GM Mike Rizzo's Innovative Investments

What does it take to build a winner in baseball?  Certainly money is a part of it, but it doesn't guarantee success, just as a lack of it doesn't guarantee failure.  Luck is also a part of it.  But being creative--a leader in trends--is the third and only controllable way.  I think Nationals GM Mike Rizzo may being skewing this method of winning in favor of his team.

The baseball draft is a little different from other drafts in that money plays a larger role.  Some teams actually pass on draft picks because they'd be too expensive to sign.  Often you'll hear of a player who fell, sometimes very far, due to "signability" issues.  "Signability" is a word Rizzo doesn't comprehend.  Signability?  What signability?  Have you met my billionaire friend, Ted?

But seriously, in football you take the next player for your team off the board round after round.  That's also how it works in basketball.  In baseball, a team may choose to skip the next best player because they'll have to spend more money to convince him to not go to college.  Other times a player has signability issues because he's been hurt, and he thinks that if he goes back for another year and proves he's healthy, he'd make a lot more money.

Those are opportunities Rizzo drools over.  He drafts like it's a football draft.  Rizzo is excited when a guy the Nats rank as a first rounder falls to them in the fourth round, because he doesn't care that he's still got to pay him first round money.  And neither does his boss.  That makes two smart guys in the room.

The Nats are paying a premium based on where the player was drafted, but believe they are getting a discount on the player's actual worth.  In the investment world, everything is about paying for risk (and having the cash to make the upfront investment, which the Nats have).  If an investor thinks risk has been incorrectly priced, there's an opportunity.  There are enough teams who avoid players who need more money than their draft position  would indicate because of cash issues that there is probably price imperfection in the market.

There's another important factor, and that's MLB's recommended salary slots.  While there's no requirement to follow them (and certainly some teams ignore them a little), there is pressure among owners to follow them to some degree because all owners benefit from lower salaries.  For some reason it's completely ok for the Yankees to drive free-agent prices through the roof, but it's bad if smaller-market teams ignore salary slots to their advantage.  The Nats recognize that baloney and are happy to take advantage of it.

Finally, I'll bet owners are particularly bothered by the Nats being in bed with mega agent Scott Boras.  Owners are convinced he's been at least somewhat responsible for driving up player salaries.  The Nats are riddled with his clients, and three of our first four picks were his clients.  What does it take to be the top agent baseball?  Luck, good negotiating skills,  and a convincing sales presentation are all important, but most important is how they judge talent.  They find an athlete early that they think will be a star.  They invest time in the kid and if they are right, their investment pays off.  Boras' client list is riddled with All Stars.  Some stolen, but most developed.  So teams view him as the enemy because he drives up prices, while we view him as an asset.  I have to think we benefit from others' prejudices here.  Boras will want to steer us clients to keep his current clients on our roster happy (winning), so we have a great baseball mind on our side.

With any investment there is risk of failure.  It's possible that none of the Nats' first four picks will see much time in the Majors, but I'll stand by the fact that it seems the Nationals have spied an investment strategy based on a market failure, something that doesn't happen that often baseball.  Maybe Boras is doing no more than using us to drive up his commissions, but I'll bet that it's this misunderstanding that will net us success.  Good investment theses, Mr. Rizzo.  Here's hoping they bring high yields.

Bush Should Have Cut "Backroom Deals" for his Healthcare Bill

There's been an ad featuring Mike Huckabee about the recently passed healthcare reform bill that's been bugging me.  It accuses the Democrats of using "backroom deals" to pass the bill.  I only wish George W. Bush had used similar deals to pass his landmark healthcare legislation.

The Medicare prescription drug benefit program (the new Medicare Part D) passed under the younger Bush, while an important program, was an unnecessary windfall for drug companies, HMOs and pharmaceutical benefit managers (PBMs).  All of these companies (and their shareholders) benefitted tremendously from the $700 billion taxpayers will spend over 10 years to pay for drugs for seniors.

What's more, HMOs were in no way encouraged to push seniors into using generic drugs.  Quite the opposite, the formularies offered in the plans feature robust brand-name drug offerings.  If you look at formularies offered to our veterans, they are filled with generic drugs, but not Part D plans as the HMOs were encouraged to use these plans to grab new customers at our expense.

The corporations benefitting from this program were never asked to pay a tax, adhere to many new regulations, or face reduced Medicare reimbursements to pay for the program.  Instead this program, along with the Iraq and Afghanistan wars and the Bush tax cuts took us from surpluses to sizeable deficits.

Now to Obama's "backroom deals".  He went to insurers, doctors, hospitals, rehab facilities, nursing homes, etc., and said, "we're going to pass a bill giving you guys 30 million new customers.  I'm going to ask you to pay for the subsidies that will get us there."  Obama, to be sure, could have just socked all these groups with new taxes, lower reimbursements and new regulations without even a discussion.  But he wanted them on board--after all, they are the healthcare system.  He didn't want to overly damage the providers that are essential to our health, so people from his administration sat with them indivdually and said, how do we get this bill paid for without killing you?

Obama also took the opportunity to make health insurers act more responsibly.  Before this bill, people who had less access to healthcare were people of modest means and sick people.  That's right--sick people!  Insurers could deny coverage (or charge an arm and a leg) to someone based on their health status.  Part of Obama's backroom deal with the insurance companies is that the actuarial assumptions they use to set premium prices have to represent the ultimate truth Republicans want us to ignore: healthcare in the U.S. is viewed as a right.

Ask any Republican representative if the provision in Medicare that requires hospitals to take all comers is a good one.  Ask them if it's ok for a car crash victim or a seizing diabetic to show up to a hospital and be turned away because they are uninsured.  Of course we can't do that, but Republicans want us to ignore that truth--just during the debate over Obama's new law of course.  I'm sure it was a critically important point when we were debating Part D.  They scream about the new mandate that everyone have health insurance, but the reality is that we already have it.  Who pays for the hospitals to take all comers?  We do in the form of higher fees and Medicare and Medicaid reimbursements.  We also do in the form of indigent care funds many doctors' offices have because they took an oath to treat everyone.

But rather than sticking with our crazy, inefficient healthcare system that leads to more costs and more people getting sick (and therefore becoming an unproductive worker), Obama negotiated a solution with providers to pay for a better solution.  There's your "backroom deal", Mr. Huckabee.  I'll take it.

The Simplest Solution is Often the Best Solution

I am not a scientist.  So I have no idea whether or not the myriad studies regarding the impact of people on the warming of the planet are accurate.  But I will say that the opinion of such a large part of the scientific community matters.  It seems folly to completely ignore it.  My other point is that we are not trying the scientific community in a court of law.  They don’t need to prove their case beyond a reasonable doubt. Rather a simple preponderance of the evidence says, “you know, we should see what we can do.”  So I am an advocate for policies that lead to a reduction in greenhouse gas emissions.

What I am not an advocate for is using global warming as an excuse for unconscionable largess, which is what the Democrats offered in their legislation.  The plan would collect more than a trillion dollars in revenues that Congress would then mete out as they see fit (to bring industries on board with the plan and, more cynically, open up new campaign donation markets).

I would like to plead with all people who think global warming is a problem and want to do something about it. Please recognize how politically difficult it is to do something about a problem that may or may not exist in the minds of voters. Don’t use it as an excuse to create a colossal and completely unnecessary program that is so complicated it is unlikely to solve the problem.  Just solve the problem and don't leave it for our children.

There is a simple solution that could be implemented in a short piece of legislation.  But before I get to that, let’s recognize that technology must solve this problem. Even in developed nations, where our economies can handle large expenditures and change, the idea of switching from fossil fuels today seems impossible.  The costs are too great.  Rather, we need to encourage more private investment in the development of technology. Rather than switching all coal plants to inefficient wind power, which is currently our best alternative, we need to look to solar or carbon capture and sequestration technology, and that takes time and money.

This is even more important in developing nations.  They are unlikely to weigh down their economies to fight a problem developed nations created (and benefited from).  If we really want emerging powerhouse industrial nations to deal with this problem, our best bet is to develop the technology we can sell to them.  Win win.

So I propose a tax on greenhouse gasses that rises over time.  Now of course this is hardly a new idea.  Lots of policy advocates say a tax is a better way to get at this problem than “cap and trade”, but I’ll propose a politically palatable yet still effective tax.  The tax should start very slowly.  Maybe it’s not even in place at all for five years. Maybe it’s not at all meaningful for 15 years, or more, but when corporations do long-term planning and crunch the numbers, they’ll quickly realize that if they invest in technology to decrease greenhouse gas emissions, they stand to have a competitive advantage (or avoid a disadvantage) in future years.  It actually makes, for the first time, greenhouse gas emissions part of the equation for U.S. businesses.

Finally, the impact of this tax (as well as increased costs of goods from companies investing resources to develop technology) is mitigated in two ways.  First, the investments these companies make create jobs.  And not just any jobs, but jobs in an industry that should grow over decades and develop exportable products.  Second, in my proposal we’d return all tax proceeds directly to consumers.

Quick Comments on Deficit Commission

I'm working on some other articles right now, but I decided it’s important to explain why I think taxes are unlikely to be part of the deficit reduction commission’s proposal.  Simply put, Republicans would love to go into the election saying that Democrats’ obsession with raising taxes killed the deficit reduction deal.  House Speaker John Boehner has already pledged to not put anyone on the committee who would raise taxes, and Senate Minority Leader Mitch McConnell basically said the same thing: "What I can pretty certainly say to the American people, the chances of any kind of tax increase passing with the appointees that [Speaker] John Boehner and I are going to put on there are pretty low.”  He also added that the House wouldn’t pass the tax increases anyway.

And that will kill the deal as Democrats are likely to stand firm on their pledge to protect social welfare programs without shared sacrifice.  Their election prospects hinge on their ability to argue that Republicans are only hurting the most vulnerable during tough economic times.

This Bill Cuts Fools Gold

When House Speaker John Boehner first said the only way he’d raise the debt ceiling is if there were dollar for dollar offsetting cuts, I thought, “really?”  Historically, the third year in a president’s term is a time to move to the center, but not the time for monumental legislation.  This is more true for this president than for others, as three major bills were passed in his first two years in office, meaning his political capital was spent.  Now that I’ve looked at the summary of the debt ceiling bill the House is expected to pass, it seems history has held true.  This bill does very little.

The summaries boast $900 billion in discretionary caps over 10 years.  First a quick lesson in what “discretionary” spending is in D.C.  It’s everything except entitlements and interest on the debt, including USDA, NASA, Defense, EPA, the highway fund, etc.  It’s the government as we know it.  The main thing that distinguishes discretionary spending is that it needs annual fund appropriations from Congress.  Entitlements (Medicare, Medicaid and Social Security) are on auto-pilot.  A formula for spending is in law, and the government is bound to follow it.

So the biggest problem with this bill is it only deals with discretionary spending.  Do you remember what the debate in Washington was five years ago?  It certainly was vastly different than it is today, and we can expect that our priorities are nearly unforeseeable five years from now.  Because Congress must re-authorize that spending, it may very well decide to go a different route three, five or eight years from now.  Congress would simply have to change the caps that have been put in place as part of this deal.  So the $900 billion number is not set in stone.

The other major part of the bill is a bi-partisan commission that will recommend further cuts.  Anything this commission recommends gets a fast pass through Congress: no filibuster and no amendments.  That being said, I would be very surprised if Congress passed its recommendations.  Taxes will not be part of the proposal and so the Democrats will continue to balk at entitlement cuts.

Failure to pass the commission’s proposal leads to automatic across the board cuts.  So for 2013, there will be some cuts from this bill, and then the new Congress and the new President (or new term and mandate for Obama) will have to figure this mess out.

So this is, unfortunately, not over, but probably will be handled in a way befitting the major of issue of our day.  Politicians will campaign on the issue, voters will have their say, and then our government will use that mandate to tackle it.

Let's Capitalize on our Largest Advantage

As I've been reading about the immigration debate, one thing that's struck me is how often those who want to deport illegal immigrants (there are 12 million, good luck) and make it harder for them to enter this country use the economic burden argument.  I'm not sure it's warranted.

In a great interview with the Wall Street Journal, Bob Doll, the Chief Equity Strategist of BlackRock (the largest asset manager in the world), talked about the number one advantage we have over the rest of the developed world: population growth.  "Over the next 20 years, the U.S. work force is going to grow by 11%, Europe's going to fall by five, and Japan's going to fall by 17. This alone tells me the U.S. has a huge advantage over Europe and a bigger one over Japan for growth," he says.  Economic growth is determined by the size of the work force multiplied by productivity.  So Japan and Europe will have to realize much larger productivity gains than we will to achieve positive growth.  Advantage U.S.A.

One thing we know is that wealthier societies create fewer babies.  Whether that’s due to women in the workforce or better access to birth control there is a direct correlation between income per capita and birth rates.  But while Eurpore and Japan have a negative fertility rate, the U.S. actually boasts a fertility rate that accounts for about half of that 11% we're expecting.

The other half comes from the ace up our sleeve--we have become an incredibly diverse society.  So a member of any race, culture or religion can emigrate here and find a home.  We can use this enormous advantage to maintain positive population growth for decades and stay ahead of our homogenous competitors, even if our fertility rate falls.

If you see studies about the economic burden of illegal immigrants, be wary.  Some count the cost of educating their children, typically our biggest cost.  I've even seen studies that count children of illegal residents who were born here and are naturalized citizens. We spend money to educate all children, and from that we receive a long-term benefit.  We will benefit greatly from the immigrant children we are educating, just as we always have. 

Also, most studies focus on the lack of taxes this group pays, but that masks their true economic benefit as well.  First, this would be mitigated by making them legal.  Second, they help produce goods that improve the lifestyle of Americans and make us more competitive abroad.  Third, they are consumers pumping money into the economy. 

Finally, are they taking our jobs?  That’s tough to say, but we have been at what economists call “full-employment” during times when we’ve had millions of illegal immigrants.  My guess is that, similar to legal employees, their productivity and innovation create more opportunities and not less.

Our immigration policy should reflect these realities.  We clearly have people who want to be here to the benefit of our nation.  We need to let significantly more people live and work here legally.  We also need a path to amnesty for those already here.  Let’s stop shooting ourselves in the foot.

Taxes Need to be Part of the Equation

Between 2003 and 2008 we had positive quarterly growth between near 0% and over 6%.  The period also was marked by a long period of strong growth between the end of 2003 and end of 2006.  Yet during that time, we increased our spending rate by more than a percent, when the responsible fiscal policy would have been to decrease spending and/or increase taxes.   Revenues as a percent of GDP did rise about 2%, which had the deficit slowly decreasing, but this is after it was created from surpluses.  If the Republicans wanted to act on ideology, and make government systemically smaller, that was the time to do it.

Now, we need all the bullets we can muster because the investment community is all over our budget woes.  Our deficit and debt as a percentage of GNP are too high and an effective plan is warranted.  We are in a tight spot.  If the US cuts a ton of spending up front, bond investors will worry that the decreased cash in the economy will stall a fragile recovery.  

Unfortunately, we also have long-term confidence concerns.  Our government’s credibility when it comes to sticking to tough decisions is, well, mixed.  Treasuries investors don’t like mixed.  They like the AAA rating and historic impeccability.   So if Congress puts all cuts off until later, the lack of trust could cause the government (and consumers) to pay increased interest rates, which would make even deeper cuts necessary.

There is reason to believe that putting taxes into the mix offers a better way out of our fix (hey, that rhymes). There is a stimulative difference between what a billionaire and the middle class do with a dollar earned.  The billionaire is likely to invest some, if not all, of that dollar.  This raises asset prices, which has some benefit, but a lot of that accrues to already wealthy individuals or retirement plans where that money doesn’t get spent.  But the person from the middle class likely spends most or all of that dollar, so it goes directly to a business that employs people.  The only way to get at billionaires is through taxes, where the working class is more exposed to spending cuts.

Our taxation policies with corporations also offer some opportunities.  We have numerous loopholes in the books that encourage corporations to leave money overseas, and similarly we tax the repatriation of foreign earnings, which also encourages overseas investments.  Modification of these codes may have less of a near-term impact on our economy as some spending cuts, but they are off the table.  

These are only two examples, but it serves my point, which is to say that the no tax stance of Republicans is ideology run amok.  It’s like being anti-war while we’re being invaded.  I strongly encourage Republicans to recognize that at this point, US citizens would applaud the bravery in taking a detour off a very reckless path.

A Closer Shouldn't Come Close

It always amazes me when baseball pundits suggest a relief pitcher over a position player for Rookie of the Year, which is what I’ve seen a few times in writers’ picks for midseason NL Rookie of the Year.  In this case it’s Craig Kimbrel over Danny Espinosa.  Let’s have a look.

Kimbrel has arguably been the best closer in the National League for the first half—an amazing accomplishment for a rookie.  He currently leads the NL with 31 saves, has a microscopic ERA of 2.16 but shouldn’t even be part of the conversation.

Espinosa is currently hitting just .236, fourth worst among qualifying NL second basemen.  His defense is slightly below average at 2B (albeit a difficult defensive position).  Yet when it comes down to Espinosa versus Kimbrel, the latter should garner zero votes.  Why?  Because he plays just 22% as many plays at Espinosa.  The idea of giving Kimbrel the award is almost akin to giving the NFL ROY to a kicker.

Kimbrel has faced 201 batters this year.  Espinosa has 420 plate appearances.  So right there, Espinosa’s impact on the season of his team is twice as large. Espinosa also plays defense, however, where he has had 477 chances to make an out.  So Espinosa has been directly involved in a play where a batter either makes an out or gets on base 897 times compared to Kimbrel’s 201.

So why are the experts missing this?  I think one reason is the save.  This artificial stat rewards players who make the 25^th, 26^th and 27^th outs of the game rather than outs 7, 8 and 9.  In reality each half inning represents the same three outs.  Espinosa is involved in more than four times as many outs.

Finally, I guess I should mention why Espinosa is in the ROY discussion.  Only two 2B in baseball have hit more dingers than Espinosa’s 17, he had the most HRs by the All Star break by a rookie 2B ever, and he leads his team in RBI.  Espinosa for ROY!

If I Were President: An Executive Order for Families

This is a fun game I’ll play from time to time.  I’ll tell you an idea I have, and it has to be more legal than If I Were Supreme Commander of the World.  That would be more idealistic (as would If I Were Congress, because they make the laws).  If you have an If I Were President Idea too, let us know.

If I were president, I’d issue an executive order that all federal employees with children less than two years old be offered part-time work for part-time pay.  People could obviously continue to work full-time if they choose.  This would not change maternity leave laws, but if both parents are federal employees, it would only apply to one parent.  Certain necessary jobs would be exempted.  I’d also hope that this would spread to private corporations.  Many companies use pro-family policies as a way to lure the best and brightest.

This order would be great for women because it gives them more options.  Just like men, women are vital raising children and in the workplace, but the fact is that moms tend to sacrifice work for families more than dads.  With this order, women have another option in dealing with what has become an impossible balance for them.

The old saying is that money is power, and so this order also increases women’s power in our society and puts them on more equal footing with men.  This would allow women to continue to take on more of the burden of raising families than men, but not all of the burden, if they choose.  For a lot of women, working is a safe and empowering way to raise a family.

This order is great for families.  We can stick our head in the sand and say there’s only one-way to raise a family, or we can face reality.  While some women who would have stayed home may stay in the workplace, other women who would have worked full time are now spending more time with their kids.  And for people who need money but don’t want to or can’t leave their kids all day, I think this is invaluable.

I haven’t seen any studies on what something like this would cost.  That’s an important factor, but when we consider priorities, strong families should be near the top.  And by keeping more women in the workplace, their college skills will not atrophy, and we’ll benefit over time.  Oh and finally, I'd get re-elected because it's such a popular idea.

An Inspired Performance

On Monday, the Washington Nationals went into their game at Houston with an exhausted bullpen.  The relief crew had thrown 241 pitches over the past three days, and asking them to pitch much Monday night would be inhumane.

On the way to the game, Nats manager Davey Johnson asked that night's starting pitcher, Jason Marquis, to merely pitch a complete game, a feat that, in today's game, only the best accomplish more than a few times in a season.  Marquis responded with a dazzling eight-inning, nine-strikeout, one-walk gem.

He was clearly inspired to that performance, and he admitted as much after the game.  This leads me to two observations.  First, he must believe in this team.  And second, especially if the first is true, it makes me think less of the idea of trading him.  I get why we'd trade him--we have more pressing areas that we could fill by dealing a back-of-rotation starter--but if we can sign a good extension with a guy who has won at least 10 games five of the past six seasons and shows that level of character, the Nats should be looking only at deals that knock our socks off.

Democrats and the Value of a Tax Dollar

The focus of Washington (and much of the world it seems) is on raising the debt ceiling.  However, the reason why it's suddenly an important issue is because Republicans want to use the debt ceiling as a cudgel to deal with the deficit their way.

But as much as Republicans talk about deficit reduction and responsible governance, this is about spending.  This is an important distinction.  Republicans want to use the debt ceiling to advocate slashing spending to as low as 18% of GDP.  This is not about getting our books in order to please Moody's or the investment community, it's about ideology: smaller government because, and this is key, government is bad.

There is some reason to believe the GOP is winning this argument.  As David Brooks pointed out in the New York Times last week, Republicans would typically jump at the chance to reduce the deficit with four dollars in spending cuts for every one dollar in tax increases.  And yet many are scoffing at that prospect.  (We'll see if that holds up.)

How did it come to this?  Some will argue it's the power of Reagan, or that people are sick of Washington, or it's the bad economy, or it's misinformation (and certainly that's part of it).  But I think the answer is simpler: Republicans have gotten away with arguing a tax dollar spent is a dollar wasted.  The only path to a better America is less government.  The debate has become less about priorities and more about "out of control government."  I'll blame the Democrats for this.

When Mitch McConnell argues against raising taxes by asking why we'd give more money to the people who have proven to be poor managers, nobody is punching back.  I'm not arguing that government is perfect, but the private sector has similar problems.  How many times have you purchased a product that did not live up to its billing?  Have you every waited too long to speak to a customer service representative?  Has a stock you owned ever fallen because of irresponsible corporate governance?

In fact, we as a society effectively pool our resources for the greater good.  The government provides a suite of services that make the U.S.A. stronger and more competitive.  The merits of these endeavors should be, and are, subject to the highest level of scrutiny, but to wholesale say the value of a tax dollar is near worthless is just irresponsible.  So I ask Democrats, where are you?

When Republicans scream that the Consumer Financial Protection Bureau is a burden on banks, where are Democrats to remind people that lack of regulation in the consumer mortgage market was a strong factor contributing to the financial mess we're in?  When Republicans brand government as a job-killing waste of money, who is standing up for programs and regulations that keep our fisheries from collapsing, our poor children fed, oil out of our oceans and discrimination out of our workplace.

Ask any taxpayer, and they'll agree that each of these goals has value, and yet the thought of finding the proper revenue base to pay for these priorities is so easily fought off with, "don't tread on me".  Don't take more of my money and flush it down the toilet.

It's time that Democrats hold Republicans accountable, and make a clear case to the American people.  We have been cutting taxes at an unsustainable pace for the past 20 years.  We can keep your taxes at that rate, but innovative drugs will be slower to the market, coal plants will continue to spew mercury into the air, fewer kids will go to college, and most importantly, the middle class will shrink, as it has been. If people are OK with that, then we can race to the bottom of the tax revenue barrel.  My guess is people will instead be fighting mad.

About Policy and Baseball

I have been following politics and policy for, well forever, but it's been a part of my career for about 15 years.  So I have a lot on my mind that I want to share.  I dedicate thought and energy to baseball too, so I'll also write about that (and probably other things too).

I write about government as a voter and about baseball as a fan (of the sport and specifically the Nationals).  You may not be into everything I write, so read what you want, but I do try to make everything accessible.  I don't work with an editor, so I'll apologize up front for that. 

My hope is that this becomes a place for people to discuss, debate, learn, speak their mind and have fun.  I hope to have unencumbered discussion, which is always aided by mutual respect.

If you have any comments, requests, accolades or insults that are directly for me, send them to mike.lee.hall.dc@gmail.com.

Thanks for tuning in.

Mike