NEWSLINKIDEAS AND UPDATES ON PUBLIC POLICY

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Vol. 7, No. 1 Fall 2002

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Plimouth Plantation fare at 2002 pricesPricing out the first Thanksgiving dinner

Bud, Bud everywhere but no Tokaji at Anna's KitchenQuincy puts the kibosh on wine with paprikash

W alk into Anna’s HungarianKitchen in West Quincy andyou will discover the rarecharm of an authentic Eastern

European restaurant.Once inside this personable eatery,

almost hidden in a strip mall, you will findAnna Debreczeni behind the counter prepar-ing dishes such as Tokaji wine cream soup,Wienerschnitzel, stuffed cabbage, zestychicken paprikash or the signature goulash.For those seeking to expand their culinarytastes, Anna’s Hungarian Kitchen is the placeto visit.

Schooled in her native Hungary,Anna’s cuisine hasn’t gone without notice.The well-noted dining connoisseur, ThePhantom Gourmet says the menu makes itthe best Hungarian cuisine in New England.It’s a favorite of the Hungarian consul and

draws clients from as far as Rhode Island. Membersof the MIT Hungarian Social Club are regular pa-trons.

Anna started the restaurant with her hus-band, Charles, in May 2000. Since then they haverelied on word of mouth to build a clientele. A refu-gee from the Hungarian Revolution in 1956, CharlesDebreczeni is a 33-year resident of Quincy.

He defers all matters of cuisineto his award-winning wife. A former ma-chine shop owner, Debreczeni thought therestaurant business was a natural. “I feltthat it was the best place my wife can earna living,” he recalls. He places an empha-sis on service. Most of the time he holdsforth as a maitre 'd providing some livelyconversation.

“I tell them all my problems,” hequips.

The Debreczenis’ biggest prob-lem lately is trying to secure a beer andwine license.

Debreczeni says that his patronswould like to enjoy wine or beer with theirethnic meal. He says many people areturned off by the fact the restaurantdoesn’t serve wine. In fact to be competi

continued on page 4

n 1621, the Pilgrims and theWampanoag Indians sat downtogether at Plimouth Plantationto dine at an event celebrating the

end of the harvest, which became known as thefirst Thanksgiving.

The only surviving description of the event,written by Edward Winslow in 1621, compiles alist of offerings from the original menu. In addi-tion to the ubiquitous wild fowl and theWampanoags’ gift of venison, diners ate lobster,goose, rabbit, cod, duck, corn, pumpkin, seasonalvegetables and dried fruit along with some wine.

This kept the 90 members of theWampanoag tribe and the 50 Pilgrims celebrat-ing in high spirits for three days.

We’re inclined to think that the big differ-ence between Thanksgiving then and Thanks-giving now is that, with all our modern conve-niences, we have it much easier. Shouldn’t it take

a lot less work now to eat as well as the humblePilgrims and Wampanoags did then?

Well, let’s see.

TimeThe venison provided by the Indians, along

with the wild fowl was enough to supply thevillage for a week. Deer was plentiful in the sur-rounding wooded areas and easy to cook as meatwas the cornerstone of the English diet. Cooking and clean-ing the animals was not so different than it is now, althoughtoday an already killed and cleaned turkey is common-place in supermarkets.

In 1621 turkey was prepared by boiling and couldtake, depending of the size of the bird, 1-3 hours to cook. A12-pound goose would be roasted for 1.5 hours, taking thesame length of time as it does now. So the Pilgrims didn’tspend much more time in the kitchen than we do now.Then there’s the question of how much money it took forthe Pilgrims and Indians to have their meal.

MoneyThe Pilgrims came to Massachusetts

under a charter from the London Companyas partners in a group known as the “merchantinvestors.” The Pilgrims pledged their per-sonal time and labor and the merchants theirmoney in the joint venture to start a colony inthe New World.

Under their contract as joint-stock hold-ers all land and livestock were owned in part

NewsLink is published quarterlyby the Beacon Hill Institute for Pub-lic Policy Research at Suffolk Uni-versity. The Beacon Hill Institute fo-cuses on federal, state and local eco-nomic policies as they affect citizensand businesses, particularly in Mas-sachusetts. The institute uses state-of-the-art statistical, mathematicaland econometric methods to pro-vide timely and readable analysesthat help voters, policy makers andopinion leaders understand today’sleading public policy issues.

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DAVID G. TUERCK

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EDITOR

FRANK CONTE

DIRECTOR, COMMUNICATIONS & IS

(ISSN 1094-0707)

©2002 Beacon Hill Institute forPublic Policy Research, SuffolkUniversity, 8 Ashburton Place,Boston, MA 02108-2770. Voice:(617) 573-8750; fax: (617) 720-4272;e-mail: bhi@beaconhill.org; website: http://www.beaconhill.org.

PAGE 2 / FALL 2002

BEACON HILL INSTITUTE

In Point of Fact

Y ou pay more for milk price supports!Where’s the outrage?Massachusetts regulators arethreatening legal action against

a small supermarket chain for selling milk toocheaply - as little as $1.49 a gallon, or half as muchas the statewide average. While customers of thethree Midland Farms stores in Brockton, Seekonk,and Lynn are drawn to the low prices, the stateDepartment of Food and Agriculture is investi-gating whether the stores are selling milk belowcost in violation of state law. The Midland Farmsprobe comes at a time when most analysts saythe real mystery surrounding milk prices is notwhy one or two retailers are charging so little,but why so many are charging so much. The regu-lated prices that dairy farmers receive for theirmilk have dropped to an 11-year low, but the re-tail prices paid by consumers haven’t budgedfrom peak levels for the past two years. DemetriosE. Haseotes, president of Midland Farms of NorthEaston, said the state is wielding an antiquatedlaw to insulate other retailers and dairy proces-sors from competition. He denied he is sellinghis milk below cost. He says his costs are lowerthan other retailers because his stores are low-overhead operations and he owns his own dairy-processing plant outside Albany, N.Y. ‘’We’reshocked the Department of Agriculture is givingus such a hard time,’’ he said. ‘’We’re savingpeople money.’’“Amid talk of high milk costs, low price sets offstate’s alarm,” Bruce Mohl, Boston Globe, Octo-ber 9, 2002.

The law of diminishing returnsMassachusetts consumers love to pop the top butare not as keen about getting their nickel depositback, and as a result the redemption rate underthe state’s bottle deposit law has fallen to its low-est level ever. Preliminary figures for the fiscalyear that ended June 30 indicate consumers pur-chased a record amount of soft-drink and beercontainers. But redemptions, while slightlyhigher than the year before, failed to keep pace.They dropped to 67 percent, nearly 20 percent-age points off the peak in 1995. Environmental-ists say the steadily declining redemption rateindicates the nearly 20-year-old bottle deposit lawis in need of repairs, but state officials don’t ap-pear to be in any hurry to fix it. The state’s lack ofinterest, some recycling advocates say, may bedue to the fact that it benefits financially from alow redemption rate. In 1990, the Legislaturepassed a law directing that all unclaimed bottle

and can deposits be turned over to the state. The state’sinitial take was $8 million, but with Massachusetts resi-dents now failing to redeem nearly one out of everythree containers, the so-called Clean Environment Fundtook in more than $37 million last year. This year mostof that money has gone to plug budget gaps instead ofrecycling efforts.“Fewer find state bottle law is worth the nickel,” BruceMohl, Boston Globe, September 28, 2002.

Does Jill Stein know about this?The recent strong showing by the German Green Partyis a confirmation that party members have become re-sponsible grownups. The surprising thing is that whilethey retain some of their lefty views, the Greens’ eco-nomic program is more free-market than anything theSocial Democrats or Christian Democrats are offering.The Green platform calls for relaxed job protections,fewer subsidies, and less bureaucracy –- all the thingscorporations want. “They tried in the last three years toliberalize the labor market but were always blocked bythe Social Democrats,” says Goldman, Sachs & Co.,economist Dirk Schumacher.“Joschka Fischer’s winning hand,” Jack Ewing,Business Week, October 7, 2002.

I scream, you scream, government screams for red-tape icecreamNick Pappas, the owner of the popular Lizzy’s ice creamparlor in Waltham, never realized how hazardous somepeople considered his frozen confections to be until hetried shipping pints and quarts to local gourmet gro-cers. That’s when he was forced to face the cold realityof state health regulations. “When we decided to opena second location, we were told by the health inspec-tors that we would have to get a state license and buy arefrigerator truck if we wanted to transport our ice creambetween stores,” Pappas said this week, after explain-ing his situation to the Small Business Administration’sombudsmen, Michael Barrera, at a Boston hearing.Pappas, for 27 years a software engineer at DigitalEquipment Corp., found it a little hard to swallow thatthe government would only accept one way to shipfrozen desserts - by refrigerated truck. “I had been safelytransporting super-chilled ice cream in insulated boxesin an air-conditioned van, but they didn’t want to hearabout any alternatives,” he says. “It was a refrigeratedunit or nothing, which could have cost as much as$30,000 to $50,000, more than my entire annual whole-sale revenue.” After a couple months of discussions,Pappas was able to rig a cooler that runs off his van’selectricity that satisfied state health officials, at a cost ofabout $1,000.“Ice cream maker finds state regs are no treat,” CromwellSchubarth, Boston Herald, September 19, 2002.

Minorities in America: The real risk takersAfrican-Americans are 50 percent morelikely to start a business than Caucasians,according to a new report on start-up ven-tures in the United States. The Panel Studyof Entrepreneurial Dynamics (PSED) findsthat African-American men with graduateexperience between the ages of 25 and 35are the most actively engaged populationstarting new businesses in the United Statestoday. “African Americans are starting mostnew companies,” Boston Business Journal,September 23, 2002.

The song remains the sameMassachusetts is a “risen star” in the biotechfield, yet the state must improve infrastruc-ture and become more business-friendly ifit is to remain the most desirable state forbio and pharma company expansion.“Biomed Rounds: Bay State costs restraingrowth in life sciences,” Dyke Hendrickson,Mass High Tech, October 7, 2002.

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DAnna's Kitchencontinued from page 1

tive most restaurants seek to enhance thedining experience with beer, wine or after-dinner liquors. “Part of the Hungarian foodexperience is enjoying a good Tokaji with ameal,” he says.

But the City of Quincy’s Board ofLicensing Commissioners — citing publicsafety concerns — denied the family a li-cense in June 2001. The board said the cityof Quincy already had issued enough li-censes within a mile of Anna’s Kitchen.Debreczeni says the entire effort is unfair,pointing to other restaurants that have beengranted licenses in other sections of Quincy.

But the city countered that vehicu-lar traffic on Willard Street and the lack ofparking spaces were other reasons for de-nying a license. However, Debreczeni saysthat by granting him a common victualer’slicense, the authorities believed at the timethat parking was sufficient for his type ofbusiness.

An appeal to the state’s AlcoholicBeverage Control Commission was subse-quently denied in December 2001. The stateagency found that the licensing commis-sioners did not act capriciously in its rul-ing. Still convinced that he was treated un-fairly, Debreczeni plans to re-apply for a li-quor license later this year.

Who's really opposedDebreczeni says local opposition

to his application was non-existent. He’snever had any problems with the localhealth department. And, he says, local resi-dents support his application; more than100 signed a petition in favor.

Like most small business in Mas-sachusetts and elsewhere, Anna’s Kitchenfaces a wide array of red tape and politi-cally connected opposition when present-ing plans to expand. Moreover they faceenormous legal costs in mounting chal-lenges to rulings they may deem unfair.

Given the opposition and re-sources at the disposal of public officials,most businesses stop there. In doing so theyoften pass up on the opportunity to expandrather than spend thousands on legal fees.Debreczeni actually put his restaurant upfor sale after the first vote hoping to findanother location but then reconsidered.

The real opposition saysDebreczeni is his landlord, Bruce Wood. In

testimony before the licensing boardWood said that the Debreczeni familypledged to continue the operation asa breakfast and lunch restaurant. “Ifind it hard to understand what direc-tion he’s going, why he came therewith the intention of making some-thing other than a breakfast/lunch res-taurant,” he explained at the boardhearing on June 12, 2001. “As thelandlord, I don’t think we need an-other beer and wine license or liquorlicense in Quincy.”

Up to now the difference ofopinion rested in an interpretation ofthe lease. Debreczeni maintains thatthe lease allows him to run a break-fast, lunch and supper establishment,arguing that the owner leased theproperty with the understanding thatit would be more than breakfast andlunch. Debreczeni says it shouldn’tsolely be up to the landlord to deter-mine whether Anna’s Kitchen can havea liquor license.

As the application wended itsway through the city and state regula-tory system, Debreczeni decided to lethis patrons bring their own bottle of wineor beer. BYOB isn’t against the state’s liquorcontrol law, Chapter 138. But upon learn-ing from a favorable restaurant review in alocal newspaper that Anna’s Kitchen wasallowing BYOB, city officials sternlywarned Debreczeni about the policy. As didhis landlord.

The problem is however that thereisn’t a stated policy. And there’s no recordof when one was definitively applied.Chapter 138 doesn’t prohibit BYOB. Thuswhat Anna’s Kitchen did wasn’t against thelaw.

It is here that Debreczeni decidedto open another battlefront. He challengedthe Board of Licensing Commissioners, say-ing the city violated the open meeting lawand never enacted any rule or regulationconcerning BYOB.

Correspondence from the city’sSolicitor claimed that Quincy enacted a lawin 1995. Furthermore, said the solicitor,since no vote was taken the open meetinglaw doesn’t apply. But it took Debreczenimonths to receive an updatedletter.Debreczeni is convinced that theBoard of Commissioners backpedaled. OnOctober 2, 2001, the board voted affirma-

tively to ban BYOB in Quincy. The action wasdeemed a measure to clarify the board’s in-terpretation of the state’s liquor control law.Debreczeni questions whether that boardeven has the right to make such a change —saying that power should rest with the citycouncil. But in a telephone interview, JosephShea, Chairman of the Board of LicensingCommissioners, says the board has alwayshad the authority to write rules.

Right after the vote, Debreczeni al-leged he faced harassment by the police de-partment. He believes that his restaurant wassingled out for visits by a liquor control po-lice officer because of his attempts to securea license.

A letter from an assistant districtattorney for Norfolk County to the city so-licitor appears to support Debreczeni’s ar-gument. But the Norfolk DA’s office neverpursued the complaint, suggesting toDebreczeni that he bring a civil lawsuit onthe issue of the open meeting law. But sucha move would be costly. Today no alcoholis consumed on the property andDebreczeni is thinking about re-applyingfor a license.

continued on page 4

DESSERT WITHOUT WINE - AnnaDebreczeni in her kitchen in West Quincy.The restaurant has tried unsucessfully tosecure a liquor license.

BEACON HILL INSTITUTE

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Anna's Kitchencontinued from page 3

Part of a larger problem?In responding to the Norfolk District

Attorney’s office, the Quincy City Solicitor said toallow any other interpretation of the state’s liquorcontrol law would cause the board “not to controlthe consumption of alcoholic beverages in publicplaces.”

However, recent events appear to under-mine the claims of the controlling authority. AsDebreczeni ponders his next move, the US Attorney’sOffice and the FBI have launched a far-reaching cor-ruption probe into the relationship between privatecompanies and public projects in Quincy. Recently,the US Attorney’s Office subpoenaed documents re-lating to the St. Moritz Social Club, seeking informa-

tion on all contracts, permits, licenses, and other in-formation going back to January 1, 1990.

The club was operating without a liquorlicense and serving members after hours. In late Oc-tober 2002 lawyers for St. Moritz showed up to ap-ply for a liquor license.

On October 30, the licensing board votedunanimously to suspend the permit for the socialclub, which was paying rent to a former plumbinginspector, Ralph J. Maher. Maher was indicted forbreaking into City Hall to change his personnelrecord. Investigators are looking into a loan Mahermade to a developer with ties to organized crime.Meanwhile, according to the Boston Herald, police“are trying to determine who in City Hall knew theclub had no liquor license.” The FBI is also inter-ested in St. Moritz’s licensing status.

Thus as Quincy city government wal-lows in scandal, it blithely throws up roadblocks

Thanksgivingcontinued from page 1

to a businessman’s attempt to make a liv-ing and to offer something out of the or-dinary to metro area diners. The Quincydining scene offers plenty of Bud to washdown a plate of buffalo wings or sometired pasta dish. But let a restaurantowner offer a handful of customers someTokaji to go with their chicken paprikash,and the city’s guardians of gastronomicmediocrity will put him out of businessin a blink of an eye.

Put it down as another shabbyepisode in the annals of bureaucratic ob-structionism combined with a dash of re-sistance to anything remotely exotic.

BHI Intern Nicholas Kuppens assisted in thepreparation of this story.

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nership. Grains and vegetables grown in the com-mon fields were shared by all. Some householdsthat had been wealthier back in England wouldhave brought more resources with them, perhapsproviding for individual home gardens that couldhave contributed to the meal. As a result of thispartnership, there was little need for money in thecommunity. Goods were traded, rather than pur-chased. We can, however, determine the cost of rec-reating a 1621 Thanksgiving celebration today.

According to the National Council on Eco-nomic Education, which tracks the cost of 12 basicitems found on the dinner table during Thanksgiv-ing, the average price of a Thanksgiving meal in1998 was only about $3.10 per person. But, as therecords show, the Pilgrims and Indians ate far moresumptuously than we do now.

At current market prices, the cost of a mealsimilar to that prepared by the Pilgrims for 140people would be $3,014.20, or $21.53 per person —about seven times the cost of a modern-day Thanks-giving dinner.

The Pilgrims and the Wampanoags used theitems that were found in the nearby ocean andwoods to prepare their 3-day feast. The daily rou-tines of the Pilgrims and Indians were based aroundsubsistence living - providing and preparing foodand meeting other basic survival needs. So theydidn’t have to spend a lot of money or time to puttogether their feast.

Unlike the Pilgrims and their guests who har-vested the bounty of their surroundings to put afeast on the table, we modern-day folks do our har-vesting at the local supermarket. While it may takethe same preparation time once the ingredients are

gathered, we have to work to earn the money to buythose ingredients.

An individual in today’s workforce making theaverage US wage of $23,988 a year after taxes, wouldhave to work just under 2 hours (1.8 hours) to be ableto afford one portion of the food that the Pilgrims gotfor almost nothing.1 To feed 10 Thanksgiving guests,that individual would have to work 18 hours just toraise enough money to buy the food at the supermar-

ket. And that does not include the preparation timefor cooking and serving the food nor the time neededto go shopping for these items. Thus, it would take aboutthree day’s work today to serve the dinner enjoyed by thePilgrims to a gathering of ten people, no less work than ittook the Pilgrims to serve the same dinner to the same num-ber of people.

Comparing the feasts

Upon consideration, it is not clear thatthe passing of some 380 years has made lifeon this holiday much easier. Food prepara-tion time has not decreased despite our mod-ern conveniences. Today, we are provided aholiday from our everyday work to arrangethe goods and gather our families, whereasthat was the daily work for the Pilgrims. To-day, rather than hunting and cleaning ourmeat and growing and harvesting our veg-etables, we fill carts and bags at the super-market. Even this convenience of shoppingcomes at a price, working 18 hours to buythe ingredients for a 1621 menu.

Certainly the menu of the first Thanks-giving was more diverse and elegant in in-gredients than our humble turkey and stuff-ing. In addition, today it is difficult to carveout even one day to give thanks for a year’swork and harvest – the Pilgrims feasted forthree!

It makes you wonder – if you had thechoice would you celebrate in 2002 or 1621?

1 The average U.S. wage is $32,686. The marginaltax rates applicable to this level of earnings are14.3% (federal personal income tax less state de-duction), 7.65% (Social Security and Medicare) and4.66% (state personal income tax) for a total of26.61%. That leaves an after-tax wage rate of$23,988. Taking this amount and dividing by thenumber of hours worked in a year ($23,988/2,000), we get an average hourly wage of $11.99.Dividing this amount into $21.53 gives 1.8 hours.To serve 10 people, the amount of work time be-comes 18 hours.

Staff Assistant Christopher Boyd provided theresearch for this article. Additional citationscan be found at www.beaconhill.org.

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Expensing stock options the new game in townn the heels of the corporatefinance scandals at Enron,WorldCom and GlobalCrossing, a big battle isbrewing in Congress over

accounting standards. With the public ex-pressing a lack of confidence in CorporateAmerica, Congress is moving to reformrules that determine how companies treatstock options, a popular compensationtool used to attract and retain execu-tives and other key employees.

Regulators and other publicofficials believe that the current man-ner in which stock options are treatedprovides opportunities for fraud andinflated stock prices. Executives atEnron and WorldCom were able toboost their company’s stock value be-yond sustainable levels because ac-counting rules were too lax.

Over the course of the nextyear, the debate over “expensing op-tions” is expected to draw the usuallydull world of accounting into the con-tentious arena of public policy. Alreadysome big names have weighed into the de-bate as Congress rushes to establish a se-ries of reforms that investors and Corpo-rate America hope will inspire economicconfidence. The current vehicle for reformis Senator Carl Levin’s awkwardly named“Ending the Double Standard for StockOptions Act” (S. 1940). The bill, co-spon-sored by Sen. John McCain, is now underconsideration by the Senate Finance Com-mittee.

On one side are Alan Greenspan,the Chairman of the Federal Reserve andbillionaire investor Warren E. Buffet, whoare prominently supporting legislation toexpense options. On the other side, linedup to oppose the expensing of options arePresident George W. Bush and a numberof high tech companies such as Intel,Oracle and Cisco. Aligned with bothcamps are a bevy of trade associations andprofessional boards that would like a handin fashioning accounting rules. The Coun-cil for Institutional Investors and the In-ternational Accounting Standards Boardsupport expensing while the National Ven-ture Capital Association and the US Cham-

ber of Commerce, including a number of hightechnology companies, are opposed.

Although everyone is eager to re-solve the accounting scandals and to restoresome measure of credibility to the markets,some are wondering whether the cure mayturn out to be worse than the disease. Of keyconcern to high technology companies, par-ticularly in Massachusetts, is whether small,

cash-strapped firms will continue to use stockoptions as a way of attracting talent. Manage-ment at high tech firms worry that new lawscould be so onerous that such firms will quitusing stock options altogether.

Despite the recent bad publicity,stock options were once pivotal in launchingsuccessful companies along Route 128 in Mas-sachusetts and Silicon Valley in California.Start-up companies with little available cashmake use of stock options rather than highsalaries as compensation to staff.

Young, eager staffers who get in witha company on the ground floor may moreclosely tie their own success to that of thecompany if they are offered stock options.The idea is that they exchange future richesfor smaller salaries in the present. Stock op-tions give executives and other employees theright to buy company stock at a set price overa period of time. According to the NationalCenter for Employee Ownership, nearly 10million Americans have received stock op-tions.

Currently there are two types ofstock issued by U.S. companies. A fixed-priceoption is an option for which the option-ex-ercise price equals or exceeds the fair-market-value of the underlying stock. An incentive-

based stock option is an option for whichthe exercise price is less than the fair mar-ket value of the stock. Under generallyaccepted accounting principles (GAAP),U.S. companies have the choice whetherto expense fixed-price-stock options, butthey must expense incentive-based op-tions. Most stock options at the centerof the debate are fixed-price-options. If

the company elects not to expensethe option, the pro forma effectmust be footnoted in the financialstatements.

Critics of the status quo, such asformer Securities and ExchangeCommission chairman ArthurLevitt, contend that merely footnot-ing expenses creates a lack of ac-countability, dilutes shareholdervalue and overstates earnings.Moreover, critics contend, the cur-rent system provides managementwith the wrong set of incentivesthat work against the interest ofshareholders. This misalignment of

interests is usually called the agencyproblem. Most of the major accountingscandals at Enron and WorldCom cen-tered around the ability of managementto maintain a level of what economistscall “asymmetric information” wheresuch insiders possess more informationthan shareholders. Such a failure has in-creased the calls for more transparencyand the nature of executive compensa-tion.

“The stock options were themechanisms that turned those compa-nies into Ponzi schemes,” Sarah Teslik,executive director of the Council of In-stitutional Investors told the San JoseMercury News.

The major argument against ex-pensing stock options is that they are noteasily and accurately valued. How doesone know how much the stock will beworth in the future?

Accountants have used the so-called Black-Scholes pricing modelnamed after two Nobel Prize winningeconomists. By most measures, theBlack-Scholes model works well if thestock price is stable. But the model is less

continued on page 6

Will this Wall Street reform hurt start-ups?

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BEACON HILL INSTITUTE

AStock optionscontinued from page 5

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accurate when it comes to pricing the op-tions in volatile markets such as the onesin which high technology companies par-ticipate.

In a volatile market these pricingmodels lead to overstatement of the ex-pense and inaccurate financial statements.Companies may expense an option on thegrant date that is considerably less byyear-end. For example, for the year 2000,Yahoo reported, in a footnote of its annualreport, options valued by Black-Scholes at$55 each. By year-end the value of Yahooshares had fallen to $18 and the value ofthe options had fallen to about $3. Thus,the option expense was considerably over-stated. Current rules do not require a re-valuation of the options at year-end. Fur-thermore, Black-Scholes requires a liquidmarket for the options. In other words thestocks must be able to be sold quickly.Otherwise predicting the value of a stockis like predicting who will win a lotteryticket.

The companies most likely to ex-pense options are those with low stock pricevolatility and good cash flow. In July, Coca-Cola, a company whose stock has been rela-tively stable, vol-untarily agreedto treat options asan expense. Some43 other firms, in-cluding BankOne and theWashington Post,also announcedplans to expenseoptions. Butthese blue-chipcompanies such as Coca-Cola, don’t usestock options as often as startups. Thus, theimpact of a new law may be limited.

In contrast, companies, such ascash-strapped high tech start-ups dependupon stock options to attract and reward tal-ent.

Another argument against expens-ing is that options are not a company ex-pense, but rather are costs shifted to share-holders. Footnoting the expense should per-

mit analysts to properly price the stockwithout distorting a firm’s profit andloss statement.

While there are many esti-mates used in GAAP, re-cording a major expensecalculated using a verycomplex and potentiallyinaccurate pricing modelwould further complicatefinancial statements —making them less trans-parent.

Writing in theWall Street Journal recently,Professor Burton Malkiel,professor of economics at

Princeton, and Professor WilliamBaumol, professor of economics at NewYork University, said, “there is no wayto measure the ‘cost’ - the value of theoptions at the time they are granted -with reasonable precision.”

The companies likely toexpense stock optionsare those with lowstock price volatilityand good cash flowrather than emerginghigh technology firms.

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State sales tax revenue and business cyclesPublic policy

experts often argue thatsales tax revenue isunpredictable. “Theprincipal problem isthat the amount ofmoney that the sales taxwill yield from one yearto the next is difficult toestimate inasmuch as itdepends primarily onbusiness cycles andinflation rates.”(Hy andWaugh, 1995)1 Massa-chusetts sales tax datafrom the last 16 yearsseems to validate thisstatement.

As Chart 1 shows, Massachusetts sales tax revenueis closely linked to Massachusetts business cycles, asmeasured by the state monthly unemployment rate. Whenunemployment goes up, real state sales tax revenue tendsto go down. For example, during the 1990-1991 recession,when Bay State unemployment reached a high of 9.6 %,

real sales tax revenue wasdropping, reaching a lowfor the 16 year period inFebruary of 1992.

With state unem-ployment continuing torise, doubling in the lasttwo years from 2.6% inSeptember 2000 to 5.2%in September 2002,declines in real state salestax revenue can beexpected.

Sales tax revenue,over this period, accountsfor roughly 20% of allstate tax revenues. Thedownward trend in

revenues will only exacerbate the current fiscal crisis facingthe new administration.(Source: Massachusetts Deparment of Revenue, US Bureauof Labor Statistics.)

1 State and Local Tax Policies: A Comparative Handbook, Ronald JohnHy and William L. Waugh, Jr. Lexington Books, 1978.

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A question of growth? It's economic history, stupid!Why Economies Grow: The Forces That Shape Prosperity and How to Get Them Working Again Jeff Madrick, Basic Books/Perseus Books Group, 2002. 242 pages.�����

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onventional analysis stronglysuggests that productivity, theprime mover of economicgrowth, depends on a nimble ad-

mixture of four essential components: physicalcapital (factories and tools, for example); humancapital (educated workers); natural resources(trees, oil and ore); and technology (electricityand computers and the managerial insight todeploy both effectively).

In measuring a nation’s growth interms of Gross Domestic Product (GDP), econo-mists have obsessed about how each of these fourcomponents dynamically come into play. Somenations that lack natural resources, such as Ja-pan, can compensate for the lack of oil for in-stance if they excel in the other components suchas physical and human capital.

In particular, economists are interestedin how, over the course of time, living standardsof millions of people across the globe improvedramatically. As is the nature of science, mosteconomists look for a root cause of sustainedgrowth (or even slowgrowth) to fit nicely into atheory or model. Often theylook at the introduction ofthe printing press, thethresher, the cotton gin,electricity, the automobileand more recently the neweconomy based on comput-ers and the Internet. Assuch, economists are al-ways searching for the nextbenchmark or IndustrialRevolution. Perhaps withless flair they look for thetype of discontinuity found by Arnold Toynbee,who wrote of a society “suddenly broken inpieces by the mighty blow of the steam engineand the power loom.”

Economic journalist Jeff Madrickstrongly believes mainstream economics is terri-bly wrong. A contributor to the “EconomicScene” column in the New York Times and adjunctprofessor of the Humanities at Cooper Union,Madrick argues relentlessly in his new polemic,Why Economies Grow, that the expanding size ofmarkets, of which America has long benefited,explains growth much better than any othervariable.

He believes such an “organic view,”based on economic history, makes more sensein part because the alternatives are lacking.“The modern practice of economics has a dis-turbing tendency to seek such universally ap-plicable solutions based on theoretical prin-ciples that I believe a disinterested view of his-tory does not bear out.” Yet in his rush to de-bunk classical economics his own analysis fallsshort.

At first glance Madrick makes a per-suasive case that markets – specifically domes-tic markets – are absolutely critical to economicgrowth. For most of its history, the US ben-efited from the addition of people through im-migration and the abundance of land— en-abling it to induce the consumption of farmproducts and manufactures.

To be sure, Madrick acknowledgesthe contributions of capital and technology.But it is markets that enable the use of capitaland technology rather than the other way

around.He maintains that popula-

tion growth and the sheer number ofpeople exchanging goods and services,and the role in which governmentplays, is far more important than re-cent efforts to stimulate national sav-ings, deregulate industries and em-brace high technology.

He thinks less of free marketgrowth policies and is dismissive of taxpolicy that might encourage capitalformation. In fact he says the capitalinvestment model can only take oneso far. Savings of this sort did not im-prove after the Reagan tax cuts in 1981

nor when the Clinton administration raisedtaxes in 1993, he says.

“It is controversial to deduce a risein savings will result in a rise in investment.History strongly suggests the opposite. Sav-ings are important to economic growth but nota first mover. Investment was induced by theopportunity created by growing markets ornew products more so than the availability ofsavings.”

Madrick goes on to say that neitherentrepreneurs, nor banks, nor balanced bud-gets nor the introduction of technologies pro-vide answers to his question. Upon closer in-spection, highly touted technologies take time

to permeate an economic system. Electricitywas discovered long before engineers founda way to use it in factories. Moreover, theapplication of technology is usually second-ary to managerial wit. “Technological inno-vation as pure invention is not even alwaysa necessary condition of economic growth.Henry Ford’s great innovations were muchmore managerial than technological,” writesMadrick. This however, poses a definitionalproblem as most economists would includeFord’s approach as part of technology.

Why do large markets matter?“The importance of economies of scale isgenerally underestimated in economytheory,” says Madrick. In early markets con-sumers did not benefit from the division oflabor. But such a division of labor could onlytake place in large and growing markets ofconsumers. This, according to Madrick,wasn’t lost upon entrepreneurs who saw inlarge markets opportunities to market stan-dardized products. The economies of scalein the automobile industry created demandfor petroleum products and in turn allowedgreater number of workers to become spe-cialists. These economies of scale hingedupon the ability of American industry tostandardize its products. In contrast to themodern economy, with its emphasis on nichemarkets, the American economy of the early20th century was able to reduce distributionand marketing costs per unit.

Madrick’s contention can bechallenged on two fronts: First, econo-mies of scale are more important in someindustries (e.g. autos) than others (e.g.high-end tourism). Small countries canbecome rich by exploiting niches; Ice-land has 250,000 people, yet is one of therichest countries in the world.Second, standardization doesn’t come earlyin the technology cycle. The economist RayVernon argues that there is a product cycle:at first, technology is developed close towhere there is demand, but it is unreliableand caters to the rich few; then local produc-tion expands; eventually, production is soroutine that it can be done in low-wage coun-tries. This cycle fits products such as televi-sions very well. The US profited in the earlyphases of the cycle, but now television

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manufacturing is so standard that it is no longerdone in the US.

The short-termed productivitygrowth of the late 1990s bears some semblanceto the golden age of economic growth inAmerica. “Technological advance manifesteditself in specific ways in the late 1990s and wasclosely dependent on the size and sudden rapidgrowth of the U.S. market.” While inflation washeld in check, high tech industries were able tobenefit from a demand for standardized prod-ucts such as Microsoft, Cisco and Oracle just ascenturies before consumers delighted in theproducts of Singer Sewing Machine, StandardOil, U.S. Steel, A&P, McDonalds, and AT&T.

On the other hand, Madrick attemptsto offer an explanation for the great productiv-ity slowdown of 1973-1995. The growing de-mand during this period for high quality spe-cialized goods fragmented the market and tookits toll on productivity. Because of the de-em-phasis of standardized products (attractive tothe middle class) in favor of so-called higherquality (sought by high income earners) firmssought to satisfy upper class demands. “Meet-ing these niche markets was not as given to ef-ficiencies as providing standardized productsto mass markets.” For example it took moremarketing resources to attract the attention ofhigher income individual not to mention morelabor costs. This fragmentation is likely to con-strain future growth.

But this rationale is less appealingthan others. Environmental rules began to bite“diverting” a significant chunk of investment,but getting us a cleaner environment (at the ex-pense of slower economic growth); the oil priceshocks rendered a chunk of the capital stockobsolete, and it had to be replaced which tooksome time; the workforce became, on average,less experienced with a huge influx of women(but this then worked to the economy’s advan-tage in the 1990s as experience levels rose); therapid educational gains of the 1950s and 1960s

slowed down in the 1970s; R&D spending as apercentage of GDP fell after 1973. In short, thefragmented-market explanation looks lame incomparison with these.

Madrick sees government as smooth-ing out market failures. He thinks, contrary tothe current market-oriented school of thought,that people ought tobe reminded ofgovernment’s activ-ist virtues. He sayseconomic growthwas at its height inthe 1950s and 1960s,when tax rates werevery high and gov-ernment was grow-ing rapidly. Yet evenwith higher rates,tax collections as apercentage of GDP were lower during this pe-riod.

Despite the commanding heights ofcapitalism, Madrick thinks citizens ought to bereminded that government is more than a nec-essary evil. But Madrick’s action agenda treadsno new ground here; it is written with all the dry-ness of the Democratic Party platform.

In the past, government saw fit to in-tervene not only to protect property rights butalso to enforce anti-trust regulations to ensurecompetition. He also believes that the nation’sphysical and social infrastructure has been ne-glected — a dubious claim given the growth ofgovernment over the last 30 years. The researchon whether increasing public spending on infra-structure substantially increases productivity isinconclusive. And despite the weakening of or-ganized labor he thinks management has reachedthe end of the road in terms of capping laborcosts.

Madrick writes that “assessing andranking the causes of growth requires humility,”although it is ironic that he shows no humilitywhatsoever in attacking the economics profes-sion. “Mainstream economics, at least for the mo-ment, has aligned itself closely with individual-

ism and minimal government. We cannot ig-nore how some of the precepts of contempo-rary mainstream economics, from the free flowof capital to restrained government spendingand emphasis on strong currencies, also areconsonant with the foremost desires of theworld’s richest financial institutions.” This is

not an argument but a jer-emiad. It is the last refuge of apost-Keynesian upset with allthose Nobel prizes laudedupon free-market economists.

Adam Smith, whomMadrick quotes profusely onthe division of labor, warnedagainst conspiracies by busi-nessmen to raise prices.While some conservativesmisread Smith, most main-stream economists working

within the neoclassical framework recognizethe role of government in dealing with exter-nalities such as pollution and the provision ofpublic goods. Most economists are well at-tuned to the tradeoff between imperfect mar-kets and imperfect governments.

More troubling is Madrick’soverarching foray into sociology. In the end,he views the American national characterbased on individualism and free choice as adisadvantage. If Americans are reluctant toadopt a “new social contract” it is with goodreason. The European welfare state modelMadrick apparently admires presents its ownset of unique problems. Chronic high unem-ployment is not an American way of life. Theinflexibility of German and Italian labor laws,for example, has restrained their growth po-tential. Agricultural subsidies across Europe,which dwarf those (still indefensible) subsidiesreceived by American farmers, are unfortunaterestraints to trade. Most Americans do not ig-nore the complexity of modern economics.History shows that as both consumers and citi-zens in matters of political economy they havemade a good case for Americanexceptionalism.

Despite the commandingheights of relatively freemarkets, some economichistorians are calling formore intervention. Buthistory shows this is noway to ensure growth.