Monthly Archive: January 2015

See if you recognize this typical scene, played out from time to time in workplaces all around the country.  One of your co-workers is late coming to work.  Upon his arrival, he meets the office’s quizzical looks with a verbal response that amounts to something like “Yeah!  My car had problems this morning.  I think I need a new…”.  I am willing to bet that most everyone has been on both the giving and receiving end of this exchange.

The next segment in the exchange goes something like this.  Everyone gathers around and discusses the problem.  Opinions fly as to what is exactly wrong, how much to pay, where the best place is to go to get the repairs done, and how to make sure that the mechanic doesn’t cheat.  Typically, there is a lot of varying ideas about the specifics.  “Take it to the dealer”, says one.  “No! don’t go to the dealer.  I know a guy.”, responds another.  “Check the internet first”, comes yet another bit of advice, and so on.  But there are really no differences in the general goal.  Everyone involved is trying to find the best value, the best repair relative to the price.  And every one of them is engaged and has knowledge that can be put to use.

Let’s be specific and consider the case where you need a new set of brakes for your Honda Civic.  A simple internet search with the search string ‘new brakes cost honda civic’ returns as one of the top hits a link to Civic Forums, where the same type of dialog happens in the medium of the chat forum.  For this particular repair, the generally agreed upon estimate of the cost is $150.

Also note that no one suggests that the owner file a claim with their car insurance.  No one even entertains the notion, since replacing the brakes is part of the regular maintenance on a car.  Everyone recognizes that car insurance is meant to hedge the risk of an accident that damages life, limb, and property.  Most people go through life hoping that they never have to draw on their car insurance policy.

Now consider another type of regular maintenance – maintenance of the human body.  The comparison between this activity and the situation described above is quite stark in the differences.

To begin, our natural shyness about the body tends to dissuade us from talking about the standard types of treatments we all need.  Few have the same enthusiasm for discussing trips to the doctor with their co-workers as they do trips to their mechanics.  But wait, you say, here is where the internet comes into play.  A person can set up an avatar, assume a cyber-identity, and maintain his personal dignity while getting answers to some of the more delicate questions that can be posed.  And this is absolutely true.  One need only surf the World Wide Web for a while to see that people are quite willing to discuss (and display) just about any matter concerning their body with the mask of anonymity that a computer account affords.

So then, why is there so very little general knowledge about how much various medical treatments will cost?  And what questions should be asked?  And so on.  As a society, we know far more about how to be informed and savvy consumers in almost every other market that is out there, and yet we are total dunces when it comes to the medical markets.

Again to be concrete, let’s look at a specific medical maintenance issue.  Suppose you’re now of the age where your doctor wants you to get a regular colonoscopy.  Where do you go?  How much should you pay?  How good is the doctor and how much risk is involved?  All of these are valid questions, but I am willing to bet that very few know meaningful answers.  Let’s take a look at the first two questions in detail.

A simple internet search with the search string ‘colonoscopy cost’ returns as one of the top hits an article in The Health Care Blog entitled ‘How Much is My Colonoscopy Going to Cost? $600? $5400?’ by Jeanne Pinder.  As the title suggests, there is a vast range in the costs of a colonoscopy ranging, according their research, from $600 to $5400, a factor increase of 9 from the lowest value to the highest value.

Pinder lists six items in the total cost that should be examined before committing to the procedure.  These are:

However, Pinder points out that it is difficult to get straight answers for most of these items.  The doctor, anesthesiologist, lab, and facility all bill separately.  All play the shell game between listing the charged price and the paid price.  The charged price seems to be the cost that these service-providers initially ask, while the paid price is what they settle on once the haggling with the insurance company is completed.  Having so many moving parts also makes it easy for each group to avoid accountability and, indeed, their usual response, as cited in the article, is “we don’t quote prices in advance.”  Imagine going to your mechanic and being told something to the effect “we’ll let you know how much it costs when we figure it out” – you would never put up with it.

Recently I discussed the stark contrast between regular maintenance for a car and for a boy with a co-worker.  He raised the objection “do you really want to have a procedure performed by the lowest bidder?’  On the surface this may seem like a cogent argument but some reflection shows that it is inadequate.

What logical connection is there between paying more and getting better health care?  There is some truth in the old maxim “you get what you pay for”, but that really only applies to situations where the consumer is trying to get a ‘sweet deal’ by cutting corners. This maxim is utterly devoid of meaning when the consumer knows next to nothing about the goods or services he’s buying.  Perhaps a doctor who charges more for his services may be worth it.  On the other hand, he may be a shady character who talks a good game, gives poor or even dangerous service, and is putting his profits before the patient’s needs.   He may have to charge high prices to cover his malpractice claims and you just don’t know it.  It is also possible that a good doctor is one who possesses enough skill that he can diagnose your problem without groping through unnecessary and costly tests which consume your time and put you through needless pain (both physically and mentally).

There is a related objection that asks why would you want to skimp when it come to your health.  This objection is also patently fallacious.  My health depends intimately on a day-to-day basis on the condition of my brakes and tires but that doesn’t stop me from seeking the best price. By seeking the best price, I am actually conserving my resources for other things that also have a positive impact on my health, like going to the gym, or buying better food, or moving to a better neighborhood.   The word ‘skimp’ is merely a red herring that is meant to stop us from realizing that purchasing medical services is done, like every other purchase in life, in a market.

The short of it is that when it comes to car, home, or appliance maintenance, each of us is reasonably knowledgeable in the marketplace.  Each of us tries to find the best value and each of us understands what insurance covers and why.  In the medical market, few if any of us have enough knowledge or enough courage to seek the best value and to understand what the role of insurance should be.  We trust that doctors and hospital and medical practitioners will protect our interests in a way that we don’t trust mechanics.  But this trust is predicated on nothing more than the fairy tales we’ve been told on television and in the movies.  Until each of us takes responsibility for being informed health consumers the system will remain in critical condition.

On more than one occasion I’ve visited Eastman House in Rochester NY.  Situated in the south-east section of the city, the house which Kodak founder George Eastman built stands on a beautiful tree-lined street which is particularly delightful to visit in the fall.  Entry to the house occurs in the side furthest from the road and the visitor finds himself passing through the International Museum of Photography and Film before coming to the house proper.

Exhibits of cameras and photographs, famous and unknown, fill the halls and line the walls of the museum, emphasizing and re-emphasizing the revolution that George Eastman’s innovations played in the development of the modern world.  After all, Eastman’s products shaped society and helped birth such modern day fixtures as motion pictures, photo journalism, scientific imaging and the like.  They also netted Eastman a vast fortune.

His house, which lies just beyond the museum, is a grand mansion in the true captain-of-industry style, worthy of the money he earned in his lifetime.  Eastman was so wealthy that he was actually able to have the house enlarged by having it cut down the middle, separating the pieces by several feet and then having the gap subsequently filled in and decorated.  The first floor of the house is preserved essentially in the style and furnishings of its owner at the time of his death.  On the second floor, however, some of the rooms have been turned into multimedia exhibits where the visitor may learn more about the man and the vision that netted him his wealth.

George Eastman, was born in 1854 to what could be called an upper-middle class family.  His father, George Washington Eastman, had started a business school in the early 1840s, but the family fortunes took a steep downturn shortly after George’s birth when his father took ill.  The family moved to Rochester in 1860, just two years before the father’s death from a brain disorder.

George eventually left his schooling behind and went to work as a bank teller to raise money to support his mother and himself.  Extremely dissatisfied with his experiences with professional photographers of the day, Eastman spent his spare time tinkering with the chemical processes underlying the capture of a photographic still.  From 1880 to 1884, he successfully filed for 3 patents for new ways of applying photographic emulsions and the invention of photographic film.  Four years later, he invented the first camera designed to use the film.  Four years after that (1892) he founded the Eastman Kodak company, which enabled him to earn vast sums of money, positively affect the lives of his employees and the people of Rochester, and to donate over 100 million dollars to various institutions of higher learning here in the United States and abroad.  His invention of film earned him the Gold Medal of the American Institute of Chemists in 1930.  He died of a self-inflicted wound two years later, in 1932.

It is easy to look on George Eastman’s life, his wealth and fame, his philanthropy and public works, and miss the one main ingredient that led to his success.  It was the simple business idea that people would want to take photos for themselves.  His innovations, especially the Brownie, were means to the end of bringing photography out of the hands of the experts and putting into the hands of anybody with an enthusiasm for capturing an image, documenting a memory, or making a piece of art. That’s how George succeeded.  And, unfortunately, it was the loss of that idea that led Kodak to fail.

When Eastman was at the helm, Kodak reflected his innovative spirit and his desire to put people first.  The company was unafraid to try new things, such as a 13-month accounting year or a 40 hour work week, not because they wanted to be seen innovating nor because it was shiny and new, but because they cared about people.

After his death, Kodak began a strange trajectory in the business world. From the 1930s to the 1990s, Kodak ruled the landscape of film photography, with the company commanding 90% of film sales and 85% of camera sales as late as 1976.  The constant revenue supply fueled a research development engine that generated many inventions.  Some of the most notable are:

• Invention of the tunable dye laser (1970)
• Invention of the digital camera (1975)
• Development of the Bayer filter for digital color photos (1976)
• Launch of the first megapixel camera (1986)

Nonetheless, the same time frame saw a huge number of missteps.  Kodak assumed that its customer base would remain loyal under the encroachment of Fuji Film in the later 1970s and early 1980s.  During the 1990s and early 2000s, the corporate motif was one of mergers and acquisition, and subsequent divestitures of same, sales of intellectual property, stock issues, seemingly endless branding and re-branding.  All of this finally culminated with Kodak filing for Chapter 11 bankruptcy protection on January 19, 2012.

Having emerged from bankruptcy, Kodak now says that it:

In an interesting take on Kodak’s bankruptcy, How Kodak Squandered Every Single Digital Opportunity It Had, Pete Pachal notes that

I think that Pachal is close to the mark in his criticism but that he misses the final point.  It isn’t innovation that matters but a clear focus on ‘the what’ of your business not ‘the how’.  Eastman clearly understood this distinction, since his moves were always a means to an end.  Development of film was the method to bring photography to everyone.  The Kodak and Brownie cameras were not innovations for the sake of being committed to innovation but rather a service being provided by Eastman to people everywhere.

During the years between Eastman’s death and filing for Chapter 11, we saw a lot of bumbling and stumbling from a culture inculcated during Kodak’s dominance; a culture focused on how to do things not what to do.  We saw research and development done for its own sake, because that’s how a company stays on top.  We saw companies being drawn into and spun off of the central corporate structure because that’s how a powerful business operates.  We saw a slavish devotion to film because that’s how Kodak made their money.

That’s why it wouldn’t have mattered if Kodak had stayed with WiFi for photo-sharing, or if had embraced something else that was innovative.  Rather, if the company had stayed focused on the human element, they would have continued to grow digital photography and they would have invented WiFi, cloud computing technology, and no doubt launched their own kind of Instagram.  Not because it was how to succeed but because it was what people would have wanted.  This Kodak would have known when to throw away old ideas in favor of new, and would have stayed ahead of the curve because this Kodak would have thought just like the customers they serve.

As a result, I would argue that the new Kodak is in no better position to succeed than the old Kodak before it emerged from Chapter 11 protection.  Not because the new Kodak has picked the wrong core competencies or is focused on the wrong market segment, but because the new Kodak shows no indications that it is focused on service.  It may stay in business, but it will never thrive again until the company is run by people with a vision like George Eastman's; people who know what the customer wants.

If George Eastman were alive today he would be profoundly disappointed.

For many years, the debate about income inequality has seemed to me to behave like some of my more primitive attempts at cooking.  For a while it simmers, warranting almost no attention and sitting there like the proverbial watched pot with nothing happening.  Then, as some political burner turns up the heat, it boils over into something messy like the Occupy movement, suddenly demanding damage control and cleanup.   And much like my aborted attempts at food preparation, neither of these situations ends up leading to anything satisfying.

As a result, my interest in the income inequality debate falls into the same place in my mind as does my interest in the culinary arts – a dusty corner where I vaguely recognize that people are passionate about it, but where I reason that I’ve nothing to contribute to it and it has nothing to contribute to me.  And, so, I basically tuned it out.  This situation has thawed for me this past week (forgive what will be the last food analogy) with the publication of an intriguing nugget in an article from the Washington Post.

In this article, entitled ‘Income Inequality – the issue the Democrats want’, Ed Rogers rails against what he paints as the Democrat hypocrisy.  The point that Rogers tries to make is that the Democrats don’t want to address income inequality; they simply want to use it as a political tool to separate their message from the Republican one.  He may be correct – I don’t know – but, just as I was going to stop reading at the end of the third paragraph, he posed the question ‘What exactly is “income inequality”?’ This grabbed my attention, and I found out that income inequality is measured by something called a Gini Coefficient.  Suddenly, there was a possibility of real data and actual statistical analysis, and I got excited.  Rogers also cites, as strong support for his contention, an article in the New York Times entitled Is Life Better in America’s Red States?  This article by Richard Florida presents a chart of Gini coefficients, calculated by state, which shows that the majority of the worst 21 states in terms of income inequality in 2012 are in blue or purple states, compared with the majority being red in states in 1979.  Suddenly there was actual tabulated data showing a before and after situation.

I then went off to try to understand the Gini Coefficient, which, in a nutshell, is based on something called a Lorenz Curve.   Resolving to go only one more turtle down, I then set myself to understand the Lorenz curve.  Fortunately a Lorenz curve is relatively easy to understand.

The whole machine starts with a table of income distributions.  The simplest presentation I’ve found is from Timothy Taylor’s book Principle of Economics: Economics and the Economy, 2^nd edition.  Start by dividing the existing population into quintiles, and then measure the income that each quintile receives for a given year.  For example, in the years 1967 (the first year measured in the US), 1985, and 2005, the income distribution looks like

From the table, one can tell that, in 1967, the bottom 20 percent of the population received 4.0 percent of the income, and that this percentage fell to 3.4 percent by the year 2005.  Likewise, the middle 20 percent also saw a drop in their share of the income from 17.4 percent to 14.6 over the same time span.

The next step is to construct the cumulative income by partially summing down the column.  The corresponding data looks like

with the obvious boundary conditions that zero percent of the population receives zero percent of the income and 100 percent of the population receives 100 percent of the income.  The addition of the 0-line will be needed in the next step.  Note carefully how the value at, say, 40 percent of the population is the sum of the 1^st and 2^nd quintiles, while the value at 60 is the sum of the first 3 quintiles.   The graph of these values then gives the Lorenz Curve as shown below

Calculation of the Gini Coefficient is a bit more involved, and requires two new Lorenz curves and a modest amount of computation.  The first curve, called hereafter the ‘perfect curve’, represents a perfectly balanced society with equal income distribution over all segments of its population.  The resulting income distribution and cumulative percentage of income are

The second curve, called the ‘imperfect curve’, represents the income distribution of a completely unbalanced society, with only one member receiving all of the income and every other member receiving nothing.

With all the ingredients now in place, the Gini Coefficient is then defined as the ratio of the area between the perfect curve and a given Lorenz curve to the area between the perfect and imperfect curves.  As a formula, if A is the area between the perfect curve and a given Lorenz curve and B the area between a given Lorenz curve and the imperfect curve, then the Gini Coefficient, denoted as G, is given by G = A/(A+B).  This is shown in the figure below with the Lorenz curve given for a linear distribution of income (first quintile has 6.7 percent; the second quintile has 13.3 percent, etc.).

The area between the perfect curve and the given Lorenz curve is most easily calculated by calculating the area beneath the given Lorenz curve (B) and subtracting it from the total area beneath the perfect curve (A+B), since the latter has the known value of 0.5.  The easiest way to see this fact is to convert the y-axis (cumulative percentage of income) to fractions by dividing by 100.  The perfect curve is now a 45-degree diagonal in the unit square with the area of the triangle enclosed by it, and the imperfect curve being one half. The resulting expression for the Gini Coefficient is then A/(A+B) = (A+B-B)/(A+B) = 1-2B.

So, the computation of the Gini Coefficient comes down to computing the area B by integration.  For a mathematically specified distribution, the functional form of the Lorenz curve is known, and the area can be carried out using calculus.  For example, the linear distribution curve results in the functional form of the Lorenz curve of x², where x is the population fraction.  Note that the linear curve, when partially summed, must be normalized, thus its Lorenz curve is x² not x²/2.  The integral of x² is x³/3, which, when evaluated on the interval [0,1], gives B = 1/3 and G = 1-2B = 1-2/3 = 1/3.

For empirical distributions, such as listed above for the years 1967, 1985, and 2005, a numerical approximation to the area under the Lorenz curve can be estimated in a variety of ways.  To illustrate, I chose the particularly simple approach of using the trapezoidal rule.  The resulting Gini coefficients are then

Clearly, there is a growing trend towards greater income inequality, but what to make of it?

First, it is important to remember that the Gini Coefficient doesn’t measure poverty.  Everyone in a population can be rich and the Gini Coefficient could indicate an income distribution far from the perfect curve (think of football players and owners).  Likewise, everyone in a population can be poor and the Gini Coefficient could indicate an income distribution near the perfect curve (think of a native tribe in the Amazon like the Yanomama) .

Second, to quote Taylor:

Okay, so it seems that income inequality is a fixture of life, but is there any way to understand the observed trends?  I will point out that trends in income inequality are cited by Taylor to be predominantly due to two effects.

The first is a demographic shift amongst the higher income earners, in which they have been preferentially marrying each other (e.g., a lawyer with a lawyer), thereby concentrating more income in the top earners.  This is to be contrasted with an older model in which a high income earner (e.g., a doctor) tended to marry a low income earner (e.g., a school teacher).  I would argue that this change reflects an underlying improvement in American society and the upward mobility of women.

The second effect is as discouraging as the first is encouraging.  There is an educational gap between the highly skilled worker and the low or unskilled component of society, and it seems to be widening, not shrinking.  Highly skilled workers are in high demand due to the technological advances over the past 30 years, and as more of them enter the marketplace, the pace of technological development and the need for more advanced training increases.  This problem is further exacerbated by the fact that lower income families not only have fewer good educational opportunities, but they also tend, more often than their rich counterparts, to be comprised of a single parent, which creates a substantial educational disadvantage.

In previous posts, I discussed the concept of the free rider and the harm that such a member of society can do to a common good.  In this post, with a decidedly impish tone, I identify the growing number of free riders and the related villains that I will call cheap riders, and how they are harming our road and highway infrastructure.  And with a more serious air, I will suggest what can be done.

Who are these societal ne’er-do-wells?  In what grimy back alley can we find them?  How many of them are there, and why aren’t the police cracking down?  Well, we need go no further than our own neighborhoods. Look around your street or at your work.  Find those among us who own and drive electric cars and you will find these despicable free riders.  Seek out those of us with fuel-efficient hybrids and you’ve found the cheap riders who are also not contributing their fair share.  Look for those of us that eschew car ownership completely but expect the advantages of mobile society, and you’ll have discovered a different kind of rogue.  Ranking the villainy of each of these groups is difficult, as men of good conscience can agree to interpret the same facts differently.  I judge the weight of their societal blight based on a combination of sheer numbers and on overall the snarkiness of their mindset.

Now, before a group of traditional internal-combustion enthusiasts band together to form a flash mob that begins to tar and feather these more ecologically-minded (or, in the case of the Tesla, more futuristically-minded) of us, consider that it isn’t their fault.  To paraphrase Shakespeare’s Julius Caesar (Act 1, Scene 2), the fault, dear reader, lies not in our stars, but in our poor understanding of economics.

The generally understood and designed way of supporting our roads was constructed in the days of yore to be a per-gallon tax on gasoline or diesel.  The idea here is that ‘those that drive on it will be those that pay for it’.  A fine sentiment that may have made sense back in the day when June Cleaver and her immaculate dress and fine pearls roamed the Cleaver household cleaning and cooking, but which now seems dated and stupid in these more enlightened days of electronic everything.

Consider first that marvel of modern engineering, the Tesla.  A fully electric car, the Tesla neither consumes a drop of gasoline nor does it emit a molecule of exhaust gas from the combustion of a fossil fuel.  Stealthy and silent, you can’t hear it come upon you, nor can you hear the damage it does to the roads upon which it travels.  Nonetheless, its passage on the roads does do damage, both in the physical and in the economical sense.  The Tesla driver is able to take advantage of the roads without paying for their upkeep, effectively circumventing the ‘those that drive on it are those that pay for it’ maxim.  And to heap insult on injury, many places, such as the progressively-minded University of Maryland, provide free parking and free charging to these scofflaws.

This guilt is equally borne by those who have plunked down far less money to own a Leaf or a Volt or whatever other kind of electric car is out there.  In all these cases, the tragedy of the commons is occurring before our very eyes, and, rather than scream in outrage, we applaud the perpetrators' contribution to society.

Closely behind this no-emissions crowd, is the more sinister hybrid owner, who makes up in volume what he lacks in technology.  Exemplified by the ubiquitous driver of the Toyota Prius, he seems to be, on the surface of it, a nice enough kind of guy.  He drives to the same markets you do, you pass him on the road to work every day, and you both buy your gas at the same stations.  It is his ability to blend in that tricks you into missing the inestimable harm he is causing to our roads.  Found in far greater numbers than his all-electric brethren, he puts large numbers of road-bashing miles on our nation’s bridges and boulevards while paying a minimal amount of gasoline tax for the ‘privilege’.

Some numbers should help to put this dire situation into clearer focus.  Take a side-by-side comparison between the Toyota Prius and the Ford Fiesta, both vehicles being similarly-sized offerings in the small car category.   The Prius tips the scales with a curb weight of 3072 lbs compared with the Fiesta’s slightly lighter 2537 lbs.  Assuming a 60-40 split between city and highway driving, the Prius’s effective gas mileage is 49.8 mpg compared with the Fiesta’s effective 35.8 mpg.  The implication here is clear.  The Prius delivers 20% more pounding to the road (3072/2537) than the Fiesta does, while paying 40% less for the upkeep (49.8/35.8).

But no demographic is as sinister as the car-less.  These people would pass themselves off as being above the fray – free from the mad obsession with driving from hither to thither.  After all, why can’t people live where they can bike to work, or walk to the market. This holier-than-thou attitude blinds them to the fact that all of their basic services and creature comforts come from the nation’s roads.  How else does the organic food they eat make it to market?  How do the products they consume, the electricity that they use, the medical services they pine for come to their locale without the infrastructure used by the driving crowd?

So, the answer to the problem of these free and cheap riders seems to me to be quite clear.  All of us have a vested in interest in the common good that is the nation’s highways and byways.  Just like public schooling or national defense or police and fire services, the roads are a common good that works for all and that should be paid for by all.  The idea that only ‘those that drive should be those that pay’ is ridiculous and should be met with as much scorn as is heaped upon those that say “I don’t have any children; why should I pay for schools”.  All of us should help to bear the burden of the upkeep of the national and local transportation infrastructure.  That isn't to say that we should abandon the idea of the tax being scaled by usage that underlies the gasoline and diesel tax.  But we should move the tax towards one where everyone pays a flat base rate for general upkeep, and then additional taxes are collected based on mileage.  This way, everyone has skin in the game.