Still Hard to Believe

I was reading an article in Barron’s this week about how companies are using the increases in revenue from the recent changes in the corporate income tax laws to buy back their own stocks, and provide larger rewards to shareholders in record amounts, and wondering how anyone watching this could possibly be surprised by it. I realize that this blog is starting to sound more and more like The Grumpy Old Man blog and less like a business blog, but the fact is that I’ve generally been in a bad mood since roughly 1977, I’m certainly not young anymore, and I’m absolutely a male human being of adult age for all that I don’t behave that way. And this latest reaction by business to our changing financial climate is the sort of thing that could have been predicted by a particularly dim six-year-old – or anybody else with no grasp of how money works…

It’s important to remember, I think, that stock shares aren’t just representative of an ownership position in the company; they are also sold by the company to raise money. Buying them back does cost money; potentially a lot of money. But as a result, the remaining stockholders effectively end up owning a larger share of the company, because the repurchased shares are now owned by the company, which is to say, by them. Even in the case of an overvalued stock, the share price is likely to rise because the shares themselves are now actually worth more than they were before. Naturally, this will make the stockholders happy, which will in turn make them more likely to retain (continue employing) the current board and management team, who can in term continue to collect their (sometimes ridiculously) large salaries…

This isn’t really a difficult concept. In fact, it’s somewhat simpler than a normal stock price increase. Most of the time, when the market price of a stock rises, it is because the people buying it believe that the company is or shortly will be worth more than the total value of the stock price indicates. This may have no connection to reality whatsoever, particularly in the cases where investors are speculating about things that haven’t happened yet. This is one of the factors that makes picking stocks that will increase in value so maddening; in addition to all of the economic, financial, political, and social factors involved, you’re also trying to predict buying decisions that may be completely irrational. Even people who are very good at picking stocks are only correct a relatively small percentage of the time…

From where I’m sitting, the question here is really why anybody would expect the companies who were in a position to do this to do anything else. The people responsible for the changes in the tax codes keep insisting that businesses will use the extra funds made available by the lower tax rates to expand their operations and create additional new jobs, but why should they? If any of those corporations want to use their own money to expand they probably could, but their stronger stock position means (among other things) that they can borrow money at a much better rate, and they can use the repurchased stock shares as collateral if they need to. And if a company is already profitable, and they have just become considerably more profitable, why would they or their ownership group want to mess with a good thing?

Now, I would be the first to admit that finance can be intimidating if you’ve never studied it. But this isn’t really a question of finance, or even of economics. Anybody who can grasp the idea of making the people who own your company happy being a good way to keep your job can understand why repurchase programs would happen, and anybody who can imagine that a time when people who are clearly driven by political advantage over any practical concern are making irresponsible changes to both our tax codes and our international trade status would make people cautious about expanding their operations can understand why these companies aren’t, in fact, expanding their operations…

I’ve heard a lot of people insisting that finance and/or money is too complicated for them to understand over the years – and I’ve annoyed a number of them by replying that the subject is entirely within their abilities, and refusing to learn about it means turning control of every part of our civilization that runs on money over to people who have no particular reason to act in the public interest. Let’s hope that somebody starts paying attention – to the economy, if not to me – before things get any worse…

Down Four Lanes of Highway

I think we were all expecting to see some of the companies impacted by the developing trade war start moving production outside of the US. Whether or not the new tariffs on steel and aluminum will actually help the U.S. companies that produce those materials remains in dispute, but the retaliation coming from the EU, Canada and China does not – and those counter-punches are going to hurt. For example, Harley-Davidson is facing an estimated increase of $2,200 per unit it exports to Europe – which is an increase from 6% to 31% if that helps. Company and industry sources both claim that Harley-Davidson was already considering moving more production off shore, but this gave the idea greater appeal. It’s a predictable response to a difficult situation. Unless you’re the President of the United States, apparently…

Both the BBC and CNBC are reporting on the move, and both of them are citing a tweet from our President saying that he is surprised and disappointed that Harley-Davidson is “surrendering” instead of waiting for the supposed benefits of this trade war to help make up the difference. How, exactly, a trade policy that protects US steel and aluminum manufacturers from foreign competition will help a company that makes motorcycles is a little tenuous. Granted, American metals companies could lower their own prices if they had less “unfair” foreign competition, but in general, companies lower their prices as a result of greater competition, not less of it. And even if our domestic producers were somehow inclined to lower their costs, there is no reason to believe that they will – or that it would be enough to offset the tariffs being placed on motorcycles by the EU and other to follow…

A much bigger question, at least from where I’m sitting, is why anybody would find either of these developments surprising in the first place. Random, arbitrary, and inexplicably high tariffs are going to provoke retaliation, just like any other hostile action. Make them high enough, arbitrary enough, and combine them with enough ignorant and belligerent rhetoric, and people are likely to see such measures as economic warfare – because that’s exactly what it is. And while I will concede that there are some conditions under which tariffs (and other sanctions) are justifiable, or even sensible – a trade war is still a better idea than an actual war, in almost every possible case – suddenly declaring a trade war on countries that have been your stable trading partners for decades makes about as much sense as attacking them without warning any other way…

I realize that this post is drifting away from business and towards politics, which I would prefer the blog not do, but by the same token this is very much a matter of strategy, and in this case, applying the wrong ones. As a matter of international business or economics this move makes no strategic sense for anybody except a handful of American metals companies, and we should note that if there is an economic crisis because of this trade war their business will not prosper either. The only category under which this qualifies as an actual strategy is in the case of appealing to a reactionary political base, or rewarding owners of newly-protected companies who happen to be current or potential campaign contributors. Which is really the point…

To put it simply, I don’t comment (much) on politics because having business interests attempt to direct national policy is a colossally bad idea – and that is what is happening here. I do not have any evidence that would prove that members of our current administration are allowing their own business interests, or those of their political supporters, to direct our national policy towards a potentially disastrous trade that can’t possibly do anyone on either side any good, and may ultimately be bad even for the handful of companies supposedly being protected under such a policy. I just can’t fathom any other explanation…

This won’t end well. It never does…

Unsent

I’ve been writing fiction for almost as long as I’ve known how to write, and I’ve had most of the same ambitions most writers do. Since I work mostly in Science Fiction and Fantasy, I’ve dreamed about winning the genre’s Triple Crown: the Hugo, the Nebula, and the Campbell. If you care, you already know what they’re for. But as a young man I took a degree in English Literature, and thus also dreamed about being the writer who would take the genre mainstream, and win the National Book Award, the Pulitzer Prize, and the Nobel Prize in Literature. In all honesty, though, what I really wanted to do was write a letter…

Dear Mr. Ellison,

As a long-time reader, I’m well aware of your feelings about fan letters, and fans in general, so I will keep this brief. As I’m sure you recall, in 1986 you traveled to Riverside, California, to accept the J. Lloyd Eaton Award for your achievements as an editor. While there, you were kind enough to put up with the sycophantic babblings of a truly graceless undergraduate admirer.

Needless to say, perhaps, that young man was me.

I was one of the only people present without either a doctorate or at least the beginnings of one, and when the awards dinner started I had no one to eat dinner with. I was looking for an out-of-the-way spot where no one would notice me when you entered with your party and asked if I would like to join you.

As Alan Dean Foster has written of a similar invitation, “Did I? Are bears Catholic?”

It was about half way through dinner when you stopped in mid-story and asked me if I was enjoying myself. I was probably grinning like an idiot at the time, but I certainly didn’t care. When I assured you that I was indeed, you smiled kindly, and replied “You’re a good kid, Max. You’ve got a good soul.” Then, without missing a beat, you went back to telling us a story about something that happened at a con event in New York several years earlier. I was laughing so hard by the end that I almost fell out of my chair.

Coming, as it did, more than two years after the fan atrocities you described in Xenogenesis, this was a remarkable act of kindness that has stayed with me over the years since. I have met a number of my literal and literary heroes in my travels, and entirely too many of them have eventually proven to have feet of clay. It remains an honor to have met someone just as brilliant, abrasive, combative, and irascible as his reputation would suggest, who is also kind, generous, and patient. A great spirit, if you will.

Enclosed please find a copy of my first novel. Ellison’s law may state that “90% of everything is crap,” but if you get the chance, I hope you will enjoy the 10% that (hopefully) makes up for the rest.

Sincerely,

Max P. Belin

As of today, this is one ambition I will have to abandon. Although I did meet Harlan again on two later occasions (and he remembered me from Riverside both times!), I still have not managed to publish a novel, and I never wanted to just send him a fan letter. I don’t send fan letters, and he didn’t read them, and for many of the same reasons. But it seemed to me as though telling the story, even if it is just a tiny moment in his story (an hour or so in 84 years of an eventful life), would probably mean more than anything else I could do on the occasion of his passing…

Here's to you, Harlan. Wherever you are...

 

What Color Are Your Skies?

There are times when I will read an article online and wonder about the tone of surprise and wonder the author is taking. I don’t mean the “product reviews” that say nice things about products made by companies that advertise heavily on that channel, or travel articles that encourage people to spend money on services provided by companies that do (or might someday) advertise on that channel. Both of those are common (if sleazy) practices that go back to the time of 1970s sitcoms, and it would actually be much more alarming if they didn’t happen. As American humorist Dave Barry points out, what travel site is going to publish an article titled “Uruguay: Don’t Bother” in the first place?

On the other side of the issue, you have people who write in breathless tones about people being rude to servers in restaurants, or flight attendants, as if no one is ever rude, arrogant, or snotty in public just because they are horrible excuses for human beings and the service workers can’t fire back. When that happens, I have to wonder if these writers have ever been to a public venue, let alone worked in a service occupation. I had a similar reaction to the Business Insider article about the top complaints that workers at Trader Joe’s markets have about the customers who patronize their locations. Have they ever been to a supermarket?

Granted that I have spent time in retail, but I’d imagine that everyone has discovered trash left on a shelf or in a shopping cart at least once, and most likely everybody has seen some really gross examples from time to time. A pet peeve of mine was finding frozen products dumped in non-refrigerated parts of the store – it’s generally disgusting, and always a cause of “shrink” (product stolen or destroyed by the public). Mercifully, I never worked in a store with a meat section; finding an ice cream bar that had been left out and was now a bulging wrapper full of rancid liquid was revolting enough. We also didn’t do product samples, but the idea that people would abuse such offers and attempt to graze on them for lunch can’t be that surprising, either…

Anyone who honestly thinks that members of the public aren’t going to be randomly horrible to service and retail employees, however, is either living in a dream world or has no idea how much their local service and retail workers would like to bury them head-first in a dumpster full of cat droppings. Let me recommend, once again, the compilation site of funny and stupid customer behaviors known as Not Always Right.com, where you can find thousands of specific examples of this principle in action. Although I must say that, after having worked in Academia for the last ten years, their affiliate site Not Always Learning.com is just as on-the-money, and possibly even more distressing…

Why does he tell us this? I hear some of you thinking. I don’t imagine that any of my readers (assuming I have readers) are planning careers in retail or service companies and are naïve enough to be unaware of these conditions. And while anyone can have an off day (and do things they would normally find repugnant), anyone who makes a habit of behaving that way is unlikely to recognize themselves in any of these stories or care if they do. I’m calling out writers who have never worked down at the sharp end for a day in their lives for their naivety, for assuming that these stories from the retail and service sectors are somehow alien or exotic. We can’t sentence everyone to work one of these jobs sometime in their lives, nor would I wish that on anyone. But with the service economy growing more important every year I think it may be time for everyone to start thinking of life in retail as being more than the question “Paper or plastic?”

Did You Have a Point?

A few days ago I ran across yet another article making fun of the USDA grading system for beef – you know, the kind of thing where they think it’s somehow clever to say things about “Utility” grade beef. I’d be the first to admit that grades like “Utility” or “Commercial” don’t sound all that appealing, while things like “Cutter” and “Canner” make you wonder if they are used for prison food or passed along to whoever makes dog food or hotdogs. I even made jokes like that, back when I was in my early 20s and food safety wasn’t something you could just look up on the Internet (because you couldn’t look anything up on the Internet yet). But today, all this does is obscure a serious business issue with silly wordplay…

I’m not going to link to the article, but if you’d care to see the actual beef grades used by the USDA you can find the link to the official web page here. There are three things you actually need to know about the system, even if you’re just a casual consumer. First, the USDA rating system has nothing to do with food safety. If whatever you are buying (or eating) has a USDA rating in the first place, it has already been inspected and is safe to eat. Second, the eight ratings are based on a variety of measures that should result in better flavor from a piece of beef when you cook it on a grill or a griddle – amount of fat marbling, age and size of the animal it came from, and so on. There’s no way to be sure of how any given cut of beef will actually taste; these are just industry standard estimates. And third, the rating system is a voluntary program…

The upshot is that the only cuts you are going to see in the supermarket, or in a quality restaurant, are going to be from the top three grades: Prime, Choice, and Select. The other five are just as safe to eat (or not; ask your cardiologist about that), but are not going to broil up into something people will pay $12 for at Applebee’s, $20 for at Outback, or $40 for at an actual steakhouse. On the other hand, if you grind them into hamburger, soak them in marinade, braise them in some strong sauce, or slice them up and package them as part of a canned soup or stew (along with the appropriate seasonings) they’ll taste just fine. Or, at least, no worse than those foods usually do…

Where all of this stops being an amusing Internet story (or perhaps a sophomoric joke) is that food safety really isn’t funny, and the rise in international trade is making the whole issue that much more complicated. Consider, if you will, that the US has banned importation of beef from several countries because of the threat of BSE/Mad Cow disease, while several other countries have banned importation of American beef because USDA supervision does not comply with their own national standards for food safety. In the last few years we’ve seen food recalls on everything from romaine lettuce to strawberries to breakfast cereals, for everything from e coli contamination to metal shavings, and who’s even mentioned the whole “Pink Slime” and ammonia controversy yet?

Now, I’m not saying there’s anything wrong with silly Internet articles making fun of the official terminology for something we’d all prefer to ignore. Heaven only knows, if we outlawed silly wordplay on the Internet half of these posts would just be the word “NO!” written over and over again in progressively larger and more elaborate fonts. But the official USDA terminology isn’t really any funnier than most of our Federal regulations. And I don’t know about anyone else, but I’d hate to live in a place where the USDA inspectors weren’t doing their jobs…

At the very least, I’d have to stop going out to lunch…

Born to Fail

It must have been twenty years since I last heard about the short-lived Coke product called Tab Clear, and probably longer since I’ve seen any. Most people knew of the product, if they became aware of it at all, as one of the wave of clear beverage products that appeared, briefly, in the early 1990s, along with Zima, Crystal Pepsi, and a number of others. What was not widely recognized at the time, but has since been confirmed, was that the Coca-Cola Company had never intended for Tab Clear to become a viable brand, and had accordingly spent almost no funds to test, launch, advertise or promote the new line extension. On the contrary; Coke wanted Tab Clear to fail spectacularly enough to take a competitor’s product with it…

I found the story on the Mental Floss site last week, and it immediately took me back to my first time in graduate school, when one of my MBA classes discussed what was then known about the product and the category. Pepsi had been the first company to try to take over the clear cola market, or create it if there wasn’t one, with Crystal Pepsi. The development and launch of the product had been a major expense for the company, but Pepsi was expecting to appropriate enough market share from various Coke products to recover the cost and then gain on the competition in overall sales. Coke might decide to create their own clear cola, or even reverse-engineer Crystal Pepsi and knock off their own version, but either way Pepsi would gain the coveted “first mover” position in the “clear cola” segment – if there was going to be one…

Instead, what the Coca-Cola people actually did was create a clear version of their legacy Tab cola. With the rise of Diet Pepsi over the previous decade, the Tab brand had become increasingly redundant, and any risk the company might incur from changing its formulation (e.g. alienating any remaining Tab customers) was less significant than the threat of losing share to Crystal Pepsi. What made the move so interesting was that Crystal Pepsi wasn’t a diet beverage, but since Tab was, consumers became confused and started expecting both products to be low-calorie. I have no evidence to suggest that Coca-Cola intentionally made Tab Clear taste bad (and neither do the people at Mental Floss, apparently), but they knew it couldn’t stand up to a full-sugar cola on taste alone – and with the products becoming conflated in the public’s imagination, anyone who was appalled by Tab Clear would also assume that Crystal Pepsi tasted terrible…

None of this was apparent in 1992-1993, of course, but even then people tended to place orders for “any generic diet cola” by just saying “Diet Coke.” Over the years since it has become increasingly clear that except for unusually brand loyal consumers the two products are, if not exactly interchangeable, then at least acceptable substitutes for each other, but the Coca-Cola people seem to have picked up on this phenomenon before anyone else did. I would suggest that the company’s experience with the New Coke debacle in 1985 may have given them some insights about the difference between perception and actual flavor, given that some of the most vocal opponents of the “new” formula were unable to distinguish it from the original Coke in repeated blind taste tests…

In the event, the strategy worked perfectly. People who had never tried either beverage became convinced that all clear cola products were terrible, and attempts to debunk these (baseless) opinions were no more effective than the ones regarding New Coke had been. Pepsi was never able to develop a large enough market for Crystal Pepsi, and they ended up withdrawing the product two years later without recovering most of the development costs. I’m not aware of any exact parallel cases in history, but I call the Tab Clear story to your attention anyway because it demonstrates two of the principles I try to teach my own students. First, always assume that your competition, whoever and whatever they may be, are as smart and as capable as you are – and that they will be watching you just as closely as you are watching them. And second, remember that no matter how bad the strategic picture seems to be, things can always get worse…

The Ethics of Expectations Revisited

In my July 2014 post “The Ethics of Expectations” I was writing about the rash of people complaining about, and ultimately suing over, for-profit programs in the culinary arts that ended up costing them tens of thousands of dollars to take, but would only qualify them for $8 to $10 per hour starting jobs. At the time I wasn’t really aware of for-profit schools offering law degrees; it’s not a part of the field to which I pay a lot of attention, and there are already a huge number of law programs available through traditional institutions anyway. Last week’s article about the fallout from the Charlotte School of Law fiasco (and my post on the subject) seem to have re-opened the issue, and I thought a follow-up might be in order…

There is a common perception in some of the States, particularly those with a particularly difficult Bar exam, that provided you can pass the Bar no one will care where you got your law degree. In California, for example, where fewer than half of the people who sit for the exam each year will pass it (and stories about people taking five or six tries to pass are common), it’s difficult to imagine that anyone who did pass would have trouble finding work. Maybe it won’t be the most glamourous (or high-paying) job, but surely there will be something you can do with your new credentials. Unfortunately, this wasn’t true even before the market became glutted with lawyers in the 1990s, and it is even less so now…

Despite the old joke about the person who graduates last in his or her class from medical school still being called “Doctor,” unless you plan to hang out a single and go into practice by yourself the school from which you received your degree will still matter. In a field where there will generally be more applicants than available jobs, such as in legal practice, you will very rapidly encounter situations where a managing partner has a choice between multiple candidates with identical credentials except for the quality of the school that conferred their degrees. At that point priority will probably go to the candidate from the best school, or at least from one that does not have a “horrible” reputation…

At that point, we have to question whether allowing anyone who wants to enter your law program, regardless of their odds of passing the Bar or getting a job afterwards, is any less fraudulent than promising people that they can become a celebrity chef with nothing more than a few months of school and a significant amount of debt. I’m not going to address the shenanigans the Charlotte School of Law (and others) have been pulling with fake scholarships and gaming the student loan system, because that absolutely is fraud, but the question of how bad a student can be before you have an ethical responsibility to tell them to do something else with their money and ambitions is still valid…

The problem becomes even murkier because there really are people who don’t do well on standardized exams like the LSAT, or even in regular classes, who really can excel when actually doing the job. When we include possibilities such as regulatory agencies and corporate positions that require law degrees but do not actually involve legal practice, things become even more convoluted, and when you consider that there are also people who have completed fully accredited law school programs and passed their state Bar who are still failures in practice, the question becomes hard to resolve even in the abstract. So I have to ask:

Do we, as business people or as teachers, have an ethical responsibility to exclude students from educational programs in which we sincerely believe they have no realistic chance of achieving any eventual success? Granted that as decent, caring human beings we don’t want to strand anyone with a huge debt that they can’t repay and no viable job opportunities, do we have any right to tell someone that their commitment and hard work will get them nowhere? Does our answer change if our own employment (and survival) depend on keeping students in school, or at least not driving away paying customers? I’m not suggesting that we have an obligation to keep anyone in a program that we know is beyond their abilities just so that our employers can continue to collect their tuition, but things are rarely that cut-and-dried in the classroom. How do we decide when it would be kinder to cut someone loose than string them along, and where do we draw the line?

It’s worth thinking about…