Economic development and the (hack hack cough wheeze) environment

The Financial Times reports today that Hong Kong government officials are admitting that air pollution is hurting the city's economic prospects. (Earlier this month, Forbes Magazine and a few other newspapers noted that a number of hedge funds and smaller investment firms had already debarked for Singapore over air quality concerns.) The key quote comes from Victor fung, chairman of the government-backed Greater Pearl River Delta Business Council:

Up to a year ago [pollution] really hadn't hit our pocketbook. But now people are not coming to Hong Kong to take a job because their kid has asthma."

I find this interesting for several reasons. First, while it is clear that quality of life has a certain monetary value, it's unusual to observe environmental pollution, as a single component of quality of life, actually have a measurable effect on an economy. Usually, there are just too many other factors—employment, crime, schools, the number of economic activities and opportunities involved, geography, the weather—to be able to isolate air pollution as an economic harm. For example, São Paulo and Mexico City certainly may have pollution problems that effect economic growth. But they also have enormous kidnapping and murder problems, too. Blaming all of their development issues on environmental issues is problematic, to say the least.

Hong Kong may be special in this regard because (1) other factors (schools, crime, infrastructure, weather, even political freedom) are largely controlled for, at least vis-à-vis its chief competitor, Singapore; (2) it is small, so there is no escaping the air pollution problem by moving out to the 'burbs, and even a small effect on the local economy can be measured; and (3) it is first and foremost a financial center.

This last point is critical. While Hong Kong is also a shipping center and closely linked to Chinese manufacturing centers in Guangzhou, Hong Kong's wealth comes mostly from taking a cut of the vast sums of money that flow through the territory. When compared with banking, shipping and manufacturing are low-margin businesses. In today's world, finance is also the least geographically bound of industries. Stock exchanges are electronic, and buying and selling shares can be done at any time, day or night, anywhere. This means that financial firms can very easily pull up stakes and move to greener pastures (in this case, maybe literally). Hedge funds perhaps are the easiest to move, as they tend to be firms, with the least need for physical infrastructure. But now, it appears, larger firms are also following suit.

But while finance is particularly mobile, other industries—even old-fashioned bricks-and-mortar manufacturing—are also increasingly mobile. Even real estate and physical-capital intensive manufacturing industries now pick up stakes and move to cheaper or better locales, when profitable. For these industries, of course, "human capital" does not command nearly the premium it does with financial firms, but for some manufacturers and service firms, this may be changing.

What does this mean for the economics of environmentalism? Probably not much for those regions and countries with little in the way of human capital and otherwise dependent on manufacturing industries. But, in the United States, at least, cities now appear to be competing over attracting the "creative classes" and various "knowledge-based industries" as keys to urban development. Hong Kong's experience may provide ammunition to those arguing that a clean environment plays a role in a building a strong economy.

Michael Aguirre has his own blog

I don't know why I care even a wit about what an idiot San Diego's City Attorney Michael Aguirre is. I don't live in San Diego. And while it really annoys me when local politicians use taxpayer money to push political causes through the legal system when they know full well that higher authorities (the federal government, the courts, etc.) have already ruled against them, Aguirre is not the only one who does this. You see the same thing with South Dakota's anti-abortion law, which doesn't just try to push the boundaries of Roe v. Wade, but force the Supreme Court to directly take up the entire case again (something it almost certainly won't do, no matter how conservative the court--it is much much easier both politically and legally to just chip away at the edges until the original ruling has lost most of its meaning). You saw it with Alabama Chief Justice Roy Moore, who insisted on putting up a huge stone monument to the Ten Commandments in the Alabama Supreme Court building, despite clear court decisions against him. In each case, taxpayer money was used to tilt at a given politican's personal political windmills.

So Aguirre isn't the only one out there. But Aguirre so goes out of his way to be annoying that I can't help but notice. And I find that even more annoying. His latest annoyance is his own blog, called The Aguirre Report, where he uses the San Diego City website to denounce San Diego's main newspaper, the Union Tribune. I particularly like the question he asks: "The real question is, why is the U-T devoting hundreds of inches of copy in their newspaper to discredit me?"

Because you're an idiot, Mr. Aguirre. And you are using too much taxpayer money flaunting your idiotry. San Diego has some serious problems, but your press conferences aren't going to solve them. Actually offering sound legal advice and turning over key documents to auditors on a timely basis might, but pissing off half your staff so they quit probably won't.

Oh, and by the way...Bobby Kennedy? Also an idiot.

Oh, and one other thing...if you had any guts, you'd have a comment section on your blog. But I suppose Mike is too busy reading his employees' emails to care about what San Diegoans have to say.

See the Union Tribune's latest "hit piece" here.

NSA black ops and the Daily Kos

Steven D. of the Daily Kos is suggesting that two European men who may have blown the whistle on what may have been a National Security Agency operation to tap the cell phones of certain European officials may have been whacked by U.S. operatives. (Sorry for the convoluted sentence, but that's what you get with conspiracy theories.) DK's blog post is drawn from another post by Cannonfire.

Steven D's key accusation is:

What we do know, based on the European reports cited in Mr. Cannon's post, however, suggests the existence of a massive, coordinated effort by the Bush administration to violate the laws and sovereignty of other nations in its attempts to gather information, regardless of the tenuous connection such eavesdropping may have to the "War on Terror." One that may have led directly to the death of two men who had exposed elements of this ongoing spy program operating in their countries: Adamo Bove in Italy, and Costas Tsalikidis in Greece.

I'm not much into conspiracy theories. I'm also not much into concerns about "violat[ing] the laws and sovereignty of other nations," particularly in attempts to gather information. That is, after all, what all countries do, and if our intelligence people didn't do this, we would fire them. After all, we give the NSA a lot of money each year. Does anybody not expect them to use it in ways that violate foreign laws and sovereigty?** I fully expect them to break foreign laws in collecting information. I also fully expect them to not get caught doing it. But that is something for a different post.

But the bigger issue, of course, is whacking the whistle-blowers. It does seem suspicious. But my question is, if you blew the whistle on a mafia operation, would it be surprising if the mafia tried to whack you as a result? And in all seriousness here, shouldn't we expect at least the same level of efficiency and deterrence from our own intelligence agencies, at least when it comes to foreign citizens who were assisting us in setting up an operation? After all, if a U.S. citizen blew the whistle on an operation like this, it likely would violate U.S. law and the government could bring charges against the individual--maybe even for treason (a death-penalty offense). If a foreign citizen working for a U.S. intelligence agency does this, however, the violation of U.S. law is moot, because the individual is protected by foreign law.

Sure sure, I recognize that the mafia is a criminal organization. But in the realm of international affairs, aren't all governments "extra-legal" in the sense that there is no overarching sovereign to enforce international law? And, at the end of the day, what do we really expect of our intelligence services? Not to get existentialist on you all, but, to quote the Communist leader in Jean-Paul Sartre's play, Dirty Hands:

I have dirty hands right up to the elbows. I’ve plunged them in filth and blood. Do you think you can govern innocently?

Do we think our government can govern innocently? And do we expect the guys we pay to do our dirty work will always have clean hands?

I'm just sayin'...


**By the way, do you know it is illegal for someone in Switzerland to cooperate with any foreign government official in any law enforcement investigation, even if voluntarily and even if the person in Switzerland is victim of an overseas crime? It is also illegal for a foreign official to contact someone in Switzerland--notice I didn't say "Swiss citizen"--to even ask about voluntary witness cooperation? Do you seriously expect our law enforcement and intelligence officials to not violate that law?

***Special thanks to The Truth About Black Helicopters for the graphic. Pretty and complicated--just my type!

Sarbanes-Oxley and optimal regulation

The Sarbanes-Oxley Act of 2002 was passed in the wake of the Enron and Worldcom scandals and has proven to be the most significant reform of U.S. securities laws since the first federal securities laws passed in the 1930s. If there is any section of this law that is most loathed (and every section is loathed by somebody), it is Section 404. The law itself is relatively innocuous:

SEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS.

(a) RULES REQUIRED.—The Commission shall prescribe rules requiring each annual report required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) to contain an internal control report, which shall—(1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (2) contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.

(b) INTERNAL CONTROL EVALUATION AND REPORTING.—With respect to the internal control assessment required by subsection (a), each registered public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by the management of the issuer. An attestation made under this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board. Any such attestation shall not be the subject of a separate engagement.

Boiled down, the real objection is to paragraph (b). Since passage of the Foreign Corrupt Practices Act in the late 1970s, publicly traded companies were always supposed to have a system of internal controls. And, from an investor’s perspective, who wants to invest in a company where the company doesn’t have some way of telling where and how it is spending its money? Prior to Sarbanes-Oxley, companies would voluntarily pay management consulting firms millions of dollars in fees to develop better systems for sourcing and supplier management to track how corporate funds are spent and to identify ways this money might be wasted.

So what’s the problem with (b)? It’s the testing that auditors now require in order for them to attest to management’s assessment of its internal controls. Arguably, it doesn’t require anything that audit firms shouldn’t have been doing anyway. After all, if an auditor doesn’t test management’s assessment, what does it do? Check management’s math?

But in reality, after Arthur Andersen’s collapse, Section 404 is both a threat and a promise to auditors, and one that has gotten out of hand. Section 404’s threat is obvious. Public companies in the United States are the ultimate example of what Adolf Berle and Gardiner Means in the 1930s first called "the separation of ownership from management." Shareholders of large public companies may "own" it, but they don't run it or control most of its decisions. Accordingly, there is a very real risk that the managers of these companies will run off with (as Justice Louis Brandeis once called it), "other people's money." The independent public auditor is designed to keep this from happening. Theoretically, at least, the auditor works for the shareholders and confirms that the books management keeps about how the company is performing is up to snuff.

But you can see the problem. If the auditor attests to management’s controls and a meltdown occurs, the auditor is in trouble. On the other hand, auditing, traditionally, has been a low-margin industry—which is one of the reasons that audit firms dived so deeply into the type of management consulting that led to the conflicts of interest that brought down Andersen. Section 404 reverses this. Auditing now makes money, particularly if you can force an issuer to pay for all sorts of internal controls testing before you give over the vital attestation.

Partly to blame for all this is the Public Company Accounting Oversight Board. The PCAOB, formed out of the Sarbanes-Oxley Act, takes seriously its mandate to oversee and regulate the auditing industry. So seriously that its rules relating to Section 404 are unforgiving. It initially required audit firms to test an issuer’s controls for any expenditures over $6000. That means a company that spends billions of dollars each year on inventory pretty much needs to hold on to every receipt for more than $6000 if it wants to pass the sniff test with auditors. Actually, this sounds like good policy, but probably not the kind of thing we want chief financial officers to be directly involved in.

Further, the PCAOB refused to take hints to lighten up on this from the Securities and Exchange Commission, which has oversight authority over it. (It is a widely known secret that there is considerable tension between the SEC and PCAOB, aggravated to a considerable degree by the PCAOB’s previous chairman, Bill McDonough. Rumor has it that when SEC staff first broached the issue of SEC inspections of the PCAOB’s operations—a requirement of the Sarbanes-Oxley Act—McDonough stormed out of the meeting in a fit.)

The PCAOB has since offered some additional guidance on how audit firms should test an issuer’s internal controls, but it has not gone as far as many would like. Which brings up an interesting question: Obviously, in a costless world, investors would prefer that issuers have internal controls that track every single dollar of expenditures. For a company of any size, though, clearly this is impossible, or at least extremely costly. (Can you account for every single dollar you spend?) At the other extreme, a company of any size that loses track of millions of dollars is ripe both for fraud and for the bankruptcy courts. The question is, where does the value to the investor in robust controls exceed the cost to the company (and, accordingly, the investor) of those controls? Is this the kind of question that is company-dependent? And if it is, what does this mean for audit firms, since those who probably have the most information about the true costs of these controls (management) also have the most incentive to see that those controls are less adequate than might be economically most efficient?

Even more Coase and global warming

Is MDF giving an accurate picture of the difficulties entailed in stopping or even slowing down global warming? Well, obviously I wouldn't have asked (or have written this post) if I thought so. Not, it's not that hard to create the kind of agreement he and Professor Sunstein are imagining. It's much harder. It's not just a matter of liberal types not wanting poor countries of the world to pay the rich countries, or that there's no way to enforce such a Coasian bargain, or even that the transaction costs are too high. It's that the logic of the Coase theorem suggests that in a perfect Coasian world of zero transaction costs, no one on earth would agree to such a contract.

Let's imagine that all of MDF's criteria are met. Somehow an agreement can be constructed that would not just completely put a stop to global warming, but that would also be acceptable from a geopolitical standpoint to both China and the US. Let us further suppose that some mechanism is found to ensure absolute, costless, perfect enforcement of such an agreement and that no opportunity for cheating would exist. Let's suppose that we are also able to magically suspend any and all transaction costs associated with such an agreement and that the Coase Theorem works perfectly.

Now, as Professor Sunstein (and others) have pointed out, it's mainly undeveloped countries who will suffer most of the burden of global warming. So setting aside any political difficulties (which might be considered a sort of transaction cost and so ignored in this thought experiment), poor countries will have to make a calculation: would they rather suffer the effects of global warming or pay for the high cost that would be suffered by China & the US (et al) in the process of avoiding global warming? Note that by some estimates the Kyoto protocol costs $150 billion a year. Maybe it's less, but probably not a whole lot less. More importantly, Kyoto isn't designed to stop warming or even slow it down all that much -- to actually stop the warming will cost an inordinate amount of money. So if those poor countries were to agree to an end to global warming, they would have to honestly think that there would be no better use to that money. Is that likely?

Perhaps you think I'm being unfair. Maybe poor countries really would like to make that deal, but they don't have the available cash to do it. And anyway, it hardly seems fair to demand that the third world pay the world's two largest (in PPP terms) economies not to pollute -- sounds like blackmail, doesn't it? And after all, what right do rich countries have to pollute the poor world or raise their temperatures? Ok, so let's tweak our imaginary solution and say that instead of being paid to release less carbon, that emitters will have to pay poor countries for the right to heat the planet. Poor countries would definitely be better off -- but they would only be cooler if they'd rather avoid a hotter, stormier climate and higher sea levels than receive cash payments from emitters up to the cost of averting global warming. Is that likely?

This is a somewhat different question, of course -- there's a big wealth effect and wealth changes marginal preferences -- but come on. Who is kidding whom? Sure, there'd be more flooding in Bangladesh in a few decades -- but Bangladesh would be able to afford tremendously better levees and better warning systems, and better fed population. Would they actually think they wouldn't, or shouldn't, want to trade very slightly higher temperatures for cleaner water systems so they could stop losing so many people to dysentery every year? Or just invest all that money in economic development so they'd be able to produce these things themselves? Note that all of these projects are rather cheap compared with the cost of averting global warming.

So either way, global warming continues -- which is exactly what the Coase Theorem tells us to expect. The opportunity cost of averting global warming -- all the things that could be purchased if we allow temperatures to continue to rise -- is quite high. (The cost of global warming is very high too, but not nearly as much.) Even setting aside geopolitical considerations and political difficulties, the sacrifices involved with gaining a cooler planet are just too high, because, in a Coasian sense, global warming isn't really a failure at all. It's really bad, but the alternatives are even worse.

Sunstein and global warming continued

My last post noted that Cass Sunstein's Washington Post article, "Limiting Climate Change: The Neglected Obstacle," correctly identified one of the key problems to devising an international solution to global climate change, but failed to offer any practical solutions. The correctly-identified problem is that the two largest emitters of greenhouse gases (China and the United States) will have the bear the brunt of any international effort to reduce the threat of global warming, but they are also among the least likely to be adversely affected by global climate change. The two solutions the professor offers are (1) convincing China and the United States that they have a moral obligation to incur a tremendous cost on themselves to protect India and Africa, and (2) convincing them that drastically reducing carbon emissions will not be nearly as expensive as all current estimates would lead us to believe. I noted that even under the best circumstances, these proposals likely would be non-starters. However, these solutions are even more likely doomed to failure because the PRC and the U.S. are geopolitical adversaries and economic growth is a currency for international power. Consequently, if international power dynamics are zero-sum in nature (as many international relations theorists suggest), unilaterally neither China nor the United States would be willing to do anything likely to damage their economic growth since that would leave the other in a comparatively better position.

But then what is a solution? The problem here is aggravated by the anarchic nature of the international environment. Domestic politics, of all types and under all political regimes, has a single common characteristic, and that is the police. Laws can be enforced. Who makes the laws varies considerably, but all societies have some mechanism to deal with enforcement. International relations, by contrast, have no such mechanism. At the end of the day, all agreements must be self-enforcing (i.e., you do this, and I will do that; if you don't do this, I won't do that). It is, as John Mearsheimer (another University of Chicago professor) might say, a "self-help environment."

Perhaps a third University of Chicago professor, Ronald Coase, has something to offer in this regard. (I'm not paid by the University of Chicago, by the way--though I should be.) The Coase Theorem (which led to Coase winning the 1991 Nobel Prize for economics) states that, as long as property rights exist and in the absence of transaction costs, it does not matter how those property rights are allocated because actors will bargain with each other to correct any externalities. (This is my understanding, of course, and I could be wrong. I'm not an economist, or even particularly bright...) What would such a bargain look like? One obvious solution would be for India, Africa and other countries to pay China and the United States to comply with the Kyoto Protocol, and to link these payments to some kind of oversight and enforcement mechanism, to dissuade cheating. Politically, though, I suspect this solution is as feasible as Professor Sunstein's (in other words, not at all). Poor countries paying rich countries not to create externalities may make economic sense, but all those whiny liberal types are likely to complain on moral grounds. Even aside from that, though, I doubt the poorer countries most likely to be hurt by global climate change have sufficient resources to pay China and the United States enough to make their sacrifices worth it.

Nonetheless, whatever solution is out there will need to take into consideration geopolitics. Any economic harm resulting from cuts in greenhouse gas emissions will need to take proportionality into account. The changes should not leave any powerful country proportionately worse off vis-a-vis any other powerful country. Absolute economic costs are not nearly as important as relative costs. Furthermore, mechanisms to prevent cheating must be in place, or powerful countries will suspect that potential adversaries will use the Kyoto Protocols (or whatever replaces it) as a way to gain an economic (and, from there, a geopolitical) advantage.

The uneven costs of global warming

Speaking of Cass Sunstein, he wrote an article in the Washington Post this past Friday ("Limiting Climate Change: The Neglected Obstacle") on the fundamental geopolitical obstacles to limiting global climate change. It's easy for someone to say, "That's exactly what I've been saying," but, seriously, the article says exactly what I've been saying for quite some time. And, of course, I'm not the only one. But Sunstein does manage to put the argument into very succinct, logical, fact-based terms (whereas my arguments are rarely fact-based). Basically, the obstacle is that the U.S. and China are the top greenhouse gas producers (with China shortly to overtake the U.S. for the #1 spot), and, accordingly, will bear the brunt of any emissions cuts needed to limit global warming. At the same time, both China and the United States are less likely to suffer the adverse effects of global warming than other countries--particularly India and those in Africa. (Sure, you get the odd Hurricane Katrina in the U.S., but even the enormous costs of cleaning up those messes pales in comparison to the costs you face by reducing fossil fuel emissions by 70 or 80 percent. This is even more so if you build your cities in anticipation of greater hurricane activity, instead of building them haphazardly over swamps and flood zones as was the case in most of New Orleans over the past 25 years.) China, by contrast, might actually benefit from global climate change (as will some other countries, such as Canada) as higher temperatures increase crop yields.

But a separate point that Sunstein doesn't mention is that both China and the United States are in geopolitical contest with each other. The reasons why this is so are irrelevant here--it could be a will to power (if you are an old-fashioned Realist a la Hans Morgenthau), it could be a desire for security in an anarchical international environment (if you are a Neo-Realist a la Kenneth Waltz) or, under some circumstances, it could just be a desire to become richer than everyone else (perhaps if you are a New Trade Theorist). The point is that, if the international environment has any zero-sum attributes (that is, a gain by me requires a loss to you, and vice versa), then neither China nor the U.S. would agree to anything that has any chance of harming their economies unless the other agrees to do something that causes proportionately equal harm to its economy as well. (For both Realists and Neorealists, this is because economic strength can be translated into international power.) The proportionality of the other side's harm is important here, not just the absolute value of the economic harm, because of the zero-sum nature of geopolitical power.

It is here that Sunstein's conclusions fall apart. In particular, he states:

But the troubling fact remains: The two nations now most responsible for the problem have comparatively little incentive to do anything about it. That is why, if the nations of the world really mean to take substantial steps to reduce greenhouse gases, they have two options.

First, they might find a way to convince the United States and China that they have a moral obligation to protect the planet's most vulnerable people. The United States has long benefited from technologies that, while promoting its economic growth, are imposing serious risks on disadvantaged people in India, Africa and elsewhere.

Second, the world's nations might try to convince these two countries that emissions reductions are less expensive, and more beneficial for their own citizens, than the recent projections suggest. Environmentally friendly innovations have often turned out to be far less costly than anticipated. (And if persuasive evidence is found that indicates greater losses for both nations from global warming, there will be a stronger incentive to try to innovate.)

It is only with such an incentive, or a sense of moral duty, that the United States and China are likely to participate in serious international efforts to reduce greenhouse gases. And without the participation of the two countries, no such efforts are likely to have a substantial effect on the problem.

There are some clear problems with Sunstein's proposals. The first involves convincing the United States and China that they have a moral obligation to "protect the planet's most vulnerable people." The second is convincing these two countries that "doing the right thing" is far less costly than all the evidence suggests is the case. Not to be too blunt about it, but both obviously involve some wishful thinking.

The first proposal suggests that moral suasion is a powerful force in geopolitical affairs. Evidence on this is, at best, scant. I would go so far as to suggest that if countries could be morally persuaded to take upon themselves such enormous costs "merely" to help the world's most vulnerable people, we would not be worrying about global warming to begin with. We would have solved war, poverty and hunger a long time ago. But to suggest that countries take upon themselves such costs when, quite possibly, they believe such costs may jeopardize their national security (as Realists and Neorealists would argue) is to suspend disbelief to such an extent that even George Lucas starts to make sense. In other words, Sunstein believes we need to convince China and the U.S., on moral grounds, to do something that they may well believe is starkly contrary to their national security. Furthermore, what we need to convince them to do is even more contrary to their national security if the other one doesn't go along with the plan, or cheats.

Sunstein's second point, of course, is even more clearly problematic. Basically, even though all the evidence currently indicates stopping global warming is very expensive and detrimental to economic growth, we need to convince them that it is not. And we need to start doing this by finding evidence that contradicts the evidence we currently have. I'm not sure if what he is proposing here is a Kierkegaardian leap of faith, or an attempt to prove a negative. But if that is what is necessary to save the world, you might want to learn to swim.

The risks of exploding laptops

Corey Dade of the Wall Street Journal reported earlier this week ("Laptops draw scrutiny from airline-safety officials") that, irrespective of terrorist threats, the Federal Aviation Administration is considering what to do about the dire threat posed by laptop computers. As Dell’s battery recall this week demonstrated, the problem, it seems, is not so much that laptops may be used to disguise bombs, but that they are, in fact, bombs. Particularly those models with lithium-ion batteries. The WSJ reports six incidents over the past two years where laptop batteries have started smoldering or even caught fire (apparently even when the computer was off), leading to all sorts of airline havoc. Obviously, as has been reported elsewhere, laptop fires are not just a problem for airlines. Burned laps are not fun, and a number of lawsuits have been generated via spontaneously combusting laptops whose users took the name seriously. And your first question, when you hear about laptop fires on airplanes, might be the same that the FAA is currently considering—should we ban the things?

However, misanthrope that I am, my first question is what is the cost/benefit equation being considered here. (And, no, I’m not an MBA. An MBA asks only what the cost/benefit equation is for the company he or she works for. I’m generally far more parochial—what is the cost/benefit equation for me personally? But, in this case, I mean for society.) What are all these laptops doing on airplanes to begin with? Before we consider the benefits to banning laptops from airliners, we should consider the economic costs, and only by answering this question can we properly consider what these costs are. (This same issue should be addressed when considering restrictions on carry-on items as a result of terrorist threats, but I will leave that for a different post.)

From personal experience, I suspect that most people carrying a laptop in the passenger cabin of an airline never actually use it on the airplane. Most carry it because they need to use it later, at work or at home, and consider it too fragile to be put on checked luggage. (Though, actually, just banning laptops from the passenger cabin would seem to be a nonsensical solution, since there is no indication that laptops in cargo holds are less likely to burst into flames.) If this assumption is true (and I personally believe it is), in the “costs” column we need to consider all those damaged laptops and the cost they might present to the corporations and individuals owning these computers. (Somebody is going to have to pay for these things, and, even taking into account increased computer manufacturer profits, this is likely going to be a net loss to the economy.)

Other people actually use these things on planes, and we have to consider what they are doing with them. Personally, I mostly use them to look at German gay porn, in order to discourage the guy next to me from trying to share the joint armrest that separates our seats. (Of course, since I’m not actually gay or German, this occasionally horribly horribly backfires…) I also use my laptop to watch DVDs (Hogan’s Heroes box sets being one of my favorites—there’s nothing quite as fun as watching Hogan and the gang outwit those goofy Nazis while on a flight to Europe) and sometimes I play computer games to pass the time. Occasionally, like right now, I might show my complete disregard for the safety of my fellow humans and use my laptop on a plane merely to write a blog entry. On very very rare occasions, I might do something work-related.

Arguably, my real job is a social and economic negative, but most people actually have productive jobs, so the question is how much net gain does our society and economy get from busy worker bees using their laptops on airplanes, rather than, say, reading the DaVinci Code. But even aside from actual worker productivity, we should ask what value we place on the psychological benefit we get from watching DVDs of Hogan’s Heroes, playing Doom, or just discouraging Mr. Wheezy Fatboy from sharing our armrests while on long flights between Point A and Point B. It may be hard to nail down a social utility figure for this, but we could probably guess at it by considering how much people spend on personal DVD players and computer games particularly aimed at travelers. After all, if we were all collectively grumpier as a result of airline boredom, this would have a social effect and perhaps even an economic effect, if worker bees demanded more pay to compensate them for jobs that required lots of airline travel.

Against this, of course, we need to balance the benefits to banning laptops on airplanes. The first benefit, of course, is the risk averted and potential deaths prevented. This risk is not large, however. According to the U.S. Bureau of Transportation Statistics, U.S. airlines alone handled approximately 11 million flights in 2005, and 10.9 million in 2004. If the WSJ counted 6 laptop burning incidents over the past 2 years, and we assume that this was only U.S.-based airlines (which it wasn't), this means that the risk of a laptop “incident” on any given flight is approximately 3.67 million to one. While no one has yet been harmed by a burning laptop on an airline, there is a possibility that a serious airline accident might occur between now and the time safer laptop batteries are developed, with some loss of life.

How much is a life worth? Putting a price on human life is always a dicey topic. It is complicated by the fact that some people’s lives are actually net drains on society. Huge herds of idiots, as described in previous posts—see the one about Congress in particular—insist on burning up precious oxygen, and even though oxygen is a renewable resource, it is not renewed nearly fast enough to justify their breathing it. My life, on the other hand, is infinitely valuable. But I’m guessing your's is not. Studies on regulation and the value of a human life vary, but they tend to average around $1.4 million, at least according to University of Chicago law professor Cass Sunstein.

So, should the FAA ban laptops on airlines? My guess is that they’d have to be a bunch of oxygen-wasting idiots to conclude we should.

Highly recommended lawyers

I know all of these people. Most I've either worked with or went to school with. If you don't believe me, you've obviously never gone to law school.

Somebody clearly put a lot of work into this site. Someone who worked for a major law firm at one point, but doesn't anymore. You don't have time to blog when you work at a major law firm. Or be creative. Or have a sense of humor. You know what I mean.

Stock option backdating: apparently companies also think you are stupid

On Monday, the Wall Street Journal’s David Reilly reported that many of the companies that most vociferously opposed the Financial Accounting Standards Board’s proposal that stock options be expensed are the same companies now caught up in the options backdating scandal. Why is anyone at all surprised?

FASB is the U.S. accounting standards-setting body, and it has for several years now proposed that stock options — the rights companies give some employees to buy company stock at some future date at a given price (usually today’s price) — be recorded on a company’s balance sheet as an expense. Stock options exploded in popularity during the 1990s, and originally were designed to serve two purposes. First, the allegedly align the interests of management with those of the shareholders who own the company but are not in a position to exercise day-to-day oversight over how the company is run. Share options, in lieu of cash, serve as an incentive for management to see that the company does well (as reflected in its stock price), since the options are worthless unless the company’s stock increases above the “strike price” at which the options were issued (which, ideally, would be above the stock’s current price). Share options are also given out by cash-poor start-ups to a wide range of employees (not just managers), as a way of convincing these employees to take a chance on the company in exchange for a very high potential payoff if the company does well.

When an employee or manager exercises a stock option, the company must either sell the employee stock from the company’s treasury shares (shares of the company held in reserve and not sold to the public) or first buy shares from the public to sell to the employee. In either case, this is a cost to the company, since the company could otherwise sell the treasury shares to the public at the going rate, or else the company is buying at the going rate and selling to the employee at a discount. If these are treasury shares, there is an additional dilution of existing shareholder interest in the company, since treasury shares typically cannot be voted by the company.

“Expensing” these stock options would require companies to deduct the future value of these shares (adjusted for the time value of money) from the company’s current profits. Companies that traditionally have used stock options objected to the FASB proposal by saying that, at the time the options are issued, the expense to the company is uncertain. Who knows how much the company is going to fork over to pay for them, and when (if ever)? In addition, they claimed, expensing stock options would make start-ups appear to be deep in debt because of these future expenses, and thereby confuse investors’ pretty little heads. This would thereby discourage their use, to the detriment of America’s high-tech industry. Better to just note the stock options in an accounting footnote, since investors are smart enough to know what these mean (even if they aren’t smart enough to know what they mean if you were to just put it in the actual financial statement).

However, there are techniques for measuring the present value of a stock option, including one that won its creators the Nobel Prize for economics (the Black-Scholes Model). And, as Warren Buffett famously said, if stock options aren’t compensation, what are they, and if compensation isn’t and expense, what is it?

Anyway, after being shot down in Congress in the 1990s, FASB got its way after Enron and Worldcom. Now, as the WSJ reports:

• In 2004, a KLA-Tencor Corp. executive told FASB that there was no way for her company to issue options in a way that would benefit executives in a non-transparent way. In another letter to FASB, Maureen Lamb, then a vice president of finance, wrote that while there were flaws in the accounting rules for stock-based compensation, and that "the politically charged belief that the blame lies with executives unwilling to give up their ill-begotten compensation is backward and unproductive." Ms. Lamb added that "KLA-Tencor does not currently have the ability to issue any equity-based compensation other than at-the-money stock options [i.e., at current market prices]." This past June, a committee of company’s board reached a preliminary conclusion that the price dates for certain grants likely differed from recorded grant dates. In other words, the options likely weren't "at-the-money" at all, and should have been expensed even under the old FASB rules.

• Patrick Erlandson, chief financial officer at UnitedHealth Group Inc., wrote in a June 2004 letter that "expensing stock options does not provide financial statement readers with the most appropriate reflection of the economic impact of stock-options grants on an entity's financial statements." Just recently, however, UnitedHealth disclosed that its options-grant practices are the subject of an "informal" SEC inquiry and that the IRS has requested documents regarding the options.

• Macrovision Crop. wrote FASB in 2004 to say that those favoring the FASB proposal "seem to do so for the wrong reasons." "They tend to focus on corporate greed," the letter said. "Stock options in themselves do not make people corrupt.” This past June, of course, Macrovision disclosed that the SEC had requested information about the company's options practices since 1997; later that month the company said it was subpoenaed by federal prosecutors.

• Nathan Sarkisian, chief financial officer at Altera Corp., wrote in a June 25, 2004, that the difficulty in assessing values needed to expense options would result in an "opportunity for creativity for those who might push the envelope.” This past May, Altera said the SEC and federal prosecutors are looking into its options-granting practices and that there are problems with options granted between 1996 and 2000. It expects to restate nine years of financial results.

None of this should surprise anyone. All of the arguments against expensing stock options are predicated on the idea that investors are too dumb to understand the complexities of how companies are run. But if this were true, it calls into question the whole foundation of the U.S. disclosure-based approach to securities regulation. If investors really are this dumb, a better approach might be merit-regulation, whereby the SEC would decide for investors whether a company’s business model and financial health were sound enough for investors to put their money into it. If, however, investors, in aggregate (even if not individually), are not so dumb, they will recognize that stock option expenses do nothing to effect the actual cash flow of a start-up. Even if the actual expensing calculation is wrong, investors will soon learn to discount this error appropriately, since the error will apply universally.

The lesson here is that when a corporate executive opposes something because “it will just confuse investors,” run and hide your wallet.

It's always a heartening story when a runner-up comes back to take first prize

But it's also a funny story when the contest is for the Darwin Awards.

The key lines are:

Dodd, the fourth local resident to be struck by a train this month, also was hit by a train in 1999.

and

The railroad workers said it appeared that Dodd had his head on the rail, using it as a pillow.

Now that's the Ann Coulter we know and love!

She admits that she was wrong to say that Bill Clinton is gay—but then adds that Al Gore is a total fag. And she disses Chris Matthews while doing it.

That's the Ann Coulter we love. Funny and sharp. We need more of that, and less ranting. If you want ranting, that's what you got me for.

Watch it here.

Congress thinks British Petroleum is stupid (or possibly that you are)

While MDF is on vacation, or at least out of town, I’m picking up the slack. Today’s extended rant topic: Congress, oil companies, and price-fixing schemes. Congress has announced an investigation (sr) into BP’s corroded Alaskan pipeline, suggesting that the shutdown might be part of a plan by BP to influence the market and drive up prices.

Obviously, I don’t want to argue that corporations don’t do ethically questionable things (I definitely don’t want to say that on this site). I just want to ask, why on earth would BP want to do this ethically questionable thing. We can all imagine why a monopoly would want to cut production — to increase prices. Doing that sort of thing is the whole point of having a monopoly (or a cartel, or a guild, or a union …). But why would a particular company want to do so unilaterally? I could see why, say, Exxon or Shell would be thrilled by BP cutting production — they would get to see just as much as before but at a higher price. But it sounds like BP would get screwed: they would take all the losses and reap few of the benefits. If oil companies are acting as a cartel, BP really needs to renegotiate.

And let’s imagine that oil companies did decide to cartelize and decrease production: when would they do it? Let’s talk basic price theory. Prices can be high for one of two reasons: demand is high or costs are high. If gas prices are high because oil demand is high, then a cartel is likely to be very unstable, as the incentive to cheat is very high (if demand is low, cheating doesn’t get you much extra revenue anyway, so you might as well adhere to the cartel’s agreement). So if worldwide demand for oil has driven up prices, then you’d think this would be the last time that oil companies would be cutting production, even if they wanted to cartelize.

On the other hand, if prices are very high because costs have gone up, then firms won’t make all that much extra from selling above the competitive price anyway. This makes intuitive sense: if costs have gone up, you’ll sell less; if you’re already selling less, you don’t have much production to cut back. Granted, you aren’t going to be making much money either way, so you’d make a proportionate amount of extra profit from cutting back production. However, if the expected cost of getting caught and brought up on price-fixing charges is constant, you’d be taking an equally big risk for a much smaller amount of profit.

In fact, the expected cost of getting caught is almost certainly not constant. When prices are high, it’s much harder to avoid public attention and federal oversight — so you’d be taking a much bigger risk for much smaller potential reward. So this would be the absolute worst time to try a harebrained** price-fixing scheme. They should have formed a cartel in 1999, when I was getting gas for 75 cents a gallon — no one would have noticed. Maybe they did — I surely wouldn’t know. But we can be certain they aren’t now; it just doesn't make much sense.

Which goes to yet another perverse Congressional incentive — why is Joe Barton leading the attack on BP? Texas congressmen don’t normally make a habit of criticizing oil companies. But gas prices are high and the public wants a scapegoat, so someone from Texas attacking an oil company makes sense, in a Nixon-goes-to-China way. Except more evil: putting effort into looking for price-fixing schemes only when oil supply is low and demand high is just plain perverse. As is adding to the public delusion that gas prices go up when oil companies are greedy, and that more responsible energy policies are unneeded.

Congressional incentives: they’re really the evilest.

** What would you call a price-fixing scheme that would depend on publicly announcing the manner of your output reduction in such a way as to garner bad publicity among your greatest detractors (environmental disaster) and supporters (investors who suddenly realize you’re incompetent) while making Congress less likely to give you a handout (ANWR) and more likely to investigate you?

Israel/Lebanon ceasefire

Clausewitz tells us that war is politics continued by other means. If this is true, in a very simplified manner, war as politics exists on a continuum with a hierarchy of possibilities. This hierarchy looks like this:

1. Objectives achieved, no effort
2. (or 3) Objectives achieved, with effort
3. (or 2) Objectives not achieved, no effort
4. Objectives not achieved, with effort
   

The first preference is to achieve your objectives with no effort (and effort, in this case, means military expenditures, deaths and casualties, political capital, etc.)

The last preference is to fail to achieve your objectives at considerable effort.

In reality, most geopolitical contests will fall somewhere in between these two poles. And this entails a calculus. Is achieving your goals worth the effort this will take? Can you know the cost before you embark on a given course? And at what point does “cutting and running” become the least worst available solution?

I ask this because it has relevance both to Israel/Hezbollah and the U.S./Iraq. In the Israeli/Hezbollah case, so far we have an unstable ceasefire in place. What was Israel’s calculus in this matter, and what was Hezbollah’s? Did either achieve their objectives? And what was the cost they paid? (Both clearly have paid a cost, but it is not at all clear that the cost for both is equal. It is conceivable that Israel decided that it did not achieve its objectives but that additional effort was not worth the additional benefit. The same could be said of Hezbollah, or, for that matter Iran. Or they could have achieved their objectives and look at the cease fire as a way to keep the cost of this achievement from escalating).

Quick, sign me up for that investment!

It's always great when your business model is predicated on your chief competitor continuing to screw up. According to the London Times, that seems to be the London Stock Exchange's approach these days. Well, they don't say that in so many words, but that's what the article heading, "London prospers from US regulation" seems to imply, doesn't it.

Now, if we can just keep those Americans from changing their laws, we're well good, right?

No wonder everyone thinks they can run the London Stock Exchange better than the current management.

Democratic Party Mascots: Replacing the donkey with the lemming

I'm not a big Joe Lieberman fan, mostly because I think he can be horribly hypocritical. He came down hard on corporate America after Enron and Worldcom, but, in my book, he shares more than his fair portion of the blame for the financial scandals we've had over the past few years. In the 1990s, when the SEC and the Financial Accounting Standards Board tried to rein in the conflicts of interest that were plaguing the accounting industry (and which led Arthur Andersen to overlook the shenanigans going on at Enron and elsewhere), he threatened to take FASB apart and cut the SEC's budget. He won, and investors and pensions throughout America lost. That said, Jacob Weisberg in Slate is right. The Democrats' dumping of Lieberman is an early indication that they believe ideological purity is more important than control of the Senate in 2006. And if anyone can lose against the Republicans in 2008, it's the Democrats.

Mr. Levitt goes to San Diego (and Michael Aguirre is a buffoon)

Since I’m on the topic of Arthur Levitt, today’s fatwa goes out against government officials—particularly city attorneys and local prosecutors—who bring cases before the courts that they are guaranteed to lose. I don’t mean hopeless cases against violent criminals where there probably isn’t enough evidence to convict. I mean politically motivated lawsuits against someone where court precedent or other laws are clearly against the position being taken. In these cases, the point isn’t to win, but for the official to make a political statement for or against something, regardless of what the law actually says. Hey, I’m fine with all that. But in this case, you are using my tax money to make this statement, and I’m definitely not fine with that.

What is sticking in my craw today is news that San Diego City Attorney Michael Aguirre plans to sue San Diego’s audit committee, including former SEC chairman Arthur Levitt and the security firm Kroll, Inc. As has been reported in a number of places, what has Aguirre’s beef is that Levitt, former SEC chief accountant Lynn Turner, and Kroll, after extensive review, have drafted a report about who’s to blame in the San Diego pension crisis that differed with his own report. And what’s more, the Levitt/Turner/Kroll report dares to state that Aguirre’s own investigation and legal analysis was "…results-oriented and bereft of intrinsic credibility". Ouch. That has to hurt.

The audit report clearly states what went wrong. Former San Diego Mayor Dick Murphy and members of the San Diego City Council failed to disclose the extent of the city’s problems to bond investors—a major federal securities law no-no—so as not to scare them away from giving the city money to build a new ballpark for the San Diego Padres. (Bond investors tend to get nervous when your bond rating drops from AAA to BBB+, which is what Standard and Poor’s did after all this news hit the fan.) The report tops it off, Enron-style, by saying that city officials ignored warnings from a whistle-blower (former pension-board member Diann Shipione).

Other juicy parts of the report state:

• Among the consequences, the City now faces an unfunded actuarial pension liability of $1.4 billion and an inability to gain access to public financial markets.
  
• ... (T)he City's pension board and the City acted illegally and improperly and thereby allowed the City, with full knowledge and acquiescence of numerous participants in the approval process, to avoid financial obligations imposed by state and local law.
  
• ... (T)he City also deliberately failed to comply with federal and state legal mandates with regard to its municipal wastewater system....In so doing, the City not only unlawfully took money from San Diego homeowners; it breached arrangements with the state of California and thereby rendered itself liable for the return of $265 million in state funds.
  
• Under the pressure of short-term needs, City officials gave expedience a higher priority than fiscal responsibility and came to the view the law as an impediment to be circumvented through artful manipulation.
  
• The evidence also demonstrates that the City's derelictions as to both its pension and wastewater treatment systems resulted in numerous violations of the federal securities laws as the City has repeatedly obtained money from public investors through financial statements and related disclosures that were false.
  
• It appears to us that no one within City government viewed himself or herself as accountable for the accuracy of City financial disclosures.

But, for Aguirre, this report is clearly wrong. First, Levitt’s report says Aguirre’s own investigation was incompetent. Second, it doesn’t pin enough blame on those individuals who Aguirre has already determined were to blame for this mess. Third, “We may be a small town, but I’ll be damned if we need some big-shot East Coast so-called experts to come in here and tell us how to run our investigation.”

OK, he never really said that last part, but his character will when the movie version comes out.

So, since the combined fee for the investigation is about $20 million (including fees for two separate law firms involved, Willkie Farr and Vinson & Elkins), and since it is illegal for a city contractor to charge the city for work it never did, Aguirre figures he should sue them all since they clearly never did any work when putting together such a wrong-headed report.

Given Aguirre’s penchant for results-oriented legal analyses bereft of intrinsic credibility, I seriously doubt Willkie Farr, V&E, Kroll, Levitt or Turner are quaking in their boots over this threat. But San Diego citizens should be, since they will end up footing the bill for the legal fees.

One last thing: Levitt’s verbal smack-down of Aguirre during yesterday’s City Council meeting—

“We're not here to subject ourselves to your petty criticism….We're not here to subject ourselves to your playing to the press…You are continuing to demagogue a process, to embarrass your colleagues, to embarrass yourself in a way that I think is demeaning"

—definitely will be in the movie. And that quote I didn’t make up.

Other news on this sordid tale include this from the Associated Press and this from the San Diego Union-Tribune.

A copy of the Levitt/Turner/Kroll report can be found here.

Arthur Levitt in the Wall Street Journal

This past weekend, Arthur Levitt, Jr., the former chairman of the Securities and Exchange Commission, outlined in the Wall Street Journal a few proposals for reforming the way U.S. financial markets are regulated. (Unfortunately, you need a subscription to read the article.) His article is actually something of an expansion on some ideas he presented in a few speeches previously (including one in October 2004 in New York). But he also proposes a few additional consolidations: particularly, merging the SEC with the Commodity Futures Trading Commission.

Combining the regulatory arms of the exchanges (which, in the United States, are also called "self-regulatory organizations" or "SROs") would make a lot of sense. Many people don't realize that the bulk of day-to-day oversight of U.S. stock markets is not conducted by the SEC, but by the exchanges themselves. It is the regulatory arms of the exchanges that have huge computers running complex algorithms that notice the slightest trading anomalies that, in turn, lead to insider trading and market manipulation investigations by the SEC. And the exchanges generally do a good job at this. At the same time, there are some pretty clear conflicts of interest in this situation, particularly when the exchange is itself a public corporation (and its shares trade on its own exchange).

Because American exchanges have mostly demutualized (i.e., gone public), and everyone is looking to merge with everyone else (across borders and otherwise), it makes sense for this self-regulatory aspect of the exchanges to be carved out of what is otherwise a business. Self-regulation is a holdover from the 1930s. The exchanges regulated their members before the 1934 Securities Exchange Act was signed by Franklin Roosevelt, and self-regulation was a minor sop thrown their way to help easy the humiliation they were to suffer by having to answer to a federal regulatory agency. It has remained because, truth be told, the SEC does not have the resources or expertise to conduct the kind of day-to-day compliance monitoring that the SROs now do. But that does not mean that these private-sector regulators must remain nominally part of the businesses they oversee.

I do not mean to imply by this that the SRO regulators are compromised by this connection they have to the exchanges. There are sufficient operational walls and legal barriers between the regulatory folks and the business operations folks at the New York Stock Exchange and National Association of Securities Dealers (and the SEC constantly looking over their shoulders) to prevent this. But this also means that, because the regulators are so cut off from the business sides of the exchanges, cutting them completely away from the business would be relatively easy. And, as Levitt mentions, combining the regulatory arms of the New York Stock Exchange, the NASD and the National Futures Association would create some operational efficiencies and provide unitary oversight of all securities and futures broker-dealers.

Levitt's more interesting proposal is to combine the SEC with the CFTC. This is by no means a new idea. Levitt's predecessor, Richard Breeden (and even his precedessor, David Ruder) actually tried to do this. By most accounts, the reason that Breeden's and Ruder's attempts were unsuccessful is that (1) the SEC and CFTC are overseen by two separate committees in both the Senate and the House (and it's unlikely the the agricultural committees would get to hold onto oversight of a financial regulator if the CFTC merged with the SEC), and (2) to some extent the CFTC was created precisely because some in Congress didn't want U.S. futures markets to be regulated by an agency as strong as the SEC. The SEC was created in 1934, arguably at the nadir of corporate power in the United States. Unlike the Federal Reserve (or the CFTC, for that matter), the SEC is dominated by lawyers, not economists. And despite what former SEC chairman Harvey Pitt is said to have told the SEC senior staff at his first meeting with them, the SEC is a law enforcement agency and a regulatory agency, not just a regulatory agency with a some law enforcement powers. Or, at least, that is what many investors and voters believe.

The CFTC, by contrast, was created at a time when corporate America was back on its feet and Richard Nixon (and then Gerald Ford) were in the White House. It generally has a reputation for being the American version of the United Kingdom's Financial Services Authority—a place that takes a "light touch" to regulating.

There are some very good reasons for combining the SEC with the CFTC. Futures and securities markets, in particular, are so closely intertwined that separate regulation doesn't make much sense and can easily lead to regulatory gaps. (Or the opposite, overlapping regulation). At the same time, Levitt's proposal begs the question of why stop there. Banking and securities markets are also intertwined, and many major economies have moved to "consolidated regulation" with a single financial regulator (such as the UK FSA) overseeing securities, futures, banking and insurance markets. If we combine the SEC and the CFTC, why not also add in the Federal Reserve, FDIC, Comptroller of the Currency, etc.?

Levitt's answer is a good one, but one wonders if it is sufficient. The Federal Reserve (like most banking regulators) is a "prudential" regulator. As Levitt notes:

That does not mean we should create one super-regulatory agency. For instance, the Federal Reserve's regulatory functions in the banking industry should remain separate. While including the Fed in such a merger may make sense on the surface, it would not work. The Fed's dominant regulatory culture is one of safety and soundness, far different than the focus on dynamism, risk and investor protection found at the SEC or CFTC.

For the Fed, reputation matters most, and sometimes it will overlook a few "questionable activities" if asking questions might cause the public to lose confidence in the banking system. The SEC, by contrast, in many ways takes a far gentler regulatory touch to allowing new investment products and vehicles—but tends to favor public hangings when rules are violated.

But Levitt's point also applies to the SEC and CFTC. In essence, the Federal Reserve has a different regulatory philosophy than the SEC. Yet the CFTC also has a different regulatory philosophy. And, while Levitt argues that "a single federal regulator of securities also would advance and maintain our pre-eminent role in the world's financial markets, by better equipping the U.S. to address directly the looming issues of global harmonization of regulatory practices," the truth of the matter is that it is not the CFTC that is standing in the way of global harmonization. (Heck, in the past, the CFTC was more than willing to give away the store, as the recent debate over the Intercontinental Exchange demonstrates.) That said, is there not something to be said for inter-agency competition? After all, hasn't the CFTC's willingness to experiment with "mutual recognition" of foreign securities regulation (a decision which underlies the ICE controversy) shown the SEC both what can be done and the pitfalls that lie ahead? With a single financial regulator, would there be as much regulatory experimentation?

The funniest thing I've seen this week

Maybe even these past several weeks. However, Britney Spears' ability to make Kevin Federline seem intelligent is a skill that under no circumstances should be denigrated. You can see it here, if you don't believe me.

Be warned, though. Now, whenever I come across something unexpected, my jaw drops, I slap the table, and I say "Huh?" Then I belch. It's contagious.

More on Ann Coulter and something on Henry Rollins

I got an email defending Ann, in a sort of roundabout way. Basically saying that Ann Coulter, as wacky as she has become, still isn't as insipid as those who criticize her. Still, the problem with Ann today isn't what she says, it's that she doesn't mean it. It's theater. And if you don't think it's theater, you probably also believe professional wrestling is real, too.

I agree with Henry Rollins on this. (Of course, like much of what Henry writes, he's good at recognizing the problem. The efficacy of his solutions, not so much...) At any rate, I found it amusing.

By the way, have you seen Henry's new show? It's actually not bad as quasi-political talk shows go.

Ann Coulter is a deconstructionist

OK, I know this is old news, but I was on vacation and missed the funny stuff. I love this.

That college logic course was so long ago...how did it go?

All homosexuals are promiscuous.
Bill Clinton is promiscuous.
Therefore all Bill Clintons are homosexual?

Did I get that right? Maybe not, but Ann went to law school, so she must have taken logic.

Oh, wait a minute, I remember it now:

When I say thoughtful things, I get paid X.
When I say crazy-ass things, I get paid a lot more than X.
Therefore, if I want money, I should say crazy-ass things.

Actually, I think David Letterman may have caught the reason here.