Separation of Church and State

Vaclav Klaus, EU President-elect, is an economist trying to figure out what we are giving up to slow climate change which is driving the fundamentalists nuts:

As the global financial crisis takes hold, perhaps people are starting to wonder whether the so-called precautionary principle, which would have us accept enormous new taxes in the guise of an emissions trading scheme and curtail economic growth, is justified, based on what we actually know about climate.

Using credit history to price hospital care

One of the most popular posts on this site has been the use of credit history to price car insurance. It is a high quality data set (relatively few errors) that can be accessed instantly (only with your permission) for a variety of uses. Credit history is is a good predictor of behavior, from the likelihood that you will get into a car accident to the likelihood of losing your cell phone.

Now hospitals are using credit scores to determine what to charge patients:

In the hospital business they call it a "wallet biopsy." A growing number of medical centers are using sophisticated software that digs into patients' finances to help determine whether they will receive free or discounted care.

This allows hospitals to avoid giving free care to patients who falsely claim to be indigent.

EXTRA CREDIT: how could a non-indigent patient defeat this price discrimination scheme?

Re-distribution of health

Obese people in Canada have right to two airline seats, for the price of one.

The high court declined to hear an appeal by Canadian airlines of a decision by the Canadian Transportation Agency that people who are "functionally disabled by obesity" deserve to have two seats for one fare.

"It's Up to You" Pricing in Retail

We previously blogged about Radiohead's decision to offer its new CD online at a price the consumer could decide and about the results of the offer.

Here's a story about a retail store in Seattle that makes the same offer on its eclectic mix of goods: "From whimsical holiday plates to obscure albums to hundreds of other items, the customer determines the price for everything."

How's it working out? Not so good - the store is closing. Surprisingly, the landlord doesn't offer a pay what you want policy for the rent.

In case you didn't think you needed a Plan B

Our Plan B contest still has one week. No one has entertained the idea of moving to a prosperous state (Tennessee) and seceding from the Union:

Asked why he expected the U.S. to break up into separate parts, he said: "A whole range of reasons. Firstly, the financial problems in the U.S. will get worse. Millions of citizens there have lost their savings. Prices and unemployment are on the rise. General Motors and Ford are on the verge of collapse, and this means that whole cities will be left without work. Governors are already insistently demanding money from the federal center. Dissatisfaction is growing, and at the moment it is only being held back by the elections and the hope that Obama can work miracles. But by spring, it will be clear that there are no miracles."

Just when you thought it couldn't get any worse

Using jargon-free, simple prose, Susan Woodward and Bob Hall explain why the populist impulse to help homeowners is almost exactly wrong:

The main support that the government has offered so far is to guarantee modified mortgages, so that the government, not the lender, bears the cost of a default after modification. Subsidizing defaults will do some additional damage, as a good policy would discourage defaults, not subsidize them. Another questionable policy is a moratorium on foreclosures. Houses deteriorate rapidly when occupied by people who think they are going to be evicted. Policies that do not encourage true home ownership, where occupants have full incentives to take care of the houses they live in, risk additional deterioration to the housing stock. Nonetheless, several states have adopted moratoriums and there is talk of a long moratorium imposed by the federal government.

Loans are cheap; why isn't anyone buying them?

The Economist reports that ever since Secretary Paulson decided that it was a bad idea for the Treasury to buy bad loans at high prices, demand for loans has fallen, and this has lead to a fall in the price for loans.

DISTRESSED markets tend not to react well to offers of salvation being abruptly withdrawn. Holders of toxic mortgage-backed securities had pinned their hopes on the American government’s plan to buy large piles of the stuff through auctions as part of the Troubled Asset Relief Programme (TARP). The decision on November 12th to abandon that approach in favour of direct capital injections has left them shattered. The ABX index, which is linked to residential mortgages, is plumbing new depths. Spreads on the CMBX index, which is tied to securities backed by loans for offices, shopping malls and so on, have been exploding (see chart).

John Mauldin suggests that there artificial restraints may be preventing funds from buying these cheap loans:

Today, many highly rated loans are selling for 80 cents on the dollar. There is nothing wrong with the collateral or the corporation which owes the money; there is just no one with ready cash to buy the loans. I asked my friend why he doesn't buy them, since they offer very good returns.

The problem is that his fund, and most other CLOs, have covenants in their offering documents that prevent them from buying debt at less than 85 cents on the dollar. That covenant is a good thing in normal markets, as it prevents possible mischief by the manager, but right now it means that a lot of opportunity is being missed.

Test Your Civic Literacy

About 125 million Americans cast ballots in the presidential election. How many of them do you think were actually moderately well-informed? If you take a look at the results of the Intercollegiate Studies Institute's recent survey of American civic literacy, you might be a little concerned.

The Institute selected a random sample of 2,508 American adults and gave them a 33-question civics quiz. A few highlights from the results:

• Seventy-one percent of Americans fail the test, with an overall average score of 49%.
• Fewer than half of all Americans can name all three branches of government.
• Only 24% of college graduates know the First Amendment prohibits establishing an official religion for the United States.

And, it's not like the people we are voting for are any better. On average, public office holders scored 44%, five percentage points lower than non-officeholders.

Take the quiz to test your civic literacy.

What did we learn from the Great Depression?

Those who ignore history are condemned to repeat the mistakes of the past:

• MONETARY POLICY IS KEY
  
• GET THE SMALL THINGS RIGHT

He also took steps to strengthen unions and to keep real wages high. This helped workers who had jobs, but made it much harder for the unemployed to get back to work. One result was unemployment rates that remained high throughout the New Deal period.

Today, President-elect Barack Obama faces pressures to make unionization easier, but such policies are likely to worsen the recession for many Americans.

• DON’T RAISE TAXES IN A SLUMP
• WAR ISN’T THE WEAPON
• YOU CAN’T TURN BAD TO GOOD

In short, expansionary monetary policy and wartime orders from Europe, not the well-known policies of the New Deal, did the most to make the American economy climb out of the Depression. Our current downturn will end as well someday, and, as in the ’30s, the recovery will probably come for reasons that have little to do with most policy initiatives.

Stress free shopping

Sony has your best interests at heart:

Jay Vandenbree, the company’s president for consumer sales, discussed its new rule that bans retailers from discounting Sony’s Alpha digital camera line, its more expensive televisions and some other high-end products.

Mr. Vandenbree said that by having the price for these products be the same at all retailers, Sony had eliminated stress for buyers.

Quiz: which teachers will give up tenure?

Another case of Democrats doing things Republicans can only dream about. Noting that "Tenure ... has no educational value for kids; it only benefits adults," DC Schools Chancellor Michelle Rhee is offering teachers a choice:

This summer she offered a new teacher contract proposal with two options. Teachers could choose a plan under which their pay would rise spectacularly -- nearly doubling by 2010 -- in exchange for giving up tenure. Or they could opt for a smaller pay bump and still lose some seniority rights.

This "screen" will be used to weed out the good employees from the bad.

Ms. Rhee's proposal has caused a meltdown among leaders of the Washington Teachers' Union, and negotiations have collapsed. The Chancellor has raised the stakes, announcing the district would seek to dismiss tenured teachers who are ineffective. She has also hinted she'll go around the union by creating more nonunionized charter schools, or getting the federal government to deem her district in a "state of emergency."

What the feds can learn from Tennessee

Showing once again that he is not bound by Democratic Party orthodoxy, Tennessee's governor designs a health plan that would pass a benefit-cost test in an economics class:

CoverTN, which began in 2006, is a health-insurance plan for those who are self-employed, or who work for small businesses that can't afford a traditional policy.

It is not free health care. Rather it is a limited plan with shared costs. In devising this plan, we didn't start out the usual way -- by defining what benefits we wanted -- but instead set how much we wanted to pay. And then we began a competitive-bidding process to see how much health care we could buy. We initially set the amount we would pay at an average of $150 a month, and split the responsibility for that premium three ways. The company would be responsible for $50, the individual for $50, and the state for the final $50.

The bidding was vigorous. It was ultimately won by BlueCross BlueShield of Tennessee with a benefit package that meets a great many -- not all -- of the real needs of the uninsured at a cost far below conventional plans.

At these premium levels -- less than half of what a conventional plan might cost -- the benefits are limited. But the benefit structure is also different than in a conventional plan. Most limited plans achieve their savings with high front-end deductibles, requiring a person to spend often thousands of dollars out-of-pocket before benefits kick in. But when we asked our customers -- uninsured Tennesseans -- what they actually wanted, we found that they were most interested in some help with the more common things; a doctor's visit, prescriptions, a short hospital stay.

CoverTN emphasizes covering these front-end costs. It features free checkups, free mammograms and $15 doctor visits without deductibles, for example. And it achieves its savings on the back end, with relatively low limits on hospital stays and an overall $25,000 benefit limit in any one year. It does not cover truly catastrophic events.

Note to President-elect Obama: Bredesen would make a great secretary of HHS.

How NOT to get banks to lend money

Jonathan Carmel argues that the Paulson plan gives under-capitalized banks an incentive to take "heads I win, tails the taxpayers lose" bets:

If the Treasury plan is successful in restoring the LIBOR market, banks will be able to raise tremendous amounts of cash very quickly by borrowing in the LIBOR market. The money-center banks that borrow in this market have a wide array of risky investment opportunities available to them, much wider than was available to Fannie Mae or Freddie Mac.

Instead, he prefers direct equity investments in well-capitalized banks:

With increased equity capital, well-run firms that currently have strong equity positions would be able to greatly increase their borrowings and expand into the parts of the capital market left vacant by banks which have fallen. This also ameliorates the moral hazard problem since the healthy wellcapitalized banks that would directly benefit from such a plan are unlikely to have been the main culprits that caused the initial crisis.

He also cautions against purchasing bad loans or increased deposit insurance:

...we should be careful about having the government try to spend our way out of this crisis. Every dollar that the government uses to buy tainted assets, bailout banks, or cut taxes creates an extra dollar of safe Treasury securities which inevitably diverts a dollar of private investment capital from risk-bearing securities.

Mitt Romney: Detroit needs a turn around, not a check from the government

The son of the president of the now-defunct American Motors brings a unique perspective to the Congressional bailout:

• First, their huge disadvantage in costs ... must be eliminated. That means new labor agreements ..., retiree benefits must be reduced
• Second, management as is must go. New faces should be recruited from ...— from companies ... respected for excellence in marketing, innovation, creativity and labor relations

Who made money when Wall St. died, and how did they do it?

Liars Poker author does the post-mortem.

The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking home­owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’ ” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”

Creative Blogging - Professor Edition

A professor at Texas A&M International in Laredo, Texas has gotten into some serious hot water for creative use of his blog. After discovering that six of his students had cheated on an essay by plagiarizing some of their work, he posted their names on his blog. Ouch!

The professor defended his action by noting that his syllabus expressly warned students that he would “promptly and publicly fail and humiliate anyone caught lying, cheating or stealing.” And, he did. Unfortunately for him, despite the advance notice to students, the Family Education Rights and Privacy Act prohibits the release of students' educational records (note that the professor disputes whether his actions were contrary to FERPA). The professor was fired.

Lining Up at the Public Trough

So what happens when the government starts handing out money left and right? People start lining up for a crack at the pie. A recent New York Times column describes the various lobbying factions descending on the Treasury like a pack of hungry dogs.

I bet you didn't know that the National Marine Manufacturers Association has been so hard hit by the recent economic turmoil. Their lobbyists are asking if boat financing companies can get a piece of the action to help make sure that boat dealers have sufficient credit access to keep boat showrooms full. Glad to see my tax dollars potentially addressing the crisis of less than full boat showrooms.

Contest Announcement: Plan B

The fiscal future for young people in the United States is bleak. The promises we have made to retired people (through Medicare and Social Security) are going to swamp the federal budget in a short time. The rating agencies will eventually downgrade US government debt because we have no plans to pay for our entitlement programs; and long term interest rates will rise as markets punish our inaction.

I will award $100 to the best "plan B"--identify the best country or location to wait out the decline and fall of the US Empire. Post your (less than 100 word) entry as a comment to this post, and my Managerial Economics students at Vanderbilt will select a winner. A winning country will not be facing the same kind of fiscal disaster that awaits young workers in the US; and be a good place to live and work.

DEADLINE: 1 December 2009.

"Periods of crisis often beget bad policies."

So says UCLA economist Lee E. Ohanian who argues that the New Deal prolonged the Great Depression by about seven years and that the government's so called "bail out" is actually causing the slow down by increasing uncertainty.

I dont think this is what they meant by "cost leadership"

NOTE: I took this graph from someone, but cannot recall whom.

Alcohol vs. health insurance

Its not even close.

Mexicans and machines...

are stealing our jobs.

Save us from Congress

Why is the Peso falling?

Answer: The price of a peso has fallen from about $0.10 to $0.07 in the last two months. Falling US demand for Mexican exports to the US means a lower demand for Pesos. As demand for pesos falls, the price of a peso drops.

Rational Addiction

Among many other contributions, economist Gary Becker is known for his theory of rational addiction. As the name implies, the theory argues that addictions can be modeled as rational, optimal consumption plans. So, go ahead and have another Twinkie and spend another hour online!

The folks over at Freakonomics have been having a little contest (which drew over 600 comments in just over a day and a half) to predict what Gary Becker thinks is the most addictive good. Here's the answer (which I found to be a bit disappointing).

Pull the plug on GM

Former student John Tamny says saving GM would reward failure.

Government money allows the architects of bad decisions to continue making mistakes...

What are these 40,000 workers doing?

The US Post Office lost $2B last year and is thinking about laying off 40,000 of their 685,000 employees. But they say that their customers wont notice a thing

"The general public ... won't se any decrease in service.. They largely won't know about it."

Where have all the Blue Dogs gone?

After debating Jim Cooper last week, and hearing his hope that the new administration would tackle the only issue that matters (entitlements), I was ready to drink the Obama Kool-Aid. But it looks like the Blue Dog Democrats are rolling over for the new President.

Late last week the leader of the House Blue Dog Coalition, Tennessee Democrat Jim Cooper, announced that with Barack Obama about to enter the White House, "I'm not sure the old rules are relevant anymore." Why not? Because, Mr. Cooper said, "It would be unfair to the new President to put him in a budget straitjacket."

Note: it may actually make some sense to run a counter-cyclical fiscal policy. But the Blue Dogs have not been a model of consistency:

Democrats ran on "paygo" in 2006, promising to offset any new spending increases or tax cuts with comparable tax increases or spending cuts. Once in charge on Capitol Hill they quickly made exceptions, waiving paygo no fewer than 12 times to accommodate some $398 billion in new deficit spending -- not that the press corps bothered to notice.

This seems like low hanging fruit,

or at least much cheaper than bailing out the auto industry.

The CAFE rules (clean air standards) require car makers to build small clean cars domestically in order to qualify its "fleet" under the standards.

How dumb is the rule? Chrysler might not be unraveling today if not for the two-fleet rule ... Chrysler has a perfectly salvageable business making trucks, minivans, muscle cars and Jeeps -- doomed only by the lack of enough small, fuel-efficient cars to roll out of a UAW factory with a Chrysler emblem slapped on.

Exodus

...of physician's from Pennsylvania as they rush to escape the Governor's attempt to finance a universal health care system, largely by increasing physician's insurance costs:

... the number of practicing physicians in Pennsylvania is down 6% from a few years ago. Younger doctors just are not as willing to settle down in a state where liability payouts are twice the national average and physician income is 44th out of the 50 states. Today, about 7%-9% of our doctors are under 35. A few years ago, the number was 15% and in some specialties more than 40% of the practicing physicians are more than 50 years old. And less than 80% of physicians with active licenses are engaged in patient care.

Newly minted doctors educated here are setting up their practices elsewhere. In 1992, 60% of residents stayed in Pennsylvania when they finished their training. Now only 20% do so.

Google CEO on the Future of Business

The McKinsey Quarterly interviews Google CEO, Eric Schmidt; he "reflects on the coming transformation of strategy, competition, business models, and management." Maybe he read our textbook:

When the marginal cost of distribution and manufacture is effectively zero, the free model with ancillary branding and revenue opportunities is a good thing.

Unemployment from 1950

The dark lines above are officially recognized recessions. The red is John Mauldin's forecast unemployment, but he qualifies his forecast by noting that this recession is different from the ones that preceded it:

This recession is the result of serious bubbles in the housing and credit markets imploding. It is not the result of excess inventory or overinvestment in manufacturing capacity. As I have written numerous times, these excesses took years to build up and will take at least 2.5-3 years to correct. We are 15 months into the correction process. That is unlike any other recession we have experienced. So be careful in your use of comparisons based on historical averages.

Could expectations get any higher?

David Brooks has a dream:

Walking into the Obama White House of my dreams will be like walking into the Gates Foundation. The people there will be ostentatiously pragmatic and data-driven. They’ll hunt good ideas like venture capitalists. They’ll have no faith in all-powerful bureaucrats issuing edicts from the center. ...

They will actually believe in that stuff Obama says about postpartisan politics. That means there won’t just be a few token liberal Republicans in marginal jobs. There will be people like Robert Gates at Defense and Ray LaHood, Stuart Butler, Diane Ravitch, Douglas Holtz-Eakin and Jim Talent at other important jobs. ...

My dream administration will announce a Budget Rebalancing Initiative. Somebody like Representative Jim Cooper would go through the budget and take out the programs and tax expenditures that don’t work. “If we have no spending cuts, then we’re saying government is perfect. Nobody believes that,” Cooper says.

Lawyerocracy

The American Bar Association cannot find a non-attorney on Senator Obama's transition team, leading them to speculate on How an Obama Presidency May Benefit Lawyers

Lawyers in diverse practice areas ranging from labor law to bankruptcy are likely to benefit from legal changes that could be made during the Obama administration.

Lawyers can expect more regulations in banking and health care, fewer restrictions on lawsuits, more real estate lending and a pro-labor tilt, according to business development consultant Larry Bodine. Lawyers who spoke to the American Lawyer also predict fewer bankruptcy restrictions and raise the possibility of job protections based on sexual orientation.

Is Wal-Mart an inferior good?

An inferior good is one whose income elasticity of demand is negative, so that when income goes down, demand goes up. From NY Times:

Sales at department stores and specialty retailers are falling rapidly. They are cutting staff, discounting merchandise and liquidating stores to survive. But even as the financial turmoil strangled discretionary spending at many stores, it sent struggling consumers into the arms of Wal-Mart — and left it, the world's largest retailer, poised for a blockbuster Christmas.

This is a counter-cyclical fiscal policy

from WSJ:

Uncle Milton at his best

thanks Noah:

California's procyclical fiscal policy

In down times, the government increases spending and reduces taxes to mitigate the effects of recession. But California always seems to do things a little differently:

SACRAMENTO, Calif. (AP) - Gov. Arnold Schwarzenegger has proposed $4.4 billion in tax increases and billions more in spending cuts to close California's worsening budget deficit, declaring: "We must stop the bleeding." ...

California's budget relies greatly on capital gains taxes, which have dropped precipitously in recent months along with swooning stock prices. Sales and property taxes also have declined.

He said lawmakers will not be able to close the budget gap with cuts alone. He proposed a temporary 1.5 percent sales tax increase and other "revenue generators."

An early signal that change may not be bad

The Washington Post reports that our own Jim Cooper is being considered for a position in the new administration:

One prospect for a top administration job, possibly at the Office of Management and Budget, who would test the Washington establishment is Rep. Jim Cooper (D-Tenn.), a crusader for government reform who annually publishes a dire alternative report on the federal budget.

How to get our health care expenses under control

NOT

Judge Henry H. Kennedy Jr. of Federal District Court here said the policy of paying for only “the least costly alternative” was not permitted under the Medicare law.

What if the Median Voter Were a Failing Student?

He or she probably is, according to this essay by Bryan Caplan from George Mason University.

When you actually collect data on the public’s economic beliefs and test them for systematic error, systematic errors are easy to find . . . The public systematically underestimates the social benefits of the market mechanism, especially for international and labor markets, and sees the past, present, and future of the economy in an unrealistically pessimistic light.

Here's the summary

As teachers, economists usually assume that their students have systematically biased beliefs about economics; yet, as researchers, economists usually assume that voters understand how the economy works. Teachers have it right, according to Bryan Caplan, and so modern political economy needs a serious overhaul.

(HT: Richard Langlois)

Predicting the Presidential Election

Prediction markets at intrade currently rate Obama's chance of winning the election just under 90%.