Monday, June 30, 2008

Now this is creative, and capitalistic

Can the world's greatest capitalist be wrong about how to make it better? Steven Landsburgh thinks so:

If you encourage corporations to do more good (in the form of philanthropy, etc.), then you detract from their primary mission. If you encourage corporations to do less bad, then you *enhance* their primary mission.

If Archer Daniel Midland wants to get creative, I’d like to see them abolish their lobbying arm and let the sugar quota expire. If the oil companies want to get creative, let them refuse on principle to accept subsidies for offshore oil drilling. Let the auto and steel industries announce that they will no longer lobby for tariffs or other forms of protection.

Sunday, June 29, 2008

More ethanol insanity

Even the lefties realize it

Oxfam's biofuel policy adviser Rob Bailey, criticised rich countries for using subsidies and tax breaks to encourage the use of food crops for alternative sources of energy like ethanol.

"If the fuel value for a crop exceeds its food value, then it will be used for fuel instead," he said.

"Rich countries... are making climate change worse, not better, they are stealing crops and land away from food production, and they are destroying millions of livelihoods in the process."

Friday, June 27, 2008

The worst coporate governance imaginable

What would you expect from a firm with:
  • no competitors;
  • diffuse, small shareholders;
  • who cannot sell or buy shares;
  • run by managers exempt from securities laws, like Sarbanes Oxley,
  • with no disclosure requirements, so shareholders learn only what managers choose to tell them;
In the case of Electrical CO-OPs, managers amass huge pools of money by over-charging for lousy service, pay themselves big salaries, and then refuse to tell the customer/owners how much money they have for fear that the owners would want their money back.

When Congressman Cooper held hearings trying to force the coop managers to disclose information about their assets, they tried to intimidate him. For good reason
The hearing focused on the lavish spending by and large salaries of leaders of the Pedernales Electric Cooperative in Texas, the largest electric cooperative in the country.

Top Recent Articles from McKinsey

Here are the ten most popular articles from this quarter's McKinsey Quarterly.

Supremes 'dis sponsored research

The knock on academics is that they work on problems that no one cares about and then publish the results in journals that no one reads. But when academics stray from the government-suubsidy model of research to work on real problem, they get punished. Today's Supreme Court decision limiting punitive damages in the Exxon Valdez case has the following footnote. Read to the bottom.
17 The Court is aware of a body of literature running parallel to anecdotal reports, examining the predictability of punitive awards by conducting numerous “mock juries,” where different “jurors” are confronted with the same hypothetical case. See, e.g., C. Sunstein, R. Hastie, J. Payne, D. Schkade, W. Viscusi, Punitive Damages: How Juries Decide (2002); Schkade, Sunstein, & Kahneman, Deliberating About Dollars: The Severity Shift, 100 Colum. L. Rev. 1139 (2000); Hastie, Schkade, & Payne, Juror Judgments in Civil Cases: Effects of Plaintiff’s Requests and Plaintiff’s Identity on Punitive Damage Awards, 23 Law & Hum. Behav. 445 (1999); Sunstein, Kahneman, & Schkade, Assessing Punitive Damages (with Notes on Cognition and Valuation in Law), 107 Yale L. J. 2071 (1998). Because this research was funded in part by Exxon, we decline to rely on it.

thanks to Tim Brennan for pointing this out.

Agricultural subsidies vs. the Everglades

Most economists would applaud the purchase of land for environmental concerns as it assures, through market mechanisms, that the land is moving to a higher-valued use.
The dream of a restored Everglades, with water flowing from Lake Okeechobee to Florida Bay, has moved a giant step closer to reality after the largest sugar cane producer in the United States agreed to sell all of its assets to Florida and go out of business," reports the International Herald Tribune. "Under the proposed deal, Florida will pay $1.75 billion for U.S. Sugar, which would have six years to continue farming before turning over 187,000 acres, or about 75,500 hectares, north of Everglades National Park, along with two sugar refineries and other assets."
The irony, in this case, is that the purchase price would have been a lot lower, perhaps even zero, but for the US Department of Agriculture sugar import quotas and price supports.
Daniel Griswold, director of Cato's Center for Trade Policy Studies, writes: "[T]he deal is yet another cost Americans continue to pay for our misguided agricultural programs. ...The company selling the land, United States Sugar, has for decades benefited from a federal program that guarantees a minimum price for United States Sugar's crop through a system of loan guarantees and strict import quotas. This means American families and sugar-consuming industries are typically paying two to three times the world price for sugar."
- "U.S. Sugar Program Costs Another $1.75 Billion," Griswold's full response
- Cato Handbook on Policy: Agricultural Policy, by Chris Edwards
During this 1999 trip to the Everglades, I learned that my wife is afraid of alligators after the one in the photo began hissing at us.

Thursday, June 26, 2008

Economics of bad decisions

It is easy to teach economics by making fun of bad decisions, and that is the approach we take in our textbook. McKinsey has discovered this as well, and they grouped five of their articles into a "special collection" of bad decisions.

Bad news for bad drivers

In car insurance, the problems of adverse selection (high risk drivers more likely to buy insurnace) and moral hazard (once you have insurance, you are less careful) are due to information asymmetry. Now technology has allowed car insurance companies to "see" how risky you are and how poorly you drive, and charge you accordingly.
Drivers who participate in these plans have devices installed in their cars that, depending on the technology used, can track the number of miles driven, the speed at which cars are driven and even how often and how hard the brakes are used. By allowing their habits behind the wheel to be monitored, drivers get lower insurance rates -- or pay higher premiums if they're lead-footed road hogs.
Good drivers (about 2/3 of us) would pay about $270 less each year. These devices also pave the way for a carbon tax.
With pay-as-you-drive insurance, drivers in the U.S. would reduce their mileage by about 8%, with $51.5 billion in social benefits mostly from reduced congestion and accidents, according to the Hamilton Project.

Why does Castro own an American-made track suit?

Former student John Tamny charges that the candidates are repeating one of Napolean's many mistakes by assuming that an embargo will prevent Cubans from indirectly trading with the US.

Napoleon “did not realize until it was too late that the only closed political economy is the world economy. Britain could not be starved into submission by blockade unless she were totally cut off from the world. As long as Britain could trade with any nation outside France, it was thus trading indirectly with France.”—Jude Wanniski, The Way The World Works ...

Both John McCain and Barack Obama have said they’ll maintain the five decade long embargo on Cuba. ... The silliest policy of all is to impose embargos in the first place. So long as anyone in the world economy wants to buy, there will be a seller.
To find out Napolean's biggest blunder, watch the "battle of wits" from the Princess Bride (answer at 2:45 minutes).

Candidates differ on 4 key issues

Here is a nice characterization of the differences between Senators McCain and Obama on four big issues that wont go away.

The budget deficit.
The U.S. government has made promises to pay health and retirement benefits that will cost far more than projected taxes will yield. Neither candidate talks much about how -- or even if -- he'd try to fix this; most voters don't want to hear about it.

  • Sen. Obama leans toward bigger government (more taxes, more spending)
  • Sen. McCain leans toward smaller government (less taxes, less spending.)

Health care. The system is so complex it's hard to describe; same applies for proposed solutions.

  • Sen. Obama offers a mix of changes, many but not all involving government money, and argues the best solution will emerge from some experimentation.
  • Sen. McCain would, instead, make the market for health insurance more like the market for computers or cars, relying more on individuals shopping for insurance to create competition now largely absent in health care.

Inequality. The gap between economic winners and losers in the U.S. is growing. ... There is significant disagreement among politicians and voters about how hard the government should restrain market forces that are widening the income gap, particularly how much the tax code should redistribute income.

  • The differences between the candidates are sharp: Sen. Obama would wield the tax code more aggressively than Sen. McCain.

Globalization. It isn't going away. But for all the benefits it brings American consumers (and Chinese workers), the toughening competition is frightening to Americans, both as workers and as parents. ...The solution ... probably lies in assuring Americans that they aren't fending for themselves in an increasingly competitive economy -- that their health insurance won't evaporate if they lose a job and that the U.S.'s schools are preparing their children to succeed.

  • Sen. McCain [extols] the benefits of free trade,
  • Sen. Obama, ... the costs.

Wednesday, June 25, 2008

Algo Más

Translation: "something more," the answer given by Maya farmers in Guatemala for why they want to switch from subsistence farming to the lucrative cash crop of broccoli.

From colleague Ted Fischer's new book, Broccoli & Desire. There is a fierce debate among anthropologists about whether globalization is good for these subsistence farmers:
Our ethnographic examination of the desires and struggles of Maya farmers might not contain the kind of resistance narrative about exploitation and inequality that we initially set out to uncover. Yet we have been pushed to more honestly and humbly consider how broccoil production becomes desirable, if also dangerous.

If this is the way they run their convention...

The PC police can't wait for Denver:

To police the four-day event Aug. 25-28, ..., 900 volunteers will hover at waste-disposal stations to make sure delegates put each scrap of trash in the proper bin. Lest a fork slip into the wrong container unnoticed, volunteers will paw through every bag before it is hauled away. ...

...No fried food. And, on the theory that nutritious food is more vibrant, each meal should include "at least three of the following colors: red, green, yellow, blue/purple, and white." (Garnishes don't count.) At least 70% of ingredients should be organic or grown locally, to minimize emissions from fuel burned during transportation.

Don't Show Me the Money

I think a lot of people mistakenly assume that economics is only focused on money as a motivational tool. That may be where a lot of the attention goes, but an economic viewpoint is fundamentally about people responding to incentives. And, in many cases those incentives are non-monetary.

Here's an article from strategy+business that indicates employee productivity may be more responsive to changes in areas not related to compensation.
Over the past 10 years, we’ve conducted an in-depth study into the attitudes of more than 100,000 shift workers at more than 150 companies around the world. Through face-to-face surveys taken during work hours, we sought primarily to gather information about what employees like and dislike about their work environment, the changes they hope to see, the health and safety issues they face, and how their work schedules affect their personal lives. Of all the thousands of pieces of data we collected, one stood out: Eighty-one percent of employees surveyed felt that their pay and benefits were adequate. In fact, when we determined what really affects productivity, compensation paled in comparison to good management–employee communications. In other words, although most companies try to inflate employees’ morale by shoveling more dollars at them, less expensive strategies will do.

Monday, June 23, 2008

Prizes (McCain, battery) vs. subsidies (Obama, ethanol)

Senator McCain has just proposed a prize for a new battery.
“I further propose we inspire the ingenuity and resolve of the American people by offering a $300 million prize for the development of a battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars,’’
while Senator Obama re-iterates his support for ethanol subsidies:

...when it comes to domestic ethanol, almost all of which is made from corn, [Obama] also has advisers and prominent supporters with close ties to the industry ... “ultimately helps our national security, because right now we’re sending billions of dollars to some of the most hostile nations on earth.”
The Volokh Conspiracy has a nice discussion of the merits of these two policies:

Direct government subsidies are a particularly poor way to encourage innovation. Perhaps it should be possible to direct research and development funds toward the most promising and valuable technological endeavors, but this rarely happens in practice. Government subsidies tend to be dispersed on political criteria, rewarding large, politically connected incumbent firms, rather than innovative upstarts. Failing industrial dinosaurs with lobbyists on the payroll are in much better position to snatch up government goodies than revolutionary thinkers toiling in garages or private labs.
DISCLAIMER: I am supporting McCain and my co-author is not.

Why to Vote Republican

In honor of my co-blogger, an acknowledged McCain supporter, here's a video of other like-minded folks explaining why they will vote Republican.

Sunday, June 22, 2008

Lets hope that these incentives don't matter

Irwin Seltzer on Obamanomics:
Taxes change behavior. By raising rates on upper income payers, Obama is reducing their incentive to work and take risks. The income tax increase is not all that he has in mind for them. He plans to increase their payroll taxes, the taxes they pay on dividends received and capital gains earned, and on any transfers they might have in mind to their kith and kin when they shuffle off this mortal coil. If the aggregate of these additional taxes substantially diminishes incentives to set up a small business of the sort that has created most of the new jobs in recent decades, the $1,000 tax rebate will be more than offset by the consequences of reduced growth and new business formation.

Friday, June 20, 2008

Obama proposes marginal tax rates of 53%

Senator Obama's plans to (i) remove the cap on social security taxes, (ii) increase the personal income tax rate; and (iii) get rid of some deductions would increase the marginal income tax rate to 53%. This takes us back to rates not seen since Jimmy Carter and closer to Denmark's 63% top rate which has resulted in emigration of the most productive employees.

Clinton nostalgia

Kimberly Strassel has a depressing, interesting article on the ascendancy of the liberals within the Democratic party:

"Economic centrism? What's that? Even Mr. Clinton's wife disavowed his New Democratic legacy by trashing free trade and Nafta. Mr. Obama raised her bet, aligning himself with leftist trade populists. The Democratic leadership has held up deals with Colombia, Peru and South Korea. Big Labor is calling the shots, and Big Labor will suffer no new trade.

"Mr. Obama is hawking a tax policy that would take the nation back to the effective marginal tax rates of the Carter days. He wants to further tax income, payroll, capital gains, dividends and death. His philosophy is pure redistribution. Congressional Democrats voted for a budget that includes the largest tax hike in American history."

Thursday, June 19, 2008

Moral hazard and the Fed

“The danger is that the effect of recent credit extension on the incentives of financial-market participants might induce greater risk taking,” a phenomenon called moral hazard, “which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central-bank lending,” Mr. Lacker said, according to a text of his remarks. (Read the full speech.1)

DISCLAIMER: Jeff was in my study group in grad school. There must have been something in the water.

Wednesday, June 18, 2008

Hasn't Chavez tried this?

This is hard to believe:
Among other things, the Democrats called for the government to own refineries so it could better control the flow of the oil supply.

Talk about a legacy...

Guess who is
"disturbed by the ideological and disciplinary preference implied by the university’s massive support for the economic and political doctrines that have extended from [Milton] Friedman’s work.”
Answer here.

How Your Government Creates Value

The Bush administration is preparing to issue proposed new standards for enforcement of the Americans with Disabilities Act (ADA). The new rules would increase requirements in many areas and address a number of new issues. Among them is a rule that at least half of the holes on miniature golf courses must be accessible to people using wheelchairs. Furthermore, those holes must be connected by a continuous, unobstructed path. According to the Justice Department, as reported in this NY Times story, the value of the public benefits ($54 billion) are expected to exceed the costs ($23 billion).

So, how does one estimate the value of more accessible miniature golf for the disabled, you ask? You find yourself an economist, of course. According to economists hired by the DOJ, making miniature golf courses more accessible has a positive net present value of over $400 million. See this article from online magazine, Slate, for a discussion of the hocus pocus behind the calculations.

With the government and its economists creating this kind of value, look for the economy to be picking up steam again soon.

Tuesday, June 17, 2008

A candidate for those who think the government is too small

Senator Obama puts some "substance" behind his campaign for change.
Sen. Obama cited new economic forces to explain what appears like a return to an older-style big-government Democratic platform skeptical of market forces. "Globalization and technology and automation all weaken the position of workers," he said, and a strong government hand is needed to assure that wealth is distributed more equitably.
I think that I liked the "form" better.

Monday, June 16, 2008

What if environmentalists owned ANWR?

Would they sit on billons of dollars of potential profit, knowing all the good they could do with it? Walter Williams thinks not:
"two leading environmental groups, the Audubon Society and the Nature Conservancy, have allowed oil and gas production on several of their most important and unique nature preserves."

Union Mergers

We've blogged quite a bit about mergers among companies. Here's the other side of the management-worker divide - a merger between Unite, the UK's biggest trade union, and USW, which represents over 1 million workers in the United States. The parties plan to establish the first global labor organization:
Officials at both unions view the proposals as the first step towards creating a global union that will ultimately house labour movements from the world's rising economic powers in Eastern Europe, Latin America and Asia.

Friday, June 13, 2008

Immigrants move from construction to farmwork

The ability of the US economy to respond to shocks depends in part on it resiliency, which is driven in part by labor mobility (earlier blog entry on how housing crisis is reducing mobility)
Mexican emigrant Jose Peralta, 24 years old, was a field hand when he arrived in California six years ago. Four years ago, he moved into construction, earning about $11 an hour erecting condos in Newport Beach, Calif. Three months ago, work became sporadic, and wages fell to about $9 an hour. "There was little work in construction, so I went back to the strawberry fields," he said, where he earns about $9. Still, he said, "I prefer to be in construction."

Merger Simulation tools back online


Are we ready to take control of our pensions?

Defined contribution plans have overtaken defined benefit plans, but it is not clear whether employees are ready for the change:
When it comes to pensions, the buck has been passed from employers to employees. But too few workers realise how much they need to contribute to guarantee a decent retirement or feel confident enough about how to invest their funds. This will not lead to the headlines about bankrupt pension funds that marked the decline of the DB scheme. But it will be bad for many workers all the same.

What can Jury's infer from evidence?

Jurys are often prohibited from using all available information to reach a decision. For example, in criminal trials, jurys are instructed not to draw any inference from the fact that the defendant does not want to testify. The idea is that defendants should not be punished from exercising their constitutional rights.
But in the Intellectural Property distpute between Mattel and Bratz, the judge allowed the Jury to hear that Bratz used a software program called "Evidence Eliminator" to scramble his hard drive. Any bet on what they will inifer?

Thursday, June 12, 2008

"Scandal" of Handicapped Parking Permit Sales

The city of London has instituted congestion charges to try and reduce traffic within the city. Parking rates have also steadily risen. You can imagine that if you owned something that would allow you to avoid these charges, the value of that object may have increased as those costs have risen.

According to the UK's Daily Mail, drivers appear to be much more interested in obtaining disabled parking permits and the value of disabled parking permits (measured by sale prices on eBay) are spiking. In 1987 there were about 14 permits per 1,000 people while last year the number had risen to 46 per 1,000 people. Prices on eBay have approached $10,000. The Daily Mail labels this practice of moving the permit asset to a higher valued use "scandalous"

Wednesday, June 11, 2008

Stewardship using opportunity cost

Economists are trying to save the world, but is anyone listening? From the 2008 Copenhagen Consensus.

  • 1 Micronutrient supplements for children (vitamin A and zinc)--Malnutrition
  • 2 The Doha development agenda--Trade
  • 3 Micronutrient fortification (iron and salt iodization)--Malnutrition
  • 4 Expanded immunization coverage for children--Diseases
  • 5 Biofortification--Malnutrition
  • 6 Deworming and other nutrition programs at school--Malnutrition & Education
  • 7 Lowering the price of schooling--Education
  • 8 Increase and improve girls’ schooling--Women
  • 9 Community‐based nutrition promotion--Malnutrition
  • 10 Provide support for women’s reproductive role--Women
  • 11 Heart attack acute management--Diseases
  • 12 Malaria prevention and treatment--Diseases
  • 13 Tuberculosis case finding and treatment--Diseases
  • 14 R&D in low‐carbon energy technologies--Global Warming
  • 15 Bio‐sand filters for household water treatment--Water
  • 16 Rural water supply--Water
  • 17 Conditional cash transfers--Education
  • 18 Peace‐keeping in post‐conflict situations--Conflicts
  • 19 HIV combination prevention--Diseases
  • 20 Total sanitation campaign--Water
  • 21 Improving surgical capacity at district hospital level--Diseases
  • 22 Microfinance--Women
  • 23 Improved stove intervention--Air Pollution
  • 24 Large, multipurpose dam in Africa--Water
  • 25 Inspection and maintenance of diesel vehicles--Air Pollution
  • 26 Low sulfur diesel for urban road vehicles--Air Pollution
  • 27 Diesel vehicle particulate control technology--Air Pollution
  • 28 Tobacco tax--Diseases
  • 29 R&D and mitigation--Global Warming
  • 30 Mitigation only--Global Warming

Hummer, RIP?

GM is closing four factories that make SUV's and is considering whether to kill the Hummer. Apparently the high fuel prices are reducing demand.


Is it better to hire job applicants based on input measures, like an MBA degree; or output measures, like CFA certification? This weekend, 175,000 people round the world will take one of the three exams required to earn the coveted status of chartered financial analyst (CFA).

One of those candidates will become the millionth person to take the test. That is phenomenal growth for a qualification that, as recently as 1995, was taken by fewer than 20,000 people a year. This expansion partly reflects the lure of earning big money in finance (at least until the credit crisis). But it also shows the growing appeal of the CFA brand outside its American birthplace; more than two-fifths of this year's candidates come from Asia, where job ads in the South China Morning Post now often say “CFA-required”.

Tuesday, June 10, 2008

Robert Rauschenberg, RIP

The "citizen artist" who moved from abstract expressionism to pop and happenings without accepting a dime of government support has died. Rauschenberg also produced commercial and commissioned art, like the cover for a Talking Heads album

No law or joint agreement could accomplish anything but esthetic rot. We have smelt that stench before in countries attempting political muscle by inhibiting the creativity of the arts. This policy has been the downfall of the most aggressive powers.

Monday, June 9, 2008

Markets vs. bureaucrats: doctor-owned hospitals

Behind the policy war over the proliferation of doctor-owned hospitals are two competing visions of whether health care demand is best supplied by for-profit capitalists or by caring central planners.
Critics say that when doctors have a financial stake in a hospital, they have an incentive to send patients there because they not only receive professional fees for their services, but also can share in hospital profits and see the value of their investment increase. Such arrangements can lead to greater use of hospital services and higher costs for Medicare and other insurers, say the critics, including many in Congress.
On the other side of the issue, doctor-owned hospitals are typically faster, cheaper and better because they focus on only a limited number of procedures. However, they may lack the ability to handle complications or co-morbidities, and may "cream skim" the best (lowest cost) patients from general acute-care hospitals. The map above indicates that states have different policies towards doctor-owned hospitals. Maybe we can learn something from this cross state variation.

Sticking it to "the man"--II

Earlier this year, the Eagles bypassed the recording industry to sign an exclusive distribution deal with Wal-Mart for their album "Long Road." The album has sold 3 million copies at the loss-leading price of $11.98. Now Journey, Taylor Swift, and perhaps Fleetwood Mac will follow suit.
“It just goes to show you that fewer artists need to be associated with record companies,” said Larry Mestel, chief executive of Primary Wave Music Publishing and former chief operating officer of Virgin Records. “They don’t need to give up a big chunk of money to the record companies when they’re iconic. They can go direct to Wal-Mart and make four to five dollars per CD.”
I wonder what my colleague, Bill Ivey, former chairman of the National Endowment for the Arts, and author of Greed and Neglect have Destroyed our Cultural Rights thinks of Wal-Mart's role in bringing music to the masses?

I like to think that Jack Black is smiling.

The Danger of Being Ernest

A new study by economists Daniel Lee and David Kalist of Shippensburg University looks at the correlation between unpopular names and crime (news article here). They find a positive association between unpopular names and juvenile delinquency. The more unpopular a name, the more likely it was to show up in the names of young men in the juvenile justice system. So, if you run into a young man named Alec, Ernest, Ivan or Malcolm, look out.

The authors of course are careful to not claim a causal relationship here. Just naming your kid Ivan isn't going to turn him into a criminal. The more likely explanation is that unpopular names seem to be associated with poor economic conditions and family structure, which in turn is the probable causal factor.

Friday, June 6, 2008

Everyone wants to go to heaven but no one wants to die-II

Democrats have pulled a global warming bill after the Senate got around to considering its costs

..."On the one hand, the majority says climate change is the most important issue facing the planet. [But] ... a Democratic majority that wasn't ready to fully debate the bill and endorse the long-term costs of the new regime of environmental regulations.

Who is worse, Republicans or Democrats?

Strong argument that it is the Republicans:
Mr. Young spends taxpayer money so wastefully he could make a liberal Democrat blush. As chairman of the Transportation Committee (from 2001 to 2007), Mr. Young was directly responsible for one of the biggest boondoggles of the Republican majority – the 2005 highway bill. With a price tag of $296 billion, the highway bill contained a record 6,371 pork projects.

What do the U.S., Switzerland, China and the U.K have in common?

Citizens more likely to sacrifice for the common good (solve the free riding dilemma):

Among students in the U.S., Switzerland, China and the U.K., those identified as freeloaders most often took their punishment as a spur to contribute more generously. But in Oman, Saudi Arabia, Turkey, Greece and Russia, the freeloaders more often struck back, retaliating against those who punished them, even against those who had given most to everyone's benefit. It was akin to rapping the knuckles of the helping hand.

If only...

Daniel Casse has a book review in the WSJ documenting a secret agreement between President Clinton and Speaker Gingrich to reform entitlements.
When they finally met in October 1997 – in the Treaty Room in the East Wing of the White House – Mr. Clinton agreed to push for the creation of private Social Security accounts in return for Mr. Gingrich's promise to abandon a GOP push for further tax cuts. They also made plans for a commission that would recommend more private-sector involvement in Medicare.
Unfortunately, the actual plans are still secret.

What do oil and housing have in common?

Boom and bust cycles, driven by sudden changes in demand

both housing and oil supply react to a surge in demand with a long lag. In housing, the lag is caused by restrictive zoning and development laws, especially in coastal markets like California and Florida.

So when the economy roared back in 2002 and 2003, builders couldn't turn out homes fast enough for buyers armed with those cheap mortgages. As a result, prices spiked. They no longer bore any relation to the actual cost of buying and improving land, or constructing and marketing a new house (at some reasonable profit margin). Instead, frenzied buyers were setting the price.

Because builders were reaping huge windfall profits, they rushed to buy and develop land. And sure enough, those new houses were ready just as buyers were retreating to the sidelines because they could no longer afford to buy a home. That vast overhang of unsold homes is what's driving down prices today.

The story is much the same with oil, with a twist. A big swath of the market isn't really paying that $125 a barrel number you hear about seemingly every hour. In China, India and the Middle East, governments are heavily subsidizing oil for their consumers and corporations, leading to rampant over-consumption - and driving up prices even more.

But sooner or later the world won't keep paying those prices: Eventually, the price must fall back to the cost of that last barrel to clear the market.

So what does that barrel cost today? According to Stephen Brown, an economist at the Dallas Federal Reserve, that final barrel costs just $50 to produce. And when the price is $125, the incentive to pour out more oil, like homebuilders' incentive to build more two years ago, is irresistible.

"Cocaine is for horses, not for men; they say its going to kill me but they won't say when."

It's impossible to predict how the adjustment this time will take shape, just as it was in housing. There the surge in supply came in places the experts swore there was "no supply," and wouldn't be any. Builders found a way to extend vast tracts of homes into California's Inland Empire and Central Valley, and even build "in-fill" projects near the densely-populated coasts.

Thursday, June 5, 2008

Are the Wal-Mart battles over?

Unions have waged an aggressive anti-Wal-Mart PR campaign since 2005, designed to gain bargaining concessions. Now it appears that both sides are dismantling their PR machines.

Much like a political campaign after Election Day, the groups have reduced their staffs. Wal-Mart Watch, which once had 40 workers, now has 10. had up to 12 workers, but has about 6 today. And its aggressive founders, the former political operatives Paul Blank and Chris Kofinis, left in 2007. ...

But Mr. Nassar and Ms. Scott acknowledge that the appetite for criticism of Wal-Mart, which seemed insatiable at first, has waned, especially in the news media. "There has been a certain amount of fatigue about writing the Wal-Mart-is-bad story," said Mr. Nassar. Ms. Scott described "a cooling down of the Wal-Mart story."

But who won the war?
"I don't think there has been significant progress," ... Wal-Mart ... still requires workers to meet deductibles ranging from $700 to $4,000 a year for their health insurance. And most workers earn less than $20,000 a year.

Wednesday, June 4, 2008

Paid for with other people's money

What do college tuition, academic journals, and health care have in common besides price inflation?

It is easy to see why this would make demand less elastic, which would imply a higher price in any but a perfectly competitive industry, e.g., (P-MC)/P=1/|elasticity|. But what is the mechanism behind the price inflation (change in price)?

Tuesday, June 3, 2008

Kauffman Index of entrepreneurial activity

... 495,000 new businesses per month were started in 2007 with 0.30 percent of the adult population (or 300 out of 100,000 adults) involved in the startup process. This entrepreneurial activity rate is a slight increase over the 2006 rate of 0.29 percent.
New report from the Kauffman Center also documents a growing gender gap.
Men are now twice as likely as women to start a business each month, a larger differential than in any previous year of the KIEA study

Canary in the coal mine

Our entitlement problems, while enormous, are smaller than those facing Japan
...combined with the estimated trajectories of social-security contributions and taxes, ... the total sum that workers pay to the government and social security [would rise] from 18 percent of household income today to 37 percent by 2035.2
This magnitude of their entitlement burden is bigger than Sweden's (36 percent) and almost as big as Germany's (40 percent). And like our entitlement problems, no one knows how to address them.

Any increase in premiums is likely to encounter opposition from both employers and workers. ... Alternatively, policy makers could raise copayment rates, [already] among the highest in the world. [30 percent for those aged 3-29; 10% for those over 70]
To close the funding gap further would require additional measures, such as boosting consumption tax rates to 11 percent (from 5%) or raising insurance premiums to 20 percent (from the current 8 percent)

Cool Jobs - Good Pay

From Career Builder via CNN - Nine cool jobs that pay well:
  1. Brewmaster
  2. Toy Creator
  3. Food Scientist
  4. Doll Fashion Designer
  5. Sommelier
  6. Athletic Trainer
  7. Event Planner
  8. Wardrobe Stylist
  9. Concert Promoter

Monday, June 2, 2008

We are #6

The big problem with most business school rankings is that they confound the value added by the school with the quality of the students who go there. A new ranking tries to separate out these two effects to correct for what academics call "selection bias."
Rank School
1 Cornell (Johnson)
2 Indiana–Bloomington (Kelley)
3 University of Virginia (Darden)
4 Texas–Austin (McCombs)
5 Harvard
6 Vanderbilt (Owen)
7 Rice (Jones)
8 Minnesota–Twin Cities (Carlson)
9 MIT (Sloan)
10 Maryland–College Park (Smith)

Ignoring the Competition

In a prior post, we discussed a McKinsey survey that argued companies do a poor job in reacting to competitive moves by their rivals. They assess just a few options and often choose the most obvious choice.

Here’s another McKinsey survey that asked about respondents’ views on competition from companies based in emerging markets. While most appear to recognize the threat from low-cost competition, they don’t seem to be doing much about it.
  • Despite rising wages in China, executives around the world who responded to a McKinsey survey say that low-cost production remains the biggest competitive advantage for companies there and will be for years to come.
  • While more executives see China as a threat than they do any other emerging economy, the survey also shows that surprisingly few of them have made efforts to respond to the global aspirations of Chinese companies.