Why are people having fewer kids?

Reason has a short article on the so called "demographic winter." Here are the demographic trends:

Population stability is achieved when each woman bears an average of 2.1 kids over the course of her lifetime—one for her, one for her male partner, and a little overage to make up to childhood deaths. Today, there are sixty countries in which TFRs are below 2.1. For example, the European Union's TFR is 1.5 and no EU member state has a TFR at replacement or above. Even high population developing countries have seen steep declines in fertility. Since 1970, China's TFR fell from 5.8 to 1.6; India's from 5.8 to 2.9; Indonesia from 5.6 to 2.4; Japan's from 2.0 to 1.3; Mexico's from 6.8 to 2.4; Brazil's from 5.4 to 2.3; and South Africa's from 5.9 to 2.7. The U.S. TFR dropped from 2.55 in 1970 to around 2.1 today, largely because of the influx of higher fertility immigrants. However, the fertility of second generation Americans drops to the level of longer established Americans.

This is the explanation:

So, modernity essentially transforms children from capital goods that produce family income into consumption items to be enjoyed for their own sakes, more akin to sculptures, paintings, or theatre. But that's just the problem—according to happiness researchers, people don't really enjoy rearing children.

Mandatory mortgage information disclosures

In past blogs, (Next time you buy or refinance a house) and (Is deception profitable?), we have blogged about the the problems of mandatory information disclosure. Reuters reports on efforts by our favorite government agency to make the world a better place:

Research by the FTC found that half of the borrowers it surveyed could not identify their loan amount in mortgage papers. One-third could not identify their interest rate. Two-thirds did not know if their mortgages had prepayment penalties, a feature which can make refinancing effectively impossible.

"Consumers today do not understand the forms that they sign," said Marc Savitt, president-elect of the National Association of Mortgage Brokers. "All (loan) originators should disclose in the exact same forms and in the exact same manner. ... the FTC is right about this."

He is referring to research done by economists Jim Lacko and Jan Pappalardo to design a more consumer friendly mortgage disclosure form.

Zero Price?

Blogger charged us nothing for setting up this blog. There are no hosting fees associated with making the blog available on a continuing basis. The price Blogger receives from blogging customers - zero. How do business models like this work? Should we expect to see more of this approach?

Here's a very interesting article by Chris Anderson, the editor in chief of Wired magazine and author of The Long Tail. He discusses business models like Blogger's and argues that we will be seeing much more business conducted this way in the future.

In our text, we discuss cases of "Barbie Doll marketing" (you give away the dolls and sell dresses and other accessories at high markups). Examples include printers (low markup) with toner (high markup) and razor blades and razors. Anderson argues that products priced at or near zero are "the future of business" and discusses other ways that business can capture revenue from customers receiving free products (like selling advertising on web sites).

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

Why health insurance is like car insurance

Funny interview (MP3)with Jeff Margolis, CEO of Trizetto Group, where he compares health insurance to car insurance. These kinds of metaphors are going to frame the policy debate because they are so easy to understand.

Perhaps a crude but appropriate analogy is if you own an automobile, you know a couple of things. You know that if you don't maintain it well, if you don't change the oil, if you don't check your tire pressure, and if you don't do a few other safety things, you could find yourself in a lot of trouble in a hurry and really raise the cost of owning that vehicle.

Similarly, when you think of getting auto insurance, you have to make active decisions about the level of collision or comprehensive insurance and think actively about what level of risk you're willing to take on your deductible. We're incented to not drive our cars into trees, right? Because, gosh, it hurts and you can kill yourself, and in the best case, you have to pay your deductible. And even in the best case, your premiums go up after you have an act, if you will, of carelessness. So we need to think about ourselves in the healthcare system similarly.

Europe worried about US protectionism

Wall St. Journal has an interview with the Peter Mandelson, the European Union trade commissioner, who worries about protectionist rhetoric in the U.S. presidential race.

...Mr. Mandelson argues on a recent afternoon -- more so than any of the EU's 27 member states -- it is America that threatens the cause of free trade today.

"You can see it in the politics of the country," he says from his armchair in an EU office in the shadow of the Eiffel Tower. "You can see it in the Congress, you can see it in the primaries, you can see it in the town-hall meetings, you can see it in the candidates who, in order to appeal to the public, articulate these arguments" of protectionism.

"I don't see anywhere in Europe similar sentiments being expressed. I hear reservations about agriculture, or . . . about whether [trade] talks are balanced." But, he adds, "You'll not find anyone running for election in Europe and questioning whether we should complete the Doha round [of world trade talks]. You hear that from some of the candidates in the U.S., some of them from the Republican and the Democrat side."

Hedging Old Man Winter

As everyone's favorite textbook notes, "insurance is a wealth-creating transaction that transfers risk from someone who doesn’t want it (the risk-averse consumer) to someone who doesn’t mind it (the risk-neutral insurance company)." We're all familiar with traditional insurance options like life and car insurance. But, how about weather insurance?

A recent article in Newsweek mentions specialty firm Storm Exchange of New York that offers insurance against weather-related risks. Hedgers can also trade contracts on the Chicago Mercantile Exchange. Last year, over $19 billion in weather contracts traded on the Exchange.

With all of the snow in the Midwest this year, a snow insurance policy would have been nice. Shoveling the driveway for what feels like the 100th time wouldn't seem so bad if I knew a check was coming in the mail.

Which asset class has done best over past 20 years?

Satire: the subprime primer

In past blogs, we have talked about the goal alignment problem associated with the subprime meltdown. Now someone has put together a slide show (profanity-filled) satirizing all of the characters in the subprime debacle.

Negative campaigning as a repeated prisoners' dillemma

Negative campaigning works well against an opponent in the primaries, but if the Democratic primary turns nasty, which by some accounts it already has, anything the Democrats say against each other will be used against them in the general election. So while negative campaigning will help win the primary, it will also reduce the probability of winning in the general election, setting up a game with the same logical structure as a prisoners' dillemma.

Later in the call, the Clinton team was asked whether the not-qualified-to-be-commander-in-chief criticism of Obama was going too far, given that it would be used by Republicans against Obama if Obama is the Democratic nominee against John McCain. "We don't believe that he is the one who will face John McCain," Clinton spokesman Howard Wolfson said. "This is a legitimate question that Sen. Obama would face if he were the nominee, and it is a question that he is facing as a result of criticism from Sen. McCain now, so I think it's perfectly appropriate."

Senator Obama's best response to negative campaigning comes right out of an economics textbook:

1. Be nice (no first strikes)
2. Be provokable (attack immediately if attacked)
3. Be forgiving (stop if she stops).
4. Be clear (make it very clear that you will attack every time she attacks.)

Winning strategy is probably tit-for-tat, do whatever she did yesterday.