If you pay people to be unemployed,

... you get more unemployment. Robert Barro estimates that the unemployment rate would now be at 6.8%, instead of 9.5%, if jobless benefits hadn't been extended to 99 weeks.

The unemployment-insurance program involves a balance between compassion—providing for persons temporarily without work—and efficiency. The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.

Will Demand for Toast and Muffins Increase?

The cost of bagels is going up in New York:

New York State tax officials are enforcing a sales tax for sliced or prepared bagels (with cream cheese or other toppings), along with whole bagels eaten in the store, according to the state Department of Taxation and Finance.

Whole bagels sold for takeout are not subject to sales tax, but "any handling or preparation at the shop turns it into a taxable event," says Brad Maione, a spokesperson for the DTF.

Although Maione says the sales tax is not a new provision and that the stepped up enforcement is due to better technology, bagel-store owners say the tax was news to them.

HT: Mike Piana

Home Sales and Labor Mobility

The inability of people to sell their houses impedes labor mobility

On a national level, this phenomenon is hurting the efficiency of the labor market, says real estate professor Joe Gyourko at the Wharton School at the University of Pennsylvania. With these constraints, employers and employees aren't finding their best match.

"Outside of outright foreclosure itself and the loss of wealth, it's probably the most important impact of overleveraging the housing market that we're going to have in this cycle," Gyourko says.

Some parts of the country — namely the East and West Coast markets — are likely to recover more quickly. But not everyone will be able to wait for home prices to recover and continue to forgo better jobs. In other words: At some point, people will abandon their houses.

Bureaucrats run amock

We need some ideas on how to better align the incentives of the Forest Service with the will of the people.

Over the decades an obvious contradiction has emerged between preservation and access. As the Forest Service, the National Park Service and the Bureau of Land Management — each of which claims jurisdiction over different wilderness areas — adopted stricter interpretations of the act, they forbade signs, baby strollers, certain climbing tools and carts that hunters use to carry game.

As a result, the agencies have made these supposedly open recreational areas inaccessible and even dangerous, putting themselves in opposition to healthy and environmentally sound human-powered activities, the very thing Congress intended the Wilderness Act to promote.

...The agencies have even taken on Capitol Hill: in 1980 Congress authorized bicycling in Montana’s Rattlesnake Wilderness, but the Forest Service refused to allow it.

Why is the government erecting barriers to competition?

Because funeral directors have more political clout than monks:

Five years ago, Hurricane Katrina gave the Benedictine monks at St. Joseph Abbey a new calling.

After the storm pummeled much of a pine forest they had long relied on for timber and income, the monks hatched a fresh plan: They would hand-craft and sell caskets.

But now, local funeral directors are trying to put a lid on the monks' activities. The state funeral regulatory board, dominated by industry members, is enforcing a Louisiana law that makes it a crime for anyone but a licensed parlor to sell "funeral merchandise." The morticians are serious. Violators such as the monks can land in jail for up to 180 days.

What do you learn when you sell a painting?

That you didn't charge enough:

In 2008, the estate of a Canadian woman, Lorette Jolles Shefner, filed a lawsuit in U.S. district court in New York against Maurice Tuchman and Esti Dunow, two experts on the French painter Chaim Soutine, and the National Gallery of Art in Washington. The estate claimed the experts had misled Ms. Shefner into selling them a 1923 Soutine painting, titled "Piece of Beef," for $1 million in 2004, and then resold it to the museum a few months later for $2 million. As part of a settlement, the National Gallery sold the painting back to the now-deceased woman's estate, and the two experts paid the estate $210,000 without admitting wrongdoing.

The "Tells" of Deceptive Executives

The Economist reports on a new study by Stanford's David Larcker and Anastasia Zakolyukina, who analysed conference call transcripts of around 30,000 CEOs and CFOs between 2003 and 2007. They investigated the "tells" of executives whose companies had later financial restatements or serious accounting problems.

Deceptive bosses, it transpires, tend to make more references to general knowledge (“as you know…”), and refer less to shareholder value (perhaps to minimise the risk of a lawsuit, the authors hypothesise). They also use fewer “non-extreme positive emotion words”. That is, instead of describing something as “good”, they call it “fantastic”. The aim is to “sound more persuasive” while talking horsefeathers.

When they are lying, bosses avoid the word “I”, opting instead for the third person. They use fewer “hesitation words”, such as “um” and “er”, suggesting that they may have been coached in their deception. As with Mr Skilling’s “asshole”, more frequent use of swear words indicates deception. These results were significant, and arguably would have been even stronger had the authors been able to distinguish between executives who knowingly misled and those who did so unwittingly.

What happens when you destroy 5 million used cars?

This was the supply decrease caused by "cash for clunkers."  Predictably, the supply decrease has pushed prices of used cars higher. 

The used car models jumping the most in price include mid-size SUVs and mini-vans designed to carry around families.

Used Cadillac Escalades are almost 36% more.

Chevy Suburbans jumped 34% in price.

Dodge Grand Caravans are also seeing a 34% increase.

BMW X5 is 33% higher.

An Acura MDX will run you 29% more.

Sunk-cost fallacy in real estate

In the post below this one, we show that the housing market can have excess supply.  This post shows that it is due to the reluctance of homeowners to sell at a loss, a version of the sunk cost fallacy.

Two homeowners, with identical houses, will list the houses at different prices, depending on what they paid for the house because of what psychologists call "loss aversion." Unfortunately for these loss-averse sellers, buyers don't suffer from similar delusions,

Properties listed above the market price just sat there. In the Boston market over all, sellers listed their properties for an average of 35 percent above the expected sale price, and less than 30 percent of the properties sold in fewer than 180 days. In other words, much of the market went into a deep freeze as many people held out for market prices that no one would reasonably pay.

Note that this reluctance is similar to the  reluctance of businesses to pull the plug.

Housing market has excess supply

For perishable items, like flowers and hotel rooms, price will adjust so that quantity demanded equals quantity supplied.  Excess supply will lead to lower prices which will reduce the number of sellers and increase the number of buyers.  Price will keep falling until the market "clears," when the number of buyers equals the number of sellers.

For a durable good like housing, sellers have the option of holding onto inventory, in the hope that price will increase.  For this reason, markets need not clear instantaneously, as the above graph demonstrates, taken from Calculated Risk.  The blue line is the excess supply, computed as the number of months (above 12) it will take to sell off the houses currently listed for sale.  The last time it climbed that high, housing prices eventually fell.  Th black line denotes the monthly change in housing prices.

Is a double dip recession likely?

Nashville's own Merle Hazard poses the question, and Robert Shiller tries to answer it.  Don Marron thinks that the steep yield curve suggests a double dip recession is unlikely.

Why Don't Fishers Make More Money?

I noticed this post from the NYT economix blog that listed the most dangerous jobs in America. The most dangerous job was "fishers and related fishing workers" with a fatal work injury rate of 200 per 100,000 full-time equivalent workers (the second highest rate was logging workers with a rate of 61.8). My expectation was that pay to fishers would reflect this higher danger, but the data don't appear to support that. Here are median hourly pay rates from the Bureau of Labor Statistics along with the fatal injury work rate for five of the categories:

Fishers and related fishing workers	$11.34	200
Logging workers	$16.56	61.8
Roofers	$16.33	34.7
Structural iron and steel workers	$21.40	30.3
Construction laborers	$14.01	18.3

So how come fishers don't make more money?

States to avoid if you are going to make a lot of money.

From TaxProf:  Highest State Income Taxes

1. Hawaii:  11% (income over $400,000 (couple), $200,000 (single))
2. Oregon:  11% (income over $500,000 (couple), $250,000 (single))
3. California: 10.55% (income over $1 million)
4. Rhode Island:  9.9% (income over $373,650)
5. Iowa:  8.98% (income over $64,261)
6. New Jersey  8.97% (income over $500,000)
7. New York:  8.97% (income over $500,000)
8. Vermont:  8.95% (income over $373,650)
9. Maine:  8.5% (income over $39,549 (couple), $19,749 (single))
10. Washington, D.C.:  8.5% (income over $40,000)

Which hospital mergers eliminate competition?

Nearly 3,000 of the 5800 US hospitals changed owners from 1994 through 2009.  Some were involve in mergers that eliminated competition:

Last November, Claire Zvanski, a San Francisco parking administrator and commissioner of the city-employees’ health insurance fund, proposed dropping Sutter hospitals from the plan offered to the city’s 110,000 workers. Zvanski said she hoped dumping Sutter would cut costs and curb an expected rate increase from Blue Shield.

Her proposal stirred heated protest from plan members at commission meetings, who said they would have to drive 30 miles to find a non-Sutter hospital. Under pressure, Zvanski tabled the idea.

On July 1, the city, to cover rising costs, raised health-care contributions from employees by 13 percent -- to $6,552 a year for a firefighter with two or more dependents. It doubled co-payments to $100 for emergency-room and outpatient services and $200 for hospital stays.

“Sutter really has us over a barrel, I hate to admit it,” said Larry Barsetti, a retired police lieutenant who supported Zvanski’s proposal. His premiums went up $100 on July 1, to $10,188 a year -- more than double what he paid upon retiring in 2003. “We’re getting gouged,” Barsetti said.

Sutter has held price increases to single digits in recent years, Gleeson said. “Still,” he added, “we know we have a responsibility to make sure our services are affordable and we’re working to do so.”

What is a "debt constant?"

If you invest in an asset that loses its value after some period (like designing a new model that will become obsolete after 7 years), you can account for this loss in value by computing the Net Present Value of the investment over its lifetime.  For example, if your cost of capital is 10%, and a new model design requires a $400 million initial investment, you would discount the future profit over the next seven years using a 10% cost of capital, and invest in the project if, and only if, the Net Present Value of the future profit is bigger than the $400 million design cost.

If you want to use a break-even short cut, however, you can adjust your cost of  capital to account for the finite life of the investment by using a debt constant  = r/ (1 - (1 / (1 + r) ^ n)), where r is the cost of capital and n is the number of years before the investment loses its value.

For example, if the investment loses its value after one period, then the debt constant is 110%, which makes intuitive sense.  Only an investment that pays 110% next period will cover the initial investment plus the 10% cost of capital.

For an investment that loses its value after 7 years, the debt constant falls to 20.5%, which means that the investment has to return at least 20.5% each year to cover the 10% cost of capital.

For an investment that loses its value after 30 years, the debt constant falls to 10.6%, which means that the investment has to return at least 10.6% each year to cover the 10% cost of capital.

With a debt constant, you can use break-even analysis to determine whether you are going to sell enough to cover your cost of capital.  But use the debt constant, not the cost of capital, when computing your annual fixed costs.

"All You Can Jet" with JetBlue

Fly as much as you want for a flat fee on JetBlue from Sep 7 to Oct 6:

JetBlue, which pioneered the fare concept last year with its "All You Can Jet" pass, is offering fliers two options this year. The most flexible — which costs $699, $100 more than last year — lets customers book a seat on any available flight from Sept. 7 to Oct. 6. For $499, customers can fly any day but Friday and Sunday to any of its 61 destinations.

Sun Country, a small airline operating out of Minneapolis St. Paul, is offering a similar promotion.

Bubble-ology talk: "What the $#%@ is going on?"

Talk given August, 2010 on Bubble-ology

Does this reduce the value of the marriage contract?

Divorce is costly to the parties getting divorced, in part, to make it less likely that parties will engage in opportunistic behavior ("I gave  him he best years of my life and he traded me in for a younger model.")  Will divorce insurance weaken the incentives to invest in relationship-specific assets, the kind of investments that differentiate marriage from a series of meaningless spot market transactions?

The casualty insurance is designed to provide financial assistance in the form of cash to cover the costs of a divorce, such as legal proceedings or setting up a new apartment or house. It is sold in “units of protection.” Each unit costs $15.99 per month and provides $1,250 in coverage. So, if you bought 10 units, your initial coverage would be $12,500 and you’d be paying $15.99 per month for each of those units. In addition, every year, the company adds $250 in coverage for each unit.

Then, if you get divorced and your policy has matured (see below for the maturation rules), you would send WedLock proof of your divorce. In return, you’d receive a lump sum of cash equivalent to the amount of coverage you had purchased.

UK Hay Shortages

Two weather-related factors have resulted in a seriously reduced supply of hay in the UK. A lot of snow over the last winter meant less grazing and farmers having to feed using stored hay supplies. Then the first six months of this year have been abnormally dry, resulting in poor growing conditions. Supplies are down about a fifth, and you can guess what's happened with prices. Up over 40% from around £3 to about £5 per bale.

Betting on Your Grades

Feeling confident about upcoming classes? Want to put a little money on that? If you are a student at one of 36 campuses in the United States, you can place a wager on your academic performance with Ultrinsic. According to a Huffington Post article, here's how it works:

A student registers, uploads his or her schedule and gives Ultrinsic access to official school records. The New York-based site then calculates odds based on the student's college history and any information it can dig up on the difficulty of each class, the topic and other factors. The student decides how much to wager up to a cap that starts at $25 and increases with use.

Students can also purchase Course Insurance and Semester Insurance, which pay for bad grades.

QUESTION: How many economists does it take to accurately pick industrial winners?

ANSWER:  None, the market will do it.

One of the unfortunate side effects of stimulus spending is that the government must decide where to spend.  The list of mistakes is long, but apparently soon forgotten:

the record shows, again and again, that industrial policy doesn’t work. The hall of infamy is filled with costly failures like Minitel (a dead-end French national communications network long since overtaken by the internet) and British Leyland (a nationalised car company). However many new justifications are invented for the government to pick winners, and coddle losers, it will remain a bad old idea. Thanks to globalisation and the rise of the information economy, new ideas move to market faster than ever before. No bureaucrat could have predicted the success of Nestlé’s Nespresso coffee-capsule system—just as none foresaw that utility vehicles, vacuum cleaners and tufted carpets (to cite examples noted by Charles Schultze, an American opponent of state planning) would have been some of America’s fastest-growing industries in the 1970s. Officials ignore the potential for innovation in consumer products or services and get seduced by the hype of voguish high-tech sectors.

The universal race to create green jobs is the latest example. Led by China and America, support for green tech is rapidly becoming one of the biggest industrial-policy efforts ever. Spain, blinded by visions of a solar future, subsidised the industry so lavishly that in 2008 the country accounted for two-fifths of the world’s new solar-power installations by wattage. This week it slashed its subsidies, but still has a bill of billions.

Will Republicans win control of the House?

Intrade puts the probability at 60%.

Why can't auto manufacturers sell direct over the Internet?

Currently, GM's dealer network adds about 30% to the price of a new car.   In 2008, GM experimented with a direct sales alternative, a build-to-order sales model in Brazil for its Chevrolet Celta.  This kind of experimentation is unlikely in the US:

... direct manufacturer auto sales are prohibited in almost every state by franchise laws requiring that new cars be sold only by dealers. These bans on direct manufacturer sales are part of a broad array of state laws that bar manufacturer ownership of dealers and regulate entry and exit of dealers through territorial restrictions and provisions on dealer termination. Analysis of the economic effects of these laws has led some to conclude that they harm consumers and should be eliminated.⁽⁵⁾ ...– state laws banning direct manufacturer sales, since they may [also] be curtailing development of a more cost-effective method of auto distribution.⁽⁶⁾

So you want to buy a Chevy Volt

Due to heavy demand, some dealers are marking up the retail price to $53K, well above the MSRP of only $41K.

This is a classic example of what economists call "double marginalization" or the "double markup" problem. It can also be characterized as a prisoners' dilemma between firms producing complementary pdocuts, i.e., manufacturers and dealers.  If manufacturers were allowed to control retail pricing, or could operate their own dealerships, these double markups would disappear. 

What happened to California?

The "old" progressive coalition of pro-growth Democrats gave way to the "new" progressive coalition consisting of labor unions, anti-growth "greens," and minorities and liberals, who demanded more social spending. The result was a switch from pro-growth infrastructure investment to anti-growth tax increases and public sector expansion:

“Jerry” Brown, Jr., who took office in 1975, ... scuttled infrastructure spending, in large part because of his opposition to growth and concern for the environment. Encouraged by “reforms” backed by Brown—such as the 1978 Dill Act, which legalized collective bargaining for them—the public-employee unions became the best-organized political force in California and currently dominate Democrats in the legislature (see “The Beholden State,” Spring 2010). According to the unions, public funds should be spent on inflating workers’ salaries and pensions—or else on expanding social services, often provided by public employees—and not on infrastructure or higher education, which is why Brown famously opposed new freeway construction and water projects and even tried to rein in the state’s university system.

DISCLAIMER: I voted for Jerry Brown when he ran for President. I can say only that I was young and confused.

Can those who teach also do?

Gary Loveman is a former econ professor who was hired by Harrah's to run the company after doing some consulting for them.  He used the tools of statistics to  identify his most valuable customers

First he considers the most basic set of probabilities, gender and age, since females are more regular gamblers than males and older women are the most lucrative demographic of all. Then he factors in where we live, what we do, how much we make, and, most important, how we wager and what we play when we come to one of his casinos. From those details, Loveman can divine to a remarkably accurate degree how much you, or the set of probabilities you represent, will be worth to Harrah’s over the course of your lifetime.   

He then created a customer loyalty program to encourage repeat business, and then went on an acquisitions spree to give his best customers more options to choose from.  

Since taking over as CEO in 2003, Loveman, 50, has relied on the numbers to build Harrah’s from a regional operator of 15 casinos to one with 39 in the U.S. and 13 more overseas.

This is a (rare?) example of an extremely cohesive strategies, with an easily articulated justification for his acquisitions (mergers).

Finally

Colorado reduced the raise that people who are already retired get in their pension checks each year.

This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.

Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. “We have to take this on, if there is any way of bringing fiscal sanity to our children,” said former Gov. Richard Lamm of Colorado, a Democrat. “The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010.”

8 standard interview questions

Be prepared to answer these:

1. How about those Yankees?
   
2. If I called three people who have worked with you, how would they describe you?
   
3. What makes you stand out from others?
   
4. Tell me about a time when you initiated a project that resulted in increased productivity
   
5. What's the toughest feedback you've ever received and how did you learn from it?
   
6. When have you been most satisfied in your career?
   
7. If you were in this job tomorrow, what are the first things you would do and in what priority?
   
8. Do you have any questions?
   

PBS special on the Greek crisis

Why do developing countries recover from crises faster than developed ones?

Because their wages fall faster:

...when it comes to banking crises, the emerging markets, particularly those in Asia, seem to do better in terms of unemployment than do the advanced economies. While there are well-known data issues in comparing unemployment rates across countries, the relatively poor performance in advanced countries suggests the possibility that greater (downward) wage flexibility in emerging markets may help cushion employment during periods of severe economic distress. The gaps in the social safety net in emerging market economies, when compared to industrial ones, presumably also make workers more anxious to avoid becoming unemployed.

One way to understand Keynes macro model is to think about what happens in the labor market when wages are "sticky," and do not fall following a decline in labor demand.  If wages do not adjust, you have involuntary unemployment, and only an increase in labor demand (brought about by an increase in government "stimulus") can bring unemployment back up.

Of course, this "delays" the pain.  Neoclassical economists implicitly want to wait for wages and prices to adjust.  Rogoff's results says that things might be over more quickly if they did.

Geography of Billionaires

From Visualizing Economics:

What causes the wealth and poverty of nations?

Italy provides a fascinating case study. The country has an almost pathological fear of competition, and uses government enforced laws to prevent it.

...Cabs are relatively scarce in Milan, especially at 5 a.m., when [an econ professor] wanted to head to the airport, so he called a company at 4:30 to schedule a pickup. But when he climbed into the cab half an hour later, he discovered that the meter had been running for more than 20 minutes, because the taxi driver had arrived soon after the call and started charging for his time. Allowed by the rules, but to Mr. Giavazzi, utterly unfair.

“So it was 20 euros before we started the trip to the airport,” recalls Mr. Giavazzi, who is an economics professor at Bocconi University. “I said, ‘This is impossible.’ ”

After Professor Giavazzi later wrote an op-ed article, the taxi guild organized protests that had taxis driving around his house, honking their horns at night.  These guilds drive up costs throughout the economy:

“This is a country with a lot of rents,” says Professor Giavazzi, sitting in his office one recent afternoon, using the economists’ term for excess profits that flow to a business because of a lack of competition. “You need a notary public, it’s like 1,000 euros before you even open your mouth. If you’re a notary public in this country, you live like a king.”

THE protectionist impulses of the guilds are mimicked throughout the Italian labor market. The rules are different for small companies, but in effect, people with a full-time job in a company with more than 18 workers have what amounts to tenure, even if they don’t belong to a union. This makes managers reluctant to hire, especially in a downturn. You are stuck with new employees in perpetuity, whether they’re good or not. 

So how does the country survive?  By evading the taxes and regulations.  Economists estimate that 25% of the economy is in the so called "black market."