Joshua D. Rauh, an associate professor of finance at Northwestern University who studies public pension funds, predicts that at the current rate, Illinois’s pension system could run out of money by 2018. He believes the funds of other troubled states — including New Jersey, Indiana and Connecticut — are also on track to run out of money in less than a decade, unless they make meaningful changes.
If a state pension fund ran out of money, the state would be legally bound to make good on retirees’ benefits. But paying public pensions straight out of general revenue would be ruinous. In Illinois’s case, it would consume about half the state’s cash every year, bringing other vital state services to a standstill.
Saturday, June 19, 2010
What does the end game look like?
Watch the blue states:
When push comes to shove, Consequentialism trumps Deontology
What can Congress learn from North Korea?
SEOUL -- Bowing to reality, the North Korean government has lifted all restrictions on private markets -- a last-resort option for a leadership desperate to prevent its people from starving.
In recent weeks, according to North Korea observers and defector groups with sources in the country, Kim Jong Il's government admitted its inability to solve the current food shortage and encouraged its people to rely on private markets for the purchase of goods.
Friday, June 18, 2010
How do we know that Nashville is currently more attractive than San Diego?
Look at where people are moving. Red lines indicate outflows; black lines, inflows.
Economists call this "revealed preference."
Economists call this "revealed preference."
Advice for college freshman
From David Brin (9 min video)
From Kurt Vonnegut (not)
Wear sunscreen.
If I could offer you only one tip for the future, sunscreen would be it. The long-term benefits of sunscreen have been proved by scientists, whereas the rest of my advice has no basis more reliable than my own meandering experience. I will dispense this advice now.
Enjoy the power and beauty of your youth. Oh, never mind. You will not understand the power and beauty of your youth until they've faded. But trust me, in 20 years, you'll look back at photos of yourself and recall in a way you can't grasp now how much possibility lay before you and how fabulous you really looked. You are not as fat as you imagine.
Don't worry about the future. Or worry, but know that worrying is as effective as trying to solve an algebra equation by chewing bubble gum. The real troubles in your life are apt to be things that never crossed your worried mind, the kind that blindside you at 4 pm on some idle Tuesday.
Do one thing every day that scares you.
Sing.
Don't be reckless with other people's hearts. Don't put up with people who are reckless with yours.
Floss.
Don't waste your time on jealousy. Sometimes you're ahead, sometimes you're behind. The race is long and, in the end, it's only with yourself.
Remember compliments you receive. Forget the insults. If you succeed in doing this, tell me how.
Keep your old love letters. Throw away your old bank statements.
Stretch.
Don't feel guilty if you don't know what you want to do with your life. The most interesting people I know didn't know at 22 what they wanted to do with their lives. Some of the most interesting 40-year-olds I know still don't.
Get plenty of calcium. Be kind to your knees. You'll miss them when they're gone.
Maybe you'll marry, maybe you won't. Maybe you'll have children, maybe you won't. Maybe you'll divorce at 40, maybe you'll dance the funky chicken on your 75th wedding anniversary. Whatever you do, don't congratulate yourself too much, or berate yourself either. Your choices are half chance. So are everybody else's.
Enjoy your body. Use it every way you can. Don't be afraid of it or of what other people think of it. It's the greatest instrument you'll ever own.
Dance, even if you have nowhere to do it but your living room.
Read the directions, even if you don't follow them.
Do not read beauty magazines. They will only make you feel ugly.
Get to know your parents. You never know when they'll be gone for good. Be nice to your siblings. They're your best link to your past and the people most likely to stick with you in the future.
Understand that friends come and go, but with a precious few you should hold on. Work hard to bridge the gaps in geography and lifestyle, because the older you get, the more you need the people who knew you when you were young.
Live in New York City once, but leave before it makes you hard. Live in Northern California once, but leave before it makes you soft. Travel.
Accept certain inalienable truths: Prices will rise. Politicians will philander. You, too, will get old. And when you do, you'll fantasize that when you were young, prices were reasonable, politicians were noble, and children respected their elders.
Respect your elders.
Don't expect anyone else to support you. Maybe you have a trust fund. Maybe you'll have a wealthy spouse. But you never know when either one might run out.
Don't mess too much with your hair or by the time you're 40 it will look 85.
Be careful whose advice you buy, but be patient with those who supply it. Advice is a form of nostalgia.
Dispensing it is a way of fishing the past from the disposal, wiping it off, painting over the ugly parts and recycling it for more than it's worth.
But trust me on the sunscreen."
Author: Mary Schmich (USA)
First published: July 1, 1997
Copyright: Herald Tribune
From Kurt Vonnegut (not)
Wear sunscreen.
If I could offer you only one tip for the future, sunscreen would be it. The long-term benefits of sunscreen have been proved by scientists, whereas the rest of my advice has no basis more reliable than my own meandering experience. I will dispense this advice now.
Enjoy the power and beauty of your youth. Oh, never mind. You will not understand the power and beauty of your youth until they've faded. But trust me, in 20 years, you'll look back at photos of yourself and recall in a way you can't grasp now how much possibility lay before you and how fabulous you really looked. You are not as fat as you imagine.
Don't worry about the future. Or worry, but know that worrying is as effective as trying to solve an algebra equation by chewing bubble gum. The real troubles in your life are apt to be things that never crossed your worried mind, the kind that blindside you at 4 pm on some idle Tuesday.
Do one thing every day that scares you.
Sing.
Don't be reckless with other people's hearts. Don't put up with people who are reckless with yours.
Floss.
Don't waste your time on jealousy. Sometimes you're ahead, sometimes you're behind. The race is long and, in the end, it's only with yourself.
Remember compliments you receive. Forget the insults. If you succeed in doing this, tell me how.
Keep your old love letters. Throw away your old bank statements.
Stretch.
Don't feel guilty if you don't know what you want to do with your life. The most interesting people I know didn't know at 22 what they wanted to do with their lives. Some of the most interesting 40-year-olds I know still don't.
Get plenty of calcium. Be kind to your knees. You'll miss them when they're gone.
Maybe you'll marry, maybe you won't. Maybe you'll have children, maybe you won't. Maybe you'll divorce at 40, maybe you'll dance the funky chicken on your 75th wedding anniversary. Whatever you do, don't congratulate yourself too much, or berate yourself either. Your choices are half chance. So are everybody else's.
Enjoy your body. Use it every way you can. Don't be afraid of it or of what other people think of it. It's the greatest instrument you'll ever own.
Dance, even if you have nowhere to do it but your living room.
Read the directions, even if you don't follow them.
Do not read beauty magazines. They will only make you feel ugly.
Get to know your parents. You never know when they'll be gone for good. Be nice to your siblings. They're your best link to your past and the people most likely to stick with you in the future.
Understand that friends come and go, but with a precious few you should hold on. Work hard to bridge the gaps in geography and lifestyle, because the older you get, the more you need the people who knew you when you were young.
Live in New York City once, but leave before it makes you hard. Live in Northern California once, but leave before it makes you soft. Travel.
Accept certain inalienable truths: Prices will rise. Politicians will philander. You, too, will get old. And when you do, you'll fantasize that when you were young, prices were reasonable, politicians were noble, and children respected their elders.
Respect your elders.
Don't expect anyone else to support you. Maybe you have a trust fund. Maybe you'll have a wealthy spouse. But you never know when either one might run out.
Don't mess too much with your hair or by the time you're 40 it will look 85.
Be careful whose advice you buy, but be patient with those who supply it. Advice is a form of nostalgia.
Dispensing it is a way of fishing the past from the disposal, wiping it off, painting over the ugly parts and recycling it for more than it's worth.
But trust me on the sunscreen."
Author: Mary Schmich (USA)
First published: July 1, 1997
Copyright: Herald Tribune
Thursday, June 17, 2010
Investors want compensation for holding Greek Debt
Can you recognize opportunity costs?
QUIZ from Ferraro and Taylor:
Select the Best Answer to the Following Question:
You won a free ticket to see an Eric Clapton concert (which
A. $0
B. $10
C. $40
D. $50
B. $10
C. $40
D. $50
Have an answer? Now try this one:
Select the Best Answer to the Following Question:
A. $0
B. $10
C. $40
D. $50
B. $10
C. $40
D. $50
The answer to both is (of course?) B.
A study polled PhD economists and found that only 22% got the first right, and about 40% got the second right. Year of degree, quality of school, etc., were insignificant in explaining this. Only significant finding was that micro theorists were better than all other groups, and macroeconomists were indistinguishable from undergraduates who NEVER took an econ course!
Cork Competition
Benjamin Franklin claimed that "in the world nothing can be said to be certain except death and taxes." I think we should add competition to the list. The previously cozy natural cork market is now fighting competition from plastic corks.
The story of how Nomacorc and other stopper upstarts broke the centuries-old cork monopoly is a lesson in how innovation, timing and hustle combined to exploit an opening in a once airtight market. It shows that any dominant industry can be vulnerable to competition, especially if it grows complacent about its position.
Wednesday, June 16, 2010
Governments Can Create Wealth
A new article by Galiani and Schargrodsky in press at the Journal of Public Economics examines the effects of providing land titles to squatters in Buenos Aires. They find that:
Enforcing property rights matters.
... entitled families substantially increased housing investment, reduced household size, and enhanced the education of their children relative to the control group. These effects, however, did not take place through improvements in access to credit. Our results suggest that land titling can be an important tool for poverty reduction, albeit not through the shortcut of credit access, but through the slow channel of increased physical and human capital investment, which should help to reduce poverty in the future generations.
Enforcing property rights matters.
Tuesday, June 15, 2010
When should you negotiate; and when should you use an auction?
Pat Bajari (paper, paper) and various co-authors conclude that
Bottom line: use negotiation when flexibility (like change orders) is important, as is likely for large complex projects; and if you negotiate, use a reputable firm because you are subject to hold up when unforeseen contingencies arise. Contracting with a reputable firm can reduce the risk of hold-up.
Auctions may perform poorly when projects are complex, contractual design is incomplete, and there are few available bidders. Furthermore, auctions may stifle communication between buyers and sellers, preventing the buyer from utilizing the contractor's expertise when designing the project.
Bottom line: use negotiation when flexibility (like change orders) is important, as is likely for large complex projects; and if you negotiate, use a reputable firm because you are subject to hold up when unforeseen contingencies arise. Contracting with a reputable firm can reduce the risk of hold-up.
Should BP Anticipate Hold Up?
A number of US Senators are calling for BP to create an escrow fund from which those affected by the spill off of Louisiana could be compensated. This very well could be a good idea. It might insure that funds will be available to all claimants and it might relieve BP from long term commitments. But how vulnerable does it leave BP to possible hold up problems?
Suppose experts estimate the price tag at $20 billion (or $30 billion or whatever) and BP funds this. What would keep the government from coming back later and claiming that the actual costs are greater? In fact, I would expect that whatever deal is reached would include contingencies under which BP would have to pony up more funds. It is just too difficult to foresee all of the costs from such a singular event. But this leaves BP vulnerable to later claimants to arguing that the conditions are met when they might not be. Anticipating this BP is likely to drag its feet. It might low ball estimates and put up more onerous conditions than optimal knowing that it will have to relax them later. In the end, it would not free them from long term commitments and they are likely to suffer continued reputation loss for decades.
Suppose experts estimate the price tag at $20 billion (or $30 billion or whatever) and BP funds this. What would keep the government from coming back later and claiming that the actual costs are greater? In fact, I would expect that whatever deal is reached would include contingencies under which BP would have to pony up more funds. It is just too difficult to foresee all of the costs from such a singular event. But this leaves BP vulnerable to later claimants to arguing that the conditions are met when they might not be. Anticipating this BP is likely to drag its feet. It might low ball estimates and put up more onerous conditions than optimal knowing that it will have to relax them later. In the end, it would not free them from long term commitments and they are likely to suffer continued reputation loss for decades.
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