Tuesday, May 31, 2011

Private Colleges Heavily Discount Published Tuition, On Average 42 Percent Discount

From The Washington Post, "Tuition discounting hits record high" by Daniel de Vise:
The average tuition “discount rate” among private, nonprofit colleges hit a record high of 42.4 percent in 2010, meaning that the average student now pays about 58 cents on the dollar of published tuition.

Thursday, May 26, 2011

Foreclosed Homes Sell At 27 Percent Discount

From Bloomberg, "Distressed Homes Sold at 27% Discount" by Dan Levy:
U.S. homes in the process of foreclosure sold at an average 27 percent discount in the first quarter and purchases of distressed properties fell to less than half the peak set two years ago, according to RealtyTrac Inc.

The discount reflects the price of distressed properties relative to normal sales. A total of 158,434 homes that sold in the period received notices of default, auction or repossession, down 16 percent from the fourth quarter and 36 percent from a year earlier,

How To Fix Medicare And Get The Seniors Onboard

It is possible to change Medicare to solve its future funding problems without alienating seniors or allowing the other political party to negatively categorize the changes. Increasing the supply of alternative low cost trained medical providers is one way.

What do we know about Medicare funding and assets?
We know, according to the 2011 Medicare Trustee Report, that Medicare has enough revenues and reserve assets to continue for at least another decade despite above inflation rate medical cost increases and increasing enrollment rates due to changing demographics. That means there is some breathing room, but changes must be implemented soon to achieve cost benefits within a decade or so.

We also know that increasing taxes, whether on just the wealthy or on a broader segment of the workforce, will not cure the future funding shortfall problem. Future Medicare enrollees and medical costs are growing at too fast a rate compared to future workforce growth for taxes to be able to fund Medicare as is.

What do we know about Medicare enrollees, especially seniors?
We know that seniors vote, are knowledgeable about issues affecting them and want Medicare benefits preserved, the structure left alone and the cost to them not increased, or at least the risk of substantial cost increases not passed on to them.

What do we know about vouchers and proposed Medicare reimbursement cuts?
Seniors, other Medicare enrollees, and approaching future Medicare enrollees do not like vouchers because they fear they would lose their existing benefits and be unable to afford medical care.

We know that legislative cuts in Medicare doctor reimbursement and other Medicare funding cuts are always overridden by Congress for fear of losing a reelection because the cost cuts affect the supply and availably of medical care to seniors.

Despite the independence of the cost cutting panel in Obama's health care legislation, when the panel and its cuts go into effect, Seniors' wrath will be vented against their elected Congressional members. As the Medicare Trustees recognize in their alternative scenario, the law very likely will be amended to override the panel's Medicare reimbursement cuts, or Congressional incumbents will lose their seats.

How do we make changes to Medicare and get voters to agree?
We know that price controls, cost controls, limits on Medicare reimbursement and limits on medical care (aka death panels) will not work because incumbents very likely will lose reelections unless they override the proposed cost savings.

We know seniors do not want the payment risk passed on to them through vouchers or any other funding mechanism.

If you cannot change the cost reimbursement, the demand for or access to care or shift any of the increasing cost risk to seniors, then Congress is left with only one option to reduce and limit its and taxpayers' future Medicare funding liabilities.

Congress needs to pass legislation that will increase the supply of medical care providers and lower medical care delivery costs to seniors and other Medicare enrollees.

Congress needs to override state laws that restrict doctors certified in other states from practicing in a state, directly or through threatened federal reimbursement loss to states; allow more foreign trained doctors into the US and allow them to practice medicine; find ways to motivate undergrad colleges and nursing schools to offer an degree equivalent to a 2 or 4 year doctor associate degree that will allow the associate to takeover many of the routine functions and routine examinations of a doctor and change reimbursement rules to allow payment for associate doctors and other equivalent licensed medical providers.

Increasing the low cost medical provider supply instead of restricting access or limiting reimbursement
Increasing the supply of low cost medical providers will provide more care to seniors. It will also put pressure on doctors to lower their costs, to use more associates and to pyramid themselves like law firms that use associates instead of partners for routine law firm work to lower cost. It will also alleviate doctor shortage problems by providing a trained alternative to 4 year medical school doctors.

Firms like Walmart that are experts in cost controls could use associate doctors to set up alternative first line medical care providers to meet many mundane medical needs of consumers. Doctors will face patient competition, lose some of their routine patients to associate doctors and need to lower their costs to survive, especially if they are reimbursed at the same rate as an associate doctor for mundane, routine care. The lower reimbursement rate will stick because a doctor backlash will not affect associate doctor medical care to seniors.

Additionally, hospital costs have to be lowered. Also, changes to the FDA need to be made lower the cost of drug approvals.

In the end
Congress need to substantially increase the supply of first line low cost medical care providers to lower the cost of medical care and to create cost competition to medical doctor services.

Changes to the FDA to lower costs of drug approvals and changes to hospital care are also needed to lower all Medicare reimbursement costs.

With an increase in the supply of low cost medical providers to seniors, Congress will be able to lower reimbursement costs to doctors without affecting primary care to seniors and other Medicare enrollees and without losing reelection.

China Ranked First, Ahead Of US, In Renewable Energy Projects

From Bloomberg, "China Widens Lead in Renewable Energy Ranking" by Alex Morales:
China widened its lead over the U.S. as the most attractive country for renewable energy projects, following its “greenest” five-year plan to date, Ernst & Young LLP said.
Read the complete Bloomberg article here.

Wednesday, May 25, 2011

Internet Accounts For Significant Share Of Global GDP: McKinsey Quarterly

From McKinsey Quarterly, "Measuring the Net’s growth dividend" May 2011:
The Internet accounts for 3.4 percent of overall GDP in the 13 nations studied. More than half of that impact arises from private consumption, primarily online purchases and advertising. An additional 29 percent flows from investments by private-sector companies in servers, software, and communications equipment. The Internet economy, now larger than that of Spain, surpasses global industry sectors such as agriculture and energy.

During 2007-09, More Young Adult Black Males Lost Jobs From Minimum Wage Hikes Than Recession: Minimum Wage Hikes Increased Unemployment And Decreased Hours Worked For All Young Adult Males

From "UNEQUAL HARM: Racial Disparities in the Employment Consequences of Minimum Wage Increases" by William E. Even, Miami University and David A. Macpherson, Trinity University, May 2011, Employment Policies Institute:
Drs. Even and Macpherson focus on 16-to-24 year-old males without a high school diploma, a group that previous studies suggest are particularly susceptible to wage mandates. Among white males in this group, the authors find that each 10 percent increase in a federal or state minimum wage decreased employment by 2.5 percent; for Hispanic males, the figure is 1.2 percent. But among black males in this group, each 10 percent increase in the minimum wage decreased employment by 6.5 percent.

The effect is similar for hours worked: each 10 percent increase reduced hours worked by 3 percent among white males, 1.7 percent for Hispanic males, and by 6.6 percent for black males.
***
Across all 50 states and the District of Columbia, approximately 34,300 black young adults lost their job due to the recession; during the same time period, 26,400 lost their job due to minimum wage increases that occurred.

But the picture grows even more troubling when the authors focus just on the 21 states fully affected by the federal minimum wage increases in 2007, 2008, and 2009. Approximately 13,200 black young adults in these states lost their job as a direct result of the recession; 18,500 lost their job as a result of the federal wage mandate—nearly 40 percent more than the recession. In other words, the consequences of the minimum wage for this subgroup were more harmful than the consequences of the recession.
The authors offer a non-discriminatory reason for the disparity in unemployment rates; one out of three young black adults works in the low margin restaurant industry, which cannot afford to pay higher wages:
The authors find that they’re more likely to be employed in eating and drinking places–nearly one out of three black young adults without a high school diploma works in the industry. Businesses in this industry generally have narrow profit margins and are more likely to be adversely impacted by a wage mandate. There’s also substantial variation in regional location, as black young adults are overwhelmingly located in the South and in urban areas.

It’s also likely that unobserved differences in skill level and job experience play a role. To the extent that these differences are concentrated among young men of a particular race or ethnicity, this group would have the greatest risk of losing jobs when the minimum wage is increased.
Read the full 19-page report here.

Tuesday, May 24, 2011

Higgs Boson 2013 Intrade Contract Is Signaling A False Higgs Find Or Its Mispriced

The 2013 Intrade Higgs Boson discovery security is signaling a likelihood that a find of the Higgs Boson will subsequently be determined a false positive result or inconclusive.

There are four different expiration date Intrade securities on the discovery of the Higgs Boson particle that have trading prices. Payment of $10.00 per contract is made if the Higgs is discovered before the expiration date of the contract.
  • Higgs Boson discovery before December 31, 2011 Intrade security price is $3.00 or 30 percent.
  • Higgs Boson discovery before December 31, 2012 Intrade security price is $4.50 or 45 percent.
  • Higgs Boson discovery before December 31, 2013 Intrade security price is $3.00 or 30 percent.
  • Higgs Boson discovery before December 31, 2014 Intrade security price is $5.00 or 50 percent.
The Intrade Higgs prices are $3.00, $4.50, $3.00, and $5.00 for 2011, 2012, 2013, and 2014. Why pay $4.50 for the 2012 contract to get $10.00 when one can pay $3.00 for the 2013 contract. If the Higgs is discovered before the end of 2012 both contracts pay $10.00. Why not buy the cheaper 2013 at $3.00 instead of the 2012 at $4.50. Additionally, the buyer of the 2013 gets an extra year's chance of the Higgs discovery at a lower price, $3.00.

One reason may be Intrade's Rule 1.4. (Any changes to the result after the contract has expired will not be taken into account - Exchange Rule 1.4 -- see below).

If there is publication in a major scientific journal of the observation of the Higgs Boson particle before expiration of the Intrade contract, the holder will be paid. Any event that happens after the expiration date of the contract will not be taken into account.

Intrade allows short selling. So, anybody can short the 2012 contract, receive $4.50 and use $3.00 to buy the 2013 contract. It is a risk free arbitrage unless one factors in the risk that in the subsequent year from 2012 to the end of 2013, the results will be changed and the arbitrageur will have to pay $10.00 to the 2012 securities without recouping the ten dollars from the 2013 contract.

If the arbitrage works, the short seller will get $4.50 on the 2012 contract and spend $3.00 to buy the 2013 contract, for a gain of $1.50. If Higgs is observed before 2012, the arbitrageur will get $10 on the 2013 contract to use to pay the 2102 contract holder. The arbitrageur keeps the $1.50. If the Higgs is not discovered before 2012, or 2013, the arbitrageur again keeps the $1.50 difference in price. The arbitrageur, without paying more, also has a chance to make an additional $10 if the Higgs is found after 2012 but before the end of 2013.

The fact that Intrade allows shortselling, and the 2012 and 2013 prices are not much closer, indicates to me that the Intrade Higgs market thinks there is some significant probability that false positive results will be announced and subsequently quickly overturned. A 2013 contract holder has the risk that a 2012 contract payment will be made but not a 2013 contract payment.

Intrade Rules

The Intrade rules for payment on the security are:
Confirmation of the Higgs Boson particle having been observed must be published in a major scientific journal for this contract to be expired. Clarification (Jan 5th 2009): for the Higgs Boson particle to be "observed" there must be a "five sigma discovery" of the particle.

Due to the nature of this contract please also see Contract Rule 1.7 Unforeseen Circumstances.

The Exchange reserves the right to invoke Contract Rule 1.8 (Time Protection) if deemed appropriate. [Intrade can unwind trades if occurred within an hour previous to an announcement or news story.]

Any changes to the result after the contract has expired will not be taken into account - Exchange Rule 1.4.

NY Leads US In Outmigration Of State Residents

From City Journal, "Goodbye, New York: State residents are rushing for the exits" by Fred Siegel:
For more than 15 years, New York State has led the country in domestic outmigration: for every American who comes to New York, roughly two depart for other states.

Saturday, May 21, 2011

Mississippi River Floods Repairing BP's Deepwater Horizon's Oil Spill Damage To Louisiana Wetlands

From TIME, "How the Floods May Restore Louisiana's Wetlands" by Steven Gray:
Only a year ago, the worst oil spill in American history [BP's Deepwater Horizon's oil spill in the Gulf of Mexico] slathered millions of gallons of oil across Louisiana's coast. The muck covered the tall, bamboo-like cane and short grass that stitches together the vegetation that makes up the wetlands south of New Orleans, preventing them from receiving oxygen. Many experts feared it would take years for the wetlands to recover, and that Louisiana's core seafood industry — especially the oysters, which unlike shrimp and fish cannot run away from hint of oil — was imperiled. Such sediment is crucial: the loss of vegetation quickens erosion of soil and islands.

Now, however, sediment-rich floodwaters are headed for the contaminated wetlands. The U.S. Army Corps of Engineers, manager of much of the nation's waterways, has, over the last century, set up a framework of Mississippi River containment that has ultimately deprived the Delta's wetlands of much-needed silt. That reduced sediment has, experts say, accelerated the shrinking of the Delta. Now, however, the agency has opened two channels to divert part of the Mississippi away from New Orleans and toward the wetlands. One channel is the Bonnet Carre spillway, which is funneling water into Lake Pontchartrain, and, from there, to the Gulf of Mexico. The other is the Morganza spillway, which sends water along the Atchafalaya River Basin and into the Gulf. The water and sediment forced through this channel, experts say, will likely help replenish the wetlands to the west of the Mississippi with fresh sediment, especially near fishing and shrimping villages like Dulac. The last major flood, in 1973, delivered enough sediment to create what are now large mud banks covered with lush grass and trees. Those banks have provided some of the crucial defenses of New Orleans during major storms.

The flood will, to some degree, flush out the oil remaining from last year's spill.
Read the complete TIME article here.

Thursday, May 19, 2011

Our Political System Does Not Reward Balanced Budget Compromises

The US Congress is in disagreement, mostly along party lines, about raising the current debt limit ceiling, raising taxes and decreasing spending in the FY2012 budget and thereafter.

In rough numbers, the US government spends about $3.5 trillion a year, raises about $2 trillion in taxes and fees per year and borrows the shortfall of $1.5 trillion per year. Of the $2 trillion in taxes and fees, less than a trillion dollars is from the individual federal income tax, about $900 billion in 2010.

The US is on track in 2011 to have another $1.5 trillion dollar deficit shortfall with more expenses than revenue. See my other post.

As I mentioned before, an individual income tax increase of 100 percent, doubling the tax revenue, is not enough to cover the yearly deficit, which means the passage of any tax proposal is unlikely by itself to solve the yearly deficit problem of spending more than revenues.

The President's continuing talk of taxing the rich is just divisive prattle that does not solve our budgetary problems. The top ten percent of taxpayers pay 70 percent of taxes, about $630 billion. A 50 percent increase in the taxes on the top ten percent, the rich, would only generate at best another $315 billion, leaving a current deficit of about $1.2 trillion and an even bigger future deficit as more people become over 65 years old.

Likewise, the overspending is so huge that the US government has to cut its spending by over 40 percent, almost in half, to balance the budget. A 40 percent cut in spending would leave just enough to pay for the current costs of Social Security, Medicare, Medicaid, unemployment benefits, food stamps, and child health programs. There would be just about nothing left for other government programs. There will also be nothing left for the expected growth in costs of Social Security and Medicaid Medicare due to the coming increase in the percent of the US population over 65 years of age. So a spending cut of 40 percent per year, by itself, will not solve our future impending budget problems. Spending on Medicare, Social Security and other social welfare entitlements has to be cut if we will ever balance our budget and live within our means.

Using a credit card analogy, imagine a household (Congress) spending (about $3.5 trillion per year) more than its income ($2 trillion per year) and using a credit card (deficit financing of $1.5 trillion per year) to pay for the extra spending over income.

At some point, if the borrowings on the credit card do not stop, the repayments and interest to the credit card lender will consume a significant portion of the household income and if the debt is not reduced, eventually the household will reach a point where the credit card company, the lender, will not raise the credit limit and the household will not be able to borrow additional funds to pay for new expenses with the credit card.

In life, in these types of situations, usually two things are done to get the household budget back into order.

First, spending is usually severely curtailed to bring it in line with income.

Second, additional income to pay off the debt is generated through working at a second job or putting someone to work that has not been generating income.

The US budget is way out of whack. Yearly income to the US government is too low. It is only about 60 percent of the amount it spends. Equivalently, the US government spends too much. It spends 175 165 percent of its income.

Neither major political party's solution to the budget deficit problem, Republicans cut spending or Democrats increase taxes, will balance the budget, currently or over the next few decades.

Both parties ideas are mandatory if there is to be a real solution to our deficit and over spending problem.

Like a household that over uses it credit card, Congress needs to both cut its actual yearly spending and increase its income that can be used for repaying debt. Spending needs to be cut to a much more realistic level and Congress needs to spend within its means. Entitlement programs along with other spending must be cut.

Likewise, much more income needs to be generated and Congress needs to raise taxes on more than just the rich if any meaningful amounts of new revenues are to be generated to balance the budget and payoff existing debt.

Unfortunately, we have a political system that does not reward compromise, especially when the choices are raising taxes and cutting individual benefit programs. Also, sadly, we have a President in the White House that likes to name call and bully the opposition party, is reluctant to promote realistic solutions and take responsibility, is willing to use the rich and the Republicans as the scapegoats for all the US budget and economic problems, and who seems to believe that there are free lunches.

Wednesday, May 18, 2011

$14 Billion Per Year More Than Current Spending Needed To Maintain US Highway System, CBO Statement

According to CBO testimony before the US Senate Finance Committee, the government needs to spend an additional $14 billion dollars per year over current spending levels to maintain the US highway system.

From Statement of Joseph Kile, Assistant Director for Microeconomic Studies, "The Highway Trust Fund and Paying for Highways" before the Committee on Finance, United States Senate, May 17, 2011:
Status of the Highway Trust Fund
The United States spends about $160 billion annually on highways, with about one-fourth of that total, or roughly $40 billion, coming from the federal government. Federal highway spending is funded mainly through taxes on gasoline and other motor fuels that accrue to the Highway Trust Fund. In recent years, the Congress has spent more on highways than the revenues accruing to the fund for that purpose, and it has supplemented the trust fund’s balance with money from the general fund of the Treasury.

The law that authorizes collection of taxes for and spending from the Highway Trust Fund is set to expire on September 30, 2011. Even if the provisions of that law are extended, the trust fund will be unable to meet its obligations in a timely manner by the summer or fall of 2012, CBO projects, unless transfers similar to those in the past are made, other sources of revenue are identified, or spending is reduced.

How Much Should the Federal Government Spend on Highways?
The Congress has a range of options for future spending on highways, and the one it selects will influence the amount and distribution of economic benefits from the nation’s network of highways and roads. Those options include the following:
  • Limit spending to the amount that is collected in current taxes on fuel and other transportation activities; doing so would result in spending that would be about $13 billion per year below the current amount.

  • Maintain current capital spending, adjusted for inflation.

  • Spend enough to maintain the current performance of the highway system; doing so would require about $14 billion per year more than current spending.

  • Fund projects whose benefits exceed their costs; doing so would require even more spending than maintaining current services, up to about $50 billion more than current spending, depending on the degree to which benefits would be expected to exceed costs.
Read the full statement on the CBO site here or on Scribd here.
The Highway Trust Fund and Paying for Highways

Tuesday, May 17, 2011

Where Do Oil Companies' After-tax Earnings Go? Who Will Be Harmed By A Tax Increase? A Look At Exxon

As Congress is considering increasing the federal taxes on oil companies, closing so called tax loopholes, I thought I take a look at where those after-tax earnings go and who would lose if Congress increased taxes, closed "tax loop holes" and decreased oil company after-tax earnings.

Using Exxon as an example, in 2010, Exxon paid 28 percent of its after-tax earnings, and 17 percent of its cash flow, as dividends to its widely held shareholder base. (About 50 percent of Exxon's shareholders are institutional. These are mostly mutual funds and pension plans.)

Exxon invested about all of the remaining after-tax income, about half of its cash flow, in its facilities, property, plant and equipment. The remaining cash flow was used for financial balance sheet purposes, almost entirely to pay off maturing debt.

So, what will happen if Congress increases the taxes Exxon pays?

It will likely hurt US citizens and retirees.

In 2010, the total of Exxon's earnings went to shareholder dividends, a large part of which are mutual funds and pension accounts, and to the purchase of property, plant and equipment used in the oil exploration and refinery businesses.

On a cash flow basis, all the cash went to dividends, purchase of property, plant and equipment and debt repayment.

Exxon is contractually obligated to make debt repayments, but it is not obligated to make a dividend payment or to reinvest in its business through the purchase of property, plant and equipment.

So, if Congress increases Exxon's tax payments, Exxon will have to cut dividends to its shareholders or reduce the amount it reinvests in its oil business or both.

It is likely Exxon will cut its dividends if its taxes are increased. The payment of dividends is not essential for Exxon's business strategy or to maintain Exxon as a going concern. Cutting dividends is also a very visible act that will get a lot of media attention and draw attention to the negative effects of a tax increase on oil companies.

I offer no opinion as to whether a federal tax law change for Exxon will negatively impact its stock price.

Also, see my post from last year, "BP Dividend Suspension Is A Hidden Tax On US Retirees."

Monday, May 16, 2011

The Muddled College Education Value Debate: Value And Affordable Are Not The Same Concept

There is an article on Bloomberg about the value of a college education, "U.S. College Education Isn’t Worth Price: Report" that is typical of the confused debate in politics and the media about higher education.

Investment value (or just value) and affordable are two different concepts. A $10 million commercial office complex may be a terrific investment value, but I may not be able to buy it because I cannot afford a $10 million purchase, even with reasonable bank financing.

The same is true for a college education. According to the Bloomberg article, a college education results in a $20,000 per year increase in earnings. On the other hand, a four year private college could cost $100,000 to $200,000. A 40 plus year investment return on $200,000 of $20,000 per year is almost a 10 percent return. Ten percent is a very decent 40 year return on $200,000 and comparable, if not better, to a return in the stock market.

The public, politicians and the media should have two different concerns about the price of a college education. Is it worth the investment? Is it affordable, with or without loans?

College Value

The answer to the first question is that yes, a four year college education, so far, has returned an increase in a worker's earnings that justifies the price of the education. The resulting increase in wages is a fair and adequate return for the investment. See my previous post, "Four Year College Degree Expected Wage Premium: No Signs Of Tuition Bubble."

College Cost

The answer to the second question about cost, is that to some people it is affordable and to some it is not, like all expensive things. Some college students have parents or grandparents that can afford to pay for their college. Some students get scholarships. Some students, after graduation, will make enough to repay college loans. Some recent graduates, because wages generally start low and increase over a worker's working years, will find it a tremendous burden on their budgets to repay loans used to finance a college education in the first few years after graduation, but will be able to repay their college loans. A college education may not seem to be of value to some right after graduation, but its value will be become evident over time, as their earnings increase.

For other prospective college students and graduates, an expensive private college education may be out of reach. Some of these students will go to more affordable state schools, to below average tuition cost colleges, or default on their student loans. Some will not got college.

Public Debate

The public and political debate about college costs is about what government should do, if anything, for those who skip college because they cannot afford or cannot finance their college education. There is value to a college education, but for some college is too expensive. What if anything more should the government do about those prospective students that can neither afford nor finance their college education?

Skip The Interest

One suggestion I have raised before on this blog is to eliminate the interest charge for some students on their student loans. If it is to society's benefit to foster a college education for groups that cannot afford to go to college, why should the government charge them interest on their student loans? The monthly repayment cost of a $200,000, 10-year 8 percent student loan will drop by a third from about $2,400 to about $1,600 a month, if the interest rate went from 8 percent to zero.

Proper Debate

The media, politicians and the public should stop confusing value with cost because it obscures the solution. A college education, at its current cost, has value by increasing future earnings about $20,000 per year. A college education is expensive at its current costs, and may be out of reach for some. The public debate is not about lowering college costs, but about what to do for that limited subset of prospective college students who cannot afford college with or without loans.

Sugar Increases Antibiotics' Potency

From "Add sugar to your antibiotics and crush superbugs" by Esther Inglis-Arkell:
Adding some ordinary sugar to the antibiotic helps it kill off persisters. Bacteria, persister and not, feed on sugars. Persisters survive by shutting down their metabolism when antibiotics strike, but if they're stimulated by sugar, they just keep feeding. This allows the antibiotics to destroy them exactly the way ordinary bacteria are destroyed.

Adding such a simple and widely available compound to existing antibiotics enhances their effectiveness against persisters, and fast. One test showed that a sugared up antibiotic could eliminate 99.9 percent of persisters in two hours, while a regular antibiotic did nothing. Doctors believe that this discovery will help treat urinary tract infections, staph infections, and strep throat, but its most life-saving application may be against the age-old disease tuberculosis. This infection of the lungs kills many people, and is hard to fight off. A little sugar could help save a lot of lives.

Sunday, May 15, 2011

Four Year College Degree Expected Wage Premium: No Signs Of Tuition Bubble

Taking a Gary Becker approach that an investment in education is an investment in human capital, what should the expected return on that capital investment be over the working life of a wage earner who makes an educational investment in four years of college? In other words, what will the wage premium be for a four year college degree over a high school graduate that did not make the same investment in education and in human capital?

The average private college costs a student about $30,000 per year plus the opportunity cost of lost wages of about $20,000 per year for a total cost of roughly $50,000 per year. (See Wall St Journal article, "What's a Degree Really Worth?" for reasonableness of the numbers used in this post).

Assuming a longterm expected rate of return of 8 percent (approximately the longterm rate of return in the stock market, but one's own estimates can be substituted for analysis), the future value at the end of 4 years of 4 yearly $50,000 payments is about $243,000.

Assume the student graduates and works from about age 22-23 to 65 for about 42 years in total.

The student invested $243,000 in his/her own human capital by the end of the four years of college and is expecting an 8 percent yearly return on that capital. An 8 percent return on $243,000 is slightly above $19,000 if the educational investment is not amortized over the 42 working years and about $20,000 if the investment is amortized over the working years. In other words, the wage premium over a high school graduate of a college graduate should at a minimum be about $19,000-20,000 for an 8 percent return on the college education human capital investment.

In the Journal article mentioned above, the Census Bureau found the college education wage premium to be about $19,500.

If ones uses a lower return on capital interest rate, the expected wage premium will be less than the $19,000-20,000. (At a 5 percent return on capital, the expected return is $13,000, significantly below the $19,500 historical return number for the college education yearly wage premium.)

Despite the high and rising cost of private college education in the US, a fair and adequate return on the cost of the investment in human capital through a college education is still likely. College costs have not reached the level where a fair return on that investment is unattainable or unlikely, especially in the recent economic downturn where high school graduates have a much higher unemployment rate, and loss of wage income, than college graduates.

If one can expect to make a fair and adequate return on an investment, it is not in a bubble and it is not overpriced.

Saturday, May 14, 2011

Obama's Stimulus Saved 450 Thousand Government Jobs But Lost 1 Million Private Sector Jobs

From "The American Recovery and Reinvestment Act: Public Sector Jobs Saved, Private Sector Jobs Forestalled " by Timothy Conley, Department of Economics, University of Western Ontario, Canada and Bill Dupor, Department of Economics, The Ohio State University, USA:
Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs. State and local government jobs were saved because ARRA funds were largely used to off set state revenue shortfalls and Medicaid increases rather than boost private sector employment. The majority of destroyed/forestalled jobs were in growth industries including health, education, professional and business services. This suggests the possibility that, in absence of the ARRA, many government workers (on average relatively well-educated) would have found private-sector employment had their jobs not been saved. Searching across alternative model specifications, the best-case scenario for an effectual ARRA has the Act creating/saving a net 659 thousand jobs, mainly in government.
Read their complete paper here.

(HT: Greg Mankiw)

No Tragedy Of The Commons

A comment I posted on The Percolator blog, "The Non-tragedy of the Bison Commons" by P.J. Hill:
Of course, the ancillary question is, "Is there ever a resource situation where 'tragedy of the commons' occurred?"

Elinor Ostrom documented actual resource situations where expected theoretical tragedies of the commons did not occur due to resource users' restraint.

What Garrett Hardin and others failed to consider is that the free rider, game theoretic approach ignores the loss of the future economic value of the resource to the current users.

In life, in many resource use situations, the users have a discount rate that preserves the resource, offsets the marginal value of a current additional use in favor of a future additional use, and prevents a 'tragedy of the commons.' To preserve their future value, resource users will establish, monitor and enforce rules to prevent depletion.

At times, government has misunderstood, overridden local user preservation efforts, set prices and established itself as overseer and that is when depletion most likely will occur.

Even now, government involvement in clean air and utilities, gives utilities incentives to pollute. Government regulates utility price increases and is reluctant to grant utilities consumer price increases. Regulators will not object, however, and often will mandate, an extensive capital expenditure to remove pollutants. Utilities like this because they get a rate increase, which covers their capital expenditures and gives them a fair return on the invested capital. Utilities get to make more money without increasing their customer base or usage.

Air was getting cleaner before The Clean Air Act and the improvements in the air seem to be following the same trend line it was before the clean air law. So even for air, where there should be extensive free rider and tragedy of the commons issues, it is unclear that it exists in this situation.

Unfortunately, tragedy of the commons is accepted as fact, and used as justification for many actions without empirical evidence that it would actually occur in the situation.

Thursday, May 12, 2011

Full Text Of Federal Appeals Court Decision Affirming Dismissal Of Lawsuit Against Credit Rating Agencies Of Mortgage Securities

The United States Court of Appeals for the Second Circuit affirmed the dismissal of a lawsuit against credit rating agencies for misleading and inaccurate credit ratings of mortgage securities.

Specifically, the appeals court affirmed the decision of the lower court, The United States District Court for the Southern District of New York, "dismissing plaintiffs’ complaints seeking to hold the rating agency defendants liable as underwriters or control persons for misstatements or omissions in securities offering documents in violation of §§ 11 and 15 of the Securities Act of 1933."

The full text of the decision is available on the court's website here, on Scribd here, and embedded below.

In Re Lehman Brothers Mortgage-backed Securities Litigation

My previous blog on this lawsuit decision is available here.

Wednesday, May 11, 2011

Credit Rating Firms' Opinions Protected By Free Speech Against Liability

From The Wall Street Journal article, "Ratings Firms Notch Legal Victory: Court Finds Raters Can't Be Held Liable for Stances on Mortgage Securities" by Michael Corkery:
A three-judge panel of the U.S. Court of Appeals for the Second Circuit ruled that Moody's Corp., Standard & Poor's, and Fitch Ratings can't be held liable for their ratings of mortgage-backed securities.

In a decision upholding a lower court's dismissal of the case brought by pension funds in Wyoming and Detroit, the Second Circuit judges wrote that ratings firms provided "merely opinions" about the credit-worthiness of the securities.

Opinions are protected by the First Amendment, a defense the rating firms have often used in the past.
The full text of the court opinion is available here.

Automobiles Cause Obesity

From "Study: Surge in obesity correlates with increased automobile usage" on ScienceBlog:
Junk food, video games and a lack of exercise all have received their fair share of blame for the spiraling epidemic of obesity in the U.S. But according to a University of Illinois researcher, public health enemy No. 1 for our supersized nation may very well be the one staple of modern life most Americans can’t seem to live without one (or more) of: the automobile.

Sheldon H. Jacobson, a professor of computer science and the director of the simulation and optimization laboratory at Illinois, says that the surge in passenger vehicle usage in the U.S. between the 1950s and today may be associated with surging levels of obesity.

“You can think of obesity as an energy imbalance,” Jacobson said. “People consume food, which is a form of energy, and then they expend it in their activities. But if you look over the last 60-plus years, the automobile has become our primary mode of transportation – so much so, in fact, we have literally designed our way of life around it. It is that energy imbalance that ultimately may lead to obesity.”
Read the complete article here.

Monday, May 9, 2011

FDIC Chair Sheila Bair Resigns Effective July 8, 2011

From FDIC Press release, "FDIC Announces Chairman Bair's Official Departure Date":
The Federal Deposit Insurance Corporation (FDIC) today announced Chairman Sheila C. Bair's official departure will be effective July 8th, 2011. Consistent with previous public statements, Chairman Bair has announced her intention to depart the agency following the expiration of her term as Chairman. The FDIC will hold a board meeting during the first week of July. This will be Chairman Bair's final board meeting.

US On Track For $1.5 Trillion FY2011 Budget Deficit

According to CBO in its latest Monthly Budget Revue, through April 2011, US fiscal year 2011 revenues were $1,309 billion and outlays were $2,180 billion for a seven month budget deficit of $871 billion.

Annualized, the budget deficit for FY2011 will be about $1.5 trillion.

First Quarter Home Prices Tumble

From The Wall Street Journal article, "Home Market Takes a Tumble: Turnaround More Distant After 3% Drop, Steepest Quarterly Decline Since 2008" by Nick Timiraos and Dawn Wotapka:
Home values posted the largest decline in the first quarter since late 2008, prompting many economists to push back their estimates of when the housing market will hit a bottom.

Home values fell 3% in the first quarter from the previous quarter and 1.1% in March from the previous month,

XKCD On Lise Meitner And Emmy Noether Who Deserve Much More Recognition For Their Intellectual Achievements

From xkcd:

Sunday, May 8, 2011

125 Year Old Example Of How Private Railroad Competition Worked To Lower The Nation's Transportation Costs

Without government interference, without government money, without government legislation, without government tax or monetary incentives, but due to the competition among the various private railroads and their need to lower the consumer costs of transporting goods between the North and South, over two days in 1886, 11,500 miles of railroad track privately owned by various private railroad companies was converted to the same gauge width.

Read the interesting story on how railroad competition and the need to reduce costs spurred the conversion and standardization of railroad track here and in the small excerpt below.

From "The Days They Changed the Gauge:"
May, 1886. President Grover Cleveland was making final preparations for his wedding.
***
And in the South, plans were nearing completion for one of the most complex and dramatic two-day periods in railroading history-changing the gauge of an estimated 11,500 miles of track.

It was a little over a half-century since the South Carolina Canal and Rail Road Company had inaugurated steam-powered freight and passenger travel on a regularly-scheduled basis. Horatio Allen, the railroad's chief engineer, had departed from the 4-foot 8 1/2-inch gauge used in England by prescribing a 5-foot gauge and in the years that followed, most of the South's railroads copied his example.

But in the North, the British example was dominant.
***
At first, the problem of interchange had been temporarily relieved by laboriously loading freight from one car to another at interchange points between railroads of different gauges.
***
Variety in gauge size wasn't uniquely a difference, between North and South. In 1871 no less than 23 different gauges existed in the United States, ranging in width from three to six feet.
***
It was clearly a condition that could not continue. In 1884 the Illinois Central-which operated in both regions-found it necessary to begin changing the gauge of its lines in the South to conform with the northern width.
***
In effect, the pressures of free competition had provided a catalyst, and the stage was set for changing the gauge of practically every road in the South-a change that, ultimately, would be accomplished in less than 36 hours.
Read the complete post here.

A Viable And Realistic Way To Fix Medicare: Focus On Increasing The Supply Of Medical Services Instead Of Restricting Demand

Congress is facing a politically difficult problem of finding ways to continue Medicare, while facing a huge future Medicare revenue shortfall. It is politically difficult to promote ideas and legislation that will shift more medical costs to the elderly or increase everyone's tax burden, even if the reality is that the government itself in the future will no longer be able to bear the expected Medicare cost.

Over the next three decades, the number of Medicare enrollees will double and that will double Medicare's total inflation adjusted cost. Additionally, if medical cost increases follow their historical trend and grow above the inflation rate, let say at about 2 percent over the CPI, per enrollees inflation adjusted costs will double even without an increase in the number of enrollees.

The two factors, an increase in number of Medicare enrollees and increases in medical costs above the inflation rate, in total, over the next 3 decades, will cause Medicare's total inflation adjusted costs to increase fourfold.

Meanwhile, the workforce will only increase by 28 percent over the next three decades and therefore tax revenues from the current level of the Medicare payroll tax will also increase by only 28 percent. Even if Congress doubled the Medicare payroll tax rate and revenue, Medicare will see only see a 56 percent increase in revenues, which will be significantly below the 400 percent expected increase in total cost. Individual and corporate income tax increases will not be able to close the 350 percent revenue shortfall gap.

Most of the general and political discussions and suggestions to date to control medical costs for the government and for families focuses on the demand side of medical costs. Costs are controlled by limiting the amount paid by the government for specific medical services or by excluding certain medical services from the services covered and paid under Medicare or health insurance.

A More Politically Acceptable Practical Medicare Solution

Politically and practically, it may be easier to solve Medicare's expected funding shortfall on the supply side. Congress needs to find ways to substantially increase the supply of lower cost medical service providers to the elderly.

If there were significantly more medical providers to the elderly than there currently are, cost will go down. The number of elderly is expected to double in the next few decades. Meanwhile, there are an insufficient number of new doctors in the pipeline to meet that growing need.

Congress needs to find ways to allow the medical provider market to grow to meet the demand and to grow in sufficient amount to lower costs. Additionally, Congress should fund colleges and nursing schools expansions in student enrollment for 2 and 4 year programs that will graduate people who can be medical providers to the elderly. Most of the care that the elderly receive is non-specialized and can be delivered with high quality at a much lower cost than if a doctor provided the service.

Providing incentives to individuals and to schools to significantly increase the supply of low cost medical providers will lower future Medicare costs without restricting future access to medical services.

Politically, I believe it is much easier to have a public discussion about increasing medical training and increasing the availability of lower cost medical services, than it is to have public discussions about finding ways to fund Medicare's revenue shortfall or to find ways to shift costs to other parties.

Friday, May 6, 2011

Canada Adds Three Times More Jobs Than Expected: Unemployment At 7.6 Percent

From "Canada Adds More Jobs Than Forecast as Unemployment Falls" by Greg Quinn:
Canada added almost three times more jobs than economists forecast in April and the unemployment rate declined, suggesting the central bank will raise interest rates in the next few months.

Employment rose by 58,300 after a March decline of 1,500, Statistics Canada said today in Ottawa. The jobless rate fell to 7.6 percent....

Consumers Buy On Value Perception And Not Just Low Price: McKinsey & Co

From McKinsey Quarterly, "The value proposition in multichannel retailing: Consumers love low prices, but retailers shouldn’t overlook the way shoppers perceive value online and in stores." by Jeffrey Helbling, Josh Leibowitz, and Aaron Rettaliata:
Yet while price competition is tough, our [McKinsey's] consumer research and client experience show that perceptions of value still matter in the ever-more-complex multichannel-retailing environment. Retailers can employ proven tactics to shape perceptions and take advantage of the fact that consumers care about more than just the price tag when they buy.
***
Consider, for example, how consumers view leading sellers of women’s apparel in the United States.... While actual average prices at Kohl’s and JCPenney are similar..., consumers clearly perceive Kohl’s as offering lower prices.... Amazon.com—which typically has among the lowest prices in categories such as consumer electronics—charges more for similar types of apparel than Kohl’s and JCPenney do, yet retains a “halo” of value among the consumers we surveyed.
Read the complete article here.

US Needs Another 15-20 Million Jobs To Get Back On Trend

From Chart of the Day:




Restaurants Get Half Of Families' Food Budgets

From "Families are ‘lovin’ it’" on ScienceBlog, May 5, 2011:
According to the United States Department of Agriculture, Americans are spending about half their food budget in restaurants. As it is widely known, food prepared away from home, as compared to food prepared at home, is often higher in calories, saturated fat, and sodium.

Thursday, May 5, 2011

State And Local Pension Liabilities $2 to $3 Trillion Unfunded, CBO Report

From CBO, "The Underfunding of State and Local Pension Plans" May4, 2011:
According to the Public Fund Survey of 126 state and local pension plans, which account for about 85 percent of pension assets and participants in state and local pension plans in the United States, those plans held roughly $2.6 trillion in financial assets in 2009 but had about $3.3 trillion in liabilities for future pension payments. Thus, those assets covered less than 80 percent of liabilities, and unfunded liabilities (the amount by which liabilities exceed assets) amounted to roughly $0.7 trillion. That share of liabilities covered by assets in 2009 was the lowest percentage in the past 20 years. By comparison, the amount of state and local governments' debt that was outstanding at the end of 2009 was $2.4 trillion.

That estimate of unfunded liabilities is calculated on the basis of actuarial guidelines currently followed by state and local governments. Another approach for measuring pension assets and liabilities, which more fully accounts for the costs that pension obligations pose for taxpayers, yields a much larger estimate of unfunded liabilities for those plans in 2009—between $2 trillion and $3 trillion.

In any event, most state and local pension plans probably will have sufficient assets, earnings, and contributions to pay scheduled benefits for a number of years and thus will not need to address their funding shortfalls immediately. But they will probably have to do so eventually, and the longer they wait, the larger those shortfalls could become.[Emphasis added].
Read the entire report here.

The Under Funding of State and Local Pension Plans

Wednesday, May 4, 2011

An Osama Bin Laden Death Photo Will Be Released

Does anybody doubt that in this age of easy manipulation of digital photos, someone (maybe many) out there will post on the Internet a faked, but very realistic photograph of Osama Bin Laden after he was shot and killed.

The photograph will go viral and will be used anytime, for any purpose, when one wants a Bin Laden death photograph.

The fake photo will be used in every situation and for every purpose that President Obama uses to justify not releasing the real photograph. Most viewers in those situations will assume the fake is real. A doctored photo will inflame passions against the US just as well as the real photograph.

Obama's reasons are internal. All he will accomplish is to add more fuel to the fire in the Americans that think his allegiance is more with the Arab world than with the US. His withholding of the photo, despite his belief that he is doing it with good intentions and for the right reasons, will not stop Arab world anger in those that are against the US or the recruitment of those who are prone to anti-American feelings.

Hispanics Are The Largest Minority Group In Major American Cities

Frpm Brookings, "Melting Pot Cities and Suburbs: Racial and Ethnic Change in Metro America in the 2000s" by William H. Frey, Senior Fellow, Metropolitan Policy Program:
Hispanics now outnumber blacks and represent the largest minority group in major American cities. The Hispanic share of population rose in primary cities of the largest 100 metropolitan areas from 2000 to 2010. Across all cities in 2010, 41 percent of residents were white, 26 percent were Hispanic, and 22 percent were black.

Tuesday, May 3, 2011

Low Salt Diets Increase Risk Of Death

From The New York Times, "Low-Salt Diet Ineffective, Study Finds. Disagreement Abounds." by Gina Kolata:
A new study found that low-salt diets increase the risk of death from heart attacks and strokes and do not prevent high blood pressure
***
Dr. Michael Alderman, a blood pressure researcher at Albert Einstein College of Medicine and editor of the American Journal of Hypertension, said medical literature on salt and health effects is inconsistent. But, he said, the new study is not the only one to find adverse effects of low-sodium diets. His own study, with people who had high blood pressure, found that those who ate the least salt were most likely to die.
Despite the protests about the conclusions of this study within the medical profession, this study is better than many others in that it was a prospective study and not a data mining exercise using historical data and reporting statistical correlations as "medical research."

All past data has some correlations, but finding a relationship in past data does not prove cause and effect. Prospective studies are more likely to prove or disprove casual factors. Random double blind controlled prospective studies are the gold standard of study methodology.

Fat Loss Decreases Life Expectancy, At Least in Mice

From "Mouse study turns fat-loss/longevity link on its head" on ScienceBlog:
The scientists then correlated the amount of fat reduction to life span.

The answer: Mice that maintained their fat actually lived longer. Those that lost fat died earlier.

Contrary to view

“Indeed, the greater the fat loss, the greater the likelihood the mice would have a negative response to dietary restriction, i.e., shortened life,” said James Nelson, Ph.D., professor of physiology at the Barshop Institute. “This is contrary to the widely held view that loss of fat is important for the life-extending effect of dietary restriction. It turns the tables a bit.”
Read the complete article here.

White House, President, Military Slander And Insensitive To Native Americans: Osama Bin Laden Called Geronimo

From The New York Times article, "Clues Gradually Led to the Location of Qaeda Chief" by Mark Mazzetti, Helene Cooper and Peter Baker:
The code name for Bin Laden was “Geronimo.” The president and his advisers watched Leon E. Panetta, the C.I.A. director, on a video screen, narrating from his agency’s headquarters across the Potomac River what was happening in faraway Pakistan.

“They’ve reached the target,” he said.

Minutes passed.

“We have a visual on Geronimo,” he said.

A few minutes later: “Geronimo EKIA.”

Enemy Killed In Action. There was silence in the Situation Room.

Finally, the president spoke up.

“We got him.”

Obama 1, Osama 0

Image: The Business Insider

Monday, May 2, 2011

Intrade's Prices Indicate Obama And Trump Would Be In A Neck And Neck Presidential Race

A comment I posted on Intrade's security, "Donald Trump to be elected President in 2012" on Trump's chances of winning the 2012 presidential election:
To be elected president, the candidate has to be on the ballot. If the person does not get a party nomination, the chance of winning the presidential election is zero (write in's and independents are extremely unlikely to win, except may be for someone very wealthy and widely known, like Oprah, etc.).

The Intrade prices for a "to be elected president" security are conditional on the probability (Intrade price) of getting a party nomination. If you do not get the nomination, your presidential election winning Intrade security will drop to zero. The chance of winning is conditional on getting the nomination first.

That means the Intrade price of winning the presidency equals (=) the Intrade price of getting nominated times the true chance (price) of winning the presidential election.

For Obama, using current prices, 62.3 = 91.8 times the probability of winning, or 67.9 chance of winning the presidency again (62.3/91.8)

For Romney, its 10.0 = 23.9 times probability of winning the presidency, or 41.8 chance of winning the election (10/23.9).

For Trump, its 5.2 = 5.5 x probability of winning, or 94.5 percent. But an analyst of Trump's chances to win might want to lower those odds since Trump has the recognition and resources to run without the Republican party nomination and his true odds may not be 5.2/5.5 but 5.2 divided by a number bigger than 5.5 to reflect his higher chances of being on the ballot even if he does not get the Republican nomination. The Intrade price for another party other than Dem or Rep to win the presidency is 1.7. If one takes that as an Independent or write in odds of winning [inadvertently left out: as Trump's odds of being an Independent or write in candidate], then Trump's chance are 5.2/(5.5 + 1.7) or 5.2/ 7.2 or 72.2 percent chance of winning the presidency if he is on the ballot.

So, Obama's and Trump's odds of winning the presidency in an election against each other are very close at this very early point in the presidential election race.

Obama's Intrade Reelection Odds And S&P Futures Jump On Announcement Of Bin Laden's Death

As of 1 AM, EST, New York, the Intrade security price for Obama winning reelection jumped 17.6 percent to 69.9 and S&P futures jumped 10.70, 0.79 percent. The increases are in response to the President's announcement of the killing of Osama Bin Laden and the US recovery and DNA identification of the body.