Plea for Long Term Thinking in Business and Finance

Public companies in the US are required by law to report their quarterly earnings.  As a result, they are often under a lot of pressure from investors to maximize earnings and reduce costs on a quarterly basis in a dynamic referred to as "short-termism."  This can often hurt long-term performance for example by laying-off employees to reduce costs.  It also often results in irresponsible environmental or human rights practices.  At the same time it's really difficult to address these issues since they almost certainly require a multi-year commitment.

Larry Fink, the CEO of BlackRock, periodically sends letters to investors and companies imploring both groups to get beyond short-termism.  Last week he sent his latest letter to S&P500 companies.  Fink has been a prominent figure in advocating for good corporate governance, which typically refers to having board members that are not related to each other and subjecting the executive leadership to board oversight.  He says,

Generating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors facing companies today. These issues offer both risks and opportunities, but for too long, companies have not considered them core to their business – even when the world’s political leaders are increasingly focused on them, as demonstrated by the Paris Climate Accord. Over the long-term, environmental, social and governance (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts.

At companies where ESG issues are handled well, they are often a signal of operational excellence. BlackRock has been undertaking a multi-year effort to integrate ESG considerations into our investment processes, and we expect companies to have strategies to manage these issues. Recent action from the U.S. Department of Labor makes clear that pension fund fiduciaries can include ESG factors in their decision making as well. We recognize that the culture of short-term results is not something that can be solved by CEOs and their boards alone. Investors, the media and public officials all have a role to play. In Washington (and other capitals), long-term is often defined as simply the next election cycle, an attitude that is eroding the economic foundations of our country.

Public officials must adopt policies that will support long-term value creation. Companies, for their part, must recognize that while advocating for more infrastructure or comprehensive tax reform may not bear fruit in the next quarter or two, the absence of effective long-term policies in these areas undermines the economic ecosystem in which companies function – and with it, their chances for long-term growth.

A particularly interesting and bold recommendation was to reform the capital gains tax.

...tax policy too often lacks proper incentives for long-term behavior. With capital gains, for example, one year shouldn’t qualify as a long-term holding period. As I wrote last year, we need a capital gains regime that rewards long-term investment – with long-term treatment only after three years, and a decreasing tax rate for each year of ownership beyond that (potentially dropping to zero after 10 years).

*clap clap clap*

Who manages your 401k, and what are their positions on corporate governance, short-termism, and ESG?

Interstate Cooperation for Clean Energy

I wrote up a policy  memo for a class last week.  It made me realize how much of a problem coal still is, largely because it is not easy for coal-miners to transition to other jobs.  

California, Arizona, New Jersey are leading the nation in manufacturing and installing solar power.  Arizona alone has over 316 solar companies, supplying a variety of parts for solar installations[i]. 

The number of solar installations has been growing across the nation, increasing 15% in Q2 of 2013[ii].  States with solar manufacturing are well-positioned to benefit as more states install more solar power.  Those states will have more well-paying jobs and tax revenues as the solar industry grows. 

On the other hand, there are many opponents of solar power.  About 40% of the electricity generated in the United States is from coal.  Coal mining in the US is concentrated in some states, particularly Kentucky, West Virginia, Pennsylvania, and Wyoming.  These and other states such as Ohio, Virginia, Indiana, and Illinois have strong pro-coal lobbies and constituents[iii].

Coal miners and their communities are justifiably concerned about losing their jobs and economic security.  Right now, they support ways to keep coal cheap, which works directly against the interests of the solar industry and Arizona generally.

In order to undercut the support for cheap coal, I recommend that states without coal industries share some of the benefits of their growing solar industries with coal miners.  Continued access to healthcare and education are particularly valuable.  Solar producing states should offer scholarships to family members of coal miners to their state universities.  They could also contribute to a fund to pay for healthcare for families of coal-miners.

Those directly affected by the decline of the coal-producing industry are relatively few, about 20,000 coal-miners in Kentucky, for example[iv].  Providing a safety net for those people would go a long way towards reducing the urgency of keeping coal production going.  This would give coal producing states less opposed to clean tech.  They would also have more resources to develop jobs in other industries rather than coal mining.

Solar producing states should partner with coal producing states to find mutually beneficial solutions to their economic, environmental, and health problems.        

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[i] ‘Arizona Solar’, Solar Energy Industries Association [accessed 5 December 2013].

[ii] ‘Solar Industry Data’ [accessed 5 December 2013].

[iii] Kris Maher and Tom McGinty, ‘Coal’s Decline Hits Hardest in the Mines of Kentucky’ [accessed 5 December 2013].

[iv] ‘Mining Employment and Production Trends’, The Impact of Coal on the Kentucky State Budget .

Kenneth Arrow Sez, Use Declining Discount Rates

Kenneth Arrow is the man.  More on this later

http://www.sciencemag.org/content/341/6144/349

http://www.rff.org/RFF/Documents/RFF-DP-12-53.pdf

California Green Jobs Report

I read more about the California Workforce Education and Training Needs Assessment for Energy Efficiency, Distributed Generation, and Demand Response.

This is really a line of research I am interested in pursuing. Here are some things that stuck out to me.

They talked about the need for "high-road agreements," which I think means including higher standards in contracts for businesses. The report also stresses the importance of enforcing standards and having certifications for labor force training.

The study found that incorporating environmentally friendly practices and standards into traditional training programs was more important than brand new training programs for new specialized green jobs. That is, greening traditional trades is more effective than anticipating narrow specialized emerging occupations. Actually, this is exciting because this has been my attitude towards green jobs, although it was just based on a hunch. The report's conclusion is more about the technicalities of job creation and training, but the message I was trying to send when I did the Big Picture Panel Lecture was that students should try to work on sustainability within whatever field they chose, not feel like they needed to change careers to work on environmental sustainability. While I think it makes sense to try to get a Sustainability minor or certificate, it would not make sense to make a Sustainability major. At least, not for most people.

I also thought of two other ideas while reading this report. One is that maybe businesses that work on contracts should have online rating sites like Yelp, especially government contractors. Consumer product ratings are now ubiquitous, but taxpayers regularly pay companies that they don't know much about. On the other hand, it may be that this information is readily available, and people are just not that interested.

The other idea is that students in high school and also college should have more information available about possible career choices so they can make better decisions. It seems like to me that most people make career decisions based on their interests, which is good, but I think it would be better if there was at least a little bit of data or infographics. Otherwise, the bit of data that students use are from TV shows and celebrities. It is becoming clear that the middle class has benefited the last three decades from cheap goods in China, and so it has not been particularly difficult to maintain a pretty good standard of living in the United States even if you did not make savvy career choices. It simply has not been that competitive. I think that the labor market is going to get more and more competitive now in the United States, and that more data for students are in order, not just more SAT prep.

UCB Professor Michael Hanemann

Professor Michael Hanemann is an economist who works on environmental policy. He is a professor in the Department of Agricultural and Resource Economics.

Dr. Hanemann’s research interests include non-market valuation, environmental economics and policy, water pricing and management, demand modeling for market research and policy design, the economics of irreversibility and adaptive management, and welfare economics.

He is an expert in the economics of water, the valuation and the demand of water. I would be more interested in applying his techniques to other material resources, though. On the one hand, according to standard environmental economics analysis, my drive to reduce the use of other material resources is to minimize the negative externality of pollution or climate change. However, I feel it is more than that. I suppose that fundamentally I feel that exponential increases in material resource use is a problem. I also think that improving supply chain is an insufficient solution. It only seeks to make resource use efficient, but there is no mechanism to ultimately constrain it. Even so, it's a necessary first step.

Some People Were Trying

Today on NPR I heard about Brooksley Born, who was the chairperson of the Commodity Futures Trading Commission. She lobbied Congress, banks, and the the President to let the CFTC regulate derivatives. However, she was opposed by Robert Rubin, Alan Greenspan, and Larry Summers. What is really disturbing is that even though someone in a position of power knew what to do, she was blocked by people who had more power. It shows that economic policy decisions have to be backed by one of a select few.

Raghuram Rajan was the chief economist of the IMF when he also foresaw a collapse in the financial markets. He was also ridiculed and marginalized by Larry Summers and others.

This makes me more pessimistic about preventing economic crashes in the future.

Good Venue for Climate Change Agreements

How to Change the Global Energy Conversation

Latest Breakthrough Institute article in the Wall Street Journal

Information Flow

Sometimes more information can make us dumber.

Princeton Professor Michael Oppenheimer has done some interesting research on negative learning.

Uncertainties in scientific models such as the mechanisms of climate change can cause consensus to coalesce around wrong numerical results. This becomes a problem when policy decisions need to be made sooner than consensus can find the true value. There are a lot of reasons why this happens, but it's pretty new and interesting field of research.

(I just finished writing my essays for the Princeton STEP program.)

NSF Research Proposal

I applied for NSF again. I am concerned about being disqualified because of my grades, but they actually didn't really mention that last year, and at least this time I have a much better research proposal.


Impact of policy on clean energy technology diffusion in US states

Keywords: environmental economics, public policy, climate change, technology policy

Introduction:

Global climate change is a pervasive and hugely consequential negative externality stemming from energy consumption that needs to be managed in order to ensure prosperity for generations to come. Substituting clean energy generation technology such as wind and solar for fossil fuels is a primary component of mitigating climate change. Dominant carbon emissions reduction policy tools are carbon emissions taxes, emissions trading systems, and renewable portfolio standards for clean energy. Technology diffusion is a particularly challenging stage of technological innovation in the energy industry. Understanding the effects of policy on clean energy technology diffusion in each state is central to fostering cooperation amongst states and developing effective policies for reducing US carbon emissions.

Finding Internships in Public Policy

NASPAA site with links to internship search engines

Got it off the Harvard Kennedy School site.

Thoughts on Research and Career Directions

I'm starting to talk to other people about my research ideas so I can make them better, but I'm also trying to continually evaluate my career options. I am most drawn to macro, dynamic modeling, and theory, but I'm wondering if I should really be doing more applied economics since I'm ultimately interested in developing policy for the real world. Perhaps I should really be looking into public and labor economics more, and researching cross-impacts of environmental economics and labor economics through data-driven analysis.

At the same time, I'm not sure if I should be going into economics at all. I'm not sure that I have the right kind of instincts for analysis, and perhaps I should go into public policy after all. I should try to look at what kind of research is done in public policy or consider not doing research at all, and trying to figure out how to someone who helps implement policies. I think maybe I'm good at crisis management and figuring out what people need and getting them things.

Finance Reform Passes

Today Congress passed the Finance Reform Bill. Honestly, though, I don't know too much of the details in the bill, but I am generally supportive.

The Dodd-Frank bill -- named after Dodd and Rep. Barney Frank (D-Mass.), who ushered it through the House -- passed by a vote of 60 to 39. Three Republican senators -- Scott Brown of Massachusetts and Olympia J. Snowe and Susan Collins of Maine -- joined 57 members of the Democratic caucus in support. Sen. Russell Feingold of Wisconsin was the lone Democratic opponent, saying the measure didn't go far enough.

Finance Reform Bill Passes in Senate

59-39 vote in Senate for the Finance Reform Bill.

Raise Fuel Standards

Obama Mandates Raising Fuel Efficiency Standards for Cars

Health Care

Obama signed the health care overhaul! I'm excited, but it makes me uneasy how there are still so many people who oppose it. I should really figure out what the bill actually said. At any rate, MA already has mandatory health insurance, and the federal overhaul was modeled after MA's overhaul, so things aren't going to change that much in MA.

Here's President Obama's remarks in Iowa City.

He claims

But we have built into law all sorts of measures that in the years to come, health care inflation, which has been rising about three times as fast as people’s wages, is finally going to start slowing down. We’ll start reducing the waste in the system, from unnecessary tests to unwarranted insurance subsidies.

And once this reform is implemented, then health insurance exchanges are going to be created. This is the core -- the core aspect of this bill that is going to be so important to Americans who are looking for coverage. Basically, we set up a competitive marketplace where people without insurance, small businesses, people who were having to pay through the teeth because they’re just buying insurance on their own, maybe you’re self-employed -- you’re finally going to be able to purchase quality, affordable, health insurance because you’re going to be part of a big pool -- by the way, with members of Congress. So you will be able to get the same good deal that they’re getting, because if you’re paying their salary, you should have health insurance that’s at least as good as theirs.

Here's an article about More Doctors Taking Salaried Positions vs private practice. It could be generally good for patients as their records can pass through the system more easily, but could be letting Big Medicine more easily set high health care costs. However, "The process feeds on itself because doctors who remain in private practice worry that as their peers sell out, their own options become more limited and the prices for their own practices fall," implying that insurance companies are paying doctors less so I'm kind of confused about which is it.

“We wouldn’t go back,” he said, “now that we’ve seen the value of improved patient care and improved communication with primary care physicians.”

Michael Packnett, the president of Parkview and Dr. Mirro’s new boss, said that his organization was growing rapidly, while the number of independent hospital and doctor practices in northeast Indiana shrank. A key reason, Mr. Packnett said, is that many doctors have decided that the challenges of running their own businesses are simply too great.

“Now they get to refocus on practicing medicine,” Mr. Packnett said.

Bill Gates as a Public Figure

This past year was Gates' first year working full time on the Gates' Foundation. He put out an annual letter and has been going on the morning circuit with his views on various policy issues.

ABC News article and video with George Stephanopolous

article at PCWorld

Breakthough Institute blog

He has come out in support of bank fees and tax increases. At the same time, he seeks to moderate people's expectations in the government's ability to make a full recovery, saying that the government is limited in what it can really do. According to Gates, the best thing the government can do for the economy and for social equity is invest in education. The government needs to focus on long term goals. I think changing people's expectations would help a lot or else Scott Browns are going to get elected everywhere.

His main interest is in health services. He talked about the need for innovation in health and the need for more pills. What about preventative measures and things like diet, though? He also notes that we need a lot more investment in clean energy and he downplays the effectiveness of energy efficiency measures. He is right about the lack of funding of clean energy in the US, but I wonder what he would think about the concept of a steady state economy, less work hours, and less material throughput.

He even had a diplomatic analysis of the Google v. China free speech issue.

He has an interesting blog http://www.gatesnotes.com.

It's interesting how billionaires like Gates and Warren Buffet have much more credibility than any actual politicians. On the one hand, it makes sense because they are proven to be successful people. On the other hand, it's a little sad because I don't think there are any politicians that people really trust.

Energy Talk at MIT with Sterman

This is from last year IAP, actually. John Sterman, the system dynamics guy is the moderator, and Harvey Michaels is a speaker along with some other people I'm not that familiar with yet. Through this, I found some interesting companies.

XENERGY

Environmental Law Institute

and also driving to work today, I saw Alteris Renewables

Obamacare Officially Announced

I listened to Obama's health care speech last night, and I thought he made some a very comprehensive reasoning for his ideas.

I'm definitely a lot more excited to learn more about the issue and attend events and possibly throw events at MIT about health care.

Cash For Clunkers Success?

Cash for clunkers is a government program subsidizing the trade-in of a "clunker" for a car that get at least 10mpg mileage than the clunker. It was wildly popular and ran out of money in a week.

I'm not sure how this is different from bailing out the car industry or giving people some stimulus money back or cutting taxes.

I guess the most valuable aspect is that the government is changing the market demand for more fuel efficient cars and therefor influencing the future of the industry. In that sense, it is better than loaning car companies money and stipulating that they make more fuel efficient low emissions cars.

A free marketer might disapprove since the government is meddling, but since the government is not giving money to any individual companies thereby picking winners and losers, there haven't been a lot of objections from raging capitalists.

Health and Bankruptcy

neato study about the causes of bankruptcy. Guess it really makes sense.