Ron Amundson’s Political Blog

The usual conservative argument is based upon trickle down economics, and while I believe a careful analysis shows that model doesn’t work out all that great, I don’t believe Keynes does either. Instead, I’ll focus on the practical in your face situation when it comes to business decisions.

First of all, very few people have been in the hot seat, of whether to expand ie invest or not, especially when significant sums are at issue, or even ones lively-hood. I’ve been in the bet the farm mode a number of times over the years, and those decisions are never easy. For the wealthy, its different in that they are not betting the whole farm, as is often the case for the founders of a start-up. However, the wealthy individuals I’ve worked with over the years, while not sweating bullets as to whether their fortune is won or lost, whether they will be able to eat or not, take the matter almost as seriously.

The deal is this… if you are in that spot where a call has to be made, you don’t make the jump, unless you are darned sure its the right call. In some cases, its easier, a line of customers at the door with purchase orders, and cash in hand, and an existing stable platform make it a no brainer. In others, many potential customers say, if you could add this, we’ll put you at the head of the chart when it comes to making a call, and research looks super great for ones market focus. Those are trickier. Then there is the case, where its a new market, and demand is really unknown (proformas are always a guess) . The research shows it looks good, but research is far from a purchase order, and customers with cash are a huge unknown. Those are even harder to judge,

In today’s world, most research shows demand has crashed, or if it hasn’t crashed, its on life support. Unless one has customers beating down the door with purchase orders and cash in hand, no one will bet the whole farm. A few might speculate with a small amount. The thing is, with demand at zero, or very low, no one in their right mind will make substantial ie bet the farm investments. (Demand is not low in all areas, some niches, and niches in the pipeline are likely to do well, but thats an exceedingly small part of the economy for now). The end result, for most entities, tax increase or decreases are not going to pay a large role in investment decisions at this time.

However, when the economy is growing leaps and bounds, ie the real estate bubble, and the dot com bubble, by all means tax deductions can provide for more capital availability, and that can help. Not so much as to making an expansion, but more so the scope of such expansion can be larger, or with a better cushion, as more cash is available. Of course, this is also the time when hopefully govt spending drops off, such that deficits generated by the lean times can be made up, and reserves put in place for the next cycle.

The problem is, a bubble is not where we are. Granted no one wants higher taxes, but if they spur the economy as a whole, whether it be via infrastruture improvements, or even cost reductions in health care, its likely such spending will do a lot more for the economy than tax cuts which likely result in hoarding or offshore tax shelters, as internal investment/expansion is not prudent.

The end result, tax policy can affect business investment both pro and con, but external factors like demand, cash flow, and market niche likely play a much more significant role than specific tax policy within a given time frame. Granted, there are specific deductions which can make a difference, but they are few and far between.

The program was killed off in the house yesterday as part of the budget vote. There are some detailed studies out, and there is a ton of spin. I decided to take a look at the academic part of the studies to see if I could sift through things a bit.

From National Review Online:

Academic researchers evaluating the program have found that parents of voucher students are more satisfied with their children’s schools. Initial evidence suggests that children who were offered vouchers are performing better academically than their peers who were not, though the results so far aren’t statistically significant.

More satisfied parents and test scores that appear to be rising — not bad for a government program. Why, then, are congressional leaders so intent on terminating this relatively tiny expenditure?

The results of the first couple years dont seem to indicate much of a difference in academic performance.

After 2 years, there was no statistically significant difference in test scores in general between students who were offered an OSP scholarship and students who were not offered a scholarship. Overall, those in the treatment and control groups were performing at comparable levels in mathematics and reading.

The main difference is that after 1 year, the non-SINI and higher performing groups of students appeared to experience statistically significant positive impacts on math achievement, while in the second year the impacts were on reading achievement. Adjustments for multiple comparisons suggest that both sets of results may be false discoveries.

Now, whats goofy, is that in some cases, some research shows that private schools do provide a better education than public schools. Certainly in other areas of the country, voucher programs have shown significant success. Then add in the description of the public schools in Washington DC…

Despite the system’s spending more than $14,000 each year per student, barely half of all students ever graduate high school. One out of every eight D.C. students reported being assaulted or injured with a deadly weapon during a recent school year. That’s equal to the percentage of D.C. eighth-graders who scored “proficient” in reading on the National Assessment of Educational Progress.

I went whoa on this, so I had to look it up, and the are correct… scary.

And if all the facts are on the table, something doesnt add up at all, thus there has to be something seriously skewed here. Any private school that has such a low performance in reading would loose all their students in a flash. However, the NAEP is likely a drastically different evaluation, than what was used in the study.

Some possible explanations (its my guesses, no data to back them up, just my thoughts:)
1. The public schools taught to the tests used in the study, where as the private schools focused on a well rounded education.
2. Standardized testing in K-12 edu is pretty worthless as a sole metric of comparison.
3. Involved parents traditionally have more to do with education than funding, Scholarship students parents would be involved, so performance should be better. Why doesnt the study show this, ie parental approval is very high, but student performance is comparable.
4. Two years of data is too little to make a call.
5. The transition in schools may have caused a temporary drop in achievement.

I think it was a bad call to end this program at this time. It was supposed to run through 2012, and then there would hopefully be enough solid data to make the call. Granted preliminary data is not very good, but that could be due to other factors. In fact the next eval will be out this summer, at least they could have moved forward with this for another year. By then, the reports could have been looked at with a fine tooth comb. If it was indeed not effective, perhaps they could find out why, ie what are the other factors contributing to this. As a anti standardized test guy, obviously I blame the measurement methodology, but I really would like to understand what the real deal is. Also, to upend kids education over ideology, which does appear to be the case, is way uncool. I dont care which party does it… kids education has to be a priority, not the parents, not the unions, not the school district, nor Washington ideology.

Last night, volcano monitoring was portrayed in a negative light as part of the stimulus bill. In some ways, I must admit a good point was made, ie, its a long term investment, and short of preventing brain drain at USGS, it doesn’t immediately stimulate the economy. Same with hurricane monitoring, tornado research, or even rebuilding the levi system in Louisiana.

Ie, one could make the argument not to spend, and let the insurance companies and the free market take care of it on their own. While it might mean that the vast majority of individuals and companies in such areas would be unable to procure affordable insurance, or perhaps not at all, that is their problem, they chose to establish where to set roots. Or perhaps it would mean insurance companies would fail left and right, as investors would freak if policies could not be immediately canceled. What if their was a massive exodus of people and companies from the affected areas? Would that affect the economy over all as a boost or a drain? Is allowing them to stay a stimulus or a moral hazard? From an overall financial pov only, its not such an easy call. From a moral pov, I think the answer is pretty easy, which makes me wonder why Gov Jindahl chose it as a topic, when so many others, which are not related to his state are available.

Now, one could make the argument that such spending, being it is a long term investment doesn’t belong in the stimulus bill, just as with many other programs. The thing is with disasters, they are unpredictable, the experts are few, and brain drain is a valid concern. Lets say it was left out to be dealt with later… with appropriations, who knows, perhaps it could be many months. Then throw in political budget shifting, funding might be available, or might have so many political ramifications added in, the whole program gets watered down. Then add in the potential USGS staff reductions, and its indeed possible, the US would get a lot less bang for the buck than doing it now. Or worst case, the delay results in a gap where a disaster occurs, and much loss of life and property occurs, thus costing a ton more, both financially, as well as politically and morally. In the perfect world, by all means such would be in appropriations, but the world is not perfect, and govt far less so.

I think the right call was made to include such funding. Stimulus needs to be part short term, and part long term. Disaster planning actually does quite well in both sectors.

From the Star Tribune:

If another budget cut of 5 percent or more comes down, Magnuson will recommend dramatic action — shutting down conciliation court, cutting hours and suspending prosecution of 21 types of cases, including property damage, harassment, probate, and more than 1 million traffic and parking cases a year.

Magnuson said that shutting down traffic cases is no small move, “but we’re running out of choices here, and I will not compromise the prosecution of criminal cases.”

Another 5% would bring us back closer to the 1970’s as a percentage of the state budget, and I’m not sure that’s such a bad thing. Criminal cases must be a priority, and if there is no money for the others, there isn’t. Obviously some of this is real, and some is political spin for more money. There has to be a cost/benefit analysis done, granted criminal prosecution costs are much higher than they were years ago. Now, this may mean limited court access or alternative means of resolution for other matters, and in some cases, laws would need to be repealed or changed. When it comes down to prosecuting, and keeping a non violent individual in prison, or hiring/retaining a few teacher(s), or getting medical care to those in need, I would error on the later two over the first one. That’s how things worked years ago, that’s how they can work again. The exception of course is if the citizens want to spend a lot more on taxes, and if they do, fine, but be open as to what the tradeoffs would be.

I do however agree with Chief Justice Magnuson as well as concerns the erosion of the rule of law and its impact on society, but with a different spin on it. If the govt cannot afford the rule of law they created, than the rule of law needs to be changed to make it affordable.

No matter what, once efficiency is wrung out, then no more cuts can be made… and wringing efficiency out of the legal system is a very slow process with tons of unintended consequences. Changing the rule of law would be less expensive, faster and likely less prone to counterproductive consequences.

Neither change of course is politically friendly, but the days of Cadillac rules of law for cheap must end. Either pay through the nose while carefully going after efficiency gains, or change the law, I’d go with change the law as I’m cheap, its faster, and I fully believe history shows it works. Others will view this differently.

Paying retention bonuses greater than employee production with taxpayer money.

Brokers at Morgan Stanley and Citigroup’s Smith Barney unit who produce at least $1.75 million of revenue may be eligible for a payment equal to 105 percent of their annual production, according to a person familiar with the plan.

About 6,500 of the combined entity’s 20,000 brokers are expected to be eligible for the retention package, with the first payment in January 2010 and the second in 2012, the person said. Overall retention bonuses could total $2 billion to $3 billion, the person said.

First of all… I know brokers are a rather odd employee class. Ie, they don’t use traditional non-compete agreements and other things like most employees are exposed to. In fact if a broker switches from one employer to another, most get to freely take their clients with them!!!! Imagine the mess if that occurred in the technology realm. Work for Intel, and then go to work for AMD, and take the IP with you with no consequences…. It would not fly, but Wall Street is different.

Granted, $MS and $C are a business, they can do what they want, and maybe these somewhat oddball employee practices have value… but as soon as they take taxpayer money, now I have a real interest, and will fuss about it.

So, onto retention bonuses… I take it no one can do basic math anymore.

6500 employees eligible
As it reads, to be eligible you must produce at least $1.75 million
The bonuses are 105% of their production, or $1.8275 million, assuming all eligible employees only produce the minimum of $1.75 million each

for a total of $11.944 billion

So how on earth does this total $2-$3 billion!!!! who ate the other $8.944 billion

With this kind of accounting, no wonder Wall Street is in trouble.

In all seriousness, my guess is either the spokesman or the reporter didn’t quite get all the facts straight. Its likely out of the 6500 broker eligibility pool, only small percentage fall into the $1.75 million or more productivity realm. At least that’s what I hope the case is.

Either way… who are they going to go work for? Why pay to retain them at all at this point? Its not like they will take their client base and go to work in Antarctica or something. And if they did, and can make that kind of money starting a new firm from scratch, by all means they should do so. Remember if one renounces citizenship, they really get hammered tax wise, thus tax payers would get their due anyhow.

CR had an interesting graph comparing house prices with median household income late last year. His was focused on the entire US, I did the same thing, but focused mine on Minnesota.

Minnesota Housing prices as a function of household income over time

As one can see, we are far from the bottom, housing prices still have quite a bit to drop before they reach a point where they are affordable and perhaps more importantly sustainable for the average Joe. Any attempts to try and prop up the market are likely to be exercises in futility, short of govt subsidizing most folks paychecks to bump up household income.

As far as timing goes, I think CR’s suggestion as to the end of 2009 or longer, with the emphasis on longer is legit. I don’t think anyone expected to see the huge number of salary cramdowns as are becoming more common place today (I expect many to stay in place for a long time, if not be made permanent). Those combined with increases in the number of folks underemployed or unemployed will shift nominal income to even lower levels, and thus housing has still further to fall than my or CR’s graph would suggest. Then add in with under employment, or unemployment, credit scores are going to head to the dumpster. Even for those who might want to buy, either A, their payment is sky high, and thus they cant afford a more expensive house, or B they don’t qualify for as high a principal, or C they don’t qualify at all. The end result will be even fewer potential buyers. This will then further push down the demand for houses.

Its not all doom and gloom though, a housing reset will likely result in much more manageable cash flow for new buyers, and with it, the potential for investment and innovation can be huge. Its just getting through things while it happens that’s the problem.

Yep, I got a typo in the title, and then thought hey, why not live it as is… it is a dud in many ways. The legislature has asked for opinions, so I cranked out a number of suggestions in their online form, not sure how well that format will work… I guess if I get any feedback from them, maybe it does, but then again, its likely filled with a bunch of extremes on all sides. As such, I expect the local meetings likely will carry a lot more impact, but I just don’t see how I can get to one, much less testify… so I’ll rant a little bit here.

The biggest issue… the legislature. They need to take this seriously, and realize that nothing should really be off the table, and that little things do add up. Now, in sound bites and internet commentary, they do seem to look at this seriously. However, a quick scan of the 290 proposed bills in the domain of the finance committee suggest otherwise. Egads, it seems nearly every bill is focused on expanding government and spending more money. That doesn’t bode too well for a need to take things seriously. If anything, a moratorium on all new spending bills may be in order. Granted, there are no doubt some good things in there… but when you can’t manage with what you have, adding more is not prudent at all. At a minimum, if one proposes to spend more money in one area, concurrently cut in another. (in fairness some of the bills are based upon incoming fed money, but thats a whole other story).

The only way the budget issue will be solved is massive cuts, plus tax increases. One or the other along will not cut it… and using debt and creative accounting sure didnt work out too well for banking and housing… its not going to work out too well for state govt either, if not now, it will come back to haunt later.

I really like what rep Steve Drazkowski had to say in his learning from the private sector release. However, he didnt go far enough with the parallel to the private sector. Ie, no business in their right mind will cut their unique selling position / core competence beyond what will scale (ie, a business needs scalability, otherwise its doomed to shrink etc). Pretty much everything is negotiable up to that point. Once you start gutting out a business such that scalability is negative, failure becomes inevitable, short of the current trend of bailouts.

And thats the issue of state budgeting, what is the minimum level needed to achieve positive outcomes in the future. Ie, q-comp is not it, prisons are not it, university building projects are not it, nor is any level of further govt expansion. Cutting public health services to the citizens will come back to bite, even dental funding if deferred will be much more expensive later. Oversight, administrative, and supervision functions on the other hand even if efficiency drops, provided its not state mandated are tolerable. Errors made in those areas are fixable at minimal cost later… but basic safety nets are not. Thiis would require a rewrite of mandates and qualification criteria, as agencies would not have the manpower to comply, if overhead in such areas were cut…. lots of sacred cows would need to go.

Cutting public safety back through a reduction in laws and a change from misdemeanors to non-crimes will also reduce the load on the judiciary, and the prison system at minimal future expense. (I dont buy the law enforcement side that going after minor crimes saves money in the long haul…. I’ve got too many friends in law enforcement who admit otherwise privately). Also history bears that out, in the 70’s our percentage of folks in prison was a fraction of what we have today, and society back then was not all that bad.

Education needs to be cut all around… $160,000 costs per classroom, where a teachers fully burdened wages is under $100,000 is just too much overhead. Its not sustainable long term… and do teachers and students really get much benefit for that $60,000 worth of overhead, I really doubt it. I know they dont get didly for standardized testing, in fact, I realy see NCLB as focused on all the wrong things… rote learning and teaching to the lowest denominator in 2 subjects is not the way to prepare the young for the future. Accountability is needed, absolutely, and NCLB had good intentions, but the implementation is insanity cubed. I’d rather see overhead slashed by 25%, and a $2000 refundable tax credit given to each full time teacher for their classrooms… Put the money where it most closely impacts the students with as few strings as possible… My guess is education spending efficiency would shoot through the sky if the individual classroom teacher had the responsibility to make it happen. Sure, some would get wasted or misused, but I’d bet the vast majority of cases would result in a windfall

LGA at the city level should not be cut , as its where most citizens receive the greatest value for the dollar, either via education, local services, or public safety, ie police and fire. Otoh, LGA should not be expanded either.

At the county level, consolidate, consolidate, consolidate, even going so far as to use online remote terminals and limited hours in some locations. Its a luxury we can no longer afford.

Tax cuts, when the problem overall is a lack of demand are likely to result in hoarding, or offshore investments. Encouraging investment in NEW MN business or expansions into NEW markets through targeted tax deductions is a different matter entirely. Its like the stimulus bill, if you want A, you need to comply with B… across the board non discretionary tax cuts would be exceedingly counter productive.

As far as MNCare and such goes… cutting is counterproductive on the outset. However, negotiating with providers to save money is another story. They full well know if MNCare gets cut, their ER visits, and non collectible recievables will go through the roof. Force them to compromise on reimbursement… as getting 80% on the dollar, is better than getting nothing combined with increased usage.

Its probably a good thing I’m not in govt… I’d be too ruthless with cuts, and lobbyists would have my head by upending central control, but I’d rather see the calls made in Warroad, MN that best benefit that area, than St Paul dictating what they think best for the far north areas of the state.

Wabasha and Goodhue counties are considering considation of their police, ambulance, and fire dispach centers. For the most part it is a win win deal, once the dispatchers get trained on the new areas. The problem is the interim time, when they are not yet up to speed as concerns specific local issues. Its also a bit of an ongoing issue, everytime a new employee comes in. Yet, even in the current situation, a new employee is likely not to know the county like the back of their hand.

One could also argue that consolidation also makes the system less robust, as with fewer centers, a disaster at one now takes out two or more areas instead of just one. Yet, the reverse argument could also be applied, as the system by its nature is not really distributed, nor all that easy to rip up and move to a new location should a disaster occur.

In many ways, this consolidation mirrors what the FAA has done over the last 30 years or so. Back in the 70’s, there were flight service stations distributed through out each state, and over time, they consolidated to each cover a larger area. Then in the mid eighties, the push was on to save money, and all of a states FSS operations were consolidated in a single location within that particular states. As of late, for the most part, all of the states operations have been consolidated into one massive system, and that has been outsourced to a private contrator who maintains just a few locations, rather than 50. We’ve yet to see flight service operate out of India, but had the economy not tanked, chances are that was on the long range plan.

Now, from a performance and quality point of view, distributed local operations provide the optimum, but are also pretty spendy due to duplication. Consolidation makes a lot of sense, state wide operations perhaps even more so. There really is not a whole lot of difference once operations no longer function in the immediate area. Privatization, combined with off shore operations likely provide the ultimate in cost savings, but with my experience with the FAA”s privatization of FSS ops, despite the huge savings, the perfomance and quality aspects are greatly reduced. Granted we dont have smoking holes in the ground from aircraft crashes, but I am 100% sure the safety margins are no where near as good as they were during the days of the distributed model. (in fairness though, in-aircraft backup systems have improved multifold, its a way different aviation arena than it was in 1975.

And that brings us back into the police, ambulance, and fire domain… what is an adequate safety margin, that falls within todays economic constraints. My layman’s guess is that a state wide setup would still provide a reasonable level of safety margin, and the cost savings would be huge. Of course, thats a laymans guess, and its also likely one that bean counters would come to sooner or later. The problem is, just like in the flight service domain, there are a ton of intangibles which are impossible to assign a monetary value to, and/or enter in a database such that a dispatchers experience with the immediate area appears much less a factor. Those intangibles provide substantial safety margins from a qualitative pov, but its near impossible to assign them a quantitative value, until something bad happens.

Realistically, in todays climate, the loss of said intangibles will likely be part of public safeties shared sacrifice. Thats probably ok though, 50 years ago, we had tube equipment, and the system was far far away from the reliability and performance both in normal and emergency ops that we have today. Sure, the intangibles do matter, but technology has taken us to a point, where its likely they can go away, and we still have the same as, or better overall quality than we did in 1980, which was light years beyond the 60’s. I think thats a reasonable benchmark bearing in mind todays economy.

Granted emergency services providers wont like falling back 30 years or even 10 years, but the country survived and even prospored during that era. Society can no longer sustain the Cadillac approach, thus regression to an earlier time is likely to happen, and I think with sufficient planning, we will be just fine.

The biggest problem would be the resulting turf wars. Unlike the FAA, where the feds are in charge, counties will fight this left and right… but short of printing their own money, something has to give, and it it means rolling things back it does.

Proposed changes to workmans comp in MN

Coverage for undocumented immigrants would be cut… Hmmm, so now we have an incentive to hire undocumented immigrants in dangerous occupations. Does anyone see anything wrong with this, apart from the fact unemployment is shooting through the roof? Also, by taking them out of the no fault pool, imagine the legal field day that could be had…(som lawyer will figure away around this in some fashion) I think this is short term thinking with long term consequences.

Incentives for injured workers to waive their legal rights is another proposed idea. On the surface, it makes sense, but it is a no fault pool. The idea is to limit lawsuits… so this tells me the system is not working very well. Ie, an attorney as a rule wont get involved unless its going to pay… So obviously it does pay to have legal representation. Maybe we need to do the same for the no fault auto policies… It sort of takes the wind out of the sails of the whole no fault concept.

What this tells me, is the system is not working… It would be much better to rework the system, reduce complexity, overhead, and increase fairness, such that there would not be any need to cut coverage, or bring in legal representation. Of course that takes time, but to make these sorts of changes on the surface rather than fixing the underlying problems will come back to bite down the road.

In Pawlenty’s budget, Q-Comp is increased from $64 Million to $113 million. Argh, its not really tested, its not widely implemented, and it is filled with tons of overhead. First, lets look at implementation, and then some studies.

• Currently, MN spends $64 million on it for 72 school districts and charter schools.
• It is proposed that all 341 school districts and 150 charter schools operate under it for a total of 491 schools with a bidget of $113 million.
• Thus participation is increased by nearly a factor of 7, and with a budget increase just slightly under 2X.

Scaling and leverage can work in some cases, less so in govt, but to double spending and expand the reach 7 times in a new fairly untested program doesnt add up… Thats fishy, either A, someone is doing math with the first pentium which had errant math functions which have deteriorated further, or B, the overhead costs are absolutely insane. I’m guessing the later.

Next, we have a duplication of effort problem… The Office of Legislative Auditor, and the MN Dept of Education ran parallel studies as to what Q-Comp is doing. Talk about a duplication of effort and money running out the door. Granted, the studies are different, but not all that different. They should have worked together, and done a better job of defining the scope of the research to minimize overlap. Instead, a large portion of the research was duplicated effort. The good part, is the conclusions were similiar. The MN Dept of education study and the OLA study are well worth a read, even though the combo totals nearly 300 pages.

There is also the issue of whether Q-Comp is really effective. The studies show that it is, but its questionable due to the limited sample size, the relatively short history of Q-comp, and a bias towards metro school districts (ie the overhead of implementation precludes many smaller rural districts). Also, a significant part of performance metric is based upon the very very limited standardized tests. Tests on reading and math courtesy of NCLB, where teachers often teach to the test, dont really tell very much as concerns teacher effectiveness… and imho are more of a distraction than a help when it comes to the actual students education. Then as concerns pay for performance…. what if a teacher achieved top numbers in each category from the states q-comp program… but the local district has no additional money, or in some cases, less money, what then? It just doesnt add up.

The positive aspects were increased teacher-teacher collaboration, and administrator-teacher collaboration. A feeling that they are in this together, and there is a ton of power in such sharing. Also, the methods of in classroom evaluation showed pretty good promise.

Q-Comp does have some good things going for it, so to totally throw it out is not prudent, but I fear as usual, the good points will be tossed, as they are pretty hard to assign quantitative measurements to, and the bad parts, being easy to measure will be where the focus and spending is.

Lastly, in this time of budget crisis, why spend more money on a state wide mandate with questionable effectiveness. If anything, run the program with some of the recommendations, especially scale it out to rural areas, drastically reduce the overhead, and then go look at the data to make an informed decision 3-5 years down the road. Finger in the wind calls on govt spending just can’t be tolerated. It is likely the good parts of Q-Comp will become clear, and the ineffective ares will become more visible as well. Then restructure it, as needed, and in 5 years, the budget should be there to make it happen. One doesn’t add a new addition to ones home after getting a 20% reduction in hours, except in extraordinary circumstances. Ie a known benefit, known costs, and a known payoff in the short term. The state should do likewise.