Plan B, II

When we ran our Plan B contest last semester (choose the best country to live in while we await the decline and fall of the US empire), we never voted on a winner because our automated survey instrument broke down. But instead of voting, we should pick a winner from emigration patterns:

The Heritage Foundation suggests some more obvious choices in its 2009 Economic Freedom Index. Five English speaking — or at the very least English friendly — countries rank ahead of the United States (Hong Kong, Singapore, Australia, Ireland, and New Zealand). Right behind the U.S. is Canada, Denmark, Switzerland, the United Kingdom, and Chile. Should the U.S. continue its slouch towards socialism, all of these would be likely places for some of America’s best and brightest to land in the event of economic collapse.

It turns out that Costa Rica, one of the entries, doesn't look so good.

Costa Rica is ranked #46 on the Economic Freedom Index. Costa Rica already has national health care and is working towards being carbon neutral. While it has small government and lower taxes than the U.S., good luck opening a business or getting a hearing in court in a reasonable amount of time. Corruption is a big problem in Costa Rica, with Heritage proclaiming, “The government does not emphasize enforcement of anti-corruption laws, regulations, and penalties. Some foreign firms have complained of corruption in the administration of public tenders.”

If we zone for it, will they come?

Disturbed by the dearth of art cafes, book stores, and coffee shops, the Nashville Planning Commission is trying to get rid of used tire stores, pawn shops, and payday lenders.

..the zoning isn’t market-driven: On Gallatin Pike, the new zoning didn’t create a stampede of desired businesses [clamoring] to replace the title pawn stores and other undesirables.

This kind of command-and-control central planning seems to be making a comeback in Washington as well.

What do you do with a major in Cultural Anthropology?

Go to Iraq:

Human Terrain System [is] an attempt to bring cultural awareness to the military. When the United States is fighting counterinsurgencies in both Iraq and Afghanistan, such knowledge is priceless and indispensable. One has to win the population over, not kill them. Knowing the local customs is vital. Indeed, one of the lead advisers to Gen. David Petraeus was David Kilcullen, a former infantry-company commander with a Ph.D. in political anthropology.

If that doesn't work, I would advise enrolling in Vanderbilt's Summer Accelerator Program.

DISCLAIMER: I teach in the program.

Strangely timeless potest songs

Songwriter Bob Walkenhorst is making a comeback:

Give a man a free house and he’ll bust out the windows
Put his family on food stamps, now he’s a big spender
No food on the table and the bills ain’t paid
’cause he spent it on cigarettes and PGA
They’ll turn us all into beggars ’cause they’re easier to please
They’re feeding our people that government cheese
It’s the man in the White House, the man under the steeple
Passing out drugs to the American people.

NY encourages high income earners to move to TN

NY State plans new "temporary" income taxes, designed for the next three years:

The plan would raise $4 billion a year by creating two new tax brackets, the highest one affecting those who earn $500,000 or more. If approved by rank-and-file lawmakers in the Assembly and State Senate, the tax increases would be a major victory for unions and liberal advocacy groups and a signal of the new balance of power in Albany, where Democrats won control of both houses of the Legislature and the governor’s office in last year’s election.

Although the proposed tax has been called a “millionaires’ tax,” it would affect those with incomes starting at $300,000, who would be taxed at a rate of 7.85 percent. The highest bracket would carry a tax rate of 8.97 percent — the same as New Jersey’s current highest rate.

Tennessee has no income tax.

Stocks vs. Bonds: who wins?

In equilibrium, the risk premium that compensates investors for holding relatively risky stocks is about 2.5%. But, as the above graph of stock-bond returns shows, (from John Mauldin, Why Bother with Bonds), there are plenty of periods when bonds outperformed stocks. The period ending in 2008, is one such episode. Each of the horizontal lines denote periods where bonds outperformed stocks.

Related links:

• Market timers vs. asset allocators
• Jeremy Siegel, Stocks for the Long Run

Management Advice for Troubled Times

The latest issue of Business Week offers a series of articles on "breakthrough management ideas for a world in which the game will never be the same." One of the recurring themes is the need to move quickly.

John Chambers, Cisco CEO: "Without exception, all of my biggest mistakes occurred because I moved too slowly."

Ray Davis, CEO of regional bank, Umqua Holdings: "Standing still is how you kill the company."

What would happen if we let the banks go under?

New entrants would appear. Kroger now offers mortgages with your groceries

Loan Type	Rate	Points	APR* as of 03/24/2009
30 year fixed	4.875	0	4.914
15 year fixed	4.750	0	4.818
5/1 ARM	4.875	0	4.518
Jumbo 30 year fixed	5.625	0	5.637

Scotland is taking our best and brightest

From a serial entrepreneur who is moving his company to Scotland:

• We will reincorporate the company in Scotland- form a new Scottish entity and have it acquire 100% of the US entity.
• I will remain in the States, but we will pass all of the revenue through Scotland to avoid the higher US corporate taxes.
• The Scottish government has 35 'recruiters' on the ground in the States (10 in Boston, 5 in NYC, and 20 in Silicon Valley). Their purpose is to recruit entire companies or specific operations of existing companies to Scotland. They are doing a roaring business.
• Scotland has decided that they are going to create a knowledge-based workforce and economy. They have allocated a significant amount of grant money to attract companies to 'Silicon Glen'.
• We are qualified for $2+ million in grants. This is a prime reason for us to consider Scotland.
• Another reason is that Scotland's high tech expertise in display and voice recognition technology is ahead of the States. Both technologies are key to our product.
• Another reason is that the Scots allegedly have a much higher work ethic than the Americans do. I am extremely put off by the entitlement mentality that grips the upcoming generation of Amwerican workers. I don't want to hire any of them.
• Another reason is that the 'Card Check' legislation is very likely to pass. Moreover, the unions are planning to specifically target the high tech sector. I do not want to ever deal with that issue. It will kill many businesses - especially in the tech fields - where you have to be able to change strategy and direction quite quickly.
• Finally, our current administration is highly anti-business, which is the best reason for me not to bother starting a new company based in the States.

Wisdom from dead white guys

Winston Churchill:

“Socialism is a philosophy of failure, the creed of ignorance and the gospel of envy, its inherent value is the equal sharing of misery.”

Joseph Schumpeter (via former student John Tamny):

In his 1942 book, Capitalism, Socialism and Democracy, Schumpeter asked the essential question: “Can capitalism survive?” His unsettling answer was, “No. I do not think it can.” Schumpeter’s words were in no way meant to denigrate capitalism, instead he felt “its very success undermines the social institutions which protect it.”

...the commercial success wrought by the pursuit of profit has created an unproductive elite that lives off the very business profits that it regularly casts a skeptical eye on.

... Schumpeter was of course talking about a United States that he envisioned post World War II, but his fears then don’t stray too far from the concerns of many today. Indeed, he worried that as wars usually accrue to the power of the state, that heavy government spending “would likely evolve into total government control over investment.”

Protectionism begets discrimination

Good post on the zero-sum fallacy behind protectionism:

The Employ American Workers Act (a part of the stimulus bill) makes it difficult for companies helped by the federal bailout plan known as TARP to hire skilled immigrants.

Policies like these, and the discrimination that usually goes with them, are fueled by the mistaken theory that a job held by an immigrant is a job that cannot be held by an American. We will ultimately see the Employ American Workers Act as unjustified, just as we now regret the “marriage bars.”

The “marriage bar” is a discriminatory employment practice that was common years ago, even if it seems unfamiliar today. The marriage bar actually had a couple of versions: a “hire bar” in which a woman would not be hired if she were married, and a “retain bar” in which single female employees were fired when they married.

What can we learn from Sweden?

How to get rid of companies that produce stuff that no one wants:

Struggling for its own survival, G.M. has said it will completely pull out of Saab by the end of 2009, a course that Ms. Olofsson, the enterprise minister, described as tantamount to declaring “that they wash their hands of Saab and drop it into the laps of the Swedish taxpayers.”

She said: “We are very disappointed in G.M., but we are not prepared to risk taxpayers’ money. This is not a game of Monopoly.”

Why study econ?

In defense of a liberal arts education (via Greg Mankiw's blog):

Companies like to hire economics majors from liberal-arts colleges not because the students have been trained in business, but because they have a solid background in the liberal arts. What I hear from businesspeople is that they don't care what a job candidate has majored in. They want students who can think, communicate orally, write, and solve problems, and who are comfortable with quantitative analysis. They do not expect colleges to provide students with specific training in business skills.

Democrats vs. incentives, III

Treasury Secretary Geitner wants private sector help to buy the bad assets off the balance sheets of banks. But how much will we have to pay them to help? The recent attacks on incentive pay suggest that we will have to compensate companies for dealing with the government. And if the participating companies cannot use incentive pay, we might expect all their best people to leave.

Senior executives on both sides of the Atlantic on Friday warned of an exodus of talent from some of the biggest names in US finance, ...

“There are three big industries where the US has global leadership: financial services, media and technology. Introducing this 90 per cent tax is like taking one of those industries out the back and shooting it,” said a top Wall Street executive.

Small car demand collapses

Consumer demand for small cars reached a peak in the summer of 2008, coinciding with very high gasoline prices. Now that gas prices have fallen, so has demand for small cars.

Practically every small car in the market is stacked up at dealerships. At the end of February, Honda Motor Co. had 22,191 Fits on dealer lots -- enough to last 125 days at the current sales rate, according to Autodata Corp. In July, it had a nine-day supply, while the industry generally considers a 55- to 60-day supply healthy.

If expectations are rational, consumers should be looking ahead to the price of fuel over the lifetime of the automobile. That demand has collapsed so suddenly suggests either that consumers expect gas prices to stay low, i.e. that we will not recover quickly from the recession, or that expectations are not forward looking, and are instead driven by the current gas prices.

The Advantages of Falling Slightly Behind

An interesting study from a couple of Wharton professors looks at how the halftime score at basketball games predicts the ultimate winner of the game. As expected, teams trailing at halftime generally lower probabilities of winning the game. So, what makes the study interesting? The authors found that teams trailing by one point at halftime had a higher win probability than those leading by a point at half time. Two explanations could account for this - either slightly trailing teams pick up second half performance or slightly leading teams slack off.

Using some lab experiments, the authors found that individuals performing a task who were told they were slightly trailing tend to increase performance; the leaders showed no slacking off. Prospect theory, with its observation that people feel losses more than gains, can provide one explanation for why the trailers worked harder.

It appears that this phenomenon applies to individuals and teams. Does it apply to companies as well? If so, we would expect that companies slightly trailing their competitors to step up their performance.

Our Creditors

Here are the ten countries that own the most US treasuries as of December 2008. No wonder China is worried.

Will wages adjust to offset the new tax progressivity?

In equilibrium, we know that workers must be compensated for jobs that require higher levels of investment in human capital, like physicians. If not, people would exit these professions into those that require fewer investments. Likewise, if we increase the progressivity of the tax system, we should expect a compensating wage increase. Evidence that this happened in Canada in 1967

...our results suggest that the progressivity of the Canadian income tax system significantly affected wage settlements and that the implicit tax increases attributable to this progressivity were at least partially forward shifted into higher wage rates.

Is the US too big to fail?

If we aren't already, President Obama's budget will get us there soon. Our largest creditor (1 trillion)--the Chinese--are worried that we wont be able to pay them back:

"We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference following the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."...

Washington is counting on China to continue buying Treasuries to fund its massive stimulus package. Last month, visiting Secretary of State Hillary Rodham Clinton sought to reassure Beijing that government debt would remain a reliable investment....

"They are worried about forever-rising deficits, which may devalue Treasuries by pushing interest rates higher," said JP Morgan economist Frank Gong. "Inside China there has been a lot of debate about whether they should continue to buy Treasuries."

Once the Chinese stop buyinig treasuries, long term rates should increase.

Noteworthy blog

Matt Blinkley points me to Baseline Scenario, written by three econ. professors. Simple, clear (leftish?) commentary on the crash.

Quote of the day

From SC Governor Mark Stanford on turning down stimulus money:

"What you're doing is buying into the notion that if we just print some more money that we don't have and send it to different states, we'll create jobs," he said. "If that's the case, why isn't Zimbabwe a rich place?"

Zimbabwe is printing trillion dollar notes and its currency has an expiration date on it in an attempt to combat 80% unemployment.

God help Venezuela

Ever since Valley Forge, when George Washington put controls on the price of meat and found that the supply disappeared, politicians have had a hard time understanding why they markets react so negatively to government regulation. President Chavez is repeating George's mistake:

First, President Hugo Chavez announced that he had ordered troops to intervene in the country's rice production.

He accused rice producers of evading a law on controlled prices.

"They are making a mockery of the Venezuelan people," said Mr Chavez.

He said companies were refusing to produce sufficient quantities of standard white rice - which is subject to price regulations - and were producing flavoured varieties instead to avoid government controls.

'No such law'

Polar foods, one of those involved, said there was no law which obliged them to produce a certain quantity of basic white rice.

Within the day there was such a law. The government introduced quotas on 12 basic foods, including rice.

Walmart vs. Target Expansion Strategy

Check out FlowingData.com for a couple of really cool graphs that show the geographic expansion of Walmart and Target over the years. Aside from the fact that the technology is wicked cool, it's interesting to contrast the two expansion strategies.

Walmart tended to expand geographically out from Arkansas in a stepping-stone fashion, and its sphere of influence slowly expanded radially outward. Target, in contrast, established multiple beachheads across the country - it was more willing to open new stores far away from home. And, once located in that far-away area, it would open more stores in that area. (HT: Peter Klein)

Friday night smackdown: Stossel vs. Obama

Sponsored by Drew Carey & Reason:

In his next 20/20 special, John Stossel takes his shovel to "Bailouts, Big Spending, and Bull" with segments about the crackdown on medical marijuana, universal preschool, traffic congestion, eminent domain, border walls, and the myth of the struggling middle class—all inspired by Drew Carey's award-winning Reason.tv videos. Featuring a special appearance by Drew Carey himself.

10pm Eastern

Risk premia are way up

In September, Corporate borrowing costs have skyrocketed relative to Treasuries. The graph measures the spread of coporate borrowiing over Treasuries with the pre-payment risk removed from series. This is called the Option Adjusted Spread.

Who Wins with the New Housing Plan?

According to the WSJ, the plan rewards vice and penalizes virtue:

President Obama continues to insist that only "responsible families" will benefit from his foreclosure prevention program. Addressing Congress last week, Mr. Obama said his plan "won't help speculators or that neighbor down the street who bought a house he could never hope to afford." Sorry, Mr. President. It's becoming increasingly obvious that your plan is going to help tens of thousands of borrowers who put the "liar" into liar loans.

. . .

There is a moral hazard in rewarding bad decisions. But it's worse than that: The White House plan contains penalties for everyone else. The mortgage "cramdown," allowing bankruptcy judges to reduce the amount owed, can only make investors less willing to lend to future homebuyers..

Unemployment in historical perspective

From Woodward & Hall's blog.

Who benefits from class warfare?

SWHC=Smith & Wesson Holding Company
RGR=Sturm, Ruger & Co.
GSPC=S&P 500 index fund

Obama is not who we thought he was

David Brooks puts things into perspective:

But the Obama budget is more than just the sum of its parts. There is, entailed in it, a promiscuous unwillingness to set priorities and accept trade-offs. There is evidence of a party swept up in its own revolutionary fervor — caught up in the self-flattering belief that history has called upon it to solve all problems at once.

So programs are piled on top of each other and we wind up with a gargantuan $3.6 trillion budget. We end up with deficits that, when considered realistically, are $1 trillion a year and stretch as far as the eye can see. ...

The U.S. has never been a society riven by class resentment. Yet the Obama budget is predicated on a class divide. The president issued a read-my-lips pledge that no new burdens will fall on 95 percent of the American people. All the costs will be borne by the rich and all benefits redistributed downward.

The U.S. has always been a decentralized nation, skeptical of top-down planning. Yet, the current administration concentrates enormous power in Washington, while plan after plan emanates from a small group of understaffed experts.

The U.S. has always had vibrant neighborhood associations. But in its very first budget, the Obama administration raises the cost of charitable giving. It punishes civic activism and expands state intervention.

The U.S. has traditionally had a relatively limited central government. But federal spending as a share of G.D.P. is zooming from its modern norm of 20 percent to an unacknowledged level somewhere far beyond.

...In the past weeks, Democrats have legislated provisions to dilute welfare reform, restrict the inflow of skilled immigrants and gut a voucher program designed for poor students. It will be up to moderates to raise the alarms against these ideological outrages.

UPDATE: Obama is killing the stock market

The illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.

John Taylor at Vandy

The Department of Economics is pleased to announce that Professor John Taylor of Stanford University and the Hoover Institution will deliver the David Steine Memorial Lecture on Tuesday, March 10th from 4 to 5:30 PM in Wilson Hall 103. The title of Professor Tayor's talk is: "Getting Off Track: How Government Caused, Prolonged, and Worsened the Financial Crisis."

John Taylor served as senior economist on the President's Council of Economic Advisors from 1976-1977 and as a member of the President's Council of Economic Advisors from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001. The lecture will also be streamed live on this web site and will be archived for future viewing.

Iceland is a hedge fund

Iceland is interesting mainly because it is so closely associated with the inflating and bursting of the world's credit bubble:

it is Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power?

How did this happen?

For the past few years, some large number of Icelanders engaged in the same disastrous speculation. With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn’t afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising. “The fishing guys pretty much discovered the trade and made it huge,” says Magnus. “But they made so much money on it that the financial stuff eventually overwhelmed the fish.” They made so much money on it that the trade spread from the fishing guys to their friends.

It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders—especially young Icelanders—own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them. To the Range Rover problem there are two immediate solutions. One is to put it on a boat, ship it to Europe, and try to sell it for a currency that still has value. The other is set it on fire and collect the insurance.

Sometimes you measure your accomplishments by the enemies you make

By this account, our own Jim Cooper is doing pretty well, although we are hoping he moves up on Pelosi's list.

5. Rep. Jim Cooper (D-Tenn.). The fiscally conservative gadfly would have topped the list had he not reversed his first stimulus “no” by voting in favor of the final package.

Even so, the most outspoken of the Blue Dog Democrats is still on thin ice with leadership, thanks to his comment that he “actually got some quiet encouragement from the Obama folks” for initially bucking Pelosi on the stimulus. That required a hasty Obama-Pelosi cleanup effort that resulted in a Cooper clarification - although he continues to express dissatisfaction with what he sees as Pelosi’s top-down leadership style.

Market timers vs. asset allocators

Modern Portfolio Theory tells us to hold a balanced portfolio of stocks and bonds. If we want higher returns, we have to increase the portion of our portfolios devoted to risky stocks.

Jeremy Siegel takes this argument one step further and notes that if you have a longer time horizon, e.g., 20 years, there is no tradeoff between risk and return: holding bonds serves only to reduce return:

Stocks on the long term have returned 6.8% per year after inflation, whereas gold has returned -0.4% (i.e. failed to keep up with inflation) and bonds have returned 1.7%. The equity risk premium (excess return of stocks over bonds) has ranged between 0 to 11%, it was 3% in 2001^[8]also.

John Mauldin has a good column on the revenge of the market timers. He shows, in the table below, that it matters when you get into the market.

The implied prescription is to look at market fundamentals and enter the market only when stocks are relatively cheap (as Shiller's methodology currently says it is).

Next time, we won't be so easily duped

Martin Marietta and Vulcan Materials Company produce construction aggregates in the United States. When President Obama sold us on the $800B stimulus bill in December, it was mostly about bridges and roads, precisely the kinds of projects that would benefit the two companies. Consequently, their stock prices soared.

But by February, when it became clear that the stimulus contained only $30B for infrastructure, the stock prices told us what it was likely to accomplish.

Friedman can never be replaced

Uncle Milton famously predicted that the EU would not survive its first recession:

His theory is now being put to the test. A deep recession and a protracted credit crunch have munched their way across the eurozone, leaving the 16-nation currency bloc mired in crisis.

Economies are contracting at breakneck speed, social unrest - fuelled by soaring unemployment - is growing, and several member states have had their credit ratings downgraded. The possibility that at least one member of the zone will default on its debt in the coming months has alarmed economists and politicians alike.

There seem to be two big problems: (i) how to keep the PIGS (Portugal, Italy, Greece, Spain, and now Ireland) from a national default that would cause them to abandon their Euro; and (ii)

Some countries of Central Europe, like the Czech Republic and Poland, are doing relatively well. Others, like Hungary, Romania and the Baltic states, are in a state of near-meltdown. But only two newer members - tiny Slovenia and Slovakia - are protected by being inside the euro zone, and there was little support Sunday for changing the rules to allow more to join quickly.

Tobin Replacing Friedman?

Meet James Tobin, 1981 Nobel Prize winner and "inventor" of Tobin's Q.

After a three-decade run, the free-market philosophies of Friedman that shaped U.S. policy are being eclipsed by the pro- government ideas of Tobin, the late Yale economist and Nobel laureate who brought John Maynard Keynes into the modern era.

Tobin’s stamp is on the $787 billion stimulus signed by President Barack Obama, former students and colleagues say. His philosophies are influencing Austan Goolsbee, a former Tobin student advising Obama, and Ben S. Bernanke, head of the Federal Reserve. Unlike Friedman, Tobin provides guidance for today’s problems, said Paul Krugman, a Princeton University economist.

Atlas Shrugged vs. Audacity of Hope

If the economy keeps going the way it is, Ayn Rand will best the President:

Whenever governments intervene in the market, in short, readers rush to buy Rand’s book.

Heads, AIG wins; tails, the taxpayers lose.

Not only did AIG offer banks a way to make more risky bets,

How did banks get their risk measures low? It certainly wasn’t by owning less risky assets. Instead, they simply bought A.I.G.’s credit-default swaps. The swaps meant that the risk of loss was transferred to A.I.G., and the collateral triggers made the bank portfolios look absolutely risk-free. Which meant minimal capital requirements, which the banks all wanted so they could increase their leverage and buy yet more “risk-free” assets. This practice became especially rampant in Europe. That lack of capital is one of the reasons the European banks have been in such trouble since the crisis began.

But AIG didn't hedge any of their own bets:

At its peak, the A.I.G. credit-default business had a “notional value” of $450 billion, and as recently as September, it was still over $300 billion. (Notional value is the amount A.I.G. would owe if every one of its bets went to zero.) And unlike most Wall Street firms, it didn’t hedge its credit-default swaps; it bore the risk, which is what insurance companies do.

UPDATE: by propping up AIG, it looks like we are bailing out the European Banks.

Incentives and Security

This still doesn't seem right to me:

An employee of Whole Foods in Ann Arbor, Michigan, was fired in 2007 for apprehending a shoplifter. More specifically, he was fired for touching a customer, even though that customer had a backpack filled with stolen groceries and was running away with them....

Almost certainly, Whole Foods has a no-touching-the-customer policy because its attorneys recommended it. "No touching" is a security measure as well, but it's security against customer lawsuits. The cost of these lawsuits would be much, much greater than the $346 worth of groceries stolen in this instance. Even applied to suspected shoplifters, the policy makes sense: The cost of a lawsuit resulting from tackling an innocent shopper by mistake would be far greater than the cost of letting actual shoplifters get away. As perverse it may seem, the result is completely reasonable given the corporate incentives — Whole Foods wrote a corporate policy that benefited itself.

At least, it works as long as the police and other factors keep society’s shoplifter population down to a reasonable level.