Conversations with My Older Brother

Suz: Here's what retired government wonks do: Take a look at my new blog entry at www.government-reform.info. Here's an excerpt: "If Wall Street is going to run the economy into the ditch every once in a while, then government is going to have to impose speed limits and hire some cops. And imposing executive pay caps is like putting a governor on a rental car driven by a teenager. It's not his car, and he's still out looking for thrills. We need to have bankers act like a new father out driving with his baby daughter in a car seat in the back. We need them to have some 'skin in the game.'"July 24, 2009Robber Barons, Great Depression, or Three Mile Island?

Filed under: Design of Government - KNiZ @ 8:54 am

Do you think that our current economic mess is more like the age of the Robber Barons of the late 1800s, the Great Depression of 1929, or the nuclear power plant accident at Three Mile Island on March 28th, 1979?

Regardless of YOUR opinion, don't you think that the government's response(s) to the crisis should be based on thorough analysis? The best theories available? Diagnosis before prescription?

I. Let's look first at the oligopoly thesis.

The theory here is that market concentration often generates behavior that's at odds with the general welfare. Does the name OPEC ring a bell? Worldwide, the four firm concentration ratio defines "oligopoly" as existing when four firms have more than 60% of their market. The Big Four banks in America are the Bank of America, JP Morgan Chase, Citigroup, and Wells Fargo. Does anyone know of any other banks? Of course, the big investment banks like Goldman, Sachs have had their rivals, like Bear, Stearns just "disappeared" by the Federal government. Can it be long before there's just one brokerage, following the path shown by Morgan Stanley Smith Barney?

In the olden days, the Federal Justice Department had an Anti-Trust Division that was charged with policing anti-competitive behavior, and indeed breaking up firms with undue market concentration. That was long ago, before economic theory (especially the Chicago School) bowed to industry practice. The ideological shift happened between the 1982 breakup of AT&T and the 1999 settlement allowing Microsoft to continue as one firm.

It would appear obvious on its face that the salaries and bonuses paid on Wall Street demonstrate oligopolistic profits. The "value-added" simply isn't there. In 1979 Ezra Vogel published his book "Japan as Number One: Lessons for America" which notes that at that time Japanese CEOs took home salaries only ten times those of their shop floor workers. Can you imagine?

An argument can be made that the societal concern about the increasing concentration of Wall Street's financial institutions is not their unwarranted profits, but the systemic risk associated with having so few firms. That is, if we had more firms, we could allow a few to fail without inviting disaster. This in turn could reduce the moral hazard associated with the Federal government backstopping them.

So, if you believe that today's problems are due at least in part to oligopolistic behavior or its associated risks, you might recommend breaking up the large (and growing larger) financial institutions on Wall Street.

II. A Reprise of the Great Depression?

If upon reviewing the history of the years after the Great Depression, in which the business cycles were substantially dampened, you might (A) associate those successes with the government policies responsible, and (B) wish those policies to be continued in the future. Most economists DO associate the dampened business cycles with government policies.

Sadly, much of the Federal government's economic policy was degraded over time, due perhaps to people saying "Look, we haven't had more economic crises, so we don't need those policies!" Doesn't there seem to be a logical fallacy in there somewhere?

A good start towards reimposing controls on the markets would be to reinstate the Glass-Stegall Act and reinstitute serious margin requirements, among other actions. After all, "If you want to keep the economy between the ditches, you may have to impose some speed limits." Been there, done that. Worked for three generations.

III. Or Is Wall Street really like Three Mile Island?

Wikipedia has a good account of the Three Mile Island (TMI) accident. In part, it states:

"The Three Mile Island accident of 1979 was a partial core meltdown in Unit 2 of the Three Mile Island Nuclear Generating Station in Pennsylvania. It was the most significant accident in the history of the American commercial nuclear power generating industry.
"The accident began on March 28, 1979, with failures in the non-nuclear secondary system, followed by a stuck-open pilot-operated relief valve (PORV) in the primary system, which allowed large amounts of reactor coolant to escape. The mechanical failures were compounded by the initial failure of plant operators to recognize the situation as a loss of coolant accident due to inadequate training and ambiguous control room indicators.
"The scope and complexity of the accident became clear over the course of five days, as various officials tried to understand the problem, communicate the situation to the press and local community, decide whether the accident required an emergency evacuation, and ultimately end the crisis.
"In the end, the reactor was brought under control, although full details of the accident were not discovered until much later, following extensive investigations by both a presidential commission and the NRC. The accident was followed by essentially a complete cessation of the start of new nuclear plant construction in the US."

In fact, the "scope and complexity" were not so clear. Charles Perrow, now an emeritus professor at Yale, spent years researching the TMI accident, and created a theory about highly complex and interrelated entities or systems.

His book, Normal Accidents, was published five years after TMI. His conclusion was that if a system's components are both highly complex and tightly interrelated, failure is inevitable. That is, a system's structure and design determine whether it will (not whether it may!) fail.

Most recently, Perrow wrote an Op-Ed for the Washington Post about the system failures involved in the fatal Metro crash in June, 2009.

Perrow has also contributed to the study (and theory!) of High Reliability Organizations (or HROs). HROs have both a wikipedia entry and a website.

HROs have things in common, per the Wikipedia entry: "There are 5 characteristics of High Reliability Organizations that have been identified as responsible for the "mindfulness" that keeps them working well when facing unexpected situations:
- Preoccupation with failure
- Reluctance to simplify interpretations
- Sensitivity to operations
- Commitment to resilience
- Deference to expertise

Does "mindfulness" sound like Wall Street to you? Not to me! And what's sauce for stand-alone organizations must be sauce for tightly coupled groups of organizations - as in a 21st century financial system, with information and money sloshing around at the speed of light!

So if the structure and design of the financial system will determine whether it will (not whether it may!) fail, and if failures of the financial system cause major societal crises, then either (A) those in the financial system must show the rest of us that their system is a highly reliable system, or (B) the government must assure that the financial system is so designed and operated.

We now have the government involved in redesigning the financial system and its controls. What troubles me is that there has been NO discussion of the theory and practice of designing High Reliability Organizations in the public discourse, and I'm not convinced that it's being discussed in private either!

So as far as the design of the Federal government's response to the financial crisis is concerned, what we're seeing is not transparency as promised, but "translucency." Translucent means "permitting light to pass through but diffusing it so that persons, objects, etc., on the opposite side are not clearly visible."

And given the influence of Wall Street veterans in the governmental design process, I'm worried that not only are

'persons and objects not clearly visible,' but that they're really 'on the opposite side' - from the rest of us.

(I am indebted to The Teaching Company and Michael Roberto's magnificent course, The Art of Critical Decision Making for introducing me to Charles Perrow and High Reliability Organizations)

Great timing, I have been about to write you on similar subjects for days.

I am about l/2 way through Good To Great. I'd be further but the only quiet place here is on the pot! Absolutely fascinating. None of the major concepts had I ever heard of. I went to his website to see if there were comments from him on what has happened to Fannie Mae, but nothing. I was also wondering why Wal-Mart wasn't in there, went to the index, turns out he didn't include any companies that the person who started the company was still running it. Wal-Mart's charts are so interesting. I was 11th in line in the pharmacy line the other day, Sam would have rolled over.

I never had a job in any "company." Obviously hospitals try to make money, and particularly in Union they invited the head RN's to the top staff meetings. Such things as the base room rate being as low as possible-around $105 a day at that time-1990-because they said people call around if a procedure is non-emergency, and what they ask is the base rate. So then you just add higher prices for everything else, and I do mean everything.

At that time, a bag of IV fluid cost the hospital $1.00, we charged the patient $10.00. A Foley catheter cost us $5.00, the patient paid $57.00. But then of course, they added for 1-1 RN care, etc.

Same basic thing at my previous job in Psych at MUSC, the base room rate was low, but they had at least 5 therapies for each patient, and I mean the group ones like physical therapy, music therapy, this isn't counting the medical student seeing the patient, the intern, the resident, the MD, the staffing, etc, etc.

But what got me the most was in Union, I worked there about the

time Office Max and that type of store opened. Of course they sent catalogs to everyone. I knew the prices we paid in Central Supply for packs of 3 x 5 cards, pens, all sorts of stuff, and of course there are hundreds if not thousands of those things. Some

of the prices that hospital paid for office supplies were 10 X what Office Max charged.

So I went to the head of that department with the catalog in hand, marked, but he said they liked to order everything from one supplier, so paid what ever that supplier charged.

The darn vets are the same now. If I buy a bag of IV fluids from my vets, it is $35.00. They are exactly, and I mean brand, label, everything, and the same as we used in Union, and every other job I have had. IV fluids are considered a prescription drug, where as the tubing and the needles are not.

I can get the identical fluids for $3.99 a bag from KV vet but the Vet has to call or fax the prescription in. They do allow for the vet to tell them what you can have in a year, and you can order it however you want. Of course the shipping is fairly high, so I order maybe 12 at a time, which that lasts me usually a year. And I can buy if from a site that is supposed to be for vets, but I have a password, every breeder I know uses it, for $4.99. The same stuff, propofol, that Michael Jackson used IV, it is on that site.

The lady that is the financial head of my Vets' 2 offices, told me the same identical thing, they want to order everything from one place. I have a catalog that the medicine for preventing the dog version of Alzheimer's, called Old Dog Encephalitis, Selegeline, 5 mg twice a day, costs $5.99 for 500 tablets.

The first time I had Huey, Andrew's father, to the vet for confusion, maybe 2 years ago, the vet told me she had read it helped, but had offered it to 3 clients, but the $200 a month caused them not to get it. I had her write down the name and dose, [just so I could remember it] which the dose is the same for people, went to Wal-Mart it was $46.00, called Pet Care RX, it was $26.00, then saw it in a catalog for vets for $5.99 for a huge size. I can order anything from that catalog except for prescriptions. I got a box the size that a pair of high top sneakers for you would be shipped in, absolutely stuffed with IV tubings, for $4.99 the other day, 100 of them. That will last me the rest of my life.

Would it not pay a hospital or a busy vets' office, really 2 offices with 7 vets, one full time person's pay to check prices and order things from different suppliers? In IV fluids alone they could pay that person a week's salary a month. They even order packages of sweetener and sugar and instant coffee from the same place! How do things like this fit into the direction of having a great company? And of course I only see a few things.

At Joe's work at The Pet Store, I have been amazed at the way the national company works. They send out the number of classes they want that store to sell each week. Joe is off on Mondays, which is their first day of a week, and he does not find out until Tuesday of that week, how many they are supposed to sell.

The head office is in the west, and I wonder if they take that week the year before, and just add a percentage to it, or if someone really knows WHY the sales vary. It seems obvious to me, that there are very few sales the week before Christmas. Everyone is buying puppies for Christmas and all the doo-dads that go with puppies, no one has any thought the puppy may be a problem. 3 weeks after Christmas, the sales are out the roof since the puppies by then are tinkling all over the floor, chewing on people's toes, and either won't walk on leash or are trying to eat other dogs when they do.

The week before school starts, we have a sales tax vacation on

school supplies; everyone is at Wal-Mart. They have posted every school in or near the district and what that school requires year by year for each child, and everyone's money is spent there. But about 2 weeks after school starts, the classes jump up, the mothers at home are looking for stuff to do, and they sign up for classes in the day time when the kids are at school.

I can pretty much predict what the goals for the week will be, but no one at the store seems to know. Does the office in the West know why this is working like it does? In areas such as very rich areas near the beach where most people are retired, do those stores take into account the fact that things to do with kids are irrelevant?

If this is predictable, why not have special sales? I asked Joe if their store can have any kind of ad, even if it is signs on the doors and cash registers, such as if you sign up for a class between x date and y date and have a terrier, a dog under 4 months, a dog over 2, a brown dog, a female dog, a spotted dog, a dog with a top-knot, the class is 1/4 off? No, they can't do that. He had to go around all kinds of corners to get approved as an AKC trainer for the Canine Good Citizen test, because the main focus of the AKC is showing dogs, which are to be "evaluated for the purpose of breeding" whereas The Pet Store has the Vets' Office next door, whose main focus is neuter them as soon as possible, for $300 to $400 each, yes you read that right.

Your accounts of how MDs and Vets work, as well as The Pet Store, aren't too surprising. What's surprising is that WalMart hasn't gone into the pet care biz...

Obviously there's not enough competition in the MD biz, the hospital biz, or the Vet biz -- so they can soak the customers w/o worrying about customers going elsewhere. And, of course, people get "attached" to their MDs, hospitals, and Vets...

You DO kinow that the AMA closed about half the med schools about 1900, ostensibly for "quality" reasons, but really the effect was to DECREASE the supply of doctors?

And that the fedgov pays a LOT of the cost of educating docs because we underwrite the extra costs of teaching hospitals?? BIG BUCKS there...

ALSO, it'll be interesting to see how many people find out about 'back door' ways of bypassing all those charges, just as you are. You're first in line...

Bro

Well not to change the subject, but are you an addict to Dremel products? I have been for years, it kind of comes and goes, but I love to collect all the little what-cha-ma-collets even if I have no idea what they do. I can't find one book on them, but you can

download info on each thing or lots of projects on their site. I wish they had a book with everything in it, I guess it would have to be updated a lot.

I also have wanted a small digital camera. I have a good new one, but I like to wear or carry a camera and you know what I do all day-pick up poop-which requires lots of bending over, etc. My camera if I wear it, is about 4 inches from front to back and sits on a cord swinging and whacking me in the boob area, plus the cover for the lens immediately pops off and hangs there on a string making a clicking noise, the lens gets fuzzy, although I did get a very interesting picture from the fingerprint or whatever it was-

Probably you can get that effect somehow on a camera but I sure don't know how.

I need one that is no bigger than the size of a pack of ciggies, so it can fit in my pocket and also it has to open and start up very fast, since what I will be shooting is going to move, probably, in a few seconds. If you know of one, cheap, let me know. I lose things. I lost the first ear piece to my 2 piece phone; the base is on my pocket, after a few weeks, found it the other day when cleaning the bathroom. I knew a dog hadn't gotten it since I found no chewed up plastic, so now I have a spare. But things do fall out of my pockets a lot. A safety pin would make it too slow, but a pinch clip might work. Joe is great at figuring that type of stuff out.

Suggestions:
1. Go to Costco (or wherever). They have lots of 'em. The basic camera is a "point-and-shoot," and it sounds like you're one level up from there. The "P&S" cameras are just the size of a pack of ciggies. They have no lenscap. They are small. They are remarkably tough. The competition is fierce among brands, so the prices are dropping.

2. Turns out you can get a 10 megapixel jobber w/a 3x optical zoom lens for not a lot. I've got a Pentax Optio 'Whatever' that works fine for me. (Of course, more often now I'm carrying just my iPhone which has a bum camera, but it's there...) The DIGITAL zoom is worthless. Turn it off. You can make good 8x10s w/a P&S, and they're just FINE for web work.

3. The three major brands are Nikon, Canon, and Pentax. I started w/Pentax, and I've stayed with Pentax for three for four little cameras. Damn companies come out with improvements, I lose 'em, I give 'em away...

4. STAND in the Costco or WalMart, take the camera(s) in your hand, and "dick with 'em" for ten minutes before deciding. Then get one, and "dick with it' even more!

5. I've found that when I'm in a situation where I think I'll have photo opportunities, I leave the little string handle sticking out of my pocket a little. I used to think I had to put the little cameras into a metal box, so I spent a lot of time trying to find little metal boxes (fancy candy, butane cigar lighters) but I found that the cameras are pretty tough. I don't wear it when I know I'm going to be lifting heavy things, or using a chainsaw, but otherwise I often do.

6. NOT GOOD to get 'em wet, though. There are waterproof models, but my guess is that they're a bit larger, and possibly are missing some features.

Lemme know what you get.

Bro

Love that government/business stuff. Having regular hourly jobs, philosophies and theories like that did not enter my mind, except for the money aspect I went into above.

I guess that's a lot of what you did all your working life, huh?

Nope; when you're up to your ass in alligators, you forget about draining the swamp! The stuff on the blog is mostly about draining the swamp! We talked about it some w/Gore, though.

More comments on the blog are welcome!

Do you remember any quotation like:

"Never miss an opportunity to insult someone you love?"

I can't find it, so it must be a Melvinism.

Nope; my favorite related one is: "No one forgets where the hatchet is buried!"

Sus

Apparently WM put Circuit City out of business?

WalMart is THE BEST at supply chain management!
As they say, when you pick up a half gallon of milk, WalMart calls the cow...