Thursday, February 28, 2008

Why are people having fewer kids?

Reason has a short article on the so called "demographic winter." Here are the demographic trends:
Population stability is achieved when each woman bears an average of 2.1 kids over the course of her lifetime—one for her, one for her male partner, and a little overage to make up to childhood deaths. Today, there are sixty countries in which TFRs are below 2.1. For example, the European Union's TFR is 1.5 and no EU member state has a TFR at replacement or above. Even high population developing countries have seen steep declines in fertility. Since 1970, China's TFR fell from 5.8 to 1.6; India's from 5.8 to 2.9; Indonesia from 5.6 to 2.4; Japan's from 2.0 to 1.3; Mexico's from 6.8 to 2.4; Brazil's from 5.4 to 2.3; and South Africa's from 5.9 to 2.7. The U.S. TFR dropped from 2.55 in 1970 to around 2.1 today, largely because of the influx of higher fertility immigrants. However, the fertility of second generation Americans drops to the level of longer established Americans.
This is the explanation:
So, modernity essentially transforms children from capital goods that produce family income into consumption items to be enjoyed for their own sakes, more akin to sculptures, paintings, or theatre. But that's just the problem—according to happiness researchers, people don't really enjoy rearing children.

Wednesday, February 27, 2008

Mandatory mortgage information disclosures

In past blogs, (Next time you buy or refinance a house) and (Is deception profitable?), we have blogged about the the problems of mandatory information disclosure. Reuters reports on efforts by our favorite government agency to make the world a better place:

Research by the FTC found that half of the borrowers it surveyed could not identify their loan amount in mortgage papers. One-third could not identify their interest rate. Two-thirds did not know if their mortgages had prepayment penalties, a feature which can make refinancing effectively impossible.

"Consumers today do not understand the forms that they sign," said Marc Savitt, president-elect of the National Association of Mortgage Brokers. "All (loan) originators should disclose in the exact same forms and in the exact same manner. ... the FTC is right about this."
He is referring to research done by economists Jim Lacko and Jan Pappalardo to design a more consumer friendly mortgage disclosure form.

Zero Price?

Blogger charged us nothing for setting up this blog. There are no hosting fees associated with making the blog available on a continuing basis. The price Blogger receives from blogging customers - zero. How do business models like this work? Should we expect to see more of this approach?

Here's a very interesting article by Chris Anderson, the editor in chief of Wired magazine and author of The Long Tail. He discusses business models like Blogger's and argues that we will be seeing much more business conducted this way in the future.

In our text, we discuss cases of "Barbie Doll marketing" (you give away the dolls and sell dresses and other accessories at high markups). Examples include printers (low markup) with toner (high markup) and razor blades and razors. Anderson argues that products priced at or near zero are "the future of business" and discusses other ways that business can capture revenue from customers receiving free products (like selling advertising on web sites).

Tuesday, February 26, 2008

A tale of two senators

In this blog, we have attacked ethanol subsidies for their perverse effects (they encourage energy consumption--not conservation--and are worse for the environment), yet we have them because supporting them is the easiest way to win the Iowa caucuses. This is the traditional route that Senator Obama took through the primaries. Senator McCain took the road less traveled. From David Brooks column, "The Real McCain"
In 2000, McCain ran for president and reiterated his longstanding opposition to ethanol subsidies. Though it crippled his chances in Iowa, he argued that ethanol was a wasteful giveaway. A recent study in the journal Science has shown that when you take all impacts into consideration, ethanol consumption increases greenhouse gas emissions compared with regular gasoline. Unlike, say, Barack Obama, McCain still opposes ethanol subsidies.
DISCLOSURE: I am supporting McCain

Monday, February 25, 2008

Why health insurance is like car insurance

Funny interview (MP3)with Jeff Margolis, CEO of Trizetto Group, where he compares health insurance to car insurance. These kinds of metaphors are going to frame the policy debate because they are so easy to understand.

Perhaps a crude but appropriate analogy is if you own an automobile, you know a couple of things. You know that if you don't maintain it well, if you don't change the oil, if you don't check your tire pressure, and if you don't do a few other safety things, you could find yourself in a lot of trouble in a hurry and really raise the cost of owning that vehicle.

Similarly, when you think of getting auto insurance, you have to make active decisions about the level of collision or comprehensive insurance and think actively about what level of risk you're willing to take on your deductible. We're incented to not drive our cars into trees, right? Because, gosh, it hurts and you can kill yourself, and in the best case, you have to pay your deductible. And even in the best case, your premiums go up after you have an act, if you will, of carelessness. So we need to think about ourselves in the healthcare system similarly.

Europe worried about US protectionism

Wall St. Journal has an interview with the Peter Mandelson, the European Union trade commissioner, who worries about protectionist rhetoric in the U.S. presidential race.
...Mr. Mandelson argues on a recent afternoon -- more so than any of the EU's 27 member states -- it is America that threatens the cause of free trade today.

"You can see it in the politics of the country," he says from his armchair in an EU office in the shadow of the Eiffel Tower. "You can see it in the Congress, you can see it in the primaries, you can see it in the town-hall meetings, you can see it in the candidates who, in order to appeal to the public, articulate these arguments" of protectionism.

"I don't see anywhere in Europe similar sentiments being expressed. I hear reservations about agriculture, or . . . about whether [trade] talks are balanced." But, he adds, "You'll not find anyone running for election in Europe and questioning whether we should complete the Doha round [of world trade talks]. You hear that from some of the candidates in the U.S., some of them from the Republican and the Democrat side."

Hedging Old Man Winter

As everyone's favorite textbook notes, "insurance is a wealth-creating transaction that transfers risk from someone who doesn’t want it (the risk-averse consumer) to someone who doesn’t mind it (the risk-neutral insurance company)." We're all familiar with traditional insurance options like life and car insurance. But, how about weather insurance?

A recent article in Newsweek mentions specialty firm Storm Exchange of New York that offers insurance against weather-related risks. Hedgers can also trade contracts on the Chicago Mercantile Exchange. Last year, over $19 billion in weather contracts traded on the Exchange.

With all of the snow in the Midwest this year, a snow insurance policy would have been nice. Shoveling the driveway for what feels like the 100th time wouldn't seem so bad if I knew a check was coming in the mail.

Friday, February 22, 2008

Which asset class has done best over past 20 years?

Satire: the subprime primer

In past blogs, we have talked about the goal alignment problem associated with the subprime meltdown. Now someone has put together a slide show (profanity-filled) satirizing all of the characters in the subprime debacle.

Wednesday, February 20, 2008

Negative campaigning as a repeated prisoners' dillemma

Negative campaigning works well against an opponent in the primaries, but if the Democratic primary turns nasty, which by some accounts it already has, anything the Democrats say against each other will be used against them in the general election. So while negative campaigning will help win the primary, it will also reduce the probability of winning in the general election, setting up a game with the same logical structure as a prisoners' dillemma.
Later in the call, the Clinton team was asked whether the not-qualified-to-be-commander-in-chief criticism of Obama was going too far, given that it would be used by Republicans against Obama if Obama is the Democratic nominee against John McCain. "We don't believe that he is the one who will face John McCain," Clinton spokesman Howard Wolfson said. "This is a legitimate question that Sen. Obama would face if he were the nominee, and it is a question that he is facing as a result of criticism from Sen. McCain now, so I think it's perfectly appropriate."
Senator Obama's best response to negative campaigning comes right out of an economics textbook:
  1. Be nice (no first strikes)
  2. Be provokable (attack immediately if attacked)
  3. Be forgiving (stop if she stops).
  4. Be clear (make it very clear that you will attack every time she attacks.)
Winning strategy is probably tit-for-tat, do whatever she did yesterday.

The Struggles of a Conglomerate

In a number of posts (here, here, and here, for example), we have discussed the challenges of firms' diversifying through mergers and acquisitions.

Business Week profiles Tyco International, "a complex tangle of businesses . . . thrown together," and the struggles of its management team to make sense of how the disparate parts all fit together. The article also includes a description of a paper available on the Social Science Research Network that summarizes a roundtable discussion of finance academics on how they teach the topic of the diversification discount to MBA students.

Tuesday, February 19, 2008

Who will buy this wonderful forest?


The Economist reports of a bargaining impasse between America's armchair conservationists and Cameroon over a rich virgin forest. Cameroon wants $2/hectare to forego logging while the conservationists figure that the going rate for virgin rainforest is only $0.37/hectare.

If, as our textbook says, "the alternatives to agreement determine the terms of agreement," then American Conservationists seem to have the upper hand, as there are lots of rain forests that can be saved for much cheaper than $2/hectare. Expect Cameroon to acquiesce soon.

Forget golf, take up cycling

From San Jose Mercury News:

In the past five years, cycling has become the hip sport of Silicon Valley. Technology entrepreneurs have taken to whirring through redwood groves on bicycles worth as much as the GNP of a small nation....

It started with San Francisco investment banker Thomas Weisel, who founded the U.S. Postal Service team that gave Tour de France winner Lance Armstrong his rise in the 1990s. Weisel eventually took over USA Cycling eight years ago. The leadership change led to the creation of a fundraising arm known as the Champions Club, where members donate $100,000 to get in, then contribute $25,000 annually.

The list of 30 members on the group's Web site includes legendary venture capitalist John Doerr; George Battle, the retired executive chairman of Internet search engine Ask Jeeves; and Tench Coxe, Russell Hirsch and Greg Penner, all partners at Peninsula investment firms.

If Obama wins, this company will fire some employees

One of my former students sent this message to his managers:

------ Forwarded Message------
From: CEO
Date: Tue, 19 Feb 2008
To: managers
Subject: Food for thought

Some Presidential candidates have suggested removing the limit upon which social security taxes are imposed on wages. Right now, the first $102,000 of an employee’s W-2 income is subject to the withholding tax of 6.2%. And the employer matches that amount.

Currently employees who earn more than $102,000 in a calendar year are not taxed 6.2% for social security on amounts above that and the company does not make any matching social security contributions for wages over $102,000. (which is one reason January’s payroll costs are always higher than December’s).

In 2007 more than 45 of our employees earned in excess of $102,000. Under the plans being floated, each of these employees would pay 6.2% more in taxes on the difference between $102,000 and their total pay. (e.g., if you made $202,000, your tax bill would have been $6,200 higher than it was.)

Our treasurer estimates that had the change been in effect for 2007, our employees would have paid an additional $500,000 in social security taxes. The employees paid and the company matched $410,000 in social security taxes in 2007.

Increasing the tax may be fair and just, depending upon your political ideology and your view of taxes and government spending and how much you pay now.

But consider this: What none of the press accounts bothers to mention is that employers must match this amount. Had the tax change been in effect for 2007, our company would have owed another $500,000 in matching social security taxes, (over and above what would be withheld from employee’s pay) almost certainly creating a situation where major cuts would have been necessary.

Just something to consider.

Monday, February 18, 2008

Grey Market: 1.3 million i Phones smuggled out of US

In past, we have blogged about Apple's attempt to control the distribution of its popular iPhone. It is apparently losing the "war" to smuggling, from the US back to China.
There the phones’ digital locks are broken so they can work on local cellular networks, and they are outfitted with localized software, essentially undermining Apple’s effort to introduce the phone with exclusive partnership deals, similar to its primary partnership agreement with AT&T in the United States.
This kind of smuggling is called a "grey market," where consumers circumvent the attempt of a private company to control pricing or distribution, to distinguish it from a "black market," where consumers circumvent governments attempt to control pricing or distribution of a product.

Be careful what you ask for...

The Labour party in Britain promised that patients would have to wait for no more than four hours to be seen in an emergency room. Guess how the National Health Service is meeting this performance goal:
Seriously ill patients are being kept in ambulances outside hospitals for hours so NHS trusts do not miss Government targets.

Thousands of people a year are having to wait outside accident and emergency departments because trusts will not let them in until they can treat them within four hours, in line with a Labour pledge.

The hold-ups mean ambulances are not available to answer fresh 999 calls.

Ambulances

Ambulances: 'A colossal waste of resources says the union Unison

Doctors warned last night that the practice of "patient-stacking" was putting patients' health at risk.

More criticism of Bill Gates' "creative capitalism"

In past blogs we have critiqued Gates' naivete in calling for the world to adopt "creative capitalism." Now his ideas attract criticism from two Nobel Laureates:

A curious omission in Gates's speech is a theory of why so many people are desperately poor. When he says that "diseases like malaria that kill over a million people a year get far less attention than drugs to help with baldness," he does not pause to inquire why that is so. It is so, first of all, because people in wealthy countries do not suffer from malaria, and, second, because cheap but highly effective methods of combating malaria, such as mosquito netting and indoor spraying of DDT (which would have few negative environmental effects, unlike outdoor spraying), are somehow not provided, but for reasons political and cultural rather than financial. We know that a nation doesn't have to be rich in natural resources to be prosperous. The essential ingredient of economic growth is human capital, and it depends primarily on the existence of a political system that prevents violence, enforces property rights, provides a minimum level of public goods, and minimizes governmental interference in the economy. Without such institutions, economic growth will be stunted; altruistic capitalists will not cure their absence.

And the final irony:
And if creative capitalism does succeed in lifting billions of people out of poverty, the problem of global warming will become even graver than it is because the world demand for fossil fuels will soar.

Light Up to Reduce Health Care Costs

Interesting short article in this week's issue of Business Week abnout a study by the National Institute for Public Health and the Environment in the Netherlands.

In favor of banning smoking to reduce the cost burden on the health care system? The study does estimate that smokers cost the health care system the most. But, only up through age 56. Who has the highest lifetime health care costs? Healthy weight, nonsmokers. These people live the longest so consume more health care, especially in the later stages of their lives.

Friday, February 15, 2008

Is the war over yet?--Blu Ray vs. HD DVD

In the past we have blogged about the standards war between Blu Ray and HD DVD. It looks like the war is almost over:

Wal-Mart Stores Inc. has picked Blu-ray over HD DVD in the market battle for the format of high-definition video.

The nation's largest retailer said Friday it has decided to sell only Blu-ray DVDs and hardware in its 4,000 U.S. stores and no longer carry rival HD DVD offerings.

The announcement comes five days after Netflix Inc. said it will stop carrying rentals in Toshiba Corp.'s HD DVD format and instead go exclusively with the rival Sony Corp. technology favored by five major movie studios.

Florida hospitals erecting barriers to entry

In past blogs we have noted the use of laws and regulations to slow down the forces of competition. Florida hospitals are busy erecting barriers to entry:

The state's 289 full-service hospitals worry that if CON were removed, small, doctor-owned facilities focused on high-margin procedures for insured patients would open. These patients are needed at existing hospitals, Glatfelter said, to offset the 65 to 75 percent of patients who are uninsured or covered by Medicare or Medicaid, which reimburses at less than cost.

Siding with the hospital trade association is the influential business group Associated Industries of Florida. The group said studies by three auto manufacturers have shown that the cost for health care is significantly higher in states without CON. A hospital building boom would also exacerbate the shortage of doctors and nurses in Florida, it said.

How do the candidates vote on trade issues?

Senator John McCain
Barrier Votes: 88%
(35 votes out of 40 opposing trade barriers)
Subsidy Votes: 80% (8 votes out of 10 opposing trade subsidies)

Congressman Jim Cooper (Nashville)
Barrier Votes: 81%
(21 votes out of 26 opposing trade barriers)
Subsidy Votes: 50% (4 votes out of 8 opposing trade subsidies)

Senator Barack Obama
Barrier Votes: 36%
(4 votes out of 11 opposing trade barriers)
Subsidy Votes: 0% (0 votes out of 2 opposing trade subsidies)

Senator Hillary Clinton
Barrier Votes: 31%
(9 votes out of 29 opposing trade barriers)
Subsidy Votes: 14% (1 votes out of 7 opposing trade subsidies)

Our own Congressman Cooper did better than Clinton and Obama, but not as good as McCain. All in all, very good for a Democrat. Data from Cato.

Newspapers form ad alliance

In the past, we have blogged about declining demand for newspapers on both the reader and the advertisers side. We have also seen mergers as a strategic response to the declining demand. Now we see the newspapers forming a network so that they can better compete for national advertising dollars:
QuadrantONE, scheduled to be operating by April 1, is designed to offer national advertisers one-stop shopping for display ad space in the partners' network of websites. The sites reach 50 million unique users monthly and cover 27 of the nation's top 30 advertising markets, according to Dana Hayes, a Tribune executive who is functioning as the venture's interim chief executive. The network also would be open to websites unaffiliated with the partners.

Thursday, February 14, 2008

Why is poverty high near subway stops?

Elegant and accessible new working paper by Edward Glaeser:
...the rich and the poor use different transportation technologies (LeRoy and Sonstelie, 1983). If the rich drive and the poor take public transportation, then the rich can have lower costs of commuting per mile even if their time is worth more. Glaeser, Kahn and Rappaport (2007) find that access to public transportation does seem to explain the decisions of the poor to live in urban centers. Indeed, poverty rates even seem to rise in areas that are close to new subway stops. The connection between public transportation and poverty is not a problem, but rather a reflection of the valuable role that public transportation plays in serving and attracting the poor.
Also explains why house prices fall with distance from the city center (HINT: in long run equilibrium, you have to be compensated for travel costs.)

Finally, Glaeser opines on whether to rebuild New Orleans:
The economists’ desire to put people first might seem obvious, but it is often in conflict with much place-based urban policy. For example, regional policies in Europe, such as the European Union’s spending on infrastructure for poorer areas like the Mezzogiorno and in the U.S., such as the Appalachian Regional Commission, are classic place-based policies that aim to make particular regions wealthier. In the wake of Hurricane Katrina, many advocates for New Orleans called for hundreds of billions of dollars to be spent so that the city would come back.

The economics approach to public policy pushes us to ask whether this money would be better spent on people, rather than place based policies. For example, would 500,000 residents of New Orleans be better off with 200,000 dollars apiece or 100 billion dollars worth of government infrastructure.

Benefits of a weaker dollar

From the NY Times:

The United States trade deficit shrank in 2007 for the first time in five years, buoyed by a surge in exports that has helped domestic businesses stay afloat as the domestic economy flags.

The gap between what Americans import and export contracted by 6.2 percent last year, to $711.6 billion, the Commerce Department said on Thursday.

Incentives to Russian parents to have kids

From BBC:

The government has become so worried about the falling birth rate that it's come up with a scheme.

When a woman's second child reaches three years of age, she receives a payment of 200,000 roubles ($8,000) and, if she manages to bring more three-year-olds into the world, she'll get a payment for each one.

Obamanomics: No to NAFTA & Wal-Mart

From yesterday's speech, via Greg Mankiw:
...t's a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart. That's what happens when the American worker doesn't have a voice at the negotiating table, when leaders change their positions on trade with the politics of the moment, and that's why we need a President who will listen to Main Street – not just Wall Street; a President who will stand with workers not just when it's easy, but when it's hard.
This is what the Democratic primaries do to a candidate.

Wednesday, February 13, 2008

Welfare that works?

How do you alleviate poverty without creating incentives to become poor? Brazil may have the answer. From the Economist:

Bolsa Família works as follows. Where a family earns less than 120 reais ($68) per head per month, mothers are paid a benefit of up to 95 reais on condition that their children go to school and take part in government vaccination programmes. Municipal governments do much of the collection of data on eligibility and compliance, but payments are made by the federal government. Each beneficiary receives a debit card which is charged up every month, unless the recipient has not met the necessary conditions, in which case (and after a couple of warnings) the payment is suspended. Some 11m families now receive the benefit, equivalent to a quarter of Brazil's population.

Obamanomics: tax and spend?

Obama's economic plans include increased taxes on income, dividends, and capital gains to pay for tax cuts for lower and middle income taxpayers and increases in spending on alternative energy.


From US News:

1) Yes, Obama is for raising income-tax rates on wealthier Americans. But that, along with advocating greater government involvement in healthcare, was the admission ticket to the Democratic primaries. ...

2) Yes, Obama wants to raise payroll taxes. But he's actually a bit of a maverick in this since it's the semiofficial Democratic line that Social Security is not really in crisis.

3) ...If there's a Democratic landslide in November, would Obama use that electoral edge to push through all those huge tax increase and spending proposals without any GOP votes—as Clinton did with his tax hikes in 1993? Or would he attempt to compromise?

4) President Obama would come into office facing a $400 billion budget deficit and the prospect of huge future deficits because of Social Security and Medicare. I think that factor alone may turn Obama into an incrementalist on domestic policy...

5) I wonder what Obama voters are really voting for? They want the United States out of Iraq, to be sure. But what beyond that? Well, consider this: I've heard Obama supporters say that Obama will be "their Reagan."

Ouch!

Feeling down about the slowing economy? Credit crunch hitting you particularly hard? Recent stock market performance depressing your portfolio? Well, console yourself with the fact that you could have lost a lot more.

Business Week reports on the effects of the recent bear markets on superstar CEOs. Leading the list (check out the slide show) is Larry Ellison, Oracle co-founder and CEO, whose recent 11% loss in holdings' value translates into just under a $3 billion decline. Don't feel too bad for him, though; his current holdings are valued at over $24 billion.

This does point to one problem with using stock as incentive pay. A lot of times the stock goes down (or up) for reasons having little to do with the recent performance of the CEO and other employees.

Tuesday, February 12, 2008

Is US economy losing its labor mobility?

In previous recesssions (early 1990's), there was a big migration from the rust belt to the sun belt where jobs were plentiful. But this one is different. The downturn in housing is making it difficult for people to move (unless they walk away from their mortgages), reducing the flexibility of the US economy that has limited the duration and size of previous downturns. From the Economist:


YOU won't hear the R-word much in the modest governor's mansion in Helena, Montana. The occupant, Brian Schweitzer, insists that Montana's economy is in better shape than it has ever been. It has had one of the fastest rates of job growth in the country. The state is prospering on the back of booms in mining and farming, as well as steady growth in tourism. Paul Polzin of the University of Montana forecasts that the state's economy will grow by 4.1% this year, the fifth consecutive year of growth above 4%. “We've been searching for realistic doomsday scenarios,” he says, “and we just can't find any.”

Go to Michigan, by contrast, and it is hard to find anything but gloom. The collapse of America's car industry, coupled with a nasty subprime mortgage bust, has left the state reeling. It has the highest unemployment rate in the country (7.6%) and the third-highest foreclosure rate, and was the only state to lose a large number of jobs in 2007. In the run-up to the state's Republican primary (which he won) Mitt Romney traversed Michigan, promising to save voters from a “one-state recession”.

What am I missing?

NAFTA has provided huge benefits to Mexican farmers, so it is really hard to understand their protests. From NY Times:

Last week, tens of thousands of poor Mexican farmers marched down Mexico City’s fancy Paseo de la Reforma demanding that Nafta be reversed, their cows and donkeys occasionally taking a nibble from the grass along the median strip.

...Nafta has already shaken up Mexican farming — mostly for the better. The value of agricultural imports from the United States has doubled since 1994, when tariffs started to gradually decline. Imports of corn have more than doubled by volume.

But this isn’t displacing Mexico’s small-scale farmers. Most corn from the United States is used for feed and doesn’t compete with white corn farmed in Mexico. Mexican corn production is about a third higher than before Nafta came into effect. And cheap American corn is providing cheap feed to Mexico’s livestock farmers.

Monday, February 11, 2008

Understanding Changes in the Soybean Market

Here's a chart of prices in the soybean market over the last year from AgWeb



What's driving the increasing prices? As George Will notes in a recent Newsweek column, at least two forces are combining to drive up prices. Demand is increasing thanks to rising world population and incomes. Supply is also contracting because many farmers have decided to switch production to agricultural products that can be turned into biofuels.

Rising demand and falling supply = prices going up, up, up.

Sunday, February 10, 2008

Income distribution


The previous post generated a lot of e mail questioning the underlying distribution of income. Here it is, from the Economist:

... Many studies suggest that mobility between generations has stayed roughly the same in recent decades, and some suggest it is decreasing. Even so, ordinary Americans seem to believe that theirs is still a land of opportunity. The proportion who think you can start poor and end up rich has risen 20 percentage points since 1980.

That helps explain why voters who grumble about the economy have nonetheless failed to respond to class politics. John Edwards, the Democrats' vice-presidential candidate in 2004, made little headway with his tale of “Two Americas”, one for the rich and one for the rest. Over 70% of Americans support the abolition of the estate tax (inheritance tax), even though only one household in 100 pays it. ...

Other rich countries are watching America's experience closely. For many Europeans, America's brand of capitalism is already far too unequal. Such sceptics will be sure to make much of any sign that the broad middle-class reaps scant benefit from the current productivity boom, setting back the course of European reform even further. ...

Whether these shifts were good or bad depends on your political persuasion. Those on the left lament the gaps, often forgetting that the greater income disparities have created bigger incentives to get an education, which has led to a better trained, more productive workforce. The share of American workers with a college degree, 20% in 1980, is over 30% today.

Friday, February 8, 2008

Putting the tax debate into historical perspective


One difference between the Democrats and Republicans is whether to let the Bush II tax cuts expire. From the graph above we see the Kennedy tax cuts (from 91% down to 70%) in 1962; the Reagan tax cuts (from 70% to 28%) in the early 1980's; the Bush I (28% to 35%) tax increases; the Clinton tax increases (from 35% to 39%); and the Bush II tax cuts (from 39% to 35%).

Some economists predict a big negative effect on tax collections because elasticity of tax receipts with respect to marginal tax rates is big for high income taxpayers; but small for low income tax payers. This means that the tax cuts for low and middle income workers will produce a big drop in tax receipts and the tax increases on high income workers will produce a small increase in tax receipts.

Historical note: no Republican's (not Goldwater, not Bob Dole) supported the Kennedy tax cuts. How things have changed.

Will they ever learn?


George Washington tried to reduce the cost of the food he purchased at Valley Forge by imposing price controls. Predictably the supply disappeared. Now, the WSJ reports similar efforts are underway in developing markets to combat high food prices caused by the demand for biofuels.

Economists warn that price controls encourage hoarding and can lead to supply shortfalls, fueling unrest. Faced with persistent food shortages, the government of Venezuela last week warned it could "expropriate" any food company necessary to ensure the nation's "food security and sovereignty."

Perhaps the biggest disadvantage of price controls, however, is that they short-circuit potential changes in behavior by producers and consumers that might damp the underlying causes of inflation

Aligning physician incentives with goals of patients

This is the most difficult, some would say "only," issue in health care management. Physicians have the information necessary to make good decisions, but their decisions are influenced by their incentives. Now some companies with big health care expenses are trying to change physican incentives. From WSJ:

...reward primary-care physicians significantly more than that, but they would be required to make much bigger changes and adopt a more integrated approach to coordinating patients' care. Such steps include following up on referrals to other physicians, systematically tracking tests, flagging abnormal results and adhering to widely accepted medical guidelines to monitor and treat diabetes and other chronic conditions.

By using such processes to improve and better coordinate care, doctors can receive $125 annual bonuses for each patient covered by a participating employer, up to a maximum $100,000 a year. Based on previous work with doctors' practices, Bridges to Excellence executives estimate such improvements in quality save $250 to $300 per patient in the first year.

Thursday, February 7, 2008

Biofuels worse than gasoline

From NY Times:
Almost all biofuels used today cause more greenhouse gas emissions than conventional fuels if the full emissions costs of producing these “green” fuels are taken into account, two studies being published Thursday have concluded.

Biofuel Follies

Latest column from George Will:
The environmental argument for ethanol and other biofuels is... refuted by the need to mandate and subsidize the fuels. The argument that biofuels are important for reducing our energy dependence on unreliable or dangerous Middle Eastern nations (the two largest sources of U.S. oil imports are turbulent Canada and militant Mexico) is mocked by the 54-cents-a-gallon tariff penalizing Brazilian ethanol. The theory behind that tariff is as old as American history. It is that "infant industries"—in this case, the ethanol industry that the government has ordered into existence—require protection. But protection permanently infantilizes industries.

Newspapers sinking fast

from NY Times:
In 2007, combined print and online ad revenue fell about 7 percent. In the last six decades, only one other year — 2001, when there was a recession — had a steeper decline, according to the Newspaper Association of America. Adjusted for inflation, 2007 ad revenue was more than 20 percent below its peak in 2000.

Circulation revenue has declined steadily since 2003, and the number of copies sold has been slipping about 2 percent a year. Some of the largest papers — including The San Francisco Chronicle, The Boston Globe and The Los Angeles Times — have lost 30 to 40 percent of their circulation in just a few years.

Wednesday, February 6, 2008

Jumping without Incentives

I was sitting at my computer working Monday night when I heard the doorbell ring. My wife answered the door and I heard a squeaky little voice asking my wife if she would be willing to sponsor the young girl in her school's participation in Jump Rope for Heart.

Perfect, I thought. Here's a chance to support a good cause while teaching kids about the benefits of incentives. I waited to hear how much per jump my wife would be willing to pledge. To my utter horror, she went looking for her wallet and gave the young lady a cash donation. "Whoa, whoa, whoa," I said to my wife, "what exactly are this young lady's incentives? She gets the same payment from us whether she jumps once or 1,000 times. Think of the horrible inefficiencies created by the need to monitor her performance. For her benefit and for the overall welfare of society, we should have put her on a per-jump incentive plan!

As you might imagine, I didn't get too far with this argument.

Monday, February 4, 2008

Physicians paid to prescribe generics

From WSJ:
Health plans are drawing scrutiny for offering financial incentives to entice doctors to prescribe cheaper generic medicines, including paying doctors $100 each time they switch a patient from a brand-name drug.

Incentives and Prescriptions

See this week's issue of Business Week for an interesting article on efforts to educate medical school students on the effects of drug company perks. While many believe that they won't be swayed by pitches from pharmaceutical reps, the statistics would seem to indicate otherwise.

The article quotes Dr. Adrian Fugh-Berman who says that a doctor who spends one minute with a pharma sales rep prescribes 16% more of the product than he or she was previously prescribing. A four-minute interaction is associated with a 52% increase. I am a little skeptical of the causality here (we might expect that doctors who are interested in a certain drug are more willing to meet with a sales rep; their interest in the drug causes both the meeting and the increase in prescriptions), but it's something to think about. Fugh-Berman's web site features some interesting videos from drug reps describing their marketing tactics. In this one, a rep compares free samples to crack.

Saturday, February 2, 2008

Michael Porter updates his 5 forces

January 2008 issue of Harvard Business Review includes an article by Porter "updating" the five forces model:
Porter here reaffirms, updates, and extends the classic work. He also addresses common misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today.