Tuesday, November 30, 2010

Job interview tips, and mistakes

From Craig Newmark

Private property under attack in Venezuela

This is a fast moving train wreck.
Hugo Chávez, the country’s leftist president, has been on a nationalisation spree, seizing everything from steel companies and bottle makers to housing schemes. ...
Polls suggest that most Venezuelans disapprove of the nationalisations and firmly support private property. But Mr Chávez seems to be following the advice of Alan Woods, a Welsh Trotskyist who has become an informal adviser. Mr Woods, who is better known in Caracas than Cardiff, publicly urged the president to respond to his electoral setback by “accelerating the revolutionary process”, expropriating land, banks and the main industries. Venezuelans had better brace themselves for more nationalisation, scarcity and economic decline.

Incentives matter -- dump your sick employees into the govt. exchange

Marginal Revolution blogs that President Obama's health care bill gives employers incentives to offer healthcare plans that are designed to induce ONLY THE LEAST HEALTHY employees to opt for coverage on the exchange. Employers would find this profitable because:
(i) they would avoid any penalty under the "employer mandate,"
(ii) their health care costs would decrease substantially by virtue of reducing coverage and shedding high-cost employees,
(iii) high-cost employees would not be much worse off, as they could acquire coverage on the exchange with no medical underwriting or preexisting conditions.

Based on the plan designs I have seen, this looks like what employers are demanding from the insurance companies.

Incentives Matter - Professor Edition

Nice post on the Organization and Markets blog noting a recent study that looks at how professor research productivity responds to extrinsic incentives.

Monday, November 29, 2010

Save a balding, middle-aged, fat guy.

...by taxing his health care benefits.

Colleague Larry van Horn eats poorly and doesn't exercise to illustrate the moral hazard associated with subsidized health care. Nice video of Larry interviewed on the big problems of health care

Now Larry is blogging for Forbes.

Wednesday, November 24, 2010

The real meaning of Thanksgiving

John Stossel gives us another lesson that you won't learn in high school:

When the Pilgrims first settled the Plymouth Colony, they organized their farm economy along communal lines. The goal was to share everything equally, work and produce.
They nearly all starved.
Why? When people can get the same return with a small amount of effort as with a large amount, most people will make little effort. Plymouth settlers faked illness rather than working the common property. Some even stole, despite their Puritan convictions. Total production was too meager to support the population, and famine resulted. Some ate rats, dogs, horses and cats. This went on for two years.
"So as it well appeared that famine must still ensue the next year also, if not some way prevented," wrote Gov. William Bradford in his diary. The colonists, he said, "began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length after much debate of things, [I] (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. ... And so assigned to every family a parcel of land."
The people of Plymouth moved from socialism to private farming. The results were dramatic.
"This had very good success," Bradford wrote, "for it made all hands very industrious, so as much more corn was planted than otherwise would have been. ... By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many. ... "

Peter Klein has some commentary, as does the revisionist NY Times:

Tuesday, November 23, 2010

Elections have consequences: it is time to reduce the deficit

The proposal from the Chairman of the deficit reduction commission has the benefit of broadening the tax base, and reducing the marginal rates.  This is a huge step in the right direction.  Our current tax system is way too inefficient.
... the chairmen of President Obama’s deficit reduction commission, have taken at hard look at these tax expenditures — and they don’t like what they see. In their draft proposal, released earlier this month, they proposed doing away with tax expenditures, which together cost the Treasury over $1 trillion a year.

Such a drastic step would allow Mr. Bowles and Mr. Simpson to move the budget toward fiscal sustainability, while simultaneously reducing all income tax rates. Under their plan, the top tax rate would fall to 23 percent from the 35 percent in today’s law (and the 39.6 percent currently advocated by Democratic leadership).

I still don't like the term "sustainability" because it can mean almost anything. However, in this context, it almost makes sense.

Monday, November 22, 2010

You cannot stop the blunders of one government program...

...by putting another one on top of it.  Twelve minute interview of Richard Epstein, who helped me come out of the libertarian closet at the Univ. of Chicago.


Vice President Gore now thinks corn ethanol subsidies were a mistake:
"First generation ethanol I think was a mistake. The energy conversion ratios are at best very small. ...

He explained his own support for the original programme on his presidential ambitions.

"One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president."
If he had only read this blog.  Now can Senator Gore get President Obama to give up his addiction to ethanol?

---------------POST FROM TWO YEARS AGO-----------------------------

Tuesday, February 26, 2008

A tale of two senators

In this blog, we have attacked ethanol subsidies for their perverse effects (they encourage energy consumption--not conservation--and are worse for the environment), yet we have them because supporting them is the easiest way to win the Iowa caucuses. This is the traditional route that Senator Obama took through the primaries. Senator McCain took the road less traveled. From David Brooks column, "The Real McCain"
In 2000, McCain ran for president and reiterated his longstanding opposition to ethanol subsidies. Though it crippled his chances in Iowa, he argued that ethanol was a wasteful giveaway. A recent study in the journal Science has shown that when you take all impacts into consideration, ethanol consumption increases greenhouse gas emissions compared with regular gasoline. Unlike, say, Barack Obama, McCain still opposes ethanol subsidies.

DISCLOSURE: I am supporting McCain

Were Hayek and Von Mises right?

The Economist seems to think so:
A one-paragraph explanation of the Austrian theory of business cycles would run as follows. Interest rates are held at too low a level, creating a credit boom. Low financing costs persuade entrepreneurs to fund too many projects. Capital is misallocated into wasteful areas. When the bust comes the economy is stuck with the burden of excess capacity, which then takes years to clear up.

  • Were interest rates held too low? The case seems self-evident for Ireland and Spain, where the European Central Bank was setting a one-size-fits-all monetary policy. Many people would also argue that the Federal Reserve kept rates too low. Some lay the housing boom of 2003-06 at the Fed’s door,
  • Was capital misallocated? Again most people would accept that too many houses and apartments were built in Ireland and Spain, as well as individual American states like Florida and Nevada. In some places these dwellings may sit idle for a while, keeping downward pressure on property prices.
  • Economists who would not describe themselves as Austrian have reached conclusions that chime with Hayek. Carmen Reinhart and Kenneth Rogoff, in their book “This Time is Different”, argued that past financial crises have been followed by long periods of sluggish growth.

Thursday, November 18, 2010

Stocks for the long run

This article argues that diversification--buy, hold, and re-balance--is still the best way to make money.

The chart nearby illustrates how someone who invested $100,000 at the start of 2000 and, following my advice, used index funds, stayed the course and rebalanced once a year, would have seen that investment grow to $191,859 by the end of 2009. At the same time, someone buying only U.S. stocks would have seen that same investment decline to $93,717.

Wednesday, November 17, 2010

Core inflation is zero

So the cartoon mocking the Fed, a few posts ago, is not accurate on this issue.

Save the tigers

...by eating them, a policy option that only a consequentialist could love:
Chinese tiger-breeding centers have proposed creating tiger farms to cull the animals' body parts, thereby diminishing demand for the products and lessening the chances they might be hunted in the wild. The idea has met with resistance from environmental groups.

The option value of waiting

Tuesday, November 16, 2010

Revisiting Resale Price Maintenance

We've blogged previously on the issue of resale price maintenance and the US Supreme Court's 2007 decision that removed the blanket prohibition against retail price agreements between manufacturers and retailers.

According to today's Wall Street Journal, the losing party in that case is again asking the Court to review the issue. They claim that lower courts have gone too far in applying the 2007 ruling.

Friday, November 12, 2010

Do tourists pay more than locals III?

I am currently visiting Brazil to do some work on a competition issue. My host and I had to travel to Brasilia for some meetings. We landed and he called for a taxi. While waiting, I noticed a long line of taxis waiting for clients and asked why he needed to call. It turns out you get a discount of ~20% by if you know how to order a "radiotaxi," something with which most tourists will be unfamiliar.

Can you figure out how to make money here?

Zillow estimates home values, and then compiled a list of the ten cities with the most mortgages underwater, i.e. whose housing values are less than the debt owed on the house.

  1. 80% of Las Vegas mortgages are underwater
  2. 64% of Reno mortgages are underwater
  3. 64% of Orlando mortgages are underwater
  4. 57% of Stockton mortgages are underwater
It occurred to me that these underwater mortgages keep homeowners from moving to different cities and accepting new jobs because they don't have enough money to sell their homes.  This represents an inefficiency in that homeowners are stuck in less attractive jobs (lower valued uses).  

But as we emphasize in Chapter 2, inefficiency also implies opportunity.  If you can figure out a way to move these assets to higher valued uses you can make some money.  

Wednesday, November 10, 2010

Currency wars, animated

Do Real Estate Agents Get You Higher Prices?

Not according to this study by Aviv Nevo at Northwestern and François Ortalo-Magné at Wisconsin. They compared two types of sales in Madison, Wisconsin - ones using real estate agents and ones completed through FSOB Madison. Sellers represented by real estate agents did not realize higher prices; in fact, the prices were actually a bit lower. And this is before the commission is paid.

The one apparent benefit of using a real estate agent? Homes sold through agents tended to sell faster.

Tuesday, November 9, 2010

The effects of "Quantitative Easing"

This looks like a success:
Under QE the Fed buys long-term bonds with newly created money. This lowers long-term yields and chases investors into riskier, alternative investments. The real yield on ten-year, inflation-indexed Treasury bonds has fallen from 1.05% to 0.5%, a result of relatively flat nominal yields and a rise in expected inflation. The yield on their five-year cousins is negative (see Buttonwood). Share prices are up by 14% in the same period. Lower yields make the dollar less appealing: it has duly fallen by 5% against the Japanese yen, by 9% against the euro and by 5% on a trade-weighted basis. “You can declare QE to be a success already,” says one hedge-fund economist. “Whether this translates into real activity remains a question-mark. But the question of whether the mechanism would work has been answered.”

Whether this translates into real "stimulus" is still unknown. The reduced long term real rates are...

...supposed to boost growth through three channels. First, lower real yields spur borrowing and investment. This channel is bunged up: many households cannot borrow because their homes have fallen in value and because banks are less willing to lend. But the remaining two channels remain open. Higher share prices have raised household wealth by some $1.4 trillion, which will spur some spending. And the lower dollar should help trade. American factory purchasing managers reported a sharp jump in export orders in October and a drop in imports.

Monday, November 8, 2010

Management problems at the US Department of Agriculture

Historically, government agencies with very broad authority and mandates have fared poorly, like the FTC before 1980.  After abusing its broad rule-making authority, the agency was criticized as the "national nanny" and came within one vote of being shut down.  Then Congress narrowed its authority and the agency began using benefit-cost analysis to guide its law enforcement activities (see testimony by Howard Beales, a former colleague of mine, on the history of the FTC).

Today, the US government creates agencies with narrow mandates or goals so it is easier to monitor and control the agency.  And while this does make it easier to develop performance evaluation metrics for each agency, it also creates conflicts between agencies whose narrow mandates run at cross purposes to one another.

At the absurd end of the spectrum, incentive conflicts may occur between divisions of the same agency.  This weekend, the NY Times ran a funny story about how the Department of Agriculture's Dairy Management Program was encouraging cheese consumption, while the Department of Agriculture's anti-obesity drive was encouraging the opposite
Consider the Taco Bell steak quesadilla, with cheddar, pepper jack, mozzarella and a creamy sauce. “The item used an average of eight times more cheese than other items on their menu,” the Agriculture Department said in a report, extolling Dairy Management’s work — without mentioning that the quesadilla has more than three-quarters of the daily recommended level of saturated fat and sodium.

The first job of senior management in an organization is to ensure that its divisions do NOT work at cross purposes to one another.  It seems that the Department of Agriculture would benefit from reading Chapter 22 of our texbook, "How to get Divisions to work in the Best Interests of the Organization."

Friday, November 5, 2010

The yuan is appreciating against the dollar!

If a country like China tries to peg their nominal exchange rate against the dollar, they lose control over their own money supply.  To see why, imagine that an exporter sells a flat panel TV to a US retailer.  The US retailer pays in dollars, but the exporter's costs are in yuan, so he has to exchange dollars for yuan in order to pay for the TV.

If there is a net inflow of dollars to China (there are more Chinese exporters want to sell dollars to buy yuan than there are Chinese investors who want to sell yuan to buy dollars to invest in the US), then the Chinese central bank must "print" yuan to make up the difference.  In turn, this causes Chinese inflation, which raises the price of Chinese goods.  This means that a dollar, exchanged into yuan at the official (nominal) exchange rate can buy fewer Chinese goods.

In other words, the real value of the dollar has fallen, or the Chinese yuan has appreciated in real terms.  This will make Chinese exports more expensive, and US imports to China less expensive, which should help correct the trade imbalance.

Stossel on Vanderbilt

Compensate me for bearing risk of a Greek default (II)

Thursday, November 4, 2010

Shots fired in currency war against US

With so-called "quantitative easing" (funny video), the Fed is increasing the supply of longer term loans, which will bring down US interest rates.  This, in turn, encourages foreign borrowers to borrow in US currency, trade their dollars for, e.g., Brazilian real, and then invest in Brazil.

The increased demand causes the Brazilian real to appreciate relative to the dollar which makes Brazilian exports more expensive.  This leads to reduced demand for domestic labor in Brazil.  If wages cannot fall, then you get domestic unemployment.

Predictably, foreign governments are trying to stop this from happening:
China, Brazil and Germany on Thursday criticised the Fed’s action a day earlier, and a string of east Asian central banks said they were preparing measures to defend their economies against large capital inflows.

Guido Mantega, the Brazilian finance minister who was the first to warn of a “currency war”, said: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter.”

Wednesday, November 3, 2010

Unintended Consequences - pollution abatement edition

In 2007, new EPA regulations that mandate cleaner diesel engines took effect. The new engines reduce particle emissions by up to 98% over the previous generation and cut Nitrogen-oxide emissions in half.

But they increase the cost of trucks by $12,000, or about 10%. In addition, truckers (consumers of the new engines) expect higher maintenance costs and worse fuel mileage.

Predictably, the new regulations caused a big increase in demand for 2006 engines and trucks,
Truckers seeking to beat the price increases made 2006 a record year for truck makers. More than 373,000 big-rig trucks were built in North America, says Ken Vieth of A.C.T. Research, which follows truck sales trends. The tally easily topped the previous record of 330,000 trucks in 1999.
But next year, Vieth predicts "a production drought," with sales falling by more than 40% to 220,000 as trucking firms hold off buying to see how the new clean-diesel trucks perform. ...
The cost to truckers goes beyond new big-rig purchases, according to Moskowitz. The new fuel costs 5 cents to 10 cents more per gallon to refine and may produce lower fuel mileage. The new engines weigh more, further cutting mileage. "Over the long run, their increased costs will be passed on to the shippers and ultimately, the consumers," Moskowitz says.
Both the 2006 boom, and the 2007 bust were predictable with simple supply-demand analysis, especially since a similar regulatory change occurred in 2002.

For policy makers, this points out yet another disadvantage of acommand-and-control approach to clean air. Mandates from Washington have to be phased in, and this gives consumers an incentive to stockpile old, cheap, but dirty engines so they can use them in the future. Instead of telling producers what to produce, or consumers what to consume (by picking technologies, like ethanol, to subsidize), tax what you don't want (pollution) and let the market decide how best to reduce it.

Bottom line: How many economists does it take to screw in a light bulb? None--the market will do it.

Are US stocks over-valued?

Ask your investment advisor why stocks are above their long-run average P/E ratio.  If she obfuscates, don't trust her advice.

Supply and Demand Sugar Edition

QUESTION: Why has the price of sugar has jumped to a 30-year high?

ANSWER: Brazilian harvest has tailed off sharply, hardening expectations of a shortage.

Supply and Demand Cotton Edition

Cotton prices are up about 80% this year. Here's a chart of the "A" Index from January 2009 to October of 2010. The index is a proxy for the world price of cotton and is available here.

What's driving the price increases:
Cotton prices have been driven higher by demand from developing countries, notably China and India, where rising wealth is boosting consumption patterns. Mother Nature is also to blame, with the deadly floods in Pakistan and heavy rains in China damaging many crops and limiting cotton supply.

Monday, November 1, 2010

Small Businesses Are NOT the Engine of Job Growth

Earlier this year, while proposing a $30 Billion Small Business Lending Fund, the president said:
"This will help small banks do even more of what our economy needs – and that's ensure that small businesses are once again the engine of job growth in America."

To be fair, this has been the mantra for Republicans as well as Democrats. But it is wrong. In the most comprehensive study to date, Haltiwanger, Jarmin and Miranda use census data to conclude:
"... our main finding is that once we control for firm age there is no systematic relationship between firm size and growth."

I try to remain open to arguments that the SBA is not just another expensive boondoggle and that politicians are not just pandering to contributors and voters, but it is becoming increasingly difficult.

How do we align the incentives of government employees with the goals of taxpayers?

Not, as Michael Barone has opined, by giving labor unions the ability "to elect [their] own boss."

What would FDR have thought about this?
"The process of collective bargaining, as usually understood, cannot be transplanted into the public service," he said in the 1930s. A public employee strike, he said, "looking toward the paralysis of government by those who have sworn to support it, is unthinkable and intolerable."

...The problem is that, as Roosevelt understood, public employee unions' interests are directly the opposite of those of taxpayers. Public employee unions want government to be more expensive and government employees to be less accountable.