A Nuts and Bolts Example of Economies of Scale (or the Lack Thereof)

 

  Source of graphic:  online version of the WSJ article cited below.

 

Mr. Bair said Boeing is working closely with its primary fastener supplier, Alcoa Inc., to get enough high-quality titanium bolts to put the plane together in a logical fashion. Nevertheless, major components, such as the wings, arrived from Japan and other locations such as Italy and South Carolina held together by thousands of temporary fasteners.

The unexpected lack of fasteners marks the sort of test Boeing will face in coming years as it moves to fill a press of orders for the 787 and other aircraft amid an aerospace boom.  . . .

. . .

Unlike previous airplanes, the Dreamliner is made largely of futuristic composites, which can’t be held together with traditional aluminum rivets. Instead, the major sections are bolted together with specially coated bolts that fit into brackets at each joint. Each bolt must be individually made on a lathe — a process that can’t be hurried. Because it takes time to set up the lathe, Alcoa would prefer to make thousands of one type of fastener before breaking the machine down and resetting it.

"Problem is, we don’t need thousands of bolts right now. We might need 10 of one kind," Mr. Bair said. 

 

For the full story, see: 

J. LYNN LUNSFORD and PAUL GLADER.  "Boeing’s Nuts-and-Bolts Problem Shortage of Fasteners Tests Ability to Finish Dreamliners."  The Wall Street Journal  (Tues., June 19, 2007):  A8. 

(Note:  ellipses added.)

 

Human Capital and Rule of Law Are “Largest Share of Wealth”

 

Two years ago the World Bank’s environmental economics department set out to assess the relative contributions of various kinds of capital to economic development. Its study, "Where is the Wealth of Nations?: Measuring Capital for the 21st Century," began by defining natural capital as the sum of nonrenewable resources (including oil, natural gas, coal and mineral resources), cropland, pasture land, forested areas and protected areas. Produced, or built, capital is what many of us think of when we think of capital: the sum of machinery, equipment, and structures (including infrastructure) and urban land.

But once the value of all these are added up, the economists found something big was still missing: the vast majority of world’s wealth! If one simply adds up the current value of a country’s natural resources and produced, or built, capital, there’s no way that can account for that country’s level of income.

The rest is the result of "intangible" factors — such as the trust among people in a society, an efficient judicial system, clear property rights and effective government. All this intangible capital also boosts the productivity of labor and results in higher total wealth. In fact, the World Bank finds, "Human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries."

Once one takes into account all of the world’s natural resources and produced capital, 80% of the wealth of rich countries and 60% of the wealth of poor countries is of this intangible type. The bottom line: "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity."

 

For the full commentary, see: 

RONALD BAILEY.  "Secrets of Intangible Wealth."  The Wall Street Journal  (Sat., September 29, 2007):  A9.

 

Helping Russians Remember the Truth About Communism

 

BalabanovAlexeiRussianDirector.jpg  Some of the crew of Gruz 200, including the director Alexei Balabanov, who is second from the left.  Source of the photo:  online version of the WSJ article cited below.

 

(p. B1)  The film is named "Gruz 200" (Cargo 200) after the zinc-lined coffins in which dead Soviet soldiers were shipped home from the 1979-89 war in Afghanistan. Messrs. Balabanov and Selyanov say they made the movie as an antidote to what they describe as rising nostalgia in Russia for the Soviet period.

"I show what filth we lived in," said Mr. Balabanov, a director sometimes described as Russia’s Quentin Tarantino. "Society was sick from 1917 onwards," he added, referring to the year the Bolsheviks took power.

The film — a graphically violent story of the sexual abuse of a teenage girl at the hands of a sadistic Soviet policeman — paints a relentlessly negative picture of a time that many Russians recall with warm nostalgia. The filmmakers hope to release the movie overseas but haven’t yet signed up a foreign distributor.

Russian President Vladimir Putin, who restored Russia’s Soviet-era national anthem, has called the 1991 collapse of the Soviet Union "the greatest geopolitical catastrophe of the 20th century," and polls show a majority of Russians regard the period as one of relative prosperity, stability and national pride. 

. . .

(p. B2)  Mr. Balabanov says "Gruz 200" is based on his own experiences while traveling across the Soviet Union in the 1980s, as well as on stories he heard second-hand.

Mr. Selyanov says he believes it is his "duty" to remind people of what the Soviet Union was really like and combat the rising warmth for the period. "We have to fight this nostalgia," the producer says.

But the film has been dogged by controversy since even before it opened. Mr. Balabanov says three prominent actors who had played in his previous films refused parts once they read the script. "They were scared," he said. The director was forced to use largely unknown actors.

. . .

Russian TV networks, controlled by the state, have balked at even late-night showings — critical to financial success for Russian movies.

"We don’t have the courage to put something like this on the air," said Vladimir Kulistikov, head of the No. 3 NTV network, in a statement.  

 

For the full story, see: 

ANDREW OSBORN.  "From Russia, Without Love: New Movie Slams Soviet Union."  The Wall Street Journal By  (Thurs., June 21, 2007):  B1 & B2.

(Note:  ellipses added.)

 

Gruz200PoliceCaptain.jpg   The sadistic police captain is portrayed by Alexei Poluyan.  Source of the photo:  online version of the WSJ article cited above.

 

Labor Unions Endorse Hillary and Edwards

 

   Source of graphic:  online version of the WSJ article excerpted and cited below.

 

Union endorsements could provide a big boost with next year’s early, front-loaded primary calendar. Half of all 15.4 million union members live in six states — California, New York, Illinois, Michigan, New Jersey and Pennsylvania — and all but Pennsylvania will have voted by Feb. 5.

Major unions have already split their endorsements between three Democratic candidates: Sens. Hillary Rodham Clinton and Christopher Dodd, and former Sen. John Edwards. Union leaders are loath to repeat the division of support that marred the 2004 election, where major unions endorsed Richard Gephardt and Howard Dean, wasting resources on losing candidates. Only one Republican candidate, former Arkansas Gov. Mike Huckabee, has picked up a major union endorsement.

 

For the full story, see: 

NICK TIMIRAOS.  "HOT TOPIC; U.S. Unions: Still a Political Power?"  The Wall Street Journal  (Sat., September 29, 2007):  A7.

 

Incentives, and Unintended Consequences, in Medicine

 

  A clever image, but is it apt, since the article claims doctors are extracting money, rather than injecting it?  Source of image:  online version of the NYT article quoted and cited below.

 

If patients paid for their own care, doctors would have a greater incentive to improve overall care that is valued by patients.  The perverse incentives of the current government Medicare reimbursement rules would be gone.

One main lesson from the article below is to show how fundamentally hard it is for the government to get the incentives right:  they tried to re-jigger the reimbursement rules, but the law of unintended consequences once again bit them in their collective ass (or more accurately, alas, it bit us). 

 

(p. C1)  When Medicare cracked down two years ago on profits that doctors made on drugs they administered to patients in their offices, it ended a windfall worth hundreds of thousands of dollars a year for each physician.

The change, which mainly affected drugs to treat cancer and its side effects, had an immediate effect. In all, cancer doctors billed about $4.4 billion for chemotherapy and anemia medications in 2005, down from $5.6 billion in 2004, with Medicare covering 80 percent of the bills in each year. The difference mostly represented profit that doctors had made on the drugs.

But the change did not reduce overall federal spending on cancer care, which increased slightly. And cancer doctors say the change did nothing to reduce a larger problem in cancer treatment.

Some physicians say that cancer doctors responded to Medicare’s change by performing additional treatments that got them the best reimbursements, whether or not the treatments benefited patients. Those doctors also say that Medicare’s reimbursement policies are responsible.

“The system doesn’t value the time we spend with patients,” said Dr. Peter Eisenberg, a cancer doctor in Greenbrae, Calif., and a former director of the American Society of Clinical Oncology. “The system values procedures.”

The ballooning cost of cancer treatment, one of Medicare’s most expensive categories, offers a vivid example of how difficult it may be to rein in the nation’s runaway health care spending without fundamentally changing the way doctors are paid.

. . .

(p. C6)   Now, oncologists are lobbying Medicare officials and members of Congress to reverse some of the changes and again raise the prices the government pays for drugs.

But Dr. Robert Geller, who worked as an oncologist in private practice from 1996 to 2005 before leaving to become senior medical director at Alexion, a biotechnology company, said that increasing drug reimbursement might raise oncologists’ profits but would not relieve the system’s deeper flaws.

As long as oncologists continue to be paid by the procedure instead of for spending time with patients, they will find ways to game the system, however much money they make or lose on prescribing drugs, he said.

“People go where the money is, and you’d like to believe it’s different in medicine, but it’s really no different in medicine,” Dr. Geller said. “When you start thinking of oncology as a business, then all these decisions make sense.”

 

For the full story, see: 

ALEX BERENSON.  "A Stubborn Case Of Spending On Cancer Care."  The New York Times (Tues., June 12, 2007):  C1 & C6.

(Note:  ellipsis added.)

 

   Source of graph:  online version of the NYT article quoted and cited above.

 

Business Should Stop Apologizing for Creating Wealth

 

   Source of book image:  http://hoeiboei.web-log.nl/photos/uncategorized/atlasshrugged.jpg

 

David Kelley’s op-ed piece, excerpted below, was published in the WSJ on October 10, 2007, the 50th anniversary of the publication of Ayn Rand’s greatest novel.

  

Fifty years ago today Ayn Rand published her magnum opus, "Atlas Shrugged." It’s an enduringly popular novel — all 1,168 pages of it — with some 150,000 new copies still sold each year in bookstores alone. And it’s always had a special appeal for people in business. The reasons, at least on the surface, are obvious enough.

Businessmen are favorite villains in popular media, routinely featured as polluters, crooks and murderers in network TV dramas and first-run movies, not to mention novels. Oil company CEOs are hauled before congressional committees whenever fuel prices rise, to be harangued and publicly shamed for the sin of high profits. Genuine cases of wrongdoing like Enron set off witch hunts that drag in prominent achievers like Frank Quattrone and Martha Stewart.

By contrast, the heroes in "Atlas Shrugged" are businessmen — and women. Rand imbues them with heroic, larger-than-life stature in the Romantic mold, for their courage, integrity and ability to create wealth. They are not the exploiters but the exploited: victims of parasites and predators who want to wrap the producers in regulatory chains and expropriate their wealth.

. . .  

. . .   At a crucial point in the novel, the industrialist Hank Rearden is on trial for violating an arbitrary economic regulation. Instead of apologizing for his pursuit of profit or seeking mercy on the basis of philanthropy, he says, "I work for nothing but my own profit — which I make by selling a product they need to men who are willing and able to buy it. I do not produce it for their benefit at the expense of mine, and they do not buy it for my benefit at the expense of theirs; I do not sacrifice my interests to them nor do they sacrifice theirs to me; we deal as equals by mutual consent to mutual advantage — and I am proud of every penny that I have earned in this manner…"

We will know the lesson of "Atlas Shrugged" has been learned when business people, facing accusers in Congress or the media, stand up like Rearden for their right to produce and trade freely, when they take pride in their profits and stop apologizing for creating wealth.

 

For the full commentary/review, see: 

DAVID KELLEY. "Capitalist Heroes."   The Wall Street Journal  (Weds., October 10, 2007):  A21. 

(Note:  ellipsis in Rearden quote was in original; the other two ellipses were added.)

 

Good Democracies and Bad Democracies

 

  A street demonstration in Ukraine’s December 2004 democratic revolution.  Source of photo:  online version of the NYT article cited below.

 

Democracy is neither a necessary, nor a sufficient, condition for having free markets.  At best, we can argue that in the long run, liberal democracies may be more likely to sustain free market economies.

 

. . . , as the free market and autocrats gained power in the Caucasus, Central Asia, Latin America and Russia, the initial optimism about democracy’s sure-footed march faltered. Some scholars pointed out that the American experience, where democracy and capitalism arose at the same time, was not so much a model for the rest of the world as an anomaly. “Capitalism came before democracy essentially everywhere, except in this country, where they started at the same time,” said Bruce R. Scott, an economist at Harvard Business School who is finishing a book titled “Capitalism, Democracy and Development.”

“In the rest of the world, it took 100, 200, 300 years before they got to where they could manage a democracy,” Mr. Scott said. A big mistake, he said, was assuming that “all you had to have was a constitution and an election and you had a democracy; that was really stupid.” 

Joseph E. Stiglitz, a Nobel laureate now at Columbia University, agrees that one of the biggest changes since the early 1990s is an appreciation of the complexity and limits of democracy.

As more fledgling democracies fail, various theories have surfaced to explain the appearance of democracy and elections without real freedom.  

 

For the full commentary, see:

PATRICIA COHEN.  "POLITICAL MEMO; An Unexpected Odd Couple: Free Markets and Freedom."  The New York Times   (Thurs., June 14, 2007):  A4.

(Note:  ellipsis added.)