Economics Question of the Day: An Intermittent Blog

...And the Damage Done

2011-09-11T08:46:00.002-04:00

Ten years later, some things are a blip, no matter the publicity.

While others abide, less noted.

New Yorkers, hug a fireman today—for the ones who died because "modernization" meant moving Disaster Operations from the safety of One Police Plaza to the 25th floor of the already-attacked-once 1 WTC, not making certain radio communications worked.

Then, if you can, go visit the Empty Chairs. If you're really brave, try to explain to your kids why the life of the secretary for the NYSSA—a kind woman who read Laurell Hamilton books and had a life outside of Series 7 and 63 and 24 and 8 and...—was worth so much less than a Cantor Fitzgerald salesman who was intermediating between two financial intermediaries in an already-overcrowded space.

Then try to explain why 11 Sep 2001 was an act of terror, but 11 Sep 1973 was a heroic effort that lead to The Chicago Boys (who presided over the only period when that country grew slower than the rest of the area) and the Chilean Pension System so beloved by Herman Cain, so hated by even its originator.

And, if I haven't offended enough people yet: those of you in DC and Boston who had friends and relatives at the Pentagon or friends and relatives on the flights, wonder why the Two Towers get all the attention.

Happy September 11th, and What It Hath Wrought.

Never forget.

cross-posted from skippy the bush kangaroo

If They're All Young Hooligans, Why Are Four of Eleven Over 35?

2011-08-11T17:51:00.004-04:00

With a hat tip to Tim Harford, The General Manchester Police are reporting their already-public-record convictions via Twitter (@gmpolice).

On a quick check, four of the eleven so far convicted (including the one woman), are over 35. So far:

It appears that legendary "moral decay" began under Margaret Thatcher. Whodathunkit? Well, maybe David Cameron in 2007:

Sometimes a piece of research is published which goes straight to the heart of the national debate – it holds up a mirror to the whole of society and makes us see ourselves as we really are.

That happened this week. On Wednesday, Unicef published a report entitled "An overview of child well-being in rich countries." It brings together comparative research on the material, educational and emotional state of childhood in 21 developed nations.

Britain comes bottom of the list....

Ten years after the current [Blair] Government was elected on the promise to end child poverty and make education its number one priority, Britain comes 18th out of 21 rich countries on material wellbeing, and 19th out of 21 on educational wellbeing. According to the report, British children are among the poorest and least educated in the developed world....

On the radio yesterday morning two local residents were interviewed about the spate of killings in their area....One said, "the children don't seem to have anything to do. They just roam the street.” When she was asked who she blamed for that, she said "the Government, really. They're closing down all the community centres."

Now I like to agree when people blame the Government for things that go wrong. And, more seriously, I also agree that there is a problem with the lack of community facilities in our big cities....

Ultimately, we didn’t need the Unicef report – pages of statistical analysis – to tell us there is a problem with the emotional wellbeing of Britain’s children....

We need common sense in schools. It is madness for the authority of teachers and heads to be second-guessed by outside evaluators when they want to impose simple discipline in their own classrooms. It is madness for a teacher to fear that if he restrains a child who is violently bullying another child, he will end up in court on charges of abuse. It is madness for schools to have to cancel outdoor trips because their insurance policies won’t cover them in case of mishap.

Indeed, it is grimly instructive that the only measure in the Unicef report where Britain does not come at or near the bottom – where we come a respectable 12th out of 21 – is (you guessed it) health and safety. Our children might be the loneliest, worst behaved, unhappiest children in the developed world– but at least they are protected from sprains and bruises....

And I hope they illustrate something of what the Conservative Party under my leadership stands for. When we were last in government, in another political era, we stood for economic revival. We now stand for social revival. We used to stand for the individual. Now we stand for the family, for the neighbourhood – in a word, for society.

How's that working out?

Is Warren Buffet the 2008 version of 1907's J. P. Morgan?

2008-10-04T13:25:00.002-04:00

The only reason not to answer "yes" seems to be whether there are other Great Financiers of the Day.

IF values must be GE 0, how do we account for extinctions?

2008-09-14T23:17:00.004-04:00

Economists tend to assume an ordered set of preferences, and holdings in all securities /commodities to reflect that.

To make the math work, the standard assumption is that the holdings are >=0. This includes the assumptions of Arrow-Debreu, which is the model usually used to bash Stern supporters.

That is, in most cases, you hold zero of a specific stock or commodity by choice.

I live diving. I like coral reefs. If I read the Stern Report correctly—or even just heard Sir Nicholas's presentation at January's AEA meeting correctly—the coral reefs are not going to be around within 50 years.

The obvious conclusion is that someone placed a negative value on coral reefs.

But this contradicts the model, which requires x.GE.0.

So how do we explain extinction (a real phenomenon, and one not to be confused with "creative destruction") in economic modeling?

Two Questions on Economic Growth in Developing Countries

2008-04-29T10:07:00.000-04:00

If the prescription for open markets and universal trade used by many of the "Washington Consensus" is accurate, can someone please cite two examples (I'd probably settle for one, but it would have to be a Really Good One) of companies that have made the transition using that method?
Relatedly, how is a country supposed to develop a Competitive Advantage in such a scenario?

Cross-posted at Marginal Utility.

Question of the Fundament

2006-12-09T18:48:00.000-05:00

Given that no corporation in its right management would ever attempt to maximize GDP, why do economists believe that GDP is an appropriate benchmark for a society?

(Cross-posted at Snark of the Day, but rather a serious question if you think about it.)

A Footnote for the Ages

2006-10-28T13:11:00.000-04:00

With a hat tip to Greg Mankiw via David Friedman, comes this from Todd Kendall's "Pornography, Rape, and the Internet" (PDF):

35 On the other hand, as discussed earlier, more dating also means more opportunities for date rape.

If We Were All Rational, would everyone be speeding?

2006-10-16T23:27:00.000-04:00

Thought-experiment: assume that all cars work perfectly, that law enforcement is not absolute, and that people are strictly rational. Would not one then conclude that the optimum speed i at which one should drive, given p(x) as the probability of receiving a ticket for speeding and s(x) is the level of the speeding fine, is:

Given that p(x) at i=56 <> 1, no rational driver would drive at or below the speed limit.

The proximate reason for this thought is the exchange between Mark Pauly and Kenneth Arrow on the matter of "moral hazard," in which both appear to conclude that social stigma alone are not a matter of governance.

Out of Context Quote, Small Sample Size

2006-09-09T18:41:00.000-04:00

"Rapid price changes lead to economic inefficiency." - Samuelson and Nordhaus, 16th ed., p. 373

TOS currently: $139.99 (though I believe it's $44.99 per season in the stores).

Original pricing from late 2004:

Season 1: $106.99
Season 2: $106.99
Season 3: $ 99.99

Memory serving, the set was offered last Xmas for around $270. Best Buy now lists it for $179.99.

Does this count as deflation?

By the way, the best Star Trek series is coming out for Thanksgiving.

(Cross-posted to Marginal Utility)

The Times Drinks Habitat's Kool-Aid—Still...

2006-09-09T18:07:00.000-04:00

The letter from Peter Ostrower praising the efforts of his organization, Habitat for Humanity, in the rebuilding of New Orleans is revelatory.

(To be clear: I gave regularly to Habitat until they shifted their literature to emphasize that they are a "Christian" organization, at which point I shifted to other organizations. I still admire the work they do and their publicity skills.)

Mr. Ostrower declares his group "the city's largest organized rebuilding effort." How much rebuilding?

Habitat has handed over the keys to more than 30 houses this summer and plans to complete 100 homes this year.

Cool. At that pace, it would only take 300 years to rebuild the city. Ostrower continued:

Habitat's goal of 1,500 new houses by 2011 creates a significant demand for volunteer labor. Although our current progress may seem like a modest first step, it's an energetic start.

So, if they get the "volunteer labor," Habitat would be able to build an average of either 280 (if he means 2007-2011, inclusive) or 350 (if he means 2007-2010) houses a year. Which would have the city almost rebuilt around the end of this century.

Don't get me wrong; to re-emphasize, I support the effort of Habitat for Humanity in spirit (the rest of you can send cash). But their capacity and "energetic start" isn't anywhere near what would be needed.

Tell me again, please, why we should believe that private charities are any more efficient or effective than government support and funding?

(Cross-posted at Marginal Utility)

Understatement of the Century

2006-09-03T15:29:00.000-04:00

In the continuing Economists-cage-match, Duncan Black puts into words (a bit too glibly, perhaps) what often bothers me about Brad DeLong's arguments:

This, in a nutshell, is the worldview of the Sensible Liberal. It's the belief that there are Sensible Policies concocted by Wise Men (and women), preferably ones with advanced degrees, which are Right and True and Good. Wise Men may disagree a bit about the means, and we should throw a few conferences to hash these differences out. Politics and ideologues who do not share the ideology of the Wise Men, who of course are not really tainted by ideology, get in the way of enacting policies which are Sensible.

It's a dangerously wrong view of the world.

As they say in the blogsphere, read The Whole Thing.

Especially, though, see DeLong's post that inspired the reply, since the discussion (with himself) is not unreasoned:

First, I think...that the benefits of using government policies to strengthen unions (while they are certainly there) are much smaller than Paul [Krugman] judges them to be.

This is perhaps a matter for discussion as described, though one notes that many of DeLong's cohorts (and himself) are perfectly willing to argue for R&D credits that don't benefit workers either directly or proportionately while making such statements.

The second half of the argument is more clear-cut, though.

The events of the past decade and a half have convinced [Paul Krugman], I think, that people like me are hopelessly naive, and that the Democratic coalition is the only place where reality-based discourse is possible. Thus, in his view, the best road forward to (a) make the Democratic coalition politically dominant through aggressive populism, and then (b) to argue for pragmatic reality-based technocratic rather than idealistic fantasy-based ideological policies within the Democratic coalition.

He may well be right.

Xenos, in comments, finishes the job of hanging DeLong's hide to the shed (De Long tanned it himself), but is short by two orders of magnitude.

"He may well be right."

Understatement of the year. [typo corrected]

(Cross-posted from Marginal Utility, where Tom continued the concept with more discussion and data.)

This is the MBA Administration?

2006-08-19T13:02:00.000-04:00

If David Cay Johnston didn't exist, it would be embarrassing to have to invent him.

Within two weeks, the I.R.S. will turn over data on 12,500 taxpayers—each of whom owes $25,000 or less in back taxes—to three collection agencies....The move, an initiative of the Bush administration, represents the first step in a broader plan to outsource the collection of smaller tax debts to private companies over time. Although I.R.S. officials acknowledge that this will be much more expensive than doing it internally, they say that Congress has forced their hand by refusing to let them hire more revenue officers, who could pull in a lot of easy-to-collect money. [emphasis mine]

The cash flow choices are simple:

The private debt collection program is expected to bring in $1.4 billion over 10 years, with the collection agencies keeping about $330 million of that, or 22 to 24 cents on the dollar.

By hiring more revenue officers, the I.R.S. could collect more than $9 billion each year and spend only $296 million—or about three cents on the dollar—to do so, Charles O. Rossotti, the computer systems entrepreneur who was commissioner from 1997 to 2002, told Congress four years ago.

The math from that is also simple: Over ten years, the outside collection agencies will produce a net of $1.07B ($1.4B-0.33B). Over ten years, the IRS would produce $87.04B ($90B-$2.96B).

The net loss of owed tax revenues—all from low-level debtors—will therefore be approximately $85.97B.

And they're using reputable companies as well:

One of the three companies selected by the I.R.S. is a law firm in Austin, Tex., where a former partner, Juan Pena, admitted in 2002 that he paid bribes to win a collection contract from the city of San Antonio. He went to jail for the crime.

Last month the same law firm, Linebarger Goggan Blair & Sampson, was again in the news. One of its competitors, Municipal Services Bureau, also of Austin, sued Brownsville, Tex., charging that the city improperly gave the Linebarger firm a collections contract that it suggested was influenced by campaign contributions to two city commissioners.

And the reasoning is the same as the justification for outsourcing: capital classification advantages, not value maximization:

Under federal budget rules, money spent to hire tax collectors is treated as a discretionary expense, and Congress is cutting discretionary spending. In business terms, the rules treat the I.R.S. as a cost center, not as the government's profit center.

The private debt-collection program, however, is outside the budget rules because, except for the start-up costs, the collectors are to be paid from the proceeds.

So we have the failed outsourcing experiment, the failed privatization experiment, bogus accounting, and poor incentive alignment combined to produce nearly $86B in lost revenues. If there were any responsibility to the shareholders, the CEO would be fired.

(Cross-posted from Snark of the Day)

Reasons Capital Cannot be at the Efficient Frontier

2006-08-19T12:39:00.000-04:00

Billmon notes an intriguing point about the recently-deceased housing bubble, one we all knew but never emphasized:

It's also why it took almost ten years for the last home price boom/bust cycle in California to come around again. According to the Office of Federal Housing Enterprise Oversight, the reg agency that tracks these things, home prices in the greater Los Angeles metro area didn't return to their 1990 peak until the spring of 2000. [emphasis mine]

Anecdotally, the New York area data is that the peak was in 1989 and the break-even was around early 2003.

I know several people, most on Long Island, who almost literally could not afford to move during the 1990s. And those were only the ones who might have wanted to do so. People with a two-hour commute each way, every day. (Which also implies that industry didn't follow the housing expansion.)

The bursting of a housing bubble—among other, more significant, things—creates a decent amount of endemic inefficiency in the system, much of which will not be reflected directly in data, since it is primarily opportunity cost. But it will be a loss nonetheless.

(Cross-posted from Marginal Utility)

Charity Values

2006-08-10T23:03:00.000-04:00

At Marginal Utility, I asked if there was any way to help Lebanese refugees.

Juan Cole provided one good answer. (Direct link here.)

Badger Tracker noted that Catholic Relief Services is working with folks on the ground as well.

It took until today to realise that there may be someone who reads here but not there.

This post will remain at the top of the blog until there is a cease-fire.

Risk Mismanagement, or, It's the Infrastructure, ******

2006-08-09T23:18:00.000-04:00

Other than the Castro-is-in-great-shape comment, the other thing that caught my eye in the 29 July-4 August issue is this Economist story about the Queens blackout (may require subscription) is this 'graf three paragraphs from the end, almost a throwaway:

Indeed, one of the ironies of this week's power failures is that America is at last starting to grapple with the most entrenched problems in its electricity system. After the 2003 blackout, a joint American-Canadian taskforce delivered a withering 228-page report highlighting the failings of the utilities—which, among other things, had not been regularly monitoring the condition of transmission lines [emphasis mine].

It is difficult note to speculate that this situation was caused in no small part by the deregulation of the energy companies. But that's not (directly) what brings me to discussing this.

Rather, in a fortunate dovetail (via Mark Thoma), Brad DeLong notes that "the death of distance" is very dependent on having a functioning infrastructure. As such, one of the advantages of our tax code is that it is structured to ensure that infrastructure is maintained, at least within a given company.

The corollary to a need for infrastructure is our generous Depreciation and maintenance tax credits. Between them, there should never be an infrastructure maintenance issue for any firm that can fairly be described as a "going concern."

Everyone who owns a car or an appliance (including computers) is exposed to maintenance costs. It's a central tenet of the TCO religion that maintenance expenses should be considered before any purchase.

For companies, the compensation for having to replace machinery that is past its value, or to do maintenance is that they get tax credits and are allowed to depreciate the value of their assets. They can then effectively buy and replace capital assets at no net cost to the company (assuming the firm has the cash flows to cover such replacements, but we are talking about going concerns here, not a fly-by-night operation).

So, unlike my household, which "boasts" three 8-track players (one of which works, sometimes), there is no excuse for a company such as BP, whose latest Alaska oil spill came about:

BP discovered corrosion in the transit lines only after the Department of Transportation ordered an inspection following a 270,000-gallon spill in March at another section of the field....

BP officials said the line where the leak was found was last checked for weakness in 1992, using a technology called a "smart pig" in which a device is sent down the tubes to assess pipeline integrity. [emphases mine]

So we have a utility company that doesn't monitor the quality of its transmission lines and an oil companies that doesn't worry about its pipeline (in far from optimal conditions).

I don't monitor every little piece of my car, either--but I know well that Ray's people are going to charge me $65/hour and am willing to take the tradeoff between that and spending a couple of years in auto shop.

Who will charge BP and Con Edison? If the status quo remains, unfortunately, Attaturk provides the answer here.

When I was a wee trader, in the mid-1980s, our firm did its annual "let's-make-fun-of-ourselves-for-the-holidays" reel. One skit had a deal being done in the Cleveland office:

We'll book the profits in Cleveland, the risk in Dallas, and the expenses in Los Angeles.

Apparently, those bankers are now running BP. And Con Edison. And maybe you're infrastructure-dependent firm as well.

(Cross-posted from Marginal Utility)

What does this have to do with the price of oil? Everything.

2006-08-08T23:39:00.000-04:00

It took me until reading Jenny Diski's Skating to Antarctica (and, iirc, reviewing Sage Walker's Whiteout around the same time) to realize why control of The Malvinas is of singular import to the British. (The 1982 war is remembered primarily two things: that one of the queen's sons served, and for the crack British programming that identified three incoming Exocet missiles as friendly; note the newspaper headline in this video for a flavor of the times.)

The treaty that prevented drilling in Antarctica expired in 2003. The nearest land mass to the continent—and therefore the place you most want to use for storage and/or processing of Antarctic crude—is the Malvinas.

Journalists who didn't mention that in 1982 might be forgiven, but those reporting on the islands now have little excuse. Which is why this:

It seems an unlikely scrap of land to squabble over. Treeless, remote, and blasted by the full fury of the South Atlantic, the Falkland Islands are home to less than 3,000 people, and thrilling only to those who love nature, big winds, and spectacular isolation.

is the type of disingenuous reporting I would expect from The Washington Times, not the Christian Science Monitor.

This is one of the times when the Economic Way of Thinking would make it clear there is a gap in the argument:

Britain says that as long as the islanders want to remain part of Britain there can be no question of ceding sovereignty, despite the annual £100 million ($191 million) bill of keeping 1,200 soldiers on the islands.

It is only near the end that the reporters examine the ROI, and only the current ROI at that:

The economic potential of the islands has not been lost on Argentina. It has repeatedly protested to Britain about oil prospecting and fishing activities in the waters around the islands. The fisheries, professionally run, have proved so lucrative in fact that several Falklanders have become millionaires in recent years. In response, the Argentines have strongly criticized the Falklands government for extending commercial fishing permits from one to 25 years.

This isn't generating anywhere near the 100MM quid in tax revenues referenced above, though. The economic reason to control the Malvinas is, quite simply, the option on Antarctic drilling.

(Cross-posted from Marginal Utility)

The Cost of Great Schools

2006-08-07T10:53:00.000-04:00

One thing about Saint Christy's coke-inspired 1993 tax cuts is that they were always "deferred tax liabilities," as PGL at AngryBear puts it, not true cuts.

It's time to pay the piper--and is anyone surprised that the bill is being given mainly to those who reaped no benefit from the previous cuts?

Then again, this is ~~silly~~not quite accurate:

Gov. Jon S. Corzine of New Jersey said... “Our citizens pay through the roof for a tax that is imposed without any regard to income or ability to pay.”

It is true that I could not afford to buy my house right now; the property tax bill passed the mortgage last year, if not the one before. But it is also true that property taxes are assessed based on the value of the land and building one owns--those "property rights" one hears so much about. And one of those rights is the right to sell those assets. If you don't like living in the state that provides the highest per-pupil public education spending of any in the union, you are not forced to live in it. (On the other hand, if you want that benefit without any of the cost, then you're trying to cause a free rider problem.)

It should come as no surprise that several of the states with higher property taxes are those that face rising costs but do not use or have other tax options:

Earlier this year, legislators in South Carolina and Texas — two states in which the rise in property taxes has outstripped that of income by a wide margin — approved measures to relieve the burden with rebates or caps. And in Idaho, the governor has called a special session of the Legislature to address the issue.

It is only three 'grads later that Ford Fessenden gets around to mentioning that tax bills have to be paid with taxes, and what you call them affects changes, not the need to pay them:

New York City property taxes are rising rapidly as well, up 47 percent since 2000, compared with just 5 percent from 1995 to 2000. But city property taxes are lower than those in the suburbs because most of the city’s revenue comes from income and sales taxes.

And it is only at the end that we find the reality described:

Bob Vena, 63, a plumbing contractor in Hazlet, N.J., has been a beneficiary of the real estate boom. He bought his home from his parents 25 years ago, and he also owns a bungalow in Matawan. Today the houses are worth many times what he paid for them. [emphasis mine]

But the taxes on his homes have been rising steeply, he said, and now total $13,500. Business is good enough that he can afford them, Mr. Vena said, though it is becoming a strain. He said there was little he could do to increase the income from his plumbing business to keep pace.

“Eventually,” he said, “I hope to sell everything and just get out of New Jersey.”

The appreciation of those houses has been much more than enough to pay for the increase in Mr. Vena's total property tax bill. Will we see an article from Mr. Fessenden later about all the people who sell their New Jersey houses to live a life of privilege elsewhere?

(Cross-posted at Marginal Utility)

Menzie Chinn Saves the Best for Last

2006-07-27T17:49:00.000-04:00

Via Mark Thoma comes Menzie Chinn's fine argument against "Dynamic Analysis."

UPDATE: Thoma has more, including Jason Furman's updated analysis (PDF).

I'm not certain Chinn intended the post that way (though I suspect in the affirmative), but the collateral damage he does to the concept is impressive:

The 0.7 percent deviation from baseline cited in the 2007 MSR is in the top right hand corner element, under "Financed by Decreasing Future Government Spending" (recent history has not been too supportive of this possibility, though)....

Of course, the astute reader will note that if taxes are raised in the future to finance the tax cut, then GNP will eventually be 0.9 percent lower than steady state baseline....

(By the way, the "Division on Dynamic Analysis" is in the President's budget proposal for FY2007.)

One might believe he greets this as positively as P.Z. Myers take[down] on the National Center for Complementary and Alternative Medicine.

Chinn is also clear on what "Dynamic Analysis" is not:

It is important to understand that there is no welfare calculation undertaken, despite the fact that under certain conditions, GNP is higher than under baseline. That is because undertaking a welfare analysis would require taking a stand on the utility associated with government spending on goods and services. So even if one were to take the Treasury's high end estimate for the long run steady state effect, the answer to the question of whether tax cuts are desirable depends upon the utility associated with spending on civil servant wages, bridges, and body armor. [emphases mine]

So, in summary, tax cuts might be a positive force if (1) they are offset by spending cuts, (2) they don't have such an effect as that they need to be balanced by increases later, and (3) you don't consider the value that revenue may have produced.

(Originally posted at Marginal Utility)

Brad DeLong eats the wrong mushrooms; produces strange pomegranate

2006-07-11T22:17:00.000-04:00

Responding to a post by Mark Thoma, Brad DeLong ~~yesterday~~recently tried once again to find the rose growing in the shit of a proposal from the National Review. The result is a curious hybrid--perhaps a blue rose--that smells as if it were made from a blend of coca-cola syrup and epicac.

DeLong returns to a drum he has been beating for a while, one whose tune reveals that economists use the term "unintended consequences" to mean very strange things. Ceasing what he sees as the rose from the NRO article--investing Social Security accounts in "the market"--DeLong makes several legitimate points before venturing into territory generally found only when using psychedelics or, perhaps, the legendary "original ingredient of Coca-Cola.¹ To wit:

If, say, we were offered a pomegranate that consisted of: (a) contribution increases, (b) well-designed, low-fee private accounts, (c) Treasury Secretary-to-be Paulson with the baton to make the detailed decisions and set the tradeoffs, (d) advised by an Assistant Secretary for Social Security Reform named Jagadeesh Gokhale, who (e) promised to retain enough social insurance in the system to preserve a substantial defined benefit component--then yes, I would eat that pomegranate.

Yes, that is the expectation that Henry Paulson, until recently the CEO of Goldman Sachs and a major shareholder in that company still (whether those assets go into a blind trust or not), will embark--successfully--on an effort to reduce the fees paid to Investment Banks and others who manage accounts for High Net Worth and other individuals. As Captain Spock once observed, "There is an old Vulcan proverb: 'Only Nixon can go to China.'" But Nixon was willing (and able) to sell out Tibet as part of the price of history. Could Paulson make the same type of sacrifice? And, even if he could, would anyone in the current Administration allow him to do so? Brad DeLong has argued no, and who am I to argue with him?

(As Tom noted, he does so here as well:

Now it is possible to make Social Security private accounts a bad deal for everyone. And it is surely the case that the Bush White House's track record is such that only an idiot would sign on to any proposal designed and implemented by the Bush White House.

but that doesn't stop him.)

Why does DeLong believe that increasing Social Security contributions, and designating that overage to "market investments," would be a good thing? Apparently, because he believes this would address the low national savings rate:

True, but private accounts as an add-on would be a fine thing for Social Security. Americans need to save more, both individually and collectively. Hence greater "contributions" now and in the future are attractive.

Now, I am perfectly willing to believe that the low national savings rate needs to be addressed, and even more willing to concede that I don't have a solution to suggest, since I view the recent decline in national savings as rational behavior for reasons to be discussed in the next post. But, on considering the current savings and investment landscape, I am failing to see the multiplier that would produce an increase in savings from the DeLong solution.

Let us start with the fundamental choices: saving or spending. As I noted above, I believe that spending is the rational behavior for most American workers right now. Assuming that your mileage varies--as well it might--there are currently multiple savings vehicles available, many of which are either tax-deferred (traditional IRAs, stock or index purchases) or tax-free (Roth IRAs, municipal bonds), as well as traditional interest-bearing savings and not-so-traditional-unless-you-are-young interest-bearing checking accounts..²

There is little doubt that these voluntary accounts are available to all. As a wag once noted, "The rich are free to sleep under a bridge as well." So if savings are not increasing among the poor, when they are "free" to do so, we must assume that there is a misalignment of incentives.

DeLong attempts to address this. It is not where I would start--nor necessarily is it where he would--but it is not unreasonable to him, having noted that the poorest 50% in the United States have no exposure to the U.S. Equity market (effectively, they are short equities and overweighted, from an asset management point of view, in U.S. Treasuries, those being the place their Social Security payments are currently invested, and other liquid assets, primarily DDAs that may or may not require a fee and/or check cashing services that most certainly do).

DeLong proposes to mandate an "improved" asset mix by, apparently, increasing the contribution to SSDI and having the "excess" invested in those mythical low-cost accounts mentioned above. This increased exposure will (if all goes as DeLong expects, of course) increase national savings--not directly, but rather by producing a greater return on retirement benefits that will increase long-term savings, or at least have people waiting an extra week or two before they end up eating cat food. (Am I unfair to the premise? Perhaps, but not clearly, depending upon the size of the increment, the spread between the return on Treasuries and the return of the S&P500, and the term of the accruals.

But we are always taught to think in terms of Sources and Uses of Capital, and DeLong's capital increase comes not so much from the spread as from the employer-matching aspect of Social Security. Even were we to ignore Risk-Adjusted Return on Capital and fiat that, in the long-term, the S&P must produce a better return than Treasuries, the breadth of that return is being generated from the following sources:

An increase in the SSDI tax on the employee. This is not necessarily a bad thing in itself, but it reduces said employee’s take-home pay. This will further disincent those on the margin of saving and spending, which will move to a higher income level (all else remaining constant). Presumably, the Gokhale/DeLong plan expects this Source to have either a neutral or marginally positive effect on savings by the following reasoning:
1. Those who are saving now will simply readjust their portfolio, reducing their equity exposure elsewhere in compensation, and having no net effect
2. Those who are saving only 6.2% of their earnings now--i.e., their SSDI contribution--will of necessity save more in direct proportion to the incremental increase, while their “portfolios” will benefit from the rebalancing into an equity exposure. This effect should be net positive.
3. The net negative effect of moving the Savings Curve out from x(0) to x(1) will have a coefficient less than one, abetted by the matter that the savings rate of those who were below the margin was effectively zero (i.e., only their SSDI contribution). So (ii) should be greater than (iii), producing a net increase in savings.
An increase in the SSDI tax on the employer. While 401(k) contributions may be matched by the employer, SSDI contributions are matched up to the threshold (currently $90,000). Unlike minimum wage increases, which have a propagation effect on the system, the effect here would be proportionate (coefficient of 1).
1. This produces a marginally higher cost per employee which, even on a tax-adjusted basis, likely means either a reduction in benefits in other areas (e.g., health insurance) or reduced earnings for the firm.
  1. Collaterally, this increases the incentive to firms to offshore jobs--getting a tax credit for hiring overseas is economically preferable to paying more in employee costs. The net effect, therefore, is likely to be a reduction of the American workforce solely for tax reasons.
  2. Those downsized/outsourced employees will require more social services (unemployment compensation, AFDC, Medicaid, etc.), producing a marginal increase in the budget deficit (more services required, less taxes paid due to the Outsourcing Tax Credit).
  3. The increase in unemployment claims will, in itself, cause an increase in the amount those businesses are charged for unemployment insurance. Again, the cost of doing business goes up as the American workforce is reduced.
  4. Businesses have reduced capital available for investment and higher expenses, which leads necessarily to a nominal decrease in net savings. While it is likely that this reduction is less than the increase produced in Section I, it does reduce the desired net savings effect
The Stock Market Effects
1. The rebalancing of portfolios (“Barro Effect,” as it were) by those who notice the equity effect of the add-on Social Security contribution will mitigate but not obviate the increase in capital in the market. I might tend to argue that transaction costs will limit
  this, since the maximum contribution from the add-on is currently $900*(% of increase) per annum, which for anything under about a 20% increase in Social Security taxes will be less than half that current allowed to be contributed to an individual IRA ($5,000), even with employer matching. Selling 30 or 40 shares of XOM hardly seems worth the trouble-and to the extent that it is not worth the trouble:
  1. The portoflios of those currently in the equity markets will be overweighted toward equities, but
  2. There will be excess capital in the market, chasing what should be the same value, but the coefficient will be less than 1.0 due to rebalancing.
2. Company Earnings will decline
  1. Part of this is because the after-tax effect of the increase in employee compensation
  2. Part will be because the employee retention will decline marginally (as people realize their take-home pay declined), increasing the cost of training and knowledge transfer, and
  3. Part will be because the employees who are happy with the reduce pay will, given that the market is efficient, not have the same skills as those being replaced.
3. Either the P/E multiplier must decline, or the “gain” on the stock price will come solely from a shifting of assets
  1. This is simple logic: more money chasing the same stocks may well increase the price of the stock, but it will not in itself increase the earnings of the company, except from an accounting perspective. It will produce what we old-timers call the “Boston Chicken” effect, and what the younger generation thinks of as the Internet Stock effect. (VA Linux? Juno? JDSU? CMGI? AOL? The possible examples are as plentiful and variegated as Dutch tulip bulbs.)
Other Market Effects
1. Less money chasing other markets means higher yields (lower prices) in the bond markets, including (of course) Corporate Bonds, which us Treasuries as their benchmark.
  1. Cost of borrowing increases, fewer projects get approved, more retained capital implies (if we assume capable management, which implies that the eliminated projects were good investments in the previous scenario) that there will be a lower ROE for the companies.
  2. More business failures leads to a reduction in the tax base, requiring either higher tax rates or significant spending reductions. To the extent that those reductions impact government subsidization of businesses (what economists refer to as “corporate welfare” as if naming it eliminates the inefficiency), available capital is reduced; to the extent that they affect lower income workers, the result is either less able workers (someone who has not had a good meal cannot do a good job) or workers who demand higher compensation in compensation.
2. Currency exposure would be a collateral effect, but not likely to be a positive one on a long-term basis
  1. There may be a short-term rally in the currency markets as U.S. Interest rates are pushed up (at the margin) by there being less buyers of U.S. Securities, requiring a higher interest rate on the those securities (see d.i)
  2. However, any long-term effect would have to consider lower earnings and production shifts Purchasing Power Parity that would be in favor of the non-U.S. Entity. Again, this may be a marginal effect, but there would be a marginal effect.

So, in summary, the artificial shift of assets into equities, producing an exposure to equities of those who (as Tom notes) cannot afford that exposure in the normal course of their lives, will produce lower earnings and less able workers at the margin, will dampen the intrinsic value of the company (i.e., the Present Value of its expected future cash flows) unless the P/E multiplier is increased (more) disproportionately for the virtue of being in the S&P 500, will increase business failures, and will reduce the value of the U.S. Dollar in the international currency markets.

Other than that, it appears to be a great idea.

Now, I'm certain there is some econometric model that will conceive that the added Social Security contribution is "national savings," which will make De Long et al. happy. Were I a better economist, and this note a blog, I might even try thowing together the appropriate differential equations to "demonstrate" the results. But the reality of free-flowing capital, unified budgets, and a dubious faith in the ability of the equity markets to continue to outperform even as the international playing field becomes more level makes the proposed "pomegranate" look more like a fungus--or the result of eating one--with each viewing.

1I do not speak from personal experience on this matter, but have seen several Aaron Spelling and especially Irwin Allen television shows from the days when LSD was still legal and worked on a trading desk in the late 1980s and early 1990s.

2 I believe the interest rate on my checking account currently would result in doubling the account value in approximately 720 years; such is the "power of compound interest." Still, a traditional checking account would never double in value, so investors for the long-term should not completely disparage the option, depending upon their liquidity needs.

How Money Moves in the Real World?

2006-07-11T17:37:00.000-04:00

From Frank Partnoy's Infectious Greed, p. 252.

James Cayne, the CEO of Bear Stearns, a second-tier securities firm, was so taken by LTCM that he not only agreed that Bear Stearns would serve as the clearing agent for most of LTCM's trades--transferring money and various securities to the parties who were owed them--but he also invested $13 million of his personal funds, even though he had never met John Meriwether.

Piling On...but why not?

2006-07-11T15:05:00.000-04:00

There are enough economists and others in the blogsphere, both directly and indirectly, who have pointed out the lunacy of Larry Kudlow's latest declaration, but I particularly want to address this gem:

When this last happened in 2003-04 (remember the "jobless recovery" election-year rant of Democrats?)

Which would lead you to believe that people became better-employed in 2003-2004. As John Clute once said, let's look at the evidence.

Via Legal Fiction (out of Duncan via Ezra), we find the U.S. Census's Historical Poverty Tables. And we would expect a decline in real terms--or at least percentage--in people around the poverty level (as the marginal effect of the "recovery" should elevate people out of poverty). Instead, we have:

In simple terms:
1) Over 1,000,000 more people below 125% of the poverty line.
2) Over 150,000 less people (from a larger sample) above the line itself.

In short, at the margins, the percentage of people at or below the poverty line went from 15.4% to 15.7% (an increase of 0.3%) during Kudlow's "recovery."

Does anyone still wonder why the "recovery" bears the adjective "jobless"?

Cross-posted at Marginal Utility

Exxon-Mobil Shareholder Recommendations

2006-05-30T15:40:00.000-04:00

At least they're not Home Depot.

More TK

Long Distance, Runaround

2006-05-25T10:55:00.000-04:00

Never saw a tax they liked?

I promise to follow this up with a calculation of how much we have paid over the past three years, but note that

Individuals will be allowed to claim three years' worth of refunds on their 2006 tax returns, filed in 2007. They would be given the option of calculating their actual taxes paid or claiming a standard amount set by the Treasury Department and Internal Revenue Service.

is a free option.

Sellers of free options should not be running Treasuries.

The other key point that appears is that the country used to fund, not finance, its wars:

The tax dates to 1898, when telephones were a luxury and lawmakers needed money to fight the Spanish-American War.

The legend of Teddy Roosevelt and the Rough Riders was paid for in part by a luxury tax.

Menendez proposes a credit "bill of rights"

2006-04-25T13:13:00.000-04:00

I'm not certain a pulse is required

Declaring that anyone with a pulse and a Social Security number can get a credit card, Sen. Robert Menendez, D-Hoboken, unveiled legislation Monday that would strengthen consumer protections against zealous marketing practices and abuses by credit card companies.

How zealous?

Menendez, a member of the Senate Banking Committee, said credit card companies have increased their solicitations to consumers 500 percent since 1990, to more than 5 billion in 2004. A member of Menendez's own staff got a solicitation for his 2-year-old child last year, the senator said.

Only one? I've gotten four or five for Valerie so far this year.

The issue:

"More and more Americans are using credit card debt to manage daily living expenses such as basic living costs, medical bills and house or automotive repairs," Menendez said in prepared remarks released by his Senate office.

And the opposition:

Feddis said banks are already required under federal law to assess credit risks before issuing borrowing limits.

But if they were doing so, would they have needed last year's bankruptcy bill?

Menendez's proposal would keep credit cards from some borrowers who would use credit only in emergency situations or to build their credit history, she said.

How would this be so? In the former case, the person is clearly credit-worthy, and in the latter (where, presumably, one pays off the balance on time each month), the same would be true.

The question one has to ask is whether the business model for credit card issuers conforms to that of the "required...assess[ment of] credit risks." No reasonable analysis of Feddis's statements would lead one to believe it does.

(links and updates to follow)

Equivalent to Raider merchandise?

2006-04-19T18:57:00.000-04:00

Is this an efficient market?

Or is it just sickening? (See UPDATE below)

"Historically, lacrosse has been one of our three or four best-selling sports," said Tom Craig, general manager of retail stores at the Durham, N.C., school. "But over the last month, sales have increased to three or four times our normal rate."

But there is a silver lining from some:

"The reasons we stopped selling the gear are very straightforward," said Jeff Hennion, senior vice president and chief marketing officer of the company, which has more than 200 stores nationwide. "It is highly controversial in the Raleigh-Durham area. Having that type of product out in front of our customers seemed to be a lightning rod. And secondly, we had customers who saw it out in the store and complained about it."

Nice to see Michael Savage's listeners still have some spare cash.

When the story first hit the news more than a month ago, the average price of a Duke lacrosse item on the online auction site eBay was $7.74. The average price now is $17.04. The pace of transactions has increased, too. In early March, only a handful of Duke lacrosse items changed hands in a week. This past week, 79 items sold.

UPDATE: ESPN.com's Dan Shanoff weighs in with the same reaction:

The demand for Duke lacrosse merchandise is hot. Actually, it's a little sickening....

I have to believe that you won't get a warm reception from people if you're trying to suggest you're cool or an ironic hipster by wearing the shirt.

I wish I thought he was correct.

This is what economists mean when they say "win-win" situation?

2006-04-12T21:14:00.000-04:00

At least he called him "an economist" (p. 133)

There is nothing I can possibly add to Tim Lambert's destruction of John Lott, who insists we use his data even though the dog (or something) ate his homework.

But I hasten to note that Freakonomics called Lott "an economist," while Levitt Paul Krugman was a "New York Times columnist and devout critic of George W. Bush (p. 91)." Maybe Levitt can blame it all on his co-author?

(Updated with page references and the full Krugman description)

Is this an economics question?

2006-04-07T13:58:00.000-04:00

What was the effect on children's asthma rates when it became socially acceptable for women to smoke out of doors?

Does your answer change if the question becomes:

How much of the decline in children's asthma rates is attributable to women not doing all of their smoking at home?

Will they make more on Application Fees than this will cost?

2006-04-02T16:38:00.000-04:00

In Which I Say Nice Things about Lawrence Summers

Harvard has instituted, as part of Summers's greatest achievement, a new tuition structure. (The story was posted 31 March, so I will for now assume it is not an April Fool's Day joke.)

Harvard had previously waived tuition for its students from families earning less than $40,000.

Don't get me wrong; this structure still doesn't mean that Harvard becomes affordable for all

Harvard...set its annual tuition, room, board and mandatory fees at $43,655 last week.

but it becomes a lot easier to justify applying there if you are in the position of, say, Mark Thoma. Or the author of this blog way back when.

Quoting Thoma:

I know how hard it was for people in my town to get out of there and go to college anywhere, and I know how easy it would have been to slip through the cracks, how close I came to doing just that, so I hope you will bear with me when I push on educational issues. It made a huge difference in my life and I'd hate to see others miss out on their window of opportunity.

It's easy to overlook how little space there may be in that "window of opportunity." It's not that some people wouldn't succeed any way; the host of this show was a waitlisted student; had his alma mater gone co-ed five years earlier--he probably still would have come out of Oberlin or Case Western or Washington University of St. Louis. But it might not have been so easy for him to do so.

"Trickle down" depends on opportunity, which is why the crony capitalism of Bushalliburton's "no-bid," "not required to perform" contracts is opportunity lost.

More later.

What will be the Effect on Hotel Rates?

2006-03-27T18:23:00.000-05:00

The long-overdue move of NYC into the 20th century continues, with pay toilets being part of the plan.

On seeing a report about these on the local news, my wife--who is smarter than I--immediately asked what would happen if you went over the fifteen minutes. From the article (not the television reporter, who believed we didn't Need to Know):

A quarter will secure entree to the inner sanctum for 15 minutes (with a 3-minute warning). Linger past that, and the door slides open again for the next occupant even if the current one is not quite done.

"People are going use them for sex," she said in response to my clearly Not Getting It.

And the scales fell from my eyes, as Saul-who-became-Paul on the Road to Damascus; visions of available toilets in a city that dearly needs them we transformed into something fit for an early film starring one or another of those TNG guest femmes in their Skinemax days.

What's the TCO for sex in a pay toilet v. a hotel? (1) the ambience is lacking; the Regarding Henry-Expense Account crowd will still use The Ritz. But for what will literally be "a quickie," the worst case is probably that you pay someone a market rate (let's guess ca. $10-20) to put a second quarter in and give you an uninterrupted half-hour. (Anything more than that and the ambience factor should again dominate.)

So will short-term hotel rates have to adjust? Or are there other forces in the market that I'm missing?

Anyone have a question for R. Glenn Hubbard?

2006-03-22T16:50:00.000-05:00

Getting to meet him at a reception Monday night, and don't want to be too off-putting. (Most of my usual questions--e.g., given that companies are asking workers to take more risk [e.g., defined contribution pensions], why is their compensation being reduced?--are probably unacceptable to the Powers Who Arranged the Bash.)

Update: No harm, no foud, and not enough ambience to make it worth considering staying at the reception. Noticed a couple of (relatively speaking) Movers and Shakers there, but, as Tom Bozzo notes (after the first set of photos), there are more important things than Another Cocktail Party.

Steve Waldman ignores his own data

2006-03-13T09:42:00.000-05:00

The Washington Monthly somewhat proudly adds guest commenters such as Amy Sullivan and Steve Waldman (yes, I know him slightly from college, and, yes, his brother was President Clinton's chief speechwriter, and, no, neither of those affects the underlying data) who tell us that the problem with the Democratic party is the Secular Leftists.

Steve, unlike Amy, cites data (that he published at his admirable beliefnet site) and complains that "secular liberals...seem to have a disproportionate impact on the [Democratic] party's image and approach."

One might wish Steve would examine his own data. The self-identified "Religious Left" split their vote in 2000 evenly between the candidates. That same group in 2004 went 7 to 3 for John Kerry. And the self-identified "Religious Right"? Well, Kerry polled 1% less than Al Gore did--but George Bush also lost 1% of that vote.

Still, are the Evangelicals alienated by Democrats? "Moderate Evangelicals" were 7% of both Gore and Kerry voters. But Bush/Cheney, again, lost 1% of that vote.

The only two places in that table where the Republican vote change is greater than the Democratic party is in Latino Christians and Black Protestants, the latter group of which declined (both as a portion of Democratic vote and as a participation in the electoral process) as distance from the Clinton administration increased.

Looking at the data Waldman cites, it is clear that, if the "secular left" is leading the Democratic party, it's gaining popularity among exactly the demographic that Waldman, David Brooks, and many others identify as declining.

One has to wonder if they understand their own evidence.

Redefing Austerity

2006-03-07T15:49:00.000-05:00

Pence-Wise, Quid-foolish

Pull quote:

Senior aides say the conservatives' plan would wring about $350 billion from Medicare, Medicaid and other social programs and save $300 billion partly through a major reorganization of the Education, Commerce and Energy Departments.

Because taking medical care from the poor and infirm, cutting education, and energy research is always a win-win situation with economic growth--not to mention with voters. (Explanations of how Commerce made the list would be welcome.)

And, in the "you needed a laugh" category:

...[A] push by some Republicans to re-establish themselves as champions of fiscal restraint...as President Bush struck a similar theme on Monday by asking Congress to grant him line-item veto power to eliminate federal spending that he might judge wasteful.

Because he has always walked the ground of fiscal responsibility, as reflected by his never having used his current veto power despite "the growing practice by lawmakers of inserting spending for pet projects into legislation — a practice that has figured into continuing corruption scandals."

Mars Bitching

2006-03-02T09:09:00.000-05:00

New Budget Delays or Cancels Much-Promoted NASA Missions - New York Times

So is this a bittersweet microcosm of the Administration: announce a grand plan, then show no follow-through and hope no one notices?

Is this really 8th grade math?

2006-02-27T19:46:00.000-05:00

Via Atrios, comes Could You Pass 8th Grade Math?.

The answer is still yes.

You Passed 8th Grade Math

Congratulations, you got 10/10 correct!

Not exactly the most difficult quiz I've ever taken. But when I graduated high school, my high school didn't have computer programming, or any languages other than German and Spanish (the school discontinued French after my junior year).

These days, they do.

So I have to ask: if this is eighth-grade math in the United States, is it also 8th-grade math in India, Japan, China, or South Korea?

Why do research when your computer can compile press releases?

2006-02-23T11:47:00.000-05:00

If it's true thatthe outsourcing wave hits investment bankers, then why is all the talk about moving research and analysis offshore?

Pull quote:

"Investment banking has a lot of number crunching that to a large degree can be done anywhere," said Alenka Grealish, manager of the banking group at Celent LLC. "By taking press releases and data feeds and digesting them offshore, the components can be made into basic analyst reports" that are available to clients early in the morning.

And those investors should certainly pay just as much for an edited press release as actual research being done.

Pull quote 2:

The [Deloitte Touche Tohmatsu] report also predicts that driven by the need to take aggressive cost-cutting measures, the financial services industry will move 20 percent of its total costs base offshore by the end of 2010, compared to the current average of 3.5 percent.

This presents some additional risk to investors. Will they be compensated for it? (see also quote 4, below)

Pull quote 3:

Top performers can see cost savings of up to 60 percent while bottom performers report savings of less than 20 percent, [Peter Lowes, principle and head of outsourcing advisory services at Deloitte Consulting LLP] said.

Combining this allegation and the statement above, we would conclude that about 1/3 of the investment banking jobs currently in the United States will be offshored by 2010. How much will that reduce the value of an MBA?

Pull quote 4:

"The economics (of offshoring in banking) are strong and the risks are being successfully mitigated" [Lowes]said. "Today it's a competitive necessity."

Uh huh.

Noted as a Point of Information

2006-01-25T12:31:00.000-05:00

15 of the 30 most popular eBooks from the New York Public Library are currently Romance novels.

Discuss demographics and business opportunities accordingly.

More notes toward a review of Pietra Rivoli's The Travels of a T-Shirt in the Global Economy

2006-01-24T16:28:00.000-05:00

There are 75 uses of the phrase "free trade" in Pietra Rivoli's The Travels of a T-Shirt in the Global Economy. However:

Nearly one-third of those (22) are in the notes and Appendices, where (other) economists use the phrase

One is uses in quotes, derisively. Several others are used similarly, though without the specific quotation marks.

Several are part of a phrase, e.g., North America Free Trade Association (NAFTA)

So, ultimately, in a 272-page book discussing "the Markets, Power and Politics of World Trade," the phrase appears roughly 1.5 times every ten pages.

Several of those appearances are bunched, but certainly the most notable comes--and, yes, I regret having surrendered both the book and the PDF back to the libraries from whence they came--over 200 pages into the book, where Rivoli declares what we have been able to detect from her previous shadings and biases: she firmly believes that "the idea of free trade" is dominant.

The problem the reader will have with this assertion is that the idea's power is such that, as Ms. Rivoli demonstrates throughout this book, it is continually avoided. Rather like the Platonic Cave, "free trade" comes across as something that is discussed in the abstract, but never realised.

One might fairly conclude that those who claim to be advocates of free trade are defining trade to be free only so long as the market clears at the price they desire.

(to be continued)

Note toward a review of Pietra Rivoli's The Travels of a T-Shirt in the Global Economy

2005-12-23T16:47:00.000-05:00

Let me begin by noting that The Travels of a T-Shirt in the Global Economy is the best popular-economics book of the year, in my limited readings. It's nowhere near so offensive as Freakonomics, in which John Lott is described as "an economist" while Paul Krugman is "a New York Times columnist."

But why is it that economists who blather about the need for what is essentially a regulatory infrastructure--as Rivoli does, on cue--complain when people apply their skills to that infrastructure?

The working title of the review is "More in Sorrow than in Anger," but that may change to "Economicsland, where all Consequences are Unintended Except when they are to blame."

Congress Cuts Research, Education Spending - Yahoo! News

2005-12-16T09:04:00.000-05:00

Courtesy of Shakespeare's Sister, we find this glory:

Programs funded under President Bush's No Child Left Behind education law would face a 4 percent cut, while aid for special education and Title I funding for disadvantaged children would be frozen at last year's levels, assuming the across-the-board cut is imposed.

Yeah, great. Underfund, and then wonder why you can't hit impossible goals.

And David Obey, whom I picked on yesterday, at least falls (literally) on the side of the angels here:

"The holidays are supposed to be a time of generosity — a time when Santa Claus fills children's stockings," said Rep. David Obey, D-Wis. "Instead, this Congress is emptying them in order to provide a tax cut that gives 50 percent of the benefit to people making more than $1 million."

Meanwhile, back in IrresponsibleRepublicanville, the rationalisations are flying:

Republicans said they had produced the best bill they could in lean budget times....They noted that lawmakers had sacrificed $1 billion worth of hometown projects such as grants to community health centers to spread additional funds to other programs.

Gosh, that makes me feel better! They're cutting pork--and they think that a "community health center" is pork. Talk about the other white meat...

How to be fiscally responsible, per the current "Republican" party

2005-12-15T10:35:00.000-05:00

G.O.P. May Harness Arctic Drilling to Pentagon Budget - New York Times

Tax Cuts, Part II:

In another year-end spending fight, the House voted 215 to 213 on Wednesday to approve a slightly modified version of a $142.5 billion health and education spending measure rejected a few weeks ago. The measure reduced spending on programs covered under the legislation by more than $160 million from last year and was the first cut in education spending in a decade. In an effort to win approval, its authors funneled more money to rural health care.

Yep. Best way to secure the future is to stop educating in the present.

Representative David R. Obey of Wisconsin, the senior Democrat on the House Appropriations Committee, said the vote was just the latest in a series of Republican decisions in recent weeks to reduce spending on Medicaid, food stamps, student loans and child-support enforcement.

"This Congress will be taking away $48 billion from those who need it most in order to provide tax cuts, 50 percent of which will go to the top 1 percent - those who need it the least," Mr. Obey said.

Well, if we don't feed them, they don't need to be educated. Obey has clearly been affected by the "communing with Satan" they do in Madison.

CNN.com - AP: Blacks likely breathe most unhealthy air - Dec 14, 2005

2005-12-15T10:28:00.000-05:00

NIMBY?

Off the Rails - New York Times

2005-12-14T08:47:00.000-05:00

Let's take a look at the data presented as evidence that NYC transit workers should be grateful for management's largese:

For example, the authority wants to train subway operators to work as conductors and vice versa. In exchange, workers would get a 3 percent raise the first year and 2 percent the second (with the second year's raise contingent on the workers' cutting back the number of sick days they take to 2002 levels). Their above-average paychecks would increase in line with inflation.

That "above average" excludes that these are specialized jobs, and that "the market" is determined solely by the contract. (Unlike my profession, where people who believe they are short-changed are free to vote with their feet, the NYC Transit Authority has a monopoly, in exchange for which is negotiates with the workers.)

So those pay increases are contingent on (1) additional work outside of the area of specialisation and (2) reducing sick days to receive a 2% raise [which, last I checked, is not quite "in line with inflation"].

But it gets more interesting:

Union members now pay nothing toward their own health-insurance premiums; the authority wants new workers to contribute about 2 percent of their pretax wages before overtime toward those health benefits.

So the real "increase" would be 1% the first year and 0% (nothing) the second year.

Mr. Gelinas closes by declaring that if there is a strike, New Yorkers "should think about which side - the authority or the union - has acted unreasonably."

I'm certain there is a clear benefit to doing more work for less money, but if this is what the Manhattan Institute--and, by extension, The New York Times--thinks of as a "reasonable" offer, I would hate to see their idea of one that is favorable to management.

Business Model: Offer Credit Cards to the Newly Bankrupt

2005-12-12T14:37:00.000-05:00

Newly Bankrupt Raking In Piles of Credit Offers

Tell me again about how we needed the new bankruptcy law to punish people for not being responsible. Explain your answer in terms of both "moral hazard" and "sound business practices."

Develop a model to determine if this adds value.

Cluelessness at the New York Times

2005-12-09T09:36:00.000-05:00

The right course is clear: responsible senators should approve alternative minimum tax relief, but stand firm against machinations that would tart up the tax code with additional giveaways for the wealthiest Americans.

Examine this sentence in the context of census and FRED data. Estimate how many people will be marginally affected by the AMT this year. Approximate their income bracket.

Explain how "responsible" senators can approve this "relief" without "tart[ing] up the tax code with additional giveaways for the wealthiest Americans."

Multiplier Effects, Real-World Version

2005-12-08T11:47:00.000-05:00

Two 'grafs together, two worlds apart:

On Thursday, House leaders hope to win approval for their top priority this week: a $56 billion tax cut that would extend President Bush's tax cuts for stock dividends.

House and Senate Republican leaders also edged closer on Wednesday toward an agreement to cut as much as $45 billion over the next five years from domestic programs like Medicaid, food stamps, student loans and child-support enforcement.

Nice to know my tax savings are being used to make certain people don't eat, don't see a doctor, don't go to school, and don't fulfill their legal obligations.

Would hate to think the new DVD burner I can buy with the savings is a waste of money.

Gedankenexperiment II: Economic Value of Newslettering Cassandra

2005-12-06T20:01:00.000-05:00

Remember your answer to the first question.

Now, assume that you know of a financial newsletter, such as Grant's, published by an acquaintance of Cassandra's. The editor/publisher finds her statements so improbable that s/he prints several of them as absurdities.

What is the value of the newsletter?

Does it increase or decrease if the Absurdities feature becomes a regular event?

Assuming that you view the value of the newsletter as being higher than speaking with Cassandra directly, explain your answer. Then explain how the value of the newsletter would, in an economically perfect world, be divided.

Explain differences between your ideal and your expectation of reality.

Gedankenexperiment I: What is the Economic Value of Cassandra?

2005-11-20T14:14:00.000-05:00

It is well known that perfect correlation is ideal, even if it is perfect negative correlation. (If Jim Cramer really were wrong all of the time, it would be worth watching his current show--well, maybe not, but it could be justified then.)

But what of the legendary Cassandra, who always tells the truth (perfect correlation) but is never believed?

What they lose in price they make up in volume

2005-11-17T17:07:00.000-05:00

For those wondering about the value of "social cost," here is a clear example. Compare the second paragraph:

[S]everal companies and organizations were unveiling their plans to bring the world closer and, in a sense, narrow the digital divide, by providing laptops that cost just US$100 (euro85)

and its later elaboration

Late Wednesday, a text-book sized laptop boasting wireless network access and a hand-crank to provide electricity was unveiled by Nicholas Negroponte, Chairman of MIT Media Lab.

The machines will sell for $100, making them accessible to millions of school-aged children worldwide, he said.

with

[Nicholas] Negroponte said he expects 1 million of them to be sold to those countries. He did not say who would build the machine, which will cost $110 to make, but at least five are considering bids to do so.[emphasis mine]

MaxSpeak, You Listen!: THE REDNECK WELFARE STATE

2005-09-21T09:45:00.000-04:00

There is little more to say in the abstract than this.

E-mail suggests government seeking to blame groups - The Clarion-Ledger

2005-09-20T17:49:00.000-04:00

One of the keys for reading the National Review, as AngryBear often notes, is realising that what they say often has no relation to reality.

Apparently, their geography is often as poor as their economics.

Whoever is behind the e-mail may have spotted the Sept. 8 issue of National Review Online that chastised the Sierra Club and other environmental groups for suing to halt the corps' 1996 plan to raise and fortify 303 miles of Mississippi River levees in Louisiana, Mississippi and Arkansas.

The corps settled the litigation in 1997, agreeing to hold off on some work until an environmental impact could be completed. The National Review article concluded: "Whether this delay directly affected the levees that broke in New Orleans is difficult to ascertain."

The problem with that conclusion?

The levees that broke causing New Orleans to flood weren't Mississippi River levees. They were levees that protected the city from Lake Pontchartrain levees on the other side of the city.

How the Liberals Lost the Dialogue, Part 1 of a Series

2005-09-19T08:43:00.000-04:00

In the grand tradition of "you've got to be in it to win it" (or, as the old joke goes, "Meet me halfway, Morrie. Buy a ticket!"), the CNBC Squawk Box Guest List for today:

Mark McClellan
Centers for Medicare & Medicaid Services Administrator

Greg Valliere
Stanford Washington Research Group
Chief Political Strategist

Scott Amey
Project on Government Oversight
General Counsel & Lead Investigator

Tim Seymour
Red Star Asset Management
Managing Partner

Robert Bixby
The Concord Coalition
Executive Director

John Brady
Man Financial
Senior Vice President

Tom Schatz
Citizens Against Government Waste
President

Michael Cuggino
Permanent Portfolio Fund

Oliver Sartor
Stanley Scott Cancer Center, LSU

How to Describe a Month, CNBC-style

2005-09-19T08:35:00.000-04:00

CNBC just listed the four largest month-on-month drops in Consumer Sentiment. #1 is this month (Katrina). #2 was described as "Before Recession" (possibly the 1973 oil price spike). #3 was was in 1990, and noted as "End of Recession."

#4--September of 2001--was also described as "End of Recession."

Yeah. that's always the way I'll think of September of 2001.

Reality Bites Oligopolies Too - Sep. 16, 2005

2005-09-16T11:38:00.000-04:00

Reality Bites: "Mistakes that caused bad times were made in good times: Management at fault in bankruptcies"

Which leaves the question: if managers should be compensated for their performance, why does such compensation tend to be a one-way street?

Check out the graphic at the right. Of the seven largest airlines, five are at or near bankruptcy. The other two are Continental and Southwest.

The Southwest story is well-discussed everywhere. Continental, in my humble opinion, has the best Customer Service department of all the airlines. This doesn't mean they are perfect--they once took 24 hours to return a suitcase to me that never left their possession, and which they originally mistagged--but they try and they work with you.

In an oligopolistic industry, it's often too easy to think of advertising as the best way to differentiate your product. But customer service leads to "free" advertising (i.e., word of mouth), which would seem to be more effective.

Just as the people at Doesn't Ever Leave The Airport, whose effective monopolies and resultant pricing power in several locations (Cincinnati, Atlanta, etc.) doesn't seem to have carried the day.

How much can Manager Skill Matter? (Aug 29 catch-up)

2005-09-15T19:12:00.000-04:00

Forbes reports that the Washington Redskins are the most valuable franchise in the NFL.

Can anyone who has watched the team under Dan Snyder's ownership and control (effectively, management) explain how the relative value of the franchise appreciated by at least 6.5% per year from the time Snyder bought the team for $800 million in May of 1999 and the Forbes article in 2004?

Note: Forbes declares that Snyder paid $750MM, while the Redskins's website declares $800MM. Using the Forbes figure would produce a return of just under 8% p.a.

The Value of Employee Retention

2005-09-04T06:44:00.000-04:00

A friend who is rather more optimistic than I noted that the skills the current Administration has not displayed during Katrina ("Knowledge of crowd control, logistics and the military operations, command structure and control? Along with some political savvy?") are all present in one person--former
Secretary of State Colin Powell.

If Employee Retention is valuable--I believe it is, though the base metric varies by industry--why do the macro business models not consider it?

And, to the extent that it is valuable, should the value of outsourcing be reduced proportionately?

If you ban a market, cui bono?

2005-09-01T22:55:00.000-04:00

The petition was popular last year. This year, the legislature, never known for its perspicacity, made the move: U.K. moves to ban violent sex on Net. Well, not the presence of violent sex on the Net; just knowing about it:

On Tuesday the government agreed, announcing plans --- the first, it said, by any Western country --- to ban the downloading and possession of violent sexual images.

Ignoring the legal questions (e.g., what is "serious violence"?) and giggling at the disclaimers ("the government said it did not plan to prosecute people who accidentally stumbled across the images"), this is a markets question.

If you make a living selling imagery, including that which is a "graphic and sexually explicit and which contains actual scenes or realistic depictions of serious violence, bestiality or necrophilia," then the economy is willing and able to "clear" your transaction such a manner as to make it worth your while to produce those depictions.

What is the effect on demand--and on price--if the available commodity is then banned in one form (but, notably, no others)?

(As an aside, I can think of several episodes of, for instance, Millennium that may count, if they were viewed as streaming video. Depending on enforcement decisions.)

The two most obvious natural beneficiaries of the law should be:

1. Adult Video Stores (those who choose not to risk downloading shopping elsewhere), and
2. Producers of violent-sex material (who go from being price-takers to price-makers, and are compensated for their greater risk.

Am I missing anyone?

RBC and u* (for 30 Aug)

2005-09-01T11:55:00.000-04:00

David Altig, Angry Bear, and Max, among others, have been discussing this paper by Robert Hall, in which he discusses neoclassical economics and Kydland [Thank you, Tom] and Prescott's RBC (real business cycle) model in loving detail.

Hall notes that the neoclassical model is an economy in which "production functions, consumption demand functions and labor supply functions" are "embedded in markets that clear."

Now, if the markets clear--that is, if all transactions make economic sense to all participants, given their information at the time--why would the same not be true of the "natural" rate of unemployment (u*)? It would seem that the neoclassical model implies that any unemployment rate above zero would be a sign that potential GDP (y*) has been lost.

What am I missing?

Obviously Lying with Statistics

2005-09-01T11:51:00.000-04:00

Advert on CNBC from a company helping to reduce business debt:

Text 1: 4 Businesses Fail Every Minute.

Text 2: 40,000 Businesses Fail Every Month.

What's wrong with this, you ask?

60 minutes in an hour * 24 hours in a day * 30 days in a month = 43,200 minutes/month

So if the first were true, that would be ca. 173K failures a month.

Given that their mathematical skills are that bad, why would anyone use the firm for debt relief?

Why Did the Price of Oil Rise Today? (30 Aug - 1 Sep)

2005-08-30T21:13:00.000-04:00

This is a markets question, really, not an economics one.

As axioms go, "buy on the rumour, sell on the fact" is still more the rule than the exception in the financial markets. So why would the "fact" being less severe than the rumour result in a price increase?

A casual check of Sunday's blogverse finds a post from Atrios on Sunday night of the then-current forecast for the Louisiana area:

MOST OF THE AREA WILL BE UNINHABITABLE FOR WEEKS...PERHAPS LONGER. AT LEAST ONE HALF OF WELL CONSTRUCTED HOMES WILL HAVE ROOF AND WALL FAILURE. ALL GABLED ROOFS WILL FAIL...LEAVING THOSE HOMES SEVERELY DAMAGED OR DESTROYED.

The market certainly knew this before anyone started trading on Monday.

So it was no secret that (1) the LA/Gulf Coast area is a major source of oil, (2) the LA/Gulf Coast area was likely to be in bad shape ("at a standstill") by Tuesday morning.

And, indeed, that is what happened. However, while we should in no way belittle the human and direct economic costs, the damage caused by Katrina was, if anything, less than that expected on Sunday/Monday morning.

So traders knew nothing today that was worse than they expected yesterday. If you expected on Monday that a Category 5 hurricane to hit New Orleans, or much of Biloxi to be "uninhabitable," it would only be natural to expect that oil production in the Gulf would be impacted--severely for a few days, significantly for a while (logistical issue; getting people to and able to work while they try to rebuild their lives and homes), but not for the long term.

Now Tuesday has come around, and New Orleans was hit with a Category 4 (certainly more than bad enough, but not the expected Category 5) hurricane, and nothing else was hit worse than the predictions and expectations of Monday. (Again, the point is not that the predictions in any way ease the suffering and dislocations, just that the result was not worse than the expected horror.)

So why would the price of oil go up over 4.9% ($3.30 from $67.20) today? And what does that say about rational expectations and/or the efficiency of the market?

UPDATE: Apparently, in part because of poor resource allocation and in partthe post-hurricane activities, the damage is every bit as bad as originally expected. Meanwhile (hat tip: Max), James Hamilton has more on the actual damage done to production, including this note that was not highlighted in the CNN story referenced above:

In New York, oil prices sunk from their $70/barrel opening price to end the day at $67.20, up just a little over a dollar a barrel for the day. [emphasis mine]

Otoh, CNBC currently (31 Aug, 11:00am EDT) lists Crude Oil price at $70.05, up $0.24, which implies that yesterday's close was $69.81.

Again, the human tragedy is significantly more important, long-term, than this temporary problem with production/refining. But the market reaction is easier to measure for precisely that reason.

UPDATE 2: Tom Bozzo suggests another scenario. His conclusion--that the rally is a selling opportunity--appears to be the same, though.

UPDATE 3: How Risk Management in the face of very solid, very public information should have been done.

[A] brigade of the 101st would be have moved to Ft. Polk over the weekend and their helicopters would have been rescuing people as soon as the weathered cleared. Their heavy lift battalion would have been ferrying in supplies to isolated communities and the AF would have been dropping humanitarian aid packages like they did in Afghanistan over isolated rural areas. But that would be a serious understanding of the situation.

The upfront cost might have been substantial, but it will be far less than the incremental FEMA and insurance costs. The only point of disagreement is that this didn't take Mr. Bush understanding the situation--almost anyone in the administration, from Michael Chertoff to Secretary of the Interior Gale Norton (whose organization is conspicuous in its absence from this press release) to the Undersecretary for Emergency Preparedness and Response [emphasis mine] could have made this a less dangerous, less expensive, and less of the disaster it is.

Aligned Incentives are a Good Thing

2005-08-24T14:43:00.000-04:00

So what genius created this situation:

Jure Sola, the CEO and chairman at Sanmina-SCI (SANM, news, msgs) collected $26.4 million during the past four years while Sanmina shares fell 78%. The bulk of Sola's pay came in the form of a performance bonus of $19.9 million, paid for hitting one recent quarter's targets. [emphasis mine]

So in one quarter of the past two years, the company hit some target. As you can see from the stock price history, this didn't exactly do the investors any good.

Under what economic system does a manager receive more than 3x his annual compensation while the company gains less than that? If your answer is "capitalism," please explain the variety without using the word "crony."

If this is the Bull Case...

2005-08-24T14:24:00.000-04:00

Several days worth of posts to catch up on. Meanwhile:

CNBC today presented the Bull case for Coach, which makes "Textile - Apparel Footwear & Accessories."

Part of the Bull case was that the stock is trading at 27x Forward Price-Earnings. In a competitive, mature industry. For a stock that doesn't pay dividends.

What does a Bear case look like??

Crack and Technology as Business Models

2005-08-19T18:58:00.000-04:00

The Freakonomics blog references some interesting work on the history, growth, and ultimate stabilization of the crack "market," including the paper by Fryer et al. that forms the basis for the chapter in Levitt and Dubner's eponymous book, as well as this paper by Alfred Blumstein that explicitly considers crack in the sense of the traditional business model.

Indeed, crack fits the model well: introduction in 1985, peaked in 1993. The standard eight-year business cycle that was taught in B-schools and MBA programmes for decades.

Given that, why do people continue to believe that technology companies should be evaluated as if their "growth period" should be based on a 10- or 15-year time horizon?

A Win-Win for Da Bums?

2005-08-18T08:29:00.000-04:00

History tells us that it took no time at all for Robert Moses and NYC to refuse the request of Branch Rickey to keep the Trolley Dodgers in Brooklyn. Rickey almost immediately moved them to Los Angeles, where dodging trolleys is rather less common.

Since then, as Rory Costello of SABR notes, the area that was Ebbets Field has been developed and used by the city, providing construction jobs, housing, and ultimately generating revenues.

Is this a win-win situation?

Introduction

2005-08-18T08:27:00.000-04:00

Offering a question, speculating on an approach, and looking for advice and comments.