Thursday, July 31, 2008

Paternalism run amock

City government legislates against temptation for low income Los Angelenos.

"Green with Envy" by Merle Hazzard

Déjà vu

Turns out that the current banking crisis is very similar to five post-war banking crises that preceeded it.
At this juncture, the book is still open on the how the current dislocations in the United States will play out. The precedent found in the aftermath of other episodes suggests that the strains can be quite severe, depending especially on the initial degree of trauma to the financial system (and to some extent, the policy response). The average drop in (real per capita) output growth is over 2 percent, and it typically takes two years to return to trend. For the five most catastrophic cases (which include episodes in Finland, Japan, Norway, Spain and Sweden), the drop in annual output growth from peak to trough is over 5 percent, and growth remained well below pre-crisis trend even after three years. These more catastrophic cases, of course, mark the boundary that policymakers particularly want to avoid.
Thanks to Merle Hazzard for pointing this out.

Wednesday, July 30, 2008

Good to Not-So Great

As I read recent news of problems at Fannie Mae, I recalled that it was one of the companies profiled in Jim Collins' smash book, Good to Great. Hmmm... I guess it's a lot easier to craft ex post explanations of success and find apparent patterns and causal explanations than it is to find a good predictive model of what companies are going to succeed in the future. As Steven Levitt of Freakonomics fame notes, a portfolio of the 11 companies featured in Good to Great has underperformed the S&P 500.

If you haven't had a chance, check out Phil Rosezweig's book, The Halo Effect, for a discussion of some of the problems in creating ex post explanations of success.

Monday, July 28, 2008

How can general hospitals compete with specialty hospitals?

In the past, we have blogged about the competition between General Acute Care Hosptials and Specialty Hospitals, (Hospitals trying to make the rules so their rivals won't). Speciality hospitals not only "cherry pick" the most profitable patients (insured patients, simple care), but give physicians an ownership stake so that they will refer patients there.

Now McKinsey has some advice on how General Hospitals can fight back.
  • trying to be all things to all patients is no longer a viable strategy.
  • organize by service line, focusing on building world-class capabilities in just a few clinical areas.
  • Choosing the right service lines to emphasize requires a superior understanding of a hospital’s economics and competitive environment.
  • Returns from Lobbying

    I have always found defenses of political lobbying as something other than a quid pro quo to be a bit perplexing. If the companies aren't getting something of value, why are they spending all that money? A new working paper, Corporate Lobbying and Financial Performance, by Hui Chen at the University of Colorado at Boulder, Vanderbilt's David C. Parsley, and Ya-Wen Yang
    of the University of Miami offers some evidence of the benefits of lobbying. The paper drew a short mention in a recent Business Week. Here's the abstract:
    Corporate lobbying activities are designed to influence legislators and thus to further corporate goals by encouraging favorable policies and/or outcomes. Using data that became available after the passage of the Lobbying Disclosure Act of 1995, this study evaluates the effectiveness of corporate lobbying from a financial perspective. We find that a firm's lobbying expenses are positively correlated with its accounting-based financial performance. We also demonstrate that lobbying expenses are value-relevant to firms' market valuation. Finally, we use a portfolio approach to compare stock returns of lobbying firms with non-lobbying firms. We find that portfolios of firms with higher lobbying intensities significantly outperform portfolios of firms of similar size and book to market ratios as well as portfolios of firms with zero lobbying spending.

    Friday, July 25, 2008

    The One Lesson of Business (7 min lecture)

    La renaissance française

    President Sarkozy is liberating the French economy from the political shackles put on it by the unions. How an unpopular president is able to accomplish this is nothing short of a miracle.
    1. First, by firing off in so many directions at once, Mr Sarkozy has made it difficult for the unions to focus. During the June strikes, for instance, it was unclear what the protests were supposed to be against. Pension reform? Working-time rules? Public-sector job cuts? “His method is to make everyone giddy,” comments one aide. At times, the president has played this game masterfully. When teachers went on strike in May against (modest) job cuts, Mr Sarkozy appeared on television not to calm but to wrong-foot them: he announced a new plan, popular with parents, to guarantee “minimum service” at schools during strikes.
    2. Second, Mr Sarkozy has treated a select number of union leaders as grown-ups, taking them to fine restaurants in Paris and inviting them for talks at the Elysée. As Xavier Bertrand, the labour minister, puts it, “in the past, the government waited for a conflict and then negotiated; today, we talk first.” Mr Sarkozy's direct, inclusive approach goes down well with a group that is more used to disdain from French leaders. When Dominique de Villepin, a former prime minister, tried to introduce a flexible work contract for the young, he failed even to tell the unions about it first.
    3. Third, if talks lead only to timid results, Mr Sarkozy seems willing to press ahead regardless, relying on public opinion for support. One example concerns working time. After months of talks on labour reform, unions and employers agreed in April to make elections to works councils more open and democratic, but did little to loosen the 35-hour week. So Mr Bertrand announced a new law, passed on July 23rd, to let companies negotiate longer working weeks with union representatives—all but squelching the 35-hour week.

    Snapping magnetic fields cause Northern Lights

    Even with the mystery gone, I still enjoy them.

    Heads they win, tails we lose

    In past blogs, we have documented the ruthless reaction of rural electrical and telephone CO*OPs to Representative Jim Cooper's simple call for transparency. Joe Stiglitz (Nobel Laureate) asks for similar transparency at Fannie and Freddie as the US government is about to embark on another private-public partnership, in which the private sector takes the profits and the public sector bears the risk:
    1. First, it should be fully transparent, with taxpayers knowing the risks they have assumed and how much has been given to the shareholders and bondholders being bailed out.
    2. Second, there should be full accountability. Those who are responsible for the mistakes – management, shareholders and bondholders – should all bear the consequences. Taxpayers should not be asked to pony up a penny while shareholders are being protected.
    3. Finally, taxpayers should be com­pensated for the risks they face. The greater the risks, the greater the compensation.
    UPDATE: Senator McCain expresses similar views:
    “Americans should be outraged at the latest sweetheart deal in Washington,” writes McCain. “Congress will put U.S. taxpayers on the hook for potentially hundreds of billions of dollars to bail out Fannie Mae and Freddie Mac. It’s a tribute to what these two institutions — which most Americans have never heard of — have bought with more than $170-million worth of lobbyists in the past decade.”

    Wednesday, July 23, 2008

    Have we lost the ability to sacrifice for our future?

    The Naked Economist slams politicians for offering investments that look more like consumption:

    The definition of an investment, whether it's public or private, is an undertaking that requires foregoing consumption in the present in order to achieve higher consumption in the future. It's just like the marshmallows, only you get real money, or more life satisfaction, or something else worth waiting for.

    People respond to incentives

    CATO explains, then slams Senator Obama's Social Security Tax plan. I like the part when he slams Senator McCain to prove he is not pimping for the GOP.

    Crazy Inflation

    According to this story, the government of Zimbabwe recently introduced $100 billion bank notes in an effort to combat continuing cash shortages in the inflation-racked country. The latest official inflation rate is 2.2 million percent, and the new $100 billion note is reported to be equal to one US dollar. Needless to say, this is all indicative of an economy that just isn't functioning. Reports have unemployment rates as high as 80 percent.

    Monday, July 21, 2008

    Change that works

    Reason slams Senator Obama for opposing change that might upset the public school monopoly:
    McCain wants to expand a Washington, D.C. program that provides federally funded scholarships so poor students can attend private schools. More than 7,000 kids, he reported, have applied for these vouchers, but only 1,900 can be accommodated.

    Obama promptly expressed disdain for McCain's proposal. The Republican, his campaign said, offered "recycled bromides" that would "undermine our public schools."

    You would think a leader who plans to liberate us from the partisan dogmas of the past would be open to this approach—and in February, Obama indicated he was. "If there was any argument for vouchers, it was, 'Let's see if the experiment works,'" he said. "And if it does, whatever my preconception, you do what's best for the kids."

    But it didn't last. After those comments drew attention, his campaign hastily reminded voters that "throughout his career, he has voted against voucher proposals" and that his education plan "does not include vouchers, in any shape or form."

    DISCLAIMER: I am supporting McCain

    Stupid Company Tricks

    In the tradition of Letterman's stupid human tricks and stupid pet tricks, here's another entry in a growing collection of stupid company tricks (see here for companies that hire hypnotists). Apparently, some companies pay up to $10,000 a month to consult with "intuitionist" Laura Day. What's an intuitionist, you ask? Well, according to Laura Day's web site, Practical Intuition,
    The Practical Intuition series is a training in intuitive development and application. Each of these books in the series focuses you on applying your intuition to your life's challenges while developing skills such as telepathy and precognition which allow you to function as an intuitive for others.
    I've got to be making this up - no sane business manager would spend company funds to hire someone to help develop telepathy and precognition, right? Wrong - see this article on and this one from Newsweek.

    Saturday, July 19, 2008

    Now this is radical

    Senator McCain proposes giving money to consumers and letting them choose.
    Andrew Coulson, director of Cato's Center for Educational Freedom, comments: "Republican presidential candidate John McCain told the NAACP that after decades of broken promises by the nation's public school systems it is time to give parents an easy choice of public and private schools. He is right, so long as he doesn't propose a private school choice program at the national level. ... It is far better and safer for presidential candidates to tout the merits of school choice and encourage their state level counterparts to put these programs into place. In that way, the varying experiences of the states -- the so-called 'laboratory of federalism' -- can help to identify and eliminate problems in their implementation."

    The most basic question about your company

    Advice from McKinsey on which lines of business you should be in. Look for
    operational synergies, distinctive skills, or specific strengths, such as superior access to capital and talent in emerging markets. The most important thing is the difference an owner can make to a business, not its absolute level of returns.

    Thursday, July 17, 2008

    ...and you may ask yourself, "well, how did I get here?"

    Nice history of how the mortgage giants mis-used their low implicit cost of capital to expand into the very investments they were supposed to avoid,
    Joshua Rosner, an analyst at Graham Fisher, a research firm, who was one of the first to identify the problems in the mortgage market in early 2007, reckons Fannie and Freddie were buying 50% of all “private-label” mortgage-backed securities in some years—that is, those issued by conventional mortgage lenders. This left them exposed to the very subprime assets they were meant to avoid. Although that exposure was small compared with their portfolios, it could have a big impact because they have so little equity as a cushion.

    McCainonomics vs. Obamanomics

    CATO slams both candidates:

    Mr. Obama's fiscal plan is totally implausible. He has, according to the National Taxpayer Union (NTU), already promised to increase spending on a variety of government programs by more than $344 billion per year. He intends to pay for it by increasing taxes on the "wealthy" (the top 1 percent of taxpayers already pay 39percent of the income tax). But the revenue he seeks will not be there, because the rich are able to find many legal (and illegal) ways to avoid paying much higher tax rates. ...

    Nobel Laureate and "father of the euro" Robert Mundell said if Mr. Obama does not renew the 2003 tax rate reductions, "the U.S. will go into a big recession, a nosedive."

    John McCain and his advisers have developed a more responsible fiscal plan, but need to explain more clearly how and where Mr. McCain will reduce spending (in light of his proposed $69 billion spending increases — again using NTU estimates) to attain his projected balanced budget and economic growth targets.

    DISCLAIMER: I am supporting McCain

    Wednesday, July 16, 2008

    Cheap gas kills 14,200 people each year

    and makes us obese:
    With public transit use nationally at a 50-year high, traffic dropped 2.1% in the first four months of this year across the country. That mileage reduction -- along with people driving smaller cars, and more slowly, to save gas -- could mean that 12,000 fewer people will die in traffic accidents this year, ... Air pollution has been reduced enough, ... to prevent 2,200 respiratory-related deaths over the last year. Less eating out and more walking and biking could mean a 10% reduction in obesity,

    Likelihood of me being FEMALE is 14%

    Interesting site showing how to use statistical inference to estimate your sex based on browser history, via Adam Schiff. You can use this to design an online price discrimination scheme based on gender.

    Is satire insulting?

    Only if its done well.

    Randomized experiments to evaluate policy

    Anyone who reads this blog appreciates the importance of metrics to evaluate firm performance, e.g., profit, stock price, sales, and market share, to name a few. Government policy evaluators are trying to catch up:
    ..economists...have begun to champion the latest thing in development economics: “randomised evaluations” in which different policies—to boost school attendance, say—are tested by randomly assigning them to different groups. In one celebrated example, researchers looked at what happened in 20 antenatal clinics in western Kenya when some gave away insecticide-treated bednets, an anti-malaria therapy, and others sold them for different prices. Their conclusion was that free distribution is far more effective in getting people to use bednets than charging even a nominal sum would be.

    This seems so obvious...

    At 2.9%, the home-owner vacancy rate, which measures the share of vacant homes for sale, has reached its highest point since measurement began in 1956. But forget the complicated bail out plans being crafted by politicians to help the housing sector. All you have to do is reduce supply, and prices will increase:
    Unlike mortgage bail-outs, this policy does not encourage risky lending. However, it requires cities to spend money on demolition merely to lose money through reduced taxes.

    How would stocks react to an Obama presidency?

    With Obama futures trading at $0.65, stockholders may be reacting to the likelihood that Senator Obama will be elected president "by tossing financial, health insurance, manufacturing and high-dividend stocks into the ash can, and are growing skeptical about energy companies as well."

    Airline Revenue Part 2

    If you haven't flown lately, you may not have heard of one of the newest cost-cutting moves: no more free snacks. While your average airline passenger may not be very pleased with this idea, it makes a lot of sense to me. Why were we all subsidizing people to eat snacks that they valued less than their cost? I know there have been plenty of times on an airline when I wasn't particularly interested in a snack, but heck if it's free I'll chow down a few peanuts or pretzels. Now, only those who really value a snack buy, and the rest of us don't have to subsidize our fellow passengers' snacking habits.

    One thing the airlines seem to be missing, though, is a lesson from behavioral economics. Framing things as losses tends to irritate people much more. By charging for snacks, airlines lead passengers to focus on the tragic loss of their free snacks. Imagine the reaction, instead, if airlines offered everyone who skipped the snacks a $5 discount on their airfare. Same situation but a very different passenger reaction I would imagine. The loss of snacks is now framed as a gain (the $5 you save).

    Monday, July 14, 2008

    What economics can teach us about love

    Ben Stein (former FTC economist) offers these insights:
    • If you invest caring, patience and unselfishness, you get those things back.
    • High-quality bonds consistently yield more return than junk, and so it is with high-quality love.
    • Stay with high-quality human beings. And once you find you that are in a junk relationship, sell immediately.
    • The most appealing and seductive (that word again) exterior can hide the most danger and chance of loss.
    • In every long-term romantic situation, returns are greater when there is a monopoly.
    • The returns on your investment should at least equal the cost of the investment.
    • Fall in love in haste, repent at leisure.
    • Realistic expectations are everything.
    • When you have a winner, stick with your winner. Whether in love or in the stock market, winners are to be prized.
    • Have a dog or many dogs or cats in your life.
    This advice seems to parallel that from my favorite textbook:
    Marriages are vulnerable to the same type of post-investment opportunism that plagues commercial relationships. Parties invest time, energy, and money in a marriage, the kinds of investments that differentiate marriages from more casual, spot market transactions. These investments are valuable to the marriage parties but are largely sunk, in that they have a much lower value outside the relationship. The marriage contract penalizes postinvestment hold-up (i.e., divorce) and thus makes couples willing to invest more in the marriage.

    Consider an apocryphal story of an economist and his fiancee. The two were receiving premarital counseling from a priest. The priest’s first question to them was ‘‘Why do you want to get married?’’ The economist’s fiancee answered, ‘‘Because I love him and want to spend the rest of my life with him.’’ The economist had a somewhat different answer: ‘‘Because long-term contracts induce higher levels of relationship-specific investment.’’ A year later, trying hard to find the right words to express how he felt about his wife, he wrote an anniversary e-mail—using a nice cursive font—declaring that his ‘‘relationship-specific investment was earning an abnormally high rate of return.’’

    Airlines Working to Increase Revenue

    Many of you have probably heard of the airlines' beginning to charge extra for passengers' checked luggage. Here's another way airlines are working to increase revenue - by identifying "extras" that have value and then charging for them.

    My wife and I recently flew on Northwest Airlines and when checking in, we were able to reserve exit row seating for an additional $20 per person per leg. I think this is a great idea. Why waste exit row seating on customers who don't value it? Move it to a higher valued use - and charge those who are willing to pay. I was certainly happy to fork over a few extra bucks for a slightly less cramped ride.

    Sunday, July 13, 2008

    If everyone was an economist, ...

    We would see candidates pushing these policies:

    Saturday, July 12, 2008

    Housing bubble wipes out savings

    Since most American's use their houses as a way to save money, and since housing prices are declining two percent/month, savings are disappearing at an alarming rate:
    The decline in house prices since the middle of 2006 has lead to the loss of ... more than $50,000 for every homeowner in the country. Real house prices are now dropping at close to a 2.0 percent monthly rate, which translates into a loss of almost $350 billion everymonth.

    The projections show that the crash of the housing bubble is likely to eliminate most, if not all, of the gains that families had made in accumulating wealth over the last two decades. The median family in the cohorts from age 35-44 is actually projected to have less wealth in 2009 than their counterpart in this age group in 1989. The median family in the cohort from ages 45-54 is projected to have just 0.8 percent more wealth in 2009 than the median family in this age cohort in 1989.

    Friday, July 11, 2008

    Incentive compensation for attorneys

    Most attorneys are compensated on a cost-plus basis, which gives them an incentive to run up legal fees and billable hours. This has created an opening for an Ohio based law firm with a better way to align the incentives of attorneys with the goals of their clients. The key is an accurate measure of performance:

    ...success fee may be based on several factors. They include whether a corporation is able to get the case dismissed or to settle the case within a defined time period, whether the payout is less than a set amount, and whether the corporation’s insurance carrier covers the payout.

    Fines for large wastelines

    Japan will start fining those with big waistlines.
    The law requires everyone between 40 and 74 years of age to have their waist measured. The requirement, which will cover almost half of the country's population, stipulates that people whose waists exceed the allowable limit — 33.5 inches for men and 35.4 inches for women — will be given three months to get in to shape. Failing that, they will be given another six months of health re-education to reduce their waist measurements. Companies with large-waisted employees will be financially penalized.
    I wish I were clever enough to make this stuff up.

    Wednesday, July 9, 2008

    Consumers Lock in Today's Gas Prices


    A new web site,, allows drivers to purchase future gas fill-ups at today's prices. According to this ABC News story, about 2,000 people have signed up for the site since a soft launch in January. is one more example of the type of wealth-creating transactions that are a theme of our text. The transaction transfers risk from those who don't want it (the consumer) to those willing to accept it (the company). Ain't the market grand?

    Tuesday, July 8, 2008

    Solving problems using economics (7 min)

    Study past mistakes before you repeat them.

    As Congress contemplates banning speculators from trading oil contracts, it should study its past efforts to rein in speculation:

    In 1958, Congress officially banned all futures trading in the fresh onion market. Growers blamed "moneyed interests" at the Chicago Mercantile Exchange for major price movements, which could sink so low that the sack would be worth more than the onions inside, then drive back up during other seasons or even month to month. Championed by a rookie Republican Congressman named Gerald Ford, the Onion Futures Act was the first (and only) time that futures trading in a specific commodity was prohibited, and the law is still on the books.

    Even after the nefarious speculator had been banned, the volatility of onion prices remained high. Ironically, growers now want the speculators back.

    Monday, July 7, 2008

    Why is it so hard to get to green?

    In the past, we have blogged about the reluctance of companies to pull the plug on unprofitable investments. Here is an interview with Amory Lovins on the opposite mistake, the unwillingness of companies to make profitable investments:

    And I’m astonished how often chief executives confuse the top and bottom lines. Years ago, I was talking to the head of a Fortune 50 company and was able to tell him about an engineer who had just cut $3.50 per square foot per year off the energy costs in one of the company’s plants. The CEO quickly and correctly translated that into $3.5 million in cost savings. But in the next breath, he said he couldn’t get excited about energy, because it was only 2 percent of his cost of doing business! He forgot where saved overhead goes—straight to the bottom line.

    I had to do the arithmetic and show him that if he hypothetically achieved the same result in his 92 million square feet of facilities worldwide, his total net earnings would rise by more than 50 percent. That got his attention. He promoted the engineer, who spread his practices all over the company. Until then, that idea had never occurred to top management, because energy wasn’t an important factor cost.

    Most Corrupt Countries

    Transparency International, "the global civil society organisation leading the fight against corruption," has released its latest Global Corruption Report. Included is a ranking of countries based on the Corruption Perceptions Index (CPI); the index uses surveys of business people and assessments by country analysts. Here are the most corrupt countries:
    • Somalia
    • Myanmar
    • Iraq
    • Haiti
    • Uzbekistan
    • Tonga
    • Sudan
    • Chad
    • Afganistan
    • Laos
    • Guinea
    • Equatorial Guinea
    • Congo, Democratic Republic
    The United States is ranked as the 20th least corrupt country (out of 180 countries ranked)

    Friday, July 4, 2008

    Median voter theory

    The median voter theory suggests that candidates will try to appeal to the median Democratic or Republican voter to win the nomination, and then try to appeal to the median general election voter (Democratic + Republican + Independent) to win the November election. Charles Krauthammer is chonicling Obama's move to the center:

    In last week's column, I thought I had thoroughly chronicled Obama's brazen reversals of position and abandonment of principles -- on public financing of campaigns, on NAFTA, on telecom immunity for post-Sept. 11 wiretaps, on unconditional talks with Mahmoud Ahmadinejad -- as he moved to the center for the general election campaign. I misjudged him. He was just getting started.

    Last week, when the Supreme Court declared unconstitutional the District of Columbia's ban on handguns, Obama immediately declared that he agreed with the decision. This is after his campaign explicitly told the Chicago Tribune last November that he believes the D.C. gun ban is constitutional.


    Obama's seasonally adjusted principles are beginning to pile up: NAFTA, campaign finance reform, warrantless wiretaps, flag pins, gun control. What's left?

    Iraq. The reversal is coming, and soon.

    Two weeks ago, I predicted that by Election Day Obama will have erased all meaningful differences with McCain on withdrawal from Iraq. I underestimated Obama's cynicism. He will make the move much sooner. He will use his upcoming Iraq trip to finally acknowledge the remarkable improvements on the ground and to formally abandon his primary season commitment to a fixed 16-month timetable for removal of all combat troops.

    Thursday, July 3, 2008

    Read this tomorrow

    Nice summary from Cato on the two documents that define our country.
    We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

    Unintended Consequences of Stimulus Checks

    Retailers like Sears, Wal-Mart, Kroger and Radio Shack all have plans in place to try to capture part of the proceeds of the rebate checks from President Bush's Economic Stimulus plan.

    It looks like that's not the only place the checks are going.

    Wednesday, July 2, 2008

    Anti-takeover provisions facilitate empire building

    Three of the most prominent anti-takeover provisions (ATPs) are

    • staggered boards, where only a third of directors are up for election each year;
    • poison pills that allow existing shareholders to acquire large amounts of stock at a substantial discount when a hostile bidder acquires a large block of shares;
    • golden parachutes, or extraordinary severance packages for executives terminated or demoted after a change of control.

    Colleague Ron Masulis finds that acquisition announcements by firms with more ATPs (most significant are staggered boards) tend to generate lower returns. He concludes that managers at firms with more ATP's are more likely to engage in opportunistic behavior such as empire building.

    Sucking Up to the Customer College Style

    The Chronicle of Higher Education reports on the strategy of High Point University in North Carolina to differentiate itself from competitors. To increase customer satisfaction (and in the university president's view the student is the customer), High Point offers a "jaw dropping menu of student services." From live music in the cafeterias, concierge services, birthday recognition, and miscellaneous other gifts and services, High Point takes sucking up to students to a new level. Not surprisingly, entrollment has tripled since the new president took over.

    I wonder if they are hiring faculty??