Wednesday, December 31, 2008

The year of the CFO

New Year's prediction from the Economist:

For the past decade the prevailing wind in boardrooms has been gentle. Emotional intelligence and innovation have been what counted, and what leaders professed to value. But those ideas are all but finished. No one will talk of EQ (“emotional intelligence quotient”) any more. It will be EVA (“economic value added”) instead. Thinking outside the box (an over-rated activity at the best of times) will not be celebrated. Ticking boxes will be.

As financial skills are valued more highly, CFOs will make it to the corner office in greater numbers than before. Recession, credit crunch and the increasingly complex nature of global companies will all play directly into the bean counter’s hands.
And while the CFO gains, HR and Marketing will lose:
In this new world the HR director might just cling on to his title, but his job will be downgraded to personnel and in particular to payroll.

The marketing director will also lose out. He has already been kicked once by the decline of advertising and kicked again as the power of the internet has made his traditional tools useless. In 2009 his budgets will fall further, as will his status. As for the corporate-social-responsibility supremo, he will be told to take a gap year indefinitely.

Automakers Step in it Again

Say you lent me $1,000 and I took $500 of it and rented out a billboard to advertise what a swell person you were for lending me the money. Pretty stupid, huh? (And, I guess the other question would be who's the stupid one: me for buying the billboard or you for lending money to the type of idiot who would turn around and blow part of it).

If you think this sounds too ridiculous to actually happen, you'd be wrong. Chrysler recently spent a couple hundred grand to take out ads in the Wall Street Journal and USA Today thanking you and me for sending them a big chunk of taxpayer-funded bailout dollars. Are the automakers just clueless?

Monday, December 29, 2008

Drop in Demand = Raise Price?

If you don't see anything wrong with the title of this post, I think you are qualified to work somewhere in government.

According to this article, traffic in the express lanes of the I-25 toll road around Denver has fallen over the last year. So, what's the government doing? Raising the fee for the express lane, of course. Maybe we should appoint a toll czar!

Note: the increase in the toll is because of an agreement that the tolls can't be lower than express service rates on buses, and the bus rates are going up. The astute among you might wonder why road tolls are linked to bus rates - I have no idea, but I definitely think we should get government more involved in private business!

Sunday, December 28, 2008

Where does all the money come from?

The Fed and the Treasury are spending money like drunken sailors. But who pays for all this?
In the case of the Fed, the money comes from its authority to print dollars from thin air. Since late August, the Fed has expanded its balance sheet from about $900 billion to more than $2.2 trillion, creating $1.3 trillion that did not exist to replace some of the trillions wiped out by falling house prices and vengeful stock markets. The Fed has taken troublesome assets off the hands of banks and simply credited them with having reserves they previously lacked.
And the Treasury is borrowing from foreigners:
In the case of the Treasury, the money comes from the same wellspring that has been financing American debt for decades: Investors in the United States and around the world — not least, the central banks of China, Japan and Saudi Arabia, which have parked national savings in the safety of American government bonds.
...which raises the spectre of long term inflation and a run on the US dollar.

Americans have gotten accustomed to treating this well as bottomless, even as anxiety grows that it could one day run dry with potentially devastating consequences.

The value of outstanding American Treasury bills now reaches $10.6 trillion, a number sure to increase as dollars are spent building bridges, saving auto jobs and preventing the collapse of government-backed mortgage giants. Worry centers on the possibility that foreigners could come to doubt the American wherewithal to pay back such an extraordinary sum, prompting them to stop — or at least slow — their deposits of savings into the United States.

That could send the dollar plummeting, making imported goods more expensive for American consumers and businesses. It would force the Treasury to pay higher returns to find takers for its debt, increasing interest rates for home- and auto-buyers, for businesses and credit-card holders.

For now, deflation looks like a bigger threat. But at some point, all this debt has to be paid for with a lower standard of living. If you want to glimpse our future, take a look at Iceland.

Saturday, December 27, 2008

Can unemployed investment bankers build bridges?

Where is Obama going to find 3 million workers to build new ports, medical infrastructure, mass public transit infrastructure and expanded electricity grid and "green" technologies.
We have 1.2 million unemployed construction workers. We have 123,000 unemployed architects and engineers. We have 83,000 unemployed machinery workers. We have 145,000 unemployed transportation-related workers. So that brings us to barely more than 1.5 million of a labor pool the government can tap into for all the new building activity. But the bulk of the joblessness is in financials (up to half a million), retail/wholesale (1.2 million), leisure/hospitality (1.3 million) and health/education (1.2 million). And if investment bankers, shopkeepers, bell captains and medical chart technicians have anything in common it is that they don't have much experience in shovel-ready activities.

Wednesday, December 24, 2008

Minimum prices on toys

In the past we have blogged about the incentive conflict between retailers and manufacturers, and how contracts on pricing can help manage the conflict. Last year, the Supreme Court reversed a 90 year old ruling that allowed manufacturers to set minimum prices as a means to enhance a brand's image and for retailers to make enough profit on their merchandise to provide better customer service. It appears that some toy manufacturers are doing so.

This season's products affected by pricing agreements include Guitar Hero World Tour Band Kit from Activision Blizzard Inc., documents show. The video musical game has been priced at $189 at Best Buy Inc., Circuit City Corp. and Toys "R" Us Inc. since its October release. A new rival product, Electronic Arts Inc.'s Rock Band 2 Special Edition, also has been retailing for that price at all three outlets.

"Activision Publishing Inc. would like to inform you of its Minimum Advertised ('MAP') program," the game maker wrote to retailers in a letter dated Sept. 24. The letter, which says it won't subsidize any advertisements that violate the policy, goes on to list 19 products and their minimum prices, including Guitar Hero and the James Bond: Quantum of Solace videogame.

The upside of recession

We begin saving again.

Get Your 102% Mortgage from the USDA

Use of the USDA's Rural Development Guaranteed Loan program has been growing recently. Over $7 billion in loans were insured under this program in 2008 compared to $3.6 billion in 2007. What's so attractive about these loans?

First, despite the name, the program is being used outside of rural areas. The loans are restricted to towns of no more than 25,000 residents, which allows areas beyond traditional "rural" areas to qualify. Second, the program allows borrowers to borrow 100% of the purchase price plus roll in the 2% program fee. But, don't worry. USDA officials say they have a strong track record, so excessive defaults shouldn't be a problem. They're smart bankers, so we should trust that they know what they are doing, right?

Monday, December 22, 2008

Where Do Deadbeats Shop?

I don't know, but apparently American Express thinks it does. According to this article from the Atlanta Journal-Constitution, AMEX has been reducing the credit limits of some of its customers based on the customers' shopping habits. The notice accompanying credit reductions states "Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express."

Sunday, December 21, 2008

Tax cuts vs. govt. spending

I have blogged about the broken window fallacy of government spending, as a theoretical matter. Now we get some practical advice on the difficulties of ramping up spending.
... existing agencies are working full time administering the budgets they have. They can't just add a zero at the end of each contract and be done with it.

Stop looking at models and equations and theoretical constructs for a while and look at the practical considerations of the stimulus package. I've been doing this sort of thing for quite a while and I'm convinced it's doomed from the start. If they feel the need to blast a trillion dollars into confetti, then tax cuts would make the most sense. Even if the public used the money to pay down debt, that would be a good thing as it would transfer the debt burden from the consumer to the government making the consumer feel a little bit like spending again.
Score one for tax cuts.

Saturday, December 20, 2008

Bargaining in bad faith?

On Monday, the Braves faxed a signed offer to Rafael Furcal,
...three years, $30 million with a fourth-year vesting option. The Braves then believed they had a deal. No member of the Braves’ front office ... could recall a time when a signed term sheet was not the equivalent of a handshake agreement, ethically – if not legally – binding. Instead, the Braves believe, Kinzer shopped the term sheet to the Dodgers.
And the Dodgers signed him for $3 million more.

Friday, December 19, 2008

Might the crisis be worse in Europe?

due to the closer links between banks and industry:
...in Europe, the close connections between banks and industry almost assure a broad and deep spread of the contagion. Unlike the United States, where the government has spent more than a century battling to break the links among government, industry and banks, this battle is only rarely joined in Europe. If anything, such links — one could even say collusion — between banks and businesses were encouraged from the very beginning of modern European capitalism.

...in times of a global shortage of capital, European corporations are left with few financing alternatives they are comfortable with. (In contrast, while banks are an important source of financing in the United States, corporations there depend much more on the stock market for investment. This forces American firms to compete ruthlessly for capital and constantly seek greater and greater efficiencies.)

Wednesday, December 17, 2008

St. Paul, in his own words

Volker compares the current crisis to past ones.

A simple way to reduce health care costs

Outsource:
Next month, Apollo Hospitals, India's biggest health-care company, will for the first time treat employees of a non-Indian company, Wisconsin-based Serigraph Inc., for certain elective procedures.

The costs will be picked up by Serigraph's insurer, Anthem Blue Cross and Blue Shield. Employees will receive travel and concierge help, including free plane tickets for patient and companion, plus post-operative care upon return to the U.S. There will be no co-payments.

It's a trial program, but the economic benefits aren't in doubt: A cardiac bypass can cost about $100,000 in a U.S. private hospital. Apollo says it can do the procedure -- and accommodate a companion -- for a tenth of the cost.

You Can't Fight Supply and Demand

I think we should update the old phrase "You can't fight City Hall" to "You can't fight supply and demand" to give people a better appreciation for economic forces that influence outcomes (leaving aside the issue that as the feds slowly nationalize one industry after another, we are all eventually going to be working for "City Hall"). The thought occurred to me as I read this post from The Huffington Post complaining about the treatment of adjunct professors in American colleges (or as the poster describes it - "The Great Shame of American Colleges").
they are hired only on a part-time basis, made to sign a pledge that they will not work more than twenty hours a week and will not--not now, not ever--have a claim to health or retirement or any other kind of benefits, not even a parking pass. That they are "at will" employees who can be let go at any time, for any reason. Their salaries are so meager, they have to teach two, three, sometimes five classes a semester, at five different universities, just to pay their rent.
And why do these "terrible" conditions exist? It's all about supply and demand. The poster notes that for each position there are "two or three other PhDs waiting in line for his job in case he dares complain or ask for more money." When supply exceeds demand, prices get driven down. It's not shameful; it's reality. Conditions for adjuncts will improve when fewer people are chasing the finite number of openings.

Tuesday, December 16, 2008

unsolicited advice

On his first day in office, President-elect Obama could save 7,000 American lives a year, put an end to the physical and mental suffering of another 100,000 men, women and children, and save billions of dollars in unnecessary medical costs:
All he has to do on Jan. 20 is call for the repeal of the National Organ Transplant Act of 1984. That's the terrible federal law that criminalizes the buying and selling of human organs for transplant operations—and therefore makes it a virtual certainty that the supply of kidneys, livers, and hearts will never meet our demand for them.

Uncle Fred Thompson on the economy

“Ask not what your country can spend for you … as what you can spend for your country.”

Flexible labour supply

Not only is demand down, but there is new entry: WARNING: ADULT CONTENT

An escort agency owner told the Sun he’s getting about 40 interested applicants every day, the majority of whom are women running from the wreckage of lost finance jobs.

Monday, December 15, 2008

More on bad business writing

To combat poor writing, I assign Fred Kahn's classic "My War Against Bureaucratese," the gobbledygook written by government bureaucrats designed to hide what they are really doing. Colleague Mike Shor's MBA Writer puts phrases from student memos together to generate sentences that sound all too familiar.
To proactively manage profit, our key initiative objective pushes the envelope toward systematized reciprocal capability.
And now the Onion takes a crack at it:
"Due to the increased scope of the project vis-à-vis Tuesday's meeting, compounded with our aforementioned desire to maintain quality without increasing cost, an as-yet indeterminate amount of time will be allocated to our newest venture," Atkins said without once stuttering. "You should all be proud of the amount of effort and energy you have put forth thus far, and can be certain the project's conclusion will become more apparent as the tasks become increasingly more finite."

Sales of Home Safes on the Rise

I saw an article this morning in the hometown newspaper about a recent rise in the sales of home safes (see Google news for a bunch of similar articles). As people have become concerned about leaving their money in banks, they appear to be turning more toward the home safe solution.

The perceived cost of using banks for money storage has risen leading to an increase in demand for a substitute product, the home safe. Perhaps this will, in turn, lead to an increase in home robberies. Any thieves reading this blog now know that the incentive to engage in robbery has increased with larger potential rewards from robbing the average house (assuming you are the type of thief who can figure out how to crack a home safe). That's one of the things that's cool about thinking in economic terms: what might be the unintended consequences or unforseen outcomes of events like this.

Thursday, December 11, 2008

One Tennessee Democrat opposed the auto bailout

Vanderbilt's own Jim Cooper puts reason above party loyalty:

The proposed rescue plan "won't revive America's auto industry," Cooper said in a statement. "It only delays the pain and rewards bad management."

Tennessee's own Marsh Blackburn had the best soundbite:
"I cannot recall the last time you saw the federal government (successfully) micromanage an industry," Blackburn said. "Not every solution needs to come out of Washington."

Wednesday, December 10, 2008

Illinois Governor uses economics

If you dont know the value of an item, and you dont know where its highest valued use is, an auction will identify the high-value bidder, and set a price for the item. Had not the FBI disrupted the auction, Obama's Senate seat would have moved to its highest-valued use.
The FBI says in an October 31, 2008 conversation, Blagojevich described an approach from an associate of Senate Candidate 5: "We were approached 'pay to play.' That, you know, he'd raise me 500 grand. An emissary came. Then the other guy would raise a million, if I mad him (Senate Candidate 5) a Senator."

Last Thursday, December 4, the FBI says Blagojevich "was giving Senate Candidate 5 greater consideration for the Senate seat" because he might "get some (money) up front, maybe."

Is it illegal to bid for a Senate seat?

High Re-Default Rates on Modified Mortgages

One of the calls to action in all of the bailout talk has been a call to help homeowners at or near default on their mortgages. Here's some early evidence that modifying mortgages (at least the types of modifications tried so far) hasn't been overly successful so far.
More than half of homeowners fell behind on mortgage payments in the first six months after their loans were modified earlier this year, new data from the Office of the Comptroller of the Currency and the Office of Thrift Supervision show. . . . The data, released Monday, cover loan modifications by the 14 largest national banks and thrifts, including Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co., which together account for more than 60% of mortgage loans outstanding. The lenders modified nearly 73,000 loans in the first quarter and an additional 114,000 in the second quarter.

Nearly 36% of borrowers were more than 30 days past due three months after their loan was modified, and nearly 53% were more than 30 days late after six months, according to an analysis of modifications completed in the first quarter, going through Sept 30.

Tuesday, December 9, 2008

Let them fail

An auto bailout that wont cost a dime

And will have immediate tangible benefits to both consumers and the automakers:

What the politicians have not highlighted is that a relatively simple change of regulations — perhaps just a temporary exemption — at the same time Congress opens the purse strings could quickly alter the competitive landscape for the Detroit Three.

General Motors and Ford already make popular, high-quality, high-mileage automobiles. The trouble is, because of regulatory differences between the United States and the European Union, they’re sold only in Europe.

The automakers’ reluctance to sell those cars in the United States is not as simple as the cars’ inability to meet United States standards for equipment, safety and exhaust emissions; there’s also the cost involved in the certification process. Changing the law to allow the United States sale of cars compliant with European emissions and crash standards, even for just a few years, would allow G.M. and Ford to quickly add some of their popular, high-mileage European models to their lineups here in America.

Ford S-Max

Monday, December 8, 2008

Prius prices are coming down

...because gasoline prices are coming down. From my former colleagues at the Department of Justice:
The median effect of a one dollar increase in the gasoline price per gallon is a reduction in the manufacturer price of $171. The calculation varies greatly across vehicles--for example, the effects range from a reduction of $1,506 for the 2005 GM Montana SV6 to a rise of $998 for the 2006 Toyota Prius.

The Quintessential Inferior Good


As noted in this prior post about Wal-Mart, an inferior good is one whose income elasticity of demand is negative, so that when income goes down, demand goes up. Sales of another inferior good, Spam, are also on the rise with the recent economic difficulties. Sales have increased over ten percent in the most recent three months, and the manufacturer (Hormel) has instituted double shifts at its production facility.

For those of you not familiar with the product, Spam "is made of just a few simple ingredients. Ham, pork, sugar, salt, water, a little potato starch, and a mere hint of sodium nitrite to help SPAM® keep its color. Sounds delicious, and it is."

Saturday, December 6, 2008

Why supply emergency medical services?

Low reimbursement (lousy payor mix) combined with high costs (liability), means that more hospitals are closing ER's or building new hospitalis without them. Meanwhile the ER visits keep growing, so that remaining ER's serve more and more patients.

How quickly things change

A year ago, the Army had trouble finding recruits. Now my students tell me that there is so much demand that they are raising their standards.

Isn't the government supposed to try to reduce unemployment?

So what gives with the new employment tax?
You and your spouse were both employed in 2005, at which time you bought a house, took out a mortgage equal to four years' family income and committed to a monthly payment about one quarter of your family's monthly income. Today your house is worth three year's income. To add to your injury, your family income is cut in half because you lost your job. Your housing payment is now more than half of your family income.

Your best course of action may be to fail to find a new job. Citigroup Inc. is your mortgage lender, and (as part of the Treasury rescue deal) is willing to renegotiate mortgages with people in financial trouble and limit their monthly housing payments to 38 percent of the family's monthly income. With you unemployed, your family income is low enough that you qualify for this loan forgiveness. If you find a new job quickly, you and your spouse will no longer qualify.

Friday, December 5, 2008

The Great Repression

A layman's guide to the crash: this makes for good teaching or reading material:
Had it not been for the frantic efforts of the Federal Reserve and the Treasury, to say nothing of their counterparts in almost equally afflicted Europe, there would by now have been a repeat of that “great contraction” of credit and economic activity that was the prime mover of the Depression. Back then, the Fed and the Treasury did next to nothing to prevent bank failures from translating into a drastic contraction of credit and hence of business activity and employment. If the more openhanded monetary and fiscal authorities of today are ultimately successful in preventing a comparable slump of output, future historians may end up calling this “the Great Repression.” This is the Depression they are hoping to bottle up—a Depression in denial.

Return to rationality: stocks predicted to yield 6%

In 1996, economists Campbell and Shiller met with Fed Chairman Alan Greenspan to brief him on their research that the stock market was significantly over-valued. Greenspan was impressed enough by their work to give his "irrational exuberance" speech. Christopher Carroll has applied Campbell and Shiller's methodology (P/E ratios computed using a 12 year moving average of earnings) to today's stock market and says that it is just about where it should be.
Some market commentators argue that the recent stock price declines reflect a degree of irrational pessimism or panic that is the inverse of the irrational exuberance of the 1990s. The Campbell and Shiller figure provides no support for that view; the vertical line reflecting the Graham P/E ratio in late October is right around the middle of historical experience, not on the far left end. The intersection of that line with the regression forecast indicates that historical experience would lead one to forecast a historically average return on equities over the next 12 years of about 6 percent or so per year (net of inflation).

Wednesday, December 3, 2008

In Defense of Corporate Jets

The CEOs of the Big Three automakers were skewered in the popular press for their recent decision to fly to Washington DC on corporate jets to request bailout funds for their companies. While this type of story plays well in the media, it's not at all clear that offering this type of perk is unreasonable. Among other things, it provides a non-monetary incentive for managers to work harder in an effort to move up the corporate ladder. Here's a defense of the Big Three "jet scandal" from Time Magazine.

While I don't think the use of corporate jets is a real issue, it is somewhat worrisome that these three stooges didn't anticipate the public relations aspect of their decisions.

Tuesday, December 2, 2008

Will your merger be challenged as anticompetitive?


New enforcement data released by FTC shows that in cases where entry is difficult, 2->1 mergers (duopoly to monopoly) are almost always challenged. Mergers with at least four significant competitors are challenged about one third of the time.

Be glad you are not in Iceland

Current residents are facing a falling currency and much higher prices for imports, which is most of what they consume. From a former student living in Reykjavik:
The Icelandic krona is the smallest currency in the world. The central bank failed to build foreign currency reserves as the Icelandic banks expanded internationally. The central bank pursued a policy of high interest rates to fight overheating of the economy. This was a fatally flawed policy that many, including yours truly, warned against. Predictably the high interest rates attracted investors who borrowed in low yield currencies and took advantage of carry trade. This in turn drove up the krona and fueled economic expansion. Icelanders, individuals and companies, borrowed in low yield currencies and the prices of imported goods came down in krona. This was all fine until international credit tightened and later crumbled. The Icelandic house of cards came crashing down. The central bank tried to fight the international credit crisis by repeatedly raising interest rates but to no avail. In a nervous financial world the krona was toxic and no one would touch it.
In hindsight Iceland may have been better off joining a larger currency area like the EU.

Monday, December 1, 2008

Does anyone support the bailout?

If they do, I am going to unleash Hazlett on them:

The real problem entailed by the auto-maker subsidies will never be discussed because it can never be seen. The opportunity cost of shovelling capital to companies such as GM is that companies such as Boeing or United Technologies or Disney or start-ups unknown will be unable to use it to fund their projects. Propping up today’s US car manufacturers means beating down tomorrow’s economic star. In an era of technological leaps, those emergent stars tend to be leapers. The bail-out puts the public’s chips on the former, pulling stakes from innovative rivals.

The UK ran this experiment in the 1960s, picking national champions that were to push the national economy to the cusp of global dominance. The government selected companies for protection and subsidy, including British Leyland in autos. BL sank so fast that it had to be acquired by the UK government in 1975 and over £1bn in public funds were pumped into that nationalised money pit by 1980. National champion? The unsubsidised Ford UK overtook BL in the British market. The Thatcher regime sold off BL, liquidating a failed experiment. Competitive car makers – private, unsubsidised and exporting – now dot the English countryside.

Competition between airports

Ironically, in Moscow:

Moscow's airport rivalry highlights a paradox of the global aviation industry: Airlines compete fiercely with each other for customers, but they face many monopolist suppliers, such as air-traffic control systems, fuel distributors and airports. Resulting costs and poor services get passed on to travelers.

Regulators world-wide are starting to tackle the issue -- and some see Moscow as a paradigm.

Britain's competition authority, for example, last year considered breaking up BAA, the company that runs London's three big airports. In testimony before the regulator, officials from the International Air Transport Association, a trade group, cited Moscow as evidence of the benefits that competition could bring London's airport system. IATA testified that fees at Moscow's fast-growing, privately owned Domodedovo Airport are as much as 20% lower than at Sheremetyevo, the state-owned hub of flag carrier Aeroflot.

Lessons from Mervyn's

The most recent issue of Business Week features a story of how private equity companies supposedly ruined Mervyn's , a mid-range department store located primarily in the western U.S. I think there are a number of interesting aspects to the Mervyn's story.
  • First, it's a prime example of the effects of competition. As this commentary argues, Mervyn's did quite well as a mid-range retailer until other stores started piling into the space and Mervyn's failed to adapt.
  • Second, although the main Business Week story casts the private equity companies as villains in the downfall of the company, I'm not sure the case is made very well. The main objection regarding the actions of the private equity companies seems to be focused on Mervyn's real estate holdings. The PE companies split the company into real estate and retail, and then sold off many of the operating leases. The new lease holders increased the rents to market rates, which caused lease payments to double in many cases. So, essentially, the company had previously been subsidizing poor retail operations with below-market lease rates. By moving lease rates to market rates, the PE companies were helping ensure that the real estate was being allocated to its highest and best use. Apparently that was not a Mervyn's department store, as the company could not survive and is filing for liquidation. Yes, I imagine the story is probably more complicated that this, but the Business Week story certainly doesn't give the PE companies any credit for moving these real estate assets to a better use.

Saturday, November 29, 2008

Separation of Church and State

Vaclav Klaus, EU President-elect, is an economist trying to figure out what we are giving up to slow climate change which is driving the fundamentalists nuts:
As the global financial crisis takes hold, perhaps people are starting to wonder whether the so-called precautionary principle, which would have us accept enormous new taxes in the guise of an emissions trading scheme and curtail economic growth, is justified, based on what we actually know about climate.

Friday, November 28, 2008

Using credit history to price hospital care

One of the most popular posts on this site has been the use of credit history to price car insurance. It is a high quality data set (relatively few errors) that can be accessed instantly (only with your permission) for a variety of uses. Credit history is is a good predictor of behavior, from the likelihood that you will get into a car accident to the likelihood of losing your cell phone.

Now hospitals are using credit scores to determine what to charge patients:
In the hospital business they call it a "wallet biopsy." A growing number of medical centers are using sophisticated software that digs into patients' finances to help determine whether they will receive free or discounted care.
This allows hospitals to avoid giving free care to patients who falsely claim to be indigent.

EXTRA CREDIT: how could a non-indigent patient defeat this price discrimination scheme?

Thursday, November 27, 2008

Re-distribution of health

Obese people in Canada have right to two airline seats, for the price of one.
The high court declined to hear an appeal by Canadian airlines of a decision by the Canadian Transportation Agency that people who are "functionally disabled by obesity" deserve to have two seats for one fare.

Wednesday, November 26, 2008

"It's Up to You" Pricing in Retail

We previously blogged about Radiohead's decision to offer its new CD online at a price the consumer could decide and about the results of the offer.

Here's a story about a retail store in Seattle that makes the same offer on its eclectic mix of goods: "From whimsical holiday plates to obscure albums to hundreds of other items, the customer determines the price for everything."

How's it working out? Not so good - the store is closing. Surprisingly, the landlord doesn't offer a pay what you want policy for the rent.

Tuesday, November 25, 2008

In case you didn't think you needed a Plan B

Our Plan B contest still has one week. No one has entertained the idea of moving to a prosperous state (Tennessee) and seceding from the Union:
Asked why he expected the U.S. to break up into separate parts, he said: "A whole range of reasons. Firstly, the financial problems in the U.S. will get worse. Millions of citizens there have lost their savings. Prices and unemployment are on the rise. General Motors and Ford are on the verge of collapse, and this means that whole cities will be left without work. Governors are already insistently demanding money from the federal center. Dissatisfaction is growing, and at the moment it is only being held back by the elections and the hope that Obama can work miracles. But by spring, it will be clear that there are no miracles."

Just when you thought it couldn't get any worse

Using jargon-free, simple prose, Susan Woodward and Bob Hall explain why the populist impulse to help homeowners is almost exactly wrong:
The main support that the government has offered so far is to guarantee modified mortgages, so that the government, not the lender, bears the cost of a default after modification. Subsidizing defaults will do some additional damage, as a good policy would discourage defaults, not subsidize them. Another questionable policy is a moratorium on foreclosures. Houses deteriorate rapidly when occupied by people who think they are going to be evicted. Policies that do not encourage true home ownership, where occupants have full incentives to take care of the houses they live in, risk additional deterioration to the housing stock. Nonetheless, several states have adopted moratoriums and there is talk of a long moratorium imposed by the federal government.

Monday, November 24, 2008

Loans are cheap; why isn't anyone buying them?

The Economist reports that ever since Secretary Paulson decided that it was a bad idea for the Treasury to buy bad loans at high prices, demand for loans has fallen, and this has lead to a fall in the price for loans.

DISTRESSED markets tend not to react well to offers of salvation being abruptly withdrawn. Holders of toxic mortgage-backed securities had pinned their hopes on the American government’s plan to buy large piles of the stuff through auctions as part of the Troubled Asset Relief Programme (TARP). The decision on November 12th to abandon that approach in favour of direct capital injections has left them shattered. The ABX index, which is linked to residential mortgages, is plumbing new depths. Spreads on the CMBX index, which is tied to securities backed by loans for offices, shopping malls and so on, have been exploding (see chart).
John Mauldin suggests that there artificial restraints may be preventing funds from buying these cheap loans:
Today, many highly rated loans are selling for 80 cents on the dollar. There is nothing wrong with the collateral or the corporation which owes the money; there is just no one with ready cash to buy the loans. I asked my friend why he doesn't buy them, since they offer very good returns.

The problem is that his fund, and most other CLOs, have covenants in their offering documents that prevent them from buying debt at less than 85 cents on the dollar. That covenant is a good thing in normal markets, as it prevents possible mischief by the manager, but right now it means that a lot of opportunity is being missed.

Test Your Civic Literacy

About 125 million Americans cast ballots in the presidential election. How many of them do you think were actually moderately well-informed? If you take a look at the results of the Intercollegiate Studies Institute's recent survey of American civic literacy, you might be a little concerned.

The Institute selected a random sample of 2,508 American adults and gave them a 33-question civics quiz. A few highlights from the results:
  • Seventy-one percent of Americans fail the test, with an overall average score of 49%.
  • Fewer than half of all Americans can name all three branches of government.
  • Only 24% of college graduates know the First Amendment prohibits establishing an official religion for the United States.
And, it's not like the people we are voting for are any better. On average, public office holders scored 44%, five percentage points lower than non-officeholders.

Take the quiz to test your civic literacy.

Saturday, November 22, 2008

What did we learn from the Great Depression?

Those who ignore history are condemned to repeat the mistakes of the past:
  • MONETARY POLICY IS KEY
  • GET THE SMALL THINGS RIGHT

He also took steps to strengthen unions and to keep real wages high. This helped workers who had jobs, but made it much harder for the unemployed to get back to work. One result was unemployment rates that remained high throughout the New Deal period.

Today, President-elect Barack Obama faces pressures to make unionization easier, but such policies are likely to worsen the recession for many Americans.

  • DON’T RAISE TAXES IN A SLUMP
  • WAR ISN’T THE WEAPON
  • YOU CAN’T TURN BAD TO GOOD
In short, expansionary monetary policy and wartime orders from Europe, not the well-known policies of the New Deal, did the most to make the American economy climb out of the Depression. Our current downturn will end as well someday, and, as in the ’30s, the recovery will probably come for reasons that have little to do with most policy initiatives.

Stress free shopping

Sony has your best interests at heart:

Jay Vandenbree, the company’s president for consumer sales, discussed its new rule that bans retailers from discounting Sony’s Alpha digital camera line, its more expensive televisions and some other high-end products.

Mr. Vandenbree said that by having the price for these products be the same at all retailers, Sony had eliminated stress for buyers.

Quiz: which teachers will give up tenure?

Another case of Democrats doing things Republicans can only dream about. Noting that "Tenure ... has no educational value for kids; it only benefits adults," DC Schools Chancellor Michelle Rhee is offering teachers a choice:
This summer she offered a new teacher contract proposal with two options. Teachers could choose a plan under which their pay would rise spectacularly -- nearly doubling by 2010 -- in exchange for giving up tenure. Or they could opt for a smaller pay bump and still lose some seniority rights.
This "screen" will be used to weed out the good employees from the bad.

Ms. Rhee's proposal has caused a meltdown among leaders of the Washington Teachers' Union, and negotiations have collapsed. The Chancellor has raised the stakes, announcing the district would seek to dismiss tenured teachers who are ineffective. She has also hinted she'll go around the union by creating more nonunionized charter schools, or getting the federal government to deem her district in a "state of emergency."

What the feds can learn from Tennessee

Showing once again that he is not bound by Democratic Party orthodoxy, Tennessee's governor designs a health plan that would pass a benefit-cost test in an economics class:

CoverTN, which began in 2006, is a health-insurance plan for those who are self-employed, or who work for small businesses that can't afford a traditional policy.

It is not free health care. Rather it is a limited plan with shared costs. In devising this plan, we didn't start out the usual way -- by defining what benefits we wanted -- but instead set how much we wanted to pay. And then we began a competitive-bidding process to see how much health care we could buy. We initially set the amount we would pay at an average of $150 a month, and split the responsibility for that premium three ways. The company would be responsible for $50, the individual for $50, and the state for the final $50.

The bidding was vigorous. It was ultimately won by BlueCross BlueShield of Tennessee with a benefit package that meets a great many -- not all -- of the real needs of the uninsured at a cost far below conventional plans.

At these premium levels -- less than half of what a conventional plan might cost -- the benefits are limited. But the benefit structure is also different than in a conventional plan. Most limited plans achieve their savings with high front-end deductibles, requiring a person to spend often thousands of dollars out-of-pocket before benefits kick in. But when we asked our customers -- uninsured Tennesseans -- what they actually wanted, we found that they were most interested in some help with the more common things; a doctor's visit, prescriptions, a short hospital stay.

CoverTN emphasizes covering these front-end costs. It features free checkups, free mammograms and $15 doctor visits without deductibles, for example. And it achieves its savings on the back end, with relatively low limits on hospital stays and an overall $25,000 benefit limit in any one year. It does not cover truly catastrophic events.

Note to President-elect Obama: Bredesen would make a great secretary of HHS.

Friday, November 21, 2008

How NOT to get banks to lend money

Jonathan Carmel argues that the Paulson plan gives under-capitalized banks an incentive to take "heads I win, tails the taxpayers lose" bets:
If the Treasury plan is successful in restoring the LIBOR market, banks will be able to raise tremendous amounts of cash very quickly by borrowing in the LIBOR market. The money-center banks that borrow in this market have a wide array of risky investment opportunities available to them, much wider than was available to Fannie Mae or Freddie Mac.
Instead, he prefers direct equity investments in well-capitalized banks:
With increased equity capital, well-run firms that currently have strong equity positions would be able to greatly increase their borrowings and expand into the parts of the capital market left vacant by banks which have fallen. This also ameliorates the moral hazard problem since the healthy wellcapitalized banks that would directly benefit from such a plan are unlikely to have been the main culprits that caused the initial crisis.
He also cautions against purchasing bad loans or increased deposit insurance:
...we should be careful about having the government try to spend our way out of this crisis. Every dollar that the government uses to buy tainted assets, bailout banks, or cut taxes creates an extra dollar of safe Treasury securities which inevitably diverts a dollar of private investment capital from risk-bearing securities.

Wednesday, November 19, 2008

Mitt Romney: Detroit needs a turn around, not a check from the government

The son of the president of the now-defunct American Motors brings a unique perspective to the Congressional bailout:
  • First, their huge disadvantage in costs ... must be eliminated. That means new labor agreements ..., retiree benefits must be reduced
  • Second, management as is must go. New faces should be recruited from ...— from companies ... respected for excellence in marketing, innovation, creativity and labor relations


Who made money when Wall St. died, and how did they do it?

Liars Poker author does the post-mortem.
The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking home­owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’ ” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”

Creative Blogging - Professor Edition

A professor at Texas A&M International in Laredo, Texas has gotten into some serious hot water for creative use of his blog. After discovering that six of his students had cheated on an essay by plagiarizing some of their work, he posted their names on his blog. Ouch!

The professor defended his action by noting that his syllabus expressly warned students that he would “promptly and publicly fail and humiliate anyone caught lying, cheating or stealing.” And, he did. Unfortunately for him, despite the advance notice to students, the Family Education Rights and Privacy Act prohibits the release of students' educational records (note that the professor disputes whether his actions were contrary to FERPA). The professor was fired.

Monday, November 17, 2008

Lining Up at the Public Trough

So what happens when the government starts handing out money left and right? People start lining up for a crack at the pie. A recent New York Times column describes the various lobbying factions descending on the Treasury like a pack of hungry dogs.

I bet you didn't know that the National Marine Manufacturers Association has been so hard hit by the recent economic turmoil. Their lobbyists are asking if boat financing companies can get a piece of the action to help make sure that boat dealers have sufficient credit access to keep boat showrooms full. Glad to see my tax dollars potentially addressing the crisis of less than full boat showrooms.

Saturday, November 15, 2008

Contest Announcement: Plan B


The fiscal future for young people in the United States is bleak. The promises we have made to retired people (through Medicare and Social Security) are going to swamp the federal budget in a short time. The rating agencies will eventually downgrade US government debt because we have no plans to pay for our entitlement programs; and long term interest rates will rise as markets punish our inaction.

I will award $100 to the best "plan B"--identify the best country or location to wait out the decline and fall of the US Empire. Post your (less than 100 word) entry as a comment to this post, and my Managerial Economics students at Vanderbilt will select a winner. A winning country will not be facing the same kind of fiscal disaster that awaits young workers in the US; and be a good place to live and work.

DEADLINE: 1 December 2009.

"Periods of crisis often beget bad policies."

So says UCLA economist Lee E. Ohanian who argues that the New Deal prolonged the Great Depression by about seven years and that the government's so called "bail out" is actually causing the slow down by increasing uncertainty.

Wednesday, November 12, 2008

Mexicans and machines...

are stealing our jobs.

Save us from Congress

Why is the Peso falling?

Answer: The price of a peso has fallen from about $0.10 to $0.07 in the last two months. Falling US demand for Mexican exports to the US means a lower demand for Pesos. As demand for pesos falls, the price of a peso drops.

Rational Addiction

Among many other contributions, economist Gary Becker is known for his theory of rational addiction. As the name implies, the theory argues that addictions can be modeled as rational, optimal consumption plans. So, go ahead and have another Twinkie and spend another hour online!

The folks over at Freakonomics have been having a little contest (which drew over 600 comments in just over a day and a half) to predict what Gary Becker thinks is the most addictive good. Here's the answer (which I found to be a bit disappointing).

Tuesday, November 11, 2008

Pull the plug on GM

Former student John Tamny says saving GM would reward failure.
Government money allows the architects of bad decisions to continue making mistakes...

Monday, November 10, 2008

What are these 40,000 workers doing?

The US Post Office lost $2B last year and is thinking about laying off 40,000 of their 685,000 employees. But they say that their customers wont notice a thing
"The general public ... won't se any decrease in service.. They largely won't know about it."

Where have all the Blue Dogs gone?

After debating Jim Cooper last week, and hearing his hope that the new administration would tackle the only issue that matters (entitlements), I was ready to drink the Obama Kool-Aid. But it looks like the Blue Dog Democrats are rolling over for the new President.
Late last week the leader of the House Blue Dog Coalition, Tennessee Democrat Jim Cooper, announced that with Barack Obama about to enter the White House, "I'm not sure the old rules are relevant anymore." Why not? Because, Mr. Cooper said, "It would be unfair to the new President to put him in a budget straitjacket."
Note: it may actually make some sense to run a counter-cyclical fiscal policy. But the Blue Dogs have not been a model of consistency:
Democrats ran on "paygo" in 2006, promising to offset any new spending increases or tax cuts with comparable tax increases or spending cuts. Once in charge on Capitol Hill they quickly made exceptions, waiving paygo no fewer than 12 times to accommodate some $398 billion in new deficit spending -- not that the press corps bothered to notice.

This seems like low hanging fruit,

or at least much cheaper than bailing out the auto industry.

The CAFE rules (clean air standards) require car makers to build small clean cars domestically in order to qualify its "fleet" under the standards.

How dumb is the rule? Chrysler might not be unraveling today if not for the two-fleet rule ... Chrysler has a perfectly salvageable business making trucks, minivans, muscle cars and Jeeps -- doomed only by the lack of enough small, fuel-efficient cars to roll out of a UAW factory with a Chrysler emblem slapped on.

Exodus

...of physician's from Pennsylvania as they rush to escape the Governor's attempt to finance a universal health care system, largely by increasing physician's insurance costs:

... the number of practicing physicians in Pennsylvania is down 6% from a few years ago. Younger doctors just are not as willing to settle down in a state where liability payouts are twice the national average and physician income is 44th out of the 50 states. Today, about 7%-9% of our doctors are under 35. A few years ago, the number was 15% and in some specialties more than 40% of the practicing physicians are more than 50 years old. And less than 80% of physicians with active licenses are engaged in patient care.

Newly minted doctors educated here are setting up their practices elsewhere. In 1992, 60% of residents stayed in Pennsylvania when they finished their training. Now only 20% do so.

Google CEO on the Future of Business

The McKinsey Quarterly interviews Google CEO, Eric Schmidt; he "reflects on the coming transformation of strategy, competition, business models, and management." Maybe he read our textbook:
When the marginal cost of distribution and manufacture is effectively zero, the free model with ancillary branding and revenue opportunities is a good thing.

Saturday, November 8, 2008

Unemployment from 1950


The dark lines above are officially recognized recessions. The red is John Mauldin's forecast unemployment, but he qualifies his forecast by noting that this recession is different from the ones that preceded it:
This recession is the result of serious bubbles in the housing and credit markets imploding. It is not the result of excess inventory or overinvestment in manufacturing capacity. As I have written numerous times, these excesses took years to build up and will take at least 2.5-3 years to correct. We are 15 months into the correction process. That is unlike any other recession we have experienced. So be careful in your use of comparisons based on historical averages.

Friday, November 7, 2008

Could expectations get any higher?

David Brooks has a dream:

Walking into the Obama White House of my dreams will be like walking into the Gates Foundation. The people there will be ostentatiously pragmatic and data-driven. They’ll hunt good ideas like venture capitalists. They’ll have no faith in all-powerful bureaucrats issuing edicts from the center. ...

They will actually believe in that stuff Obama says about postpartisan politics. That means there won’t just be a few token liberal Republicans in marginal jobs. There will be people like Robert Gates at Defense and Ray LaHood, Stuart Butler, Diane Ravitch, Douglas Holtz-Eakin and Jim Talent at other important jobs. ...

My dream administration will announce a Budget Rebalancing Initiative. Somebody like Representative Jim Cooper would go through the budget and take out the programs and tax expenditures that don’t work. “If we have no spending cuts, then we’re saying government is perfect. Nobody believes that,” Cooper says.

Lawyerocracy

The American Bar Association cannot find a non-attorney on Senator Obama's transition team, leading them to speculate on How an Obama Presidency May Benefit Lawyers

Lawyers in diverse practice areas ranging from labor law to bankruptcy are likely to benefit from legal changes that could be made during the Obama administration.

Lawyers can expect more regulations in banking and health care, fewer restrictions on lawsuits, more real estate lending and a pro-labor tilt, according to business development consultant Larry Bodine. Lawyers who spoke to the American Lawyer also predict fewer bankruptcy restrictions and raise the possibility of job protections based on sexual orientation.

Is Wal-Mart an inferior good?

An inferior good is one whose income elasticity of demand is negative, so that when income goes down, demand goes up. From NY Times:
Sales at department stores and specialty retailers are falling rapidly. They are cutting staff, discounting merchandise and liquidating stores to survive. But even as the financial turmoil strangled discretionary spending at many stores, it sent struggling consumers into the arms of Wal-Mart — and left it, the world's largest retailer, poised for a blockbuster Christmas.

This is a counter-cyclical fiscal policy

from WSJ:

Uncle Milton at his best

thanks Noah:

Thursday, November 6, 2008

California's procyclical fiscal policy

In down times, the government increases spending and reduces taxes to mitigate the effects of recession. But California always seems to do things a little differently:
SACRAMENTO, Calif. (AP) - Gov. Arnold Schwarzenegger has proposed $4.4 billion in tax increases and billions more in spending cuts to close California's worsening budget deficit, declaring: "We must stop the bleeding." ...

California's budget relies greatly on capital gains taxes, which have dropped precipitously in recent months along with swooning stock prices. Sales and property taxes also have declined.

He said lawmakers will not be able to close the budget gap with cuts alone. He proposed a temporary 1.5 percent sales tax increase and other "revenue generators."

Wednesday, November 5, 2008

An early signal that change may not be bad

The Washington Post reports that our own Jim Cooper is being considered for a position in the new administration:
One prospect for a top administration job, possibly at the Office of Management and Budget, who would test the Washington establishment is Rep. Jim Cooper (D-Tenn.), a crusader for government reform who annually publishes a dire alternative report on the federal budget.

Tuesday, November 4, 2008

How to get our health care expenses under control

NOT
Judge Henry H. Kennedy Jr. of Federal District Court here said the policy of paying for only “the least costly alternative” was not permitted under the Medicare law.

Monday, November 3, 2008

What if the Median Voter Were a Failing Student?

He or she probably is, according to this essay by Bryan Caplan from George Mason University.
When you actually collect data on the public’s economic beliefs and test them for systematic error, systematic errors are easy to find . . . The public systematically underestimates the social benefits of the market mechanism, especially for international and labor markets, and sees the past, present, and future of the economy in an unrealistically pessimistic light.
Here's the summary
As teachers, economists usually assume that their students have systematically biased beliefs about economics; yet, as researchers, economists usually assume that voters understand how the economy works. Teachers have it right, according to Bryan Caplan, and so modern political economy needs a serious overhaul.
(HT: Richard Langlois)

Predicting the Presidential Election

Prediction markets at intrade currently rate Obama's chance of winning the election just under 90%.

Friday, October 31, 2008

Dirigisme

Creeping socialism has broken into full gallop.
The center of gravity of the world economic system has moved from New York to Washington. ... The US Treasury has become the only "customer" that matters. The Treasury is now the customer—and investor -- with the $750+ billion checkbook. The Treasury is now the "investment banker" of last resort, arranging and financing mergers. Banks are competing against insurance companies for their slice of the bailout pie. Chrysler and GM (and the Michigan Congressional delegation) are looking to Washington, not Goldman or Merrill, to facilitate a merger. This is a seismic shift.

Strategy Under Uncertainty

Find out why war is the best metaphor for business. Courtesy of the Marines:
Because we can never eliminate uncertainty, we must learn to fight effectively despite it. We can do this by developing simple, flexible plans; planning for likely contingencies; developing standing operating procedures; and fostering initiative among subordinates.

Thursday, October 30, 2008

Predicting China "surprises"

Oxymoronic speculation from the McKinsey Quarterly:

  • China announces that by 2020, half of the cars in the country will be electric. It invests tens of billions of dollars in R&D toward achieving that goal.
  • The Chinese government buys a 50-year lease on an entire geographic region of Mexico, enabling Chinese companies to build factories there to supply the North American market more easily.
  • A major office block collapses in Chaoyang, Beijing’s central business district.
  • A leading Chinese company tries to buy an iconic US technology firm (or two).
  • A restructuring of China’s telecommunications industry turns into a complete consolidation.
  • The English Premier League football association buys its Chinese counterpart, the Chinese Super League.
  • Warming cross-strait relationships lead to a merger between the mainland’s Industrial and Commercial Bank of China and Taiwan’s Chinatrust Commercial Bank.

Wednesday, October 29, 2008

Who Watches this Junk?

The other day I had one of the cable business channels on in the background. I sometimes find the parade of prognosticators to be amusing although it's a little scary that some viewers might believe this stuff. One commentator noted that stocks "always" have a big rally the last week of October.

Don't viewers see the problem with this type of claim? If stocks "always" rally the last week of October, it would make sense for everyone to buy the week before to capture the value increase of the rally. Then, the rally would occur the week before when the buying started. And, of course, knowing this, everyone would buy the week before that. And, so on and so on.

Monday, October 27, 2008

Other people's money

Danny DeVito on socially responsible investing:

Labor mobility attenuates shocks

Wall St refugees leave NYC in mass migration:
Bankers and brokers looking to escape the financial meltdown are scrambling to relocate their families, possessions and rarified talent far from Wall Street to places such as Florida, Chicago, Milwaukee, Virginia and Asia.
Just think how difficult it is for countries without a mobile labor force to respond to these changes. Policies designed to ease the pain from these shocks has the perverse effect of decreasing our ability to respond to them.

A Humorous Explanation of the Financial Mess


(HT: Erik Doving via O&M)

Sunday, October 26, 2008

New Deal II?

Harbinger of things to come:
The nation’s battered economy needs an old-fashioned “Rooseveltian lift” of regulatory reforms and government spending on the infrastructure, clean energy and other sectors, U.S. Sen. John Kerry said yesterday.

Friday, October 24, 2008

Speaking truth to the formerly powerful

But now that Congressman Cooper is in power, we should be asking why Congress isn't doing more.

Wednesday, October 22, 2008

Outsourcing entitlement policy to the AARP...

They say that Democracy is the worst form of government except for all the others that have been tried, but I am beginning to wonder. Why can't we get the candidates to talk about the only problem that matters, the future? Robert Samuelson calls young voters "chumps," for trying to change the channel instead of facing up to the problem and demanding change--to our unfunded entitlements.
You're not hearing much of this in the campaign. One reason, frankly, is that you don't seem to care. Obama's your favorite candidate (by 64 percent to 33 percent among 18- to 29-year-olds, according to the latest Post-ABC News poll). But he's outsourced his position on these issues to AARP, the 40 million-member group for Americans 50 and over.

Nifty pricing exercise

I rarely use the term "nifty" but this exercise from Michael Ward via Joel Waldfogel certainly qualifies. Shows students how to make pricing decisions based on survey data.

And they say it would never happen here...

In 2012, Moody's will likely reduce the rating on US government debt because Medicare, Social Security, and Medicaid are running out of money. Whoever is president at that time will face some very difficult choices: increase taxes, cut benefits, allow more immigration or, like Argentina, confiscate private savings:
José Piñera, a former Chilean cabinet minister who pioneered the privatized pension system and has served as a consultant to many other countries that have implemented it, called the nationalization proposal "just another step in Argentina's 100-year 'road to underdevelopment.'"
At that point, we will discover what the parties really stand for.

What Does it Mean to be a Republican?

James Carville and Paul Begala have an interesting recent post at The Huffington Post. They claim that Obama looks like a lock for the election and it's time for the Republicans to start placing the blame for the failure to retain the presidency. What I found more interesting was a passage later in the post questioning what it means to be a Republican these days. And, yes, I know these two aren't the most objective commentators on political issues.
What does it mean to be a Republican? Do Republicans support laissez-faire or nationalized banking? Do Republicans support a balanced budget or half-trillion-dollar deficits? Do Republicans want a "humble foreign policy" like George W. Bush, or preventive war against countries that pose no threat, like, umm, George W. Bush? Are Republicans the party of limited government or a vast Medicare prescription drug benefit? Are they wary of Big Brother or eager to expand warrantless wiretaps? Do they support Christian values or torture? Are they the party that believes that cutting-edge technology can shoot a missile out of the sky or the party that believes humans and dinosaurs walked the earth simultaneously?

Monday, October 20, 2008

“I’ve been waiting for someone to put all the blame at my doorstep,

Fascinating interview with Henry Cisneros who began the policies that resulted in an increase in home ownership by loosening mortgage rules (see graph above).
Victor Ramirez and Lorraine Pulido-Ramirez bought a house in Lago Vista in 2002. “This was our first home. I had nothing to compare it to,” Mr. Ramirez says. “I was a student making $17,000 a year, my wife was between jobs. In retrospect, how in hell did we qualify?”

Humor: The Onion on Children's healthcare


Study: Most Children Strongly Opposed To Children's Healthcare

A Managerial Hippocratic Oath?

An article in the October Harvard Business Review argues that "Managers have lost legitimacy over the past decade in the face of a widespread institutional breakdown of trust and self-policing in business" and offers the solution of a managerial code of conduct to be enforced by some sort of governing body. (Here's the Economist's discussion of the article.)

It's a pretty long code, but here's one interesting part of the pledge:
My purpose is to serve the public’s interest by enhancing the value my enterprise creates for society.
Hmmm.. not sure how you would measure value created for society. Anyway, if I risk my capital to start a business, my purpose is to serve my interests by enhancing the value my enterprise creates for me. I think I would pass on taking their pledge.

Friday, October 17, 2008

Not for profit, but not for loss

Nonprofit Hospitals Leave The City for Greener Pastures. Are they behaving like for-profits?

When the safety net gets too big, people jump in.

Hawaii is dropping the only state universal child health care program in the country just seven months after it launched.
"People who were already able to afford health care began to stop paying for it so they could get it for free," said Dr. Kenny Fink, the administrator for Med-QUEST at the Department of Human Services. "I don't believe that was the intent of the program."

Wednesday, October 15, 2008

Deja vu all over again

From a discussion with Alex Blumberg, host of NPR's Planet Money:
New York: Alex, if you are an insolvent (or near-insolvent) bank and you take a bucketful of money from the Treasury in this stock-for-capital plan, why wouldn't you just make the riskiest bets possible? If you fail, you and your shareholders lose little (as your bank was near insolvency to begin with) and if you succeed, you've made a cool buck off of Uncle Sam's generosity. Seems like Hank is just encouraging moral hazard here for small banks, no?

One of my former students (thanks Brian) recognized the question as classic moral hazard in lending. A near-insolvent borrower can make a "heads I win, tails you lose" bet with borrowed funds, so a lender has to monitor the behavior of the borrower to try to limit the riskiness of the kinds of investments borrowers can make.

This is exactly what happened during the S&L crisis in the 1980's.

Setting Prices for Distressed Assets

So, apparently you and I as US taxpayers are going to be buying some distressed assets through our friends at the Treasury Department. What price should we pay? The supposed problem right now is that no one wants to buy these assets, so maybe zero is the right number. The counter argument is that they have some value. So, what do we do?

In a Slate column, Steven Landsburg (economist and author) proposes that we use a Bils-Kremer auction.
Here's (roughly) how a "Bils-Kremer" auction would work: First, put 10 similar distressed assets (such as a series of collateralized debt obligations) up for auction. At the close of the auction, the Treasury pays the winning bids for nine of these properties. The 10th property (chosen randomly) gets sold to the winning bidder.

Tuesday, October 14, 2008

Those who ignore history...

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance. -- Cicero , 55 BC

ERRATUM: Cicero never said that. The quote is taken from a book of historical fiction, A Pillar of Iron, written by Taylor Caldwell, published in 1965

Cato on Stossel

John Stossel's "Politically Incorrect Guide to Politics" at 10 p.m. on Friday, Oct. 17.

Is mark-to-market accounting causing the crisis?

One of the themes in our textbook is that seemingly innocuous rules can have real effects if they are tied to decision making. Many argue that banks' reluctance to lend money is tied to the mark-to-market accounting rules they are using. If the underlying value of a bank's assets decline then then they have to mark down their equity which reduces the amount of money they can lend.

If this is indeed causing the crisis, we may have a nice natural experiment to test the hypothesis. FASB, the accounting folks who brought us mark-to-market accounting rules, are now suggesting that banks use cash flow analysis instead:
What this means is that if financial institutions are able to argue cash flow analysis to the auditors, the fire sale write downs of illiquid loan pools will no longer erode financial market capital.

Monday, October 13, 2008

And The Winner Is . . .

Princeton University professor and NY Times blogger, Paul Krugman, has been awarded the 2008 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. According to the press release, Krugman is being recognized "for his analysis of trade patterns and location of economic activity"

Ironically, Krugman's work on international trade showing that trade can make things worse has been cited by policy makers trying to justify protectionism. Krugman, however, advocates a liberal trade policy, unlike many Democrats, including one Senator seeking higher office. See How do the candidates vote on trade issues?

Saturday, October 11, 2008

You are not rich because...

Becoming a millionaire has less to do with how much you make, it's how you treat money in your daily life

  1. You care what your car looks like
  2. You feel entitlement
  3. You lack diversification
  4. You started too late:
  5. You don't do what you enjoy
  6. You don't like to learn
  7. You buy things you don't use
  8. You don't understand value
  9. Your house is too big
  10. You fail to take advantage of opportunities