Are employees abusing Family Leave rules?

From the Wall St. Journal

...the act allows workers to take as many as 12 weeks of unpaid leave to care for a newborn or a sick child, spouse or parent, or to recuperate from their own serious medical condition -- without fear of losing their job. Many say it helps avoid costly nursing-home or other institutional stays and lowers turnover costs by helping to retain workers. As many as 13 million workers took FMLA leave in 2005, according to the Department of Labor, the latest data available.

Yet employers and workers are increasingly accusing each other of abusing the law, which dates from 1993. Companies say more workers are using it to take time off for vague and chronic maladies and doing so intermittently [6.1 million], rather than in blocks of time, which makes scheduling and staffing difficult. Many of them have begun to clamp down on employees, hiring outsiders to screen applications for leave and at times to videotape workers to make sure they aren't moonlighting or vacationing.

Latest weapon in standards war--price cuts

We have beeen following the standards war between Blu-ray and HD DVD (Will this standards war become a quaqmire? and DVD war drags on). They had been fighting the war by trying to convince movie studios to put out movies only in one format.

But now, the Wall St. Journal reports that they are both trying price cuts.

Wal-Mart surprised industry observers by taking an additional $100 off in a 48-hour sale, triggering other retailers to match the price. The players sold out in minutes at some Wal-Mart stores. According to DisplaySearch, Toshiba sold 90,000 to 100,000 players in just two days. ...

But makers of Blu-ray players are coming up with their own price cuts. After lowering its price on an existing Blu-ray player by $100 to $399 last Sunday, Sony, the lead manufacturer in the Blu-ray camp, said Best Buy customers could get an additional $100 gift certificate ...

Who is winning the war?

households with stand-alone HD DVD players will total 600,000 and households with stand-alone Blu-ray players will total 400,000.

When spending other people's money, who cares about price?

Never mind our huge entitlement problem that we are mortgaging our children's future on items like erectile pumps, The NY Times reports that Medicare is also paying way too much:

...last year Medicare spent more than $21 million on pumps to help older and disabled men attain erections, paying about $450 for the same device that is available online for as little as $108. Even for a simple walking cane, which can be purchased online for about $11, the government pays $20, according to government data.

The basic problem, which we have noted before (In praise of irrational politicians), is that old people vote in much greater numbers than young people. This makes political reform very difficult.

...when officials and politicians have tried to cut these costs, they have often encountered a powerful foe: the companies that sell these devices, who ask their elderly customers to serve, in effect, as unpaid lobbyists, calling and writing to their representatives in Congress, protesting at rallies, and even participating in political attacks against individual lawmakers who take on the issue.

“These industries rely on a basic threat: If you mess with us, we can turn the seniors against you,” said former Senator Alan K. Simpson, Republican from Wyoming.

Declining dollar benefits US farmers

News from Memphis:

The declining dollar has sparked such a buying binge of U.S. farm commodities, exporters are struggling to find room on steamships and enough containers to carry all the wheat, soybeans and cotton. ...

In 18 months, the price of getting commodities from inland markets -- like Memphis -- to markets overseas has doubled and is forcing traditional local exports -- cotton, lumber and paper -- to compete for containers being gobbled up by grain.

Global strategy: more customers but more competitors

McKinsey's classic article "Getting to Global" is now available for free (requires registration):

Economic integration, the force driving this expansion, will promote the formation of global markets in accounting, chemicals, food, health care, the mass media, pulp and paper, telecommunications, and many other industries. Indeed, more integration will take place in the next 30 years than occurred in the previous 10,000 or more.

Companies operating in these future global markets will have profit opportunities worth hundreds of billions of dollars. The annual pretax earnings of, for example, the global personal financial services (PFS) industry, now standing at some $300 billion, will double within a decade. At the same time, the world's PFS markets, until recently segmented by regulation and technological limitations, so that no single participant captures more than 3 percent, or $9 billion, of the global profit pool—will integrate and become accessible to all. Thus any company that can capture 10 percent of the global PFS market can look forward to annual profits of $60 billion.

More bad news about ethanol

American Enterprise Institute and Brookings weigh in:

If annual production increases by three billion gallons in 2012 -- a plausibly modest number when the EPA made its own calculations -- we estimate that the costs will exceed the benefits by about $1 billion a year. If domestic production reaches the more "optimistic" Energy Department projection for that year, net economic costs would likely top $2 billion annually.

Our analysis is deliberately weighted to give ethanol the benefit of a doubt. For example, we assume that, on balance, ethanol from corn reduces greenhouse emissions, even though recent science suggests that substituting ethanol for gasoline might actually have a negative impact (it increases emissions of nitrous oxide, a more potent greenhouse gas than carbon dioxide). Ethanol distilled from grasses and waste materials has a better environmental payoff, but has much higher direct production costs.

Ethanol cure worse than oil disease

Today's Wall St. Journal reports that markets are starting to doubt our country's ethanol subsidies:

A recent study by the Organization for Economic Cooperation and Development concluded that biofuels "offer a cure [for oil dependence] that is worse than the disease." A National Academy of Sciences study said corn-based ethanol could strain water supplies. The American Lung Association expressed concern about a form of air pollution from burning ethanol in gasoline. Political cartoonists have taken to skewering the fuel for raising the price of food to the world's poor.

Hopefully, this will cause Congress to re-think our ethanol policies, including our $0.54 tarriff on imported ethanol, which the New Yorker called "absurd even by Washington standards."

Because of the ethanol tariffs, we’re imposing taxes on fuel from countries that are friendly to the U.S., but no tax at all on fuel from countries that are among our most vehement opponents. Congressmen justify the barriers to foreign ethanol with talk of “energy security.” But how is the U.S. more secure when it has to import oil from Venezuela rather than ethanol from Brazil? These tariffs are bad economic policy, bad energy policy, and bad foreign policy. Talk about your Domino effect.

But with the presidential primary season underway, this is unlikely to happen (Fortune),

Iowa, home to the first-in-the-nation presidential caucus, is the biggest corn-growing state in the country, and in Iowa ethanol isn't just another campaign issue. It's the cash cow, the golden goose and the fountain of economic youth all wrapped up in one.

Stossel takes on the ethanol myth:

Rewards for Sucking Up to Employees

Many of you have probably heard of the idea of 360-degree reviews. HCL Technologies, an Indian outsourcing firm, has a new twist on the system according to this story from Business Week. The company allows employees to view their supervisor's scores along with the scores of the top 20 managers of the company.

According to the CEO, "We are trying, as much as possible, to get the manager to suck up to the employee." I guess I was absent the day someone explained why it's a good idea to have managers "sucking up" to employees. Yes, I understand that we need to move away from more dictatorial management styles, and 360-degree reviews might help facilitate that process. But, do we really want managers trying to curry favor with their employees in order to boost their public ratings?

Another View of Blogging

From the comic strip, Pearls Before Swine

Inflation in oil countries caused by currency peg

In past posts (China busted by the laws of economics) we have talked about China's inflation being caused by its currency peg. Now the Economist reports on the same pheonomenon in the gulf countres: Kuwait, UAE, Saudi Arabia, Oman, and Bahrain. By tying their currencies to the dollar, they give up control of their domestic money supply, which leads to domestic inflation. For a different reason than China, they are reluctant to revalue their currency:

A revaluation has costs. The huge stock of dollar assets held in the GCC would be worth less in terms of the home currencies. But unchecked inflation would also erode the domestic value of foreign assets and in a more damaging way.

Does anyone still think that momentum investing works?

Today's WSJ (November slump chills hopes for end of year) has an article describing the perverse incentives of money managers who piled into succesful stocks, hoping to beat the stock market indices against which their performance is judged. It was as if they forgot to read their own disclaimers, "past performance is no guarantee of future results."

The problem is that November has been a really bad year for succesful stocks:

Freeport McMoRan Copper & Gold was up 112.2% for the year at the end of October. The miner has fallen 21% this month. Monsanto was up 85.9% at the end of last month. The agriculture company has fallen 7.4% since then. Technology companies have been among the hardest hit. Apple, up 123.9% at the end of last month, is down 9.7% so far in November.

It is rare to find money managers like Vanderbilt's Bill Spitz who can recognize investment opportunities when they occur.

Why Vote?

In addition to Thanksgiving and Veteran's Day, the month of November is probably best known as election month. Year after year, neither rain nor sleet nor gloom of night, etc. dissuades a significant portion of the public from trudging to the polls to cast their votes for offices from local city councils through the presidency of the country. But, why??

As a rational, self-interested individual, voting is a poor investment. It is costly - it takes time to become at least mildly informed (assuming you are not just voting randomly) and to travel to the polls on election day. The individual benefit is nearly non-existent. The likelihood that your vote will change the results in nearly nil, and it's questionable how much you would personally benefit if your one vote did make the difference in electing the candidate of your choice. Yet, significant numbers of people do vote. Curious.

Here's a 2005 article from the authors of Freakonomics discussing the issue. They summarize some research from Sweden that seems to indicate that one significant reason people vote is social pressure. So, people receive utility from the process of voting not just the outcome.

Inequality as incentive pay

The posts on the Vatican's adoption of incentive pay and on the real meaning of Thanksgiving generated a lot of e mail. A year ago, Peter Klein posted a more complete story of the first Thanksgiving:

Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

Private property turns each landowner into a residual claimant, able to claim the surplus production after all the costs have been paid. The resulting inequality(some farms produce more than others) is necessary to create incentives to produce. Similarly the Vatican's incentive pay creates inequality which gives its workers the incentive to produce.

Note the Pope's earlier critique of Capitalism:

“...with the cruelty of capitalism that degrades man into merchandise, we have begun to see more clearly the dangers of wealth and we understand in a new way what Jesus intended in warning us about wealth.”

Faith not enough--Pope tries incentive pay

BBC reports:

The Vatican says it has decided to give financial rewards to employees who are doing a good job. It says it will take into account issues such as "dedication, professionalism, productivity and correctitude" when awarding a pay rise.

The real meaning of Thanksgiving

John Stossel gives us another lesson that you won't learn in high school:

When the Pilgrims first settled the Plymouth Colony, they organized their farm economy along communal lines. The goal was to share everything equally, work and produce.

They nearly all starved.

Why? When people can get the same return with a small amount of effort as with a large amount, most people will make little effort. Plymouth settlers faked illness rather than working the common property. Some even stole, despite their Puritan convictions. Total production was too meager to support the population, and famine resulted. Some ate rats, dogs, horses and cats. This went on for two years.

"So as it well appeared that famine must still ensue the next year also, if not some way prevented," wrote Gov. William Bradford in his diary. The colonists, he said, "began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length after much debate of things, [I] (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. ... And so assigned to every family a parcel of land."

The people of Plymouth moved from socialism to private farming. The results were dramatic.

"This had very good success," Bradford wrote, "for it made all hands very industrious, so as much more corn was planted than otherwise would have been. ... By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many. ... "

Why are reservists more affected by war?

Mike Ward has the answer:

One commentator speculated that, because reservists’ military health benefits run out faster than active duty personnel, they have an incentive to report more sooner upon return stateside. As evidence, she noted that claims of physical disabilities were also higher among reservists.

Strategy Content vs. Implementation

Business strategy is often described as doing something different than your rivals. My concern is that perhaps we tend to overemphasize the "what" of strategy at the cost of the "how." Two companies can have exactly the same strategy content (e.g., be the low cost producer) but differ greatly in their ability to implement that strategy.

I was reminded of this when looking at a national retailer recently. The content of its strategy (great customer service, well-trained employees, efficient supply chain control, etc.) was extremely similar to that of its main rivals. Does this mean the retailer can not generate a competitive advantage? Not at all. If the retailer has hard-to-duplicate resources that allow it to achieve its strategy better than its competitors, it can create a competitive advantage with exactly the same strategy content.

So, when you think about strategy, don't just think about what your strategy should be. Think about implementation, too. (And many would argue that implementation is actually the more difficult of the two issues.)

Eagles stick it to "the man"

In past posts, we have documented the changing relationships between retail stores and the manufacturers that supply them (see list of posts on managing vertical relationships). Now the Eagles are trying to bypass the recording industry by releasing their new album exclusively through Wal-Mart.

It’s possible that the Wal-Mart exclusive will translate to fewer total “Eden” CDs sold. Bostonians, for example, will have to travel to Quincy, Lynn or beyond to pick up the album. If you want to download it, forget iTunes; you can only access “Eden” from the Wal-Mart Web store.

What do the Eagles get in return for giving Wal-Mart an exclusive? A $40 million ad campaign and a much larger cut from every one of the self-released CDs sold.

Ed Christman, a Billboard magazine retail reporter, doesn’t know the details of the Eagles/Wal-Mart deal, but suspects that without having to split profits with a record label or distributor, the band could rake in twice the standard superstar cut of $4 an album.

After decades of artists singing about sticking it to the man, do we finally have an artist who figured out how to do it?

Small effect of declining dollar on US prices

We scooped the Wall St Journal with yesterday's blog post (Will declining dollar result in higher import prices?). From today's Journal:

Foreign exporters are so keen to keep U.S. market share that when the dollar weakens, they often lower their prices to keep them constant after the currency effect. That's especially true when the economy is slowing and consumers are less willing to pay higher prices.

The Continuing Decline of the Dollar

Newsweek reports on some unique evidence regarding the continuing decline of the dollar. Rap stars are throwing over the dollar in favor of the euro! Don't look for any dead presidents or benjamins in Jay-Z's lastest video - it features euros. Wu-Tang Clan's new CD is priced only in euros on its official web site.

It's no longer all about the benjamins. Maybe it's all about the baroques and rococos.

Will the declining dollar result in higher import prices?

My colleague David Parsley writes:

The U.S. has one of the lowest 'pass-through' rates of any country, i.e., exchange rate depreciations are not typically passed through to price increases to any great extent. Perahaps a ball park estimate would be from 10-20% only in the short run - say w/in a couple of years.

WARNING: decline and fall of the US empire

In past blogs (In praise of irrational politicians) we have talked about our entitlements crisis: old people vote in much greater numbers than young people, so politicians rationally respond to these incentives by voting to transfer income from young people to old people in the form of Medicare and Social Security benefits that we cannot afford.

Now we have David Walker, head of the Govt. Accountability Office, interviewed by Newsweek, warning that without a political solution, we could end up like the Romans when the Barbarian horde crossed the Rhine.

NEWSWEEK: You have likened the situation here in the United States to the fall of the Roman Republic. Do you foresee the decline and fall of the United States?

David Walker: I don't believe that the United States will decline and fall, but I think it's important that we wake up and recognize that we are seeing some of the same warning signs that existed with the Roman Republic. There are many people who think the United States is the longest-standing republic in the history of mankind, and that's not true. Rome lasted over double the period of time that we have existed so far, and it is important that we make tough choices to make sure that we are the first republic to stand the test of time.

Microfinance in the developing word: Kiva

In the past, we have blogged about the problems of microfinance in the US (Micro-finance, character loans, and discrimination). Stanford Magazine has a story about the start of Kiva.

Kiva has so many lenders—more than 123,000 extending $12.4 million to some 18,000 entrepreneurs in 39 countries—that it recently limited each participant to $25 per business, “so that everyone has a chance to make a Kiva loan.” After two years in operation, Kiva attracts $1.5 million a month, Matt says. The impact is bigger than it looks, notes Jessica, MBA ’07, because “each loan is touching 15 people, whether it’s other workers in the business, or family.”

China is busted by the laws of economics

If you try to peg your currency to the dollar, then you give up control of your domestic money supply. For example, the Chinese have pegged their currency at an artificially low rate relative to the dollar to encourage exports. As a consequencec of the peg, the Chinese Central Bank has had to print money to give to Chinese exporters when they exchange their dollars for yuan. This has lead to domestic inflation that has been largely unreported.

Until recently, China had never participated in the careful price surveys needed to convert accurately its gross domestic product into PPP dollars. The World Bank's estimates based on summary data from the late 1980s probably overstated China's PPP gross domestic product even then. Up to now, the bank has revised its estimate very little. In the meantime, China has repeatedly raised the prices of food, housing, healthcare and a range of other non-traded goods and services. These reforms should have lowered the PPP adjustment, but the bank left it basically unchanged.

These new price data imply that the real exchange rate with China has fallen (the dollar has depreciated relative to the yuan) and that the Chinese economy is 40% smaller than we thought it was. Can anyone think of an incentive for the Chinese government to under-report inflation?

From the Financial Times via marginalrevolution.com and kids prefer cheese.

How smart do you have to be to read this blog?

Google vs. Apple: another standards war

We have blogged about standards wars before (Another standards war, this one with rules, Will this standards ware become a quagmire?, DVD war drags on), and now we see a new one being fought between Google and Apple for a mobile telecommunications/Internet operating sytem.

Adam Schiff analyzes the tradeoffs between an open system (Google, more applications) vs. a closed operating system (Apple, higher quality):

But if I had to bet on it, I’ll bet on Apple. I think people’s preferences for quality are relatively strong, especially among people who want to use Internet applications on their mobile phone. I think a platform that provides some quality control over the applications available on its system will have an advantage over one that doesn’t, even if it reduces the number that are available. Of course, this depends on getting all the prices right — how much to charge for applications and how much to pay developers. This makes me more nervous about betting on Apple, as they don’t have a history of getting prices right the first time.

Are banks hiding more bad news?

In past blogs (Securitisation and its hidden costs, Can functionally organized banks "see" risk?), we have talked about the organizational problems of banks and mortgage brokers that exacerbated the subprime crisis. Now we find out that similar organizational problems may prolong it. Maverecon (via marginalrevolution.com) identifies the bigger problem behind the problem:

the sub-prime crisis is but the tip of the credit risk mis-pricing iceberg. Unsecured consumer loans and car loans, and the large stock of ABS backed by credit card receivables, are waiting to join the credit risk-repricing party.

The single best thing that could happen would be for the true magnitude of the losses suffered by banks and other exposed parties to be revealed and put in the P&L. Until what happens, fear of getting stuck with the hot potato makes banks unnaturally unwilling to extend credit against the kind of collateral that they would not have thought about twice accepting at the beginning of the year.

In other words, banks continue to make bad loans in order to hide the bad loans they have already made.

Is Asia's antitrust "surge" working?

in past posts (What if there were no antitrust?) we have blogged about Asia's antitrust laws. Now, from Tad Lipsky:

Those who scan the horizon for new international antitrust developments will have noticed that South Korea has become a frequent and active player, spearheading what might be viewed as a "surge" in antitrust activity across the Pacific. Japan has adopted a leniency program and is pursuing cartels with new vigor, both alone and in cooperation with other jurisdictions; class actions seem to be emerging as a regular feature of the Australian system, and the ACCC professes interest in criminal remedies; Singapore is rolling out its new law, and with continuation of merger review and the enactment of the first broad-gauge antitrust statute in China, due to go into effect in August 2008, one wonders how close we are to the day when every deal and every major antitrust issue faces an acid test in at least one Asian jurisdiction (in addition to the "standard" US/EU/Canada, etc.). But South Korean enforcement is active right now -- not "over the horizon" or even "on" it.

Beware bearers of bad news

Irwin Stelzer is supicious of the bad news coming out about the economy because those with the best information may be trying to pressure the Fed into cutting rates (from the Weekly Standard)

Had enough gloom and doom? Then consider this. The job market remains strong, not as strong as in the recent past, but strong enough to keep unemployment at low levels and to have Goldman Sachs' economists call it "robust." Productivity rose at the robust annual rate of 4.9 percent in the third quarter, causing labor costs to fall. Core inflation remains low. Most CEOs I meet are expecting profits to grow at double-digit rates in 2008. Personal incomes continue to rise. The economy did grow at a healthy pace in the third quarter. The World Economic Forum ranks America number one in competitiveness, up from sixth last year. The International Monetary Fund expects the world economy to grow at close to 5 percent, which bodes well for U.S. exports. And Ben Bernanke, while at the same time warning of downside risks to any projection, told the Joint Economic Committee late last week that "most businesses appeared to enjoy relatively good access to credit . . . the overall economy remained resilient in recent months," and that he expects growth to resume in the second half of 2008 after a "sluggish" first half, "as the effects of tighter credit and the housing correction begin to wane.

Evolution of Business Education

Harvard Business School professor Rakesh Khurana reviews the evolution of B-school education in his new book, From Higher Aims to Hired Hands (review from Business Week available here).

While I have not read the book myself, it seems to be generating at least a little bit of buzz (here’s a post from our friends at the Organizations and Markets blog). I must admit that I approach the book with a bit of skepticism given that Business Week notes that it argues for “the reinvention of management” to foster virtues like “custodianship, duty, and responsibility.” Oh, boy!

Want a kidney? Wait six years.

In our textbook, one of our best money making ideas is selling kidneys:

If I can borrow $100 million at 20% interest, I can buy a hospital ship, anchor it in international waters, and begin selling kidneys. I can set up a database to match donors to recipients, broker sales, and fly in experienced transplant teams. If I charge $200,000 and earn 10% on each transaction, the break-even quantity is just 1,000 transplant each year. This represents about 1% of the potential demand in the United States alone.

Now the Wall St. Journal reports that since the waiting list has grown to six years, there is growing support for lifting the federal law that led to the shortage:

Dr. Matas, 59 years old, is a Canadian-born physician... [has]...been traveling the country trying to make the case that barring kidney sales is tantamount to sentencing some patients to death.
...
The federal ban on organ sales dates back to 1983, when Virginia physician Dr. H. Barry Jacobs proposed buying kidneys -- mostly from the indigent -- and selling them to whomever could afford to buy. His plan was met with widespread outrage. In Congress, then-Rep. Al Gore (D., Tenn.) introduced legislation banning the sale of organs. The bill became law in 1984.

Can Toyota be big, green, and high quality?

From The Economist

By the end of the year, Toyota is set to edge past General Motors (GM) with forecast group sales of 9.34m vehicles compared with GM's 9.29m. At the same time, it will decisively push Ford into third place in the crucial North American market. ...

The danger Toyota faces is that two of the very things that have made it so successful—the rock-solid reliability of its products and its reputation for making fuel-efficient, greenish vehicles—are threatened by the need to keep feeding its phenomenal growth.

Momentum vs. Mean Reversion

The Economist reports on the fall of Bill Miller and his Legg Mason Value Trust which is trailing the S&P500 by 7%.

Mr Miller calculates that if you had taken the 50 best performing stocks over the 3 years ending December 31st 2006 and taken them as your portfolio for this year, you would have earned a return double that achieved by the S&P 500. In other words, what goes up did not come down but kept on rising.

That is not the traditional pattern of financial markets. Momentum has been a successful strategy but only in the short term (say six to twelve months). Over the longer term, stocks tend to revert to the mean, as attractive companies eventually become overvalued and struggling companies become cheap. This time, the winners have kept on winning, particularly in commodities, industrials and emerging markets. As Mr Miller points out, these all thrive on global reflation and global growth.

Mr Miller has essentially lost by betting on the reversion to the mean, assuming that beaten-up stocks in the financial and consumer sectors would rebound. Given his record, he may well prove to be right in the end, just as they those who forecast the tech bust were eventually vindicated.

Blessings of the Commons

The Economist reports that Spanish fisherman want to establish a fishing reserve out of self interest:

One study of marine reserves in St Lucia and Florida showed that catches by adjacent fisheries increased by around 50%, and the biomass of five types of commercially exploited fish tripled in three years inside the reserves and doubled in adjacent fishing grounds. A more recent study in Sicily showed that a reserve multiplied the catch by a factor of 27 in only five years.

Gender Discrimination at the Coffee Shop?

Tim Harford, Slate's "Undercover Economist," reports on research by economist Caitlin Knowles, who studied waiting times of different groups at eight coffee shops in the Boston area. One of the more robust findings was that women have to wait longer to receive their orders. This effect persisted even after controlling for the type of drink ordered. And, it did not appear to be a case of employees trying to flirt with female customers, as wait times increased when the shops were busiest (when you would think flirting is least likely to occur).

The results are a bit curious because many economists think that competition should reduce discriminatory practices. A discriminatory coffee shop is driving away customers and the associated revenues, which is not likely sustainable in a competitive environment.

The graying of China

From AEI:

In the early 1970s, China's then-current childbearing patterns implied nearly five births per woman. At the start of the "one child policy" in 1979, China's total fertility rate was nearly three births per woman. Today, China's fertility rate is far below the "net reproduction rate"--by many estimates, just 1.7 births per woman nationwide. In some major population centers--Beijing, Shanghai and Tianjin among them--the average number of births per woman today has fallen below one baby per lifetime.

This "success," however, comes with immense inadvertent costs and unintended consequences. Thanks to a decade and a half of sub-replacement fertility, China's working-age population is poised to peak in size, and then start to decline, more or less indefinitely, within less than a decade. A generation from now, China's potential labor force (ages 15-64) will be no larger than it is today, perhaps smaller. ...

China's age profile will "gray" in the decades ahead at a pace almost never before witnessed in human history. China is still a fairly youthful society today--but by 2030, by such metrics as median population age, the country will be "grayer" than the United States--"grayer," that is, than the U.S. of 2030, not the U.S. of today.

Why is the dollar falling?

From Business Week:

This economic strength or weakness is reflected in yields on bonds and interest rates. Right now, Keith Hembre, chief economist at First American Funds, says the bond markets seem to expect many more interest rate cuts from the Federal Reserve in the next several months. That means the markets also are expecting a deep slowdown in the U.S. So it's no surprise that investors are moving money out of dollars and into other currencies that will give them better returns.

Gender gap opens: women board directors earn more

From Business Week:

In its annual director pay survey, The Corporate Library, a corporate governance and executive compensation research group, reports the median earnings for female corporate directors is $120,000. That's about $15,000 higher than the median total compensation for male directors, which is $104,375.

Southwest changing strategy

Every business school likes to teach strategy cases based on Southwest because its low fares, frequent flights, and enthusiastic employees unencumbered by rigid work rules seems like the perfect fit between the resources and capabilities of the firm and its external competitive environment.

But now, Business Week reports that Southwest is changing its low-cost strategy by slowing expansion and by trying to wring more revenue out of its business travelers by using what it calls "ancillary services," like priority boarding and in-flight "extras."

Two factors are driving the radical changes: tougher competition and higher oil prices. Many of Southwest's competitors have gone through bankruptcy, allowing them to cut labor costs and shed unprofitable gate and plane leases. The result is that the airline's cost advantage over rivals has shrunk, and its pilots and flight attendants are now the highest paid in the industry. At the same time, the price of oil is nearing $100 a barrel (BusinessWeek, 11/7/07), driving up Southwest's costs.

The outlook this year isn't pretty. Southwest's earnings are expected to decline about 15% in 2007, to $510 million, on sales of $9 billion, even as many of its rivals are reporting profit gains. "Their business model is ten years out of date," says aviation industry consultant Michael Boyd.

38% of Radiohead's fans pay for music

In earlier posts ("Its up to you" pricing), we reported on Radiohead's experiment in asking fans to pay what they want for their new CD, "In Rainbows." The results are in: 38% paid an average of $5 for the music. Americans paid an average of $8.05 but about the same percent downloaded for free.

Hat tip to Lewis.

Why pay executives to take risk?

Nice description of the moral hazard problem created by Citigroup and Merrill Lynch by letting their CEO's resign and collect huge bonuses:

The moral hazard ... is caused by a phenomenon called the "trader's option" - the problem that a financial trader has an incentive to take careless risks with his bank's capital because he gains a multi-million dollar bonus if he makes money but loses nothing (apart from, perhaps, his job) if he is wrong. Any trading loss is borne by his employer and its shareholders.

In recent years, banks have done their best to counter the trader's option by paying bonuses largely in shares that vest gradually over three or four years. This provides two safety mechanisms.

The first is that, since traders are paid in shares, they have an equity incentive to do their best for the bank as a whole. The second is that, since their bonuses vest only gradually, banks have the time to find out whether trades that make big profits in one year blow up the following year. They can fire a dodgy trader before he gets all of his bonus. ...

This is why Merrill's board should not have caved in to Mr O'Neal and allowed him to claim his unvested stock. He punted with Merrill's capital and made a terrible error. He should have been dispatched without his unvested shares as a lesson to him and his successors.

Hat tip to Stephen.

End war by raising the opportunity cost of fighting

NY Times reports that war is unlikely in Kurdistan (northern Iraq) because they are making too much money.

...despite bellicose Turkish threats, an all-out armed conflict may be less likely than is widely understood: the growing prosperity of this region is largely Turkish in origin.

In other words, while Turkey has been traditionally wary of the Kurds of Iraq, it is heavily invested here, an offshoot of its own rising wealth. Iraqi Kurdistan is also a robust export market for Turkish farmers and factory owners, who would suffer if that trade were curtailed.

This parallels what happened in Ireland: low taxes increased prosperity and now everyone is too busy making money to fight.

thanks to Laura for pointing this out.

What should I read after I finish Freakonomics?

Brad DeLong has some suggestions: if you are a liberal, read Tyler Cowen's Discover Your Inner Economist.

Consider, for example, Cowen's discussion of tourists from affluent countries who travel in poor countries and find local guides and beggars waiting outside hotels. For the guides and beggars, waiting for the rare generous tip or gift is better than other available options — but not much better. More generous and well-intentioned visitors do not improve the well-being of local guides so much as they simply multiply their numbers. People who would otherwise be doing something useful wait instead for the relatively big score, and increased generosity becomes a social loss.

So what should an ethical liberal do? Many flint-hearted libertarians anxious to cast scorn on woolly-headed liberals would stop at this point, smugly pointing out that liberal generosity is counterproductive. Cowen goes a step further, and asks what a non-woolly-headed liberal who actually wanted to help would do. He has a simple answer: Get off the beaten track. Find somebody who is both poor — not just looking poorer than they are in the hope of attracting generosity — and busy doing something productive and useful. Give them the money. As Cowen puts it, "If you are going to give, pick the poor person who is expecting it least." That accomplishes the most efficient transfer of wealth.

I recommend Tyler's book for clear thinkers as well (How to control the world: the basics) but DeLong recommends Robert Frank, The Economic Naturalist, for intellectual balance.

Housing prices down only 4.5%, but unsold backlog reaches 10 months

In earlier posts (Sunk-cost fallacy in real estate), we documented the reluctance of homeowners to sell at a loss. Now the Wall St Journal reports that housing prices have fallen only 4.5% from their March 2006 peak and, due to the reluctance of sellers to reduce price, there is a ten month backlog of unsold houses.

Keeping your house on the market can cost as much as 1% of the house value each month. Their advice:

Ask your real-estate agent how many properties are on the market in your town today and how many sold in each of the past six months, advises Chris Mayer, director of Columbia Business School's Milstein Center for Real Estate.

"If there are 2,000 houses on the market and 200 houses sold last month, that means it's taking 10 months to sell a house," Prof. Mayer says. "That's pretty simple math, but nobody ever does it. If you price your house like everybody else, it might take 10 months to sell it."

$2000/kidney in the Phllipines

Kidney sales are illegal in the Phillipines but this CNN video documents a thriving black market. A surprising policy proposal to help the donors.

Do Penalty Takers Behave Randomly?

In the spirit of this week’s earlier post on going for it on fourth down in football, here’s an example of using economics in real football (soccer to Americans). For those who lack the good taste and sophistication to follow the beautiful game, penalty kicks involve a one-on-one contest where a shooter tries to score against the goalkeeper from a distance of twelve yards.

Anticipating how your opponent will act is critical. If you are the keeper, if you can accurately predict the direction of the shot (to the right/left or down the middle), you have substantially increased your odds of stopping the shot. In these types of situations, game theory predicts that players will use mixed strategies in which they randomize over their possible actions in order to remain unpredictable.

In a 2003 paper in the Review of Economic Studies, economist Ignacio Palacios-Huerta studied over 1,400 penalty kicks in professional soccer games (so, here’s a guy who is essentially getting paid to watch sports highlight shows!). He found that professional players could indeed behave randomly. Their decisions showed no correlations with prior outcomes, prior decisions they had made, or prior decisions of the opponent. They appeared to be able to generate random sequences, an act that is usually quite difficult for people to accomplish (try it yourself at Mike Shor’s game theory web site.)

Give, but verify

From Unintended Consequences:

This morning’s Marketplace from American Public Media included a story on using Wall Street know how to evaluate and raise money for charities. A problem is that prospective donors have trouble distinguishing “worthy” charities from those that squander resources or worse. So a couple of Wall Street types are developing SocialMarkets. The idea is to trade a security that pays off depending on how well the program ... succeeds in meeting its stated goals.

The prices of these contracts would tell us which charities are likely to succeed, in much the same way that the prices of political futures contracts tell us that Senator Clinton has a 71% chance of winnig the Democratic nomination for president.

Fear of failure causes failure.

The incentive conflict between NFL owners, who tend to be entrepreneurial and focused on outcomes, and managers, who are often focused on not screwing up, manifests itself in coaches reluctance to go for it on fourth down. According to Economist Paul Romer, the expected benefits from going for it on fourth down are much bigger than the expected costs:

teams should regularly be going for it on fourth down, even if it is early in the game, even if the score is tied, and even if the ball is on their own side of the field.

From Washington Post, via Greg Mankiw.

Demand for newspapers continues to decline

From Editor&Publisher

...for 538 daily U.S. newspapers, circulation declined 2.5% to 40,689,617.

• The New York Times was down 4.51% to 1,037,828
• The Washington Post was down 3.2% to 635,087
• The Wall Street Journal was down 1.53% to 2,011,882
• However, USA Today posted a gain of 1% to 2,293,137.

In response, daily newspapers are cutting back circulation in outlying [high cost] areas. Newspapers are also merging editorial deparments to take advantage of obvious scale economies and merging their adveritising to provide a more attractive vehicle to national advertisers.

Breaking the First Law

According to everyone's favorite Managerial Economics text, the First Law of Demand states that consumers demand (purchase) more as price falls, assuming other factors are held constant.

Despite its obvious importance in economics - it's the "first" law and we write it with all capital letters, so it must be pretty important - the First Law sometimes appears to break down. I was reminded of this when my wife went shopping for a new cell phone this weekend. She was comparing two Bluetooth headseats to accompany her phone. She had no basis for comparing the quality of the two headseats, but she was sure that the more expensive one had to be better. So, my wife's quantity demand for the higher-priced headseat rises as price increases. Curious.

Now your typical weasely economist is liable to say, "hey, we said 'assuming other factors are held constant' in the First Law." If price affects perception of quality, maybe other factors aren't held constant. With this kind of big qualification, maybe we should call it the "First Guideline." ;)

For examples of other instances of quantity demanded increasing with price increases, see Giffen goods and Veblen goods.

Micro finance, character loans, and discrimination laws

I just chaired a session at the annual Net Impact conference on micro finance in the US. Three speakers from non profit banks made what they called "character" loans to smal, risky, and unprofitable borrowers. Ironically, the discrimination laws of the US have induced most commercial banks to abandon "character loans" in favor of formal credit scoring.

New Stossel video: "Stupid in America"

[40 minutes long] John Stossel takes a look at America's public schools. Regardless of whether you agree with his libertarian sensibilities, these make good teaching tools. I show Stossel's "Microeconomics" and "Macroeconomics" videos to break up my classes. Good at generating discussion.

The management problem is how to measure school performance when so much depends on the student's background. Vouchers put parents in the role of evaluator, who vote with their feet if they think the school is not serving their children well. Vouchers would likely give rise to school "brands" or certification services to help parents evaluate school performance.

Attractiveness of business environment set to decline

In past posts (World Index of Economic Freedom), we have underscored the effect of a country's legal and regulatory environment on its citizens' well being. Now the Economist reports that the United States' is set to decline:

The comparative attractiveness of America's business environment is set to decline over the next five years as a result of mounting financial and macroeconomic risks, increased protectionism, security concerns and strained international relations. The Economist Intelligence Unit's business environment rankings for 2008-12 show America falling to ninth position, the lowest the country has placed since the launch of the business environment rankings in 1997.

I wonder if this is a related to the Democrats' likely success in the next election? (Equality vs. incentives: US tax reform, Taking from top 1% to give to the top 2-25%, Antitrust priorities of the next administration?) Or it is a function of the Republicans' stewardship of the government?

Equality vs. incentives: US tax reform

The Economist criticizes Congressman Rangel's proposed tax reform:

...raising the top marginal rate will blunt incentives. If the Bush tax cuts are allowed to expire, America's top rate of income tax could rise to almost 45%, up from 35% today, with state taxes on top of that....His plan ... is mostly concerned with shifting the tax burden from the affluent to the very rich. That is not the kind of redistribution for which it is worth inflicting so much damage on incentives at the top end.

However, they do give him credit for wanting to cut the corporate tax rate:

Mr Rangel wants to cut America's top rate of corporate income tax from 35% (about the highest in the OECD) to 30.5%. The revenue (almost $400 billion over a decade) would be recouped by getting rid of several deductions, including a distorting tax credit for domestic manufacturers. Given that Democrats have long refused to consider cutting corporate income tax, for fear it would be construed as handing tax cuts to the rich, Mr Rangel's ideas mark a clear step forward.

Innovation in health care

The WSJ reports on a primary physician, running a walk-in clinic, who is trying a new business model.

For a monthly fee of $83 per individual or $125 for a family, the clinic provides unlimited primary and urgent care. Those who enroll in the prepaid plan get office visits, lab work, X-rays and as many generic drugs as the clinic can provide. Dr. Wood is one of several hundred doctors across the country offering flat-rate, pay-in-advance plans.

Antitrust priorities of the next adminstration?

In previous posts (Will Resale Price Maintenance Return?), we have argued that contracts between manufacturers and retailers, like the contracts between PING and its golf stores, serve to align the incentives of retailers with the goals of the manufacturer.

With Clinton futures trading at $0.71, we get a glimpse of a what a Clinton antitrust policy might look like. Senators Kohl, Biden, and Clinton introduced a bill that would prohibit manufacturers and retailers from contracting on price:

The Discount Pricing Consumer Protection Act (s 2261) will ... simply add one sentence to Section 1 of the Sherman Act--the basic provision addressing combinations in restraint of trade--a statement that any agreement with a retailer, wholesaler or distributor setting a price below which a product or service cannot be sold violates the law. No balancing or protracted legal proceedings will be necessary. Should a manufacturer enter into such an agreement it will unquestionably violate antitrust law.