Daniels PR Machine Backfires

October 17, 2011

‘Covering Variable Costs’ in the Daniels Administration

(For the membership only, not for publication, quotation or distribution)

A friend of mine, a professor, has a fancy way of telling his family that he’s not doing much — “I’m covering variable costs,” he might say from the couch on a Saturday afternoon. He is using the economist’s term for someone engaged in activity unrelated to overhead.

We journalists are never supposed to admit such a thing, always giving the impression our words are playing a central role in saving the world. This column, though, if you promise not to tell, is covering variable costs, in this case two bits of authoritative-sounding misinformation.

The first is the troubling reaction of the Daniels administration to a former member’s congressional testimony.

Tad DeHaven, now an analyst for the Cato Institute, used his experience as a deputy director of Mitch Daniels’ Office of Management and Budget to make the point that the problem with big government was not personalities but system.

DeHaven, who was part of a politically lauded budget task force, noted that even under a Republican governor with a reputation as a cost-cutter, there was little progress on his group’s recommendations. He thus made a compelling bipartisan argument for systemic reform before a skeptical congressional panel.

Unable to accept that not everything is about their boss, the Daniels people walked over DeHaven’s point to attack the character of their former associate.

Daniels’ chief of staff, Cris Johnston, used his contact with a political column in the Indianapolis Star to deride DeHaven’s political skills and willingness to play ball (attributes unclaimed by even the subject’s closest friends). Unexplained were the excellent performance reviews that Daniels gave DeHaven.

Most telling, though, was that the Daniels people apparently believed it was conclusive to say that “more than half” of the recommendations had at least been “partially” implemented.

“So there,” Johnston seemed to say, following it perhaps with a Bronx cheer.

But wait, his argument demonstrated the ignorance of economic principles that DeHaven and others were up against inside the administration. For in economics, unlike politics, there are absolutes — incentives, facts and natural laws that cannot be averaged, cut in half or partially implemented.

The historic example is Mikhail Gorbachev’s “the Law on Cooperatives” enacted in 1988. The law, to encourage foreign investment, allowed Soviet citizens to be capitalists, to “own” stores, manufacturing plants, utilities and other private property. The problem was that the government reserved the option of confiscating private property when it saw fit.

Needless to say, there were few investors coming forward until the Iron Curtain and the socialist system collapsed utterly — Glasnost and Perestroika and the Soviet version of “Pay for Performance” and all.

Nor, I suspect, will many skilled economists risk character assassination speaking their minds in the waning years of this Daniels administration.

Now, to cover a second variable operating cost of the Indiana political discussion.

Gary Gutting, who teaches philosophy at Notre Dame, is quoted by the Wall Street Journal in general defense of the “Occupy Wall Street” movement and in particular its anti-capitalist element:

“Corporations are a particular threat to truth, a value essential in a democracy, which places a premium on the informed decisions of individual citizens. The corporate threat is most apparent in advertising, which explicitly aims at convincing us to prefer a product regardless of its actual merit.”

I will leave it to someone who actually studies business to address such mutterings from the philosophical left field, namely Dr. John Gaski, an adjunct scholar of the Indiana Policy Review Foundation.

“There is a natural marketplace disincentive to engage in deceptive advertising,” begins Dr. Gaski of Notre Dame’s Mendoza College of Business. “Customer satisfaction is a function of product performance relative to expectation. If the marketer inflates expectation too high via false advertising, it only causes dissatisfied, and former, customers, with corresponding loss of revenue. False advertising does not pay off because almost all marketers depend on satisfied, repeat customers to stay in business — not to mention the value of favorable word-of-mouth.”

It is all a scene in Barry Levinson’s 1987 classic movie, “Tin Men,” where the aluminum-siding salesman played by Richard Dreyfuss catches the federal investigator rummaging through his files late at night. “Why don’t you develop leads honestly like we do?” Dreyfuss asks in disgust.

Oh yes, and Dr. Gaski adds that the federal and state laws against deceptive or even misleading information are “very strict” — not the case, of course, in the area of political discourse indulged by the likes of Mr. Johnston and Mr. Gutting.


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