Tuesday, July 24, 2012

Should we raise the minimum wage?

Mark Perry has a nice piece on proposals to raise the minimum wage from $7.50 to $10, a 38% increase.  He begins with research that finds an elasticity of demand between  -0.1 and -0.15 or a 2-3 percent reduction in employment from a 20 percent increase in the minimum wage.
Accordingly, a 38 percent increase in the minimum wage to $10 per hour would reduce teenage employment by between 3.8 and 5.7 percent.  And what would that mean for the number of jobs eliminated and the increase in the jobless rate?  
If the 38 percent increase in the minimum wage to $10 per hour had the minimum effect of reducing teenage employment by “only” 3.8 percent, that would put 171,000 currently-employed teenagers out of work and increase the teen jobless rate almost three full percentage points to 26.6 percent.  At the high end, a 5.7 percent reduction in teen employment would put almost one-quarter million teenagers out of work and drive the teenage jobless rate up to 28.1 percent, the highest rate in history. 

Friday, July 20, 2012

How did Chile become the richest nation in South America

Three decades ago, it was a basket case.  Since then, it has been the fastest-growing economy in the region. How did they do it?

Pension reform is the best-known economic reform in Chile. Ever since the early 1980s, workers have been allowed to put 10 percent of their income into a personal retirement account. This system, implemented by José Piñera, has been remarkably successful, reducing the burden of taxes and spending and increasing saving and investment, while also producing a 50-100 percent increase in retirement benefits. Chile is now a nation of capitalists.

These capitalists have
  1. liberalized trade
  2. reduced the size of government
  3. strengthened property rights
  4. reduced the burden of regulation
  5. protected their currency

In short, they have moved their country in almost the opposite direction as the United States. 

New discounting rules from GASB should affect Nashville

Its not often that I get excited when a Government Accounting Standards Board acts, but this time they have done something really extraordinary--rewritten the rules on how much governments, like Nasvhille, should save:
Discount Rate. The rate used to discount projected benefit payments to their present value will be based on a single rate that reflects (a) the long-term expected rate of return on plan investments as long as the plan net position is projected under specific conditions to be sufficient to pay pensions of current employees and retirees and the pension plan assets are expected to be invested using a strategy to achieve that return; and (b) a yield or index rate on tax-exempt 20-year, AA-or-higher rated municipal bonds to the extent that the conditions for use of the long-term expected rate of return are not met.

I think this means that if Nashville is earning less than its discount rate (see previous post), they have use a much lower discount rate. In other words, a bunch of accountants may force political leadership in Nashville to do the right thing.

HT:  Steve & Beth

Hyperbolic discounting and Nashville's growing pension problem


The city of Nashville uses discounting to decide how much to save for its future pension obligations. For a pension that pays out $100,000 in 20 years, Nashville must save $20,485=$100,000/(1.0825)^20 today, using an 8.25% discount rate.   If the city invests the $20,485, and earns 8.25%, the savings will compound and be worth $100,000 in twenty years.  If however, the investments return less than 8.25% (in fact they have done much worse),then the city will not have saved enough when the future finally gets here.  Of course, a more realistic discount rate, say 6.5%, would mean much higher current savings, 28,380=$100,000/(1.065)^20 to fund the same future pension.  But higher savings means less current spending, and spending is politically popular.

If voters were perfectly rational, they would recognize that their cities are not saving enough to fund their future pension obligations. 

That they don’t seem to care has long been recognized by psychologists, and even has a name, “hyperbolic discounting.”  It means that most people make decisions using discount rates that are too big.  In other words, they place too much weight on the present, and not enough weight on the future.  Businesses, like politicians, take advantage of this irrationality by, for example, offering a low “teaser” price which goes up in the future, or by offering a low price on a consumer durable, like a pod-coffee maker, and then charging a high price on the consumables,like the pod.  When deciding whether to purchase the pod-coffee “system,” consumers place too much weight on the “current” low price of the machine, and discount too heavily the “future” high price of the pods.  By shifting most of the system costs to the future, the coffee company makes the system appear cheaper, which increases demand.

WIll someone please tell the president that outsourcing is only trade

...and that trade makes both parties better off.

To see this ask why we outsource banana production to Costa Rica.  We could grow bananas domestically, in green houses.  We don't because it is much cheaper to grow bananas in Costa Rica.

Mark Perry has a nice essay explaining it. 

Thursday, July 19, 2012

What happened to frozen corn prices in 1995?

I have been playing around with the new version of Mathematica, and you can access all kinds of data through the WolframAlpha command.  I simply typed "=corn prices" and a graph popped up, and by clicking on the graph you are able to grab the underlying data (they give you the commands if you click on the series),

I grabbed the frozen corn series, and plotted it.  What happened in 1995?

Nothing showed up on Google, so I think it may be a break in the data series.  This reminds us of an important lesson:  always ask where the data come from, how it was collected, and exactly what it shows 

Corn prices spike due to drought


Drought reduces supply, which increases price, as reflected in the above futures contract prices. 

Monday, July 16, 2012

Vandy grad uses economics to uncover massive fraud

Brian Fox, distinguished Vandy alum, remembered one of the lessons from Chapter 1,  that those who fail to anticipate self-interested behavior are often victimized by it.  Brian's confirmation.com software helped uncover the fraud at PFGBest:
Wasendorf was asked by NFA months ago to grant permission for audit confirmations to be run through Confirmation.com.  Such permissions are required because banks cannot just give information out about a client without their permission.  However, Wasendorf pushed back and refused for months to give such permission.

When Wasendorf signed off on allowing NFA to use Confirmation.com last week, he knew the end was near.  By 8:00am on Monday, he was in his car when his son found him unconscious in the PFGBest parking lot…
Beyond its use to catch fraud, Brian is also suggesting that you can use his software as a "screen" to identify miscreants:
”Simply not wanting to use the system is often a red flag that something is wrong,” Fox said of the PFGBest refusal.  Fox, who has been on vacation since Monday, only heard of the PFGBest situation when he read about it in the news.  As he read more about the case, he knew that their software had been a part of discovering this fraud.  ”Since Tuesday, my phone has not stopped ringing,” he said.
 Now, if I can only get Brian to plug the textbook...

Why shale-oil drilling in the US, but not in Europe?

If you give people secure property rights, they have the incentive to move the property to its highest valued use:
'Whoever owns the soil, it's theirs up to Heaven and down to Hell." So goes the ancient common-law principle. Today, however, almost no major country recognizes full subsurface private property rights, except for the United States.

Tuesday, July 10, 2012

Moral case for markets

A little over-stated, and too preachy for my taste, but fast paced. 

Monday, July 9, 2012

Auto Learning-by-Doing is Embodied in the Managers

While on my European excursion to multiple conferences (read junket), I was able to see Chad Syverson present his research coauthored with Steve Levitt and John List called, "Toward an Understanding of Learning by Doing: Evidence from an Automobile Assembly Plant." It seems that as a production line is setup for a new car model, there are substantial increases in productivity (2-3 fold) up to a point, at whch point it plateaus. But when a new model trim or work shift (usually a swing shift) is added, the productivity does not jump back to that of the initial model/trim or shift. And when problems are detected for one trim or shift, they are mostly fixed for all. This suggests that the learning-by-doing is not "embodied" in the workers but instead resides in the management practices. It is the job of managers to make sure that knowledge gained in one place is applied wherever it is useful.

Friday, July 6, 2012

50 best blogs by business professors

Should young people join the tea party?

Niall Ferguson, historian of the financial crisis, is surprised that young voters support policies that make matters worse for them, like maintaining defined benefit pensions for public employees
...the most recent estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly 13 times the debt as stated by the US Treasury. Notice that these figures, too, are incomplete, since they omit the unfunded liabilities of state and local governments, which are estimated to be around $38 trillion.
These numbers are so staggering, that we have run out of adjectives and metaphors to describe them.

Thursday, July 5, 2012

The Affordable Care Act just became unaffordable

Last week, the Supreme Court ruled that the federal government could not punish states that refused to expand Medicaid (to 133 percent of the federal poverty line) by yanking their existing Medicaid funding.

So what does this mean for states?
...beginning in 2014 they could pare their Medicaid program back to the federally-designated minimum (100 percent of poverty), saving the state a lot of money. Everybody between 100 percent and 133 percent would be eligible for insurance subsidies – with the federal government (read: taxpayer) picking up the entire tab.
For states, this is a clear winner – covering more individuals and saving budget dollars at the same time. But the taxpayers will have to pick up the full cost of the additional and generous insurance, probably about $500 billion over ten years.

Monday, July 2, 2012

Waiting on disater

... in Colorado, from a former student:
 if you really want to keep houses from burning, you would not provide insurance against forest fires (i.e. people will start cutting down the trees around their homes or choose to live somewhere else). 

The hail damage part of the article really is a story about adverse selection and moral hazard. About 20 years ago, we had a huge hail storm that pretty much got everyone new roofs. My experience since that time has been that people learned that if they wait it out on their roof updates, that they can eventually get their insurance policy to cover a new roof. Apparently, over the past few years, strong-enough hail storms finally hit and paid off to the homeowners (at least the irresponsible ones).