Sunday, August 31, 2008

"...enough experience to be arrogant, not enough to be humble"

econ professor explaining the difference between Senator Obama and McCain:
Obama as a classic interventionist who overestimates the government's power to control the economy. 'He's relatively young. He knows enough to be arrogant and not enough to be humble,' Froeb says. 'Whereas McCain knows enough to be humble. He sees a problem and he may understand that there isn't an immediate solution.'

Thursday, August 28, 2008

Scariest words of the week

House Ways and Means Committee Chairman Charles B. Rangel (D-N.Y.) said his policy staff and Obama's have been working together for more than a month to craft a legislative agenda:
"This is my last chance," Rangel, 78, said of his opportunity to make a lasting legislative imprint. "This is the big one."

It looks like the Feds got this one right

Finding evidence that the antitrust agencies are helping the economy is notoriously difficult because the agencies challenge anticompetitive behavior, including mergers. But when they lose in court, nature provides us with a natural experiment that, in principle, should allow us to examine the effects of anticompetitive mergers, or at least mergers that were thought to be anticompetitive at the time. Today's WSJ follows up on 1989 merger between the only two hospitals in Roanoke, Virginia.
Nearly two decades later, the cost of health care in the Roanoke Valley -- a region in southwestern Virginia with a population of 300,000 -- is soaring. Health-insurance rates in Roanoke have gone from being the lowest in the state to the highest.

That's partly a reflection of Carilion's prices. Carilion charges $4,727 for a colonoscopy, four to 10 times what a local endoscopy center charges for the procedure. Carilion bills $1,606 for a neck CT scan, compared with the $675 charged by a local imaging center.

Carilion's market clout is manifest in other ways. With eight hospitals, 11,000 employees and $1 billion in assets, the tax-exempt hospital system has become one of the dominant players in the Roanoke Valley's economy. Its dozens of subsidiaries include businesses ranging from athletic clubs to a venture-capital fund.
These mergers affect the bargaining that goes on between hospitals and insurers. As our favorite textbook says, if the alternatives to agreement determine the terms of agreement, then a merger that can put a bigger hole in a provider network has the potential to raise price. These mergers make insurers more eager to reach agreement, and this often means higher prices paid to hospitals.

Wednesday, August 27, 2008

Things you should do, but probably don't

Advice from Nudge (book review), a new book summarizing research in Behavorial Economics:
  • save more
  • diversify your investments
  • don’t invest much in your employer’s stock
  • don’t pay points on mortgages
  • buy insurance with the biggest deductible you can afford
  • don’t pay for extended warranties

Antitrust suit against vertically integrated CVS

In 2006, when CVS, the second-largest retail pharmacy, acquired Caremark, a Pharmaceutical Benefits Manufacturer (PBM), there was speculation that Walgreen Co, the largest retail pharmacy, would be "jolted into action," to look for its own acquisition to avoid losing customers:
“If Walgreen eventually believes it’s losing volume to CVS from a loss of Caremark customers, they may need to step up their search,” said HSBC analyst Mark Husson.
Instead, Walgreen Co has sued CVS for blocking access to Caremark customers, like BlueCross:

Walgreen Co. says state law specifically forbids insurers from denying licensed pharmacies the right to participate in an insurance network. The company said a Shelby County Chancery Court judge ruled in January of this year in its favor when it sued BlueCross to get the rights to the network. Now, it's going after Caremark, saying the company continues to prevent Walgreen Co. from selling mail order and specialty drugs to BlueCross members.

...Walgreen Co.'s lawsuit says Caremark, since 2005, "intentionally engaged in this scheme to protect its unlawful, lucrative and favored position in (BlueCross') networks ..."

Printer Betrayal

Everyone's favorite economics text describes how the seemingly ridiculous prices of toner cartridges relative to printer prices is an indirect price discrimination scheme. Little did I know that the situation is even worse than I thought.

How do you know whether your printer needs a new cartridge? The printer tells you. Stop and think about that for a minute. What are your printer's incentives to be honest with you? Not too many. Wouldn't your printer be a little bit better off by perhaps shading the information it reports and telling you that you need to replace the cartridge before you really need to? I always thought my Brother HL-1440 looked a bit suspicious sitting there so quietly (it's always the quiet ones).

Here's an article from Slate discussing how your printer tricks you into thinking you need new toner and what you can do about it.

Dirty, low-down, lying printer! Or perhaps economics has infected my brain. Perhaps my printer is truly an altruist who is just extremely worried about me running out of toner when I am printing an extremely important document.

Tuesday, August 26, 2008


In past, we have blogged about managerial problems created when companies switch accounting standards. As US regulators debate whether to permit or require US firms to prepare financial statements using International Financial Reporting Standards (IFRS), a new paper concludes that net income computed with GAAP has a higher information content than net incomce computed under IFRS.

Monday, August 25, 2008

How to Really Stop White Collar Crime

I recently attended a session at the Academy of Management conference in which one of the papers presented concerned unethical behavior by corporations. The author argued that this type of behavior could not be explained by simple cost-benefit analysis. I thought, "Why not?" The benefits to a lot of these activities are pretty high and the probability of being caught seems fairly low. And, even if the individuals are caught and their extremely well-paid and talented legal team are unable to successfully defend them, what type of sentence awaits them? Probably a few years at a minimum security prison.

Things might be a little different if the penalties were stiffer, like this. According to the article, the former finance director of China Southern Airlines was accused of embezzling over $100 million dollars and was recently convicted. His sentence:
Chen, 59, was sentenced to death with a two-year reprieve by Guangzhou Intermediate People's Court.

Friday, August 22, 2008

What took them so long?

Alabama has given its 37,527 state employees a year to start getting fit — or they'll pay $25 a month for insurance that otherwise is free.

Thursday, August 21, 2008

Other people's money: "emergency" medicine

If given a choice, it is not surprising that patients would choose the option that involves lower waiting time for an appointment.

Four in 10 of the patients flooding California's dwindling and overtaxed emergency rooms could be treated elsewhere, but can't wait for an appointment with their own doctor, according to a study released Tuesday.

Wednesday, August 20, 2008

Bean counters and the new methodology for counting beans

As International Financial Reporting Standards (IFRS) replace Generally Accepted Accounting Practices (GAAP), management decisions could be affected. The biggest difference is in the treatment of R&D which is expensed under GAAP whereas"D" is capitalized under IFRS. So, for example, only $10 of a $100 dollar R&D expenditure, amortized over ten years, would show up on an IFRS income statement.

If a firm's R&D budget is mechanically tied to last year's accounting expenditures, which is often the case for cost centers, then budgets could be automatically reduced when a firm switches from GAAP to IFRS. I just heard that a big Fortune company, whose competitive advantage is linked to R&D, inadvertently cut its R&D budget when they switched to IFRS.

I would be interested to hear about other management problems created by the change from GAAP to IFRS.

The idiocy of "energy independence"

Trade is good, autarky is bad, and Stossel seems like the only journalist who knows how to think.
McCain and Obama talk constantly about how much they will "invest" -- with money taken from the taxpayers, of course -- to achieve energy independence. "[W]e can provide loan guarantees and venture capital to those with the best plans to develop and sell biofuels on a commercial market," Obama said.

What makes Obama think he's qualified to pick the "best plans"? It's the robust competition of the free market that reveals what's best. Obama's program would preempt the only good method we have for learning which form of energy is best.

Has he learned nothing from the conceits of his predecessors? Jimmy Carter, saying that achieving energy independence was the "moral equivalent of war," called for "the most massive peacetime commitment of funds ... to develop America's own alternative". Then he wasted billions of our tax dollars on the utterly failed "synfuel" program.

Thanks to Quirk.

Concierge Medicine

Frustrated with the difficulty in getting an appointment with your primary care physician? Unhappy with the amount of time your doctor spends with you during an appointment? Have a few extra thousand dollars a year?

If these questions describe you, you might be a candidate for concierge medicine. Under this approach, primary care doctors charge patients a flat rate (the article mentions rates from $1,500 to $6,000 per year) for better access to the doctor. Benefits include longer appointments and increased access to the physician (one claims to provide 24/7 access via cell phone and email).

Tuesday, August 19, 2008

Resist business bureaucratese

UPDATE: "This has created a significant downturn in the volume of the frontend product pipeline which has resulted in a negative impact on portfolio diversity"
"The current financial reporting structure does not provide direct feedback to decision makers impacting costs."
I don't know what it is about MBA students that makes them write in a style that no one wants to read. This sentence on their first homework assignment inspired me to assign Fred Kahn's classic "My War Against Bureaucratese," the gobbledygook written by government bureaucrats designed to hide what they are really doing.

Professor Kahn began this war as part of his succesful effort to deregulate the airline industry. He is the hero of Thomas McCraw's Pulitzer Prize Winning book Prophets of Regulation. Interestingly, the villain of the book is Louis Brandeis for his role in creating the FTC.

Colleague Mike Shor's MBA Writer puts phrases from student memos together to generate sentences that sound all too familiar.
To proactively manage profit, our key initiative objective pushes the envelope toward systematized reciprocal capability.

Enabling continuity, enterprise optimization accelerates the movement towards third-generation contingencies.

"We are all Reaganites now"

Former student John Tamny critiques Senator Obama's tax plan:
Reagan's ideas about incentives and taxation seem to have positively infected both political parties to varying degrees, and this means there's reason for moderate optimism no matter who wins in November.

Still, Obama's tax plan is unfortunate because it flies in the face of his own objectives. Indeed, as Furman and Goolsbee noted, "Sen. Obama believes that one of the principle problems facing the economy today is the lack of discretionary income for middle-class wage earners."

But if that's the case, Obama won't help the middle class by penalizing the wealthy. This is so because wages can only rise when the amount of available investment capital increases. Simply put, without capital there are no wages.

So while Furman and Goolsbee argue that "Obama's middle-class tax cuts are larger than his partial rollbacks for families earning over $250,000," they misunderstand the origin of middle-class comfort. In short, a 10% rate cut on income of $250,000 and up frees up far more capital than a tax cut on income of $50,000.

Top 50 business blogs

In six categories:
  1. Technology
  2. Management
  3. Economics & Finance
  4. Marketing
  5. Strategy, Leadership, Innovation
  6. Miscellaneous

Monday, August 18, 2008

More on Paying for Kidney Donations

We've blogged a number of times on the shortage of kidney donations and laws against paying donors. As discussed in this recent Slate article, The American Medical Association has apparently adopted our view - the Association recently voted to lobby Congress to allow the study of the use of some sort of financial incentives for donating organs.

Unfortunately, the National Kidney Foundation will not support this effort. According to a senior vice president for health policy and research with the organization, financial payments would cheapen the gift and lead to fewer people donating overall. We need to track this person down and send them a copy of our book.

Sunday, August 17, 2008

How to organize a school system

from NY Times Magazine:
Schools would receive money on a per-student basis, and principals could then use that money to staff their schools as they liked and pay for whatever instructional methods they chose. Each school would negotiate salaries and work rules directly with its teachers. The system’s small central office would be responsible only for oversight, though it would have considerable power to hold principals accountable: schools that didn’t produce results would be closed, and successful schools would be imitated and replicated.

Friday, August 15, 2008

Is trade deficit a cause for concern?

Financial and trade flows have to balance. So when we run a trade deficit, it means that foreigners are investing in the US, essentially supplying us with cheaper capital, resulting in lower interest rates.
Daniel Griswold, director of Cato's Center for Trade Policy Studies, comments: "Contrary to the claims of free trade critics, the trade deficit tells us almost nothing about the success or failure of U.S. trade policy. The deficit reflects the continuing inflow of foreign investment to the U.S. economy. Without that investment, millions of homeowners and businesses would be saddled with higher interest payments. It's ironic to hear Democrats complain about the trade deficit. Under President Clinton in the 1990s, the trade deficit exploded from $70 billion to $380 billion and by all accounts the American economy performed well."
- Cato Handbook on Policy: Trade, by Brink Lindsey and Daniel Griswold

Wednesday, August 13, 2008

How to keep profit from eroding (7 min lecture)

Oligopsony cartel breaks down

Cartels are inherently unstable, regardless of whether they are selling (oligopolies) or buying (oligopsonies) because individual incentives differ from those of the group. The city or Irving has cut an indepedent deal with a supplier, much to the chagrin of the "Regional Water District planning director," which seems like bureaucratese for "cartel manager":

"It makes for bad policy, and it is a real blow to regional coordination and cooperation, which historically this region has found a way to do great things."

Thanks to Michael Ward.

Thursday, August 7, 2008

Are there gains to delaying marriage?

Only for women:
...delaying marriage increases hourly wages of women by nearly four percent for each year they delay. Marriage timing has no impact on the wages of men. They find that delaying marriage may have costs as well. All else equal, women who delay marriage marry spouses with lower wages.

Co-payments for the un-insured

Emergency Room waiting times rise to an hour.
“There are more people arriving at the ERs. And there are fewer ERs,”

Wednesday, August 6, 2008

Srategy is like pornography...

hard to define, but I know it when I see it. Here are some definitions from economists
  • The strategic management field is—positively—the scientific study of the plans that firms build and implement in order to achieve and maintain competitive advantage, and—normatively—the attempt to identify optimal plans for achieving and maintaining competitive advantages
  • A field aimed at understanding competitive heterogeneity
  • Strategic management is the interdisciplinary field that studies the behavior of companies and other market parties, in terms of their strategic behavior, the choices they make with regard to organizing their production, their interrelationships, and their competitive positioning. All of this is set against a thorough understanding of the broader environment in which companies have to operate
You have to read the article to get the views from scholars in Sociology, Marketing, and Management.

The Costs of Socially Responsible Investing

One of the leading advocates of socially responsible investing in recent years has been the California Public Employees' Retirement System (CalPERS). Socially responsible investors avoid investing in countries, industries, and companies that engage in business that the investors find objectionable ("socially irresponsible"?).

A recent report indicates that this investment stance comes with some serious costs. For example, CalPERS had rejected investing in China, India and Russia. Avoiding these countries resulted in the fund underperforming an index without such a screen by just over 2.5 percent per year and reduced returns by $400 million according to a CalPERS report (note: last year the fund changed its policy on investing in these countries). Avoiding tobacco stocks has reportedly cost the fund over $1 billion in returns over the last seven years.

Monday, August 4, 2008

Capitalism at the Beijing Olympics

Ticket prices for various events at the Beijing Olympics tell an interesting story of what events are most popular. The opening and closing ceremonies command the highest maximum listed ticket prices at $729 and $438, respectively.

The top individual sports include basketball, swimming, and table tennis ($146, $117, and $117). Bargain hunters can catch the rowing for only $12 and shooting for $7.

Friday, August 1, 2008

No pay for bad performance

Medicare will stop paying hospitals for making errors:

Medicare officials announced Thursday that it no longer will pay the extra-care costs associated with treating dangerous blood clots in the leg following knee or hip-replacement. The program also will not pay extra for complications stemming from poor control of blood sugar levels.

EXTRA CREDIT: if reports of blood clots or poor control of blood sugar decline, is it because hospitals are making fewer errors (moral hazard) or because they are accepting fewer patients suceptible to these complications (adverse selection)?

Tearing down barriers to entry

The Internet is allowing amateur photographers to compete with professional graphic designers:
So-called microstock Web sites offer to sell photos submitted by users for as little as $1 an image. Other sites let buyers post open calls for designs and pay for only the submission they like best, a practice that riles graphic designers who say it amounts to working for free.
Watch for the professionals to ask government to regulate the industry to prevent "ruinous competition" and to "protect" customers from low quality work.