Good Strategy/Bad Strategy: Obama Foreign Policy Division

An overview article in the Wall Street Journal about President Obama’s foreign policy, apparently fueled by White House image-polishing sources (such as noted foreign policy expert David Axelrod), brings to mind what Richard Rumelt called “bad strategy” in his opus Good Strategy/Bad Strategy. (I would have preferred to call it “anti-strategy” or “pseudo-strategy” to distinguish it from actual strategies that are bad, but we go to war with the terminology we have.) For anyone with a passing acquaintance with today’s world, the lead of the WSJ story tells the tale:

President Barack Obama gathered his foreign policy team in the White House Situation Room several weeks after his 2012 re-election for a meeting to set his second-term agenda.

Now that he was free from the politics of another presidential campaign, Mr. Obama told the group, he wanted a “blue skies” assessment of all policies worth considering, according to participants. Nothing was off the table.

What emerged was a sweeping and fundamental re-orientation of U.S. foreign policy, highlighted by four initiatives: conclude a nuclear deal with Iran; renew diplomatic relations with Cuba; elevate climate change to a national-security issue; and complete a free-trade deal with Asia.

This set of four disconnected initiatives, whatever their individual merit (my personal scoring vector: -10, -1, -2, 5) does not add up to anything like a coherent foreign policy or national security strategy. Not surprisingly, the WSJ article goes on in great detail to describe how the actual imperatives of the United States’s foreign environment–aggression and irredentism from Russia, China, and Islamic State, as well as the continuing battle with militant Islamic supremacists globally–impinged on and “crowded out” much of Obama’s agenda.

This dog’s breakfast of random objectives, even if achieved, would do little or nothing to make the U.S. stronger or safer or to advance American ideals. It is not attached to a serious diagnosis of threats and opportunities, strengths and weaknesses, or adversary and allied incentives. None of the four objectives materially reinforces another, nor do they work together to accomplish a coherent foreign-policy goal. While I could put on a debater’s hat and cobble together a diagnosis and guiding policy to which these objectives could be attached to form Rumelt’s kernel, that is not a debating position I’d expect to be able to defend effectively. Good luck, for example, trying to reconcile the elevation of climate-change objectives–which can only be accomplished by preventing emerging economies from developing along the same lines as the OECD nations–with a devotion to free-trade principles. A best-case scenario deal with Iran would inhibit that country’s use of nuclear power, a precedent that would also hinder the climate-change objective. Recognizing Cuba without preconditions sends a signal to the Iranian government that they can get what they want with minimal concessions, making a deal harder to close and ratify. And those are just the internal contradictions. The lack of contact, for the most part, between these initiatives and the actual pressing problems facing the United States is glaring.

What comes through clearly from this and other articles, as well as memoirs from Administration insiders and foreign counterparts, is how much of what passes for “big picture” thinking in the White House is purely reactionary–not to events in the world but to what are perceived as the sins and errors of past American policy. Anything smacking of the “Cold War,” whether it be opposition to Russian expansionism or to Cuban human rights violations, is automatically downgraded. Anything smacking of the “Bush Doctrine,” even such no-brainer moves as cashing in the hard-fought (and blunder-filled) victory in Iraq with a Status of Forces Agreement permitting a permanent contingent of U.S. troops to stabilize Iraq, is treated with negligence bordering on contempt. The problem, of course, is that even though the Cold War is indeed over (and even if you were lukewarm about it at the time) and even if Bush’s war in Iraq was a blunder, that has little or no bearing on the current situation facing the U.S.

The ironic thing is that in moving away from Bush’s counterinsurgency approach (population security, hearts and minds, build up indigenous state institutions) toward a pure counterterrorism strategy (assassinate enemy leaders) the Obama administration ended up doubling down on many of Bush’s legal and tactical innovations, such as broad surveillance of Americans and drone strikes. But that shouldn’t mask the fundamentally reactionary nature of the new approach. Unfortunately, countries cannot succeed with a George Costanza approach of simply doing the opposite of what they have attempted previously.


When Better Customer Service is Seen as…Anticompetitive?

NJ Governor Chris Christie has banned Tesla’s direct sales model in NJ. Now, I understand completely why an auto manufacturer would want to use franchise dealerships rather than tying up all that capital themselves — they can focus on what they do best. I have absolutely no idea, however, how one could argue that the decision to sell directly is anti-competitive. Selling electric cars is extremely complicated — it takes way more effort and education than selling traditional vehicles. There’s plenty of evidence that salespeople at traditional dealerships are not equipped to (nor interested in) investing the extra effort it takes to pitch electric cars. (Imagine your car salesman explaining how you get a city permit to install a 220 volt charger in your garage and you start to get the idea…) Thus there’s a strong case for Tesla deciding to run the dealerships themselves. They want to make the experience smooth, slick, and iPhone like. And when someone goes into a Tesla dealership, it’s not because they were hoping the salesperson would compare the Tesla’s benefits with those of the Volt or Leaf, so where is the harm to competition?

Christie, what gives? Did NJ ban GM Saturn dealerships in the 1990s? Strange move for a Republican…

http://www.forbes.com/sites/michelinemaynard/2014/03/11/new-jersey-to-tesla-youre-outta-here/

New Jersey To Tesla: You’re Outta Here

Tesla Motors TSLA -1.77% is being courted by four Southwestern states for its $5 billiongigafactory, but there’s another state that is kissing Tesla goodbye.

The New Jersey Motor Vehicle Commission voted Tuesday to ban the direct sale of vehicles in the state, becoming the third state in the nation to prevent Tesla from selling to consumers. That would force Tesla, founded by billionaire Elon Musk, to sell its cars through dealers.

Instead, Tesla will stop selling cars in New Jersey on April 1, according to Dow Jones. That means the auto company won’t have access to one of the nation’s most lucrative markets for luxury vehicles, while well-heeled New Jerseyites will have to pick up their Teslas somewhere else.

The commission’s vote followed month of discussions between Tesla and members of Gov. Chris Christie’s administration, according to a post on Tesla’s blog. The auto company said it thought that the commission and the administration were working to help it in the face of opposition from the New Jersey Coalition of Automotive Retailers.

Like many other dealer groups across the country, New Jersey dealers did not want Tesla to be able to sell cars directly to customers. On Monday, Tesla said it learned that “Governor Christie’s administration has gone back on its word to delay a proposed anti-Tesla regulation so that the matter could be handled through a fair process in the Legislature.”

Tesla said it had already been issued two licenses to open dealerships in New Jersey. “This is an issue that affects not just Tesla customers, but also New Jersey citizens at large, because Tesla would be unable to create new jobs or participate in New Jersey’s economic revival,” the Tesla blog said.

Meanwhile, a spokesman for Gov. Christie said Tesla officials would need to convince the state legislature to reverse the New Jersey ban on direct sales.

Christie spokesman Kevin Roberts said,  “Since Tesla first began operating in New Jersey one year ago, it was made clear that the company would need to engage the Legislature on a bill to establish their new direct-sales operations under New Jersey law. This administration does not find it appropriate to unilaterally change the way cars are sold in New Jersey without legislation, and Tesla has been aware of this position since the beginning.”

English: Headquarters of Tesla Motors Inc., lo...

Tesla Motors and New Jersey are not perfect together. (Photo credit: Wikipedia)

The other two states to have banned Tesla from direct sales are Arizona and Texas. Coincidentally, both states are on Tesla’s consideration list for its massive battery factory. The other states in the running are New Mexico and Nevada.

Texas’ auto dealers have said they would still fight to keep the company from being able to sell directly to customers, even though the $5 billion plant is considered one of the biggest industrial prizes ever.

The New Jersey action comes after the Tesla Model S was named the top car for 2014 by Consumer Reports magazine.

 
 

Tesla Model S

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Photos courtesy Tesla MotorsTesla Model S


Great Moments in Tacit Knowledge, High-Energy Physics Division

From Alan Krisch’s 2010 account of research involving the (still-unresolved) anomalous behavior of tranversely polarized colliding protons:
After all this hardware was installed, an even larger problem was tuning the AGS. In 1988, when we accelerated polarized protons to 22 GeV, we needed 7 weeks of exclusive use of the AGS; this was difficult and expensive. Once a week, Nicholas Samios, Brookhaven’s Director, would visit the AGS Control Room to politely ask how long the tuning would
continue and to note that it was costing $1 Million a week. Moreover, it was soon clear that, except for Larry Ratner (then at Brookhaven) and me, no one could tune through these 45 resonances; thus, for some weeks, Larry and I worked 12-hourshifts 7-days each week. After 5 weeks Larry collapsed. While I was younger than Larry, I thought it unwise to try to work 24-hour shifts every day. Thus, I asked our Postdoc, Thomas Roser, who until then had worked mostly on polarized targets and scattering experiments, if he wanted to learn accelerator physics in a hands-on way for 12 hours every day. Apparently, he learned well, and now leads Brookhaven’s Collider-Accelerator Division.
Score a data point for the individualist view of organizational capability.

Does Hedging Produce Competitive Advantage?

A review of George Szpiro’s 2011 book on the history of the Black-Scholes option-pricing formula uses Southwest Airlines’famous fuel-price-hedging strategy as a key piece of its explanation for why firms might want to use options. Southwest’s hedging has received a lot of attention; the gains and losses on these financial trades have rivaled operating profits and losses on its income statement. Most commentators have applauded this aggressive trading activity, merely cautioning that sometimes Southwest guesses wrong about future oil prices and loses a lot of money.

What no one seems to ask is why Southwest shareholders would want the firm to be speculating in the fuel market in the first place. Unless these hedges materially reduced the risk of bankruptcy–and Southwest’s balance sheet is typically stronger than its rivals’–the classic argument applies: Shareholders should not want corporate managers to hedge industry-specific risks, such as swings in fuel prices, because they can very easily deal with these risks themselves by holding a diversified portfolio of stocks (including oil firms) or even by buying their own options on oil prices. Southwest’s financial risk reduction via hedging conveys little or no benefit to the owners of the firm.

But wait, many will object–doesn’t hedging give Southwest a cost advantage over its rivals when oil prices go up? And since these hedges are often accomplished by options, isn’t there an asymmetry, since when Southwest guesses wrong, it only loses the price it paid for the option? Doesn’t the airline therefore lower its costs by these trades, gaining a leg up on its rivals?

The answer is No. These hedges have no impact whatsoever on Southwest’s cost of being an airline operator. They constitute an independent, speculative financial side business, a business that is exactly as good for Southwest shareholders as the CFO’s team is at outguessing the fuel market. Even when Southwest guesses right, it is not improving the airline business’s competitiveness.

To see why this is true, think about the incremental fuel cost to Southwest of running a flight with or without the hedge. If the spot price of fuel is $x/gallon at the time of the flight and it consumes y gallons, then the fuel cost is xy. If Southwest has successfully hedged the oil price, then it will make a bunch of money after closing out its position, but it would still independently save $xy by not running the flight. If Southwest has guessed wrong and lost money on the hedge, it would also save $xy by not running the flight. So the cost of operation–the increment in expenditure caused by producing another unit–is unaltered by the hedging strategy.

This situation should be easy to visualize because the hedges are on oil rather than jet fuel and because they are settled for cash rather than physical delivery. But even if the hedges were denominated in physically delivered jet fuel, successful or unsuccessful hedging would have no impact on airline operating costs. If Southwest just bought fuel early for $(x-a)/gallon and stored it until the spot price was $x/gallon, the opportunity cost of the flight would still be $xy, since the airline could cancel the flight and sell y gallons for that amount. The incremental expenditure difference between flying and not flying is exactly the same. (If opportunity cost confuses you, visualize that Southwest has some fuel on hand purchased at the lower hedged price and some at the spot price, and note that it doesn’t matter which barrel of gas goes into which plane–all the fuel is fungible, and it is all worth $x/gallon if that’s what it could be sold for.)

Now, risk-averse behavior by managers may be in their own interest, depending on the form of their compensation, the structure of the labor market, and their perceived ability differential over their peers. But it is of little help to the owners of public firms that are far from bankruptcy. That’s a point that should not be hedged.


Say It Ain’t So–Baseball Hero and “Small Government” Fan Turns Failed Crony Capitalist

Over at Reason.com they have interesting text and video on the sad tale of 38Studios, New England baseball hero Curt Schillng’s collapsed videogame venture that attracted nary an independent private investor but sucked up $100 million from Rhode Island taxpayers. Some takeaways from the story:

1) When inexperienced and undermanaged quasi-public economic development corporations go chasing glamour ventures to try to cover up their state’s abysmal business climate, bad things are likely to happen.

2) When the glamour venture is headed by a star athlete with zero experience or expertise in his chosen field, and appears to have no experienced management at all, the odds go down.

3) When a venture making a totally conventional product, such as a massive multiplayer game, can’t get any private investors, there’s probably no conceivable public policy justification for a subsidy.

4) People like Schilling who claim to be against big government but then reach their hands into the taxpayers’ pockets to fund their own dreams are, at best, intellectually stunted.

5) Schillings’s pro-Bush political views may helped save the taxpayers of Massachusetts, because Democratic governor Deval Patrick turned Schilling down flat even though the pitcher is an immensely popular legend among Boston Red Sox fans.


Happy Talk About Published Scientific Error and Fraud

Over at the American Scientist (in an overall interesting Jan-Feb. 2013 issue) we have a column arguing that there’s no need to worry about a contagion of fraud and error in scientific publication, even though the number of publications has exploded and the number of retractions has exploded along with them. The basic pitch: the scientific literature is wonderfully self-correcting. The evidence given: the ratio of voluntary corrections to retractions for fraud looks kind of high, and journals with more aggressive and welcoming policies toward corrections have more of them. I kid you not.

But wait, you say. How is that evidence at all probative? Good question, as one says when the student goes right where we want to take the discussion. At the very least, we’d want to see if the rate of retractions is going up over time, but somehow those figures and graphs don’t appear in the article. But what we’d really like to know is how many non-retracted, non-corrected, and non-commented articles are in fact erroneous or misleading despite peer review, and here the article is silent. It’s evidence is almost completely non-responsive to the question it purports to address. But the problem goes deeper.

Recent public concerns, including on this blog, have noted pressures for sensationalism, publication bias, data snooping and experimental tuning bias and many similar causally based arguments. John Ionnadis has made a pretty good career pounding on these issues and trying to place upper and lower bounds on the problem. The devastating Begley and Ellis study of “landmark” papers in preclinical cancer research found that only 6 of 53 had reproducible results, even after going back to the original investigators and sometimes even after the original investigators themselves tried to reproduce their published results. Here is what the latter authors think about the health of the peer-reviewed publishing system in pre-clinical cancer research:

The academic system and peer-review process tolerates and perhaps even inadvertently encourages such conduct5. To obtain funding, a job, promotion or tenure, researchers need a strong publication record, often including a first-authored high-impact publication. Journal editors, reviewers and grant-review committees often look for a scientific finding that is simple, clear and complete — a ‘perfect’ story. It is therefore tempting for investigators to submit selected data sets for publication, or even to massage data to fit the underlying hypothesis.

Of this substantial and growing literature on the prevalence of error and publication of invalid results, the American Scientist article is entirely innocent. Instead, it uses a single Wall Street Journal article as its target for attack, and even there ignores the non-anecdotal parts of the story–evidence that retractions have been growing faster than publications since 2001 (up 1500% vs. a 44% increase in papers), that the time lag between publication and retraction is growing, and that retractions in biomedicine related to fraud have been growing faster than those due to error and constitute about 75% of the total retractions.

Perhaps a corrigendum is in order over at the Am Sci.

UPDARE:

A September 2012 article in PNAS found that most retractions are caused by misconduct rather than error:

A detailed review of all 2,047 biomedical and life-science research articles indexed by PubMed as retracted on May 3, 2012 revealed that only 21.3% of retractions were attributable to error. In contrast, 67.4% of retractions were attributable to misconduct, including fraud or suspected fraud (43.4%), duplicate publication (14.2%), and plagiarism (9.8%). Incomplete, uninformative or misleading retraction announcements have led to a previous underestimation of the role of fraud in the ongoing retraction epidemic. The percentage of scientific articles retracted because of fraud has increased ∼10-fold since 1975. Retractions exhibit distinctive temporal and geographic patterns that may reveal underlying causes.


The Fallacy of Equivocation at the Economist

In a remarkably shoddy example of anti-market propaganda emanating from the Nottingham Business School, the Economist runs a screed that starts out with the debatable but reasonable premise that business leaders exaggerate their omniscience. It somehow ends up with the unsupported conclusion that business schools should abandon economics, finance, and the pursuit of profit for the cant trio of “sustainability,” “social responsibility,” and “leadership for all not for the few.”

The crude equivocating shifts from intellectual humility to moral humility to altruism would qualify for an F in any class on composition, much less philosophy. The vague assertions about “business excess” (entirely unsupported or even defined), the implicit attribution of these excesses to the teachings of business schools (ditto), and the wild leap at the end (replacing business school education with an agora-like setting in which sophists mingle with scientists and philosophers with philistines to figure out what are “social needs”), all conduce to a massive loss of reader brain cells per sentence. This article might be useful as a sort of mine detector–anyone who finds it congenial is best separated from responsibility for educating or commenting on business or economic issues.

 


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