Wednesday, March 31, 2010

Congress and President ignore the first law of holes

When you are in one, stop digging--Donald Marron's 6-step program for derailing our fiscal train wreck:
  1. Set firm budget goals, like a 70% debt-to-GDP ratio, and put mechanisms in place to ensure you will be held accountable for meeting them. 
  2. Keep all options open, by combining proposals to cut spending, increase revenues, and, where possible, boost growth. 
  3. Reduce the growth rate of spending.
  4. Recognize that different spending challenges require different approaches. For Social Security, the key issue is political will... For Medicare and Medicaid ... policymakers should approach health spending as a research-and-development challenge, not as a one-time matter of setting specific policy dials. 
  5. Not all taxes are created equal --Taxes on income, for example, are usually worse for the economy than taxes on consumption.
  6. Obey the first law of holes

Buffet vs. Barack

Debtholders apparently have more faith in the Sage of Omaha versus Uncle Sam:
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg.

“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion.

Rotten Real Estate

America's most underwater housing markets:

Las Vegas, NV
Merced, CA
Phoenix, AZ
Orlando, FL
Greely, CO
Bend, OR
Minneapolis - St. Paul, MN
Memphis, TN
Cleveland, OH
Grand Rapids, MI

Tuesday, March 30, 2010

You might be an economist if...

  • You don't want to sell your children because you think they will be worth more later; or
  • Human interest stories don' t interest you
    The Stand-up Economist is coming to Nashville and YOU’RE INVITED to a fun and educational evening at University School of Nashville featuring, IN PERSON, THE WORLD’S FIRST AND ONLY STAND-UP ECONOMIST YORAM BAUMAN Author of The Cartoon Introduction to Economics

    UNIVERSITY SCHOOL OF
    NASHVILLE AUDITORIUM
    2000 EDGEHILL AVE.
    NASHVILLE, TN 37212
    MONDAY, APRIL 5
    5:30 p.m. (There will be a book signing and reception at 5pm)

    FREE FOR ALL AREA STUDENTS AND TEACHERS, $5 FOR THE REST OF US TO BENEFIT USN's SCHOLARSHIP FUND.

    SEE YOU THERE.

    Is the stock market over-valued?

    John Mauldin says it looks expensive:
    jmotb032910image003
    Based on the above research findings, with the S&P 500 Index's current ten-year normalized PE of 20.3 and ten-year normalized dividend yield of 2.1%, investors should be aware of the fact that the market is by historical standards expensive. As far as the market in general is concerned, this argues for unexciting long-term returns, possibly a "muddle-through" trading range for quite a number of years to come.

    Nice visual

    A student explains the budget.

    Monday, March 29, 2010

    Chapt. 3 lecture: Accounting costs don't mean squat

    This recession is different

    One of the usual engines of recovery - residential investment - isn't contributing this time.
    The reason RI is moving sideways is because of the huge overhang of existing housing units (both single family and rental units). And this is one of the key reasons I think the current recovery will be sluggish and choppy - and that unemployment will stay elevated for some time.

    Sunday, March 28, 2010

    Canada's growing private health sector

    Fewer Canadians may be coming to the US to get medical care (Danny Williams, Premier of Newfoundland flew to the US to get his heart surgery done a coupe of months ago):
    But a Supreme Court ruling last June — it found that a Quebec provincial ban on private health insurance was unconstitutional when patients were suffering and even dying on waiting lists — appears to have become a turning point for the entire country.
    "The prohibition on obtaining private health insurance is not constitutional where the public system fails to deliver reasonable services," the court ruled
    In response, the Quebec premier, Jean Charest, proposed this month to allow private hospitals to subcontract hip, knee and cataract surgery to private clinics when patients are unable to be treated quickly enough under the public system. The premiers of British Columbia and Alberta have suggested they will go much further to encourage private health services and insurance in legislation they plan to propose in the next few months.
    Private doctors across the country are not waiting for changes in the law, figuring provincial governments will not try to stop them only to face more test cases in the Supreme Court.
    Private clinics are opening around the country by an estimated one a week, and private insurance companies are about to find a gold mine.

    Friday, March 26, 2010

    Payors vs providers: the bargaining continues

    The alternatives to agreement determine the terms of agreement:
    ... insurers contend that in recent years big hospital systems have been buying up smaller medical centers and using their dominance in a region to demand big rate increases. America's Health Insurance Plans, a trade organization, points to data showing hospital markets are 47% more concentrated than they were 13 years ago....
    In a first-quarter earnings report to Wall Street analysts, WellPoint's Ms. Braly told investors that her company is getting support for more aggressive contract negotiations from its employer customers, who want to keep their own costs down.
    Empire's Mr. Wagar says customers are telling him, "No. This is enough," while Cigna Inc. is enlisting its customers to lobby hospitals with which it is in disputes, to push for lower prices. "We will have a large employer go to a facility and say 'these are my numbers, I'm not going to pay this,' " says Cigna chief executive David Cordani.
    Several hospital executives counter that they have no choice but to ask for more money. "We're looking for double-digit increases in reimbursements," says Vin Capece, the COO of Middlesex Hospital in Middletown, Conn., a 210-patient bed center with $350 million in annual revenue. "That's being driven by growing Medicaid numbers. We've got this growing uncompensated care issue."

    Thursday, March 25, 2010

    Will mortgage rates increase soon?

    Federal demand for mortgage backed securities is about to fall:
    The NY Fed purchased an additional net $8 billion in MBS for the week ending March 24th. This puts the total purchases at $1.248 trillion or 99.84% complete. Just $2 billion and one more week to go ... 
    recall that the price of a loan is inversely related to yield (interest rates). Another way to think about this is that the supply of debt is declining (equivalent to demand for mortgages) which raises the price of debt (interest).

    UPDATE
    The Fed has been buying mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae since December 2008 to help drive down mortgage rates and spur a housing recovery. In addition to the $1.25 trillion in mortgage-backed securities, the Fed has soaked up $175 billion of the big mortgage firms' debt, which could be part of an asset-sales program.

    Fed officials have been debating for several months whether to sell the assets as the economy heals. The large mortgage portfolio makes it harder for the Fed to manage short-term interest rates because buying the securities meant flooding the financial system with cash. Because of all that extra cash in the system, it might be hard to get banks to lend it out at higher rates when the Fed wants to raise them.

    How much is your privacy worth?

    If you let Progressive monitor your driving they will offer you lower Insurance rates:
    Usage-based insurance relies on a small monitor hooked up to the car’s diagnostic port. It calculates a driver’s risk by measuring miles driven, acceleration, braking, speed and possibly where the car is being driven using a GPS. This allows the insurer to forgo normal risk factors, such as age and driving record, in favor of real-world information about a person’s driving habits.

    Wednesday, March 24, 2010

    Do Pay Caps Really Drive People Away?

    One of the big arguments I recall against capping executive pay was that caps would lead to the flight of talent from companies with caps. Here's some evidence that points to that concern not being that big of a deal. Of course, just because they didn't leave doesn't mean that they are working as hard as they did without caps.
    Of the 104 senior executives whose pay was set by the federal pay regulator in the last two years, 88 executives, or nearly 85 percent, are still with the companies even though their pay was drastically cut back, according to people briefed on the government data.

    Monday, March 22, 2010

    Creative destruction and antitrust

    i am sure that former student John Tamny would have some choice words for me if he knew that I was investigating (when I was chief economist at the FTC) the proposed Blockbuster-Hollywood Video merger when they decided to abandon it.
    ...as often happens as companies grow, Blockbuster concentrated on perfecting its existing service while beating competitors offering the same instead of looking into ways that outsiders might destroy its business model altogether. Schumpeter long ago noted that entrepreneurs disrupt: For Blockbuster, the "disrupter" in question was Netflix.

    Innovation Visualized






















    This works out to an annual 25% decline in costs and an annual 40% decline in weight.

    Hat tip: Craig Depken

    Dan Ariely Interview

    John Heins, publisher of Value Investor Insight interviews Dan Ariely, the author of Predictably Irrational and the forthcoming The Upside of Irrationality (drops June 1). He concludes with a comment on the impact on the financial crisis on his work.
    Do you think the financial crisis has made the book more popular?
    It’s hard to find comfort in this, but there’s no question the financial crisis has been a good thing for behavioral economics. A few years ago people assumed markets drove out all this irrationality we were seeing. That assumption isn’t nearly as prevalent today.

    Thursday, March 18, 2010

    Green morality

    (W)hen they have reason to feel a little superior, that positive self image triggers a sense of moral license. That is, the righteous feel they have some latitude to stray a bit in order to compensate. It’s like working in a soup kitchen gives you the right to cheat on your taxes later in the week.

    Wednesday, March 17, 2010

    Improve Your Strategic Decision Making

    The latest McKinsey Quarterly includes an article, "The Case for Behavioral Strategy," that advises you on how to improve strategic decision making in your company. Looks like important advice considering a recent McKinsey survey indicated that only 28% of executives rated the quality of their company's strategic decisions to be good, 60% thought bad decisions happened as often as good ones, and 12% thought good decisions occurred infrequently.

    The high-level advice for countering known biases:
    1. Decide which decisions warrant the effort (of trying to deal with biases)
    2. Identify the biases most likely to affect critical decisions
    3. Select practices and tools to counter the most relevant biases
    4. Embed practices in formal processes.

    Monday, March 15, 2010

    This Post is Definitely an "A"

    Environmental cues might be affecting your performance subconsciously:
    Seeing the letter A before an exam can improve a student's exam result while exposure to the letter F may make a student more likely to fail. The finding is published in the British Journal of Educational Psychology in March 2010.

    The study, carried out by Dr Keith Ciani and Dr Ken Sheldon at the University of Missouri, USA, investigated whether exposing students to the letters A or F before a test affected how they performed. Dr Ciani said: "The letters A and F have significant meaning for students, A represents success and F, failure. We hypothesised that if students are exposed to these letters prior to an academic test it could affect their performance through non-conscious motivation."

    A total of 131 students took part in three separate experiments. In the first, 23 undergraduates were asked to complete a number of analogies in a classroom setting. All of the tests were the same, however half of the tests were labelled 'Test Bank ID: A', and the other half 'Test Bank ID: F'. Before starting the test the participants were asked to write their Test Bank ID letter in the top right hand corner of each sheet.

    Each participant's analogy tests were scored and compared between the groups. A significant difference between the two groups was found, with the A group performing significantly better than the F group; A scoring on average 11.08 correct out of 12, and F only 9.42 correct on average.

    Friday, March 12, 2010

    Millionaires respond to incentives

    The Laffer Curve is alive and well:
    Illinois Governor Pat Quinn is the latest Democrat to demand a tax increase, this week proposing to raise the state's top marginal individual income tax rate to 4% from 3%. He'd better hope this works out better than it has for Maryland.
    We reported in May that after passing a millionaire surtax nearly one-third of Maryland's millionaires had gone missing, thus contributing to a decline in state revenues. ...

    Well, the state comptroller's office now has the final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million.

    What’s the difference between General Motors and California?

    California hasn’t gone bankrupt. At least, not yet.
    Over several decades the leaders of both GM and GS (that is, the Golden State) caved in to the demands of aggressive unions, choosing what seemed the path of least resistance. Both gave their employees richer and richer retirement plans during their respective boom years and assumed that their revenue growth and the hefty returns on their pension fund investments would go on forever. Not so long ago, in fact, officials of both GM and California boasted that their employee pension plans were in good shape.

    When the economic crisis struck and car sales collapsed that fall, GM’s cash reserves evaporated, even as repeated rounds of layoffs left the company saddled with ten retirees for every active employee. The company required a massive federal bailout and bankruptcy to stay in business. Only thanks to cash from the feds did GM’s retirees keep their pensions intact. Retirees of GM’s then-bankrupt auto-parts subsidiary, Delphi Corp., also kept their benefits.

    In the Golden State, meanwhile, the California Public Employees’ Retirement System, or CalPERS, had sharply increased benefits for state retirees in 1999. “CalPERS’s investment returns provide this historic opportunity,” then-board president William Crist declared, “without causing any additional taxpayer burden.”
    Since then the state’s public employee pension outlays have ballooned by 2,000 percent, while state revenues have increased only 24 percent. In the current fiscal year alone, some $3 billion has been diverted from other state programs to pay pensions. And California’s general obligation bond ratings from all three agencies — Fitch Ratings, Moody’s Investors Service and Standard & Poor’s — are the lowest among the country’s ten most populous states.

    Thursday, March 11, 2010

    Unintended consequences

    Airlines respond to the threat of new $27,500 fines for keeping passengers on the tarmac for more than 3 hours:
    Carriers say that to avoid those fines, they will aggressively cancel flights before and during storms—even if the bad weather never materializes. The threats could foreshadow significant changes in air travel, making it even less reliable for millions of road warriors and vacationers. By canceling flights, it could take days for all travelers to get home when storms strike.

    Gold medalist Shaun White with my brother's kids

    Wednesday, March 10, 2010

    Casinos Profit with Game Theory

    Say you are playing in a poker tournament at a casino. The initial buy-in is $65 and gets you 2,500 chips (2.6 cents a chip). You also have the option of buying an additional 500 chips for $5 more (1 cent per chip). None of this additional buy-in money, however, goes into the prize pool - it goes straight to the casino. Do you buy the additional chips?

    If your opponents are buying the extra chips, you better buy as well to keep up. And, if they are not buying, you should buy to get a chip advantage. So, everybody has an incentive to buy. But, if everyone buys, no one has an advantage. Everyone is worse off from spending the $5. The casino, however, makes a nice profit by placing the players in a Prisoners' Dilemma. Nice.

    HT: Mind Your Decisions blog

    Tuesday, March 9, 2010

    Alt. Headline: "Boondoggle Expossed"

    Here is another letter to the editor that I fired off this morning.
    Dear Editors:

    Nobody doubted that the new Cowboy's Stadium in Arlington would increase tourism and the associated tax receipts in Arlington (Susan Schrock ,"Arlington records tenfold increase in tourist spending during the fiscal first quarter" Star-Telegram 3/9/2010 1A). Rather, we wondered if the increase would pay for the stadium as promised? If the interest rate on the $350 million in stadium bonds issued by the city were a paltry 5%, the annual debt service alone comes to $17.5 million. An increase in tourism dollars by $15 million in the Fall would generate $0.3 million in city sales tax revenue (if the city's sales tax rate is 2%). Even if the three off-season quarters saw comparable tax collections, revenue from increased "economic activity" still comes $16 million short. Rather than applauding these gains, the Ms. Schrock could have exposed the stadium for the boondoggle that it is.

    Michael R. Ward
    My wife says I am turning into an angry, letter-writing curmudgeon but I claim some expertise. See:
    Carolyn A. Dehring, Craig A. Depken, and Michael R. Ward, “A Direct Test of the Homevoter Hypothesis,” Journal of Urban Economics, 64(1) (2008) 155-170.

    Carolyn A. Dehring, Craig A. Depken and Michael R. Ward, “The Impact of Stadium Announcements on Residential Property Values: Evidence from a Natural Experiment in Dallas-Fort Worth,” Contemporary Economic Policy, 25(4) (2007) 627–638.

    Monday, March 8, 2010

    Why are diversified firms less profitable than single-segment ones?

    New research from Peter Klein finds that the "diversification discount" for banks is related to organizational structure.  He finds two forces pulling in opposite directions:
    1. Membership in a [diversified] holding company gives a bank access to the parent organization’s capital and liquidity, which allows banks to do more lending, and hold less capital, than unaffiliated banks; however
    2. Bank holding companies with many subsidiaries are less profitable and have lower q ratios than similar holding companies with fewer subsidiaries.

    Whither Liberal Arts?

    Here is a letter I just sent to the local paper.
    Dear Editors:

    Jake B. Schrum suggests that a return to liberal arts education might lead to a more civil discourse and break government gridlock "(Schrum. "The solution to government gridlock is liberal arts education" Star-Telegram, 3/8/2010 7A). Perhaps, but where would these liberal artists come from? Would he suggest this alternative instead of more science, engineering, and business majors? Is civility in discourse worth a disruption in the steady flow of better cholesterol lowering drugs, smarter smart phones, and more stuff from efficient commerce?

    The liberal arts had their run at improving the human condition for a millennium before the Renaissance and the Enlightenment. This is when more empirical approaches initiated almost uninterrupted and increasingly universal increases in life-expectancy and material well-being. To quote Steven Landsburg, "The average middle-class American might have a smaller measured income than the European monarchs of the Middle Ages, but I suspect that Tudor King Henry VIII would have traded half his kingdom for modern plumbing, a lifetime supply of antibiotics and access to the Internet."

    Because I love my children, I would not want to do anything to stop this amazing gravy train we have been riding for only the last few hundred years. If the cost is more bickering in Washington, then so be it.

    Michael R. Ward
    We'll see if it runs.

    Are states already relying on health care reform?

    What does it mean that state public employee's retirement pension benefits are 84% funded; but state public employee's retirement health care benefits are only 5% funded? 

    One possible answer is that states are counting on the federal government to step in and takeover their health care benefit payments. 

    If anyone has any information on this, I would like to hear it. 

    Sunday, March 7, 2010

    Texas vs. California

    Compare and contrast:
    [In California], Democratic majorities have obediently done the bidding of public employee unions to the point that state government faces huge budget deficits. Gov. Arnold Schwarzenegger's attempt to reduce the power of the Democratic-union combine with referenda was defeated in 2005 when public employee unions poured $100 million -- all originally extracted from taxpayers -- into effective TV ads.
    Texas is a different story. Texas has low taxes -- and no state income taxes -- and a much smaller government. Its legislature meets for only 90 days every two years, compared with California's year-round legislature. Its fiscal condition is sound. Public employee unions are weak or nonexistent.
    And Americans have been voting for Texas with their feet. From 2000 to 2009, some 848,000 people moved from other parts of the United States to Texas, ...at the same time as 98,000 were moving out of California.

    Economic decline is a choice, not a fate

    ...and it has everything to do with big, intrusive government.  The story from Canada:
    Cutting public sector pay -- relative to private sector -- is more than a fiscal necessity. It is also a moral necessity, though using that word more in the sense currently conveyed by the word "morale." With money, job security, and administrative power, comes prestige. We need to reduce that.

    This is one of the points that was grasped in the earliest stages of turning India around, by such as the late Rajiv Gandhi. The argument was that business and all other private activity suffered, because the country's "best and brightest" were magnetically attracted to the prestige of so-called "public service." It was what upwardly mobile parents prepared their children for.

    Saturday, March 6, 2010

    What's the difference between Greece and Germany?

    Germans retire at age 67 with a pension at 43% of their salary; Greek workers retire at 61 at 97% of their salary:
    So it shouldn’t be any surprise that Germans are infuriated at the thought of having to stump up for a rescue of Greece’s Augean state. Their own economy is faltering. They have held back labor costs for years. They have, often painfully, maintained budgetary discipline. That’s not the way it’s been in Greece. With Greek government debt at 125 percent of GDP, a budget deficit of 12.7 percent....

    Friday, March 5, 2010

    What does the end game look like?

    for the democracies that must reduce their budget deficits?
    Spending must be cut or taxpayers must pay more. Many political battles of the next few years will be fought on these simple lines, with taxpayers on one side and the beneficiaries of public spending on the other. One imminent battle will be between taxpayers and public-sector workers. In some countries, one party can be seen as representing taxpayers (the Conservatives in Britain and the Republicans in America) and the other the workers (Labour and the Democrats, respectively).
    Another of these fights will be between generations. In America the biggest medium-term budget busters are pensions and health care for the old. A big deficit may ease the economic pain in the short term but risks saddling the next generation with a growth-sapping burden of higher taxes and interest payments.

    Advice drawn from other countries experience:
    Raising the retirement age, probably to 70, and cutting the public-sector pension bill will deliver only modest savings in the short run, but will immensely improve the long-term picture. It will, however, be staggeringly unpopular. The proportion of the population in or nearing retirement is increasing; and older people are much more likely to vote than younger citizens. Without reform, however, those apathetic young voters face a crippling tax burden.
    There are many battles over deficits to come: taxpayers against public-sector workers; old against young. Well-chosen policies that foster growth may make them less fierce. They may be bloody even so.

    Thursday, March 4, 2010

    Changing Content and Distribution Roles for TV

    TV content is still differentiated and, therefore, can generate rents for producers. Distribution (via cable TV systems) has traditionally been differentiated and can garner rents too. Traditionally, there have been entry barriers to distribution too. But how much has the Internet changed all that?

    Viacom's pulling The Daily Show and The Colbert Report from Hulu appears to be over how to split the ad revenue. Many Content producers had partially vertically integrated into distribution by offering shows on their own websites. Hulu was hoping to pull this disparate content together to become a one stop outlet for high quality video. But just how much value is created in doing so? Are there barriers to the emergence of alternative aggregators?

    Wednesday, March 3, 2010

    Disintermediate Your Doctor

    Frustrated by having to go through your doctor to get a blood test? And, then, of course, you have to wait for the doctor to get the results back and report them to you. If you don't want to deal with this hassle, you now have the option of going direct (or in fancy Internet-hype-speak: "disintermediating" your doctor) if you happen to live near an ANY LAB TEST NOW location.
    ANY LAB TEST NOW® offers a revolutionary healthcare lab testing experience by providing thousands of standard healthcare lab tests in a professional, convenient and cost-effective manner. At ANY LAB TEST NOW®, you don't need insurance, a physician's referral, or an appointment.

    Monday, March 1, 2010

    Bond markets vs. Greece

    Even if the EC does not discipline Greece, the bond market will:

    Fiscal train wreck is 12 years ahead of schedule

    HT: Donald Marron

    Add-to-Cart to See Price

    Are you annoyed by online shopping sites where you can’t see the price until you add the item to your shopping cart? Here’s one explanation of why you may be seeing more of this. A 2007 Supreme Court decision gave manufacturers greater ability to dictate pricing policies to retailers. One way the manufacturers have become more aggressive is in preventing retailers from advertising products below a certain minimum price. And, the manufacturers consider product pages from online retailer sites to be advertisements. So a retailer who wants to sell below the manufacturer-specified minimum doesn’t let you know the price until you are past the ad.

    Note that an alternative explanation for this pricing tactic by retailers relates to the endowment effect – you may actually create a psychological attachment to the product by placing it in your cart, making you willing to pay more.