Saturday, August 30, 2014

Why are physicians so unhappy?

After Medicare was introduced in 1965 as a social safety net for the elderly, doctors' salaries actually increased as more people sought medical care. In 1940, in inflation-adjusted 2010 dollars, the mean income for U.S. physicians was about $50,000. By 1970, it was close to $250,000—nearly six times the median household income. 
But as doctors profited, they were increasingly perceived as bilking the system. Year after year, health-care spending grew faster than the U.S. economy as a whole. 
Meanwhile, reports of waste and fraud were rampant. A congressional investigation found that in 1974, surgeons performed 2.4 million unnecessary operations, costing nearly $4 billion and resulting in nearly 12,000 deaths. In 1969, the president of the New Haven County Medical Society warned his colleagues "to quit strangling the goose that can lay those golden eggs." 
If doctors were mismanaging their patients' care, someone else would have to manage that care for them. Beginning in 1970, health maintenance organizations, or HMOs, were championed to promote a new kind of health-care delivery built around price controls and fixed payments. Unlike with Medicare or private insurance, doctors themselves would be held responsible for excess spending. Other novel mechanisms were introduced to curtail health outlays, including greater cost-sharing by patients and insurer reviews of the necessity of medical services. That ushered in the era of HMOs.

Thursday, August 28, 2014

Is the stock market over-valued?

Two rival schools of thought:

One camp argues that the market is dangerously overvalued. The so-called CAPE ratio—the price-earnings multiple for the market based on cyclically adjusted earnings averaged over the past 10 years—stands at over 25, well above its long-run average of about 15. Today's CAPE has been exceeded only during the market peaks of 1929, early 2000 and 2007. 
Another group of forecasters are convinced that stocks are reasonably valued. The main competitors for stocks in individual and institutional portfolios are bonds. And yields on fixed-income securities are at all-time lows. Short-term interest rates are essentially zero, and the yield on the 10-year U.S. Treasury bond is only 2.4%. Investors seeking a reasonable rate of return have few places to go other than equities. This camp believes equities are a particularly attractive option in the menu offered by today's capital markets.
Burton Malkiel, author of "A Random Walk Down Wall Street" thinks there is merit to both camps:

If we add three or four percentage points to the current low Treasury yield, we still get a low discount rate that can justify high stock prices. And today's low interest rates may persist. The world is likely to experience a long period of abundant productive and labor capacity with attendant slow growth, along with low interest rates. 
While continued low rates can justify high stock prices, the CAPE followers are correct as well. Long-run equity returns from today's price levels are likely to be considerably lower than their 10% long-run average.

He recommends diversifying, not trying to time the market.  He seems like a buy and hold kind of guy.  

Wednesday, August 27, 2014

Tuesday, August 26, 2014

Weaker takeover defenses lead to more takeovers, but ...


Does this benefit shareholders?  On the one hand, weaker takeover defenses expose the companies to the threat of takeover which should force management to maximize shareholder value.  

However, when the high-value acquirer comes knocking, it doesn't need to pay as much to acquire the company.  Remember that the alternatives to agreement determine the terms of agreement and by weakening takeover defenses, the target firm has a worse outside alternative.  

What you major in is more important than where you go to school

Planet Money discovers compensating wage differentials:
Michael Gardner just graduated from City College in New York with a degree in psychology. He applied for more than 100 jobs, had trouble getting interviews and worked at Home Depot to make ends meet. ... 
Gardner just got a job earning $36,000 a year as a case worker — and he feels lucky to have it. "I came into the school knowing where I want to go and what I wanted to do," he said. "Honestly, I don't mind the money. It's more of a fulfilling thing for me."

Meanwhile, Engineers make about 3 times as much.  Now some of this is selection bias (different people choose Engineering vs. Psychology, but some is due to the causal effect of the different majors.

Monday, August 25, 2014

Is Argentina going to devalue the Peso?

The gap between the official exchange rate (9 Pesos/dollar) and the unoffiicial rate (14 Pesos/dollar) suggests that it will.  The Financial Times reports
The government’s unorthodox economic management came under further scrutiny on Thursday when beef exports were suspended to combat inflation, despite dollar shortages.

Saturday, August 23, 2014

Thursday, August 21, 2014

REPOST: America's top chef uses marginal analysis

America's top chef uses marginal analysis

Alinea, which opened in 2005, was named the best restaurant in America by Gourmet Magazine in 2006. The restaurant's co-founder and head chef, Grant Achatz, said his 23-course meal is motivated by what any econ student would recognize as marginal analysis:

So there's something that we call the law of diminishing returns in our cooking. That's why the steak is only two ounces, because by your fifth bite you're really, you're done. You're done with that steak. You know what it's going to taste like. The actual flavor starts to deaden on the palate.

If we were to make you take 10 more bites, by the time you got to bite 15, the steak's just not that compelling anymore. So if we have a series of 23 small courses, where it's a burst of flavor on the palate, and then you move on to something completely different and then completely different, that helps us set up a more exciting meal, and it's something that is easier to kind of be compelled to go through a 23-course menu.

RESPOST: for those of you who get queasy during economics class

Economists are really good at figuring out the consequences of various policies, like selling pollution permits.  By placing a price on pollution, you also create an incentive to reduce it.  If the policy goal is less pollution, this is one of the best ways to reach it.

This kind of analysis leads naturally to the moral ethic of consequentialism, where a policy is judged "good" if its consequences are good, i.e., the ends justify the means.

So why does this rub so many people the wrong way?  Perhaps the biggest objection to consequentialism is that by using markets to allocate goods and services, we turn personal relationships based on love or affection into arms-length commercial relationships based on the pursuit of profit.  Philosophers call this "commodification."

This can make a difference if, for example, the "means" of trading pollution permits, changes how we feel about the "ends" of reducing pollution.  Specifically, by allowing people to trade pollution permits, we may reduce the stigma of pollution, and make it more acceptable.

So, if some of you get queasy during economic class, you are not alone:
What Money Can’t Buy – which must surely be one of the most important exercises in public philosophy in many years – examines a wide variety of cases in which goods that in the past were believed to be outside the market have been turned into commodities. Surrogate motherhood, paying others to queue for you to attend a Supreme Court hearing, buying the right to immigrate into a country or shoot endangered wildlife, purchasing the insurance policies of ailing and elderly people to collect death benefits and charging fees for a better class of prison cell are just a few of the examples that Sandel deals with.

The problem with this critique, of course, is that we need something to replace economic relationships. And, as the author points out, a highly pluralistic society such as ours, there is not much consensus on the content of the good life. As a result, there is little prospect of agreement on the moral limits of the market. Sandel points out: “We disagree about the norms appropriate to many of the domains that markets have invaded.”

This reminds me of something that Winston Churchill would have said, "markets are the worst way to allocate goods and services, except for every other method that has been tried."

HT:  Daniel C.

Tennessee forces Nashville and Memphis to fund their pensions

Two cities in Tennessee manage their own defined-benefit pensions, and it is no coincidence that both are majority Democratic, and both are underfunded.  We have discussed the reasons for this in past  blog posts.

Efforts at pension reform have been slow because voters in these cities do not seem to understand or care much about the future pension liabilities, which means that it is not a high priority for politicians.

For example when Nashville went to a more realistic discount rate, from 8.25% down to 7.5%, the city also changed the assumptions on pension growth so that the net effect was no additional savings.  So Nashville gave the appearance of change, without the substance.    

Also, for underfunded pensions, this kind of discounting creates an incentive for fund managers to go into riskier assets.  Indeed, Nashville's pension manager has adopted a riskier investment strategy.  Cross your fingers.   

And we still save nothing for medical pensions.  That is the elephant in the room.  

The obvious solution is a defined contribution schedule, like the Swedes, or  a more reasonable rate linked to the 30 year treasuries, adjusted for tax free status, e.g. 6.5%.

The latest development is a new state law, designed to force these cities to fully fund their pensions.  It does not force cities to make up for past underfunding.  

Tuesday, August 12, 2014

How the internet is changing the worlds oldest profession

WARNING: We rarely feel the need to alert readers to explicit content. But our discussion of the online sex trade requires frank language, and some may find the topic distasteful.

The Economist has an article on how the Internet has changed the worlds oldest profession.
Now specialist websites and apps are allowing information to flow between buyer and seller, making it easier to strike mutually satisfactory deals. The sex trade is becoming easier to enter and safer to work in: prostitutes can warn each other about violent clients, and do background and health checks before taking a booking. Personal web pages allow them to advertise and arrange meetings online; their clients’ feedback on review sites helps others to proceed with confidence.

Labor mobility is discouraging price fixing:
Twenty years ago most prostitutes in Norway were locals who all aimed to charge about the same, says May-Len Skilbrei, a sociologist at Oslo University. Today, with growing numbers of sex workers from the Baltic states and central Europe, as well as Nigerians and Thais, such unofficial price controls are harder to sustain.

The wealth of online data allows industry participants to make better pricing and investment decisions:
going from flat-chested to a D-cup increases hourly rates by approximately $40, meaning that at a typical price of $3,700, surgery could pay for itself after around 90 hours. 

Thursday, August 7, 2014

Unocal holds up California

Every state has their own summer gasoline formula to reduce pollution. After California Air Resources Board decided to use Unocal's formulation--and after the refiners sunk billions of dollars re-tooling to produce CARB gasoline--Unocal said "Oh by the way, we have patent on the formula" and charged them a royalty of five cents/gallon.

The FTC sued Unocal for illegally acquiring monopoly power, but a judge dismissed the complaint in 2003 basically because the patent laws "trump" the antitrust laws, and allow a patentee to do what they want with their patents (this is NOT true in the EU and is changing in the US).

But the FTC got the relief they wanted when Chevron put the patents in the public domain as a condition for approving the Chevron/Unocal merger.

REPOST: Larry the Liquidator



REPOST: Stossel on Vanderbilt's GREED

Monday, August 4, 2014

Europe's troubles are microeconomic

Nice article in the Financial Times about the path to growth in Southern Europe: "good" deleveraging, then new equity capital to buy up the failed companies.

Good deleveraging is when balance sheets are restructured and bad debts written off. This way, viable businesses and creditworthy households should be able to borrow from healthy banks to fund productive investment. The economy grows and the burden of debt falls. 

But good deleveraging requires clear legal rules to restructure debt:  

...insolvency regimes across Southern Europe are too weak and borrower-friendly, and judicial systems too cumbersome, to enable the swift resolution of bad debts. In Italy, Greece and Cyprus, for example, it can take 10 years for a bank to get its hands on its collateral through the bankruptcy courts.

And finally, once the loans get restructured, the assets must be sold off to new owners.  New owners have been taking control of real estate, but not the smaller family owned companies:

The snag is that this problem may be largely cultural—and therefore more difficult to fix. Many businesses in Southern Europe are family-owned and family-run. These family shareholders may be reluctant to bring in outside capital, preferring to walk away rather than hand over control to financial investors. 
At the same time, many equity providers may be wary of taking control of businesses in parts of Europe where governance may be weak and success can often depend heavily on close personal relationships with politicians, officials, banks and suppliers. The alternative is to share control with the existing owners, which private equity is typically reluctant to do.