Board should point the finger right back at the manager and say, “But this smart guy hired them and followed their advice.”

I wrote more on the subject of consulting in my posts, …And that resulted in what? and Be leery of big words. I still like this paragraph from the latter:

Can you imagine what the owner of an NFL team would do if his head coach hired a consultant to tell him what strategy his team should use to win games?  That’s right.  And that’s what Boards of Directors should do to managers who do that in business.

Mass Transit

In the other podcast, they discuss something about mass transit that I rarely see mentioned: Actual ridership.

According to the guest on the podcast, when actual ridership is taken into account, cars are more energy-efficient than buses and trains aren’t much better.

That’s mass transit blasphemy, isn’t it?

Mass transit proponents like to present us with idealized scenarios of heavily loaded vehicles. But, it turns out in the real world that a train or bus that moves a lot of people in one direction in the morning and another direction in the evening, make a lot of return trips when they are empty.

Also, they are typically run on schedules throughout the day when ridership is very low.

An efficiency advantage our cars have is that they don’t drive around empty all day while they wait to carry us home.


Be careful of the Pied Piper

I recommend listening to the latest Freakonomics podcast, The Power of the President. In it, Freakonomics economist Steven Levitt admits he was wrong about Obama.

At the 12:30 mark Levitt says:

I’ve probably never been more wrong about anything than I was about my projections for what the Obama administration would look like.

Levitt usually doesn’t pay much attention to politics and usually doesn’t vote. But he did in the last election. He credits Obama for being a great speaker and compares him to the Pied Piper, because:

…even though I disagreed with most of what he said, I immediately wanted to do them. I would have done whatever he would have told me to do.

That’s why I voted for Obama. I never vote, but I thought there was a good chance that Obama would be the greatest president in the history of mankind, and I wanted to be able to tell my grandchildren that I voted for Barack Obama.

One reason Levitt usually doesn’t vote is because he doesn’t think a president “matters all that much,” but he thinks the president can set a tone for the nation, and he thought “Obama would be able to set an incredible tone for our country.” He goes on:

…and what’s strange and surprising to me is that almost exactly the opposite happened. As soon as he got into office, it was just rancor and off-tune, off-pitch.

I’m glad someone can admit he was wrong. I wish he’d give other people, who weren’t wrong, more credit. Maybe we should more carefully consider their position in the future.

I’m reminded of a time where I participated in a mock government exercise as a high school student. In the gubernatorial campaign speeches, one candidate passionately recited some non-sense lyrics from a Prince song.

I remember thinking “what a disaster, this guy is bombing big time.” Much to my surprise, the auditorium erupted in applause and gave him a standing ovation. Myself and the guy sitting next to me were among the few who remained seated and silent with furled eyebrows. I asked him, “What the hell did he just say?” He responded, “I have no idea.”

That’s when it first occurred to me how many people could be swayed by style and emotion and there are very few of us that are more resistant to that.

Even Levitt, an economist, duped himself. He didn’t agree with much of what Obama said, but he would have done whatever Obama told him to do. For some reason, I have a natural tendency to put more weight — nearly all weight — on whether I agree or disagree with what someone is saying, not whether I like the way he or she says it.

I’m usually scanning for content and filtering out style. Much to my chagrin, I’m at the mercy of a population that appears to do the opposite.

But, they don’t just do the opposite. They often know they disagree with the person, but rationalize it away. I had friends in ’08 election who tried to convince me that while Obama appeared to be a bit far to the left (judging from what he said and his voting record), but he’d move to the middle when president. One even told me recently that while Obama hadn’t really moved to the middle in his first term, he expects that he will if he gets a second term. I’m sorry, what?

I would appreciate hearing Levitt say something like, “I’m going to make a point to be more careful about being swayed by style, emotion and fallacy in the future, and I encourage all of us to do the same. Listen to what people are saying. Ask yourself if you agree or disagree and then ask yourself why. Then find someone who can represent the disagreeing position well and talk to them.”

“Why I Support Obama”: Point 1

This my response to the first point made by the Facebook Obama Supporter.  Let’s first review her point:

For 30 years I’ve heard politicians talk about health care reform, and he’s the first one to do something about it.  The Affordable Care Act removes conditions on pre-existing conditions, makes health care more affordable for small businesses, raises the age at which children can be on their parents’ policies, removes lifetime caps, and more. With the possible exception of insurance execs, who would not want these changes?

First, politicians have been reforming health care for a long time.

Second, the Obama supporter doesn’t realize those reforms are why we have the problems that she wants the government to solve, like pre-existing conditions.

I wrote about how government created the pre-existing condition problem here.  John Cochrane, finance professor at the University of Chicago, agrees with me.  So does economist Steven Levitt.

Next, the Obama supporter believes Obamacare will make health care affordable for small  businesses. First, intentions of government programs are rarely realized. Usually it’s the opposite — the government programs make things worse. Second, affordability is partly caused by the government tax treatment of health insurance (see links in previous paragraph).  If we purchased health insurance like we do auto and home insurance, small business — or any business — could get out of the health insurance business and focus on whatever they do best.

Next, it’s not clear to me what problem raising the age for children to remain on their parents’ policy solves that wouldn’t be solved by decoupling insurance and employers as discussed in the previous two paragraphs.

Next, lifetime caps?  I haven’t heard of these caps being a problem.  And, in a freer market of health insurance, if people wanted protection over and above the lifetime cap, they could probably get it.

I’m not an insurance exec and I don’t want these changes.  I believe they will have negative unintended consequences that will slow progress and innovation in health care and lower quality and availability.

Plus, I bet insurance execs are not as upset by this as the Obama supporter thinks.  They are now politician’s cronies and as long as they keep their political cronies happy, the political cronies will keep directing our money to them.  That’s easier than developing innovative products that individuals choose over the competition.

Steven Levitt on health care

On the April 13, 2011 Freakonomics podcast, Steven Levitt describes the two problems he doesn’t believe were addressed with health care reform.

The following is my dictation of Levitt’s comments, which start about 10 minutes into the podcast:

There were two things you needed to do to health care reform to materially improve the situation.

The first was to break the link between the provision of health care and employment.  That is just an archaic element of our health care system that really makes no sense, and yet because of tax subsidies, it’s the way that most get their health care.   There’s no good economic justification for it.  If anything, I think this health care reform bill strengthened that link.

Why doesn’t it make sense to have health care tied to employment?  I think that you actually want to turn the question around.  Why in the world would you want it tied to employment?  I think there’s no good reason.  For one thing, many people don’t work.

It leads to job lock, where it’s difficult to change jobs, and it leads to circumstances where we have to have these overlapping systems, which are inefficient.

He then asks a question I often ask:

Why is your auto insurance not tied to your employer?

Reason number two:

An even bigger problem with health care today, which was not addressed at all in the reform bill, is that people aren’t paying for the services that they’re getting.

It’s virtually the only part of the economy where I can go out and get any service I want — cancer treatment, open heart surgery — whatever it is and I pay $3 for it even if it costs $50 thousand or $100 thousand.

Then Levitt goes on to explain that health care is just like any other good in the economy and because

…we aren’t charging people for it what it costs to produce, people are inefficiently consuming it, they’re making the wrong choices and you can tolerate that if it were a small part of the economy, but since it’s 15% to 17% of economy we have to treat it like its any other good.

Now people hate to talk about this trade-off between health and life and money, but the fact is that if not today, then sometime in the not too distant future, we’re going to have to make trade-offs, such as my grandmother is in a vegetative state being kept alive by machines pumping her heart, and instead of the state paying for that, they’re going to say, look, you’re going to pay for some of this.  You can either take the $150,000 and we’ll keep your grandmother alive or you can put your kids through college, your choice.

And people are going to have to start making those tough choices.  It won’t be pretty.  It won’t be fun or happy.  Economics is the study of scarcity and in a world where health care becomes more and more costly, the scarcity is going to be more and more binding and we’re going to have to make those tough choices that are imbued with this moral element, but nevertheless it’s an economic choice when you get down to it.

I agree with Levitt.  I believe these two things will do more to improve the status of our health care and the world’s health care than anything else.

But, as I typed the last two paragraphs it occurred to me that perhaps those tough choices are what people hope to escape.  In a freer health care market, we fear for that moment when we have to make such an economic choice, knowing we have to live with it and others may question our motives.  Maybe its easier on our conscience to have someone else make that choice for us.  Or we’d rather make the choice without money being a factor.

However, something I think many of us overlook is that innovation and competition in a freer health care market could drive costs down and improve effectiveness to the point that money is about as much of a factor as it is in deciding whether to eat at Chili’s or Applebee’s (it’s not).  Innovation and competition have worked wonders for other goods and services.

The other part of the podcast on college education was worth it too.