{{{{August von Hayek /> {{{August von Hayek /> {{August von Hayek />

{August von Hayek />

You can almost watch his mind at work. If you give long hard consideration to the topic of inflation, you have to conclude that there seems no reason for it to be a bad thing. It may take a little time, but the price of everything will eventually read just to a new higher level, and relationships will go on undisturbed. At first glance, inflation is just a harmless numbers game. You can understand the power of inflation; everybody likes a little of it for his own personal benefit. If everybody enjoys a little of it in his own sphere, then the whole world is pushed to a higher numerical level.

After long consideration, Hayek came to see that the disruptions of inflation are caused by the uneven speed of penetration throughout an economy or nation. If the price of oil goes up, the price of transportation goes up, then the price of home heating. But those who take the train or who heat their homes with coal are not affected so soon. Mortgages carry a fixed interest rate for thirty years, until the unwisdom of such agreements becomes clear; but it takes time. The process of inflation creates winners and losers, and disruption in the culture of payments. The speed of payment is itself a factor in the virtual size of the monetary pool. In the long run we're all dead and it all settles out, unless we set in motion a universal scramble to get out the door before others get there. Inflation is just as much an evil as collectivism, and somehow the two are usually seen together. The Road to Serfdom sits on the shelf, right next to The Austrian Theory of the Trade Cycle, and Other Essays .

http://www.philadelphia-reflections.com/blog/1262.htm

Picking Up the Usual Suspects

The federal government directly controls about half of health care spending, and makes rules affecting most of the rest.

Claude Rain

Every group or business which receives some of this money is alert not to lose it. Many other groups are alert for openings to get more of it. All employ sentries in Washington. False alarms are frequent, stealth attacks are a constant threat, constituents paying the bills demand immediate reassurances. Members of Congress seldom initiate a disturbance unless someone from inside an industry brings it to them. Consequently, when proposals do surface, and seem to be serious, the question to be immediately answered is -- who's behind this? If you know who starts something, you can readily imagine the motive, assess the political strength, decide how to respond. With what little was generally known about the Clinton Health Care Plan of 1993, it was easy to imagine a host of people with some motive, but very hard to say who was actually pushing one. Must be a Democrat, obviously, but not immediately obvious which of several possibilities was the real agitator.

Health insurance companies would always seem likely to have proposals about national health insurance. Blue Cross dominates the market in large geographical markets, mainly East Coast, and would seem fearful to lose that dominance in a major upheaval. But other market areas of the country are dominated by commercial insurance companies who might seek to upend the Blue Cross monopoly, but whose form of business would be even more seriously threatened by health insurance innovations. Most commercial health insurance was written by large life insurance companies who regard health insurance as a small sideline for the convenience of their industrial customers. Blue Cross was somewhat more comfortable with government work, particularly since the 1965 Medicare and Medicaid programs were patterned after them. However, Blue Cross was non-profit, thus lacking in incentives, and historically controlled by health care providers. That is, Blue Cross was formed by and dominated by the hospital associations, and Blue Shield was formed by and dominated by medical societies. Since doctors and hospitals were very prompt in announcing their deep concerns and uncertainties about the Clinton Plan, Blue Organizations seemed unlikely to make daring proposals so likely to provoke trouble at home.

Not that some doctors and some hospitals didn't try to see what might be made of this opportunity. At the American Medical Association, certain leaders known to have Blue Shield involvement offered conciliatory remarks about waiting for further details before taking a stance, but were abruptly halted by a general opinion that things had apparently already gone too far for substantive negotiation. Much the same thing occurred at the Hospital Association; the winners had too much to lose, the losers had too little influence to matter, and nobody stepped up to claim an inside track. Hospital trustees didn't know what was going on, strongly suspected something was going on, and didn't like either situation. If the doctors got mad enough at a hospital, they could ruin it, and if hospitals got mad enough at Blue Cross, it too was ruined. The main strength behind the Blue Cross monopoly position was the secret discount provided to them by hospitals, which was refused to competitor insurance companies, but could easily be extended in the interest of fairness. If need be. The commercial competitors wanted that discount much more than they wanted new insurance models.

There is one subset of doctors and hospitals that might be suspected of generating a sweeping revision of the medical system -- academia. Medical schools think of themselves as the appropriate source of vision about the profession they are training, and they run large prestigious hospitals. Their heavy dependence on government research grants, teaching subsidies, and tuition support programs puts them in constant contact with Washington bureaucracy and politics; propinquity is a great match-maker. Their style of salaried faculty creates estrangement from making a living by being paid fees for specified services, and they are reasonably comfortable with the flaws and techniques of professional promotion within a large organization. So, a slogan which has been attributed to Wilbur Cohen himself does not greatly jar on their ears. The author of the Medicare Act is said to have announced that the entire medical system of America could be accommodated by thirty or forty Mayo Clinics. Twist that just a little, and you are imagining he said forty or fifty medical school teaching hospitals. The briefest contemplation and rebuttal will knock down that proposal, such as pointing out that we have several times that many teaching hospitals at present without achieving anything like the nation-wide coverage envisioned. After absorbing the administrative chaos of readjusting to that model, you would confront the old repeated history of grossly overestimating, and then grossly underestimating, the future manpower needs of a medical system in the process of constant scientific turmoil. Supppose you built the fifty Mayo Clinics and found you needed two hundred? Suppose you built two hundred and found you needed seventy? And then, finally, remember that each big city could expect to contain one of these organizations, but the fewer of them there are, the longer the distance everyone else would have to travel to get to them. No one has even ventured to speculate how you could go about doing such a thing, let alone doing it three or four times to get it right. But, but. The infeasibility of academia at the center of medical care delivery does not eliminate the possibility that the idea underlying the Clinton Health Plan may have originated in academia, or that academia might support some similar proposal with something else at its center.

Since it was soon clear that the traditional "players" in the health policy arena were unlikely to be sponsoring some self-serving policy that might masquerade as the Clinton Health Plan, the search went on. There were a number of professional groups within the medical community who had traditionally chafed at domination of the hierarchy by physician leadership. Nurses, hospital administrators, pharmaceutical companies, druggists, corporate human resources officers, public health officials, social workers, biology teachers all represented groups who derived status with the public by displaying inside knowledge of medicine. But all of them fell silent when a physician entered the room, and tended to shift their emphasis to faults of the "system" or the "industry". Their Washington representatives placed their emphasis on changes in the existing system which might elevate the prestige and income of the members, and were particularly vigilant for system modifications intended for other purposes which might nevertheless create advantageous loopholes for the members. All of this is normal striving in the good ole' American way, a polite variant of the mixture of bellicosity and restraint usually seen in the Union movement. These people wanted to improve their income and working conditions, but were ultimately quite hesitant about radical proposals that might sink the ship. A quick survey showed they were not supporting any particular reform project, even though they could be counted on to support any reform project. Furthermore, they consistently injured their political strength by extending beyond economic goals to issues like radical feminism in the case of nurses, or direct advertising to the public as in the case of the drug companies, or practicing medicine without a license in the case of limited-license practitioners. These people had votes, influence and lobbyists, but they did not have a national project for health care reform of their own devising, and they surely were not the people behind the Clinton Plan.

During the six months before The Plan was presented to Congress and the Public, a White House task force said to consist of five hundred secret members was meeting under the direction of President Clinton's wife Hillary. No doubt part of their purpose was to give Hillary a public platform on which to show her stuff, with the idea of someday succeeding her husband as President sort of in the back of her mind. But most of it was also quite practical; somebody had to figure out what this proposal was going to be, and newly elected Bill had to spend most of his time learning how to run the rest of the country. Buried in here was an efficiency principle too; the staff members of every important congressman and senator were involved in the process, making the deals and surfacing the political angles before things had to come down to votes and filibusters. Meanwhile, the rest of the country had to wait outside closed doors, fed by rumors and spin.

How well I remember one public seminar on the subject during this period of suspense. The audience was filled with people thought to be influential with the public, the usual suspects in that sense, too. Representatives of various interest groups were seated up front at a table, and for some reason I had been picked to represent doctors. Next to me was a druggist who had made a billion dollars starting an HMO; it was intriguing to watch how many well-dressed women with no interest in health care paraded up to the table to show their stuff to the billionaire, while we waited for the meeting to begin. All of the usual suspects of Philadelphia medical care were at the table, each of us wondering what the other was going to say. When some last Very Important Person had wandered in and taken a seat, it was time to begin. The moderator told a funny story or two, and then asked each one of us what we thought of the Clinton Health Plan. One by one, to the utter amazement of us all, we each explained how we were opposed to it.

So obviously this proposal was not coming from the usual agitators. But, remember, somebody was surely behind it. Before we take a stab at that mystery, let's humanize the usual suspects by describing a few of them.

http://www.philadelphia-reflections.com/blog/1265.htm

Equal Pay for Equal Work

American Medical Assocation

The House of Delegates of the American Medical Association holds a five day convention twice a year. The meetings last from 7 in the morning until midnight, although the main sessions in the auditorium only last eight hours a day during three days. The rest of the time is consumed with meals, committee meetings, geographical caucuses, and even cocktail parties. Newcomers often object to the numerous parties until they come to see that these are merely committee meetings in a different form, with different subsets of the organization picking up the necessary costs. This group of workaholics has to vote on several hundred issues each session, and most Delegates have little advance opinion when they enter the headquarters hotel on the first day. But after meeting with their specialty in one committee, and members of their geographical region in another, and members of their medical school alumni association in yet another, and with issue oriented groups, political allies, and other layers of an overlapping matrix day after day -- by the time the vote is actually called for, most Delegates could safely predict the correct outcome with very few exceptions. The AMA works at its similar job with far greater intensity than Congress does, because Congress has all year to do it, while the doctors have to go home to make a living. Don't worry about the parties, they are really work sessions for everyone except rank newcomers, outsiders, visitors, and wives. What is perhaps more worrisome is the rare occasion when just about every delegate arrives with one opinion, and is persuaded by the leadership to adopt the reverse. That can only happen if new information is suddenly revealed, with little time to check its accuracy.

There are usually fifteen or so parties every night, hosted by large state delegations, large specialty assemblies, and coalitions of smaller groups. Fifteen drinks a night would be quite a bit for most folks, and some newcomers are duped into trying to be polite about it. The rest of us take the proffered drink, walk over to a nearby plant stand and dump it. I hate to think how many potted palms I have fried that way. Each delegation has its own system of organizing these minuets, and I'll try to describe the Pennsylania system.

Nobody will come to your party if you don't go to theirs, so we make a list and divide the group into those who "travel" to the parties of other states, and those who remain to host our own party, "at the door". Everyone is expected to wear a name tag, containing your name in large type underneath which is your caucus designation, in my case "Pennsylvania". The older members instruct the newer ones to put the name tag just under their right shoulder. That way, you can seem to be looking at the hand you are shaking, while freshening your recollection of who in the world you are meeting. You can of course do anything you please, but time is short for a the transaction of a lot of business, and it's just easier to do routine things the regulation way, and get on with it.

On the evening in question, I was "at the door". The formula, repeated many times, was to extend a hand of greeting and recite, "Welcome to Pennsylvania. Are you looking for some friend in particular? Let me see that you have a drink. Come on in and meet my fellow delegate, Scotty Donaldson." You can shepherd a lot of people more or less gracefully if you reduce the formalities to a routine. After several people had been brought in under the tent, a man with highly polished shoes came up, wearing a name tag that said, "Blue Cross of America". He was greeted, his hand pumped, a drink procured, and was introduced to Scotty, our most famous extrovert. I quickly turned to the next person at the door.

Well, this lady was six inches taller than I am, and fifty pounds lighter. She wore a name tag, identifying her as President of some Nurses Association, "Welcome to Pennsylvania! Is there someone from Pennsylvania you know or would like to meet? Can I......" The apparition didn't even look at me as she brushed past through the door. Heading straight for the gentleman from Blue Cross, she poked her index finger into his chest, stopped him in mid-sentence as he talked to Scotty.

"What I want to know, " she announced to this startled man, "Is when are you people in Blue Cross going to pay nurses as much as you pay doctors?" And here I must admit I have to give this guy credit for unperturbability.

"Well, maam," he said cheerfully, "I think that's going to be quite some time."

http://www.philadelphia-reflections.com/blog/1266.htm

Quaker Gray Turns Quaker Green

Miriam Fisher

Miriam Fisher Schaefer, at one time the Chief Financial Officer of the American Friends Service Committee, had to cope with the economics of renovating the business headquarters complex for various central Quaker organizations. They're housed in a red-brick building complex, naturally, located on North 15th Street right next to the Municipal Services Building of the Philadelphia City Hall complex. The original building within the complex is the Race Street Meetinghouse, funds for which were originally raised by Lucretia Mott. The Quakers needed to expand and renovate their offices, a nine million dollar project. Miriam, a CPA, calculated that the job could be made completely environment-friendly for an extra $3 million. The extra 25% construction cost explains why very few buildings are as energy-efficient as they easily could be. However, in the long run a "green" building eventually proves to be considerably cheaper. Not only would a green Quaker headquarters be a highly visible "witness" to environmental improvement, it would pay for itself in reduced expenses after about eight years. That is, if friends of the environment would provide $3 million in after-tax contributions, they would provide a highly visible example to the world, and reduce the running expenses of the Quaker center by a quarter of a million a year, indefinitely. Effectively, this is a charitable donation with a permanent tax-free investment return of 12%, quite nicely within the Quaker tradition of doing well while doing good.

Rockefeller Center

Energy efficiency isn't one big thing, it is a lot of little things.If you dig a well deep enough, its water will have a temperature of 55 degrees, and only require heating up another 15 degrees to be comfortable in winter, or cooling down thirty degrees to be comfortable in the summer; that's described as a heat pump. Then, if you plant sedum, a hardy desert succulent plant, on the roof it will insulate the building, slow down rainwater runoff, and probably never have to be replaced. Rockefeller Center, you might be interested to learn, has a "green roof" of this sort, which has so far lasted seventy years without replacement.The Race Street meetinghouse was built in 1854 and has so far had many roof replacements, each of which created a minor financial crisis when the need suddenly arose.

The ecology preservation movement is full of other great ideas for city buildings, because buildings --through their heating, ventilating and air conditioning -- contribute more carbon pollution to the atmosphere than cars do. For another example, fifty percent of the contents of landfills originate in dumptsters taking construction trash away from building sites. What mainly stands in the way of more recycling of such trash is the extra expense of sorting out the ingredients. Catching rainwater runoff allows its reuse in toilets, eliminating the need to chlorinate it, meter it, and transport it from the rivers. And so forth; you can expect to hear about this sort of thing with great regularity now that the Quakers have got stirred up. You could save a lot of air conditioning cost by painting your roof white. At first, that would look funny. But do you suppose oddness would bother the Society of Friends for one instant? No, and you can expect them to make it popular, in time. People at first generally hate to look funny, but with the passage of time they grow to like looking intelligent.

A lot of people want to save the planet. So do the Quakers, but they have come to the view that the public is more easily persuaded to save money.

WWW.Philadelphia-Reflections.com/blog/1236.htm

http://www.philadelphia-reflections.com/blog/1236.htm

Be Careful What You Wish For

Pulse

Events at the time of the introduction of the Clinton Health Plan to Congress were a confused jumble, but one vignette stands out in my memory. The five hundred or so members of the secret work group were all invited to the White House for a big party, with saxaphones and all. On a television interview at home in Minnesota, Paul Ellwood said he wasn't going to the party. Indeed, he looked rather morose and had little to say. It is clear he had advance notice, before the plan even reached Congress, that things were not going the way he wanted. Since the public, even Congressional leaders, were still unclear just what was to be proposed, Ellwood's dejection, or rejection, did not come from them. No one has said so, but it must be presumed the rejection came from his sponsors, the business leaders. Business, in short, had pulled out; responsibility probably lies with no more than half a dozen CEOs who continue to be anonymous fifteen years later.

At that confused time, the reasoning of the masterminds was obscure. Perhaps they decided HMOs were no good; perhaps an outrageous political demand had been linked to the proposal; or there was to be too much political control, too little business control; or perhaps government costs had been shifted onto the backs of employers; perhaps the whole idea sounded too leftist to be comfortable. And perhaps a lot of other things, who knows. Even today, no one has written a book or even listed a few plain sentences of reminiscence.

What is known is that major business employers immediately launched a nation wide initiative to go ahead with a strong push to convert employer-based plans from fee-for-service to managed care HMOs. This was to be the way employers handled health care they were paying for; the government could do as it liked. It must be admitted it was a bold stroke, quite effectively handled. When you consider the rather uncertain legal right they had to impose a system of health care on their employees, it took more audacity to go ahead than you would suppose they could summon. It was a gamble that the Clinton White House would lack the courage to challenge a private initiative to go ahead with what they had so publicly endorsed, and that providers would be so surprised by the concerted coup that they would hold back legal challenge until evidence of antitrust or conspiracy emerged. It was a sort of Battle of the Bulge in reverse, and it might well have been hugely successful except for one thing they did not anticipate. Their employees almost universally hated HMOs when they tried them out. No one likes to be hustled into something he doesn't understand, no one likes to change doctors, no one like to be told he can't have what he expects to have. Employers expected resistance of this sort, but it simply had to be done to save the fiscal health of the business. Unfortunately, what emerged was that it didn't save much more money than its own extra cost to administer. The hard reality of business life is you regularly have to bully people in order to make any money. But bullying people without making any money is a quick route to dismissal. No wonder there have been no memoirs written.

A quick re-appraisal of the Clinton Health Plan was that the two systems, Medicare for people over sixty-five and employer-based for people under sixty-five, were to be merged into a single system for efficiency and better control. There were to be local, regional, and national governance bodies; evidently the purpose of the National Business Coalitions for Health was to supply a unified business hierarchy to match it up and down the line. Hated politicians, hated bureaucrats and hated unions could be counted on to apply strong pressures; business would have to remain well informed, sternly disciplined, and speak with a single voice for any hope of surviving in such an environment. It is my surmise that such a prospect seemed to guarantee failure for business. No, we're sorry, Business would draw a bright line at age sixty-five, and run its own show where it ruled the roost.

http://www.philadelphia-reflections.com/blog/1275.htm

Computerizing Medical Care

First Computer

My first encounter with a computer was in 1958, and I have loved them ever since. As president of what called itself the Delaware Valley Hospital Computing Society, I remember giving a dinner speech concluding as follows: "If you want to be happy for a day, get drunk. If you want to be happy for a week, get married. But if you want to be happy for a lifetime, get a computer!" After fifty years, my affection continues. But to be candid, billions of dollars about to be spent on computers in medical care, will mostly be wasted. Even worse, like malpractice suits computers will induce behavioral changes in the system costing far more than the directly visible costs.

That's unpopular news at present, since the National Business Coalition for Health has launched a major lobbying campaign to persuade Congress to spend an initial billion dollars inducing physicians to maintain an electronic medical record. Various health insurance companies already provide financial incentives to doctors to file electronic claims forms, eventually threatening to reject any claim submitted on paper. The American College of Physicians has established a rather large department to develop programs for physicians to use in their practices; twenty years ago the University of Indiana started much the same thing. The College of Physicians of Philadelphia has spent close to a million dollars on such a project. It is reported that Microsoft Corp. has a massive project underway to supply electronic medical records. It sounds fairly easy to obtain large research grants from the government to devise something, anything, useful in this area. In my own case, training funds really weren't necessary, since I eagerly got into the field when everybody was a beginner. I was just as good a beginner as any other beginner. But let me repeat: the electronic medical record has been in the past and will be for decades, an expensive digression. In health care, creating more administrative work isn't the solution, it is the problem.

For fifty years the problem with an electronic medical record was that it took too much of the doctor's time to complete his part of the input, and then cost him too much to pay employees to do the rest. Presumably, automatic voice recognition and dictation will soon make it possible to record doctor's notes without handwriting or typing. Since, however, the elimination of current paper forms and check-off boxes will create a major problem in organizing the dictation verbiage, it could add five or ten additional years before programmers manage to rearrange dictation material and effectively integrate it into organized form, complete with laboratory results, dictated x-ray and EKG reports, even small images of the original material. Temperature, blood pressure, weight, photographs and the like can all be readily integrated into the stored electronic record, but to do so usefully is an expensive programming project. Doctors are quite right to be anxious they will lose control of the usefulness of their records in order to ease the task of programmers, speed up the sluggish pace of development, and reduce what will surely be an unexpected cost overrun. Storage and retrieval of such records is known to be an achievable but expensive task, which however also risks sacrificing the speed and ease requirements of the medical task it is supposed to serve -- in the name of cost effectiveness.

Computers are no longer an unfamiliar tool; physicians have altogether too much experience with "vaporware" , unrealized promises of convenience, and the damaging effect on medical quality of the philosophy of Quick and Dirty. To respond to their resistance to design blunders with an accusation of undue conservatism is to provoke an icy stare and gritted teeth. Inevitably, the effective use of automation will require a redesign of workflow with major disintermediation of "gopher" staff; after all, that is how cost savings are to be achieved. That will provoke outcry that physician time is the most expensive component in the process, but unfortunately physicians will discover Information Specialists with a business background will brush that argument aside. The most overpaid people on the face of the earth are investment bankers, but information consultants have persuaded business executives that inefficiency of the investment process is more expensive than even an investment banker's time. Having been through this themselves, insurance executives are unlikely to pay the slightest attention to physicians dancing to a familiar old tune.

For all that, data input is not the real problem; it's just the first problem. It's in a class with data storage and retrieval, which is expensive and cumbersome when you add a need for instant access and total privacy. But costs will come down steadily, and eventually we can expect automated fingerprints or other biological identification, and cheap instant retrieval. Doctors will be able to make rounds in the hospital with a computer in their pocket, record telephone calls in their entirety, dial automatically and whatnot. There are problems with wireless transmission inside buildings with steel girders, and legal requirements for signatures on narcotic orders, but if we are determined, these problems can be overcome as easily as they were with electronic check writing and stock brokerage. Cost may top twenty billion dollars in twenty years, but it all can be done if we insist.

But then you encounter the real problem. Information will accumulate in these records in staggering amounts. Even if you resolutely resist demands to have the nurses record every groan, and the orderlies file every laundry slip, the legitimately important medical information will be exposed as the massive heap of transients that they really are. Plaintiff lawyers will insist no scrap of data may be deleted, hospital administrators will insist on compliance, when in fact most of a doctor's concentrated effort is devoted to brushing aside momentarily distracting data in order to see what's going on, and react to it instantly. When a quick look doesn't solve the problem, the doctor goes back for additional data. If you disrupt these skills and traditions of coping with information overload, evolved over centuries, you will at best impose frustrating delays on a complex system under pressure, and ultimately inspire elaborate systems of short-cuts. The Armed Forces are famous for paperwork, but even they know better than to ask a pilot for his Social Security number as he starts a bombing run. The hospital nursing profession has already just about collapsed under paperwork pressure. If you see five nurses in a hospital, three of them will be sitting down writing something. The terrible truth is that no one reads it, no one checks it, and ultimately it sits in the record room waiting for a plaintiff lawyer with unlimited time to sieve out some misrecorded misconception or uninformed conclusion. My faith in the computer is such that I feel sure that methods can be devised to produce periodic summaries, automatic alarm signals, and mostly effective prioritization of data elements. Unfortunately, medical care is changing at such a rapid rate that ad hoc automation of physician thought processes cannot keep up with the current pace of change in medical progress. You would think some things would be unthinkable, but since I can remember the organized campaign to suppress the CAT scan as an unnecessary expense, I confidently predict that programmer inability to keep up with some advance in medical care will at times lead to organized outcry that we should slow down the pace of improving medical care, so that computer clerks can keep up with it. But that is only a small part of the issue, which at its center is that physician time will be dissipated and his attention distracted by presenting him with unwieldy amounts of neatly printed, spell-checked, encrypted and de-encrypted, biometrically secure, hierarchically prioritized -- avalanches of data which are irrelevant to the issues of the moment. The goal is not, after all, an electronic record. The local goal is to decrease the cost of medical care by increasing the productivity of the physician, and the overarching goal is high quality patient care at reasonable price. Behind all that, since the impetus comes from NBCOH -- the ones paying the insurance premiums -- suggests that the local goal is not so much the improvement of care as oversight reassurance that care provided has been as good and as cheap as possible. The goal is legitimate, but this cybernation approach looks to be self-defeating by being overly specific.

If the reader has the patience for it, let me now cite a historical example of the third-party tail wagging the medical dog. In this case, third-party health insurance similarly overextended its reach by imposing internal health system changes, trying to facilitate the role of monitoring it externally. Specifically, the system of diagnostic code numbers was changed from one devised by the medical profession for its purposes, into a different coding system devised outside medial profession sponsorship, which seemed to suit the needs of payment agencies better even though it suited medical purposes less. After twenty-five years, it is now clear that third-party payers have shot themselves in the foot on this matter, and everyone is worse off. The topic, please pardon the obscurity, is the diagnostic coding system.

To go back to beginnings, the American Medical Association perceived a need for a diagnostic coding system in the 1920s. Organizing or even merely indexing vast amounts of information about a disease required more specificity than free style verbal nomenclature could provide. Quite a distinguished panel of specialists and consultants then produced the Standard Nomenclature of Diseases (SNODO) which in time became the Standard Nomenclature of Diseases and Operations. In order to reduce ambiguity, this system developed a branching-tree code design for anatomy, linked to a branching-tree for causes of disease, ultimately linkable to a branching tree of procedures. These three sets of three-digit codes linked the components together with hyphens (000-000-000). The first digit of each was the most general, as in Digestive, Musculo-skeletal, etc. and subsequent digits were progressively more specific and detailed, as in "Digestive, large intestine, sigmoid colon". The causes of disease would resemble "Infections, bacterial, streptococcal". An example of Procedures would be "Incision, incision and drainage, drainage and insertion of drain". In nine digits, it was thus possible to represent " incision, drainage and insertion of a drain into a streptococcal infection of the sigmoid colon". After a while, the codes grew from three to five and six digits, again repeated three times, so an immensely detailed, unambiguous description might be coded in fifteen digits by a physician who knew the rules, but didn't own a code book. This code was ultimately taken over by the Academy of Pathology, expanded and is called SNOP. The pathologists absolutely refused to give it up.

The rest of the profession gradually yielded to the pressure of hospital administration, who were pressured by the Association of Medical Record Librarians, responding to the views of outside statistical interests, particularly insurance. A simpler, shorter coding system was needed, they felt, concentrating on the thousand most common diseases. The International Classification of Diseases was produced, reducing the millions of SNODO diagnoses to 999 by heavy use of several varieties of "Miscellaneous" or "Not Otherwise Classifiable (NOC)". Since the goal was to count the incidence of common diseases, the coding system was stripped of any logical tree-branching, and became a short list of what was most common, starting with 1 and going to 999. In time, of course, the common-ness of conditions changed, and various complaints from various directions forced the ICD to go to 4 digits, then five. Unanticipated conditions or complications eventually required the patchwork of some alpha "modifiers", and the original short hodge-podge became a long and bewildering hodge-podge. Coding accuracy declined markedly, but ho-hum. The health insurance companies paid the bill, no matter what the code said. At another place, we will discuss the entertaining way that Ross Perot became a billionaire out of the computer chaos of Blue Cross and Medicare at this time, but right now the central theme to follow is DRG, Diagnosis Related Groups. Try to follow, please.

By 1980, Medicare was fifteen years old. It was clear that certain things just had to be changed, because the excuse that the system was new and untried was beginning to wear thin. The early designers of the system based their payments on auditing a hospital's yearly costs, auditing the proportion of patients who were Medicare beneficiaries, and paying a proportionate share. That was easy and reasonably accurate, but it had the rather significant flaw that it took no account of whether the patients needed to be in the hospital in the first place. Or whether they needed to stay so long. The response they adopted (in the Budget Reconciliation Act of 1983) is a measure of just how desperate they must have felt. Knowing full well how inaccurate the ICD coding system was in practice, it was all there was. Consultants, particularly at Yale, ran computer simulations of various subsets of ICD codes to find a formula that would produce approximately the same hospital payments as the system of cost reimbursement. If memory serves, the original formula was to divide the thousand ICD codes into 27 diagnosis-related groups (DRG). Eventually, the process was tweaked to seventy or eighty groups. Walter McNerny, then Past President of the American Hospital Association told Congress hospitals could live with this system, and promptly we had a system for paying out hundreds of millions of dollars. It was touted as a highly sophisticated advance in the arcane science of hospital reimbursement, so it must have included a lot of deliberate overpayment. I can remember trying to remonstrate with McNerny, who felt he didn't have time for the discussion. Physicians had very little to do with the DRG portion of the 1983 Medicare Amendments, because the AMA had long insisted that physicians and hospitals go their separate ways on reimbursement. Russell Roth, who was president of the AMA at the time, recounted many times the episode in the Oval Office, when it was announced to Lyndon Johnson that Dwight D. Eisenhower"was in the next room waiting for him. LBJ excused himself to leave, and on the way out said to Wilbur Cohen, "Give him anything he wants." Things were destined to change, but at least for a very long time, physician and hospital reimbursements were strictly independent.

http://www.philadelphia-reflections.com/blog/1277.htm

Healthcare Reform: Looking Ahead (3)

Junker

For fifty years, turmoil in the health insurance industry has originated in the steel and auto industries. It seems strange that no heroes have come to general public attention, although there may be heroes who are known to insiders; somebody may yet write a book about it. This may be of only passing importance, but the present distress in the American Big Three auto makers suggests that unexpected legislative proposals concerning health financing could emerge from that direction. The turmoil in Detroit once centered on the auto industry enjoying windfall profits which labor wanted to share. More recent discord comes from the opposite direction: the auto makers now cannot afford to honor those contracts they signed with labor having to do with health benefits.

The contract for the United Auto Workers was certainly generous. Printed up in a little red book for wide distribution, the contract states emphatically that an employee for six months or more will be completely covered for medical expenses for the rest of his life. If Medicare pays some of the cost, that is fine, but if Medicare reduces its benefits, the employer is liable. Some features of this contract may have been changed since it was printed, but it is difficult to imagine what incentives the UAW would have to agree to modifications. Except, of course, the self-interest which emerges when it looks as though the employer might go out of business unless there is some form of relief from wage costs.

To judge what is going to come of this is to judge the likelihood of the various arguments, predictions and recriminations that are so common in heated disputes. Two things are pretty clear to auto industry outsiders: the UAW contract provides more generous health benefits than almost any other employee group enjoys, while the auto industry has worse earnings than many or most other industries. Consequently both the employees and the stockholders have an incentive to make adjustments in the auto industry, a situation shared by the steel industry and other major auto suppliers. The form this has seemed to take is to favor some form of national health insurance, in which the taxpayers would take over the obligations of the auto manufacturers. So, look out for proposals from Senators and Congressmen from Michigan, and watch which nominees for U.S. President are favored by the rust-belt political delegations.

Workers in other industries are not certain to go along with such proposals. After all, most people resent it when someone else makes out better than everyone else for decades, and then comes asking for a hand-out.

http://www.philadelphia-reflections.com/blog/1286.htm

Money Bags

This little morality tale was told to me by two unrelated sources, one of whom was a staff aide to Wilbur Cohen, the author of the Medicare law. And the other was a high official of Pennslvania Blue Shield, the appointed administrative agent for Medicare in Pennsylvania.

After Lyndon Johnson rammed the Medicare amendment to the Social Security Act through Congress, he wasn't shy about drawing attention to it. The press was present in great numbers, with staff officials who had a role in crafting the document, members of Congress, and anyone else who was standing around. The legislation was laid before him and signed with twenty different pens to be presented as mementos to the in-group. Each pen was only used to inscribe about half of one letter of his name, so it was a slow but joyful process. As intended, it got lots and lots of publicity.

H. Ross Perot

So, thousands of thankful old folks saw the ceremony on television, thought they heard that the law was in effect immediately, and proceeded to dump their medical bills in a shoe box, sending them to Medicare to pay. Unfortunately, Medicare didn't have an office, a staff, or even a telephone number. These things take time. As fast as they could, the Medicare staff constructed a system of carriers and intermediaries, carriers for part A, and intermediaries for part B. And almost without exception, appointed the local Blue Cross and Blue Shield organizations to be the carriers and intermediaries, respectively, since the organization of Medicare was patterned closely after the organization of the two administrative corporations. Meanwhile, the bills from old folks just kept pouring in through the postal service. It was just about all the staff in Washington could do, just to direct the mail out to the local intermediaries and at least get it out of their hair.

Less than a year later, that's how the claims got to Camp Hill, PA, a little suburban town near Harrisburg. In desperation, Blue Shield had rented a local vacant supermarket, and piled the mailbags ten feet high. There were quite a few telephone calls of inquiry, and the old folks were politely told the matter was being looked into. It was beginning to look as though the supermarket wasn't big enough.

Computers were of course rented from IBM, who had a policy of renting, not selling, its valuable equipment. Keypunch operators, computer operators were hired, air conditioning was installed, and one team after another of computer programmers was hired -- and fired. Consultants were called, scratched their heads, sent big consultation bills, and turned sadly away. Sorry, but somehow it just don't work.

So that's how it happened that one Friday afternoon, a vice-president of Texas Blue Cross named H. Ross Perot came in, accompanied by a fellow with glasses so thick they looked like the bottom of Cocoa Cola bottles. So far as anyone can remember, the guy with coke-bottle glasses never said one word. The desperate, hopeless mess was explained to Perot, whose salary at that time was rumored to be twenty-five thousand dollars a year, about right for a Blue Cross executive. His background as a kindred Blue Cross person inspired confidence, and the conversation rambled on for an hour or so. Meanwhile, the guy with coke bottles went over to the Penn-Harris Hotel across the street, and got to work. By the end of the weekend, he had come back a couple of times, but eventually, would you believe, it really, well it really worked. Contracts were quickly signed, the wheels began to turn, the mail bags in the supermarket began to march through the processing cycle. Blue Shield, the Medicare program, the finances of the nation's elderly, and Lyndon Johnson's reputation -- were all rescued.

As everyone now knows, the Medicare processing contracts made Ross Perot into a billionaire, living on Bermuda in the lap of luxury, eventually upsetting the re-election hopes of George Bush, senior by running for President himself on a third party ticket that had something or other to do with giant sucking sounds. A Congressional investigating committee looked into the outrageous profits Perot had extracted from his homeland's elderly, volleyed and thundered. Whether Perot actually thumbed his nose at them is doubtful, but he certainly was in a position to do so.

Meanwhile, whatever happened to that guy with the coke bottle glasses, no one seems to know.

http://www.philadelphia-reflections.com/blog/1288.htm

Immigration and Universal Health Insurance

Among the many articles about the economic wonder of Dubai,

Immigrants

along the Persian Gulf, is the comment that only 20% of Dubai's residents are citizens of that country. The other 80% seem to be immigrant workers, flocking there to make $2 an hour because at home they can only make $1. America only has 12 million illegal immigrants at the moment, but comparing our problems with such extreme cases sharpens the discussion.

No matter what position you take on the question of universal American health care, or universal anything else for that matter, you eventually have to re-examine your beliefs about our national borders. It is plainly absurd to propose that America should provide health care for the whole world, but if we allow essentially unlimited immigration it comes close to the same thing if you provide health care for everyone who is here.

The reason Dubai is a useful example is that we, too, are working our way into the fix of basing our prosperity on immigration we cannot handle. In recently seeking bids for a new roof, the choices I received were from Costa Ricans, Poles, and Puerto Ricans. True, one American citizen did inquire, but he was merely a contractor for some others, who were almost surely illegal migrant workers. Following the advice of a friend, I chose the Costa Ricans because they were rather small in size; my friend said they were less likely to get hurt falling off the roof. Although the situation in Dubai is more advanced, we seem to share the same difficulty that our economy would become pretty unworkable without the immigrant labor. That problem for us does introduce an element of fairness into providing health care for people we really do depend on; or you could adopt the line that issues of practicality urge us to find a solution. Either way, you confront a dilemma, a problem offering two solutions or possibilities, of which neither is acceptable. Perhaps at least we could invent a new term, a multilemma, defined as a problem with lots of solutions, none of which would work.

http://www.philadelphia-reflections.com/blog/1289.htm

Quaker Efficiency Expert: Frederick Winslow Taylor 1856-1915

F.W. Taylor

For at least seventy-five years after Fred Taylor turned it down, any rich smart Philadelphia Quaker attending Phillips Exeter would have been automatically admitted to Harvard. We don't know why he did it, but instead F.W. Taylor just walked a few blocks down the hill from his Germantown house and got a job at the Midvale Steel Company as an apprentice patternmaker. During the twelve years while he rose to become chief engineer of the company, he took a correspondence course for a degree in mechanical engineering at Stevens Institute, and invented a process for making tungsten steel, called high speed steel. That made Midvale Steel rich, but Taylor was going to make Philadelphia rich, and after that he was going to make America rich. When he died, he was widely hated.

Evidently his lawyer father greatly admired German efficiency, having sent little Freddy to a famous Prussian boarding school where he was in attendance at the time of the

General von Moltke

Battle of Sedan. General von Moltke had used Prussian efficiency and discipline to defeat those indolent lazy French, and Fred Taylor evidently absorbed and retained these stereotypes for the rest of his life. Whatever he was looking for at Midvale Steel, what shocked him most was to find workers "soldiering on the job". That's a Navy term, by the way, invented by sailors to describe the useless shipboard indolence of any Army they were transporting. Taylor later went to Bethlehem steel, reduced the number of yard workers from 500 to 180, and was promptly fired. It seems that most of the foremen at the plant were owners of local rental houses, which were emptied of tenants when Taylor reduced the workforce. Even management came to mistrust Taylor. When the railroads wanted a rate increase, Louis Brandeis defeated them with the argument that they wouldn't need higher rates if they adopted Taylor's system of efficiency. In his later years after he became enormously rich, he toured the country giving speeches without fees, promoting the doctrine of finding the one best way and then doing everything that way.

Louis Brandeis

Over time, Frederick Taylor had come to see that the industrial revolution had proceeded to the factory stage by merely bringing craftsmen indoors, each one treasuring his little trade secrets. Bringing the point of view of the company's owners onto the shop floor, Taylor could see how vastly more profitable the steel company would be if all those malingering tradesmen would stop soldiering on the job. No doubt the young Quaker soon learned that little was to be accomplished by remonstrating with workers, just as bellowing foremen had learned that bullying was also useless. Out of all this familiar scene emerged Taylorism, the idea of paying financial incentives to those who produced more, splitting the rewards of efficiency with the management. It sort of worked, but it didn't work enough to satisfiy F.W. Taylor. When he walked around with a stop watch, he collected the data showing how much more might be produced if the workers were perfectly efficient. Not only did that create the stereotype of the stop-watch efficiency expert, it provoked Congressional hearings and a federal law against stop watches which stayed on the books from 1912 to 1949. Although management responded by forming dozens of Taylor Societies to honor the approach, the unions invented the term "Taylorism" and bandied it about as the worst sort of epithet. Curiously, the Taylor approach proved to be enormously appealing both to Lenin and Stalin, who applied it as a central part of their five-year plans and general approach to industrialization. As we now all recognize, the Communist approach was a two-tier system instead of the three-tier system that was needed. It isn't enough to have a class of comrades called planners and another called workers; you need a layer of foremen, sergeants and chief petty officers in the middle. In addition to the elaborate time and motion studies leading to detailed written procedures, there needs to be an institutional memory for the required skills of the trade. In a funny sort of way, Fred Taylor the Quaker may have organized the downfall of the communist state before it was invented.

Herbert Hoover

Another peculiar outgrowth of Taylorism may be the partisan lines of our own political parties. If you trace the American ideological divide to the 1932 election of Franklin Roosevelt, you can see we are still fighting the battles of the depression. It happens that Herbert Hoover, another Quaker, was totally captivated by Taylorism. Not only that, he was adamant that to get rid of the depression all the country needed was to return to self-reliance, individual responsibility, and hard work. Those were qualities Hoover himself had in super abundance. One telling remark that he probably regretted saying but nonetheless firmly believed was, "If a man hasn't made a million dollars by the time he is forty, he can't amount to much." Franklin Roosevelt had the million all right, but his family had given it to him. The Cadburys and Clarks could have given it to Fred Taylor, too, but he chose to make it himself.

www.Philadelphia-Reflections.com/blog/1296.htm

http://www.philadelphia-reflections.com/blog/1296.htm

The Inky

The Philadelphia Inquirer has a new, local, management. We wish it well.

Brian Tierney, the new CEO of the Philadelphia Inquirer -- and Daily News -- recently addressed the Business Roundtable of The Union League. He's quite a peppy fellow, but unlike most fast-talking salesmen, appears to avoid slanting the truth in his reporting about his new job. He fired a lot of facts at the breakfast group in fifteen minutes, and in retrospect touched on several important issues.

First of all, corporate control. Because the New York Stock Exchange for years prohibited dual classes of ownership, most major newspapers listed their stock elsewhere rather than give up the tight corporate control by minority management. That seems like an unreasonable position at first; the sort of undemocratic tyranny that most editorialists would reflexly criticise. However, Knight Ritter, the former owner of the Inquirer, surrendered to high principle and listed on the NYSE by having a single class of stock. Mr. Tierney didn't explain just how this caused the newspaper chain to lose money, but was cited as an example of the reasons why the newspaper was changed to a privately held arrangement in which the shareholders agree not to sell for five years, and then give the right of first refusal to other members of the group. We'll have to wait for the passage of time to judge what the arguments are and their merits. It's apparently linked to another agreement with more intuitive reasonableness; the stockholders agree not to interfere with the journalism. We'll see in time whether this arrangement leads to journalistic integrity, or whether it leads to one of those famous uproars where an eminent editor lets it go to his head, and gets fired amidst a loud chorus of criticism from the editorial pages of other newspapers.

And then there is the issue of unionism. Some 2000 of the 2600 employees of the Inquirer are members of some union, and this is the main source of the famous liberalism of the media. The corporations which own newsmedia get trapped into the position of proclaiming their concern for the rights of the working man so frequently that they cannot escape it in their own labor negotiations. In the case of the Inquirer, this tendency led to the conferring of full sick pay to the employees, for 42 weeks a year. While this provision is really intended to be a generous provision for extended rehabilitation from medical catastrophes, it leads to some flagrant abuses from time to time, grimly defended by a rather embarrassed union lawyer. The Inquirer was losing money, and needed to lose some more to revive its position by investing in the future. No doubt there was some significant posturing by both sides when these contracts were re-negotiated by the new management. Ultimately, the fairness of the labor agreements, union or otherwise, will be judged by whether the newspaper is able to attract and retain outstanding employees. If not, it will not matter how fair the contracts appear to be.

Both television news and newspapers are slipping. Perhaps that is temporary, perhaps it does not greatly matter what medium delivers our information to us. People under the age of 30 seem to be most distracted by other amusements, and it is anybody's guess whether they will return to the news as they grow up. But one central fact about newspapers emerges. The Inquirer employs 460 journalists and pays $3 million a year to the Associated Press and other sources. The nearest competitor is KYW, which has 38. Whatever you may think about their viewpoints or the nature of the media, this is the main news collection agency in the region by a very large margin. News is created by reporters. If you don't believe that, just watch how the papers shrink during the summer and long holidays. We wish the new owners well, hope they make a ton of money, and hope they don't let success go to their heads.

http://www.philadelphia-reflections.com/blog/1300.htm

Stephen Girard, Compulsive Gambler

Stephen Girard

Keep flipping a coin, it's unlikely to come up Heads eighteen times in a row, but it could happen. Once they get to be the richest in the country, most people would quit flipping rather than risk everything on the fifty-fifty chance the next flip will come up Tails. But Robert Morris, William Bingham, Alexander Hamilton, and many others would not only reach the pinnacles of wealth but still gamble everything they owned on a bold chance to get lots more. Stephen Girard was the same way, although in his case he never seemed to lose.

First Bank

By 1811, Girard was the wealthiest man in America. Among other things, he was the largest stockholder of the First Bank, and ran the largest shipping and merchantile empire in Philadelphia, trading extensively with France and England. From these contacts he was able to see relationships between France and England, and between England and America, were going to deteriorate into war. So, Girard cashed out, totally selling his overseas trading interests rather than risk blockades and confiscations. It was a shrewd move, boldly getting out before others could see what he saw. Girard was 61, his wife was permanently hospitalized, and he certainly never had to work again.

Thomas Jefferson as President of the United States

As a major stockholder in the bank, Steven Girard was well aware of the strong populist sentiment that the Government had no business running a bank. Although he did his best to preserve the bank, he could see its closure was politically inevitable with Thomas Jefferson as President of the United States, soon to be followed by his Virginia crony, James Madison. When the charter was revoked, Girard took his immense cash horde -- and bought the doomed bank with it. From the Virginians' perspective, they were going to need that money if they went to war with England; while in Girard's view they could not possibly fight a war without a bank to finance it. As matters turned out, the War of 1812 was largely financed by Girard's personal wealth, which ultimately meant that Girard bought the Government's bank with the Government's own money.

Girard Estate Map

Even making allowances for the fact that the troubles over the national banks were a symptom of the immature financial markets of the nation, which made passive investment difficult for those with rentier ambitions, Girard was clearly a compulsive gambler. Most compulsive gamblers are losers, Girard just happened to be a compulsive winner. His new bank was enormously successful, and as late as 1829 he purchased all of Schuylkill County for its coal discoveries, expressly directing in his will that his heirs were never to sell it. His estate still owns a large part of South Philadelphia, based on the same long foresight of a pretty old man. If you think that's easy to do, just ponder what finally happened to Robert Morris, Haym Salomon, and Alexander Hamilton.

http://www.philadelphia-reflections.com/blog/1327.htm

OUR NICE HOUSING BOOM COLLAPSES

Three Basic concepts at work:

• Steep yield curves (the normal situation) are good for banks; inverted curves (a rarity) are not. The 2006 inversion was caused by the bond market accepting abnormally low long-term interest rates, so the "spread" between risky loans and safe ones displayed a diminished "risk premium".
• The Federal Reserve then lowered short-term rates by printing more currency.
  This caused an inverted yield curve to return to its normal shape, but the 2006 problem was caused by too much(Chinese) money and this action added to it. The banks were rescued, but the currency was inflated.
• This innovative response will probably become a standard readjustment.
  But it only keeps the ship from tipping over after a sudden wave; it doesn't address the approaching storm.

Risk premiums soared in August 2007. What seemed safe, abruptly was risky, only available at higher prices.

What happened in August?....The "risk premium" --and, consequently, mortgage interest rates-- suddenly went back to normal. About $90 billion of foreclosures seemed probable. We had built far too many houses for people who couldn't afford them. Surplus houses remain for ten years, depressing all real estate prices, making everybody feel poor. Recession, anyone?

What did the Federal Reserve do? To protect the banks, Bernanke dropped short term interest rates. (This steepens the yield curve.) As the panic spread, he dropped rates some more (This floods the country with money). Inflating the currency cheapens the dollar, which robs foreign investors. Foreigners sold stock to escape, prices fell. Seeing prices fall, everybody else sold stock. 1929, anyone?

So what? They're only foreigners. If Bernanke raises interest rates, we may get a recession. If he keeps them low, we may get hyperinflation. So, he probably hopes to drop them for a couple months, then raise them again. Jimmy Carter got "stagflation" trying this sort of thing. Green eyeshades, anyone?

Remember how naughty "redlining" was? Well, now we bash the banks for "stupid mortgages". Banks issued cheap mortgages for inflated real estate -- and immediately sold the "subprime loans" to investment bankers as "collateralized bonds". We are still uncertain who holds these things, but at least $40 billion were in the hands of Wall Street when the music stopped. Wall Street had to sell perfectly good (?) stock to pay their debts. Blue chips, anyone?

Why was the risk premium so low? The Far and Middle East had something to do with it. But mainly, securitization led to undue emphasis on statistics. In a housing boom, foreclosure rates seem to go down but are really only being diluted by new loans. The fall of BNP Paribas was a sudden wake-up. Then, the computers of the "quants" exposed a flaw in their programs when they detected heavy selling of perfectly good stock, and announced the End of the World..

Thank heaven it happened before things got serious.

WWW.Philadelphia-Reflections.com/blog/1331.htm

http://www.philadelphia-reflections.com/blog/1331.htm

Port of Philadelphia

Ports of Philadelphia

When federal appropriations are doled out, it is a great advantage for the Port of Philadelphia to appeal to six U.S. Senators. However, the overlapping control of port operations can come close to paralysis. In short, we may have less chance of agreement on what we want -- but a greater chance of getting it. Right now, the ports of the world are struggling to adjust to revolutions of containerized cargo and gigantic oil tankers, plus political pressure from concern about the environment.

Some of the main arenas of our gladiator fightsl are as follows:

DRPA: The Delaware River Port Authority operates several large bridges, the PATCO high-speed subway line, and the cruise terminal, all leading to control of potentially large sources of revenue. The 1992 Congress expanded its charter to include the economic development of the port region.

SJPC: The South Jersey Port Corporation owns two marine terminals in Camden, and is planning a third in Paulsboro.

DSPC: The Delaware State Port Coorporation operates the Port of Wilmington, DE.

PRPA: The Philadelphia Regional Port Authority has little to do with city politics, but is an arm of the state government of Pennsylvania, operating 7 marine cargo facilities, and planning more.

In addition, every county, city, and town along the riverbank has some degree of authority. Every business and union involved in regional or international trade is desperate to protect its interest in the politics of port regulation. Lately, the Homeland Security Agency has taken a large role. Scientists, engineers, fishermen, oil refinery operators, economists, and others abound. The newsmedia convey their own opinions and the opinions of others. Opinions abound, because most issues about ports are important.

In addition to the traditional cargoes of coal, petroleum, iron ore and forest products, which are mostly declining in importance, the rising cargoes include meat, cocoa beans, and South American fruit. General, or casual, cargo tends to be more valuable than bulk cargo, but greatly complicates the Homeland Security risks. The ratio of imports to exports is important, because it is expensive to have a ship return empty. Shippers will therefore favor a port where there are expectations of return cargo. Oil tankers are particularly likely to return empty, since their ballast is mostly river water; but, who knows, perhaps global warming will make dirty river water seem valuable to some tropical oil producer. A quirky problem is that most of the crude oil entering East Coast ports is currently coming from Nigeria, a notoriously corrupt nation. This has led to a thriving business of car-jacking in the Philadelphia suburbs, with the stolen cars promptly packed in empty containers returning to Africa.

Of the 360 major American ports, the Delaware River ranks second in total tonnage shipped, and eighth in the dollar value of the cargo. Every year, 2600 ships call into our port, which claims to employ 75,000 people. According to Bill McLaughlin of the PRPA, the future of the port will depend on the settlement of three major disputes:

1. Deepening the Channel. The historical natural level of the river is 17 feet, artificially deepened to 40 feet up to the level of the Walt Whitman Bridge. It sludges up by two or three feet every few years, so dredging is a continuous issue. The enlargement of tankers and container ships has led to a need to deepen the channel to 45 feet. It is true that the Wissahickon schist pokes up at Marcus Hook and will have to be blasted out, but mainly the issue is dredging up the gunk on the river bottom, and hauling it away somewhere. In Delaware Bay below Pea Patch Island, the bottom is sandy and hence valuable. The State of Delaware has plans for riverfront development, and would actually like to have the 8 million tons of sand, so no problem. The 7 million tons of clay and silt which must be dredged out of the upper Delaware River channel for a 45-foot depth is more of a problem, but uses can be found for most of it. Or so the Pennsylvania representatives maintain; the New Jersey representatives led by Congressman Rob Andrews say it would be an environmental disaster to dump a thimbleful on New Jersey. Feelings get pretty hot in these things. The Haddonfield representative is portrayed as selling out his district in order to further his own state-wide aspirations, acting on the orders of North Jersey politicians who dominate New Jersey politics, who want to lessen competition with the Port of New York, which also shares a border with New Jersey. Feelings are not soothed to see the Port of New York deepening its channel to fifty feet while resisting forty-five in the Delaware port.

The document currently at the center of this interstate dispute is called PCA, the Project Cooperation Agreement. New Jersey won't agree to sign the proposal, which contains clauses to remove the DRPA from authority and replace it with PRPA(essentially transferring control and revenues from Philadelphia to the State of Pennsylvania) as the "non-federal sponsor". PRPA would then enter into a contract with the Army Corps of Engineers to get the work done.The price, probably low-balled, is $219 million, to be compared with the Port of New York's dredging price (probably high-balled) of $50 billion. There are, of course, a great many features of this political negotiation which are unlikely to appear in print.

2. Southport. The grand plan for the Philadelphia Port is to center on an intermodal complex of piers, railroads, and highways which would extend as a continuous terminal from the Walt Whitman Bridge to the old Naval Yard. No doubt this idea is linked to the round-the-world concept of Philadelphia as a way station from India to Vancouver, overcoming the empty return cargo problem by never looking back. Good luck.

3. Monetizing the Port. Like the turnpikes, ports could be sold to private investors. Of course, that could extend to selling the property to foreign investors, triggering the nationalist reaction readily observed when port management was once offered to Abu Dahbi. It could well give a new meaning to the expression, being sold down the river, but who knows maybe it's a good idea. When you criticize motives it never bothers real political pros, because it's simple to say you don't have such motives, and who knows. But the people seriously involved in government finances say they most fear that the do-gooders will be allowed to sell or lease publicly-owned facilities to improve the financial balance sheet. And then the pros will just take the money and use it to pay interest on more borrowing.

WWW.Philadelphia-Reflections.com/blog/1337.htm

http://www.philadelphia-reflections.com/blog/1337.htm

Detroit Makes, Philadelphia Takes

Junk Yard

Let's look at the economics of a junkyard in a business-school way. Derelict auto bodies worth $80 a ton at current prices can be profitably converted into $235 worth of scrap metal, provided the cost of doing so can be kept below $155 a ton. The Camden Iron and Metal company is able to do so for $115 in expenses, and so reaps a profit of $40 a ton . That's not to mention the relief the owner of a useless car feels when the derelict hulk is taken off his hands, or the relief the City feels in ridding itself of thousands of vehicles abandoned in various alleys and public places. Or the worth to the steel mills of being able to produce new metal at a reduced price compared with starting with iron ore and limestone. Or the benefit to our balance of trade from being able to export the motor blocks and transmissions salvaged intact from the wrecks, leading to foreign motor cars of a quality that may, or may not, withstand impartial examination..

Camden Iron and Metal, Inc. is crawling with engineers who help cope with the currently dwindling steel content of contemporary autos, and the consequent increase in non-ferrous metals, glass, plastic and whatever. The most profitable component of the salvage company thus lies in a subsidiary, Innovative Recycling Products, Inc. The copper content of scrap used to be a headache, but is now a revenue center, for example. There once was a time when scrap iron was chopped up and buried in landfills. Nowadays, people are getting rich digging up such landfills and mining the scrap metal. There are other problems you probably wouldn't imagine, such as the disagreeable discovery that lots of those crushed auto bodies have dead dogs locked in their trunks.

It's big business, where a single crane, of which this company has a great many, costs $1 million, and the grinding mills and purifiers cost much more, last only a year, and must be maintained or replaced. There is an increasing plastic content in cars, so that stuff is ground up, pulverized, and burned to produce energy to run the shredding operation. Trucks bringing in scrap for processing typically run all night on the highways, which reduces the public profile of the salvage operation but increases its 24-hour efficiency. When metal is torn apart, internal friction creates 2000 degree heat, cooled by water, producing huge clouds of steam. The closing of the Bessemer Steel Works reduced the local market for scrap steel, prompting more exports of scrap, and stimulating more search for ways to salvage other ingredients of the scrap. Increasingly, the purification of the raw material has thrust the scrap processors into the role of a pre-processing step in the steel industry. Just as slaughter houses used to boast of using all of the pig except the squeal, hardly anything is now left of the bodies of discarded autos except for the unattractive scrap heap. Hey, if every housewife admires the idea of household recycling, maybe they can grow to love auto body recyclers.

And then, friends, this is Philadelphia so politics enters in. It has come in the form of visits from the Governor who wants the shredder to move to the waterfront, but who also has a struggle with New Jersey over dredging the river channel to balance in his mind. So, sometimes expensive relocation proposals are made, partially implemented, and then suddenly abandoned for reasons best known in Harrisburg and Trenton. It's conjectured that a central issue in this scrap iron struggle is the high price charged for electric power by New Jersey utility monopolies, tending to drive the scrap salvagers over to Pennsylvania. Since macing utilities is a central feature of modern urban political financing, it's equally possible that Pennsylvania power is produced at a subsidized loss in this struggle, or that New Jersey is concealing its tax burden within electric bills. One would have to know more facts to form an informed judgment, in a situation where facts are hard to come by.

WWW.Philadelphia-Reflections.com/blog/1338.htm

http://www.philadelphia-reflections.com/blog/1338.htm

Dog Days

Teddy Roosevelt was a great conservationist, promoting the outdoors life, establishing the National Park Service and so on. At the same time, the walls of Sagamore Hill his home on Oyster Bay were covered with the stuffed heads of big game animals he had personally shot for no better reason than it pleased him to shoot them. This paradox is a convenient symbol of the mixed-up ideas and conflicted attitudes of the public at large about animals. We love them, but we also eat them for dinner.

The two sides of this tension have at their extreme some pretty rich nut cases, or some pretty nutty rich folks, however you wish to style them. One woman has bought half the country of Paraguay for a nature preserve. On the other extreme, it is said that one wealthy Philadelphia lady has contributed enough money to attract the solicitude the Governor, in the interest of animal rights legislation. Since his political enemies call him "Fast Eddie", that isn't his usual image. It is rumored that he loves his pet terrier, but the center city cynics gathered around lunch tables on Camac Street surmise that his really influential friends could be real estate developers. This all does require a little explaining, which is a full time occupation in some circles.

Jim Scharnburg was entertaining Innmates the other day about his almost full-time avocation of hunting rabbits in Chester County with a pack of French hounds. Hounds, mind you, not dogs. There are thirty clubs in Chester County alone concentrated on packs of hunting hounds, not to mention all the other counties in the state, and not to mention the hunters on horseback, the fox hunters, the deer hunters, and lots of other kinds of hunters, sometimes with but mostly without guns. Most of these groups have frequent outings together in the countryside, followed by jolly dinners and gatherings, and with newsletters, websites, intermarriages and lots of other associations. Social scientists would call these networks, a trendy phrase, that..

To illustrate how easily networks are formed between hound lovers and politicians, Jim tells the story of living in Manhattan near Gracie Mansion, with his hounds of course. Hounds have to be walked, you see, and the New York police are not particularly friendly to the idea, nor are other inhabitants of the skyscraper canyons, who promote pooper scooper laws and encourage police harassment of hounds. One evening a dog belonging to a native New Yorker was attacked by 27 East River rats. Jim's hounds were unleashed, the dog was rescued. It turned out to belong to Mayor Lindsay, who was quickly persuaded to create special privileges for hounds in Carl Shurtz Park and other East Side grasslands.

Some members of hound packs are into the whole thing, as Jim is, but most members merely enjoy an excuse to wander in the outdoors with convivial company, or else enjoy the parties afterward; some people just like to write newsletters and send out meeting notices. Everybody likes to talk, that's one sure thing. These things flourish in the exurbs, the farm areas just beyond the edge of development. In Chester County, such farmland is quickly disappearing at the rate of 13,000 acres a year as real estate developers find it is cheaper to build in the countryside than where you have to tear down old buildings to build new ones. Inevitably, the people whose ancestors started the farms 300 years earlier are upset at seeing the old place go. There's an economic issue as well, because farmers need local canneries and wholesalers to take their farm products; these support systems tend to wither as farming gets sparser. And the new neighbors are not accustomed to farm sounds or farm smells. The idea of living next to a pig farm is not softened by knowledge that the pig farm was there first. Perhaps you get the idea; conflict is how politics gets into it, and these are the networks who will prostrate themselves in the middle of the highway to preserve their heritage. All it takes is a couple of rich ladies to get excited enough to donate lobbying money, and wondrous inanities can get taken seriously. There is now a bill before the Pennsylvania Legislature which in other times would be referred to as a "tickle" bill, one of ten thousand annual bills submitted by legislators to placate constituents, but widely observed never to go anywhere. But put some serious money behind a tickle bill, hire a few consultants who know exactly which levers to pull and which clauses to include for support, and you could have a law to air condition all dog kennels, thus making Pennsylvania the laughing stock of the country's legislative circles. There can be rules governing the size and cleanliness of dog runs, rules about Fido's required breakfast content, and rules to sterilize every domestic animal so that in one generation we will be animal free.

Grown ups are actually saying such things, and legislators are growing afraid to oppose them. Back home in the real estate office, everybody can be all smiles. Because this is how you can get some nice zoning changes if you play your cards right.

http://www.philadelphia-reflections.com/blog/1341.htm

Gallatin Part II

Act 1 Gallatin Triumphantly Returns to Congress.

When Washington pardoned the Whiskey Rebels, Gallatin was immediately elected to Congress. It was his payback time for Hamilton and all his works. The desperate Federalists tried to oust him a second time with a Constitutional Amendment, which failed before the force of Gallatin's oratory. Gallatin then threw his influence behind Jefferson's deadlocked congressional contest with Aaron Burr, electing Jefferson and earning his own reward as Secretary of the Treasury. Although elected Vice President, Burr's fury is turned against Hamilton, foreshadowing the coming duel.

Act 2 The Virtuoso Financier.

Jefferson proves hopeless in domestic affairs, so Gallatin essentially takes over that role, just as Hamilton had taken over from Washington, who was another Virginia cavalier adrift in these matters. Gallatin promptly repealed the whiskey tax, cut government expenses, in particular the million dollar annual tribute to the Barbary pirates, and almost performed magic in financing the Louisiana Purchase together with Stephen Girard and William Bingham.

Act 3 Burr Kills Hamilton

After his Vice President kills the leader of the opposition party, Jefferson's party was on the political defensive. But not Gallatin, who spits out his famous remark, "A majority of both parties seem disposed to deify Hamilton and treat Burr as a murderer. The duel, for a duel, was certainly fair." It is an all-time low moment in the politics of the young nation.

Act 4 Diplomacy or War?

As the Napoleonic wars engulf the whole world, both England and France harass our merchant ships, and cries go up for war. Partly out of desire to annex Canada in the process, Gallatin sneers at proposals to restrain the fighting Europeans with mere sanctions. His prediction proves dismayingly correct that nothing would come of it except to make our own citizens into smugglers.

Act 5 War It Is.

The First Bank's charter was to expire in 1811, and the bank closed, creating an opportunity for Girard to buy it out and finance the coming war himself. Gallatin was desperate to end the war as quickly as possible, especially after the British burned Washington. To speed matters up, Gallatin took a leave of absence and went off to the peace conference in St. Petersburg himself.

Epilogue in front of the curtain.

Gallatin finally announces his resignation from the longest term of Treasury Secretary in our history. He is seventy years old, three score and ten. Rather than play golf, he was to spend the last eighteen years of his life in three more careers. As a diplomat, he negotiated both our permanent northern and southern borders. As an academic, he founded the discipline of ethnology with the study of native Indian languages, meanwhile founding New York University. And as a banker, he founded a bank which has since evolved into JPMorgan Chase. After all, a man has to find something to keep himself busy.

http://www.philadelphia-reflections.com/blog/1348.htm

Gloomy Future for Banks

Banks pay depositors modest interest rates, lending to borrowers at higher ones. This is known as lending long and borrowing short.

One of the many Joseph Nicholson's in Philadelphia once surprised me by criticizing Paul A. Volcker as merely a tool of the banks. That distinguished Chairman of the Federal Reserve had always been, and still is, one of my heroes for rescuing the nation from inflation. Instead of wringing his hands at inflation, Volcker had the courage to jolt short-term interest rates right up to 8%. It must have caused a lot of pain to some people, but in retrospect it was exactly the right thing for him to do. How could anyone complain about his helping the banks, when he was helping the world economy for everybody?

The answer is that the old Quaker felt 8% was too little, Volcker should have gone higher. In fact, banks always have comparatively little at stake in whether interest rates are high or low. Their profit lies in maintaining a steep yield curve. Which is to say, as long as short-term rates are safely lower than long-term rates, the banks make a profit. It may be hard to recollect, but typical interest rates facing Volcker were then about 18% for long-term loans. Joe Nicholson had a point when he complained that a 10% profit seemed too generous, but for Volcker to raise short term rates to say 15% would have been seen as the act of a madman. In fact 8% did turn out to be adequate for curing inflation, so this episode had a happy ending for both inflation and bank profits. Borrowers commonly feel that banks are greedy, but remember they must accumulate reserves. If the yield curve becomes "inverted" for a protracted time (that is if ninety-day rates are higher than ten year rates) refusing to make loans is the only alternative to spending reserves. If that fails there can be bankruptcy, usually triggered by runs on the bank by depositors in a panic.

Long term rates are set by the bond market, short term rates are set by the Fed. This limits the traditional ability of the Federal Reserve to sustain the viability of banks to one simple tool, keeping short term rates below whatever rates the bond market sets for long loans. In recent years, however, banks have a new competitor for deposits in the form of money market funds. The new formula for what banks want in their Christmas stocking is for the Federal Reserve to set short-term rates well below the market-set rate for long-term rates; but mind you, only slightly below the market-set rates for money market funds. Caught between these two implacable limits, the Federal Reserve has small room for safe maneuver. It is disquieting to hear that fluctuations of market-set interest rates are very difficult if not impossible to understand. Alan Greenspan called them a "conundrum".

And so, when you see pictures of the Federal Reserve Chairman riding off in a long limousine, he may look fully equal to the responsibility of keeping the world from financial collapse. Someone on the sidewalk once muttered that a man with a beard always looks like he's hiding.

http://www.philadelphia-reflections.com/blog/1351.htm

Exit, Pursued by a Bear

John Kastor

Everybody ends up getting fired in a recent book by John Kastor about recent events at the University of Pennsylvania just like everybody ending up dead in an Elizabethan play. The vital difference, of course, is that the dramatis personae at Penn can still relate to a bewildered audience their own versions of those grand events. To protect himself, the author peppers his book with more footnotes than a PhD. thesis. And thousands of stakeholders at the University can now realize that during those eventful times they were as clueless as Rosencranz and Guildenstern.

One basic fact about that institution is that the medical school spends three quarters of the entire university budget. That leads to grudges in the little law school, the little engineering school, and the little president's office, as they knuckle under to the Golden Rule. The department chairman with the gold, makes the rules. Since most of that gold comes from research grants, hence ultimately from the federal government, the medical students and the teaching faculty don't have the same power they had during the Vietnam War era, either. Although medical school tuition imposes a crushing burden on the students and their families, leading to debts close to a quarter of a million dollars apiece, the tuition money doesn't amount to much in the university scheme of things, either. In some schools, tuition amounts to two percent of the medical school budget. You could eliminate the students entirely and not see much difference in the "school".

Unfortunately, when you become dependent on government grants, you find they can suddenly be terminated, or awarded without funding, or held up for several months by Congressional bickering. Meanwhile, there are salaries to pay, contracts to fulfill. Even if you can furlough some of the staff, it's not easy to see what you do about a thirty-year mortgage on a research building when there is a lull in its research funding. If you try to save money, the granting agency will try to get it back; they aren't authorized to make grants to be squirreled away. If you shift money to unauthorized uses, you risk going to jail. And yet, if you don't do something along those lines, the whole enterprise can collapse.

Having said that much to be fair, it is still uncomfortable to see the financial transparency of our most valued nonprofit institutions vanish behind a Byzantine fog of secrecy, out of which arise the magnificent towers of new buildings, and in front of which an occasional limousine is to be observed. No wonder the research scientists feel the constant pressure to produce. A Nobel Prize every ten years, or so, would go a long way toward quieting envious remarks from the liberal arts faculty.

Housed in those ivy towers are three institutions, the teaching hospital, the medical school, and the university, with three boards of trustees, and at least three ruling potentates. At irregular intervals, congressional committees do things to the Budget Reconciliation Act which enrich one of the three components of the institution, or suddenly impoverish another, or both. Integration of the three under one governance sounds plausible until you notice how radically different is the mission of each one. You can take a big building away from one component and rent it back to them, and things like that; but you can't do it without starting whispers about Enron. You can gather up surplus funds from one of them during the decade of the eighties, but you have trouble giving it back twenty years later. Officials at Blue Cross come snooping to see if health insurance premiums are passing through this shell game, ultimately paying salaries in the department of English Literature. Everybody distrusts everybody else, somebody sasses somebody, and everybody gets fired.

Nothing unusual about that. It happens at every medical school.

http://www.philadelphia-reflections.com/blog/830.htm

Report Identity Theft to the Secret Service

The Internet provides new blessings, but new problems as well. Identity theft has now ballooned from a rarity to a fairly serious issue. After initial turf confusion, the issue has been assigned to the U.S. Secret Service. If it happens to you, that's where you make your anguished call. (1-877-ID-THEFT) or www.consumer.gov/idtheft

There's a certain logic to regarding identity theft as a modern form of counterfeiting, which has been with us since the days of William Penn. Shirley Vaias, representing the Philadelphia regional Secret Service, recently addressed The Right Angle Club of Philadelphia on the topic. It makes sense to learn the Service is headquartered on Independence Mall, across from the Mint. The crude forms of printing in the 18th Century made counterfeiting easy, and ever since the early days, there's been a race between improvements in technology and improvement in counterfeiting. We now have paper with little red fibers in it, watermarks, serial numbers, color-shifting inks, microprinting of secret messages in the portraits, special magnetic strips, and probably lots of other clever things we aren't told about. The Bureau of Printing and Engraving is changing the currency, one bill at a time, and recently there was a new ten-dollar bill. A counterfeit version was in circulation within six hours.

ATM machines are equipped with counterfeit-recognition devices, and special gadgets are provided for banks and retail stores, but one detection device traditionally catches most fake bills. After handling huge amounts of currency, bank tellers catch a counterfeit just by the feel of the paper. Color photocopiers are getting better and cheaper, but of course they can't change the serial numbers, so they aren't as smart as they seem. About one hundredth of one percent of the currency in circulation appears to be fake, so you are pretty safe, but the possessor of a bad bill is deemed to be the one out of luck. The consequence is that many citizens suspect a bad bill, take it to a bank, and have it instantly confiscated without recourse. That would seem to discourage reporting a counterfeit, encourage passing it off to an unsuspecting friend, and overall seems terribly unfair; but it results from the wisdom of the ages. Experience shows honest citizens are indeed tempted to try to pass the money on. While the banks don't enjoy being policemen, the effect is that counterfeits will circulate until they hit a bank, and thus confiscation is fairly comprehensive.

As the printing of money gets more complicated, the special presses needed to produce good money has became a monopoly of certain German companies, who sell the machines to other countries. Some of the American presses thus got into the hands of some Russians, who sold them to the North Koreans. So for a while at least, the North Korean government was printing American currency. It provoked vigorous countermeasures, the nature of which is confidential.

A bill of any denomination costs the government about half a cent to produce, and lasts about four years in circulation. When tons of old bills are retired from circulation, the serial numbers are recycled; to an outsider, that sounds like an impossibly tedious job, but they say they do it. There's also the issue of seignorage, a term for the profit the government makes when paper currency gets destroyed in one way or another, costing less than a cent to replace. Just how profitable the currency business is, cannot be accurately determined, because a lot of it is buried or hidden in mattresses and might someday resurface. But there is a substantial profit, which like any shrewd businessman, the government weighs against the cost of detection. Bail bonds and casinos are big sources of bad money, as could be readily imagined, and hence it is in their interest to get pretty sophisticated (and extremely unpleasant) about detection. On balance, however, it can be expected that legalized gambling in Philadelphia will promote more counterfeiting in the local economy, and hence is an offsetting cost of the tax revenue.

Over the centuries, governments have learned how to cope with counterfeiting, and there is actually much less of it than a century ago. You win some and you lose some; life just goes on. With internet identity theft, however, the criminals are developing techniques faster than governments have learned to combat them, and it is governments who struggle to catch up. Unfortunately, everybody takes a business-like approach to the matter, asking whether the precautions cost more or less than the losses. It would seem that if money continues its migration from paper currency to bookkeeping entries, it will eventually seem unsatisfactory for only one party in a transaction, a bank let us say, to keep the books while the public simply trusts them. Eventually, each individual will be forced to seek the protection of some sort of computerized system keeping the counter-parties honest, on behalf of the public, and to prevent a paralysis of commerce. Identity theft is getting expensive enough to warrant the effort.

Just how to do all that is not too clear. So, in the meantime, just let the Secret Service figure it out.

WWW.Philadelphia-Reflections.com/blog/1359.htm

http://www.philadelphia-reflections.com/blog/1359.htm

Commercial Academic Think Tank

Stephen P. Mullin

Stephen P. Mullin recently addressed the Right Angle Club of Philadelphia about assorted economic subjects; he is certainly qualified. He was once the only Republican in Mayor Rendell's cabinet, acting first as Finance Director and then as Commerce Director. At first he doesn't appear extroverted enough to be a politician, but quickly demonstrated that he knew the first names of more of the members of the club than the president did, so maybe he does have the innate talents of a politician. Urban political machines don't usually respond cordially to graduates of Exeter and the Wharton School of the University of Pennsylvania. A number of University professors are consultants to the firm, which offers statistical economic advice to the many law firms in town, to philanthropic organizations considering public-interest projects in the region, to government agencies faced with regulating unfamiliar activities, and very likely to anyone else willing to pay for the service of academics, statisticians and analysts. It certainly sounds like a service that governments and philanthropies need, and which the region needs to avail itself of. In a way, it is probably something the University needs, as well. A friend of mine is now retired, but at one time I commuted on the train with an academic administrator of the Wharton School, who was quite obviously disturbed by handing diplomas to students who promptly took jobs which paid those graduates more than he was paid himself. Obviously, such a system cannot persist very long without creating a brain drain, so income supplementation by commercial consulting is a necessary and valuable support for academics. There are, of course, probably some negative features as well.

The Wharton School

It is interesting to hear from Steve how Philadelphia can be variously described. We have, for example, significantly less foreign immigration than other cities. New York, by contrast, has a net immigration of about 700,000 persons a year; such forces can quickly transform a city in a variety of ways. The bombing of West Philadelphia during the Goode Administration was news for a while, then vanished from the papers. But it had a shattering effect on Philadelphia commerce, leading to a period of 8 or 9 years when there was essentially no private investment in the city. Philadelphia indeed now needs to have its municipal bonds issued by the state bonding authority, because our own bond rating is so low the extra cost of municipal debt is a significant one. And there is the cost of invisible shifting of power to Harrisburg. An unexpected result is that sales and real estate transfer taxes escalated to make up for property taxes which then could not possibly be raised as much as inflation. Real estate was in big trouble; whether ingenious strategies like the 10-year tax abatement for new property will be successful in rescuing the real estate industry, remains to be seen. New office towers have been built, but they drain off tenants from older office buildings. We're seeing a massive conversion of older office space into residential apartments, an apparently successful maneuver. But that drains the older residential areas, which leads to -- well, who knows what it will lead to, but it could be slums.

Mayor Michael Nutter

The traditional hostilities between Philadelphia and its neighbors can be defined in a new way, too. For a century, Philadelphia contributed more tax money to the rest of the state than it received in state services. But in the past 20 years, Philadelphia city has become a net importer of an annual billion dollars -- from the rest of the state. Two or three billion go to the schools, which the rest of the state regards as a deplorable waste in view of the quality of the product. And yet, the most hopeful feature of the situation is the vigor and ingenuity of the attempts being made to rescue the situation. In a certain sense, Mayor Nutter is the candidate of the Wharton School. He may well have some innovative ideas, and academic places like the Wharton School will surely suggest others. It remains to be seen whether Nutter can combine idealism with sufficient ruthlessness to make the city function. Cynical oldtimers will grumble that a mayor has to employ a moderate amount of deception and corruption in order to accomplish his mission. Maybe that overstates things, but it is very certain he must be tough. He's dealing with construction unions who will certainly be tough, and whose interest in sacrificing their own agendas in order to help the schools or street crime -- always fairly small -- is even further impaired by the econometrics that 70% of them live in the suburbs. We wish our new mayor all the best, since he seems smart enough to know what needs to be done, and is definitely smart enough not to drop any bombs on houses. He's smart enough to see that extra city revenues derived from gambling might permit the lowering of wage taxes, and hence an urban business recovery. But is he tenacious enough to stay in office long enough to achieve the balanced result; or will the forces of evil simply kick him out of office before wage taxes can be lowered and gambling discontinued? He won't break his promises, but will they break them for him? Beyond being competent, a city mayor needs to be tougher than the convivial but very mean friends he needs to associate with. He must, for example, decline to run for national office, the traditional way that city machines rid themselves of pointy-headed reformers.

WWW.Philadelphia-Reflections.com/blog/1360.htm

http://www.philadelphia-reflections.com/blog/1360.htm

War Dance

History Footnote: Before the white man came, the Iroquois "nation"devised rules still characteristic of our modern political parties. At various times, there were five, six, or seven tribes in the Iroquois confederacy headquartered in upstate New York, allied to each other with fluctuating loyalty. Philadelphia's tribe were Delawares, or Leni Lanape; but the most warlike and dominant tribe were the Mohawks. Confederations work best when allied against a common foe. The rest of the time, member tribes mostly beat and cheat each other.

The Philadelphia Democratic Party appeals to a number of minority groups and recent immigrants, but it is more meaningful to think in terms of players. For example, university professors are mostly Democrats, but the teachers union is an active political player. Minorities generally vote Democratic, but the Black Ministers are players. Lawyers are rather evenly divided between Republicans and Democrats, but Plaintiff Trial Lawyers, the ones who sue people for a share of the award, are players.

Some people are players but keep it quiet. Certain rich donors are players but don't want to be known as such. The chiropractors and optometrists claim to be players but would rather not have the truth known. The news media and utility companies come close to denying they are players in spite of abundant evidence otherwise.

Well, the local players had a war dance just before the November, 2005 elections; the timing was no accident, and it was publicly described as a SEPTA contract negotiation. The issues had mostly been settled in advance, but the real deal-breaker was health benefits, Blue Cross health insurance paid by the employer to escape income tax and to make the pay packet appear smaller to the taxpayers. Step by step for twenty five years, employers in the form of the Republican politicians had been keeping up a steady drumbeat, trying to reduce the incentive to overspend health insurance because it seemed free, with resulting increase in employer costs. Slowly, business management convinced a majority of the public that "first-dollar coverage" was a villain, since the person covered by the insurance has no skin in the game. Even party loyalists had to admit that it looked as though the tax exemption of health insurance was injuring the image of labor. That concept carried the slogan of "sending jobs to China", or killing the goose that lays golden eggs in the Rust Belt. Five million Health Savings Accounts were sold in 2005 in spite of state laws hampering this form of health insurance, and from experience it seemed certain that five times that many would be sold if early-adopters reported satisfaction. The surrogate was deductibles and employee contribution to health insurance; just about everybody recognizes the need to make some token contribution to health insurance in order to have skin in the game and keep costs down. But not the SEPTA workers. In 2005, the brotherhood of Septa workers would go on strike for fifty days rather than pay one penny of "give-back" for health insurance. Their energy level was high, they were waving their arms, they were ready to overturn ashcans.

Bellevue

When union contract negotiations go on for days, all day, the public gets an idea the negotiating table is a shouting match the whole time, with "negotiators" carrying on with tom-toms and tomahawks in an even more physical and extreme model for their supporters on the street corners. For about ten minutes a day, that's true. But then the television people can turn off their lights and the war hawks fan out to talk with their supporters outside the room, which in this case happened to be in the Bellevue Stratford Hotel. Perhaps you didn't know the Pennsylvania Governor has quite a nice set of offices there. Perhaps you haven't noticed that all the parking spaces on the side alleys near the Bellevue "belong" to various politicians. Just try parking there yourself to learn a few facts of Philadelphia life.

In negotiating classes, they teach you never to make the first concession. By that reasoning, no negotiation would ever end. The more practical advice is to forget about any serious bargains until the last day of the contract, or even a couple days after that. The hard reality is that no one will make a concession while there is time for some invisible player to back out; no one wants to give his constituents time to realize he has sold out their trust, or violated their loud, insistent, wholly unrealistic demands. And so in 2005, after the shouting had gone on for some time, and even a real strike began, the Governor finally sauntered into his nice Philadelphia office. Time to get to work.

Ed Rendell

Those who didn't know him made the comment they could almost believe he was a victim of Attention Deficit Disorder. He talked all the time, moved all the time, and apparently showered all the time. That is, he was in and out of sight all night, but invariably reappeared with fresh shirts, clean shaves and sharp creases. His aides confided he wasn't very good at "detail work", which is to say he conducted the whole affair on a primeval level of dominance, bluster, charm and implied threat. Don't bother me with facts. Mayor Street, on the other hand, would come in and mumble something incoherent, and then had to leave for an important engagement. Word came in that the school teachers felt they really had to pay a small health insurance deductible, and it wasn't so bad. Foo, no guts.

Somewhere along the line, the newspapers started to echo that deductibles had their merits. Foo, bunch of Communists. The black ministers were reported to feel that if their people all had to pay deductibles, why couldn't the transit workers. Bah, bunch of muddleheads. In the hubbub, someone asked what Andy Stern thought. The trial lawyers didn't have as much to say as they once did; SEPTA had reduced liability costs by $87 million through adamantly refusing to settle any case without going to court. Paper tigers. What about chiropractic benefits, we demand the inclusion of chiropractic benefits. No, said SEPTA, we aren't going to agree to any of that sort of thing. Well, what about twenty visits a year to chiropractors?

One by one, the other players deserted the SEPTA workers. The message from the other tribes in the confederation seemed to be, get what you can for SEPTA, but stop the strike by election day. The Governor produced the razzle-dazzle, a loan to the city to pre-pay the Blue Cross premium, in return for which Blue Cross would reduce the premium. The effect of that was to produce enough cash to appear to add ten cents an hour to the pay packet. We'll have to wait a year to see how this money gets restored to Blue Cross, but that's the general idea.

The strike was over, hurray. The next day, the Democrat party elected Democratic governors in New Jersey and Virginia, defeated some California amendments which would have hurt the trial lawyers and teachers unions. Surely, someone in the Democrat party nationally was telling himself that caving on the Philadelphia transit strike was a small price to pay for that.

http://www.philadelphia-reflections.com/blog/732.htm

Curing Stagflation

Walter Baghot

On Wednesday April 30, 2008 the Federal Reserve lowered short term interest rates by 0.25% (to 2%) . It had been rumored they would lower rates even more, but it became more than a rumor that two members of the Open Market Committee resisted. Paul Volcker the former chairman gave a speech describing what he had successfully done in similar circumstances, which was to raise interest rates, not lower them. On the same day, Brian Westbury published an opinion piece in the Wall Street Journal, advocating that the Federal Reserve lift interest rates back to their natural rate, which is somewhere north of 5%. A day earlier, John L. Chapman had written in the same publication that the dollar needed strengthening, which is effectively the same as raising national interest rates. All of these dissenters are more fearful of stagflation than recession, or November elections. All of them are echoing the classic opinion of Walter Bagehot, editor of The Economist between 1860 and 1877 . Nevertheless, the people entrusted to act are still lowering interest rates, and the rest of us retreat before their superior information sources.

Paul Volcker

Bagehot (pronounced baa-joe) always made his points in few words. The solution to what is now known as stagflation is to raise interest rates to punitive levels, while cutting taxes. Punitive levels are of course punishing, and unpopular. Furthermore, since the Democratic candidates for President have boxed themselves into advocacy of raising taxes because President George W. Bush had cut them, the tax-cutting part of Bagehot's terse prescription is also opposed, D versus R. To explain a little, stagflation defines a situation where there is simultaneously rising unemployment and rising inflation. That's not supposed to happen according to the rule of Phillips Curve. The theory behind the Bagehot approach is that the unemployment in this circumstance is caused by the inflation, so you must attack the inflation with higher interest rates, even though a lot of people will be fearful that unemployment is caused by other things, and will go up. Raising interest rates will likely worsen unemployment temporarily, so it takes grit to do it and keep doing it. Industry must be encouraged to invest by dangling inflated untaxed profits in front of its greedy nose. Class warfare opposition is likely to be fierce and unfair. This whole situation prompted one observer to wish we had Gerald Ford back as President, because he was the only President in fifty years to have the country's interest at heart. That's perhaps extreme, but the general reaction is supportable.

It begins to look as though some economist ought to make himself famous with a curve. Going from left to right, it would show that inflating the currency by lowering interest rates will initially help a recession and unemployment. But above a certain level, continued inflating will generate more unemployment by injuring employers. Let's call it a Bagehot Curve.

http://www.philadelphia-reflections.com/blog/1440.htm

Calendar of Local Events

http://www.philadelphia-reflections.com/blog/1438.htm

Roebling

John Roebling

The common image of John A. Roebling comes across a little hazy about details, but seems to consist of going down with the Titanic at the age of 31, with being born in Prussia in 1837, with getting the "bends" while building the Brooklyn Bridge, and first sighting General Robert E. Lee's invading army from a balloon, then dragging a cannon up Little Round Top. The obvious inconsistencies in this image do not prove they are fictitious, they prove that Roebling was several people. Mostly this composite centers on Johann Augustus Roebling and his three sons, but spreads out to a large and highly talented family. Roebling achievements are not those of a bee, but of a beehive.

Johann was a younger child in a large Prussian family living a hundred miles south of Berlin. The region had been ruled under Napoleon for seven years, creating much of the centralized governance we now call "Prussian". Following centralized orders, its school had been designated to be expert in science and engineering. Johann was particularly good at math and was singled out for intensive training in math and science, later sent to Berlin for advanced training in engineering. While there, he fell under the influence of the philosopher Hegel, who proclaimed that anyone could be anything he wanted to be, but opportunities were particularly good in America. Since Berlin went on to become the world center of electrical engineering, the world would probably have heard more of Johann Augustus Roebling even if he had remained at home; but he was going to do big things in the steel industry, so off he went to Pittsburgh. Things went rather well for him there, especially after he substituted wire rope for hemp rope in pulling canal boats over the Allegheny mountains. From that point on, John A. Roebling concentrated on perfecting and manufacturing wire cable, on which he held several key patents, and moved his business to the head of the Delaware Bay at Trenton, strategic in sales location between New York and Philadelphia.

Wire Rope Factory

Although his company would eventually build an open hearth steel mill, the Roebling enterprise always retained a central focus on steel cables made of steel wires bound together for flexibility and strength. The plant next door in Trenton, the Cooper, Hewitt Co., created the steel I-beam and thus was central in the construction of skyscrapers. Roebling supplied steel cable for elevators, without which skyscrapers would have been limited to six or eight stories. The wires within the cables start from what we can now visualize as the childs toy Slinkies (also a Roebling product,by the way). The trick to making such coils into cables was to find a way to straighten them out, which Roebling devised and patented, using a wheel arrangement to twist the wire as it unwound. Later, the wires were galvanized and compressed together. If the cables were used to carry electricity, it was necessary to cover the cable with rubber insulation as part of the manufacturing process. Eventually, over fifty different processes needed to be perfected and employed to create large quantities of non-brittle uniform cable product at low prices. Apparently, the central problem in manufacture was to smooth off burrs in the wire and meanwhile keep the assembly scrupulously clean. Roebling learned how to overcome all of the many problems in this deceptively simple-looking process, which eventually meant that the main problems remaining were in designing of factories rather than designing of cables. During the taming of the west, he produced barbed wire; during the rise of mass agriculture, he devised ways to use wire binders for sheaves of wheat. During the rise of electricity, he provided insulated wire and cable, first for the telegraph and then for the telephone. He even recognized the best business model; make huge profits during the first few years of a new product, then cut prices. By far the most famous product of the Roebling company was the suspension cable in suspension bridges.

Indeed, many people associate the Roebling name with bridge building, even though wire cable was and continued to be the central activity of the company. It was characteristic of the Roebling energy and engineering skill that he saw that if he wanted to sell cable, he had to show others how to use it, and he essentially took over the design and construction oversight of the twelve largest suspension bridges in the country. Unfortunately, his foot was crushed in a construction accident and when he died, the building of the Brooklyn Bridge had to be turned over to his son Washington Roebling. Washington in turn became badly crippled by caisson disease, the "bends", and hands-on oversight was conducted in large part by his wife, following meticulous instructions by her partially blinded husband.

Brooklyn Bridge

The work of building and designing factories for the company fell to Washington's brother Charles, and since the company was constantly changing focus in order to exploit new product lines, it was a prodigious task, always under time pressure. What's more, the main factories burned to the ground at least six different times, probably from arson in at least several cases. The Roeblings all worked like dogs for endless hours, well into old age. There was comparatively little ostentatious display of wealth, and when US Steel offered to buy them out, they declined an offer equivalent to one fifth of the value of US Steel itself. That was during an economic downturn; Roebling was probably worth half of the value of US Steel. Andrew Carnegie might sell out, but not the Roeblings.

George Washington once reversed the Revolutionary War just up the street from the Roebling plant, and John Roebling's son was named after him. Roebling was a patriot and an active Republican. But there was enough Prussian in him to prefer German workmen, and to hate unions. When the company grew large, he was forced to hire immigrants from what he called the Hapsburg Empire, although he never completely trusted them. Judging from his writing, he regarded unions as merely trying to take away control of the company without investing in it, certainly without earning it. Surviving numerous fires, recessions, and wartime demands for expansion without profit, it was plainly obvious that when times were tough and money had to be raised, there was no one except the owner to produce it. It is not difficult to imagine the hatred in the minds of union leaders, confronting a family that regarded lowered wages during a depression as normal and necessary. In the Roebling view, standing up to worker protests in such circumstances was simply a test of character, something an owner simply had to find the courage to do.

Roebling Village 1930

When it became necessary to build a huge new plant at some distance downriver, the Roeblings had to contend with a shortage of labor in a region without houses. So they built a company town which they declined to name Roebling but the railroad named the stop Roebling anyway. Using engineering skill that had made Roebling the world leader, the homes were inexpensive but elegant for the time, and even today. The company had to build stores, streets, schools, and everything else a town needed. The new headaches of this project took time and attention away from the central business of making steel cables, and Washington Roebling once wrote it was enough to drive you crazy.

So, guess what, the unions felt they had to take the lead in complaining and forcing the Roeblings to make changes. Guess what happened next; the Roeblings just sold it and walked away.

http://www.philadelphia-reflections.com/blog/1463.htm

Rise and Fall of Books

The Library Company of Philadelphia

John C. Van Horne, the current director of the Library Company of Philadelphia recently told the Right Angle Club of the history of his institution. It was an interesting description of an important evolution from Ben Franklin's original idea to what it is today: a non-circulating research library, with a focus on 18th and 19th Century books, particularly those dealing with the founding of the nation, and, African American studies. Some of Mr. Van Horne's most interesting remarks were incidental to a rather offhand analysis of the rise and decline of books. One suspects he has been thinking about this topic so long it creeps into almost anything else he says.

Join or Die snake

Franklin devised the idea of having fifty of his friends subscribe a pool of money to purchase, originally, 375 books which they shared. The members were mainly artisans and the books were heavily concentrated in practical matters of use in their trades. In time, annual contributions were solicited for new acquisitions, and the public was invited to share the library. At present, a membership costs $200, and annual dues are $50. Somewhere along the line, someone took the famous cartoon of the snake cut into 13 pieces, and applied its motto to membership solicitations: "Join or die." For sixteen years, the Library Company was the Library of Congress, but it was also a museum of odd artifacts donated by the townsfolk, as well as the workplace where Franklin conducted his famous experiments on electricity. Moving between the second floor of Carpenters Hall to its own building on 5th Street, it next made an unfortunate move to South Broad Street after James and Phoebe Rush donated the Ridgeway Library. That building was particularly handsome, but bad guesses as to the future demographics of South Philadelphia left it stranded until modified operations finally moved to the present location on Locust Street west of 13th. More recently, it also acquired the old Cassatt mansion next door, using it to house visiting scholars in residence, and sharing some activities with the Historical Society of Pennsylvania on its eastern side.

Old Pictures of the Library Company of Philadelphia

The notion of the Library Company as the oldest library in the country tends to generate reflections about the rise of libraries, of books, and publications in general. Prior to 1800, only a scattering of pamphlets and books were printed in America or in the world for that matter, compared with the huge flowering of books, libraries, and authorship which were to characterize the 19th Century. Education and literacy spread, encouraged by the Industrial Revolution applying its transformative power to the industry of publishing. All of this lasted about a hundred fifty years, and we now can see publishing in severe decline with an uncertain future. It's true that millions of books are still printed, and hundreds of thousands of authors are making some sort of living. But profitability is sharply declining, and competitive media are flourishing. Books will persist for quite a while, but it is obvious that unknowable upheavals are going to come. The future role of libraries is particularly questionable.

Rather than speculate about the internet and electronic media, it may be helpful to regard industries as having a normal life span which cannot be indefinitely extended by rescue efforts. No purpose would be served by hastening the decline of publishing, but things may work out better if we ask ourselves how we should best predict and accommodate to its impending creative destruction.

www.Philadelphia-Reflections.com/blog/1470.htm

http://www.philadelphia-reflections.com/blog/1470.htm

Buying Corporate America with Cheap Money

In the summer of 2008 Philadelphia was astonished to read that the rock of Gibralter, our family controlled Rohm and Haas had been sold to Dow Chemical company for $15.4 billion; corporate control will shift to Michigan. A week later, the Hercules Powder Company of Wilmington was sold, and then Budweiser Beer was sold for $56billion to a Belgian firm. The big old philanthropic families were cashing out.

While it may be true that taxes and philanthropic inclinations will lead this cash mountain to be transferred to non-profit foundations of benefit to the local communities, these sales are all a blow to the prestige and vitality of the cities which were once power centers of the world. Worse still, these prominent families with access to expert investment opinion may have reached the conclusion that it was better to have the cash than the business, or better to have the flexibility to shift the cash to more promising investment opportunities. Maybe they seek to diversify, or flee to gold, or invest in commodities, the next coming bubble. To what extent the falling value of the dollar motivated the purchase by foreigners or through foreign intermediaries is unclear, but it would surely be a consideration for foreigners to ponder. Worse still, these families may have decided they need to transfer more of their assets abroad. The glamorous investment advisors to large universities and major foundations are certainly advising their clients to invest much or even most of their funds to foreign investments.

Under the circumstances, one would wish that foreign investors would shrug off considerations of national pride and concentrate purely on the economics of their transactions. But not likely; just as we grieve to lose these brand names, they must be thrilled to show off their new possessions, and eventually to use their control to shift power. The Secretary of the Treasury makes the unhelpful declaration that a strong dollar is important, since he does not need to continue that avoiding a steep recession is more important.

That's the way it is. Keynesian economics waters the currency, causes a fire sale of assets, and fires the flames of inflation. Now, what?

http://www.philadelphia-reflections.com/blog/1493.htm

John Head, His Book of Account, 1718-1753

American Philosophical Society

Jay Robert Stiefel of of the Friends Advisory Board to the Library of the American Philosophical Society entertained the Right Angle Club at lunch recently, and among other things managed a brilliant demonstration of what real scholarship can accomplish. It's hard to imagine why the Vaux family, who lived on the grounds of what is now the Chestnut Hill Hospital and occasionally rode in Bentleys to the local train station, would keep a book of receipts of their cabinet maker ancestor for nearly three hundred years. But they did, and it's even harder to see why Jay Stiefel would devote long hours to puzzling over the receipts and payments for cabinets and clock cases of a 1720 joiner. Somehow he recognized that the shop activities of a wilderness village of 5000 residents encoded an important story of the Industrial Revolution, the economic difficulties of colonies, and the foundations of modern commerce. Just as the Rosetta stone told a story for thousands of years that no one troubled to read, John Head's account book told another one that sat unnoticed on that library shelf for six generations.

Colonial Money

The first story is an obvious one. Money in colonial days was mainly an entry in everybody's account book; today it is mainly an entry in computers. In the intervening three centuries coins and currency made an appearance, flourished for a while as the tangible symbol of money, and then declined. Although Great Britain did not totally prohibit paper money in the colonies until 1775, in John Head's day, from 1718 to 1754, paper money was scarce and coins hard to come by. Because it was so easy to counterfeit paper money on the crude printing presses of the day, paper money was always questionable. Meanwhile, the balance of trade was so heavily in the direction of the colonies that the balance of payments was toward England. What few coins there were, quickly disappeared back to England, while local colonial commerce nearly strangled. The Quakers of Philadelphia all maintained careful books of account, and when it seemed a transaction was completed, the individual account books of buyer and seller were "squared". The credit default swap "crisis" of 2008 could be said to be a sharp reminder that we have returned to bookeeping entries, but have badly neglected the Quaker process of squaring accounts. As the general public slowly acquires computer power of its own, it is slowly recognizing how far the banks, telephone companies and department stores have wandered from routine mutual account reconciliation.

John Head's Account Book

From John Head's careful notations we learn it was routine for payment to be stretched out for months, but no interest was charged for late payment and no discounts were offered for ready money. It would be another century before it became routinely apparent that interest was the rent charged for money and the risk of intervening inflation, before final payment. In this way, artisans learned to be bankers.

And artisans learned to be merchants, too. In the little village of Philadelphia, chairs became part of the monetary system. In bartering cabinets for money, John Head did not make chairs in his shop at 3rd and Mulberry (Arch Street) but would take them in partial payment for a cabinet, and then sell the chairs for money. Many artisans made single components but nearly everyone was forced into bartering general furniture. Nobody was paid a salary. Indentured servants, apprenticeships trading labor for training, and even slavery benignly conducted, can be partially seen as efforts to construct an industrial society without payrolls. Everybody was in daily commerce with everybody else. Out of this constant trading came the efficiency step for which Quakers are famous: one price, no haggling.

One other thing jumps out at the modern reader from this book of account. No taxes. When taxes came, we had a revolution.

www.Philadelphia-Reflections.com/blog/1517.htm

http://www.philadelphia-reflections.com/blog/1517.htm

New Museum of Chemical Heritage

Eighty percent of the ethical drug industry is located within a hundred miles of Philadelphia, and the whole chemical industry has had its center here for two centuries. The chemical industry is the region's largest manufacturer, now that locomotives and beer brewing have come and gone, but its profile remains low. In fact, chemists personally have a low profile too, and harbor a smoldering annoyance about it. No one has been more determined to change that nerdy image than Arnold Thackray, the recently retired President of the Chemical Heritage Foundation. He's not only a big idea man, but bubbles with energy and persuasiveness. That largely accounts for the fact that CHF has the second largest endowment among public institutions in Philadelphia, the best library of chemical history in the world, and a growing reputation for fine art concentrated in the field. That's not enough for him, so it came about that a new museum was envisioned, funded and created. But not built; building it was assigned to Miriam Schaefer, a famous go-getter who had the unusual qualification of being squeamish about chemistry. It was her assigned task to find a way to make chemistry exciting to people who were not instinctively excited by it, just exactly because she was the world's authority on that point of view. What was vital was that she was the sort of person who can't resist a challenge, and was capable of thinking, well, big.

With the unlimited backing of Arnold and his board, and their almost unlimited financial support, Miriam set about soliciting big ideas from uninhibited people all over the world, and some of their suggestions were even a little too wild to be acceptable. But since the whole idea was to awaken the enthusiasm of anybody, however sullen, who happens to shuffle through the museum, many outlandish suggestions were forced through the filter of a skeptical, conservative, Philadelphia establishment. The result is a series of pleasant surprises, ranging from fine art with a focus on alchemists trying to make gold out of lead, to astonishing computerized graphic displays of the elements of the periodic table fifty feet high, to depictions of Joseph Priestly known as the father of chemistry, a personal friend of Benjamin Franklin, the founder of the Unitarian Church, and a resident of Philadelphia. There's Arnold Beckman's original Beckman spectrophotometer which made hundreds of millions of dollars, was a major factor in the Twentieth century blossoming of biochemistry, and is here shown to be a clever elaboration of a simple idea. Meanwhile, the museum is housed in a massive old bank building, with its interior reamed out and replaced with as much transparent glass as could support the weight. Inga Safron the architectural critic, more than foamed over with praise in her review of just the structure itself. Don't neglect to notice the stunning portrait of Gay-Lussac, the man who discovered that water is H2O. The pigments of his portrait were mixed with bees wax, and with clever lighting have an astonishing luminosity.

The museum is part of an emerging conference center, which should attract audiences of chemists for decades. But that's not entirely the whole idea. The underlying vision is to convince those skeptical, non-chemical bozos that not only are chemists rather richer than the rest of us, and smarter, but clever and fascinating, too. Go visit this museum, before everyone else does.

http://www.philadelphia-reflections.com/blog/1523.htm

Mercantilism Dies Hard

Mercantilism to Americans

Whatever mercantilism was supposed to mean can be debated by captive college students; mercantilism to Americans is and was just a bad thing having to do with economics, mentioned only when the speaker is searching for an epithet. Our present understanding of the mercantilist term is that brutal government action, even war, was employed to benefit favored citizen merchants, while the economics of a whole nation of consumers was subverted toward enhancing state power. All of this rapacity was for the betterment of one nation at the expense of its neighbors, and at the expense of its colonies. The surprisingly vague but more modern term of fascism is often substituted, to denote evil uses of government to promote the interest of a combined military and industrial elite, to the general disadvantage of everyone else. Because so many opponents of mercantilism were upset about specific forms of mercantilist activity, Adam Smith is associated with the idea that mercantilism was the opposite of international free trade, and the American founding father are associated with the idea that mercantilism embodied everything we disliked about colonialism. Some prominent 18th Century leaders constructed a body of theory to defend mercantilism, and firmly established the idea that the whole approach was founded on long discredited sophistry. In recent times, the only reputable economist to defend parts of mercantilism was John Maynard Keynes, who approved of the idea of emphasizing third-world exports in order to assist developing countries into a modern economy. Whatever is the underlying idea behind this mercantilist idea that has caused so much trouble, and includes so many disconnected features?

Industrial Revolution

Allow an amateur theory. In my view the fundamental misconception underlying mercantilism was the idea that economic relations between individuals and nations are a zero-sum game; what I gain must be at the expense of someone else's loss. Almost every child believes that, many or even most everyday transactions seem to confirm it, and vast multitudes of mankind believe it to the end of their days. But as part of the Industrial Revolution the counter-intuitive realization began to spread that cooperative behavior, within limits, could sometimes result in all participants becoming better off, harming no one. Perhaps it was even a universal idea. Adam Smith popularized the idea that when two parties freely participate in the free trade of a marketplace, each one can come away from the trade feeling better off; one party would rather have the goods, the other party would rather have the money, and they trade. Multiplied millions of times, the expansion of free trade would enrich whole nations, even the whole world. George Washington may not have understood all that, but he did know that England was injuring him with rules about insisting British subjects must conduct all foreign trade in British sailing vessels, must not manufacture locally, must do this, must not do that.

John Maynard Keynes

Exporting was good, importing was bad, manufacturing was to be concentrated in the mother country, consuming was to be discouraged -- what was the unifying theory behind all this? It would seem to have been the gold standard. Gold was durable, and its supply was limited. It had certain undeniable advantages, but its overall effect was to restrain industrial progress. If the economy is constantly expanding, but the supply of gold is relatively limited, the price or value of everything will go steadily down over time. In George Washington's time that was particularly irksome with regard to the value of his plantation, and his vast land holdings of Ohio land. It was also true of everything else that was reasonably durable. If everything is measured in gold, and gold is limited, then the accumulation of gold is ultimately the only way to accumulate wealth. The English nobility who were profiting from the system might not perceive it, but the colonists could perceive it in their bones. Small wonder that modern banking, economics and innovative finance took root in the American colonies. If not first, at least most vigorously. Small wonder we had a revolution men would die for, while the British were merely annoyed and mystified.

Vast areas of Asia, Africa and the Middle East are still committed to the idea that the only way to get rich is to steal from others; since everyone wants to get rich, everyone steals. Someone has reduced this idea to a simple game theory called the Prisoner's Choice. If two prisoners tattle on each other, both will be severely punished. If both prisoners refuse to testify, both will go free. If one tattles and the other remains mum, the tattler will go free and the loyal comrade will get hanged. Reduced to its simplest level in a series of repeated games, the theory states that it's better for everybody to cooperate most of the time, but you must be willing to play tit for tat if the other party cheats. Be cooperative as much as you can, but never forget to wallop a cheater, and then forgive him later so he can have a chance to play nice. Lots of people will think you are a sucker if you play nice, so unfortunately it is necessary to retaliate -- swiftly and painfully -- when someone cheats. Centuries of American history are explainable with this simple game theory.

And not just with tribesmen and Nazis. When Winston Churchill finally realized that the Bretton Woods Conference was going to mean the end of the British Empire, he was almost tearfully plaintive with his friend Frank Roosevelt, but he said he understood.

And six years later, when Churchill's protege Anthony Eden invaded Egypt over the Suez Canal, Dwight Eisenhower the hero of the Normandy Invasion that saved England, suddenly turned nasty. England would immediately abandon that invasion, or Eisenhower would foreclose on British debts and ruin them.

That was the end of British colonialism, and in a sense it was the final end of the Revolutionary War.

http://www.philadelphia-reflections.com/blog/1534.htm

Merging Cities With Their Suburbs

Philadelphia 1854

When the City of Philadelphia turned into the County of Philadelphia (or vice versa) in 1854, the area had about 150,000 residents in 1850 but 500,000 in 1860. It qualified as one of the largest cities in America at the time, but what we today call middle-sized cities are about that same size. As a generalization, when a thriving American city approaches a size of about half a million, the business community often gets the idea that the city should expand its limits by annexing the neighboring districts. And, as a further generalization, the metropolitan newspapers are simply ecstatic about the idea of expanding their market reach, while the working classes of both the city and the region it proposes to swallow, are violently opposed. Since the business community typically feels that expansion would be good for business, labor unions are subdued. Leadership of the conservative middle-class rebellion is therefore generally led by the police and volunteer firemen, who are the most organized groups within the combative working class in a metropolitan region. Many citizens of all classes are of course quite indifferent about the matter. As history has turned out, only one such proposal in five will be successfully adopted, but it is almost unheard-of for a successful amalgamation to be reversed once it happens. In recent years, this general pattern has been followed in Indianapolis, Lexington, Jacksonville, Nashville, Baton Rouge, and Louisville. In countless other cities, the effort has been defeated by the voters.

It requires thriving prosperity for the business community to become politically dominant in a city, so the political context of these circuses amounts to a contest between the business "elite", often augmented by "carpet baggers from out of town" threatening comfortable lives within settled neighborhoods by merging them with culturally discordant residents in suburbs or countryside. On a political level, professional urban politicians favor expansion, because increasing the electorate generally makes it more expensive for an outsider to raise the funds to defeat them in an election. Exceptions to this rule occur when the two merging regions have different political parties in control, or when working class city districts are so opposed that urban politicians fear to anger them. A symptom of this conflict for control of a city machine can be observed in the seemingly unrelated issue of a city charter with a "stong mayor" design. Cities with a strong city council generate greater ability to defeat the machine, and are hence more reluctant to see mergers with suburbs. Nevertheless, the attraction which the business community can offer to the politicians is a larger tax base, although in the surrounding suburbs the dynamic is exactly the opposite. In the suburbs, it is the local businesses and professions who feel threatened, and who attempt to agitate the suburban politicians to protect their tax collections.

Although campaign rhetoric in these battles tends to exaggerate or distort the probable economic changes, academic studies find that the actual effect of city expansion is generally of modest subsequent growth, with modest increases in taxes. These effects seem comparatively weak since a metropolitan region is unlikely to produce a successful merger unless the economy is already growing fast enough to generate expansionism, and that vigor is likely to persist after the merger. These political uproars talk a great deal about economics, but in fact the issue is primarily political. One commentator calls them "chess games pretending to be circuses", and the real force at work is usually an elaborate variation of gerrymandering. Urban minorities who usually vote Democrat can be swallowed up by suburban majorities who usually vote Republican. Or else a thwarted inner city business community hopes to replace the urban machine with a more favorable suburban set of attitudes. There is seldom a uniform political gradient as the city border is approached from either side, so the chess game takes these patchwork population variants into detailed consideration. It is often argued that crossing a political boundary is unworkable, but since the thriving city of Atlanta is located in two different counties, that must not be a dispositive argument.

In their most elemental form, these expansion efforts have to do with political boundaries. It is therefore not surprising that the people most concerned are politicians. The battle cry is often to create a city without suburbs; failure to act leads to suburbs without a city. In fact, the underlying agendas are much more prosaic.

http://www.philadelphia-reflections.com/blog/1570.htm

Philadelphia City-County Consolidation of 1854

Consolidation Map 1854

Philadelphia is still referred to as a city of neighborhoods. Prior to 1854, most of those neighborhoods were towns, boroughs, and townships, until the Act of City County Consolidation merged them all into a countywide city. It was a time of tumultuous growth, with the city population growing from 120,000 to over 500,000 between the 1850 and 1860 census. There can be little doubt that disorderly growth was disruptive for both local loyalties and the ability of the small jurisdictions to cope with their problems, making consolidation politically much more achievable. A century later, there were still two hundred farms left in the county which was otherwise completely urbanized and industrialized. For seventy five years, Philadelphia had the only major urban Republican political machine. By 1900 (and by using some carefully chosen definitions) it was possible to claim that Philadelphia was the richest city in the world, although this dizzy growth came to an abrupt end with the 1929 stock market crash, and the population of Philadelphia now shrinks every year. In answering the question whether consolidation with the suburbs was a good thing or a bad thing, it was clearly a good thing. But since Philadelphia is suffering from decline, it becomes legitimate to ask whether its political boundaries might now be too large.

Philadelphia Map 1762

The possible legitimacy of this suggestion is easily demonstrated by a train trip from New York to Washington. The borders of the city on both the north and the south are quickly noticed out the train window, as the place where prosperity ends and slums abruptly begin. In 1854 it was just the other way around, just as is still the case in many European cities like Paris and Madrid. But as the train gets closer to the station in the center of the city, it can also be noticed that the slums of the decaying city do not spread out from a rotten core. Center City reappears as a shining city on a hill, surrounded by a wide band of decay. The dynamic thrusting city once grew out to its political border, and then when population shrank, left a wide ring of abandonment. It had outgrown its blood supply. Prohibitively high gasoline taxes in Europe inhibit the American phenomenon of commuter suburbs. The economic advantage of cheap land overcomes the cost of building high-rise apartments upward, but there is some level of gasoline taxation which overcomes that advantage. Without meaning to impute duplicitous motives to anyone, it really is another legitimate question whether some current "green" environmental concerns might have some urban-suburban real estate competition mixed with concern about global warming. Let's skip hurriedly past that inflammatory observation, however, because the thought before us is not whether to manipulate gas taxes, but whether it might be useful to help post-industrial cities by contracting their political borders.

Philadelphia Map 1860

Before reaching that conclusion, however, it seems worth while to clarify the post-industrial concept. America certainly does have a rust belt of dying cities once centered on "heavy" industry which has now largely migrated abroad to underdeveloped nations. But while it is true that our national balance of trade shows weakness trying to export as much as we import, it is not true at all that we manufacture less that we once did. Rather, manufacturing productivity has increased so substantially that we actually manufacture more goods, but we do it with less manpower and less pollution, too. The productivity revolution is even more advanced in agriculture, which once was the main activity of everyone, but now employs less than 2% of the working population. This is not a quibble or a digression; it is mentioned in order to forestall any idea that cities would resume outward physical growth if only we could manipulate tariffs or monetary exchange rates or elect more protectionist politicians to Congress. Projecting demographics and economics into the far future, the physical diameters of most American cities are unlikely to widen, more likely to shrink. If other cities repeat the Philadelphia pattern, the vacant land for easy exploitation lies in the ruined band of property within the present political boundaries of cities, or if you please, between the prosperous urban center and the prosperous suburban ring.

Many American cities with populations of about 500,000 do need more room to grow, so let them do it just as Philadelphia did a century ago, by annexing suburbs. But there are other cities which have lost at least 500,000 population and thus have available low-cost low-tax land which would mostly enhance the neighborhood if existing structures were leveled to the ground. Curiously, both the shrunken urban core and the bumptious thriving suburbs could compete better for redeveloping this urban desert if the obstacles, mostly political and emotional, of the political boundary could be more easily modified. But that's also just a political problem, and not necessarily an unsolvable one.

http://www.philadelphia-reflections.com/blog/1573.htm

Philadelphia City Controller

Alan Butkovitz

The Right Angle club was pleased to hear the City Controller, Alan Butkovitz, give us an insider's view of the municipal finances, but was a little startled to hear how badly the national banking crisis has affected our city. While of course the city does a lot of things, its present finances can be summarized as mainly consisting of two things: the pension system and the management of police/fire/corrections.

Mayors of this city for several decades have been following the national pattern of government to transfer its deficits to the pension funds of the employees. That has the effect of shifting the cost of present operations into the far future, and avoiding present confrontations by promising even more generous pension benefits in the future. Over time, the future gets closer and closer; to a large degree it is right now. Pension funds are largely independent organizations, supposedly receiving current contributions to be invested for future distribution. That requires an assumption about how much investment growth will be achieved in the meantime, now set by the Philadelphia Board of Pensions at 9%. That's not impossible to achieve in some medium-term intervals. But it's optimistic, even inconceivable, for long-haul investing; over periods of thirty or more years, most experts say that 4% is about all anyone gets. More to the point, 9% is particularly unachievable right now, in the present crash of national financial markets. That's bad enough, but repeated shortfalls in contributions to the fund have left it funded at 53% of the calculated requirement to pay the pensions of the future, even using the unrealistic 9% return assumption. A few years ago, Mayor Rendell worried about the underfunding and brought it up to 70% with a billion-dollar bond issue. Unfortunately, the crash in the markets has brought it right back down to 53% again. So, it's fair to say the pension fund is a couple of billion dollars short, even if you accept a 9% income accumulation -- which you probably can't, but at least it brings the pension fund to 70% funding in forty years. Call it four billion dollars short, just to be conservative, since it is presently admitted to be two billion. That isn't Mayor Nutter's fault, but it's sure his problem; and if it gets worse, it will be seen as his fault.

The other expense item of note includes 42% of the budget in the police, fire and prisons systems (education is handled separately through the school board). If you fired all those people, or they quit, we wouldn't have a city, we would have a jungle. But the Controller describes all three as terribly mismanaged, with the local police stations in a deplorable state of disrepair and degradation, bathrooms you wouldn't think of using, and so on. The fire department has only a minor number of fires to fight, perhaps four or five hundred a year, but it includes the emergency rescue services which respond to a couple hundred thousand calls a year. The rescue people report to the firemen, and there is social friction between the two, working to the disadvantage of rescue. It costs about $500 to respond to a call, and it isn't entirely satisfactory to send a fire truck to help someone with a heart attack. The Controller had a number of horror stories about administrative mismanagement in this area. As far as prisons go, everybody knows prisons are bad places, and ours are no exception. Confrontation with the unions is definitely in the future for the Mayor, and the city is going to be in pretty bad shape if he doesn't win some arguments.

That's the expense side of the municipal budget; the revenue side is equally gloomy. The offhand comment was that real estate taxes could double without bringing the pension system under control for twenty years. If our taxes are significantly higher than neighboring cities, or even just the same as in cities with superior uniformed services, it will be hard to attract and hold business taxpayers, causing municipal finance to spiral downward. Along the course of this patter-song it isn't exactly reassuring to learn that it now takes the City 21 days to process a check, and that absenteeism in some departments runs to 20%. We've heard a lot of denunciation of Mayors Giuliani and Bloomberg in New York, but their absenteeism runs 3% because investigators are sent to the house of an absentee, who is subject to court martial if he isn't home.

Somewhere in this nightmare lurks the hidden migration of the unionized workers. Starting with Mayor Rizzo or even earlier, the uniformed services were the main political support of the Democrat political machine. Quietly, they have moved out to the suburbs where the schools are better and the taxes are lower, and it is now said that 70% of union workers live (and vote) outside the city limits. The unions talk tough, bluffing through the uncertainty when their membership can no longer provide the votes to be so fearsome. To some degree, their weakening political power is augmented by using their pension funds to provide construction loans for new commercial real estate. Some of that political clout is used up by the need to get zoning variances and tax abatements for the projects. A lot of these power shifts are hard to assess from the outside, but a trend is clear.

The controller didn't mention it, but the city is not only a pension investor in bonds, but also an issuer. Interest rates are about as low as they can get while the Federal funds rate is nearly zero, so there is only one direction they can go in the future -- sooner or later they will go up. By the iron law of bond financing, the value of the underlying principle will then go down. That could provide an opportunity to buy them back at lower prices, or it could break the city's financial back financing higher interest payments. However, for the pension fund side of things, exactly the opposite is true. Maybe Hizzoner can tap-dance around these dangers and opportunities, but most mayors would have trouble pronouncing the words.

It's part of the job description for the controller to be a pessimist. But the most you can make of this mournful dirge is to hope he is completely wrong.

http://www.philadelphia-reflections.com/blog/1591.htm

Windmill Electricity

Windmills

The Right Angle Club was recently edified at lunch about wind-power generated electricity, by Craig Poff of Iberdrola Renewables, the largest producer of renewable-source electricity in the world. Iberdrola is a Spanish firm, headquartered in Bilboa where they have Basques, near where the Spanish Armada once started its ill-fated journey to battle Sir Francis Drake. Furthermore, it's near where there are caves with wall paintings several thousand years old. Craig is pure American, however, with a background in real estate sales. That isn't as remote a connection as it may sound, because it takes several years and a lot of salesmanship to assemble the leases necessary to create a windmill farm.

We've all seen photographs of these silvery towers, with what look like aluminum propellers glinting in the sun. They are actually made out of fiberglass in much the same way boats are made, and quite often both are made in the Trenton region. So to speak, two hollow clamshells are held together with masking tape to form a propeller blade. Eventually, it revolves slowly, slowly in the wind, starting around 15 miles per hour, and getting turned off when the wind gets so fast it's dangerous. The blades modify their pitch at different speeds, and the entire contraption rotates to meet the wind. Sometimes one windmill will "steal" the wind from its neighbor, so the middle ones get turned down or turned off. There are local "met masts" to measure the wind and its direction and respond with appropriate directions via computers. There are also regional computer centers, and finally electric power distribution is controlled by computers in Bilboa. Electricity can't be stored very well, so sometimes a perfectly good wind must be ignored when electricity isn't needed. Scientists are working on big batteries, and also on storing energy by pumping water uphill into storage reservoirs, or compressing air into caves. Storing wasted electricity is a major issue, and high hopes are held out for innovation in batteries.

Senator Ted Kennedy

A typical tower is about 123 meters high, with a wingspan of about 300 feet; the towers are separated by roughly 1500 feet, but by much more when they are downwind. It's easy to see how negotiations with local farmers can be difficult, requiring months of public relations in a new community. Sometimes they encounter someone like Senator Ted Kennedy, who just plain dislikes how windmills look. Negotiations have to be conducted to obtain access roads to the wind farm, and access to the power transmission grid. Negotiations have to be conducted both before and after construction to satisfy game commissions who worry about the birds and the bats. As it works out, a farmer gets about $7000 a year to lease out his land, but windier areas are more prized, so jealous bargaining abounds. It's probably no wonder only 2% of electric power is presently generated this way, even though Pennsylvania law requires the power companies to reach 18% by 2020. Requires? What's the reasoning behind that? At present, the windmill nearest to Philadelphia is in Pottsville.

It's nice this electricity gets generated by a source so clean, which also can't be shut off by the Iranians. But awkwardly it's expensive to make electricity this way, particularly if you include the subsidies it enjoys. Yes, yes, it's true that lots of things are receiving dubious subsidies, and some of them are competitors to wind power. But the unwillingness of wind power advocates to acknowledge the relative costs of their product suggests to any skeptic that relative costs must be extremely high, indeed. Yes, it's clean, but it's expensive and needs a subsidy. Industries that consume large amounts of power have been offered power purchase agreements that constitute a hedge against future cost volatility for many years in the future. That's both a hedge against rising costs and a promise of reliability; some businesses will pay for that. The competitive economics are that the initial cost of wind power is quite high, but future maintenance costs are quite low. More typically, most household consumers feel they have a right to know more precisely what the competitive prices really are, absent loss leaders, subsidies and hype. When we know that for sure, we consumers will decide whether a somewhat cleaner environment is worth the price. The investors in this technology must gamble they can persuade us that it is, and one can be fairly certain competitive energy producers will seek to persuade us that it isn't. What the farmers who lease their land think, also matters. But the farmers will mostly matter in the legislature voting on clean air mandates, where city dwellers tend to lose their influence. You can sort of see how the legislators think: the farmers know how much they have been offered for the land leases, but the city dwellers can only guess at how clean the environment will get, and how much the electric costs will rise.

http://www.philadelphia-reflections.com/blog/1614.htm

GIC in Paris

Global Interdependence Center

GIC logo

Delegation Agenda

Sunday, May 11^th:

6:30pm -7:00pm: Arrival and cocktails

Location: Aux Anysetiers du Roy, 61, rue St. Louis en L'Isle Metro: Sully Morland or Pont Marie

7:00pm: Dinner will be served; Registration and pre-payment was required for this event.

Monday, May 12^th:

9:00am - 9:15am: Arrival and registration. A light breakfast will be provided.

Location: Bistro de la Muette, 10, Chaussee de la Muette 75016 Paris Metro: Muette

9:15am - 10:00am: Presentation by Michael Kennedy, Head of the General Economic Assessment Division, Department of Economics, OECD, on Outlook by the OECD.

10:15am - 11:30am: Round-table discussion directed by John Silvia, Chief Economist, Wachovia Bank, including Paul Thomas, Chief Economist, Intel, Tom O'Connell, Assistant Director General of Central Bank of Ireland, Sandra Pianalto, President of Cleveland Federal Reserve Bank, Mario Baldassarri, Senator, The Republic of Italy, and David Kotok, CIO, Cumberland Advisors. Each participant will introduce a topic of concern to the group with GIC delegates acting as discussants. Chatham House Rule will apply.

12:15pm - 1:30pm: Lunch at Bistro de la Muette, sponsored by Cumberland Advisors and Wachovia.

1:30pm-7:00pm Free Time

7:00pm - 7:30pm: Cocktails and Hors d'oeuvres.

Location: Cercle de L'Union Interalliee, No. 33 Rue du Faubourg Saint-Honor� 75008 Paris Metro: Concorde or Madeleine, 5-10 minute walks

7:30pm: Private dinner with Paolo Garonna, Deputy Executive Secretary United Nations

Economic Commission for Europe and sponsored by Cohen and Company. Dress code for the club requires a jacket and tie, no blue jeans or tennis shoes please.

Tuesday, May 13^th:

8:45am-1:10pm: GIC & CEPII Conference "Monetary Policy and the Exchange Rate: The Euro and the Dollar"

Location: Maison des Arts et M�tiers, 9 bis Avenue d'I�na, 75116 Paris, Metro: Iena

Full Program will be distributed at the event. Speakers and moderators include:

William Dunkelberg, Chairman, Global Interdependence Center

Agn�s B�nassy-Qu�r�, Director, CEPII

Lionel Fontagn�, CEPII

David Kotok, Chief Investment Officer, Cumberland Advisors

David Woo, Head of Foreign Exchange Strategy, Barclays Capital

Manuel Balmaseda, Chief Economist, CEMEX

Denis Verret, Senior Vice Preside of Operations and Sales, EADS

William Clark, Director, New Jersey Division of Investments

Laurence Boone, Chief French Economist, Barclays Capital

Sandra Pianalto, President, Federal Reserve Bank of Cleveland

Christian Noyer, Governor, Banque de France

1:10 pm � 2:30 pm: Luncheon for conference attendees at the Maison des Arts et M�tiers sponsored by Barclay's Capital

7:00 pm: Dinner hosted by Christian Noyer, Governor of the Banque de France.

Location: Banque de France, Gold Library, 39, rue Croix des Petits Champs � 75001.

Please enter via 2 rue Radziwill, at the north end of the Bank. Recommended metro stops for the Banque de France are Bourse, Palais Royal-Louvre, Louvre-Rivoli or Pyramides, all a ten minute walk to the Banque de France. Dress code for the evening requires a jacket and tie. For security purposes, please bring invitation and photo ID and allow an extra ten minutes for security processes.

Wednesday, May 14^th:

9:30am: Arrive at the French National Archives, for security process. Please bring your passport for security purposes.

Location: French National Archives, 1 rue Roberty Esnault Peltierie, corner of 37 Quai d'Orsay, 75 007 Paris Metro: Invalides

10:00 am: Private tour of French National Archives where GIC delegation will have a viewing of French historical treasures such as the Louisiana Purchase signed by Thomas Jefferson, Original Treaty of Alliance signed by Benjamin Franklin, Original Treaty of Versailles as well as other historical documents.

1:00 pm: Luncheon hosted by Mr. Arnaud de Bresson, Managing Director, Paris EUROPLACE.

Location: Place de la Bourse, Palais Brongniart, 75 002 Paris Metro: Bourse (line #3)

Lunch will be followed by presentation of the Paris financial market place.

4:00 pm � 5:00 pm: Travel to meeting with Christine Lagarde, Minister of Finance. Please arrive by 4:30 to pass through security.

Location: Ministry of Finance Building,139 Rue de Bercy, Paris 12 Metro: Bercy.

5:00 pm � 6:00 pm: Private meeting with Christine Lagarde, Finance Minister of France. Please bring a passport for security purposes.

http://www.philadelphia-reflections.com/blog/1451.htm

Country Auction Modernized

Pa Turnpike

Only a decade ago, the Quakertown exit of the Pennsylvania Turnpike made possible a quick trip from the city to the country, letting you off in the cornfields between Sumneytown and Lansdale. Today, the rush hour traffic is as bad as anywhere else, even on the four-lane express highway known as Forty Foot Road. A comfortable two-lane highway would be about forty feet wide, so presumably the name denotes what was once a modern miracle of a two-lane highway, in this case until quite recently. It's all built up for miles, but almost all the commercial buildings are new. Exurban sprawl has positively lurched across the landscape, making prosperous people rich, and poor people prosperous. It won't be long before the housing subdivisions demand traffic signals to protect the school children, speed limits to reduce the collisions by teenagers, and other things destined to bring high-speed travel to a crawl, all day long. When that happens, it won't be called farm country any more.

Alderfer Auction Company

On Fairground Road, where occasionally corn is still growing, a number of large new commercial enterprises have located, among them a moving and storage company with ten or so truck loading platforms in the back. Behind that is another large new building, also with a parking lot for fifty or so cars, the auction house. Different categories come up for auction on different days, so used furniture for example comes up every few weeks, and has to be stored as things accumulate for the big day. With a moment's thought, you can easily see why the auction is affiliated with or owned by a moving and storage company. As you go through the entrance, you are invited to sign up and identify how you plan to pay, just in case you buy something; the product of this registration is a card with a number in big colored letters. That's your number, your payment arrangement, and soon you will find no one cares anything about you except that number. The auction I was interested in was for used books, one of three or four auctions conducted in different rooms. Nearly a hundred people had numbers for used books, maybe a similar number for antique furniture and paintings. Obviously, one other purpose of the registration process is to create a mailing list of customers interested in various objects, possibly linked to a program which sends out flyers and announcements. Country auctions have always been a source of local entertainment, so non-buying spectators are able to come and watch if they wish. In fact, there seem to be few if any casual sight-seers; just about everybody is a buyer, or a potential buyer. Players, as they say.

Auctioneer

Most of the customers probably set their alarm clocks for 5 AM or earlier; the auction is centrally located, but most everybody comes from a considerable distance. At 9 AM, very promptly, the auction begins, and from his manner you can tell the auctioneer is anxious to get started. The objects for sale have been on display for a day, but most people arrive around 7 AM to examine the goods, which are frequently sold in lots, meaning a boxful of thirty or forty books more or less on the same topic. At the stroke of nine, the auctioneer chanting begins, "Do I have ten dollars, yeh, ten, ten, ten, five, five, ten, fifteen, twenty, twenty, sold for fifteen. Your number, sir?" Two assistants take down the customer number, and the lot number, and the price; one of the two assistants records the transaction in a computer, the other on a list by hand. One gathers the man without a computer is on the look-out for shills, people trying to bid up the price without getting stuck for a purchase. The auctioneer repeatedly assured the audience that no one but a real bidder was allowed to bid, and cautioned the group they were supposed to know what they were doing. If you make a bid, you own it, and no excuses about being confused. When he reached the hundredth sale, this one stopped for a drink of water, and proudly noted the first hundred sales took thirty-seven minutes. It required four other assistants to fish out the lots next in line, holding them up for confirmation only, since inspecting them at a distance was out of the question. After each sale, the assistant dumped the prize in the new owner's lap.

Auction Paddle

By 1 PM on this particular day, seven hundred lots had been sold, at least five thousand books. After every hundred sales, our leader took a drink of water and made a pleasantry or two, but he was otherwise all business. About two hundred of the sales were handled by a substitute auctioneer, who looked to be twenty years old, but talked faster than any human being is supposed to talk, affecting a rasping quality of chant. As it came time for him to take over, he paced nervously near the microphone, and started chanting the moment it was decent to do so. Obviously, these people love what they are doing, and have remarkably retentive memories. On several occasions, a buyer had to fumble for his card number, and the auctioneer remembered what the number was before the card was found. New cards are issued every day. Although they were quite brusque about people who made bidding mistakes, on a couple of occasions the auctioneer had been slow in turning the lot number sign in front of him, so the bidding was repeated. The bidding stopped at the same price point, the second time around. It seems to confirm what libertarians praise so highly about the wisdom of the marketplace; the market price is as close to the "right" price as you are going to get.

You are nevertheless entitled to wonder a little at some of the unexplained market inefficiencies. The ordinary run of books thirty or forty years old will sell for between ten and twenty dollars. Books about golf, just about any old book about golf, "go" for about forty dollars. Children's books are about sixty dollars. And, to my own great surprise, boxes or albums of old photographs go for over a hundred dollars. A lady next to me excitedly brought an album of old photos back to her seat and thumbed through them. "Are you a dealer?" Yes. "Who buys this stuff?" I don't know, they come in my store and just buy it. Like the auctioneer, she had an acute feeling for what the retail price would be, made a calculation, and knew what she could afford to pay wholesale. What the stuff actually represented, why people wanted it, what was a good one and what was a bad one -- these people in the trade had very little idea, and could care less. But they know very precisely what a fair price would be. The auctioneer starts with a low price and tries to bid it up; the retailer starts with a maximum price in mind, and gradually lowers it until it sells; it is the community of buyers who set the price amongst themselves, and the seller has agreed to abide by it. Fun. Lots of fun. When a familiar insider makes a mistake and pays too much, the others laugh heartily at him. Why this funny system works so well has long been a mystery, but everyone except a socialist readily acknowledges it does work. At least it works better than any known substitute, except perhaps for the middle-man cost.

Although the ritual of the country auction has been essentially unchanged for centuries, it is just another transaction system. In the past fifty years, world economy has been transformed by computerized efficiencies in transaction systems, with vast prosperity resulting from small savings endlessly repeated. Banking and Wall Street have standardized most transactions, bundling them in perfectly astounding volume; lots and lots of people have become immensely rich for producing small efficiencies in high volume. Those of us who have not become immensely rich can easily appreciate trivial innovations which resulted in wealth, and so we easily sense the unfairness of old photos worth more than books of poetry. After all, the country auction is still grossly inefficient; the seller pays the auction company 20% of the price, and the buyer pays another 10%. There's 3% for the credit card company, and 7% for the sales tax. Forty percent of this transaction is going to the middle man, over and over and over again. The goal is to reduce transaction costs to the level of Wall Street, considerably less than one percent, which still buys lots of yachts for middle men. When you think about the whole process, it is not one of determining what is fair, or true value. It is to detect what is in the mind of the public as a market-clearing price. That somehow includes the middle-man cost, and adjusts for it, too.

As you walk out of the country auction, it doesn't take a mathematical genius to multiply thirty percent times the number of transactions, times a guess at the average sales price. No wonder these auction people are so cheerful, so much in love with their work. But two other parties are cheerful, too. That is, the willing buyer, and the willing seller.

http://www.philadelphia-reflections.com/blog/1719.htm

Re-Doing Dilworth Plaza

Richard Maimon

Richard Maimon recently visited the Right Angle Club to tell us all about the architectural plans afoot to consolidate the underground transportation network underneath City Hall, change the patterns of foot traffic, open up the views, and draw the visitors to the expanded convention center into the city itself. All of this is to be accomplished by paving over Dilworth Plaza and planting it with grass, along with an extensive fountain installation which can be used for winter ice skating. In the course of creating an entrance hub for Septa, the Broad Street and Market subways, walkways are rearranged and -- it is hoped -- the foot traffic around City Hall will shift around to make it a real city center. It's a very expensive dream because of all the overlapping transportation tunnels hidden under the largest and heaviest stone building in America, leading to a great deal of expensive construction work that doesn't show.

interior view of concourse north_

Dilworth Plaza is currently almost completely deserted, so its conversion will not be much mourned. However, the mixture of contemporary transportation entrances with the neo-classical architectural style of City Hall will probably meet resistance, and there is concern that excessive foot traffic could convert a grassy park into a mud puddle, while a large open-air lake could become a public rest-room for the homeless if the designers aren't careful. To some extent, the public forces to be resisted in the design will be self-policing if the anticipated foot traffic is at the anticipated level, but overwhelmed if the project is too successful, or left to deteriorate if it fails to succeed. And it's all too expensive to do twice; the designers have to get it right the first time.

Section Pavilions

So, it all comes down to money. Construction costs are less during a recession; but raising money is easier during a boom economy. High hopes are raised for a Democratic governor to be able to persuade a Democratic president to divert stimulus money our way. High hopes are raised for a former Mayor's ability to divert state funds to our part of the state. In other words, it all depends on Governor Rendell, now that Senator Specter has navigated himself off the Appropriations Chairmanship. In our system of government, public works projects have to be placed somewhere, so the best system is to rotate the goodies in an informal way. This rotation in turn depends on a geographical rotation of the top political officers, since they can claim that it is "Philadelphia's turn". So, the grim reality is that only two Philadelphia mayors in history have become governors of the state, with the rather bitter result that Philadelphia has been neglected in the siting of the available public projects for a very long time. Digby Baltzell long preached that it was our own fault, for being too non-aggressive. But most of the rest of us, particularly those who have wrangled with the upstate legislature, blame the situation on narrow-minded opposition from those who have worked the gerrymandering game for a couple of centuries.

http://www.philadelphia-reflections.com/blog/1755.htm

SEPTA's Long Term Planning

Septa

Byron S. Comati, the Director of Strategic Planning and Analysis for SEPTA (Southeastern Pennsylvania Transportation Authority), kindly gave the Right Angle Club an inside look at the hopes and plans of SEPTA for the near (five-year) future. Students of large organizations favor a five or six-year planning cycle as both short enough to be realistic, and long enough to expect to see tangible response. If plans continuously readjust to fit the five-year horizon, the concept is that the organization will move forward on these steppingstones, even accounting for set-backs, disappointments and surprises. Furthermore, a serious level of continuous planning puts an organization in a position to react when funding opportunities arise, such as the sudden demand of the Obama Administration that economic stimulus proposals be "shovel ready."

The Silverline V

So, SEPTA is currently promoting five major expansions, based on the emerging success of an earlier plan, the Silverliner V. Silverliner is a set of 120 shiny new cars, built in Korea on the model of electrical multiple units, which are expected in Spring 2011 to replace 73 cars or units which were built in 1963. Obviously, 120 are more expensive than 73, but they are more flexible as well. And less wasteful; most commuters are familiar with the model of three seats abreast which unfortunately conflict with the social preferences of the public, tending to make the car seem crowded even though it is a third empty. When a misjudgment like this is made, it takes fifty years to replace it with something better. For example, there's currently a movement toward "Green construction", which is acknowledged to be "a little bit more expensive". The actual costs and savings of green construction have yet to become firmly agreed on, so there's an advantage to being conservative about what's new and trendy in things that take fifty years to wear out.

Septa Regional Map

Four of SEPTA's five major proposed projects are in the Pennsylvania suburbs. New Jersey has its own transportation authority, and Philadelphia is thus left to struggle with the much higher costs of urban reconstruction assigned to its declining industrial population. And left unmentioned is the six hundred pound gorilla of the transportation costs of new casinos. A great many people are violently opposed to legalized gambling, and even more upset by the idea of crime emerging in the neighborhoods of gambling enterprises. Even the politicians who enacted this legislation are uncomfortable to see the rather large expenditures which will eat into the net revenue from this development. Nevertheless, if you are running a transportation system, you have an obligation to plan for every large shift in transportation patterns, no matter what you might think of the wisdom of the venture. The alternative is to face an inevitable storm of criticism if casinos come about, but without any preparation having been made for the transportation consequences. At present, the public transportation plan for the casinos is to organize a light rail line along the Delaware waterfront, connecting to the rest of the city through a spur line west up Market Street; it may go to 30th Street Station, or it may stop at City Hall. That sounds a lot like the present Market-Frankford line, so expect some resistance when the cost estimates are revealed. Because all merchants want to have the station stops near them, and almost no residents want a lot of casino foot-traffic near their homes and schools, expect an outcry from those directions, as well. It would be nice to integrate this activity with something which would revive the river wards, but it seems a long stretch to connect with Wilmington on the south, or Trenton on the north.

The planned expansions in the suburban Pennsylvania counties will have easier sledding with controversy, although it is the sorry fate of all transportation officials to endure some hostility and criticism for any changes whatever. Generally speaking, the four extensions follow a similar pattern of building along old or abandoned rail lines, following rather than leading the population migrations of the past. When you are organizing mass transit, there is a need to foresee with some certainty that there will be a net increase in commuters in the region under consideration. The one and two passenger automobile is a much more flexible instrument for adjusting to the growth of new development, schools, retail, and industry. Once the region has become established, there is room for an argument that transportation in larger bulk is cheaper, cleaner or whatever.

The Norristown extension follows the existing but underused rail connections to Reading. Route US 422 opened up the region formerly serving the anthracite industry, but now the clamor is rising that US 422 is impossibly crowded and needs to be supplemented with mass transit.

The Quakertown extension follows the rail route abandoned in 1980 to Bethlehem and Allentown, although extension is only planned as far as Shelly, PA.

The Norristown high speed extension responds to the almost total lack of public transportation to the King of Prussia shopping center, and will possibly replace the light rail connection to downtown Philadelphia.

And the Paoli extension follows the mainline Amtrak rails as far as Coatesville.

All of these expansions can expect to be greeted with huzzas by developers, land speculators and newsmedia, but resistance will inevitably be as fierce as it always is. Local business always fears an expansion of its competitors; the feeling is stronger in the suburbs than the city, but local business always resists and local politicians always follow their lead. To some extent, the suburbs have a point, since radial extensions are usually much cheaper to build than lateral or circumferential transportation media; bus routes are the favored pioneers in connecting one suburb with another. Therefore, the tendency in these present plans remains typical by threatening the suburbs with a need to travel toward the center hub, then take a reverse branch back in the general direction of where they started, in order to go a short distance to a shopping center or school system. The two main river systems around Philadelphia interfere with the construction of big "X" routes from the far distance in one direction to the far distance in the opposite direction. Euclidian geometry makes the circumferential route elongate as the square of the radius. And jealousies between the politicians in three states create rally foci for the special local interests which feel injured. It seems to be an established fact that the proportional contribution to mass transportation by the surrounding suburbs of Philadelphia is considerably lower than the national average; a political reconciliation might do more for the finances of SEPTA than any federal stimulus package could do. For such reconciliation, a few lateral connections in the net might pacify the suburbs enough to justify extra cost. Unfortunately, the main source of unjustified cost in regional mass transit is the high wage and benefit levels of the employees. Just as featherbedding was the main cause of the destruction of the mainline railroads, health and pension benefits threaten the life of mass transit.

And if anything, this friction threatens to get worse. In 2009, for the first time, a majority of union members in America -- work for government, the one industry which cannot be destroyed by losing money. True, SEPTA is not exactly a government function, but it has enough in common with a government department to arouse suburban voters, who regularly refer to it as an arm of the urban political machine. SEPTA isn't too big to fail, but there exists little doubt that government at some level would bail it out if it did.

http://www.philadelphia-reflections.com/blog/1766.htm

Go to Delaware, Elephants?

Dead Elephant

No one is supposed to know where elephants go to die, but if they are smart as people say they are, my suggestion is to search for dead elephants in the state of Delaware. Most taxes, and estate taxes in particular, are considerably lower, there. At least this was the message Christopher J. Topolewski, Esq. conveyed to the Right Angle Club recently. His firm, West Capital Management, has prepared a table comparing the taxes in the three states that come together at the southeast corner of Pennsylvania, which for residents of the Philadelphia area are within easy commuting distance of each other. Although Delaware has a marriage penalty (one couple is taxed more than the sum of two singles), it has no estate tax at all, no sales tax, and a property tax rate only half that of Pennsylvania, only a quarter of that in New Jersey. For residents of New Jersey there is almost no tax which is not lower in Delaware, but ex-Pennsylvanians would then have to be careful to die or cohabit, since ordinary income tax and capital gains taxes are higher in Delaware than Pennsylvania. If you must die (and who doesn't?), go die in Delaware.

This was a situation specifically contemplated as a way to discipline greedy state governments, by James Madison when he was formulating the U. S. Constitution. And there is evidence it is working. By happenstance I once encountered an offical of New Jersey taxation, who told me that 43% of New Jersey taxes are paid by 1% of the population. And that 1% was moving out of the state as fast as it could. West Capital reports that taxation as a percent of income is 1.23% in Delaware, 3.46% in Pennsylvania, and 5.82% in New Jersey. Relating total income to total tax revenues would be the best way to detect hidden indirect taxes, such as overtaxing utility bills in the knowledge it will be passed on to the consumer. Armed with even partial information, it becomes easier to understand why New Jersey would depose a governor who had been Co-chairman of Goldman Sachs, during a financial crisis. If a financial whiz can't change this, maybe it requires a meat ax.

This is a time of growing restlessness about public spending, and Tea Party revolts are likely to accelerate during the remaining nine months before the next election. Conjecture is growing about a coming deadlock between a Republican Congress and a Democratic President, lasting at least two more years. What might emerge from a strong third party congressional delegation is too arcane to discuss.

It seems almost inconceivable that professional politicians would demonstrate such a forest of tin ears as to let this happen, but the rest of Mr. Topolewski's talk just heated up the fire. His long-scheduled talk was designed to give guidance about the new estate tax laws, but he fould himself confounding his audience with the news that there are no new estate tax laws; in fact, there will be no estate tax laws at all after this year unless they emerge from the congressional gridlock we already have. Which apparently will be followed by a gridlock we can scarcely imagine. Imagine asking your lawyer to write a will which straddles the contingency that there will be no law, that there will be a continuation of the present one, or will be a new law of quite uncertain wording. One of the suggestions offered is to allow your executor the discretion to accept or disclaim certain hypothetical provisions.

And that brings up an old story. William Penn was the largest private land owner in the history of America, possibly the whole world. He had a trusted agent, who gave him an enormous pile of papers to sign. A busy rich man like Penn is regularly confronted with a discouragingly large number of routine legal documents to sign. So, Penn signed them all, not noticing that one of the various papers in the pile gave the entire state of Pennsylvania -- to his agent. The outcome of the ensuing uproar was that Penn spent six years in debtors prison.

http://www.philadelphia-reflections.com/blog/1776.htm

Urban Transportation

Stuart Taylor, who spent twenty years working for the Pennsylvania Railroad in the company of our member Bill Brady, recently gave the Right Angle Club his observations about urban transportation, which grew out of his second career as a consultant. As he describes the evolution from the horse-drawn omnibus carriage to the horse-drawn trolleycar, to the steam-driven trolley, to the electric trolley, to the underground subway, certain parallel historic movements occurred to at least one member of this audience.

Horse-Drawn Trolley Car

In the first place, mass transportation is only of value when cities grow to a large enough size to justify the expense. And the growth of cities in the 19th Century was propelled by the Industrial Revolution attracting mass immigration into urban centers. Whether the Industrial Revolution is over or not, is a topic which could be debated, but it was the gasoline engine which made buses and autos attractive, and the decaying slums made cities sufficiently unattractive to cause the flight to the suburbs in the 1920s and 1930s, heavily resumed after World War II in the 1950s. During the heyday of city growth, the evolution of mass transit seemed to be driven by technology, and that in turn attracted private ownership. When the gasoline engine and/or the decline of the Industrial Revolution made the Flight to the Suburbs possible, it made urban transportation unprofitable and hence unattractive to private business owners. Somewhere just before or after the 1929 Crash, the changing situation made it more attractive to live and/or work in the suburbs. A sign of this change in dynamics was the total disappearance of private ownership of public transportation and its supporting infrastructure, and replacement by public ownership and public tax subsidy. As local politics began to reflect this change, Urban politics somehow became dominated by Democrats, and Suburban politics became dominated by Republicans; so the enthusiasm for mass transit has waxed and waned as the political domination of federal subsidies has shifted between the parties. That's probably only an outward sign, however. The real issue is that urban transportation now has to be subsidized, since its base has shrunk to the point where people like Widener and Elkins invest in other things. And do so from their homes in exurbia, where the neighbors could care less about subways, let alone pay taxes to subsidize them. And until the city gets control of its crime, public schools and taxes, it's hard to see what will attract them back in town.

Electric Trolley

That's perhaps an overly censorious view, coming from a resident of the suburbs. A more economic view of things would be that the construction of underground subways now costs about a billion dollars a mile. Very few cities, and no private entrepreneurs, can justify costs of that magnitude since the potential ridership cannot afford the costs per ride which are implicit in that capital expenditure. Until the cities can manage to entice the suburbanites back into town, those people will solve their air pollution problems by avoiding the cities. Living to the windward seems much more plausible to them. China is just beginning this process, but they have the advantage of building the subways first, then the surrounding skyscrapers, and thus greatly reducing the costs of avoiding underground sewer systems, etc. If you call it that, the Europeans had the advantage of massive war destruction, along with much more expensive farmland to inhibit suburbanization. None of this is an argument that we shouldn't build subways, or clean up the atmosphere. It's just a warning of the daunting construction costs and staunch political opposition to mass transit. Not to mention featherbedding, over-hiring, massive hidden benefits costs and other features which seem to be inherant in union activity, at least of the historical variety.

A member of the Right Angle audience asked the speaker what he thought of the proposed Market Street light rail line. Insane, was the answer. No visible ridership. And that seemed to summarize the present debate.

Except that it really shouldn't frame the argument for Philadelphia. Philadelphia doesn't need a mass transit network, it already has a mass transit network. Much of it is growing obsolete, but the land costs and local opposition to change are greatly diminished when the network is already there. If any city can do it, Philadelphia can. The technology will surely evolve enough for our purposes if the money is there, and the money will be there if people return to using the city. What Philadelphia needs is a return of business headquarters and other sources of employment, bringing the ridership and the public demand along with it. And for that, what is essentially needed is for government to address our problems of uncontrolled crime, inferior public schools and maladministered taxes.

http://www.philadelphia-reflections.com/blog/1780.htm

Paying For College - II

Cosmos Club, Washington D.C.

To begin with an anecdote, I belong to a Philadelphia club which reciprocates with the Cosmos Club in Washington DC. It's a handy place to stay overnight on the rather infrequent occasion of visits to Washington on business. It happened I had an early breakfast at the Cosmos, and was the only guest in the dining room. A pleasant well-dressed man came in, and asked if I minded if we sat together. "I'm Bob Goheen. I work at Princeton." Since he was widely known as the President of Princeton University, he was indeed welcome. He could hardly be expected to know my daughter was then a sophomore at his college, so he was of course unprepared for what I had to say.

Empty Pockets

After introductory pleasantries, I told him of my arithmetic problem. My daughter was taking five courses, so the family was paying ten thousand dollars a year, per course. Since most of her courses had over two hundred students in the lecture hall, the University was being paid two million dollars to teach each course. Was it possible I had got the arithmetic wrong? Mr. Goheen neither flushed nor displayed hostility, but his manner did change. Well, of course the tuition pays for far more than direct teaching costs. It's expensive to maintain a first-class library, the University has a responsibility to help the town of Princeton with its problems, the University is proud of its very extensive scholarship program for needy students, there is research to be sponsored. Yes, said I, you have fallen into the trap I prepared for you. My complaint is that if I had donated money for those worthy causes, it would all be tax-deductible; but by having it extracted from me under the name of tuition, I was denied the tax advantage. As expected, he quickly changed the subject. And to his evident relief, I let him do so without resistance.

Since that time, I have had the opportunity to play the same game with several college presidents; not all of them have been suave about it. The only one who took me by complete surprise was the President of Lehigh University, who not only told me he agreed, but added that he had made himself unpopular with his peers by promoting exactly similar ideas. There is a very serious problem, here. Somehow, the higher education industry has got to engage in some statesmanship, because it is only a matter of very short time before someone proposes a government solution.

National Institutes of Health

It is possible to treat this issue as a problem of how to pay for universal college education, which would put it in a category now occupied by health care, and probably reach a political impasse for similar reasons. Or it could be treated as a problem of teasing apart the instructional costs from the research and other scholarly costs. The problem to be solved, viewed from this latter direction, assumes that excellent teaching could occur, isolated from the scholarly activities, in the manner now entirely accepted for secondary and elementary teaching. Conversely, the concept of a research institute with no teaching responsibilities is widely accepted in Europe, for instance, while in America the National Institutes of Health are the most prominent example of its workability. It can be argued that a scholar engaged in research makes a better teacher, it can also be argued that a talent for teaching is not necessarily found in those with talent for research. While it is true that some researchers are productive even in old age, for the most part research is like poetry and sports, a young person's game. A creative scientist can usually look forward to acting as an administrator after reaching a certain age; why not look forward to a career in teaching? There appears to be no serious problem with this suggestion, but a profession comfortable with its present arrangements would probably see no reason for any such contortion, merely to make college education reach universal scale more conveniently. In summary, the question is whether we can afford to put another Harvard in every town of a specified size, or whether we will be forced to transform most existing colleges into enlarged high schools, and build a few more of them. Obviously, the latter is a cheaper method; the question is whether it is a good enough product. Whatever the model to be mass produced, the overall cost would be reduced by stripping out populations who do not need so much education, and getting Google or IBM, or someone similar, to apply massive amounts of information technology to reduce the cost for the rest. In achieving universal health care, by contrast, we can reasonably foresee research reducing most of the delivery costs we now contend with, and even eliminating some of the major diseases. In education for a service economy, the potential of increasing educational need is entirely endless.

Therefore, no matter what pattern we adopt, it must be organized to be in competitive tension with the manpower needs of the economy. If the reason we need a vastly more educated population is to supply better educated graduates to run the economy, a tension must exist between the two or the educational establishment will ruin us with purposeless expansion, just as some elements of the healthcare industry might wish to do with their services, and almost all trial lawyers unashamedly wish for in their area of expertise.

In this area of economic design, lies the answer which President Goheen should have made to me in the Cosmos Club. By asking for massive tax deduction, I was yielding to the idea that education was always a responsibility of government, always paid for by rejiggering the tax code. In that direction lies disaster, since control of the tax code lies in the realm of politics and leads to populist solutions. We must not unbalance power relationships so that economic leaders, asking for a better educated workforce, are not eventually confronted with crippling taxation for the betterment of a bloated academia. A typical college has as many employees as students. We cannot get caught up in an unrestrained process leading to half of the population teaching the other half, except for those who have retired and receive a pension from both activities.

http://www.philadelphia-reflections.com/blog/1785.htm

Marcellus Shale Gas: Good Thing or Bad?

Marcellus Shale

Soon after coal, Pennsylvania discovered it also had oil in Bradford County. Pennsylvania's oil was particularly "sweet", with a low sulfur content. Long after much cheaper oil (cheaper to extract, that is) was found in Texas and Arabia, Pennsylvania oil was prized for lubricating engines, for which its higher price was less serious. This discovery of oil in the western part of the state also provided a vital competitive advantage for local railroads. Other east-west railroads like the New York Central and the Baltimore and Ohio lacked such a dependable return cargo, so the Pennsylvania Railroad became the main line to the west for a century. When oil and coal declined in use, Pennsylvania's industrial mightiness declined, too. Philadelphia and Pittsburgh lost much of their competitive advantages, while the center of the state just about went to sleep. When even Texas later ran low in oil, America's collective industrial strength became more generally threatened.

The next layer below surface minerals is porous rock filled with fresh water, the so-called aquifer. We'll return to the aquifer later.

At the beginning of the 21st Century, America's position as the only superpower is challenged by foreign competitors. We fast approach the situation where the world's cheapest oil is mostly under the control of hostile nations. There is and will be abundant oil in the world, well into the far future; but cheap oil has been selectively depleted. When military and economically weak nations like the Persian Gulf had the cheap oil, only transportation costs were irksome. But now Russia is emerging as an oil-rich state, previously impoverished states like Iran are feeling their oats, the existence of an international oil cartel is becoming more threatening because it reinforces oil price manipulation with military threats. Gold rushes are always destabilizing because sudden mineral discoveries are tempting to dictators. That's known in the political literature as the source of the "Dutch Disease", not because the Netherlands are aggressive, but because of the example of North Sea oil discoveries destabilizing even a peaceful nation. America has come to an almost universal decision to establish energy independence. It's possible to make serious careful predictions that in a decade or two, we are going to run out of competitively priced energy. To be weak is to invite aggression. To be both rich and weak, makes aggression come sooner.

Gas Drilling

There's little question America is profligate with its energy, so the need for energy conservation is also seldom disputed. Actually, we are already five times more efficient with energy use than China is; furthermore, we have improved energy efficiency by 20% while China has defiantly worsened. Unfortunately, our immense investment in inefficient home heating and transportation is too expensive to discard abruptly. There is also little question that American research and development of alternative energy sources has been neglected, while China is subsidizing R & D appreciably. Our converting food products into gasoline by subsidizing them is almost a joke, electric cars are subsidized and widely described as "Welfare buggies", wind power is twice as costly as carbon-sourced energy and needs better battery development to be able to store it, atomic energy has been encouraged by the French government, but totally held back by ours, in response to public anxieties. The long and the short of it is, we are facing a fifteen-year period of doubtful energy sources of all kinds, a vulnerability our international competitors and even enemies might well use against us.

And then came shale gas, like a gleaming savior on a white horse. For seventy five years, the world has known that essentially unlimited amounts of petrocarbons are locked into vast stores of shale. Unfortunately, it is buried deep, and generally located where it would be expensive to transport to market. And the techniques for extracting such carbons were once also unacceptably expensive in a world that shrugged off abundant oil; what was needed was a cheap, abundant energy source. Here and now, able to sustain our requirements for the fifteen years of catch-up needed to make alternative energy sources more practical. But miraculously that discovery is now upon us, right here in Pennsylvania. It takes a long time to map out the existence of shale from Canada to Texas, when it is 8000 feet deep; it was first recognized in 1839 from a cliff outcrop around the little town of Marcellus, New York and vigorously explored in the disappointed hope it would lead to discoveries of bituminous coal, iron ore or other minerals. Land speculators have been roaming Pennsylvania for two centuries. Now, they are offering $5000 an acre plus royalties for the right to drill. In 2010, probably 5000 leases will be issued. Needless to say, the discovery is popular with local farmers, and "gas fever" has enormous political momentum. With techniques discovered around Fort Worth, Texas, about 10% of the existing gas can be extracted easily, serving America's energy needs for much of the 15 years it is estimated will be required to make renewable, non-fossil, energy cheap and practical. This long history actually accounts for the apparent suddenness of the current popularity; this is not a new mineral discovery, it is a sudden development of practical extraction methodology at a critical political and marketing moment.

Tree Hugger

And equally needless to say, the environmental movement is being called to the barricades. Whatever is their objection to drilling for gas, 8000 feet below the surface of a wilderness? In the first place, just cutting roads through the forests is destructive to migrating and local bird populations. In a well-known process of "fragmentation", the cutting of roads allows an invasion of raccoons and similar bird predators. It simply cannot be avoided if drilling rigs are to enter and leave the forests; some vulnerable bird species are bound to go extinct. This particular region is particularly prone to emissions of radon, which is a gas traveling along the stone layer and occasionally entering the basement of houses; will fracturing the shale make radon seepage better or worse? The fact that this sedimentary layer lies underneath the aquifer means drilling must go through the freshwater-bearing caverns before it gets to the shale; it seems likely that expensive sealing methods will be needed to keep the contaminants below from seeping up through and around the drill holes. The practice of fracturing the shale by high-pressure mixtures of water, sand and chemicals raises issues with all three. The water consumption is in the millions of gallons per year per well, which could seemingly drain the rivers and creeks. Some operators will be tempted to use the aquifer as a surreptitious source of water, leading to consequences hard to anticipate. The sand is meant to support the walls of the rock fractures, but may clog up other channels unintentionally. And the composition of the chemical drilling components is a trade secret which the extraction companies naturally wish to keep private; the suspiciousness with which such confession is greeted, is understandable. So to sum it all up, there is a legitimate need to hurry up the drilling, and there are also legitimate environmental safety issues needing to be addressed, slowing it all down. New York State has passed laws prohibiting further drilling. Is that an opportunity for Pennsylvania, or a warning we should heed?

Where's My Aquifer?

This is a time for serious negotiation, and the spending of serious amounts of money on study and monitoring, not for shouting. Politicians sense you can't make omelets without breaking eggs. For them, it's a question whether to choose to be blamed for the inevitable problems of exploring a new science, or whether to be blamed for lack of patriotism in a national emergency. The amount of heedless rhetoric is predictably extreme, and the amount of money available to spin it is daunting. If there is anything resembling a middle road in this uproar, let's try to explore it. In the first place, some sensible discussion between scientists of both sides can be held immediately. Geologists are probably unaware of issues like forest fragmentation, while naturalists are probably unfamiiar with radon hazards and available drilling precautions. Some concerns are exaggerated, some are unsuspected; let's get the experts together quickly and establish most of the knowns and unknowns before the popular media runs away with them. Let's get the responsible leaders of the gas extraction industry into continuous dialogue with the responsible leaders of environmental protection organizations, so wars they get dragged into are real and not hysterical. Let Congress consider the issue and appropriate funds immediately to study the issues everybody agrees need to be addressed. It seems very likely the huge corporations involved in this issue will rather easily agree among themselves on responsible positions unless they get rattled by overly vocal denunciations. Since this is a gold rush, however, it is also likely that underfunded small operators will start to employ short-cuts and rush heedlessly into dangerous territory; large operators will wish to have laws passed to restrain everybody, small operators will plead fairness. The more transparency this field has, the better. And the most immediately obvious area of resistance to transparency is the natural wish to protect trade secrets in the composition of drilling fluids. In time, the other continents of the world will develop satisfactory drilling fluids; the secret won't last long. The situation cries out for the large operators to negotiate among themselves so those who have an incentive to protect secrecy can tell us how to do it responsibly, while those who have a political incentive to expose the secrets for their constituents can be offered time limits related to the speed the rest of the world takes to catch up. Politicians particularly need to be offered some mechanism for assuring the public the secret injection ingredients are safe to use.

Anyway, let's grab the opportunity to negotiate a sensible way to take whatever chances we have to take as a nation, but avoid the costly blunders of studying the issue to death. Hurry up, folks, it's only a matter of time before the inevitable problems have to be faced.

http://www.philadelphia-reflections.com/blog/1814.htm

Selling Entire Towns

Jason Duckworth

Recently, Jason Duckworth of Arcadia Land Company entertained the Right Angle Club with a description of his business. Most people who build a house engage an architect and builder, never giving a thought to who might have designed the streets, laid the sewers, strung out the power and telephone lines, arranged the zoning and otherwise designed the town their house is in. But evidently it is a very common practice for a different sort of builder to do that sort of wholesale infrastructure work -- privatizing municipal government, so to speak. A great deal of what such a wholesale builder does involves wrestling with existing local government in one way or another, getting permits and all that. In a sense, the existing power structure is giving away some of its authority, and does so very cautiously. Sometimes that involves suing somebody or getting sued by somebody. Perhaps even greater braking-power on unwelcome change is that the wholesale builder is in debt until the last few plots are sold, and realizes his profit on stragglers. Since it often happens that the last few plots are the least desirable ones, this is a risky business. Big risks must be balanced by big profit potential, and one of the risks of this sort of privatization is that too much consideration may be given to the players at the front end, the farmer who sells the land and the builder who must keep costs down, at the expense of the long rage interests of the people who eventually live in the new town. Top-down decision making is much more efficient, but its price is decreased responsiveness to the citizens.

For Sale

As it happens, Arcadia specializes in towns designed to look like those built in the late 19th Century. Close together, front door near the sidewalks, front porches for summer evenings. To enhance the feeling of being in an older village, Arcadia specifies certain rules for the architecture, to make it seem like Narberth or, well, Haddonfield. Until recently, suburban design emphasized larger plots of land, and few sidewalks, with streets often ending in cul-de-sacs instead of perpendicular cross-streets in the form of squares. The "new urbanism" appealed to those who were seeking greater privacy, revolving around the idea that if you wanted anything you drove your car to get it. Three-car garages were common, groceries came from distant shopping centers. There are still plenty of new towns built like that today, but Arcadia appeals to those who want to be close to their neighbors, want to meet them at the local small stores scattered among the houses. In the 19th Century, this sort of town design was oriented around a factory or market-place; since now there are seldom factories to orient around, the appeal is to two-income families who want to live in an environment of similar-minded contemporaries. The whole community is much more pedestrian oriented, much less attached to multiple automobiles.

Since Mr. Duckworth mentioned Haddonfield, where I live, I have to comment that the success of living in a town with older houses depends a great deal on the existence of a willing, capable yeomanry. Older houses, constantly at risk of needing emergency maintenance, need available plumbers, roofers, carpenters and handy-men of all sorts. Because it is hard to tell a good one from a bad one until too late, this yeomanry has to be linked together invisibly in a network of pride in the quality of each other's work and willingness to refer customers within a network that sustains that pride. A trademan who is a newcomer to the community has to prove himself, first to his customers, and almost more importantly to his fellow tradesmen. If you happen to pick a bad one, good workmen in other trades are apt to seem mysteriously reluctant to deal with you, because you too are somewhat on trial. Maybe you don't pay your bills, or maybe you are picky and quarrelsome. In this way, the whole community is linked together in a hidden community of trust. Over time, the whole town develops certain recognizeable social characteristics that a brand-new town doesn't yet need. If that time arrives without a network of reliable tradesmen, the town soon deteriorates, house prices fall, people move away.

Fannie Mae

It's curious that the residents of such a town are a breed apart from the merchants in the merchant strip. If the merchants of a town live in that same town, there is much less conflict. More commonly, however, the merchants rent their commercial space and commute from distant places. That disenfranchises them from voting on school taxes and local ordinances, and creates a merchantile mentality as contrasted with a resident community, dominated by high school students. One group wants lower taxes, the other group wants to get their kids into Harvard. One group wants space for customer parking, the other group is opposed to asphalt lots. And in particular, the residents want to avoid garish storefronts and abandoned strip malls. Since the only group which has influence with both sides of this friction are the local real estate agents and landlords, their behavior is critical to the image of the town. When real estate interests are not residents of the town it is ominous, and they are well advised to remember that house sellers are the ones who choose the real estate agent in a house turn-over. There's more to this dynamic than just that, but it's a good place to begin your analysis. Suburban real estate interests are constantly tempted to get into local politics, but politicians are the umpires in this game, and it soon becomes bad for their business if real estate agents seem to be putting their thumb on the scales.

FHA Seal

All politics is local, all real estate is local. Or almost so. The present intrusion of the Federal Government into what is normally a purely local issue, has become more pointed in the present real estate recession. Almost all mortgages are packaged and securitized by "Fannie Mae and Freddy Mac". By overpaying for the mortgages they package, these two federal agencies are subsidizing the banks they buy the mortgages from. Or, that is half of the subsidy. The other half is the Federal Reserve, which presently lends money to banks at essentially zero interest. Acquiring free money from the "Fed", while selling mortgages to Fannie Mae at above-market rates, the federal government supports the banks at both ends. And that's not quite all; there is something called the FHA, Federal Housing Authority, which guarantees mortgages. Essentially an insurance policy, the FHA guarantee is issued for a cost to home buyers who meet standards set by Congress (for which, read Barney Frank and Chris Dodd). Although houses during the boom were selling for 18 times estimated rental value, they are now selling for 15 times rental. FHA will insure such risks, but the banks won't lend for more than the normal rate, which is 12 times rental. Consequently, almost all mortgages are FHA insured, while the federal administration storms with fury that the banks "won't lend". And indeed it looks as though banks will never issue uninsured mortgages until home prices fall another 25%. If home real estate prices do decline to a normal 12 times rental, a lot of people will be unhappy, and not just homeowners. The market is fairly screaming that you should sell your house and rent, but so far at least, these federal subsidies seem to be holding them up. When that time comes, the recession is just about over, but it certainly won't feel that way.

http://www.philadelphia-reflections.com/blog/1819.htm

Conflict Within the Bill of Rights

Thomas Jefferson

When the First Congress convened in 1789, it confronted more than a hundred proposed amendments to the Constitution, largely stirred up by supporters of Thomas Jefferson who feared a strong central government would be too similar to the monarchy we had just discarded. Essentially, Congress dumped these noisy dissatisfactions into the lap of James Madison who had largely written the Constitution, constituting a committee with Madison as its chairman. The first ten amendments thus emerged together as a package, enabling trade-offs and compromises between them; all subsequent amendments have been taken up individually, one by one. Since the First Congress and the Constitutional Convention were largely the same people, much of the durability of the Constitution can be traced to them. And therefore, the ability of the nation to feel its way into a new idea, sometimes retreating and sometimes plunging ahead, has migrated into the hands of the Supreme Court. This result was probably accidental, but nevertheless the power of the Supreme Court was greatly strengthened by default; it alone can tip-toe out of a Constitutional tangle created by momentary impulses.

After duplicates and half-baked ideas were winnowed out, Madison's committee boiled down the wildly disparate proposals into ten amendments, supposedly limited to ten by alluding to Ten Commandments which seemed sufficiently comprehensive to Moses, and presumably to God. Two main principles emerged. The first was that the Constitution should be parsimonious in granting divine, or natural, rights, because what Nature's God had granted was hard to tell but what the judiciary could enforce had limits. And secondly, granting even these few self-evident rights to slaves would likely tear the Union apart.

James Madison

So, Madison's committee narrowed the legally enforceable definition of human rights to a handful, trying to select those which were so self-evident they could withstand the tension on those charged with enforcing them. When contemplating the problem of extending mandated rights to slaves, however, there was no obvious solution at all. The evasion agreed upon was to limit the Federal Government to enforcing a handful of enumerated powers, while leaving all unspecified matters to the state legislatures. The boundary might shift with time, but without saying so, the Bill of Rights kept the Union out of the main foreseeable trouble. The unmentioned conflict between universal rights and slavery defaulted to the individual states, or whoever, but definitely not to the Federal Government.

That tap-dance held together for nearly a century, and then it didn't and we had a Civil War. During all of that time, the balance of power was steadily shifting from the confederated states to the centralized federal government, and after the Civil War it shifted some more. However, the southern confederation may have been defeated, but it was not exactly reconciled, nor were the former slaves exactly equalized.

Robert E. Lee

Many post-war expedients were tested to heal these wounds, some of them useful and some, like forcible Reconstruction, disruptive. Two expedients opened new wounds and distracted the country for a century. The first was intentional weakening of the quality and effectiveness of state governments, to the point where it can now be asserted that state government is the weakest part of our whole government structure. Those who prized universality and efficiency, or who sought greater international power, regarded state legislatures as a hindrance; just look who got us into a Civil War. Consequently, corruption and ineffectiveness were privately tolerated in state legislatures, because discrediting state governments made them easier to control. Repairing the resulting imbalance in our overall system is now growing to be one of our greatest problems.

The second response to a sluggish equalization of racial rights was invented by Madison himself. He felt that the ability to migrate from one state to another would discipline any temptation of a state to mis-behave. If your state taxes you unfairly, move. If your state government gets too corrupt, first try to throw the rascals out, but in the last extremity, go somewhere else. This concept has worked magnificently in maintaining national interest rates with appropriate local modifications, and we are about to learn whether it will adequately restrain the half dozen states who have pushed the limits of taxes and borrowing. In the case of former slaves, massive out-migration took a century to happen and then it happened all at once, just after World War II. Wave after wave of slave descendants from the rural South, got on buses and came to the heart of Northern cities. Overwhelming the ability of weakened local governments to cope, city institutions disintegrated, particularly the public school and justice systems. The consequence is continuing disarray in Washington DC, Baltimore, Detroit -- and Philadelphia -- together with a host of smaller cities like Reading, Newark, Paterson, Wilkes-Barre and many others, in all of which the unsustainable wave of immigrants added to local industrial and civic problems which had other causes. So now we have two new problems, weakened state government and disruptive migrations, which in other circumstances tended to mitigate each other, but in this case made each other worse.

Lyndon Johnson

It took a century for Madison's scheme to break down into war, and Lyndon Johnson was surely quite right to feel a century was long enough to tolerate the dissentions and disunity of enduring that war. If he could not make people love one another, at least he could enforce the law. State governments were not doing it, so he whipped the Congress into taking it on as a Federal duty, by passing the Civil Rights Act. Half a century has passed and there has been progress, but surely not an end to the disunity. State governments have been further weakened, but mass migrations have calmed down. In another half century, the slavery issue and its consequences may fully subside. Meanwhile, the extension of federal power continues, now threatening to extend to the medical profession, the finance industry, the automobile industry, and the Internet. But our Constitution continues to survive more or less intact, into its third century, and we grow increasingly wary of tinkering with it as we watch many other nations fail to achieve its essential quality. Which is, it survives.

http://www.philadelphia-reflections.com/blog/1820.htm

Cleaning Up The Railroad Mess 1974

Amtrak, 1971

By 1971, it was pretty clear the railroads in the Northeastern quadrant of America were relentlessly losing money and would soon collapse. Bankruptcy provided the only legal method for breaking the burdensome union contracts and huge legal tangles of rationalizing eight Northeastern systems, themselves the product of dozens of earlier mergers. At least in that sense, bankruptcy was a godsend. Getting down to serious reconstruction in 1971, the first step in cleaning things up was to strip off passenger business from the basically profitable freight business. The urban commuter business, hampered by local politics and facing overwhelming automobile competition, was probably the worst burden to profitability, but the decision was made to leave that to regional negotiations. A national long distance passenger system, Amtrak, would service everybody in one nationally subsidized network, with efficiency actually enhanced by national seamlessness. In a few areas like the Northeast corridor and California, long distance passenger travel was actually still profitable.

Commuter systems however had grown up as local creations, differing greatly in local design and importance, and subsidy from the local population. They connected urban regions with suburban ones, and these two regions were often in uncertain economic (hence political) conflict with each other. Such loss-producing operations urgently needed to be stripped off from freight service, but here it seemed expedient to let each region of the country negotiate particularities, with much variation related to local issues. In particular, spreading the source of subsidy was a delicate political problem. If Philadelphia's SEPTA (South Eastern Pennsylvania Transportation Authority) is typical, these local arrangements needed to be more generous to the unions than national opinion would permit; the rest of the country, viewing them at a distance, effectively told the big eastern cities to subsidize unions if they wished, but rural regions would have no part of it. National division of opinion on this issue effectively matches the boundaries of the "Rust Belt". It is debatable how seriously commuter subsidy, net of intangible advantages, still represents an economic drag on each metropolitan economy today; but it is certainly some kind of drag, with numbers that appear rather large. Meanwhile, public sympathy is steadily drifting away from the unions; the Rust Belt is slowly migrating from liberal-leaning toward undecided.

Long distance passenger traffic was another matter; by insisting on railroads to nowhere, rural America shared equal guilt. Amtrak loses money, lots of it, but with generous subsidies it has steadily improved service and equipment, usually sufficient to get past annual Congressional complaint sessions. Because of political log-rolling, Amtrak's separation from freight business is not entirely clean. It's responsible for servicing the pensions of all railroad employees, not just passenger employees, for example. Since pension funding delays its true cost for many years, the public is only recently becoming upset about this; the matter may arise again.

Meanwhile, it soon became clear that even freight service was going to sink in spite of jettisoning passenger businesses; this alone was not enough. Even setting profitability aside, there is no economical substitute for rail transport of bulk cargo like coal, oil, wheat, and ore, so interruption of national freight service would be an unimaginable disaster. All eight northeastern railroads were facing certain bankruptcy, which at least had the advantage of permitting courts to break union contracts; but one quarter of the network could not be closed without closing freight service everywhere. The unions protested their rules were only responsible for minor costs compared with management incompetence, but the blame game was now irrelevant, bankruptcy was inevitable. Strangely, the average American had little idea of the full seriousness of this impending calamity, but the necessary legislation to create Conrail, a nationalized and subsidized Northeastern freight railroad, was cobbled together in the Regional Rail Reorganization Act of 1973. The law mostly restated agreements which had been forged during years of acrimonious negotiation between the parties. Not everyone agreed with everything, however, and a Supreme Court appeal was certain to intervene before the decisions could be final. The trustees of the Penn Central were most resistant to the terms. Investors universally regarded the outlook for a successful outcome as dismal.

Conrail, 1974

Essentially, the transaction was to trade Conrail stock for the debt represented by bondholders of the bankrupt railroads; a swap of equity for debt. Hidden in these bankruptcy proceedings was the elimination of many of the union rules that had been so burdensome. For consolation, the unions got a promise of jobs for at least some of their members, and the satisfaction of gloating that the bondholders ("speculators") had been stripped. The bondholders wanted the Tucker Act applied, which is to say the right to sue the U.S. Government later if the true value of the stock had been seriously misjudged. The situation was very bleak. Conrail probably couldn't survive, and its stock would probably prove to be worthless. The Penn Central trustees were particularly dismayed at the possibility that there would be continuing losses after the settlement ("erosion"), which Penn Central bondholders would be forced to cover by further reducing their share of the already miserable residuals. For Congress to force bondholders into such coerced backing of a venture they definitely felt was doomed, amounted to a government seizure of their property without just recompense. It would thus be a violation of the Fifth Amendment of the Constitution which contains a clause prohibiting what are known as "private takings". Meanwhile, the country was approaching an economic train wreck.

The Supreme Court had sympathy for Penn Central's argument, and did find that a Tucker appeal should be available, a second bite at the apple, so to speak. Largely unspoken was the recognition that some weakening of union power was essential for even a hope of survival of the freight industry; so some conflicting language in the 1973 Act about Tucker appeals was -- sort of ignored. But later events showed the union work rules really had been critical to getting the railroads into the mess, and so successful agreements were reached at this moment of despair which never would have been agreed to if the true facts had been predicted. Railroad management of course contended that the work rules had been crippling them. But that appeared to be self-serving and the stock market largely ignored it.

But some remarkable men were put in charge of Conrail. They moved with remarkable speed to cut the size of train crews and otherwise remove a century of make-work rules. The quantity of freight cargo in 2010 is the same as that moved in 1974, but the work force is reduced by 75%. Conrail became profitable, further mergers of national freight lines were negotiated, and it turns out that if someone had forced you to accept some Conrail stock in return for near-worthless bonds, you would have been a very lucky person.

http://www.philadelphia-reflections.com/blog/1832.htm

Copyright © 2004 - 2010 George R. Fisher, MD. All rights reserved.

Contact Us

Link to Us

Linking Partners

Hits minus Image Hits
18

---