How to ask for a raise

from NY Times:

1. For starters, know your worth in the marketplace. Consult the Occupational Outlook Handbook from the Labor Department or check salary survey Web sites like salaryexpert.com or payscale.com to find out the salary range for your job.
2. Next, write a list of your accomplishments since the last evaluation.
   
3. Then put yourself in the boss’s shoes

Iowa primary futures prices: Republicans

from intrade.com. Anyone who wins this primary has likely sold out to the ethanol lobby.

	REP.IOWA.HUCKABEE Mike Huckabee to Win	50.0
	REP.IOWA.ROMNEY Mitt Romney to Win	50.0
	REP.IOWA.THOMPSON(F) Fred Thompson to Win	1.6
	REP.IOWA.MCCAIN John McCain to Win	2.0
	REP.IOWA.GIULIANI Rudy Giuliani to Win	0.1

Iowa primary futures prices: Democrats

from intrade.com. To win this primary, you have to sell out to the ethanol lobby.

	DEM.IOWA.OBAMA Barack Obama to Win	40.5
	DEM.IOWA.CLINTON Hillary Clinton to Win	35.1
	DEM.IOWA.EDWARDS John Edwards to Win	23.0

Can blogging help your business?

From NY Times:

But some companies are suited to blogging. The most obvious candidates, said Aliza Sherman Risdahl, author of “The Everything Blogging Book” (Adams Media 2006), are consultants. “They are experts in their fields and are in the business of telling people what to do.”

Presidential futures prices: Democratic nomination

From intrade.com:

	2008DEM.NOM.CLINTON Hillary Clinton to be the Democratic Presidential Nominee in 2008	66.6
	2008DEM.NOM.OBAMA Barack Obama to be Democratic Presidential Nominee in 2008	26.2
	2008DEM.NOM.EDWARDS John Edwards to be the Democratic Presidential Nominee in 2008	5.7

Presidential futures prices: Republican nomination

With only 7 days before the Iowa caucuses, the prices become more volatile. From intrade.com:

	2008.GOP.NOM.GIULIANI Rudy Giuliani to be the Republican Presidential Nominee in 2008	32.7
	2008.GOP.NOM.ROMNEY Mitt Romney to be the Republican Presidential Nominee in 2008	23.3
	2008.GOP.NOM.MCCAIN John McCain to be the Republican Presidential Nominee in 2008	19.1
	2008.GOP.NOM.HUCKABEE Mike Huckabee to be the Republican Presidential Nominee in 2008	15.0

Aligning incentives of media consultants with goals of candidates

From NY Times:

The old approach allowed the fees to shoot up with increases in advertising in hotly contested races. Critics say it also provided a built-in incentive for the consultants to run more ads — a concern that has led to infighting in many races.

In interviews, aides said Ms. Clinton, of New York, and Mr. Edwards, of North Carolina, had negotiated flat fees with their top consultants. And Mr. Obama, of Illinois, has capped what his consultants can earn, which will convert their more traditional percentage deal into a flat fee once his ad spending passes a certain threshold, his aides say.

How an Economist Views A Christmas Carol

Here's a column to warm the hearts of any little economist who might be in a holiday funk over the deadweight loss of Christmas.

Poor Scrooge - he's just a misunderstood creator of value. (HT: Peter Klein at O&M)

If you pay doctors for treatment, you get more treatments

From NY Times:

One study found that a group of Medicare patients admitted to high-spending hospitals were 2 to 6 percent more likely to die than a group admitted to more conservative hospitals.

Why is this happening, then?

Above all, it’s the natural outgrowth of our fee-for-service health care system. It turns doctors into pieceworkers, as Ms. Brownlee puts it, “paid for how much they do, not how well they care for their patients.” Doctors and hospitals typically depend on the volume of work for their income, and they are the gatekeepers who decide when work needs to be done. They also worry about being sued if they do too little. So they err on the side of overtreatment.

Just when you thought the government couldn't get any bigger

My friend who sent this to me thought it was a clumsy parody of Senator Clinton sponsored by the vast right wing conspiracy. The idea the government is like Santa Claus, handing out presents, is taken from PJ O'Rourke's famous essay, "God is a Republican and Santa Claus is a Democrat." But truth is better than satire. From PJ O'Rourke's Parliament of Whores:

I have only one firm belief about the American political system, and that is this: God is a Republican and Santa Claus is a Democrat.

God is an elderly or, at any rate, middle aged male, a stern fellow, patriarchal rather than paternal and a great believer in rules and regulations. He holds men accountable for their actions. He has little apparent concern for the material well being of the disadvantaged. He is politically connected, socially powerful and holds the mortgage on literally everything in the world. God is difficult. God is unsentimental. It is very hard to get into God's heavenly country club.

Santa Claus is another matter. He's cute. He's nonthreatening. He's always cheerful. And he loves animals. He may know who's been naughty and who's been nice, but he never does anything about it. He gives everyone everything they want without the thought of quid pro quo. He works hard for charities, and he's famously generous to the poor. Santa Claus is preferable to God in every way but one: There is no such thing as Santa Claus.

Should New Orleans rebuild public housing?

From Fox News:

NEW ORLEANS — Police used chemical spray and stun devices as dozens of protesters seeking to halt the demolition of public housing in New Orleans tried to force their way through an iron gate at City Hall. ...

HUD says the redevelopment, in the works before Katrina hit, will mark an end to the city's failed public housing experiment that lumped the poor into crime-ridden complexes and marooned them outside the life of the rest of the city.

Are you running a trade deficit with your grocery store?

From former student John Tamny:

In his book Labyrinths of Prosperity, Canadian economist Reuven Brenner professed that, "Macroeconomics is a tautology and a myth, a dangerous one at that, sustaining the illusion that prosperity is necessarily linked with territory, national units, and government spending in general."

Perhaps nowhere is the absurdity of macroeconomics more apparent than in the discussion of the trade deficit...

Incentives in College Football

In our framework for diagnosing and solving problems in business organizations, a key question concerns the incentives of employees making decisions (how are they evaluated and compensated).

Gregg Easterbrook, who writes the Tuesday Morning Quarterback column (highly recommended for football fans!), traces the phenomenon of big-time college football programs running up the score to the incentives of college coaches. He notes that in many cases a significant portion of a head coach's salary is paid for by boosters. As an example, Bobby Petrino (or Petrino the Weasel as TMQ calls him) will receive a salary of $2.85 million, $2 million of which comes from the booster fund. Easterbrook argues that your average booster likes to bet on college football games, so coaches better make sure they cover the spread to keep their true employers happy.

Presidential futures prices: Democratic nomination

From intrade.com:

2008 Democratic Presidential Nominee
	2008DEM.NOM.CLINTON Hillary Clinton to be the Democratic Presidential Nominee in 2008	57.0
	2008DEM.NOM.OBAMA Barack Obama to be Democratic Presidential Nominee in 2008	35.0
	2008DEM.NOM.EDWARDS John Edwards to be the Democratic Presidential Nominee in 2008	5.4

Presidential futures prices: Republican nomination

From intrade.com

2008 Republican Presidential Nominee
	2008.GOP.NOM.GIULIANI Rudy Giuliani to be the Republican Presidential Nominee in 2008	34.5
	2008.GOP.NOM.ROMNEY Mitt Romney to be the Republican Presidential Nominee in 2008	25.0
	2008.GOP.NOM.HUCKABEE Mike Huckabee to be the Republican Presidential Nominee in 2008	16.7
	2008.GOP.NOM.MCCAIN John McCain to be the Republican Presidential Nominee in 2008	11.2
	2008.GOP.NOM.PAUL Ron Paul to be the Republican Presidential Nominee in 2008	8.8
	2008.GOP.NOM.THOMPSON(F) Fred Thompson to be the Republican Presidential Nominee in 2008	4.3

We will have to tell our children that we received fair warning

Our entitlement problems are becoming too big to comprehend. This must be how the Romans felt just before the barbarian horde crossed the Rhine. From MSNBC:

"Our government has made a whole lot of promises in the long-term that it cannot possibly keep," Comptroller General David M. Walker, the head of the Government Accountability Office, said Monday.

Members of Congress said the increase in the unfunded liability for Social Security and Medicare underscored the critical urgency to do something in light of the looming retirement in coming years of 78 million baby boomers.

"The longer we delay action on the issue of entitlement reform, the more difficult the solution will become," said Sen. Judd Gregg, the top Republican on the Senate Budget Committee.

Rep. Jim Cooper, D-Tenn., said the new report emphasized the need to enact legislation he is supporting that would create a bipartisan commission to make recommendations on overhauling benefit programs and then submit those recommendations to an up-or-down vote in Congress.

"If we don't take action now, it threatens to destroy our social safety net and ruin our economic prosperity," Cooper said in a statement.

Unintended Consequences of Banning Payday Loans

The "one lesson" of economics emphasizes considering the unintended consequences of an act or policy. I imagine that legislators in the state of Georgia intended to help those in tough financial spots when the state banned payday lending in May 2004. Economist Donald Morgan of the Federal Reserve Bank of New York has studied the consequences of this legislation by comparing Georgia citizens to those in states who did not pass payday lending laws (he also looked at North Carolina residents, whose government has enacted some restrictions). See this short mention of the study in Business Week.

Are these consumers better off? It would appear NOT: "compared with households in all other states, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate." Oops.

Wii shortage: poor forecasting or marketing ploy?

In the past, we have talked about deliberately under-priced products. Business Week has a story on the Wii:

The growing popularity of online shopping has created a booming secondary market in which individuals profit from shortages by snapping up supply and reselling at a premium. A search of eBay's (EBAY) U.S. site pulls up thousands of listings for new Wii consoles, with bidding well above the suggested retail price. Nintendo isn't pocketing any of that extra cash, but it's collecting a dividend in the form of free hype. That has allowed the company to hold fast on the price even as Sony (SNE) and Microsoft (MSFT), maker of the Xbox, have started discounting their newest machines to spur demand.

So it looks as if there's little incentive for Nintendo to crank up production. "You can extend the technology cycle of the product by sitting just below the demand curve and creating a sense of excitement. It's something they've done very cleverly in the past year," says Laurence Knight, a partner at marketing innovation consultant Fletcher Knight. The risk is that consumers may be turned off if they begin to feel manipulated.

Incentive conflict in bankruptcies

From the Economist:

Changes to bankruptcy laws in both America and Europe in recent years ought to have made it easier to revitalise or kill off ailing companies. But companies' finances have become much harder to unravel. Offered cheap money on easy terms, companies—just like consumers and homeowners—have borrowed far more than they used to. The type and complexity of debt have grown too, as have the range and number of creditors.

All this has increased the potential for conflict when a company becomes insolvent. A high level of debt, relative to a company's assets, means that a good proportion of creditors will be left with nothing. Because any restructuring plan has to be approved by a majority of creditors, the ability of a group of lenders to hold out for a better deal has grown. Some institutions will have taken bets that a company will go bust, and so stand to make money if a restructuring fails. This sets the stage for long, fierce battles between different classes of creditor.

Mean reversion causes volatility in debt markets

From the Economist:

...if the spread between the yield on an asset and the cost of funding is 0.5% a year, then the annual return will be 10% if the manager borrows 20 times his initial capital.

However, ... credit spreads tend to revert to the mean: in other words, when they are high, they are likely to fall and when they are low, they are likely to rise. As a result, the returns from the asset class are very volatile.

When spreads are low, investors will receive a low income and face the risk of capital loss when spreads widen (and prices fall). When spreads are high, they will get a good immediate income and the prospect of capital gain as spreads fall (and prices rise).

Congress investigates "speculation"

As almost everyone knows, futures markets move risk from those who don't want it to those who don't mind it. Without speculators, it would be impossible for risk averse producers to get rid of risk.

But now Congress is investigating: video on Kudlow

Election update: fiscal wake-up questions for candidates

From the Concord Coalition's Fiscal Wake-up page: questions for the presidential candidates.

• Do you support imposing strong budget controls, such as caps on annual spending, a "pay-as-you-go" rule for new spending and tax initiatives, and/or putting today's entitlements on a firm, long-term budget?

• What specific spending cuts, if any, do you propose  and how much of the problem would they solve? 

• What specific tax increases, if any, do you propose and how much of the problem would they solve? 

• According to the 2007 trustees' report, scheduled benefits for Social Security over the next 75 years exceed the earmarked taxes for this program by $6.8 trillion in present value. Measured as a share of the economy, Social Security will be nearly 50 percent larger by 2035. What is your vision for the future of Social Security and what strategies would you pursue to bring it about?

• Medicare poses a much bigger challenge than Social Security. According to the 2007 trustees report, Medicare's projected costs over the next 75 years exceed its earmarked taxes and premiums by $34 trillion in present value. Measured as a share of the economy, Medicare will more than double by 2035. Much of this is driven by rising health care costs rather than demographics. What is your vision for the nation's health care system, including the future of Medicare, and what strategies would you pursue to bring it about?

Ticket scalping, once illegal, now encouraged

If ticket scalping (called "touting" in England) moves tickets to their highest valued use, it seems as if it ought to be encouraged. But up until recently, it was not.

Now however, there seems to be a new appreciation of what markets can do for sports teams, musicians, and other performers. From the Economist:

• In August MLB.com, a subsidiary of Major League Baseball, signed a five-year landmark deal with StubHub, America's largest exchange. When the baseball season begins next spring, the 30 MLB clubs will refer ticketless fans to StubHub and receive an undisclosed cut of the resale revenue.
• Ticketmaster now has its own resale subsidiary, TicketExchange. More than 50 professional sports teams have now negotiated a cut of TicketExchange's resale revenue.
• Europe's biggest online ticket reseller, viagogo, based in London, this year signed deals with several English football clubs, the Scottish Premier League, lastminute.com (an online travel agency), Warner International Music and several other entertainment companies.

Results of Massachusetts health care experiment

From the Economist:

One of the advantages of America's federal system of government is that states can serve as policy laboratories. One of the biggest experiments is going on in Massachusetts, which instituted a form of universal health care. Preliminary results are in:

• ...roughly half of the state's uninsured population, reckoned to be between 500,000 and 700,000, are now covered.
• ...surveys of employers suggest that very few so far (only 3% according to one poll) have stopped covering their workers. (so no "crowding out" of private insurance); BUT
  
• Next year's insurance premiums are likely to rise by 10-12% ... If costs continue to soar, the state will not be able to afford this scheme for long, and it will become unpopular.

Scrooge Economists

Leave it to an economist to estimate the deadweight loss of Christmas. In a 1993 American Economic Review article (copy available here), economist Joel Waldfogel estimates that gift-giving destroys between 10 percent and one third of the value of gifts. What's the source of the deadweight loss? Well, anyone who has ever received a really lousy gift should be able to relate. The cost of the gift is often greater than the value placed on the gift by the recipient. Remember that $50 sweater you received that you wouldn't have paid 10 bucks for? That's value destruction in action.

The growing phenomenon of gift card presents helps reduce the deadweight loss, but it doesn't totally eliminate it. First, you occasionally receive cards to merchants of little interest so you don't spend them. Second, people often do not fully expend the amounts on gift cards. These two factors create the value destruction. In a recent Journal of Economic Perspectives article, economist Jennifer Pate Offenberg estimates a 15% loss on gift cards by studying their resale value on eBay. The best cards for holding their value include Home Depot, Lowes, Office Max, Circuit City, and Starbucks. The worst include Tiffany & Co, Victoria's Secret, Abercrombie & Fitch, American Eagle, and Express.

Be an economist this Christmas - just give cash!

Election update: what about health care?

from the Economist:

All the Democratic candidates, for instance, and none of the Republicans, are proposing some version of universal health coverage ...

Republicans prefer to concentrate on the cost side of health insurance, which makes sense. Health-care costs have risen, on average, 2.5 percentage points faster than GDP annually for four decades. That means, among other things, that the costs of the government-funded medical programmes—Medicare for the elderly and Medicaid for the poor—will bust the budget unless they are radically reformed. The Republicans further charge that Democratic plans to stop insurers excluding people with pre-existing medical conditions will hugely increase the cost of premiums.

Republicans focus much more closely than the Democrats do on using market mechanisms to bring down costs. John McCain, for instance, suggests allowing more competition across state borders. Along with Rudy Giuliani and Mr Romney, he also favours a much wider use of tax deductions. This would allow more people than just those lucky enough to have jobs that offer health insurance to benefit from what is, in effect, a large government subsidy.

Econ lecture from a man who never took an econ class

Charlie Munger, Warren Buffet's partner talks about the 9 objections to economics. What follows are my interpretation of his main objections:

1. If you give a man a hammer, every problem looks like a nail.
2. Hubris: Economists grab from other disciplines without acknolweldging the validity of other approaches.
3. Physics Envy: predictions logically derived from the wrong theory are wrong.
   
4. Too much macro, not enough micro.
5. Not enough synthesis of models with real world observation.
6. Ignorance of psychology; similar to 2.
   
7. Be roughly right, rather than precisely wrong; similar to 5.
   
8. Febezzlement: same as 7.
9. Willful ignorance of effects of vice and virtue; similar to 2, 6.

Well, it’s time to repeat the big lesson in this little talk. What I’ve urged is the use of a bigger multidisciplinary bag of tricks, mastered to fluency, to help economics and everything else.

And I also urged that people not be discouraged by irremovable complexity and paradox. It just adds more fun to the problems. My inspiration again is Keynes: Better roughly right than precisely wrong. And so I end by repeating what I said once before on a similar occasion. If you skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands

HT to Greg Mankiw

Vulture capitalists expose third world corruption

NY Times reports on the fight between vulture capitalists, who buy third world debt for pennies on the dollar, and then sue in US courts to recover; and the World Bank and the International Monetary Fund who criticize the vultures for

...forcing poor countries to fend off costly lawsuits rather than build classrooms and clinics.

But in the Congo Republic, where a deep-seated culture of graft has squandered so much of the nation’s wealth, those investors have become unexpected allies of anticorruption campaigners, who say such lawsuits may be the only way of holding the country accountable for how it spends its money....

The litigation has ... exposed the free-spending habits of government officials. According to hotel bills, the country’s president, Denis Sassou-Nguesso, paid $8,500 a night for a triplex suite at the New York Palace Hotel during a visit to the United Nations in 2005. His hotel bills in the United States in 2005 and 2006 added up to hundreds of thousands of dollars.

Shiller on hedging real estate price risk

In past we have blogged about one of the main functions of financial markets, to move risk from those who dont want it to those who dont mind it. Here is a conference on how to use the new Case-Shiller housing price index to hedge risk. I especially liked the video of Robert Shiller, who talked about how the hedging could change the macroeconomy.

What the Middle East can learn from Ireland

In past posts, we have blogged about how economic prosperity raises the opportunity cost of fighting (End war by raising the opportunity cost of fighting; World Index of Economic Freedom). Steve Forbes has something similar to say about the Middle East:

...we should be firmly advocating genuine changes that will bring about prosperity. One would be a Hong Kong-like flat tax. Another would be currency boards, such as Estonia's, or a variation of one, such as Latvia's, which have stabilized the once inflation-prone currencies of those two countries. ... It's no surprise that most Mideast countries (as well as African ones) are economic laggards. One happy exception is Egypt, which seems to be making real progress in instituting pro-growth policies. A vibrant middle class, long term, is the key to genuine and lasting peace.

Government Eyes University Endowments

According to this story in the Indianapolis Star, a number of lawmakers have expressed interest in trying to force universities to spend more of their endowments to reduce tuition. Sen. Chuck Grassley (R-Iowa), the ranking Republican on the Senate Finance Committee, believes Congress should "consider requiring schools to spend a minimum amount of what their endowments earn so they won't have to raise as much money from students." In testimony before the Committee, Lynne Munson of the Center for College Affordability and Productivity stated, "In too many cases, this wealth is being hoarded instead of shared." I think I am going to write a new pop song: "It's my wealth and I'll hoard it if I want to."

Here's a listing from the National Association of College and University Business Officers of universities ranked by 2006 endowment size along with growth in the endowment from 2005 to 2006. Harvard tops the rankings with an endowment of over $28 billion. Yes, you read that right - $28 billion.

'Tis the season of giving

The Wall St. Journal has series of articles on giving. Americans are generous; and rich Americans are very generous:

U.S. donors gave $295 billion directly to charitable causes last year, up 4.2% from 2005. About 65% of households with incomes of less than $100,000 gave to charity last year, with the average American giving 2% of income and the wealthiest as much as 8% to 10%, the report found.

Donor-advised funds make it easier to give, and the Journal has some tips for giving.

What makes a succesful charity?

From the Economist:

1. advocate and serve.
2. make markets work.
   
3. inspire evangelists.
   
4. nurture non-profit networks.
   
5. master the art of adaptation.
   
6. share leadership.

Deliberately under-priced products

A student asks me about the limited availability and absurdly low pricing of Nissan's new super sports car. It is predicted that dealers will charge upwards of $15,000 above MSRP.

This seems similar to Ninentendo Wii, Gibson's Custom Guitars, and other hard-to-find items. The low price and excess demand create media "buzz" and give the items a certain cachet. After all, would I be blogging about the car if it were priced higher?

How to spot a flawed CEO--before you hire her

From the Wall St. Journal:

• An overt zeal for prestige, power and wealth.

• A reputation for shameless self-promotion.

• A proclivity for developing grandiose strategies with little thought toward their implementation.

• A fondness for rules and numbers that overshadows or ignores a broader vision.

• A reputation for implementing major strategic changes unilaterally or for forcing programs down the throats of reluctant managers.

• An impulsive, flippant decision-making style.

• A penchant for inconsiderate acts.

• A love of monologues coupled with poor listening skills.

• A tendency to display contempt for the ideas of others.

• A history of emphasizing activity, like hours worked or meetings attended, over accomplishment.

• A career marked by numerous misunderstandings.

• A superb ability to compartmentalize and/or rationalize.

Anti-psychotics reduce nursing home costs

From the Wall St. Journal:

Nursing homes across the U.S. are giving these drugs to elderly patients to quiet symptoms of Alzheimer's disease and other forms of dementia. Nearly 30% of the total nursing-home population is receiving antipsychotic drugs, according to the Centers for Medicare & Medicaid Services, known as CMS. In a practice known as "off label" use of prescription drugs, patients can get these powerful medicines whether they are psychotic or not. CMS says nearly 21% of nursing-home patients who don't have a psychosis diagnosis are on antipsychotic drugs. ...

Nursing homes often find it difficult to balance the demands of caring for certain patients against the pressure to keep staff costs down. The economics of elderly care can work in favor of drugs, because federal insurance programs reimburse more readily for pills than people.

Tyler Cowen Interview

Tyler Cowen is a professor of economics at George Mason University and the author of the very popular economics blog, Marginal Revolution. He is also the author of a new book, Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist.

Here's an interview with Cowen from Knowledge@Wharton.

High earners flee Denmark utopia

From the International Herald Tribune:

...Denmark's growth rate will fall to an annual rate of slightly more than 1 percent for the five years beginning in 2009, reflecting a dwindling supply of a vital input for any economy: labor.

The problem, employers and economists believe, has a lot to do with the 63 percent marginal tax rate paid by top earners in Denmark - a level that hits anyone making more than 360,000 Danish kroner, or about $70,000. That same tax rate underpins such effective income redistribution that Denmark is the most nearly equal society in the world, in that wealth is more evenly spread than anywhere else.

Economist looks at John McCain

The Economist thinks McCain is worth a second look.

[McCain] has also been right about some big issues. He was the first senior Republican to criticise George Bush for invading Iraq with too few troops, and the first to call for Donald Rumsfeld's sacking. He is one of the few Republicans to propose sensible policies on immigration and global warming.

I like that McCain is not campaigning in Iowa due to its absurd ethanol addiction (see Ethanol cure worse than oil disease and More bad news about ethanol)

DISCLAIMER: I am endorsing McCain for President.

Nashville housing market looks better than rest of US

In earlier posts, (Sunk-cost fallacy in real estate, Housing prices down only 4.5% but unsold backlog reaches 10 months), we have blogged about "sticky" real estate prices. Now, Bert Matthews gives us some hard data on Nashville relative to the rest of the country. The unsold inventory (measured relative to current sales) is 6 months, compared to a national average of 10 months.And, over the past four years, Nashville has not seen as much house price inflation as the rest of the country.

The housing sector is slowing, but not as much as in the rest of the country.

Senator Clinton threatens mortgage lenders with "legislation" unless they "voluntarily" agree

Video (4 minutes): She is worried about "lending abuses"--is anyone worried about borrowing abuses?

Nine West wants to set minimum resale prices

Businesses are beginning to react to the Supreme Court's Leegin decision (Will Resale Price Maintenance Return?; Amicii brief of economists; PNG's brief ). In 2000, the FTC convicted Nine West of vertical price fixing, and prohibted them from

fixing, controlling, or maintaining the retail price of women’s footwear, as well as from coercing or pressuring any dealers to maintain, adopt, or adhere to any resale price. According to the petition, the June, 2007 U.S. Supreme Court decision in Leegin Creative Products ... “constituted a dramatic change in antitrust law and requires that the order now be reexamined.” Nine West’s petition also states that ... the Leegin ruling has put it at an unfair competitive disadvantage because it is prohibited from entering into minimum resale price maintenance agreements now available to its competitors.

The aai is opposed.

Moral hazard and the housing market

Former student John Tamny writes on the long term effects of a housing bailout:

...the message presently being sent to investors is to park cash in property as opposed to stocks. Innocuous at first, until we consider that tomorrow’s entrepreneurs are fully reliant on the savings of others. Simply put, capital invested in property is just that, as opposed to savings and investment that fund the various established firms and entrepreneurial concepts that employ us. If allegedly benevolent politicians make housing sacrosanct such that market uncertainty is a thing of the past, this will eventually materialize in tighter credit for the commercial entities in our midst that create real wealth.

PowerPoint Gone Wild

Peter Klein at Organizations and Markets discusses the University of Chicago's requirement that all business school applicants submit four PowerPoint slides as part of their application (Washington Post story here).

Supposedly, this will give students a chance to show their creativity and innovation. I guess we can all now confidently set aside any concerns that business schools don't know how to properly educate managers. PowerPoint=outlet for creativity and innovation.

Economics for Kids

Want to start indoctrinating your kids early? Everyone's favorite textbook not quite appropriate for the little tykes?

Check out the new DVD, Herschel's World of Economics, targeted toward elementary school children. The DVD, produced by the Indiana Council for Economic Education (ICEE) and Purdue University's Department of Agricultural Communication, features Herschel, a puppet dog who learns about "goods and services, producers and consumers, productive resources, scarcity, trade and money, and opportunity cost."

Hospitals trying to make the rules so their rivals won't

Physician owned hospitals are under attack from general acute care hospitals with whom they compete. The Chamber of Commerce is writing Congress on the side of the general hospitals:

...physician owners ... “cherry pick” the most profitable patient cases to hospitals in which they have a financial interest, while relegating to hospitals serving the general public more complicated and poorly reimbursed cases. Just as it is appropriate to adjust hospital payments to compensate for more complicated cases, it is imperative that Medicare not inappropriately overpay, particularly if some providers are manipulating shortcomings in Medicare’s centralized payment structure.

If left unchecked, the prognosis for continued physician self-referral is bleak: increased and unnecessary utilization of medical services will inflate premium costs to employers; raise theoverall cost of health care for all Americans; and diminish access to quality medical care for communities.

Who will come back to New Orleans?

NY Times:

Before the storm, more than half of the city’s population rented housing. Yet official attention to help revive the shattered rental home and apartment market has been scant. ... Last week, the city housing authority approved the demolition of 4,000 public housing units at five projects damaged by the storm. In their place, the authority plans to build mixed-income projects, large parts of which will not be affordable to previous residents.

One of the more striking changes to appear lately in New Orleans is the highly visible number of homeless men and women living under bridges and in parks. Social service groups say about 12,000 homeless people are living in the city, about double the number before the storm.

How to organize an auction between car dealers

A student tells me about CarBargains:

The service costs a couple of hundred dollars and organizes a sealed-bid auction among local car dealers. In my case, they got 6 dealers to bid, and the prices ranged from $1500 over factory invoice to $100 over invoice. The dealer who had the exact car (options, color, etc.) I wanted actually came in with the worst bid, but when I went to their sales manager with the $100 bid from another dealer, and explained to them I would prefer to buy from him but only if he matched the best offer, he instantly agreed and took care of the deal himself. This cut out the salesman saving the dealership the commission and saved me the time and hassle of dealing with a car salesman. Well worth the $190 the service cost. (at least as far as I was concerned)

Trade in pollution

CNN reports via Newmark's Door

...50 to 80 percent of the 300,000 to 400,000 tons of electronics collected for recycling in the U.S. each year ends up overseas. Workers in countries such as China, India and Nigeria then use hammers, gas burners and their bare hands to extract metals, glass and other recyclables, exposing themselves and the environment to a cocktail of toxic chemicals.

"It is being recycled, but it's being recycled in the most horrific way you can imagine," said Jim Puckett of the Basel Action Network, the Seattle-based environmental group that tipped off Hong Kong authorities. "We're preserving our own environment, but contaminating the rest of the world."

America's vainest cities

Forbes ranks cities with the highest per capita supply of plastic surgeons

1. Salt Lakc City
2. SF
3. TIE: San Diego, San Jose, Miami
6. TIE: Louisville, Nashville
8. TIE: Virginia Beach, New York, Los Angeles

Why is supply so high in Nashville and Louisville?

Business Week's Best Business Books

The latest issue of Business Week includes one view of the best business books of the year. The list includes

• In Spite of the Gods: The Strange Rise of Modern India (by Edward Luce)
• Asian Godfathers: Money and Power in Hong Kong and Southeast Asia (by Joe Studwell)
• The Age of Turbulence: Adventures in a New World (by Alan Greenspan)
• The Black Swan: The Impact of the Highly Improbable (by Nassim Nicholas Taleb)
• The Strategy Paradox: Why Committing to Success Leads to Failure (And What to Do About It) (by Michael E. Raynor)
• Boeing Versus Airbus: The Inside Story of the Greatest International Competition in Business (by John Newhouse)
• The Oil and the Glory: The Pursuit of Empire and Fortune on the Caspian Sea (by Steve LeVine)
• The House of Mondavi: The Rise and Fall of an American Wine Dynasty (by Julia Flynn Siler)
• The Billionaire Who Wasn't: How Chuck Feeney Secretly Made and Gave Away a Fortune (by Conor O'Clery)
• Innovation Nation: How America Is Losing Its Innovation Edge, Why It Matters, and What We Can Do to Get It Back (by John Kao)

How about you? What's the best business book you've read this year? Count one vote for The Halo Effect, discussed in this post.

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.