Loving Freedom: A 9/11 Note to Osama Bin Laden

Osama,

Today is September 11, and yes, I remember well the havoc you created nine years ago today.  And yes, I make it a point to remember it not just on the anniversary, but regularly.  And yes, you created lasting scars in American society and particularly for the families and friends of those who died or were wounded that day.  But in spite of all that, it’s worth noting one critical thing:  You lost.  You lost and you lost big and you’ll continue to lose.  How do I know?  Let’s compare notes on our lives on this day, September 11, 2010.

In the last nine years, the United States has regrouped and emerged stronger than ever.  We’re still a free society.  We still have protections that guarantee key freedoms for all individuals.  These freedoms extend into social, political, and economic spheres.  Socially, we Americans choose with whom we associate.  We argue (vociferously) with each other over political issues, and the appropriate limitations of government in our lives and in the economy.  But those arguments take place within defined bounds of acceptable discourse.  And the arguments, for the most place, take place at the margins.  No matter how heated our arguments, we share a common heritage of understanding that we are free to do that which we want, as long as we don’t infringe upon the rights of others.

And what are the outcomes of these freedoms?  In Q3, 2001, when you attacked us, our GDP was $11.6 trillion.  In our most recent quarter, Q2 2010, we stand at $13.2 trillion (both figures expressed in terms of 2005 dollars).  That’s right, in spite of your monstrous gesture and its impact, we managed to grow the already-biggest economy in the world by nearly 14% in nine years.  Need a measure besides economics?  In the last nine years, one of our most heated arguments politically has dealt with illegal immigration.  Why?  Well, because lots of people love what the United States is all about.  People want to come here.  Is that the mark of a problematic society?  Or the mark of a desirable one?  You don’t like us?  Fine.  You attack us?  Your mistake.

Outcomes of the freedoms for me?  In the last nine years, I’ve had a third child.  My wife and I have started a business.  I’ve seen special birthdays in the family.  In the last two weeks alone, I’ve visited multiple states.  I’ve flown on airplanes (A little extra screening inconvenience, yes.  But did your actions stop me?  No.)  I’ve celebrated the Jewish New Year.  I’ve met new people and been among literally thousands of strangers.  Today I’m relaxing with my family.  In short, I’ve lived freely and experienced the rewards of living in a free society.  I do not fear or look over my shoulder as I go from one place to another.  No one is hunting me.

As I start my work day, I look at the screen saver on my computer that shows a Tribute In Light showing 88 searchlights at the site of the World Trade Center creating two vertical columns of light.  And I remember that day and those that perished and those that showed true heroism.  And I marvel at the greatness of the skyline, a physical embodiment of what a free society can create.  Then I think about the last nine years in your world.  You succeeded on bringing hellfire down on regions and states that aligned themselves with you.  And you personally in the last nine years?  Running from cave to cave? Remote hideout to remote hideout?  Never secure in your surroundings?  Constantly wondering, anytime someone new is in your presence, whether he/she is carrying out a contract with the CIA, or someone from the U.S. Special Forces coming to finish you off?  Wondering, every time you hear a plane overhead, whether one of our Predators will hit its ultimate target?  You may not have been caught yet and you may not be dead yet, but I hope my description of your life is pretty close to reality.  While we’ve continued to enjoy the fruits of freedom that you couldn’t take away, you’re being hunted reaping the rewards you so justly deserve.  You’ve constantly looked over your shoulder, and your geographical sphere is limited to remote areas in Pakistan and Afghanistan.

President Bush said, nine days after the attack in an address to a joint session of Congress, “Whether we bring our enemies to justice, or bring justice to our enemies, justice will be done.”  We may not have formally completed serving our justice on you yet, but if my description of your life is anywhere close, then I revel in that.  And if you are lucky enough to continue eluding capture or death, I can only hope your life gets no better.  This does not bring back our country’s lost loved ones or the heroes from September 11th, 2001.  But I hope you have the knowledge that as a country, we’ve managed to regroup and continue.  You will NEVER have that luxury.  Even if you’re technically free, you will forever be a hunted animal.  So on this ninth anniversary, assuming the the internet is working in your miserable cave, know that we’re back out enjoying life, confident in who we are, and proud of our troops that carry out our missions.  I hope they pay you a visit soon.

David Danziger

*Dedicated to those who lost their lives on 9/11/01 and to their families, to the many heroes who served on that day, to the members of our armed services who protect our freedom and interests around the world, and to all individuals everywhere who value freedom.

What Is Job Satisfaction Worth?

I’ve written previously here and here about what employees are worth in economic terms.  A younger friend of mine (we’ll call him Hakim, though that is not his real name) recently posed another classic question of worth on the employment front.  He has a job right now that he enjoys immensely, and he has been doing it for a few years.  He gets to do what he loves.  He has great flexibility.  He likes his manager and his co-workers.  It is a great situation in all non-financial respects.  You can probably guess where this is going.  Hakim would like to make more money.  Who doesn’t, right?  Unlike some of my subjects in my prior blog post, my friend actually explored his worth on the open market.  Sure enough, he’s been offered a job that pays a full 33% more than his current employer.  He’s been completely up-front about the whole thing with his current employer, but his current employer will not raise him a penny.  They’ve laid off some people recently and have essentially instituted a salary freeze for the time being.  Here’s the catch though: Hakim is reasonably sure that he will not enjoy the new position at all. 

Hakim, who is also a regular reader of Well Worth It, sent me a note suggesting the topic of we’re covering today.  The way he characterized it in his initial e-mail was, itself, interesting: “How do you assign value to things that have no [economic] value, particularly in the workplace?”  Here are the other relevant facts associated with Hakim’s situation:

• His current job lets him create content, while his new job would largely be editing others’ content.  His quote, “It would be easy, but I think I’d be bored out of my mind.”

• Hakim’s current job is mostly “regular” business hours with some exceptions, while the new job would be on the order of 6 pm – 3 am during substantial portions of the year.  Note that my friend has been married one year and has no children. 

• The 33% salary change is significant in dollar terms for where they are financially today, though certainly not on the order of winning the lottery.  As he colorfully put it, “It’s not like we’d be going out Ruth’s Chris every night now, but we’d have a more money to do fun things and could save more.”

• His wife works at a job that pays fairly well also. 

• Hakim’s prospective new employer for the new role has some visions around rapid growth, which, if realized would mean:
  • He wouldn’t necessarily be stuck in the 6 pm – 3 am role for more than a year or two.
  • He might have opportunities to be promoted / grow / learn in the organization.

However, none of that is guaranteed.  The role for which he’d be hired is the role for the time being.  Growth prospects in his current company were completely uncertain: he and they might or might not grow over time.  When Hakim and I talked about this by phone, I think the purpose of the call was maybe just a bit for advice, but as a regular reader of this blog, he definitely wanted to provide food for thought for a blog entry.  My suspicion is that the blog entry is going to be better / more interesting for readers than any advice I gave my friend.  Because my advice was predictably simplistic, and in the form of questions which he’d clearly already thought through: “Well what’s your gut telling you?  “How important is the money at this point?” “Would there be an opportunity to go back if you decide you don’t like the new role?”  “What does your wife think about this?”  I hung up the phone almost certain that Hakim would tactfully turn down the new opportunity and stay in his current role, because it was clear that his heart was in it, and he was simply not enthused about the new job.

It did get me thinking about what I’d do if I were in his shoes and how we typically resolve such questions.  The economic worth, in the near-term, of the two possible paths was very well established.  The new job was worth substantially more, financially speaking.  But the satisfaction in the near-term was almost certain to be greater in the current job.  Looking longer term, it sounded like the new job had the higher probability of growth opportunities.  And long-term dissatisfaction in the new job was, by no means, a certainty.  The new role might yet prove to be intellectually stimulating and revert back to “normal” hours after awhile.  But that’s a lot of speculation.  The known variables are the financial comparisons and the near-term satisfaction. 

And this begs the question: what is job satisfaction worth?  Are you satisfied with your current work?  A variety of statistics show a majority of Americans are at least somewhat satisfied with their current job.  In this Gallup survey from August, 2009, tracking 13 dimensions of workplace satisfaction, the lowest dimension for complete satisfaction was “amount of money I earn”, but even in that dimension, 71% indicated they were either completely or somewhat satisfied.  If you weren’t/aren’t satisfied with intangibles in your current line of work, how much (financially) would you be willing to sacrifice to achieve satisfaction?  What if you knew that 10 years from now, you’d still be doing the same thing?  Or what if you knew that 6 months from now you’d be laid off?  Is there something you’ve always dreamed of doing?  What risks are associated with chasing your dream?  Are they real, or are they imagined?  Or a combination of the two?  Do you remain in your current role because it is what you enjoy?  Or because you’ve traded emotional / intellectual passions for financial gain?  Because you need the money?  Or because you want the money?  Is there really a tradeoff, or is this a false choice?  After all, at least implicitly (if not explicitly) we’ve all chosen to do what we do for a living.  No one forces us to get up and go to our particular place of business each day.  In today’s climate, there are plenty of people who would happily take our place.  We choose to do so in exchange for the benefits, tangible and intangible, conveyed by our business / employer. 

So back to my friend, Hakim, and his decision.  I checked back in with him a few weeks later.  Hakim came up with a clever compromise idea:  “I pitched [my current boss/ employer] on staying on to write in a freelance role, and he actually went for it” so now it seemed that Hakim had the best of both worlds lined up: the excitement of his current job PLUS financial benefits of the new role.  Unfortunately the possibility of that arrangement did not last at all: the prospective employer vetoed that idea completely.  So Hakim was back where he started in the decision process, with a difficult choice to make, and yet something in his thought process had shifted dramatically.  As Hakim put it:

“Somehow, I had started to talk myself into taking the new job (because of the additional content role with [my old employer]), and now I couldn’t seem to reverse myself.  I honestly can’t say what made me do an about face, but in the end, I decided to take the job after all. I guess thinking about the position made me focus a little harder on the idea that I was as far as I could get with [my current employer], and if I wanted to make more money and give myself some room to grow in my career, this was really the path I would need to take.  I think the hardest part of the decision was just trying to understand for myself how one week, given a certain set of circumstances, I had arrived at one conclusion, then faced with the exact same situation a week later I arrived at something completely different. Very difficult to reconcile intellectually, but my gut has felt right about it since I made the decision, so I’m trying to just look forward and make the most of it.”

Hakim may or may not regret the decision later, but I doubt he will.  This one will turn out just fine.  Had he chosen the other course, I bet it, too, would have been fine.  For better or worse, we seldom get the chance to fully see and understand what would have happened if we’d made different choices in our lives.  But being the (almost) eternal optimist that I am, I think things have a way of working out for a reason.  Nothing, professionally, is permanent, and if one thing isn’t quite right, it often can lead to another.  But most importantly in this scenario, Hakim is incredibly talented and so one way or the other, I’m pretty sure that he will ultimately have the satisfaction he wants and reap financial rewards he desires as well. 

And with that, I pose the questions: Are you satisfied in your current job?  What would make you more satisfied?  Have you made tradeoffs for economic value that you wish you hadn’t?  Or are you amazed that you are getting paid to do something you love?  Would you do what you currently do for less?  Just curious to hear responses.  Thanks for reading!

What’s a Good Employee Worth – Part 2

Several months ago, I wrote an entry that discussed the value of an employee, because it was relevant to a story making news at that time.  The truth is, I could probably write an endless series of blog entries on the topic, because it seems that even in the United States, where the free market has generally been modus operandi, we sometimes forget that the value of employees cannot be determined by government fiat, union coercion, or and employee’s individual conception of his own worth.  It should be – and ultimately is – determined by a market for the value added by that employee and his / her skills.

In the last few weeks, CNBC began running its documentary The New Age of Walmart, hosted by the excellent CNBC reporter, David Faber.  It is an exploration of Walmart and its changes since CNBC originally ran The Age of Walmart five years ago.  One of the areas covered is the increasing challenge that Walmart is facing from its employees/associates over its labor practices and salaries.  The show explored the desire by some Walmart associates to unionize.  Faber spent quite a bit of time talking to Eugene Hart, a 33 year old who unloads trucks at a Walmart in Miami, where there is a strong push for the Walmart associates to unionize.  In the discussion, it was noted that:

     1)  Hart makes $11.15 per hour working for Walmart.  

     2)  He has worked there for 3 years.

     3)  The retail industry average wage (presumably for others unloading trucks) is $12.95.

     4)  Hart said that on his salary, he can’t afford a car or Walmart’s health insurance (which had a $250 deductible).

Hart commented to Faber that he is underpaid by Walmart, that he could barely afford to meet the needs of his family.  Faber ends up asking him, “What do you think a fair wage would be for what you what you do for Walmart?”  Hart thought for a moment, and then responded, “If you’ve got experience, $13.00.”  Is he right?  Perhaps.  Perhaps not.  Does it matter what Hart thinks is the right wage, what I think is the right wage, or what Walmart thinks is the right wage?  Not at all.  Why?  Because labor is a competitive market.  Walmart doesn’t have monopoly on labor prices.  The right wage is the wage at which a qualified person is willing to work.  So am I sympathetic to the fact that Hart is working hard to claw out an honest living?  Absolutely.  Am I the least bit sympathetic to his claim that he is worth $13/hour?  Absolutely not.  If he is, then Publix, Target, Best Buy, or the myriad other retailers out there will have an opening that Hart should be able to fill.  He’s presumably an at-will employee.  Walmart and he “keep” each other voluntarily.  What really concerns me is Hart’s expression that for some reason, his employer owes it to him to pay him more.  In point of fact, employers (businesses) exist to generate profits for their owners — those who are risking capital to generate profits.  That is as it should be.  Businesses employ people to the degree an employee adds value to the business.  So for Hart, if you want to make more money, you need to either find ways to increase your value to Walmart, or find a business that places a higher value on the work product which you deliver.  Those are the options. 

Then there was the story of the Hyatt housekeepers in the Boston area who were fired and replaced them with “lower paid workers from a Georgia company”.  It does sound like it was handled poorly by Hyatt.  Indeed, Governor Deval Patrick has directed state workers not to do business with Hyatt unless/until Hyat re-hires those employees.  Before going further, I’ll stress again that I don’t welcome the news that individuals are fired.  It’s not pleasant, no matter how you slice it.  And yet, the idea that Hyatt did something wrong, and the nature of the governor’s public statements remind me, once again that there is confusion at the highest levels (a governor, in this case) as to how economies work, the role of profits, and the mission of business.  Here, we have another classic example what Bastiat wrote about with what is seen and what is not seen with respect to economic effects

What is seen is that 100 identifiable people are now out of work.  What is less noted are the widely distributed benefits resulting from the same outcomes (clean rooms) being delivered at a lower cost.  In your personal life, if you manage to reduce your cable bill by $30 per month without impacting your happiness, the $30 doesn’t disappear.  It gets re-deployed by you in ways that are beneficial for you or others.  The same “unseen” effects apply with Hyatt reducing their costs to achieve clean rooms.  

With the money that Hyatt has saved, they will presumably either:

     1)  Drop the reduced costs directly to the bottom line, increasing the company’s profits, benefiting its owners/shareholders.  These shareholders may spend the money, may invest it elsewhwere, may put it into savings where it ends up being loaned to others.  All of these are second and third order benefits not as easily seen as those out of work.

     2)  Re-deploy those reduced costs into other areas that add more value (Refurbished rooms? New development?  Increased services for guests?)  That is also a second-order benefit, not as easily seen as those out of work.

     3)  Reduce the prices of their rooms, freeing up more money for their guests to spend on other services at Hyatt, to spend elsewhere in the economy, or to save or invest.  This is a second and third-order benefit, again not nearly as easily seen as those out of work.

The governor and the government have no legitimate role to play in this.  If they choose to boycott Hyatt, fine.  That’s their right.  But using the bully pulpit to try to force Hyatt to pay more for employees than acceptable substitutes is preposterous.  They may as well say “You are mandated to maintain higher costs to deliver your service.”  Perhaps they could issue a mandate that instead of employing 15 servers in the restaurant, Hyatt needs 20.  Perhaps they could force Hyatt to hire people just to stand still in the lobby and do nothing at all.  It would be almost as logical.  As noted before, businesses do not and should not exist to employ people.  They employ people in order to exist – and increase profits.  So if you want to know what an employee is worth, first understand what value he contributes to the product or service his employer delivers to customers.  Then understand how differentiated and in-demand his abilities are in the marketplace.  Once you know that, you have a better sense of his true, open-market value.  The price at which he can be replaced (including one-time costs of hiring/training replacements and the ongoing costs of the replacement labor) is what he’s worth as an employee. 

 The morals: 

     1)  Simply wishing that we are worth more does not make it so.  The labor marketplace is competitive and sets our price.

     2)  Artificial intervention in the pricing of labor generally conveys easily-seen benefits to the few, but deprives others of hidden, greater, widely-distributed benefits.

Who is a Customer? The Person Who Pays The Bills!

A year ago, I was talking to my very intelligent brother-in-law and mentioned that I was going to start writing about what things are worth.  He said, quite simply, “Things are worth whatever someone will pay for them.”  And he is absolutely right.  And in that very simple sentence, he summed up why the free market is more productive, efficient, and moral than any other mechanism for distributing scarce goods and services.  Not only that, it’s the one that delivers that best results for consumers of goods.  But then there are certain areas where, within free market societies, the consumer of goods/services is different from the entity that pays the bills.  Not coincidentally, those are the areas where there’s often rotten customer service and economic inefficiencies. 

Here are a couple of bullets that I think will simplify my thoughts here, then I’ll expand:

-In situations where an individual is the consumer of the product / service being purchased and that same individual is the one paying the bill, the seller of the goods has every reason to make the consumer happy.  This is particularly true when the seller is a small-ish entity when every consumer is important.

-In situations where one individual is a consumer of the product/service but a different entity is paying the provider, cracks in the service, satisfaction and pricing emerge.  The bigger the provider, the less the consumer matters.

From a servicing and satisfaction standpoint, the provider is not as concerned with satisfying the consumer, becasue the consumer’s not paying the bills.  To the degree that retaining the consumer is significant, that helps somewhat.  But it’s not enough.  Example: I bought a washer at Lowe’s 14 months ago and purchased an extended warranty.  Lowe’s outsources their extended warranties to a national servicing company called A&E Factory Service.  Lowe’s was the one who paid A&E’s bills, so A&E clearly wasn’t all that concerned with my service.  A&E scheduled 5 appointments (if you can call them appointments as each had either a 4 or a 9 hour window); they showed up for only 3; they finally fixed the washer after 10 days.  Maybe Lowe’s is concerned about whether I’ll ever buy another appliance from them; maybe they’re not.  But A&E – no concerns whatsoever.  Lowe’s is paying their bills.  So unless thousands of individuals like me are vocal enough with Lowe’s that Lowe’s cancels its agreement with A&E, then A&E need not worry about rotten service.  I wasn’t their customer because I wasn’t paying their bills. 

From a pricing standpoint, when the payer is not the consumer, certain inevitabilities emerge.  These inevitabilities simply reflect the interplay of supply and demand as price always does.  Prices begin to rise at first.  Why?  Because the consumers of the goods are divorced from the costs.  So they consume more than they otherwise would if they were bearing the true price of the services.  As demand goes up, the prices rise.  But the entity paying the bills doesn’t want that to happen forever.  The payer is left with only a few choices – either find ways to collect additional dollars to cover increasing costs; or find ways to discourage demand; or begin rationing services. 

So what’s a major industry that comes to mind that fits this mold…one where there’s a major disconnect between those who pay for the services and those who consume the services?  I will not pretend to be an expert on health care.  I’m not one.  But I do know this: health care may be important human need, but its importance does not repeal the laws of economics any more than it repeals the laws of gravity.  

The U.S. health care system is not perfect.  It suffers from a magnified verson of the flaw I’ve described above: consumers of health care are divorced from its true costs.  The actual failure goes deeper (actually due to a prior government intervention in the marketplace).  In the U.S., it’s common for health insurance to be provided by employers – this emerged as a “fringe benefit” during WWII when government mandated wage/price controls were in place and tax benefits associated with employer-provided insurance were put in place.  In order to attract the most talented workers, companies, which could not offer higher salaries due to wage freezes, instead offered health insurance.  After 60+ years of consumers of health care being three steps removed from being true customers (health care provider > paid by insurance company > hired/paid by consumer’s employer > consumer), we’re finally facing up to the fact that we’ve got a suboptimal system. 

But the solution is not to be found by inserting the ultimate, unresponsive bureaucracy – government –  into the equation.  The solution is found in letting consumers be customers.  Let them pay for basic services.  Utilize insurance to cover catastrophic, big health care issues.  And then eliminate state-by-state restrictions and regulations on competition and the mandatory levels of coverage so that insurance companies must innovate and compete by offering combinations of coverage options and prices that are attractive to individual consumers.  The plans combining high-deductibles and tax-advantaged health savings accounts (HSA’s) that have gained popluarity with employers and individuals over the last several years are a step in the right direction. 

If we really want to fix what ails health care, we need to continue to take steps to strengthen the tie between those who receive services and those who pay the bills.  What will be the results?  The same results that occur in EVERY industry and where voluntary transactions  among consumers and providers rule: prices will drop, customer service will improve, and excess profits by participants will disappear except when justified by innovation.

Cash for Clunkers and Bulldozing Apartments

You can’t visit any media outlet right now without hearing all about the Cash for Clunkers program and its supposed success as well as its failure.  The coverage, as exemplified by the link I just shared, tends to focus on the overwhelming popularity of the program and on the technical snafus that make it challenging.  What’s missing in much of the coverage is a critical assessment of the program itself.  I hate it.  It is just another program where we’ve taken tax dollars and handed them out in a way that benefits very specific constituencies, but with oddities in terms of market impact as well.  Auto dealers and manufacturers will clearly benefit (short term) from this artificial demand stimulant assuming that those bureaucrats who administer the program can actually figure out how to process the demand.

But once we get beyond targeted constituencies, this program absolutely reeks.  We’ve just emerged from a period where we Americans took advantage of easy access to cash (via our homes, with artificially inflated values due to loose credit) to go on a consumption binge.  It has led to a wrenching readjustment as we return to a healthy savings and investment rate.  And yet to ease the short-term pain of the re-adjustment, here comes the government offering a program that essentially encourages us to engage in a similar behavior.  How so? 

What is a car?  It means many things for many people.  But its essential function is to provide a safe, reliable means of going from one place to another.  The Cash for Clunkers program mandates that the purchased vehicle must meet certain MPG requirements, but what really caught my eye is that it must be a new vehicle.  And that the old vehicle be scrapped.  So what we’re doing is:

a) Taking taxpayer dollars.

b) Redistributing those dollars to incent a very specific behavior (take your old vehicle, trade it in to be trashed, and buy a new vehicle).

c) And thus, via government intervention, we’re artificially reducing the supply of used vehicles and simultaneously artificially equalizing price between certain new cars and certain used cars.

d) In the short term, this will have a stimulative effect on new car purchases and because the supply of viable driving substitutes (i.e. used cars) will be reduced, prices for cars will be stabilized, further helping the car companies.

Well if it’s good enough for the car makers, why not extend Cash for Clunkers to other woeful industries.  Then the absurdity will become apparent.  To demonstrate the absurdity of this, let’s play with another analogy.  We’ve encouraged homeownership through a variety of tax credits.  But like with autos, the supply of homes currently available (as well as apartments, a viable substitute for a place to live) is exceeding demand, thus leading to a long-term price drop.  Homebuilders are hurting.  Contractors are hurting.  Someone should help.  Well, let’s follow the Cash for Clunkers model.  Perhaps coupled with home buying incentives, we should mandate that for anyone who moves into a house, their old living quarters, whether an apartment or a house, should be bulldozed so that it’s no longer supply on the market.  That way we could stabilize housing prices too.  True, we’d be artificially making it more expensive in the near and mid-term for residences, but we’d be helping home builders and contractors.  GREAT IDEA! 

Just one more thought on this.  As I type this, the U.S. Senate is considering $2 billion in additional funds for Cash for Clunkers, bringing the total allocation to $3 billion for the program.   The vehicle allowance is $3,500 to $4,500 per car.  With $3 billion in funding approved, at an average of $4,000 per car trashed, we’ll essentially have confiscated $10 from every man, woman, and child in order to:

a) Take 750,000 cars off the road.

b) Trash them (literally).

c) And put 750,000 new cars on the road.

Seems like a good use of dollars, right?  I’m reminded of the Broken Window Fallacy first discussed by Frederic Bastiat and expanded upon by Austrian economists.  Bastiat and the Austrians had it right then, and they have it right now.  We’ll talk about that further in other articles.  But in the meantime, how ’bout we start bulldozing some apartments?  Surely trashing $3 billion in assets is a good way to start recapturing our wealth!

Amazon’s Kindle 2: Money Saver? Cool Gadget?

As regular readers of Well Worth It know, one of my favorite publications is Forbes Magazine.  There are interesting nuggets in almost every issue, and Rich Karlgaard’s Digital Rules column is typically one of my favorites.  His column in the June 22 issue caught my eye.  In one of the sections, Karlgaard discusses three “joy-giving” products.  One of them is Amazon’s Kindle 2.  When the original Kindle came out, it seemed, well, interesting.  But it also looked clunky, inconvenient, and reviews were suspect.  The Kindle 2, by contrast, looks sleek and has gotten great reviews.  EBook sales are way up, and sales of the Kindle 2 are brisk.  I’m not much of a “gadget guy”, but even I think it looks pretty neat.

All that being said, I won’t be buying one (at least not at its current $359 price) because I doubt that I’d get value from it.  I love to read, but I’m also very cheap and I just don’t think that it would be worth it at $359.  So it was interesting to me that Karlgaard gave a brief description of the Kindle 2, then followed it with this: “Kindle 2 costs $359 but in the long run saves you money.  I recently bought and read on my Kindle 2 First Family, a thriller by David Baldacci.  The Kindle version costs $9.99.  The hardcover version is $16.79.  So you see, the Kindle 2 pays for itself within 50 books or so.”  He goes on to cite another less tangible value – the ability to have your library at hand…can’t disagree with him there.  But for purposes of Well Worth It, it was Karlgaard’s comment that it “pays for itself” and the math behind it that caught my eye. 

Karlgaard’s estimates that the Kindle 2 pays for itself after 50 books.  Of course, his assumption is keying off the math that people are paying $16.79 for books on a regular basis, and that they’ll save $6.80 per book.   It got me wondering whether Karlgaard is the rule or the exception when it comes to how much people spend on books.  After all, if Karlgaard buys a hardback book per week (at discounted price of $16.79), then the Kindle 2 pays for itself in a year.  A book every two weeks and it takes two years.  But that also assumes that he’s spending the $16.79 for every book.  The problem with the math is that there are also readers like me.  I love used book stores.  I visit the library.  I’ll buy from sellers on Amazon Marketplace.  My point is I almost NEVER buy a book at full price.  I can’t remember the last time I spent $16.79 for a book.  And then, of course, there are plenty of people who don’t really read much at all anyway.  So the question in my mind is how much do most people spend on books per year?  Would the Kindle 2 really pay for itself?  Do most people really spend that much in books?

I found this site on which the aggregated research looked fairly solid.  Midway down the page, it identifies North American book-only sales at major book retailers at $13.7 billion.  Add in non-book sales (questionable for our purposes) and they come to $16.9 billion.  Then add in book sales from other retailers (including Amazon.com) and including textbooks and it adds another $10 billion.  So if we take the biggest possible number, we get to $26.9 billion in annual book sales.  There are roughly 300 million individuals in the U.S.  If we use round numbers, that’s $90 in book purchases per person.  Clearly some people will spend more (Karlgaard) while others will spend less.  But if that’s the average, and if we use Karlgaard’s $16.79 as a benchmark, people are buying somewhere in the neighborhood of 5+ books per year.  At that rate, and at $6.80 in savings per Kindle 2 book, it would take 10 years for the Kindle 2 to pay for itself.   “Pays for itself”?  Undoubtedly true for some people.  But for most of the population, it seems very unlikely.  So is the Kindle 2 “well worth it” for most people in terms of paying for itself?  Unlikely at best. 

But is it a blockbuster product, or as Karlgaard calls it, a “joy-giving” product?  Looks like a yes on both counts.  Is it finally the gadget that fulfills the decade-long promise of eBooks?  I think it may be.  Might it turn the dynamics of the publishing business upside down?  I think so.  Look at this chart: after eBook sales crept up by mere hundreds of thousands, or a million, or two million per quarter for seven years, in the first quarter of 2009, eBooks sales jumped by $9 million over Q4 ’08.  Kindle 2 became available in February ’09.  Coincidence?  I think not.  It’s still a blip on the overall radar in terms of total book sales, but this feels like a revolution coming.  At $359, I’m hardpressed to view it as a money saver for most folks.  But it sure is a way cool device.  And as the price falls, it will go much more mainstream.  But even today for book lovers who want books immediately when they come out, yep, this looks like a winner AND a money saver.

The Best Way To Allocate $57 Million: Lessons from the Detroit Red Wings

The mighty Detroit Red Wings, the greatest hockey team on Earth, have now won the first two games of the Stanley Cup finals against the Pittsburgh Penguins.  They need two more wins (in the next five games) to win the Stanley Cup for the second straight year.  That will make them the first team to repeat since…the Detroit Red Wings (in ’97 and ’98).   Lest any of you think I’m merely writing this because I am a fan (and I am indeed a fan), let me disabuse of that notion.  I’m writing because the Red Wings have set the standard of excellence in the NHL for well over a decade and a half now.  Their ongoing success makes them the envy of front offices throughout professional sports, and that makes them worthy of study, fan or not.

Many sportswriters have weighed in on the secrets of their success.  This blog (sadly) is not titled “How to Find European Gems in the Later Rounds of the NHL Entry Draft” so I can’t cover that particular success component.  The blog is called “Well Worth It” so let’s talk about what’s worth what for the Red Wings with regard to the Red Wings payroll.

First a brief history lesson: in the years before the NHL lockout (which eliminated the 2004-2005 season), the Red Wings were very successful, but many attributed their success to the Red Wings’ free-spending ways.  In the final year before the lockout, the Red Wings payroll reached over $78 million.  After the lockout, teams were put on roughly equal footing with each other via the institution of a salary cap.  Many assumed that once the Red Wings couldn’t simply buy talent at will, their overwhelming success would be a thing of the past.  Instead, they’ve had one first-round exit (2006), one trip to the conference finals (2007), one Stanley Cup (2008), and one Stanley Cup finals where a Stanley Cup looks quite plausible (2009).

So why were the Red Wings still able to succeed?  I believe part of their success is rooted in appropriate salary allocation.  Just as all businesses strive to allocate their assets, their capital, their productive capacity optimally, so it is for hockey teams operating within the salary cap.  Let us start with the goalie.  If hockey is the ultimate team sport, the goalie is perhaps the one guy on the ice who has the potential to single-handedly win (or lose) a game for the team.  As a result, many teams spend heavily at this position.  The Red Wings have, at times, gone this route.  This year, a mere $2.2 million (or 3.8% of payroll) is devoted to goalies, and only $1.4 million or 2.4% of payroll) goes to the starter, Chris Osgood.  That’s second least in the league devoted to that position. 9.6% is the average devoted to goalies.  This gives the Red Wings that much more to devote to skilled position players.  How much more?  9.6% -3.8% = 5.8% of payroll more going to skaters.  The average team payroll is $53.7 million.  5.8% of 53.7 million = $3.11 million.  For $3.11 million, you can get yourself an extra 20-30 goal scorer!  So if all goes well and the Wings win the Cup again, part of me thinks Osgood should get the Conn Smythe trophy as playoff MVP (partly because he deserves it for outstanding play, but also) for his contributions within the framework of the salary cap. 

Here’s another interesting asset allocation tidbit.  The Red Wings only have 23 players signed to one-way contracts.  Only two teams had fewer.  What’s a one-way contract vs. a two way contract?  For players who will play a sizeable number of games at the minor-league farm club, a two-way contract is in order.  In a two-way contract, payers are paid different rates depending on whether they’re playing for their NHL club or for the minor league club.  The Red Wings have been stockpiling talent for years through effective drafts and excellent player development.  The result is that they have a number of NHL-caliber players who are patiently waiting their turns while playing on two-way contracts.  Knowing this, the Red Wings could pay their top 23 players higher per-person salaries than other teams requiring 25 one-way contract players for the same talent level.  It may be coincidence but among the final four contenders for this year’s cup, Pittsburgh was average with 25 one-way players.  Carolina and Detroit had 23 each.  Chicago had only 22. 

Two final points.  The first is that success breeds success.  Guys want to come to Detroit because they know they’ll have a great chance at the Cup.  In many cases, they’ll accept less than they’d have gotten in the open market because they want to win.  Case-in-point:  Marian Hossa.  Last year at this time, Hossa was playing for the Pittsburgh Penguins.  In the off-season, he was offered a 5 year, $35 million contract to stay with the Penguins.  Instead, he chose Detroit on a 1 year, $7.45 million deal.  Don’t get me wrong: $7.45 million is good coin.  But issues like injuries and skill erosion sometimes just happen, and giving up $27.55 million guaranteed is a lot.  But he wants to win.  And we’ve seen that with the Red Wings before.  The second of my two final points: the consistent way the Red Wings have built their present success has laid the groundwork for future success.  How?  It’s given the Wings the luxury of bringing their crop of young talent along slowly, letting them gain experience and playing time in Grand Rapids before being pushed into high-profile roles in the NHL.  The result: when their time comes, they are ready.  That’s shown in this playoff season when young players Jonathan Ericsson, Justin Abdelkader, Darren Helm, and Ville Leino have looked absolutely fabulous filling in for injured regulars like Kris Draper, Pavel Datsyuk, Andreas Lilja, and Tomas Kopecky.  It’s kind of like companies that use long-time successful products to fund innovation and development of new ones.  That kind of effective allocation becomes a self-sustaining cycle, and no one’s done it any better than the Red Wings.

Size Matters!

Yep.  Size matters.  But I don’t believe that bigger is better.  C’mon people, get your minds out of the gutter.  Obviously, I’m talking about innovation as it relates to company size. 

There’s a very interesting article and forum discussion underway over at the Harvard Business School Working Knowledge site.  In the introduction, Jim Heskett poses the question, “Do Innovation and Entrepreneurship Have to Be Incompatible with Organization Size?”  His article does a wonderful job framing up the question, and not surprisingly (hey, it is an HBS website), the comments in the forum are very well-informed also.

I have my own thoughts on this.  While it is possible for large companies to innovate well, and while they have certain advantages that small companies do not, I think small companies are, on the whole, much more innovative than large companies.  And there are some very good reasons for that.  I believe one of the great thinkers on this topic is Clayton Christensen.  His 1997 book, The Innovator’s Dilemma is a classic.  It’s focused on truly disruptive innovations rather than incremental ones.  Christensen describes the challenges that large companies face, strategically, as they try to serve their current markets that support ongoing profit.  What they struggle with is exploring niches and related market spaces that are often the seedbeds for the next really big thing.  They ignore niche markets because, well, they’re niches.  Those same niches are often attractive to smaller companies that can enter them with far less effort and cost.

Big companies talk a lot about innovation and entrepreneurship, and certainly some large companies are much better than others at innovating.  But I think there is a reason that we typically equate the words like innovation and entrepreneurship with smaller companies.  I’m not as famous as Christensen (yet), but I have a theory that touches on his…in a less sophisticated way.  Here is Danziger‘s First Law of Innovation^TM (yep, that’s a trademark symbol above that – I absolutely take myself that seriously!):  “Big companies struggle with innovation because they are big.”  Profound, huh?  I really do think it’s that simple though.  As sure as day follows night, there are some certainties that logically result (simply) from being big.  And those logical certainties are ones that make creativity, innovation, and entrerpreneurship that much more difficult at large companies.  What follows from “big”:

1.  Increased competition internally from other ideas.  Each one has its own advocates within an organization.  Even if you’re sure your idea is the next big thing, there are other people in your company with other ideas.  Incidentally, this doesn’t mean that all (or any) of the ideas actually are great.  Who decides which ideas are best?  Move on to #2.

2.  Big companies have committees.  They review ideas.  They twist them, shape them, talk to customers about them, refine them.  It’s very hard for radical new designs, wild ideas, and truly forward concepts to survive committees.  Why so hard?  Think about the make up of committees…see #3.

3.  Committees are made up of stakeholders, each of whom is looking for something different.  

• Sales wants something customers are asking for, so you better hope customers are ready for tomorrow’s big thing today.
• Finance wants numbers that are solid, though projecting revenues for something radically new is a bit challenging.  So costs need to be kept tightly controlled.  But controlling costs (including Marketing dollars) on something that is truly a breakthrough can strangle innovation in its metaphorical crib.
• Marketing wants to see what analysts and consumers think about the innovation.  And they try to size a market that doesn’t exist…yet. 
• Legal wants to make sure that risk and exposure are limited.  And since it’s a big company, it’s a bigger legal target.  All the more reason to be cautious. 
• And then there’s upper leadership.  Even with the best of intentions, most leadership is forced to do the things that are necessary to preserve near-term position and growth.  And they’re often incented that way too. 
• This is no knock on any of these committee members.  They are all  doing exactly what they should to maximize the near-term value of the big company and avoid disastrous mistakes.  Sort of like investing in CDs all your life.  No big growth, but no big risk.  But let’s say you get the go-ahead through all that bureaucracy to proceed.  Congratulations – you’ve moved on to #4!

4.  Step 4 includes terms like “cross-functional teams”, “formal project management”, “near-term deliverables”, “system testing”, and more.  It’s the land of implementation, big-company style.  In the land of implementation, small-company style, you walk down the hall to ask the person responsible a question.  And you get an answer.  Because there’s no hiding.  With big companies, there are so many moving parts that if one part screws up, others are put at risk.  So, yes, things take longer.  Much longer, in many cases.  And what comes out at the end of the process may or may not resemble the original, fabulous idea.  Bureaucracy takes its toll. 

5.  One more disadvantage of “big” is incentive, or more appropriately, lack of incentive.  If an individual comes up with a fabulous idea and implements it in his own company or a very small one, he “owns” it for better or worse.  He also owns an outsized share of the rewards if it’s as great an innovation as he believes it to be.  In a large company there might be bonuses or revenue shares or stock grants.  All good things to be sure, but generally these are income improvements rather than giant, individual wealth creators.  So the incentives for radical innovation simply aren’t there in large companies.

Big companies do have advantages.  They have scale.  They have access to customers.  They have resources.  All good things, but all carry with them the “baggage of big” as described in the 5 items above.  Does this mean that big companies are incapable of radical innovation?  Of course not.  My law of innovation states “Big companies struggle with innovation because they are big.”  I didn’t say it’s impossible for big companies to innovate.  The law of gravity clearly implies that it’s harder for something weighing 900,000 pounds to get off the ground than something weighing 160 pounds.  And yet a 747 can soar far higher than I can jump.  So in spite of my law of innovation, YES, big companies can innovate.  They’ve simply got a lot more to overcome to do so successfully.  Agree?  Disagree?  I’d love to hear your thoughts, so please share your comments.  Thanks for reading!

“Don’t Dream It, Be It” – The Value of Something Better

In the cult classic film The Rocky Horror Picture Show, Dr. Frank N. Furter sings, “Don’t Dream It, Be It.”  Admittedly, his context is rather different from my own, but I love the sentiment.  If you’re like me, some portion of your “thinking time” (in the shower, in bed at night, while worshipping, whenever) leads to your reflecting on something better.  Something better: it can be a blessing or can be a curse based on how we think about it and what we do about it as individuals. 

The Something Better of the Past: When we look back on the various decisions in our past, certain poor ones may have an outsized impact on our lives today.  We can choose to view where we are, and think “If I’d only done X instead of Y, things would be so much better for me.”  Or we can make the positive choice to live with acceptance of the consequences of our earlier decisions, hopefully learn from them, and ideally not look upon them with regrets.  Then look forward to how to make our something better in the near term.

The Something Better of the Present or the Near-Term Future: When we examine where we are today, it’s tempting to forever dream of improving our circumstances by living somewhere else, by associating with other people, or by pursuing a different professional direction.  Such dreams can be the critical path to personal fulfillment and growth, or the road to disappointments based on our willingness (or unwillingness) to act on them.  Put simply, dreaming of something better without taking action to make those dreams a reality is the road to extreme frustration.  We envision the something better as optimal, but our current situation becomes increasingly unbearable by comparison if we don’t take tangible steps toward something better.  But by using something better as a way to motivate ourselves to action, we suddenly become dynamic players in creating our own futures.  And something better becomes the animating influence for a greater sense of personal growth and fulillment.

The Something Better of the Societal, Longer-Term Future: When we envision something better for society in the next decade, or the next generation, it brings to mind (at least for me), unbelievable excitement.  I think of the innovations to come.  I think of the things today that my children (and their children) will someday find “quaint”, and I smile.  Few things frustrate me more than reading an article, some variety of which appears every so often, citing a poll indicating that X% of people believe they’ll have a lower standard of living than the prior generation.  The dream of something better on a societal, long-term level may be the closest thing on earth to a universally-shared goal.  But the something better of the societal future does not emerge by accident.  It only emerges when societies are organized in ways that encourage individuals to try to do things that make things better.  Put differently, societies don’t change the future.  Individuals change the future, and certain political, economic, and societal structures have proven more successful than others in driving progress.  Societies that reward hard work and individual initiative are those most likely to make the dream a reality.  For those that do not, the societal dream of something better is little more than utopian fantasy.

The Something Better of the Next Life: The vision of an everlasting life in paradise is powerful.  It, too, can make this life seem magnificent or hellish or depending on our approach.  It is admittedly easy to look at our day-to-day challenges and even the broader levels of pain and suffering in this world, and feel that in the context of “forever”, it’s just a blip.  Our physical lifetimes are something to just be endured so we can get to the good stuff.  Or as the Righteous Brothers succinctly put it in their song Rock and Roll Heaven, “If you believe in forever, then life is just a one night stand.”  Such a view can bring comfort during our times of greatest despair.  But it can also be a cause of despair…if we allow ourselves to simply float along in this life as we await the next life, we miss out on the chance shape our time here.  And we run the risk of dulling ourselves to the magnitude of the joys (and, yes, the sorrows) that are a part of our life on earth.  But a deep belief in something better in the afterlife need not cause withdrawal from this world.  It is more than possible to remain fully engaged in creating our own something better in this world while awaiting the something better that lies beyond.

Thus it is that the vision of something better, in all its forms, can be a curse or a blessing.  If we think of what could have been, then choose to constantly revisit past decisions that brought us here, then it is a curse.  If we think wistfully of what our own lives could be, then choose to passively remain in our current state without taking action to improve it, then it is a curse.  If we dream of a wonderful future for society, but advocate approaches that offer utopian hope based on societal will rather than individual initiative, then it is a curse.  If we dream of a next-life paradise and use that as an excuse to “check out” from fully living and experiencing this world, then it is a curse. 

But if we use the vision of something better:
-To accept our decisions of the past without regret
-To take actions that move us closer to our near-term, personal dreams
-To advocate sometimes-difficult policies that move our society toward long-term dreams
-And to choose to live fully and deeply today, in this life, and to strive to make our something better a reality
Then the vision of something better is indeed a blessing and something of nearly limitless value.  So to paraphrase the venerable (?) Dr. Frank N. Furter, don’t just dream of something better.  Be something better and make something better.

Everyone Knows What a House Is Worth, Right?

The original inspiration for Well Worth It blog was the wild fluctuations in prices for certain goods and services in the last couple of years.  Price fluctuations are nothing new, but the events of the last couple of years were what originally got me thinking more deeply about the intrinsic value of things, why we price them a certain way, and the impacts of those approaches.  Perhaps no subject with respect to price changes has gotten more ink in the last couple of years than housing prices in the U.S.  Maybe oil prices.  Maybe stock prices of financial services companies.  Never mind, today we’re talking about housing prices, and one in particular that’s of interest, to me anyway.  

With the dramatic reduction in interest rates, I decided to refinance my house loan.  In preparation, I looked up my home’s estimated value on Yahoo!’s Real Estate home values site.  They utilize calculations from Zillow and eAppraisal.  So that gave me two possible values.  Then as part of the refinance process, the mortgage company required a mandatory house appraisal, presumably so that they’d know the value of the asset against which they were lending, and could appropriately calculate a loan-to-value ratio.  So I had a third value.  Then, coincidentally, the county in which I live was simultaneously sending letters to homeowners with the results of our once-every-four-year value estimates for tax assessment purposes.  So in a very condensed period of time, I received four estimates of my home’s value.  It should be noted that Memphis did not participate in the upward climb of the housing bubble.  We did not see the dramatic run-ups of some of the “hot markets.”  Nor have we seen prices dropping off a cliff.  Given that, and given the fact that I bought the house less than two and a half years ago, I expected some reasonable consistency among the four recent values and even with my purchase price.  How wrong I was. 

Without explicitly revealing the actual numbers (though enterprising individuals who are really interested can probably figure them out without a whole lot of work), I’ll give you a feel for just how different the numbers were.  I’ll use 100 as the score for the lowest estimate.  Then I’ll give you the “score” reflecting the percentage increase for each of the other four estimates over that “base” number.

1. eAppraisal: Score = 100.0
2. Local Taxing Authority: Score = 101.4 – Let’s just say I wasn’t sad that this one came in relatively low among the various values. 
3. What I Paid in Late 2006: Score = 106.7
4. Zillow: Score = 113.5
5. Official Appraisal for My Refinance: Score = 120.4

Just to make sure we’re all interpreting correctly, the mortgage lender wrote a loan involving real dollars based on an appraisal that is fully 20% higher than another appraisal out there.  Admittedly, they sent a real live appraiser out to the house who took measurements in every room and ran comparables.  So I want to believe in that high number compared to the other ones, but I’m fairly sure it is wrong.  I do not believe a real live buyer in the current market would pay the appraisal price for my house that became the basis of the re-finance.  And that’s where something seems a bit unholy in light of where our economy is now and a look back at how we got here.  I don’t mean to imply that anyone in the process is purposely doing anything wrong, and I’ve been very impressed with everyone involved.  But something in the incentives seems bad.

1. I called a mortgage lending company and started the process.
2. This is a mortgage company that sells every loan they write to other companies.
3. They hired an appraiser who is paid by the mortgage lender.
4. He evaluated the property and came in with a number that might be right, but based on what I know of the market, and of the five values I’ve mentioned here, was on the high side…notably higher than the other four values I’ve noted here.
5. The mortgage lender wrote a loan, which based on the appraisal, implied a much higher level of equity than seems likely in the marketplace.
6. Within days of the loan being written, it was sold to Citi mortgage.  I, of course, plan on paying the loan back, but the fact remains that Citi now has a loan on its books that is based on a high appraisal.  One loan like that won’t make a difference.  But multiplied across the country, well…

On the other hand, the change in interest rate for me will make a difference.  And I intend to multiply that difference in ways that will help me and the economy.  The difference will be plowed into:

1. Investment in stocks and mutual funds.  I fully expect to profit by the economy’s roar-back that is coming.
2. Strategic de-leveraging on a personal and business level by principal paydowns where it makes sense, which brings me to #3.
3. Investment in my wife’s and my business, Shara’s Paperie.  In addition to plowing personal savings based on the re-fi into the business, we’ll bring other resources to bear.  I keep hearing about the banks not lending to businesses.  Maybe for big, big dollars that may be the case.  But as a small business owner, I continue to see credit extended at very attractive rates.  We’ll continue to invest with those dollars, while de-leveraging on higher-interest obligations.  In our case, it will finance a soon-to-be-active e-commerce capability on our site and accelerated marketing.  If other effective small business owners are doing the same thing, the economy will be cooking soon! 

And all this is impacted by a few measures of what a house is worth.  And I still don’t actually know the real value.