Can governments invest well?

Government "investment" sounds much better than government "spending," but a new study of Canadian government venture capital fund finds the the private sector does much better,

enterprises financed by government-sponsored venture capitalists underperform on a variety of criteria, including value-creation, as measured by the likelihood and size of IPOs and M&As, and innovation, as measured by patents.

The end of the profit-maximizing firm?

From a colleague who is visiting Germany this summer:

The only channel I get in English is CNN so I have been hearing a lot of news. Last night, they were mentioning that Exxon-Mobil shareholders fought off a number of resolutions that appear to have originated with the Rockefeller descendants (NY Times article). One was to "invest more profits in alternative sources of energy." I think this is going to become a classroom teaching tool.

Suppose that it would be less profitable to invest in alternative energy. It may or may not be socially beneficial to do so (it is possible that not all extenalities are internalized). However, some shareholders have a preference for "doing good" while this does not enter into the utility functions of other shareholders. One alternative is for the company to invest more in alternative energy and lower overall profits. Another is for them to maximize profits and distribute the earnings to shareholders who can then invest in alternative energy if they so choose. Which maximizes social welfare? Suppose instead of alternative energy, some have a preference for funding art (which supply may or may not be socially optimal). Does this change the analysis?

Adverse selection in teaching

"Those who cannot do, teach" is a succinct characterization of the problem of adverse selection in our profession. Now we learn two more types of teacher selection, only one of which is adverse:

Using data for New York City schools from 2000-2005, we find that first-year teachers whom we identify as less effective at improving student test scores have higher attrition rates than do more effective teachers in both low-achieving and high-achieving schools.

This sounds pretty good. But now for the rest of the story...

For teachers leaving low-performing schools, the more effective transfers tend to move to higher achieving schools, while less effective transfers stay in lower-performing schools, likely exacerbating the differences across students in the opportunities they have to learn.

The dollar in historical perspective

Historically, the dollar is cheap. The first "spike" in the graph above was caused by the simultanous tightening of monetary policy (dollars were scarce) under Volcker and the expansionary fiscal policy under Reagan. The second "spike" is the financial or "internet" bubble of 2000, when foreigners wanted dollars to invest in our equity markets.

Pigging out at the government trough

There is nothing like a little foreign perspective to realize how corrupt our political process is, and how even a self proclaimed reformer cannot resist another mouthful from the political trough. The unbelievable aspect of the farm bill is its future guarantees.

Shockingly, the bill's authors tied some future subsidy payments to today's record commodity prices, therefore guaranteeing already well-off farmers high incomes. Commercial farm households, which get most of the largesse, will have an average income of $229,920 in 2008, says the Agriculture Department. And it means, as the department points out, that the government could owe billions in subsidy payments to these big farmers if and when prices dip again.

John McCain and my "blue dog" Congressman, Jim Cooper, voted against this embarrassment.

Geezers and High-Tech Startups

We blogged previously about the observation that Gen Y entrepreneurship appears to be on the rise. This seems to be consistent with a common myth about entrepreneurship that it's a young person's game (I should probably say young man's game because one relatively incontrovertible fact is that men engage in entrepreneurship at a much higher rate than women). If you look at the data, however, they don't seem to support the myth of the dominance of youthful entrepreneurship.

A recent study conducted by Vivek Wadhwa, Richard Freeman, and Ben Rissing on behalf of the Ewing Marion Kauffman Foundation indicates that this myth is false even for high-tech startups. The researchers surveyed 652 US-born technology entrepreneurs who started tech companies from 1995 to 2005. They found that the average age was 39 and that twice as many U.S.-born tech entrepreneurs start ventures in their 50s as do those in their early 20s.

More on gas tax holiday--everyone wants to go to heaven but no one wants to die.

From a former student:

We all know that the consumer would never see the benefit of this reduction. The oil companies would move the price of gasoline up to capture this revenue along the supply and demand curve. The consumer would actually suffer due to the lasting effects of under funding our aging infrastructure.... [But] some states are seriously considering this proposal.

The question of whether consumers will see a price reduction from a gas tax holiday can be answered theoretically or empirically. Theoretically, you have to choose between two models, perfect competition vs. oligopoly, and then compute the pass-through rates. The advantage of perfect competition is that it gives you a definite answer (less than 50% pass-through); the disadvantage is that it is not very realistic. Oligopoly models are much more realistic, but the pass-through rates depend on the "curvature" of demand, something that is very difficult to estimate.

My preference is to go with the empirical estimates, like the Illinois gas tax holiday. There we saw a pass through somewhere between 60-80%.

On the policy side, Governments are caught between inconsistent consumer preferences for both a government policy to slow global warming and against higher gas prices.

And for the most part, the politicians favor cap and trade because it is an indirect tax. A direct tax – say, on gasoline – would be far more transparent, but it would also be unpopular. Cap and trade is a tax imposed on business, disguising the true costs and thus making it more politically palatable. In reality, firms will merely pass on these costs to customers, and ultimately down the energy chain to all Americans. Higher prices are what are supposed to motivate the investments and behavioral changes required to use less carbon.

How Much is a Year of Your Life Worth?

Now where do you think you could find an answer to such a ridiculous question? Ask an economist, of course.

Time magazine reports:

Stanford economists have demonstrated that the average value of a year of quality human life is actually closer to about $129,000. To get to that number, Stefanos Zenios and his colleagues at Stanford Graduate School of Business used kidney dialysis as a benchmark.

To tally the cost-effectiveness of such innovations Zenios and his colleagues ran a computer analysis of more than half a million patients who underwent dialysis, adding up costs and comparing that data to treatment outcomes. Considering both inflation and new technologies in dialysis, they arrived at $129,000.

"That means that if Medicare paid an additional $129,000 to treat a group of patients, on average, group members would get one more quality-adjusted life year," Zenios says. Based on patient surveys, one "quality of life" year is defined as about two years of life on dialysis.

They must have forgotten "MBA professor."

The top 10 jobs for introverts (correcting for earnings, growth, and number of openings):

1. Computer software engineer (applications)
2. Computer software engineer (systems software)
3. Computer systems analyst
4. Network systems and data communications analyst
5. Accountant and auditor
6. Lawyer
7. Financial analyst
8. Personal financial adviser
9. Medical scientist (except epidemiologist)
10. Market research analyst

But did they correct for investment in human capital?

Forbes has list of top paying US jobs

1. $193K Anesthesiologist
2. $191K Surgeon
3. $185K Orthodontist
4. $183K Obstetrician
5. $178K Oral and maxillofacial surgeon
6. $169K Prothodontists
7. $167K Internists
8. $155K Physician and Surgeon, all other
9. $153K Family and General Practitioner
10. $151K CEO
11. $148K Airline Pilot
12. $147K Shrink
13. $147K Dentist
14. $145K Pediatrician
15. $120K Dentist, all other specialties
16. $119K Podiatrist
17. $118K Attorney
18. $115K Engineering Manager
19. $113K Petroleum Engineer
20. $113K Computer and IS manager
21. $113K Marketing Manager
22. $113K Natural science manager
23. $107K Air traffic Controller

How to weed out less committed employees

To avoid hiring less committed employees, Zappos (the shoe company acquired by Amazon) used to use a unique screen:

After an intensive four-week training period that compensates new employees with their full salary, the company presents the freshly trained group with something called The Offer: “If you quit today, we will pay you for the amount of time you’ve worked, plus we will offer you a $1,000 bonus.” Zappos tests the commitment of its employees from the get-go, because it realizes the importance of a strong call-center team when that's the only customer service experience an online customer will get.

Do you have a high maintenance partner?

It may be a good sign.

...as a couple ages, a lifetime of closeness rubs up a rash of irritations. Participants in the study, which was presented at the Gerontological Society of America, were asked who in their lives – spouse, children or friends – "gets on my nerves" or "makes too many demands on me." The older the couple, the more likely the answer was "spouse."

Strangely enough, rubbing each other the wrong way might be the right way to conduct a marriage. One of the reasons couples quarrel is that they are closer and more comfortable with each other. As we age, the researchers concluded, "It could be that we're more able to express ourselves to each other."

EU Banks want your deposits

The graph to the left shows that long term rates are above short term rates in the US (normal); but below short term rates in EU (unusual). Banks typically borrow short (from depositors) and lend long (to home owners). The EU "inverted yield curve" means that EU banks have to pay so much for deposits that it is difficult for them to earn profit.
--from the Economist

Why do we need strategy consultants?

Apparently, managers are not behaving as strategically as the leading consulting firm thinks they should.

• Companies don’t react to competitive threats in the way management theory says they should, according to a McKinsey Global Survey.
• Instead of undertaking extensive, sophisticated analyses when faced with a competitive threat, most companies assess just a few responses, and they often choose the most obvious one.
• These practices give companies an opportunity to seize a competitive advantage by understanding how their competitors are likely to react to their moves.

Are stocks under-valued, or is our model wrong?

Our valuaton model for stocks is dependent on a historical relationship between the Earnings price ratio (what you "earn" by holding stocks) and the 10 year treasury bond (what you earn by holding bonds).

Historical Model: 10 yr bond - Earnings/Price ratio = 1.75%
Current relationship: 3.77% - 4.23% = -0.46%.

The last time that this relationship was negative for this long was before Reagan.

I know Senator Obama is from a farm state but ...

The $307 billion farm bill rolling through Congress with overwhelming support is both "disgraceful" (NY Times) and a "scam" (WSJ) of the worst sort. It turns "environmental concern into subsidies for corn growers" and "energy concerns into subsidies for oil companies."

Barack Obama talks about taking on the special interests. This farm bill would have been a perfect opportunity to do so. But Obama supported the bill, just as he supported the 2005 energy bill that was a Christmas tree for the oil and gas industries. Obama’s support may help him win Iowa, but it will lead to higher global food prices and more hunger in Africa. Moreover, it raises questions about how exactly he expects to bring about the change that he promises.

Here is my guy:

John McCain opposed the farm bill. In an impassioned speech on Monday, he declared: “It would be hard to find any single bill that better sums up why so many Americans in both parties are so disappointed in the conduct of their government, and at times so disgusted by it.”

Another Benefit of Foreclosures

We blogged previously about how One man's foreclosure becomes another man's treasure. Here's more evidence of the people benefitting from foreclosures. ABC News reports that foreclosed properties provide an opportunity for Habitat for Humanity to purchase more properties and provide housing for those who otherwise could not afford it.

As our prior post noted, much of the media coverage on this issue focuses on the sad stories of those losing their homes and ignores the happy stories of those gaining new homes through foreclosure opportunities. The Habitat case is a nice counterexample.

Habitat's work makes a difference in the lives of people like Yenenes Tezgera and her family, who will move into a new home in St. Paul soon after putting in an estimated 400 hours of work on Habitat projects in the area. She and her husband have a 17-month-old boy and another child on the way.

Are stocks undervalued?

Historically, the difference between the earnings/price ratio for stocks and the 10-year bond yield has been 1.75% (see figure above taken from our textbook). In our book we show how this can be used to determine whether stocks are under-valued relative to bonds.

Historical relationship: US 10 yr Note Yield - SPX EP Ratio = 1.75%

Current relationship: 3.77% - 4.23% = -0.46%

The model implies that equities are historically undervalued relative to bonds.
DISCLAIMER: If I really knew how to make money, I wouldn't tell you.

Can price discrimination survive competition?

Nice article by two economists from the Boston Fed shows that when Midway Air (green dots) and later Southwest Air (chartreuse dots) entered the Philly<-->Chicago route, United Airlines price dispersion collapsed. This is consistent with the theory that price discrimination cannot survive in a competitive market. Curiously, ATA entry (blue dots) had a much smaller effect on United prices.

We cannot tax ourselves out of this mess

Federal tax revenue looks remarkably independent of tax rates. If we raise tax rates, tax revenue doesn't seem to change.

Raising taxes encourages taxpayers to shift, hide and underreport income. . . . Higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity ... .

Gen Y entrepreneurship

...is on the rise:

• Half of all new college graduates now believe that self-employment is more secure than a full-time job.
• 60% of Gen Y business owners consider themselves to be serial entrepreneurs
• 18 to 24-year-olds are starting companies at a faster rate than 35 to 44-year-olds.
• 70% of today's high schoolers intend to start their own companies,

Politicians respond to incentives

13 of 25 Democratic Legislators voted to extend the Florida voucher experiment:

What's encouraging is that these parents have managed to convey their pro-choice sentiments to their representatives, who are responding even though voucher programs infuriate powerful ... special interest groups like the teachers unions.

ONN: historic video rentailing museum

Video satire from the Onion News Network, who likely would have mocked the FTC for its antitrust concerns about mergers in video rentailing (see Blockbuster-Hollywood Video: Where are they now?).

Government Outsourcing Not Always the Answer

It hardly seems controversial to claim that the government isn't always the most efficient provider of services. And, you've probably heard plenty of calls for the government to outsource more of its work (perhaps even a few on this blog). But, outsourcing doesn't always work out so great.

A recent article in The Washington Post describes how the IRS has outsourced the collection of unpaid tax accounts to three private agencies. The program has been far from successful with the private companies collecting amounts rougly half of what it has cost to implement the program.

Competition between States is good

Tort reform has induced 7000 MD's to move to Texas, many from Tennessee:

In 2003 and in 2005, Texas enacted a series of reforms to the state's civil justice system. They are stunning in their success. Texas Medical Liability Trust, one of the largest malpractice insurance companies in the state, has slashed its premiums by 35%, saving doctors some $217 million over four years. There is also a competitive malpractice insurance industry in Texas, with over 30 companies competing for business. This is driving rates down.

Is there a commodities price bubble?

What economists know about price bubbles is precious little:

1. Bubbles emerge at times when investors profoundly disagree about the significance of a big economic development, such as the birth of the Internet. Because it's so much harder to bet on prices going down than up, the bullish investors dominate.
2. Once they get going, financial bubbles are marked by huge increases in trading, making them easier to identify.
3. Manias can persist even though many smart people suspect a bubble, because no one of them has the firepower to successfully attack it. Only when skeptical investors act simultaneously -- a moment impossible to predict -- does the bubble pop.

Most importantly, they can't tell me when its going to pop.

Still wrong after all these years...

The father of "finite resource" or "fixed pie" economics:

Malthus got his demographic as well as his economic predictions wrong. His assumption that populations would carry on growing in times of plenty turned out to be false. Starting in Europe, one country after another underwent a “demographic transformation” as economic development brought greater prosperity. Both birth and death rates dropped and population growth eventually started to slow. ... If the world's population growth was a false concern four decades ago, when it peaked at 2% a year, it is even less so now that it has slowed to 1.2%.

Canyoneering

Guided by Rick Green, Excusions of Escalante.

Dell-Alienware: Where are they now?

In 2006, Dell acquired the leading manufacturer of gaming computers, Alienware. The idea was to use Dell's supply chain to manufacture and sell the Alienware computers, keeping the marketing and product design of the high end gaming computers in a separate division under the Alienware brandname. Recently some conflicting product announcements came out saying that Dell would pare its own gaming line to reduce cannibalization.

Dell Inc. is taking a surprising step to reinvigorate its business in specialty gaming personal computers: abandoning several of its most popular models to focus on what it sees as its premium line.

The new strategy is part of Dell's broader turnaround effort. Last year, it slipped behind bigger rival Hewlett-Packard Co. in overall PC sales and is struggling to achieve profits in consumer PCs. Gaming PCs -- high-priced machines made specifically for playing games -- are a niche market, but tend to shape PC design trends and influence mainstream buyers.

Blockbuster-Hollywood Video: where are they now?

In past blog entries we have tried to follow up on abandoned and consummated mergers to find out what happened. (See What happened after the FTC blocked the Heinz-Beechnut merger?).

In 2005, Blockbuster abandoned its proposed acquisition of Hollywood Video during an FTC antitrust investigation. The target, Hollywood Video, resisted the acquisition, and was acquired by Movie Gallery which entered bankruptcy in late 2007. Now, BBI is looking to acquire Circuit City:

Rationale for deal: Synergy w/real estate, buying power, "cross-merchandising" opporutunities. Preloading devices with movies, subscriptions, etc.

BBI just reported Q1 2008 results:

...We are particularly pleased that domestic same-store revenues showed an improvement for the first time in five years primarily as a result of several initiatives we have put in place, including an increased availability of top new movies, improved store merchandising and more effective pricing.

Some commentators think that the FTC should have quickly approved the merger.

anti-trust regulators often miss important shifts in rapidly changing markets such as video and entertainment.

DISCLAIMER: I was Chief economist at the FTC during the investigation.

Butch Cassidy's hideout

Robbers Roost Ranch was one of Butch Cassidy's hideouts. Guide Rick Green (Excusions of Escalante) just found these carvings in the San Rafael Swell. Canyoneering with Rick is a blast.

Insurers won't pay for medical errors

"Imagine remodeling your kitchen and paying the contractor extra to fix your garage door because he backed his truck into it." This article on perverse incentives from the father of managed care, Alain Enthoven:

WellPoint, Cigna, and a number of other major health insurance companies announced last month that they will no longer bear the extra costs of caring for patients harmed by any of nearly a dozen types of preventable medical errors. In other words, the doctors and hospitals that harm these patients will have to foot the bill themselves.

What's the difference between Kosovo and Burma?

There is none. The generals have to go.

A UN official in Rangoon says the military has erected more checkpoints to make sure foreigners cannot get to the worst-affected areas.

Try this analogy: Hurricane Katrina is to the teachers' unions as Cyclone Nargis is to the Burmese Junta.

Let my markets go, that they might serve me

John Stossel on government interference with prediction markets

Looking for Cheaper Gas?

Chrysler recently announced an interesting incentive program to spur sales of its new cars. Buy a new Chrysler and lock in cheaper gas prices:

Program participants pay $2.99 per gallon for a maximum number of gallons (which varies depending on model) of unleaded gas or diesel fuel in each of the next 3 years. So no matter what the price at the pump says, you'll never have to pay more than $2.99/gallon.

This looks like a clever way to take advantage of the apparent hysteria of the average American consumer about gas prices. For some reason, gas prices seem to have some talismanic importance beyond their economic impact. Take a minute to think about how much you really spend on gas every year. Say I drive 15,000 miles a year at an average MPG of 25; that translates to 600 gallons per year. Even if gas prices increase by $2 per gallon, we're only talking $1,200. Yes, I'd rather have that $1,200 in my pocket but it's not a catastrophe, is it?

Hurricane: threat or opportunity?

After Hurricane Katrina, the Orleans Parish School Board

... fired all 7,500 of its teachers and support staff, effectively breaking the teachers’ union. And the Bush administration stepped in with millions of dollars for the expansion of charter schools—publicly financed but independently run schools that answer to their own boards.

Early returns are good:

The number of fourth graders who passed a state promotional exam increased by 12 percentage points over the previous year, and eighth graders improved by four percentage points.

--via marginalrevolution.com

How to get by on less government

CATO offers these words of advice on how to cut the size of the federal government which, by their reckoning, is three times as big as it should be.

• Balance the budget without raising taxes;
• Reduce domestic discretionary spending by more than $350 billion, (from 7.9 percent of GDP to 5 percent)
• Reform Social Security by moving toward a system of individual savings accounts;
• Reform Medicare to cut costs, and freeze Medicaid spending at current levels and distribute the funds to states as unrestricted block grants;
• Establish a ‘‘sunset’’ commission to automatically review all federal programs
  
• Change the rules of the budget process to make it easier to keep spending under control; and
• Institute a strong spending growth cap equal to population growth plus inflation.

The upside of risk

Former student John Tamny has a nice piece on the unintended consequences of a housing bailout supported by Rep. Barney Frank and Fed Chairman Ben Bernanke.

... investment of any kind is uncertain. If housing, equity or art purchases offered only rising returns, those seeking to enter any of those markets would frequently be shut out. It is because investment is uncertain that markets have traditionally been allowed to clear at lower prices such that the distant object of home, equity and yes, art ownership, has become a reality for Americans to varying degrees.

Efforts to insulate the property markets from what some deem their sharper edges will enervate the economy first for encouraging all manner of speculation on what would become a “protected” industry and sector. ... If housing is turned into a certain bet, a great deal of capital will be reoriented toward the ground rather than to entrepreneurs ...

Why is commitment so rare in politics?

Democrats are committed to ending years of irresponsible budget policies that have produced historic deficits. Instead of piling trillions of dollars of debt onto our children and grandchildren, we will restore "Pay As You Go" budget discipline.

--Representative Nancy Pelosi (D-CA), Incoming House

Jim Cooper and his fellow Blue Dogs stand up to hypocrisy on spending

“We’re completely overacting,” said Rep. Jim Cooper, a Blue Dog from Tennessee and a senior Democrat on the Budget Committee. “Everything’s an emergency. And an emergency’s a perfect lobbying excuse to get your bill passed that you couldn’t get through in regular order.

Cooper, who was one of 10 Democrats who in January voted against the $168 billion economic stimulus package that was financed through deficit spending, said he sees similar writing on the wall now.

“If you add up all the bills, there are probably 100 that are pay-go-compliant and four or five that aren’t,” said Cooper. “But with every exception it reduces its force. Pretty soon pay-go will have so many loopholes that there won’t be any pay-go left.”

Myths about Health Insurance

Mark Gimein at Slate claims that private health care insurers are not the primary problem when it comes to high health care costs in the US. He argues that all three of the following commonly-believed myths are untrue.

• The profits of private insurers are so big that cutting them out would meaningfully lower costs.


• Private insurance clearly costs more than a government-run system such as Medicare.

When you eliminate co-payments and lower deductibles, people go to the doctor a lot more often. According to the Government Accountability Office, seniors with Medigap coverage may cost the government as much as 25 percent more than those without.

• Mergers that have created a small number of huge and powerful insurers increase health care costs. In fact, these insurers reduce costs:
  

  reimbursement rates from major insurers in Pennsylvania for some procedures have fallen to just 85 percent of the already low Medicare rates.

This is a bad sign

In response to US "buy American" policies, the Canadians have decided to invoke a never-used law to block the sale of a Canadian company to a US buyer, citing security concerns.

MDA decided to sell the space division because it said the business could not compete for the lucrative U.S. defence contracts necessary to survive unless owned by a U.S. company.

Protectionism begets protectionism.

Two words I have never seen together

"Funny but earnest" describes the return to figurative drawing (from abstract expressionism) by Philip Guston. New show in NY:

How to take advantage of a downturn

Disney's net income is up 22% from a year ago on surpisingly strong demand for its theme parks and resorts. Two reasons for this:

• '75% of their hotel product is 'moderately priced' or 'value priced'. In contrast, during the 1991 downturn, over 55% of the rooms were considered 'premium priced'.

• the U.S. vacation industry is benefiting from a weak dollar. At Disney, the number of international visitors was up 25% from a year ago.

How to use HSA's

High deductible health plans offer savings to consumers, reduce medical cost inflation, and reduce the problem of over-consumption (moral hazard). Here is some advice on how to use them:

Profiles in Courage

Democratic superdelegate Steven Ybarra wants $20 million for his vote. Transparency is a good thing, I guess.

The bottom looks a long way off...

How do we know that the housing market is out of equilibrium?--By comparing it to rental prices. Fed economists predict that housing is going to fall further:

...the rent/price yield in America ranged between 5% and 5.5% from 1960 to 1995, but fell rapidly thereafter to reach a historic low of 3.5% at the height of the boom. Given the typical pace of rental growth, Mr Feroli reckons house prices (as measured by the Case-Shiller index) need to fall by 10-15% over the next year and a half for the rent/price yield to return to its historical average. Again, that suggests the national housing bust is only halfway through.

Ford's new vertically integrated plant in Brazil

Fully automated plant with suppliers all working under the same roof.

Prediction markets used by business

McKinsey article on how Best Buy started out:

We ran a similar experiment later that year, when 350 random people predicted our holiday sales. Once again, the nonexperts, off by just one-tenth of 1 percent, were more accurate than the experts, who were off by 7 percent. The participants were surprised by the outcome when we shared it with them well after the actual results were in and reported. These early experiments encouraged us to get into prediction contracts, and we have to date seen over 2,000 traders make a total of 70,000 trades on 147 contracts.

Google uses them as well:

We launched our prediction markets in April 2005, and since then we’ve asked about 275 different questions, and there’ve been some 80,000 trades. Around one-quarter of our markets have to do with demand forecasting—for instance, “How many people will use Gmail in the next three months?” Almost all Google products have had, or still have, a prediction market about their usage. Another 30 percent concern the company’s performance—for example, will project deadlines be met? A smaller category concerns things that could happen in our industry, such as mergers and acquisitions that might impact Google significantly.

Another Reason Why I Don't Work in Corporate America

Yes, I know businesses face a lot of pressure to be innovative. This pressure, however, leads to some "unique" approaches to inspire creativity among workers.

According to this short article in Business Week, a number of companies have turned to hypnosis to pump up their brainstorming sessions (doesn't this seem like something you would see in a Dilbert cartoon?). According to one corporate hypnotist quoted in the article, hypnotized subjects are less inhibited and may offer their "craziest" ideas; he also claims that hypnotized individuals are better at recalling past experiences.

The cost to hire a corporate hypnotist? $10,000 - $20,000 for six hours of sessions with six to eight employees.

Would consumers benefit from a gas tax holiday?

All the economists who are theorizing about the effects of a federal gas tax holiday apparently forgot to read the empirical literature on the topic. In 2000, the Illinois State Legislature suspended the 5% gasoline sales tax. In response,

..retail gas prices are found to drop by 3% following the suspension, and increase by 4% following the reinstatement...

This would imply a pass-through rate of about 70%. Ironically, a certain junior senator from Illinois thought that this was a good idea at the time.

First Bear Stearns, now student loans

I wonder if Bernanke will be able to resist Congressional pressure to open the proverbial cookie jar:

There is ``a potential crisis in the student-loan market'' requiring ``similar bold action,'' Chairman Christopher Dodd of Connecticut and six other Democrats wrote Bernanke. They want the Fed to swap Treasury notes for bonds backed by student loans. In a separate letter, Pennsylvania Democratic Representative Paul Kanjorski and 31 House members said they want Bernanke to channel money directly to education-finance firms.

Vocabulary: "mulcting"

"But it also invited heated criticism from many people who contended that code-based wireless was a complete fraud with the subversive intention of mulcting billions of dollars from unsuspecting investors."
--The Qualcomm Equation, p 118.

Why do kidney prices vary so much?

An Aussie physician suggests paying $47,000/kidney. In an earlier post, we reported that Iran pays kidney donors less than $1,200. So why is the proposed price so high in Australia?

Australia has one of the lowest rates of organ donation in the developed world, about 10 donors per 1 million people, according to a federal health task force. ... In comparison, Germany has 15 donors per 1 million people, the Netherlands has 25, the United States 27, and Spain 35...

"We've tried everything to drum up support for organ donation and the rates have not risen in 10 years," Carney was quoted as saying in Fairfax newspapers. "People just don't seem to be willing to give their organs away for free. ... Let's pay people some money for a new car or a house deposit and those waiting lists will be halved within about five years."

No Increase in Blu-Ray Sales

We've tracked the battle between Blu-Ray and HD-DVD to become the standard-bearer for high definition DVD players. With Blu-Ray emerging as the clear victor, wouldn't we expect increasing sales of their players? Instead, according to this Cnet.com article, sales were down 40 percent from January to February and essentially flat from February to March (2 percent increase).

So, what's going on? First, Blu-Ray prices have increased from around $300 in December to around $400 in mid-March. Apparently, Blu-Ray vendors have elected to take the spoils of war in the form of higher prices rather than greater quantity. Second, the Cnet.com article argues that the relative advantage of high-def DVDs relative to standard DVDs is not substantial enough in the mind of the average consumer to justify the price premium. They predict that "Blu-ray player prices are going to have to drop dramatically, to around $200 probably, to make themselves more attractive to consumers outside of the early adopter/home theater enthusiast crowd."

Collusion in British supermarkets?

The Economist reports that one of the British supermarkets has confessed to collusion, taking advantage of a cartel amnesty program that rewards the first firm that "rats" on their fellow conspirators, thus creating a race to the courthouse--a classic prisoners' dillemma.

However, groceries are an unlikely industry for price fixing. How would a cartel monitor prices, detect cheating, and punish cheaters? Unlike recent cartel actions in industries like vitamins, paper, petrol, glass, bulk chemicals, groceries sell differentiated products, and the industry is undergoing rapid change (see the change in shares above).

In addition, the OFT's investigation appears to be on the buying, not the selling side of the industry. This kind of "monopsony" (or buying) power, is much less likely to harm consumers, unless it is also accompanied by a output or monopoly (selling) cartel.

Where did the risk go?

The Volatility Index (invented by colleague Bob Whaley) which measures the implied risk in options prices (the higher the options price, the bigger implied risk) is down to 18% from a high of 32% in March. This means that the expected change (the standard deviation) in the returns from holding the S&P index for the next year is 19%. The decline in risk has corresponded to an increase in the price of the S&P 500. The market "prices" the decline in risk by reducing the risk premium necessary to get investors to hold the risky asset. A higher current price means lower expected future return, and thus a lower risk premium for holding stocks.Or for a longer run view,

Hospitals kill

99,000 people/year die from infectious diseases caught in hospitals. Tips for staying alive:

1. Bring your own toys
2. Heat up your car
3. Ask nurses and doctors to wash their hands before they touch you.
4. Ask where that syringe has been
5. Having surgery? Speak up, ask questions!
6. Beware urinary catheters
   

Free tours as a business model

Two Vandy alums have started a free Washington tour guide business:

Since they started last summer, they have given more than 100 tours, averaging more than 35 people per outing and collecting about $150 from each group. A family of four is often happy to fork over a $20 tip rather than the $15 per person -- or much more -- they might have to pay for a traditional tour.

Predictably, there are lots of barriers to entry, erected by the "professional guides" to keep out competition:

Tour Guide license issued by the Dept. of Consumer Regulatory Affairs in Washington DC :

• - Category License Fee: $73
• - Application fee: $35
• - Endorsement fee $10

Some of the more interesting requirements of licensure include filling out a “Tour Guide Class-B Physician’s Certificate” to be filled out by a physician stating “the applicant is of sound physique, with good eyesight (at least 20/40 with or without correction), and hearing in both ears, not subject to epilepsy, vertigo, or heart trouble; free from any contagious or infectious disease and not a drunkard…”

Also, the “Tour Guide A Basic Business License Fact Sheet” requires that “each applicant shall submit separate personal reference letters from six residents of the D.C. Metropolitan Area …”

Too much information

Interesting podcast from colleague Mike Shor mocking the popular policy assumption that more information is better. The so-called "informed consent" movement has brought us policy disasters like the disclaimers at the bottom of contracts that no one reads. Mike also teaches the most popular game theory course on the planet and runs the award-winning gametheory.net.

A new reason to get married

7% of Americans get married to obtain insurance through their spouse's employer. McCain's plan to decouple insurance from employment might result in 7% fewer marriages.

DISCLAIMER: I am supporting McCain.

PJ O'Rourke on politicians

from CATO:

They are dogs chasing the cat of freedom. They are cats tormenting the mouse of responsibility. They are mice gnawing on the insulated wiring of individualism. They are going to hell in a hand basket, and they stole that basket from you. They are the ditch carp in the great river of democracy. And this is what one of their friends says.

Note: PJ wrote a blurb on the back of our textbook:

"With no experiece in business and no exposure to math since a D in high school trig, I found economics utterly incomprehensible. Then [the text] spoke one sentence to me, ... It all became clear."

What if inflation included house prices?

It would look really different:Eight percent inflation in 2005 might have told the Fed that interest rates were too low.