- Only 85% of the seats in a concert actually go on sale. The other 15% is reserved for the venue, promotor, or performer.
- Ticketmaster receives only a portion of its service fees. The rest goes back to the promoter or venue.
Friday, February 27, 2009
Ticketmaster/Live Nation merger, II
But he doesn't address our looming entitlements problem:
...[Economists at the Brookings Institution] think the deficit will bottom out near 5% of GDP in 2013 then climb to almost 6% by 2019, while debt continues to rise as a share of GDP. That is before the government has to deal with the full impact of the surge in health and pension entitlement costs. The academics reckon higher taxes or lower spending equal to a staggering 8% of GDP a year are necessary to contain those costs and stabilise the long-run debt.
...He called on Americans to “address the crushing cost of health care” but proposes to spend many billions more, not less. He reportedly abandoned support for a commission to restore solvency to Social Security, the public-pension system, because congressional Democrats objected to this loss of their authority.UPDATE: I hope this is not the best they can do:
...the Obama White House has added a link to the Financial Report of the US Government on its website, a step the Bush administration never took. The report will tell you that the per capita share of America's total obligations, including entitlements, is more than $184,000 each. The typical American family's share is roughly half a million dollars.
No way out for California
...the state already owes another $48.2 billion in unpaid costs for retiree health and dental benefits. ...
In effect the state has paid the bare minimum to cover its annual costs, as an overspending consumer might squeak by making the minimum monthly credit card payment. But the debt mounts.
Unless the state pays down the accumulated $48.2 billion it already owes to future retirees, the annual payment will grow to $5.3 billion by 2017-18. The total owed will increase to $71 billion.
State Controller John Chiang, who sits on CalPERS' board, warned this week that, "[I]t is important for lawmakers to begin crafting a long-range plan to meet this future obligation." Unfortunately, long-range planning isn't the Legislature's strong suit, as demonstrated by its annual budget debacles.
A way out for the auto industry
A federal bankruptcy judge ruled that Delphi Corp. can terminate health benefits for certain retired workers,....Delphi says it will save about $70 million per year by canceling the programs and eliminate about $1.1 billion in liability.
Wednesday, February 25, 2009
Financial Meltdown via Copula Functions
Great idea, but the problem was that the only CDS pricing information came from a time when home values were on a continuing upward trend. The inputs into the model (and therefore the output) weren't valid during time of decreasing home values. And, apparently, just about everybody was using the formula to price CDOs. Oops!
The Wired article has also caught the attention of our friends over at O&M.
Remember the words of Warren Buffett: "Beware of geeks . . . bearing formulas"
Monday, February 23, 2009
Ticketmaster/Live Nation merger
Ticketmaster and Live Nation are both part of the vertical supply chain that delivers live performances to fans.The “price” of this service is the difference or “wedge” between what consumers pay and what performers receive. At one end of this chain are firms that interact directly with artists, such as Live Nation. At the other end are firms that interact directly with fans, such as ticketing firms like Ticketmaster who sell tickets on behalf of venues.The merger is interesting because it raises both horizontal (Live Nation has begun ticketing its own events) and vertical (Live Nation is Ticketmaster's largest customer) issues. The potential horizontal costs of the merger will have to be weighed against the potential vertical benefits, including increased coordination across the supply chain.
Comments solicited on the testimony.
UPDATE: WSJ article on the merger
Price of polluting falls
A year ago European governments allocated a limited number of carbon emission permits to their big polluters. Businesses that reduce pollution are allowed to sell spare permits to ones that need more. As demand outstrips this capped supply, and the price of permits rises, an incentive grows to invest in green energy. Why buy costly permits to keep a coal plant running when you can put the cash into clean power instead?
All this only works as the carbon price lifts. As with 1924 Château Lafite or Damian Hirst's diamond skulls, scarcity and speculation create the value. If permits are cheap, and everyone has lots, the green incentive crashes into reverse. As recession slashes output, companies pile up permits they don't need and sell them on. The price falls, and anyone who wants to pollute can afford to do so. The result is a system that does nothing at all for climate change but a lot for the bottom lines of mega-polluters such as the steelmaker Corus: industrial assistance in camouflage.
Advertising for Kidneys
"Please help us, my dad needs a kidney!" began their posting in the site's volunteer section. The Floods received more than 100 responses to the Craigslist ad. Many sounded genuinely interested in helping, but others sought to sell a kidney, which is illegal in the United States.
Sunday, February 22, 2009
Democrats vs. incentives, II
...The rules prohibit any incentive compensation of any kind — bonus, commission, whatever — unless it is paid in restricted stock that doesn't vest until the TARP money is paid back to the government. And the amount of the restricted stock is limited to 50% of your salary. So if you make $200,000 a year, the most you can get in restricted stock is $100,000.
Typically, highly compensated people on Wall Street earn fairly low salaries, but then get large annual bonuses — usually based on performance. Title VII turns that upside down. No more pay for play. It's all about salary now. So if a bank normally pays a superstar trader a nominal salary of $200,000 — and in a home-run year he earns himself a $10 million bonus — the only way to pay him the same total amount is to raise his salary to about $6.6 million. He'd then get that salary even if he did a lousy job in a given year.
Is California the canary in the coal mine?
Even discounting for the impact of global recession, the most populous state's ills are unique and self-inflicted -- and avoidable. In the last three decades, California expanded the public sector and regulation to Europe-like dimensions. Schools, state employees, health care, even dog kennels, benefited from largesse in flush times. Government workers got 16 official holidays, everyone else six. The state dabbled with universal health care and adopted strict environmental standards. In short, California went where our new president and Nancy Pelosi of San Francisco want America to go.
Signs of intelligent life in DC
Summers's greatest test will be persuading Congress to vote for "entitlement reforms"—i.e., cutbacks and/or higher taxes on Social Security and health benefits for the poor and elderly. In his interview with NEWSWEEK, Summers made clear that he will urge the president and Congress to venture into an area where politicians have long feared to tread, the so-called third rail of politics (touch it and you're dead). Necessity requires it, he says—if the United States cannot curb its spending and debt, interest rates will soar and the economy will plunge once more.UPDATE: this is what he has to overcome:
The president signaled in his campaign that he would support addressing the retirement system’s looming financing shortfall, in part by applying payroll taxes to incomes above $250,000. But that would ignite intense opposition from Republicans, especially with the economy deep in recession.
Liberal Democrats are already serving notice that they will be equally vehement in opposing any reductions in scheduled benefits for future retirees. But any solution, budget analysts said, must include a mix of both approaches, though current beneficiaries would see no change.
Friday, February 20, 2009
Stimulus idea: sales tax holiday
Bob Hall (macroeconomist, in charge of the business cycle committee at NBER that dates business cycles) spoke at Vanderbilt yesterday. He used the above graph to show that the current recession is as bad as the worst post-war recession, in 1981. Bob thinks we are falling into a liquidity trap, and wants a big Keynesian stimulus program but thinks that government spending is too slow and not necessarily spent on worthwhile projects. Instead, he wants the Federal government to subsidize a temporary sales tax holiday. This has the advantage of immediacy while maintaining consumer sovereignty.
Bob and his colleague Susan Woodward (former Chief Economist at SEC and HUD), maintain a blog on the financial crisis.
Thursday, February 19, 2009
Testing for pork, II
I came across data from the house appropriations committee by data and area of spending (Aid to States, Educ, Job Training, Trans) as reported by the WSJ. Still I cannot vouch for how genuine they are.
Still, I load these data into STATA and regressed log dollars per capita against the fraction of Democrats in the states' House and number of Democrats in their Senate delegations. There still appears to be evidence of pork, this time from the Senate.
Housing plan rewards vice; penalizes virtue
I can’t count how many news accounts I’ve seen about the poor, struggling homeowners who can’t make the monthly mortgage payment, are about to be foreclosed, and risk losing the family home, yard, white picket fence, and piece of the American Dream. But I haven’t heard one word about the poor, struggling renters, the ones who scrimped and saved and put money away each month towards a down payment, who kept the credit cards paid off, stayed out of trouble, and lived modestly, and thought that maybe, just maybe, the fall in housing prices meant that they, finally, could afford a house — maybe one of those foreclosed units down the street. These people are Bastiat’s unseen. For them, Obama’s housing plan is a giant slap in the face. To hell with the prudent. Party on, profligate! Now that’s what I call moral hazard.
Wednesday, February 18, 2009
Lobbying and Bailout Dollars
Looks like BofA has a competitive advantage in converting lobbying dollars to bailout funds.
Tuesday, February 17, 2009
What was in the stimulus bill?
Apparently, someone read it:
- The CBO says that only 22% of the plan is focused on true tax cuts
- Only $107.1b will likely be spent this year;
- About 64% of the total package will find its way into the economy within 19 months
Monday, February 16, 2009
Paradox of thrift
Keynes would have the government spend more to stave off Depression:
...we seem to be starting to rediscover thrift. Debt levels are falling. Consumer spending is down. The savings rate is on the rise. Great, right? Not exactly. The sudden sobering up of the American consumer happens to be the No. 1 force driving the U.S. and global economies downward. We're saving more, yet we're all getting poorer.This is what some economists call the paradox of thrift.
...government indebtedness and spending are being substituted for consumer indebtedness and spending. The federal deficit is projected to hit $1.2 trillion this year, and that's not counting the close to $1 trillion in further stimulus being contemplated by Congress.
This kind of behavior, contends McCulley, is what the paradox of thrift demands. "Uncle Sam has got to go the other direction and lever up his balance sheet and actually spend money," he says. Simply standing by and letting the downward economic spiral worsen strikes him as "inconsistent with a civilized society."
Still, the approach remains paradoxical. Our profligacy has gotten us into trouble, and so the response is ... more profligacy? There is no shortage of critics who contend that today's massive government spending is simply laying the foundation of another financial crisis, this one centering on a loss of confidence in Treasuries and the dollar.
Beware Specific Investments
A number of chicken farmers are experiencing the problem of specific investments. These farmers build buildings specific to the raising of chickens and contract with companies like Pilgrim's Pride, Tyson Foods, and Perdue to raise chickens for the companies.
Today's chicken houses are bigger and more sophisticated than the coops of yore. Made from corrugated metal and wooden beams, the cavernous shacks can be longer than a football field and cost more than $200,000. To maximize profits, many farmers own at least four, meaning high-six-figure mortgages are common.With the slowdown in chicken consumption, the chicken companies have been cancelling contracts with farmers, leaving the farmers on the hook for mortgages on buildings that have little value other than for housing chickens.
Inside the biggest such coops, more than 20,000 chickens spend their lives pecking at feeders and water spigots on a dirt floor. Computers regulate temperature. Most houses are kept dark to minimize activity so birds pack on more pounds.
Democrats vs. incentives
One of the interesting themes running through the Democratic policies now being passed into law is a hostility to incentives. Above, Congressman Barney Frank asks why investment bankers need bonuses to do a good job. But NY Gov. Patterson apparently thinks they work, at least for public-sector employees:
Here is my own take on how to motivate government employees.
ALBANY - Gov. Paterson has secretly granted raises of as much as 46 percent to more than a dozen staffers at a time when he has asked 130,000 state workers to give up 3 percent pay hikes because of the state's fiscal crisis...
Sunday, February 15, 2009
You don't have to outrun the bear, but you do have to outrun your friends
But it doesn't look like the day of reckoning will occur anytime soon because European banks still look worse than their US counterparts. With leverage ratios approaching 50-to-1, and much less transparency than US banks, investors still prefer the relatively safety of US Treasuries.
Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars!
...The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.
Waterfield reports, “National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors – particularly those who lend money to European governments – have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
Succinct summary of stimulus insanity
"After 18 years of record spending, much of it on credit, consumers must and will de-lever and save the next $1 trillion to $2 trillion of income. Only private businesses create job multiplication and true future spending power," says Albertson. "That requires a savings and investment program, not a doomed spending program. The latter tact ate up the resource base for six years during the 1930s Depression, with little or no effect on unemployment."
I hope no one responds to these incentives
President Obama’s spending proposals are encouraging individual states to add more families to their welfare rolls; the more Americans sign on to the dole, the more state budgets will benefit from US Treasury payouts. This policy essentially undoes the policy changes passed a decade ago by Republicans and President Clinton, over the objections of liberal Democratic legislators:
Despite dire warnings that reduced benefits for single mothers and deadlines on entitlement would create a social calamity – one liberal senator warned at the time that children would be “sleeping on grates” – the 1996 reforms cut welfare rolls from more than 5m families in 1995 to below 2m a decade later without a discernible increase in hardship.
The changes that Obama has proposed will undue one of the "few undisputed triumphs of American government in the past 20 years.
Douglas Besharov, author of a big study on welfare reform, said the stimulus bill passed by Congress and the Senate in separate votes on Friday would “unravel” most of the 1996 reforms that led to a 65% reduction in welfare caseloads and prompted the British and several other governments to consider similar measures.
Though some researchers have questioned the true impact of Clinton’s “workfare” reforms, they were wildly popular with millions of US taxpayers tired of subsidising what many saw as a generation of slackers.
“They have completely overturned the fiscal and policy foundations of welfare reform,” Rector complained.
Saturday, February 14, 2009
Where are all Obama's economists?
Friday, February 13, 2009
You can check out any time you like, but ...
A move by Heritage Medical Center to close its obstetrics unit due to financial necessity has been denied by the Tennessee Health Service Development Agency.
In October, the hospital announced it intended to close its obstetrics department due to an insufficient volume of patients.
However, the Certificate of Need application made by Heritage to discontinue the services was unanimously denied at the agency's meeting Jan. 28.
Thursday, February 12, 2009
Government vs. Market
Much of the justification for government intervention comes from the assertion that markets have failed. One money manager scoffed at this idea. “The markets are working fine, but they’re giving people answers that they don’t like, so people cry market failure.” Stocks and bonds low? That’s because investors are afraid of a prolonged depression and continued government interference. House in a jobless region of Michigan worth almost nothing? A place with 50% of its former jobs only needs 50% of its houses. There are plenty of former steel towns where the price of a comfortable house stabilized at $20,000 decades ago and has barely moved since.
Just when you thought it was safe to get back into the market
When public funds slide in value, taxpayers get hit from all sides. The municipalities and school districts that hire firefighters, police, teachers, and other workers have to cut their staffs to recapitalize funds. Last October the Los Angeles County Board of Supervisors learned that the county would have to come up with an extra $500 million to keep its pension fund whole. That means the county may have to raise local taxes and cut services to deliver on overextravagant promises it failed to safeguard.
and on the private side as well:
The Pension Protection Act of 2006 requires that companies keep the accounts fully funded over time, meaning that they have to have enough money to pay all of their retirees should they decide to withdraw their funds. Yet more than 200 of the 500 big-company plans are nowhere close to meeting that standard, ...
Companies with defined-benefit pensions may soon find themselves choosing between making payroll or pumping money into their pension plans. If companies are forced to make up the shortfall out of their assets, which seems likely, that would send profits tumbling even more,...
Wednesday, February 11, 2009
Californians get what they pay for
"It's my opinion that a woman's right to reproduce should be limited to a number which the parents can pay for," Charles Murray wrote in a letter to the Los Angeles Daily News. "Why should my wife and I, as taxpayers, pay child support for 14 Suleman kids?"
DC replaces NY
One of my former students is a sell-side analyst who follows the construction industry. Instead of conference calls with the companies she tracks, she now spends her time traveling to Washington. One of von Hayek's biggest criticism of Keynes is that politicians, rather than markets, allocate capital.
The chart at left identifies the new winners and losers of the Obama regime, i.e., those who can curry government favor.
Bailout Opportunity Costs
Congress has more pressing concerns, in the form of failing banks and automakers. But maybe we should just let the automakers die and pump money into technology instead. Detroit failed because it ignored or dismissed the threat from foreign rivals and kept on making the wrong kind of cars. In contrast, companies in the ever-paranoid Valley are fully aware of the danger they face. They're not pleading with the government for a handout; they're pleading for more investment in education. They're not making excuses for inferior products or asking for protection from competition through limits on imports; they're making the best products in the world and are happy to compete, but need more brainpower to stay ahead.
Monday, February 9, 2009
Testing for pork
If the stimulus package had no pork in it, projects and dollars would be allocated regardless of political party. In the regression above, we see a positive and statistically significant (p=10%) relationship between proposed spending per capita and the percent of Democrats in the congressional delegation. Methodology courtesy of Michael Ward:
I threw the state stimulus numbers into excel along with state population and state representation in the House. Lo and behold, you get a positive correlation between the fraction democratic in the state delegation and either that state's number of stimulus projects per 100,000 (rho = 0.13) or stimulus dollars per capita (rho = 0.24). Note that I omitted two outliers (Alabama's $ per capita was 10 times mean and New Hampshire had zero projects).
UPDATE: The projects are NOT yet in the stimulus bill; they are from a "wish list" of mayors.
Keynes vs. Hayek (Cochrane)
Instead of fiscal stimulus, Cochrane advises us to rebuild credit markets:
Most fiscal stimulus arguments suffer from three basic fallacies.
First, if money is not going to be printed, it has to come from somewhere. ... Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending.
Second, investment is “spending” every bit as much as consumption. Fiscal stimulus advocates want money spent on consumption, not saved. ... But the economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift.
Third, people must ignore the fact that the government will raise future taxes to pay back the debt. If you know your taxes will go up in the future, the right thing to do with a stimulus check is to buy government bonds so you can pay those higher taxes. Now the net effect of fiscal stimulus is exactly zero, except to raise future tax distortions. The classic arguments for fiscal stimulus presume that the government can systematically fool people.
The first step is to stop chaotic interventions. Who would buy bank stock, lend long-term, or buy securitized debt, knowing that the government might rewrite the rules at any point? Second, the government must focus on the policy issue, which is making sure new savings can flow to new borrowing, not who takes the hit for old bad loans.
Paying New Employees to Quit
Nice way to ID future weak employees - the weakest ones are the ones most likely to take the offer and quit. This article also speculates that it provides the company an incentive to do a better job with initial screening of trainees to avoid paying out the quit bonus. I wonder if the evaluation/compensation of those who actually do the screening is tied to later payment of the quit bonus. If not, I don't think it's likely that it will affect their screening behavior.
Friday, February 6, 2009
Bob Hall speaking at Vandy
Thursday, February 19, 2009
Robert Hall, Stanford University
"The Financial Crisis and the Recession: What is Happening and What the Government Should Do"
Bob and his colleague Susan Woodward (former Chief Economist at SEC and HUD), maintain a blog on the financial crisis.
Is bigger government an engine of capitalist growth?
Obama is the Democrats' Great Communicator, our Ronald Reagan. It's fitting that his highest priority will be reversing the tax and spending priorities Reagan enshrined as a new American compact almost 30 years ago, and reviving the notion of government as an engine of capitalist growth -- not merely the safety net provider, but the catalyst for organizing our public resources around what makes the economy strong. We've been arguing at the margins during these last two years of pain: Government should regulate more, or less. Tax rates should be higher, or lower. But there's a dangerous civic illiteracy in our country about what the larger role of government in a modern economy is, or should be, and I don't think Obama will ultimately prevail if he doesn't start to take it on.I hope I am wrong about this:
"They're using the cover of the fiscal crisis to dramatically expand the reach and scope of government," said Luke Froeb, the William C. and Margaret W. Oehmig associate professor in entrepreneurship and free enterprise at Vanderbilt University. "It is shameful the debt legacy we are leaving on our kids. It is shameful."
It didn't work because it wasn't big enough?
Economists tend to divide into two camps on the question of Japan’s infrastructure spending: those, many of them Americans like Mr. Geithner, who think it did not go far enough; and those, many of them Japanese, who think it was a colossal waste.
Among ordinary Japanese, the spending is widely disparaged for having turned the nation into a public-works-based welfare state and making regional economies dependent on Tokyo for jobs. Much of the blame has fallen on the Liberal Democratic Party, which has long used government spending to grease rural vote-buying machines that help keep the party in power.
And what will we be leaving our children?
During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.
Thursday, February 5, 2009
What if we aren't all dead in the long run?
CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net. [The House bill] would have similar long-run effects, CBO said in a letter to Sen. Judd Gregg, New Hampshire Republican, who was tapped by Mr. Obama on Tuesday to be Commerce Secretary.UPDATE: one commentor reminds us that the CBO also estimates a short run increase in GDP:
CBO estimates that the Senate legislation would raise output by between 1.4 percent and 4.1 percent by the fourth quarter of 2009; by between 1.2 percent and 3.6 percent by the fourth quarter of 2010; and by between 0.4 percent and 1.2 percent by the fourth quarter of 2011.UDATE: The bigger long run risk is that Chinese and Japanese stop buying our bonds. When that happens, we will likely monetize the debt. Its not as if this hasn't happened before:
...in the late 1970s, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded the Keynesian theorists who believed then, as now, that federal spending "stimulus" would restore economic health.
Wednesday, February 4, 2009
Making the Rules Redmond Style
Why would a company sponsor legislation that would increase its costs of operation (leaving aside any sort of altruistic motive like saving the planet)? It might make sense if, in the absence of the legislation being sponsored, different legislation might be passed that would make the cost increase even greater. How about another explanation if that's not the case?
Thinking about a business in isolation makes it a bit difficult to understand a case like this. But, businesses don't operate in isolation. Sponsoring legislation like this might make sense if it imposes a greater cost on rivals than it does on the business in question. Given that the title of the Wired story is "The Plot to Kill Google," you can probably guess the punch line: the proposed legislation would be more costly to Google than to Microsoft. Remember: make the rules or your rivals will.
HT: Jesse Walker via Peter Klein at O&M
Tuesday, February 3, 2009
Give peace a chance
The European Union has warned of possible trade litigation against the US if Washington presses ahead with a Buy American provision in its forthcoming economic stimulus bill.EU officials have expressed concern that the requirement for companies to use US steel and manufacturing products in projects funded by the bill could encourage a wave of protectionist measures from other countries.UDPATE: The US heeds the lessons of history
John Bruton, the EU Ambassador to Washington, said that “history has shown us” where the closing of markets leads — a clear reference to the Depression of the 1930s, triggered by US protectionist laws.
Monday, February 2, 2009
How Jim Cooper ruined my lesson plan
- The multiplier is tiny
- It cannot be done quickly enough
- It is likely irreversible
- Congress stuffed the bill like a Turkey
- It is likely to start a protectionist trade war
- We have never been able to spend our way out of a recession
- Government bureaucrats, instead of consumers, decide where to spend our money
- Who pays for it?
Cooper, who has an unshakable appetite for unappetizing numbers, wishes more Americans were similarly eccentric and would read the 188-page 2008 Financial Report of the United States Government -- the only government document that calculates what deficit and debt numbers would be if the government practiced, as businesses must, accrual accounting.
Under such accounting, future outlays to which beneficiaries are entitled by existing law are acknowledged as expenditures before they are paid. Were the Social Security surplus sequestered for accounting purposes, reflecting the truth that it is already obligated, and were there similar treatment of the other entitlement programs' liabilities, the deficit for the fiscal year that ended Sept. 30 would have been $3 trillion rather than $454.8 billion. The report's numbers show that the true national debt is $56 trillion, not the widely reported $10 trillion.
Cooper is trying to make visible the true costs of our entitlement programs by forcing the Feds to use accrual accounting, that includes future liabilities.
Patterns of Random Sequences
If you want a better feel for what random sequences really look like, try generating one of your one using Mike Shor's random sequence applet.