Thursday, October 30, 2014

Bolivia legalizes child labor for ten-year olds

voluntary transactions?
In December, the Union of Boy, Girl and Adolescent Workers of Bolivia marched to the presidential palace in La Paz to press its case for legal recognition of under-14 workers. Anti-riot police fired tear gas and the TV images of gasping, red-eyed youngsters alarmed President Morales.
After meeting with the child workers, Mr. Morales declared: “The state shouldn’t outlaw child labor. It should protect them.”
The Legislative Assembly followed his advice and rewrote parts of Bolivia’s Code for Children and Adolescents. Now, children starting at age 12 who have parental consent can work under contract and those from age 10 may be self-employed, as long as both stay in school.
Luis Canaza, 15, argued that part-time jobs can improve math skills and provide money to buy school uniforms and books. Luis, who has been working since he was 7, performs weekend clown shows and moonlights as a “voceador,” the barkers who shout the destinations of minibuses to lure passengers.

Nashville's own Merle Hazard on the Federal Reserve's dual mandate

As anyone who has read chapter 21 should realize, motivating an agent to follow two conflicting goals is very difficult for any principal, much less the US government.


Thursday, October 23, 2014

For those of you who missed his Vanderbilt class, ...

Mike Aronstein spoke at Brendant Moynihan's investment class, where he spoke about inequaltity caused by the Fed:
How this works is that people in the investable class who have access to assets can liquidate them for real cash. And if these assets have been rising in value (perhaps in a bubble), the amount of cash available to borrowers can be enormous. “Anybody who has an engagement with the nominal value of investable assets right now is getting wealth at a pace that’s hundreds of times beyond that available to somebody who’s outside of that stream.”
He also thinks inflation will eventually appear.  
Are there any benefits from recent Fed policy? Possibly down the line. “Seepage of this monetary excess into the rest of the local economy, piece by piece, means you’re going to wind up with a generalized inflation later on in this process, that I don’t believe the Federal Reserve will be able to stop it, or have the will.” Could this lead to higher wages? That’s anyone’s guess at this point.

Wednesday, October 22, 2014

BEYOND IRONY: Fed Chairman causes the very inequality she bemoans


Chairman Yellen complains about inequality, yet seems oblivious to her own role in exacerbating it.  Quantititative easing makes money plentiful and cheap; and this has benefitted those who can access the money in extraordinary ways.  Let me count a few of the beneficiaries:

  • The big Wall Street banks, .. which can borrow directly from the Fed, essentially free. Because banks are in the business of making money from money, they use the Fed’s money to make more money by trading with it, investing it in government debt and pocketing the profit or by lending it out at wide spreads. ...No other business on the face of the earth gets its raw material so cheaply. No wonder bank profits have soared.
  • Wall Street’s traders and investment bankers...know – and have known for years, thanks to the Fed’s telegraphing of its quantitative easing program – that the Fed will be a continuing buyer of their risky securities at (ever-rising) market prices. Since the onset of Mr. Bernanke and Ms. Yellen’s policy, the Fed’s balance sheet has grown to $4.5 trillion, from around $800 billion before the crisis. That’s a whole lot of securities bought at high, profitable prices and paid directly to Wall Street traders. The Fed might as well have been paying the traders’ seven-figure bonuses directly.
  • The Fed’s low-interest rate policies have also been a bonanza for Wall Street’s investment bankers – and their bonuses — as companies around the world race to raise debt capital at low rates. 
  • Private equity firms ... borrow money cheaply and leverage the billions of dollars in equity – said to be $3.5 trillion these days — to buy and sell companies. The buyout firms, and of course Wall Street, also get fees from all this deal activity. 

Meanwhile the little guys on fixed income get crushed by low interest rates:
...because they can’t get a return without taking an inordinate amount of risk, by either investing in the stock market, ...,or by “reaching for yield” by investing in risky debt securities that are increasingly overpriced. Either way, Ms. Yellen’s policies are crushing these 62 million American households. 

Monday, October 20, 2014

REPOST: Über succeeds where taxis fail

Saturday, April 14, 2012


Über succeeds where taxis fail

Almost all the everyday complaints about cabs trace back to bad regulation
Drivers won’t take you to the outer reaches of your metropolitan area? The regulated fares won’t let them charge you more to recover the cost of dead-heading back without a return customer. Cabs are poorly maintained? Blame restricted competition, and the inability to charge for better quality. Cabbies drive like maniacs? With high fixed costs for cars and gas, and no way to increase their earnings except by finding another fare, is it any wonder that they try to get from place to place as fast as possible?

Über is a better way to move assets to higher valued uses

Uber makes its money at least in part by alleviating these inefficiencies. In most places, “black car” or livery services are regulated differently, and more lightly, than taxis are. Though Uber has good reason not to say so, it’s basically turning livery services into cabs. The company is one step further removed from regulation, because it doesn’t run cars itself; it funnels passengers to existing services. “We’re sort of like an efficient lead-generation system for limo companies,” says Kalanick, “but with math involved.”

Predictably, the old technology asks the government to regulate the new technology
The commission has also launched a public fight against Uber. In January, Chairman Ron Linton declared that the service was “operating illegally” and personally led a “sting” operation, impounding the car of the unlucky driver who had dropped him off at the Mayflower hotel in front of a waiting reporter. Linton followed up with an op-ed in The Washington Post, insisting that Uber was unlawfully charging for time and distance. Uber’s defenders pointed out that D.C. limo regulations define “sedans” as “for-hire” cars that charge for service “on the basis of time and mileage.” Linton now says that

HT: Brock

Friday, October 17, 2014

What happens when Apple makes it easy to switch between carriers?

Price competition should become fierce.

A preinstalled data-only SIM card has been inserted into the $499 iPad Air 2, and allows users to change carriers at the tap of a finger. It's available in the U.S. on AT&T (NYSE:T), Sprint(NYSE:S) and T Mobile (TMUS), and in the U.K. on EE. Consumers can buy short-term data plans and can switch between the carriers to find the best deal.

Wednesday, October 15, 2014

Should Tennessee fund venture capital?

Not unless they can do it better than the millions of people who already do this for a living.

Equally direct, when asked about TNInvestco 2.0, Vanderbilt University economist Luke Froeb, who is on the faculty of the Owen Graduate School of Management, said venture investment such as that discussed here should be left to the marketplace, without State involvement. He then pointed us, once again, to his earlier comments regarding what he has termed TNInvestco's "perverse incentives" for fund managers.

In fact, if they had to do it, don't you think they should have mimicked the way that investors fund VC?  Here is a REPOST on the peculiar way that they chose to do it last time.

Monday, September 10, 2012


Perverse incentives in TN state funded investment

The state is auditing the its venture capital fund, which awards $20 Million ($25 M in future tax credits are worth about $20 M today), and then asks fund managers to invest  in early stage ventures.  After the investment pays out, the state and the managers split whatever remains.

Proponents of the program say it was an innovative attempt to steer venture capital toward economic development priorities like health care, bioscience, music and other sectors. As the Business Journal reports today, some Republicans are questioning the program’s job creation so far and want to evaluate other aspects of its financial performance.


Any audit should first understand the incentives.  To do this, lets run through some scenarios.  This is what is called a "sensitivity analysis."

 Compare the (very approximate) terms of a typical Venture Capitalist (VC) to those of TNInvestco under the following scenarios:
  • Scenario A:  Good Scenario (Invest $20 million, sell investments for $50 million)
    • TNinvestco gets $25 million, State gets $25 million
    • Typical VC gets $6 million, investor gets $44 million

  • Scenario B:  Break-even Scenario (Invest $20 million, sell investments for $20 million)
    • TNInvestco gets $10 million, State gets $10 million
    • Typical VC gets zilch, investor gets $20 million

  • Scenario C:  Worse-case Scenario (Invest $20 million, sell investments for $10 million)
    •  TNInvestco gets $5 million, State gets $5 million
    • Typical VC gets zilch, investor gets $10 million
The key thing to note is that the typical VC is makes nothing (other than management fees) unless a fund makes money for investors.  This serves to align the fund manager's incentives with the profitability goals of the fund investors.

In contrast, a TNInvestco fund manager makes a substantial amount unless the fund is a total failure.  

Bottom line, TNInvestco creates incentives for the managers to not lose money, as opposed to the high level of risk taking that is typical to venture capital.  One would expect safer investments. 

Stay tuned for what the audit uncovers.


If you pay people who are unemployed, ...

... you get more unemployment.  From the St Louis Fed:

Longer benefits may reduce unemployed workers’ job search efforts, decreasing their likelihood of becoming reemployed.

BOTTOM LINE:  Every recession since 1950 has included an emergency response from Congress to increase unemployment benefits.  The good news is that the perverse incentives of the program seem small, increasing unemployment rate only a small fraction.