God is a Capitalist

Tuesday, February 25, 2014

RX for Healthcare.gov

I posted in November in A Monkey with two bananas about the left's contempt for management being the cause of the failure of the Obamacare web site, Healthcare.gov. Recently, Foreign Affairs magazine detailed the management failures of those in charge of the web site in The Key to Successful Tech Management. The authors wrote,
Assuming basic technical competence, the essential management challenge for all large technology projects is the same: how best to balance features, quality, and deadline. When a project cannot meet all three goals simultaneously -- a situation HealthCare.gov was in by the beginning of 2013, as the administration’s internal memos show -- something has to give, and management’s job is to decide what.
In other words, everyone wants their projects finished fast, cheap, and good, but in reality we can only have two of the three. Good managers understand that and let the client set priorities. The Center for Medicaid and Medicare Services (CMS) settled for fast and cheap so quality suffered. But as the authors point out, Healthcare.gov wasn't the government's worst disaster:  
That honor probably goes to the Federal Aviation Administration’s Advanced Automation System, an attempt at modernizing air traffic control in the 1980s and early 1990s that has been characterized by one participant as “the greatest failure in the history of organized work.”...

In the end, the FAA determined that $1.5 billion of the total $2.6 billion spent on hardware and software for the system had simply been wasted -- more than twice the total cost of HealthCare.gov.
And that's without adjusting for inflation! Then there was the FBI’s Virtual Case File, an upgrade of its Automated Case Support system begun in 2000. The project failed outright by 2005 and the entire $170 million project had to be written off. The authors summarize the government's problem:

These are only two of many such examples one could choose from, all stemming from problems in at least one of three distinct arenas of government tech administration: hiring and procurement, planning, and management.
The government spends $80 billion per year on tech projects, many of which will fail like those mentioned because few people in government have any respect for the field of management. 
Unfortunately, decades of nine- and ten-figure failures have not sufficed to teach the federal government and its contractors such basic lessons....

So the real question is not how to fix a website, even a big, complicated one. It is whether Washington will ever allow good management to become part of its standard operating procedures, rather than something that it turns to only when its regular routines fail badly enough to produce a crisis.
That will happen when socialists admit that CEO's deserve their pay. Good managers are as rare as good NFL coaches. Coaches do little but stride up and down the sidelines and yell during a game, while the players on the field do all of the work. And so it appears to the media and public that CEO's do little but take credit for the work of others.

But the NFL coach's job, and that of a good CEO, is to orchestrate the efforts of the many different players to achieve the team's goals. The coach needs to know something about every position, though he may not be an expert at each. No one function should dominate the effort; each contributes its portion to the goal. One can learn the basic principles of management by reading a few books. But like coaching football, becoming good at it takes years of practice.

The government will continue to fail at everything from IT projects to hurricane clean ups until it learns respect for the role of management. Unfortunately, bureaucrats who fail miserably tend to get promoted while in the private sector they get fired. CEO's have failed, but none as spectacularly as bureaucrats do on a regular basis.

Tuesday, February 18, 2014

Presidential Returns

In honor of President's Day this week I decided to take a look at a popular cyclical candidate running to help you time the stock market - the presidential election cycle. Jeffrey Hirsch, chief market strategist at the Magnet Æ Fund and author of The Little Book of Stock Market Cycles wrote about the technique in "Using Seasonal and Cyclical Stock Market Patterns" in the June issue of AAII's Journal. Hirsch's Stock Trader's Almanac has followed this cycle for fifty years and found it profitable.

Here is his graph of the average returns for the Dow Jones Industrial Average in each year of the four-year cycle from 1833-2012:

 Figure 1. DJIA Average Annual Percentage Gain (1833–2012)

Hirsch explains that, "In an effort to gain reelection, presidents tend to take care of most of their more painful initiatives in the first half of their term and 'prime the pump' in the second half so the electorate is most prosperous when they enter the voting booths. The 'making of presidents' is accompanied by an unsubtle manipulation of the economy...By Election Day, he will have danced his way into the wallets and hearts of the electorate and, it is hoped, will have choreographed four more years in the White House for his party."

After the election, reality asserts control:

Tuesday, February 11, 2014

ABCT Extends to Emerging Markets

Trouble in emerging markets has provided the rationale for at least part of the recent correction in the stock market. Emerging markets, such as, Brazil, Russia, India, Turkey, Thailand and China, are suffering largely because of the withdrawal of US dollar investments from them and this confirms the effects of monetary policy as described by the ABCT, the Austrian business cycle theory. Here is a chart showing the performance of emerging market stocks relative to the rest of the world:

To refresh your memory, the ABCT states that inflationary monetary policies such as those of the Fed for the past five years will cause an unsustainable boom as new money pours into the economy and stimulates demand for consumer goods and for investment. Usually we think of the ABCT in terms of a single nation, but the EM problems demonstrate that it has international implications, especially in a world of increasing trade integration and a currency that other countries use for trade and their banks for reserves.

Tuesday, February 4, 2014

The Great Stagnation Explained

A few economists are worried about the great stagnation, the apparent plateauing of wages and economic growth. Some attribute the malaise to rising inequality or technology having picked all of the low hanging fruit, or other causes. Any time someone identifies a problem every person with an ideology to promote offers their pet ideology as the cause or cure. Here is my take on it:
The industrial revolution caused per capita incomes in the West to rocket from $3/day in 1700 to as much as 130 times that amount today. A graph of incomes produces a “hockey stick” as this graph from the Atlantic that demonstrates:

Chicago economist Deirdre McCloskey’s explains in her book Bourgeois Dignity: Why Economics Can’t Explain the Modern World that the innovation caused the rapid take off in incomes, but innovation requires that society value business and innovation and adopt “bourgeois values.” She devotes a large portion of the book to slaying zombie explanations for the rise in incomes, including thrift, capital accumulation, greed, the Protestant ethic, colonialism, education, transportation, geography, energy, trade, slavery, exploitation, commercialization, genetics, institutions, and science.
How is it possible for innovation to benefit all of society and not just the inventor? After all, successful inventors become very wealthy. The answer is that innovators capture merely 2% of the total benefit of their inventions according to Yale economist William D. Nordhaus in his paper “Schumpeterian Profits in the American Economy: Theory and Measurement.”