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.