Archive for category Business

Efficiency Without Regulation

As many of you know, I’m completing a year’s sojourn here in Omaha, the midwestern town with a decidedly western sensibility. (Don’t believe me? Check out the River City Rodeo sometime.)

I’ve been doing web development for Werner Enterprises, one of the country’s larger trucking firms, but having dabbled in finance, I also always take a peek at the quarterly earnings reports. They almost always include a line like the following:

We continued to effectively manage the impact of higher fuel costs by improving our fuel miles per gallon… We are controlling truck idling; optimizing the speed, weight and specifications of our equipment; and implementing fuel enhancing equipment changes to our fleet.

How good are they at it? Turns out, they’re pretty good. Below is a graph of the national average diesel price vs. the company’s reported (or calculated) fuel cost per mile:

At first, you’ll see that the fuel cost grows faster than the fuel price. Some of this is a result of EPA emission regulations, which made the newer engines less fuel-efficient. As they newer engines were gradually introduced to the fleet, they affected overall operating costs. (In fact, at least one of the 10Qs from that era notes that Werner was able to command a premium when re-selling its older, hand-me-down tractors to other carriers.)

Over time, the company has managed to implement certain fuel-saving practices and patent aerodynamic designs that have cut fuel costs. The diesel price curve (courtesy of the US Energy Information Administration) look a lot like the curve leading up to 2008, but the cost per mile has dropped below it. For comparison, in Q3 2006 and Q3 2010, diesel was a little over $2.90/gallon, but Werner’s fuel cost per mile was 17% lower. That represents just under 4% of operating revenues, which is slightly enormous in this business.

They’ve done this even as the rise of intermodal has limited trip length:

Shorter trip lengths are associated with lower fuel efficiency; they involve more stops and starts, more idle time, and a higher percentage of time spent off of the interstates. So the cost containment has happened in spite of this.

It’s also happened despite the fact that class 8 trucks have no CAFE standards at all (although class 8 truckers probably have cafe standards of their own, mostly involving coffee & pie).

If anything, as we’ve seen, the government has made fuel efficiency more difficult by choosing emissions control over it. This choice may or may not be justified; that isn’t the point. The point is that, left to fend for themselves, with the government having made policy decisions that placed other priorities above fuel efficiency, trucking companies have been able to improve their own processes, and to demand better mileage from their suppliers.

More than that, it’s a little “I, Pencil” microcosm. These decisions are the result of a long chain of cost-benefit calculations stretching from engine manufacturer to trucker through customer to consumer. Each of these relationships has its own set of elasticities of supply and demand, which affect how much of the fuel cost can be pushed downstream. The amount that can’t be passed on to each customer provides the incentive for fuel economy.

It also provides the ceiling for how much each is willing to pay for it. Including the engine manufacturer. The government could probably demand higher fuel efficiency out of tractor engines, and the result would be greater inefficiency overall, because the cost of producing that engine would be greater than the system is currently willing to pay.

You could justify those expenses as externalities, say, the national security cost of keeping the Saudi pipeline safe and operating. But then you’re stuck arguing that the political & regulatory systems are as efficient in balancing interests as the economy is in balancing costs, which I think is, at best, an unproven assumption.

Note: Naturally, the opinions expressed here are entirely my own, and do not in any way represent Werner.

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Transportation Spending an Indicator?

Over at Carpe Diem (if you’re not reading it, you should), Mark Perry is arguing against a double-dip recession, suggesting instead that continued sluggish growth, the sort of grey sludge economy we’ve had for a while now, is the mostly likely scenario.  One of his indicators is rail intermodal traffic, which set a volume record last week:

By itself, this doesn’t seem to be too strong an indicator.  We’re just about at the seasonal high for the year, and year-over-year, the increase isn’t all that impressive.  Also, when I spoke with the head of UP’s media relations a few months ago, he agreed that intermodal generally moves finished goods, and is an indicator of consumption, while non-intermodal carloads are raw materials, and thus a better proxy for production.  They’ve barely moved.  So both sides seem to confirm what the other numbers are showing.

But up is better than down, and some of the weakness may be capacity.  Railroads seem to be moving to deal with that problem, and railcar manufacturers in Virginia and Arkansas are hiring new workers to meet the demand.  Most of this is coming from lighter, stronger coal cars, as well as chemical and petroleum cars.

I’m contracting at a major trucker based in Omaha, and they’ve been reluctant to increase capacity for a couple of reasons, including general uncertainty.  There’s a shortage of long-haul drivers, and already a capacity constraint, and yet they and at least one other mid-sized truck company I’ve spoken to are still not expanding their fleets.

However, they seem to be the exception.  Transport Topics (behind a paywall) is reporting that Class 8 truck sales – which include all tractor-trailers – are the highest since early 2007.  Some of this may be in anticipation of new rules that will force companies to have more trucks on the road to deliver the same amount of goods.  To that extent – if at all – the additional purchases are an inefficient allocation of capital.  But they aren’t likely the entire source of growth.  Companies are already short of inventory and capacity, and are simply expanding to meet perceived demand.

In theory, all these increased orders for trucks and railcars should be predicting continued economic growth.  In practice, we could still get blindsided by Europe, or it could be an example of companies expanding into a contraction, like a classic business cycle.

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The Wyoming High-Flow Toilet Scam

Hat-Tip to Amy Oliver for this.  According to the Denver Post, utility managers are pushing to outlaw at a state level that which is already outlawed at a federal level: your normal, regular, works-with-one-flush toilet.  You wouldn’t actually have to trade it your working toilet for the hobbled version, but according to the proposed law, “manufacturers could not sell” regular toilets.

The water savings wouldn’t be trivial, but are mostly notional: two generations from now it could amount to enough for 88,000 families of four.  What population and use numbers went into that estimate, the Post doesn’t say.  Even now, that’s barely 5% of the population, when home water use accounts for less than half of total consumption.  And while the article notes that Denver’s sewage system functions less efficiently with lower flow, the operating costs of that inefficiency (both monetary and aquiferous), and the capital expense required to mitigate, go unmentioned.

Aside from the article’s shoddy economics, there’s also the incentive system it sets up.  There’s already quite a grey market in regular toilets from housing projects (friends of mine were careful to preserve theirs when they remodeled a few years ago), and this will only make it worse.  The ban would apply to manufacturers, not individuals or remodelers, so no doubt, there will soon be calls to “close the Home-Fixtures Show Loophole.”  And at least until the big boys move in, and add another layer of middle-men to the process, you’ll see wild-eyed dreamers thinking up schemes like this.

 

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Infrastructure and Spending

Word on the street is that President Obama will call for yet more “infrastructure” spending in his Wednesday Thursday night campaign speech address to Congress.  Russ Roberts, of Econtalk, makes the effective rebuttal to this idea (as with most of the President’s ideas, it’s too amorphous to call it a “plan”) in two posts, “Crumbling“, and “Shovel Ready.”  In Shovel Ready, he notes that Japan spent a decade spending money on “shovel ready” public works projects that provided little economic benefit above and beyond the circulation of currency for its own sake (or its own sake).

In Crumbling, he shows that we’ve been increasing the percentage of GDP spent on infrastructure for about three decades, and yet still hear complaints about “crumbling infrastructure.’  He then goes on to quote a New York Times column giving examples of waste here.  One thing he doesn’t mention is that building pointless roads isn’t just a one-time expense – we’re stuck with the maintenance of those roads pretty much forever, lest they, too “crumble.”

Of course, this was before the most recent “stimulus,” and all those orange signs proclaiming spending throughout the land and to all the commutants thereof.

Taken as a whole, it’s a powerful argument against the sort of fire-hose spending “plan” that will likely be announced Thursday night.

I happen to believe that infrastructure is one of the proper areas for government spending, for a variety of reasons.  How best to do that can be the subject of vigorous debate, but the story of the Kansas Turnpike shows the risks incurred when interstate projects aren’t attempted by an interstate authority.  (For the moment, I’m happy to revisit the debates over political economy from the 1940s, but not the 1840s.)

All of this is what makes the first stimulus package such a shame.  In the 1950s, we had the luxury of buying North Dakota’s support for I-95 with I-94.  We could make a lot of mistakes, and still get the thing basically right.  We don’t have that luxury now.  Wasting almost  $1,000,000,000,000 in “infrastructure” spending in 2009 doesn’t mean we get to go back and clean up the mess.  It means we don’t have the money to do it right this time, so there is no this time.

A friend of mine likes to bemoan Americans who won’t spend on infrastructure, but it’s probably one of the few areas where the overwhelming majority of us actually do agree.  And if the government weren’t so busy  doing all the other things it shouldn’t be doing, it might actually have the attention and money to get this one right.

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Lies, Damn Lies, and Infographics

This is what happens when people get outside their area of competence.  FastCoDesign.com has its Infographic of the Day, and it can be a delight to behold.

But sometimes, like people who fell in love with the Obama “O,” they end up missing the flaws because they’ve fallen in love with the graphic design.  The infographic on “Do Green Jobs Really Exist?” is a case in point, as the comments make clear.  Here’s the graphic they like:

To his own surprise, Mr. Kuang concludes that Green Jobs not only exist, they’re pretty good jobs for middle-class workers, who don’t necessarily need advanced degrees.

But that was never in question.  Of course, green jobs exist.  But what the graphic doesn’t show is that while they’re well-paying, they’re also incredibly expensive and heavily subsidized, much moreso than oil and gas are, for instance.  On a per-unit-of-energy produced basis, they’re even more expensive, which means they’re a massive misdirection of resources, sapping the vitality of other industries which could employ far more people for the same price.

What’s a little disturbing is that Kuang thought that the argument was about the existence of the jobs, rather than their price-to-value ratio.  Admittedly, one data point is a thin reed on which to base a concern.  But it does suggest that we need to do a better job articulating the Bastiat-Hazlitt concerns about subsidies if we’re going to win this argument.

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Jobs and the Pantheon

Where does he belong?

America still has rock star CEOs: Bill Gates, Warren Buffet, Jack Welch, Michael Eisner, and the subject of today’s discussion, Steve Jobs.  Only Gates and Jobs were personally innovative, though, and between the two, only Jobs created products that people want to need, as opposed to ones they feel they’re stuck needing.

Although many articles have already recited the litany of life-changing inventions Jobs was responsible for, it’s worth running through them again, if only to have as a handy reference. The was: the Apple II (we had the II+, and Dad splurged for 48K of memory), the Mac, Pixar, the iMac, the iPod, iTunes, the iPhone, and the iPad.

But just as sex didn’t start in the 1960s, great companies didn’t start in the 80s.  Before Jobs, in some sense, at the beginning, there was Edison and Ford.  If you’re looking for comparable versatility and influence on the consumer market, directly on the lives of millions, or billions of people, those two are the gold standard.

With the distance of time, and the ravages of curricular political correctness, we forget exactly how revolutionary Edison was.  The soon-to-be-contraband light bulb, of course.  But also the electrical distribution system to run it (and the dynamo, conductive system, and on-off outlets that were required to run it).  The phonograph.  Movies.  There were about 1100 others, but those are the biggies.  And of course, Edison had to create and run the company that wired New York.

Ford, of course, developed the assembly line for automobiles.  But his genius was his insistence on creating an affordable car for the up-and-coming middle class.  Without that, the car remains a toy for the rich, and eventually industrial uses.  It was a conscious decision by Ford to make a car that the average employee could afford.  That it would be 10 years before inter-city auto travel became the norm, and 30 years before the thing would start reliably, is beside the point.  The car, as Wendell Cox has pointed out, meant that for the first time in history, the mass of people could travel distant from where they were born, and come back.

So where does Jobs stack up against these two?  I think he combines elements of both, and just as we have to adjust for the era in which baseball players played, we also have to adjust for the era in which Jobs CEOed.

The Apple II and the Mac, I think, are most like Ford’s Models A and T.  It was Jobs’s insight that the average guy not only could have a computer, but that he’d figure out what to do with it.  He and the other Steve, Wozniak, worked to make their computer affordable.  And later, Jobs insisted that the Mac be small enough to be  accessible.  (Also like Ford, he left his company, saw it passed by its main competitor, and returned to revive it, but that’s really taking the analogy too far.)

But if Jobs was more than Ford, he was, perhaps more like Edison.  The iPod is our phonograph.  Edison didn’t invent music, he just made it more available.  Jobs didn’t invent portable music, he just made it more available, in spectacular fashion.  The iPhone and the Mac perhaps add up to the light bulb.   If Edison could – in the hands of Hollywood – give an impassioned speech about people ruining their eyes trying to read by expensive candles, Jobs could made similar claims about computerizing our small-to-mid-size company finances, and putting the Internet in the palm of our hands, with similar productivity gains.  I can’t begin to tell you the number of times I’ve been saved by having Google Maps in the car, or being able to call ahead to say I’ll be late, without having to pull off the highway, find a – working – pay phone, and a phone book, and then find my way back to the highway.  And that’s, like, 1% of what the smartphone does.

Of course, Pixar was a marriage of computing technology and the movies that Edison made.  There, perhaps, Jobs is Walt Disney, even as Pixar made him Disney’s biggest shareholder.

Like Edison, Jobs has a huge back catalog of patents that either haven’t made it to market, or won’t.  Unlike Edison, Jobs appears to have left behind an culture of innovation that, properly husbanded, can continue to churn out marvelous toys for at least another decade.

But what sets Edison apart is the electrical distribution system, which made all that followed possible.  Jobs really has nothing like it to his credit.  But then, nobody does.  The closest analogy in our day would be, I think the Internet, in all its incarnations, and both the landline and wifi internets have been the result of corporate, rather than individual effort, although there have been some brilliant individual innovators along the way (Tim Berners-Lee and Marc Andreessen, call your offices.)

So Jobs isn’t Edison, or Ford, or Disney.  He’s Steve Jobs.  And that’s plenty enough to put him in the first rank of American inventor-innovator-businessmen.

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Bad News on the Colorado Jobs Front

Colorado continues to shed workers and jobs, according to the latest release from the Bureau of Labor Statistics.  On a seasonally-adjusted basis, Colorado’s unemployment rate held steady at 8.5%, but only because fewer people were looking for work.

Labor Force Employed Unemployed
July 2010 June 2011 July 2011 July 2010 June 2011 July 2011 July 2010 June 2011 July 2011
2,682.8 2,682.0 2,674.4 2,446.2 2,453.2 2,447.9 236.6 228.8 226.5
-8.4 -7.6 Change 1.7 -5.3 Change -10.1 -2.3 Change

Since July of last year, we have 8400 fewer people in the labor force, and the number employed has barely budged.  The number of unemployed has fallen roughly 10,000, but almost all of that is a result of people leaving the state or giving up.  In the last month alone, the labor force shrank by 7600, and we lost 5300 jobs.

In the meantime, the average duration of unemployment has shot past 40 weeks:

This isn’t just lost income.  It’s skills and connects that have gone stale, knowledge of their own market that has become outdated, and declining confidence that things will get better anytime soon.

The long-term unemployment is mostly among men, and mostly among less-educated, and those two classes increasingly overlap.  Keep this sort of thing going long enough – and it doesn’t take too terribly long to become self-reinforcing – and we’re liable to have a lot of cities looking like last week’s London sometime before 2020.

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Farmaggedon?

Who says real estate’s been a bad investment over the last few years?  Not if you’re buying midwestern farmland.

The Chicago Fed puts out a quarterly survey of farmland prices, and this past quarter, prices were up 17%, year-over-year.  Here’s what the chart looks like since 1964:

A couple of words on how this chart was derived.  The Fed’s survey only lists quarter-to-quarter  and year-over-year changes, not the raw number, and the data for download is only the year-over-year change, rounded to the nearest percentage point.  So I had to work backward, getting the last four quarter-to-quarter changes, and then backing out the annual changes for each year.  As a result, I can’t tell whether there’s an actual seasonality to land prices (which wouldn’t surprise me) or that annual dip is a result of some small variation in a recent year, that gets carried backwards (which also wouldn’t surprise me).  Thus the prominence of the 1-year moving average.

You can see the bubble starting around 1976, popping in 1981, and taking until about 1986 to return to the trend line.  Those of you hoping to recoup your recent residential real estate losses – sorry.

You also see the line take a nice bend upwards about 2002 or so, hits a little hiccup in 2008, and then resumes the trend.  There are a few reasons for this:   consolidations of small family farms into large operations plays a role, as do the expanding suburbs.  Unike houses, they can’t build more farmland.  Recently, you can add to that better-fed Chinese, who are buying lots of American corn to feed their soon-to-be mooshu pork.

All of which goes to explain why it’s a terrible idea to be sending about 1/3 of our corn crop to ethanol.  Farmers may like them, the ethanol industry couldn’t survive without them, but the demand subsidies – the requirements that a certain percentage of our fuel come from ethanol – are clearly helping to drive up the price of corn, and the price of the means of production of that corn, and its sometime substitute, soybeans.

(As mentioned before, it also drives up the price of natural gas, needed for the fertilizer that soil-depleting corn needs, in order to grow year after year on the same plot of soil.)

People borrow to buy farmland, too.  The interest rates on farmland loans have been trending downward for a long time, and have been mostly under 6% for the last 10 years.

Suffice it to say, this is not going to end well.

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A Transfer on the Road to Serfdom

As an emblem of what Walter Russell Mead calls, “the Blue Social Model,” there’s almost no place Bluer than New York.  So it seems fitting to pay homage to the home of the modern patronage state in a post devoted to transfer payments.

We all know that transfer payments – Welfare, Social Security, Medicare, Medicaid, Unemployment Benefits – have been growing at an unsustainable pace, and are the source of our long-term structural problems.  We’re also aware that once a program acquires a sufficient constituency, it’s almost impossible to reduce, let alone do away with.  Thus the concern when the top few percent of earners pay 40% of all income tax, and when half the country pays no income tax at all.

This dramatic Calculated Risk post about recession measures has gotten a number of people’s attention, but what struck me was the qualifier on the Personal Income chart: less transfer receipts.  Transfer receipts don’t count towards GDP, with good reason, but they certainly subtract from the country’s capital available for investment or spending.  They’re also the key, most public, most obvious way of obtaining a constituency for higher taxes and continued spending.  We’re now reaching the point where almost $1 out of every $5 of personal income comes from transfer payments (the scale on the left is in $ billions):

You can see the large boost given as Medicare and Medicaid took hold in the late 60s and early half of the 70s.  Through the 80s and 90s, the numbers continued to slope upwards, but a robust economy kept them largely between 12% and 14%, or between 1/7 and 1/8 of personal income.  Then, with the financial crisis and the preceding recession, they went through the roof.  For the first time, a boost in transfer payments was also accompanied by a year-over-year drop in aggregate personal income.  It’s that spending percentage that Obama and the Democrats want to lock in as the floor for the economy.

Colorado has it a little better, or maybe is just lagging behind the rest of the country (the scale on the left is in $ millions) :

In the 90s, as Colorado recovered from the commodities bust and attractive tech talent from around the country, the percentage of income derived from transfer payments fell just barely above 8%.  The recession of the early ’00s hit, and the slower growth of that decade, while real, was only enough to just balance the increase in transfers.  Some of this was a result of Colorado’s generosity to its own citizens, as the legislature loosened rules for Medicaid.  The state, of course, followed the rest of the country in a near-vertical climb in ’09.

The number is starting to decline gently as unemployment benefits run out, and incomes begin to slowly recover.

The chart, although the time scale is different from the one for the country as a whole, points out the main lesson of all this: growth is the only way out of this problem.  It can’t be healthy for $13 of every $100 of personal income to come from an unearned government check.  It’s even worse for the country as a whole.  And the deepening dependency of more and more people is only going to make the political will necessary to break this cycle harder to find.

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Green Still Costs Green

Regular readers know, my favorite left-of-center blogger is Walter Russell Mead, over at The American Interest.  The reason Mead is so interesting is that, unlike the Paul Krugmans and Ezra Kleins of the world, he’s willing to challenge liberal shibboleths, recognizing that for liberalism to be more relevant, it needs to be more intellectually robust.  At times he writes almost like a conservative, although he’s not.  This morning is one of those posts:

Wal-Mart has hitched its wagon to the local food train, but not to save the planet. It’s the money.  As Darrin Robbins, Wal-Mart’s senior manager for produce told the Wall Street Journal:

“We can get chili peppers from Florida all day long, but at the end of the day that is not necessarily the best model for us” … “I’m going to pay a higher price in Ohio for peppers, but if I don’t have to ship them halfway across the country to a store, it’s a better deal.”

It turns out that in the age of high gasoline and transportation costs, local produce is ultimately cheaper.

I’ve written before that Walmart is doing more for the planet than Greenpeace; this is just more proof.  A ruthless focus on price and efficiency is the best way to reduce humanity’s environmental footprint.

I think his conclusion is right: companies dislike waste more than most Greenies do – it hurts the bottom line.  Usually Greenies are wasting someone else’s time or money.  This doesn’t mean that some companies wouldn’t willingly forgo all sorts of reasonable environmental protections if they could, although it’s worth noting that the worst environmental disasters of the last century were centrally planned by the Soviet, and this century’s are shaping up to be centrally planned by the Chinese.

Nevertheless, I think he misses a more subtle point.  Those higher gasoline and transportation costs are real, and they are the result of governmental policies, usually pursued by Democrats specifically in order to drive up fuel prices.  They’ll admit this during primaries.  Wal-Mart is simply responding to incentives.

The problem, of course, is that “buy local,” unless is some specialty item, almost always means a lower standard of living.  It makes you more dependent on a smaller base of supply, and decreases out-of-season availability.  If the local crop fails, you still have to import the food from farther away, at the higher cost.  I don’t have data to back this up, but it would also make sense that the availability of long-haul refrigerated units for produce would decline along with demand, which adds even more to the marginal cost of replacing a local supply gone missing.

The country always undergoes a series of local crop failures which go unnoticed by consumers.  Now they’ll be more likely to notice those failures, and more likely to hear someone other numb-nut attributing it to your air conditioning, as well.  So not only do we bear the cost of food, we also have to put up with the sermonizing.

Mead’s incredibly insightful about larger social and economic trends, so it’s a shame to see him missing a trick on this one.

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