Saturday, October 31, 2009

World Fertility Is Rapidly Falling To Replacement Rate

Fertility is falling and families are shrinking in places— such as Brazil, Indonesia, and even parts of India—that people think of as teeming with children....the fertility rate of half the world is now 2.1 or less—the magic number that is consistent with a stable population and is usually called “the replacement rate of fertility”. Sometime between 2020 and 2050 the world’s fertility rate will fall below the global replacement rate.
From "Falling fertility," Oct 29th 2009, The Economist print edition.

The Economist also estimates world population will peak around 2050 at 9 billion.

Past 30 Years Effect Of Switching To Cognitive Over Physical Labor Force

From "The State of the Economy, I" by Arnold Kling:
I think that perhaps the most important trend of the past thirty years is the increased importance of cognitive skills relative to physical labor. Obviously, this has been going on for more than just the past thirty years, but during the past thirty years we saw an acceleration. This has had a number of consequences:

1. It changed the role of women. Their comparative advantage went from housework to market work.

2. This in turn, as Wolfers and Stevenson have pointed out, changed the nature of marriage. Men and women look for complementarity in consumption rather than in production.

3. This in turn leads to more assortive mating, with achievement-oriented men looking for interesting mates rather than for good maids.

4. This in turn leads to greater inequality across households. It also fosters greater inequality among children. The children of two affluent parents are likely to have much better genetic and environmental endowments than the children of two (likely unmarried) low-income parents.

5. Inequality is exacerbated by globalization and technological change. If your comparative advantage is basic physical labor, you have to compete with machines as well is with workers from the Third World.

The net result is an economy that has improved considerably for people with high cognitive skills, but which has improved only somewhat for people with relatively low cognitive skills.
Read Kling's full post here.
(HT: growthology)

CBO Attempts To Remove Itself From Health Care Debate: Says It Did Not Evaluate Proposals' Effects On National Health Cost Curve

The Congressional Budget Office (CBO) is trying to broaden the Congressional, public and media criteria for evaluating health care reform legislation. Additionally, it appears to be trying to extricate itself as the sole arbiter of health care reform and CBO explicitly stated that it did not evaluate whether proposed health care reform legislation would bend US national health care cost curve up or down.

CBO is trying to make Congress and the public aware that there are cost considerations outside of the federal budget impact of health reform and that there are also qualitative considerations for evaluating the proposed health care legislation.

It released a letter it sent to US Senate Finance Committee Chairman Baucus indicating that there are many ways to measure the impact of health care reform.

The letter states:
Current proposals to reform the health care and health insurance systems would affect the federal budget and the nation’s spending for health care in many ways, and those effects can be summarized using a variety of different measures. This letter aims to clarify the measures being used by the Congressional Budget Office (CBO) in its analysis of such proposals—in particular, the effects of proposals on federal budget deficits and on the magnitude of the federal budgetary commitment to health care.
CBO also states in the Baucus letter that budget effects are only some of the considerations:
The effects of health care reform proposals on the federal budget and national spending for health care are only some of the criteria that might be used in evaluating such proposals. Their impact on the market for health insurance, sources of insurance coverage, the cost of insurance before and after accounting for subsidies, the number of people with health insurance, the organization and delivery of health care, the quality and cost-effectiveness of health care, and many other factors are likely to weigh on policymakers as they make decisions about proposals. Although CBO has analyzed a number of those issues, this letter—in response to questions the agency has received—addresses only the impact on the federal budget.
CBO also mentioned that when it analyzes federal budget impacts of health reform, it does not consider the impact on total national health expenditures.
Major proposals to reform health care would affect not only the federal budget but also spending for health care by individuals, firms, and other levels of government. A broad measure encompassing those effects would be the impact on total national health expenditures. However, CBO does not analyze NHE as closely as it does the federal budget, and at this point CBO has not assessed the net effect of health care reform proposals on those expenditures, either within the 10-year budget window or for the subsequent decade. That is, CBO has not evaluated whether reform proposals would lower or raise—or bend down or up—the “curve” of national health expenditures.

Finally, the question of what impact proposals might have on health insurance premiums is also of considerable interest. CBO intends to address that issue in the near future.
CBO recognizes, without explicitly mentioning, that states and individual expense for medical care and health insurance were not considered in its federal budget impact evaluation of health reform legislation. Read the complete CBO letter here.


Friday, October 30, 2009

CBO's Analysis Of House Health Care Reform Bill, HR 3962

The Congressional Budget Office analysis on the cost of the House health reform bill, H.R. 3962, the Affordable Health Care for America Act.
The estimate includes a projected net cost of $894 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $1,055 billion in subsidies provided through the exchanges (and related spending), increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $167 billion in collections of penalties paid by individuals and employers. On balance, other effects on revenues and outlays associated with the coverage provisions add $6 billion to their total cost.

Florida’s Experience With A Public Option In Property Insurance

As Congress debates the merits of the “public option” for health insurance, we might look at Florida for some experience, because Florida has had a public option for years, not for health insurance but for property insurance.
From "Florida’s Public Option" by Randall Holcombe on Oct 29, 2009, on the Beacon Blog.

Taxpayer Cost Of Cash For Clunkers Was $24,000 Per Car For Extra Sales

A total of 690,000 new vehicles were sold under the Cash for Clunkers program last summer, but only 125,000 of those were vehicles that would not have been sold anyway, according to an analysis released Wednesday by the automotive Web site
From "Clunkers: Taxpayers paid $24,000 per car" by Peter Valdes-Dapena, senior writer, October 29, 2009. (HT: Bubble Meter).

The $3 billion program for 125,000 extra cars comes to $24,000 per car.

Thursday, October 29, 2009

Sense of Events: Is Obama A Milleniarian Without A Plan? Does He Even Need One?

I found the following blog post about President Obama and milleniarianism very interesting. I do not have an opinion as to its validity as applied to the President. The concept and description are new to me and I wanted to share it with my readers and let them draw their own conclusions.

Sense of Events: Is Obama a milleniarian without a plan? Does he even need one?

Wednesday, October 28, 2009

Will The Adverse Future Impact Of The Chrysler And GM Bankruptcies Be Obama's Lasting Legacy?

Mark Roe, a Harvard law professor, and David Skeel, a University of Pennsylvania law professor, reviewed the Chrysler expedited bankruptcy and found that the potential damage done to future large scale corporate reorganizations and bankruptcies from Obama's efforts to preserve the auto industry and the unions at the expense of creditors needs to be undone.

See their blog post, Assessing the Chrysler bankruptcy, and their research paper (free download).
Our overall conclusions are not favorable to the process and results. The Chrysler bankruptcy process used undesirable mechanisms that federal courts and Congress struggled for decades to suppress at the end of the 19th and first half of the 20th centuries, ultimately successfully. If the mechanisms are not firmly rejected, either explicitly or via judicial (or legislative) distinction or via a collective forgetting of the event among bankruptcy institutions, then future reorganizations in chapter 11 will be at risk, in ways that could potentially affect capital markets.
With Cap and Trade stalled in Congress, with health reform facing a Senate filibuster, with high unemployment and no near term job growth, with very few shovel ready projects and most of the stimulus monies still unspent, with indecision about Guantanamo detainees, Afghanistan and Iran, Obama's long term presidential legacy may very well be his weakening of US bankruptcy laws and the adverse effect on lending markets and non-financial creditors. And yet, in today's news, GMAC, a subsidiary bank of GM, is requesting more bailout funds of about $2.8 billion to $5.6 billion.

The President, using the power of his office and the cover of the financial crisis to protect his union constituency, undid a hundred years of progress of bankruptcy and reorganization process.

New York Has The Largest Resident Out Migration Of Any State

From 2000 to 2008, in both absolute and relative terms, New York experienced the nation's largest loss of residents to other states—a net domestic migration outflow of over 1.5 million, or 8 percent of its population at the start of the decade.

What accounts for New York’s chronic inability to attract and retain more Americans than it loses every year? Any attempt to answer that question must begin with New York’s state and local tax burden, perennially ranked among the heaviest in the country. Taxes aside, likely explanations differ regionally. Downstate residents face high taxes and housing costs rated among the most “severely unaffordable” in the world. Land-use regulations in downstate New York also tend to inhibit growth. In upstate New York, housing is relatively inexpensive but even more heavily taxed, and new economic opportunities have been scarce.

Weather, on the other hand, seems less compelling as an explanation. After all, while the Sunbelt’s climate has long attracted northerners, cold winters haven’t stopped New Hampshire, Wisconsin and Minnesota from adding population while upstate New York has been shrinking.
From the policy briefing, Empire State Exodus: The Mass Migration of New Yorkers to Other States, October 27, 2009, by Wendell Cox and E.J. McMahon, Empire Center For New York State Policy. A PDF version of the study is available here.

Tuesday, October 27, 2009

Credit Default Swaps Did Not Contribute To The Recent Credit Crisis

A research paper, "Credit Default Swaps and the Credit Crisis" by Rene M. Stulz, Ohio State University, Department of Finance, September 2009, NBER Working Paper No. w15384, argues:
Many observers have argued that credit default swaps contributed significantly to the credit crisis. Of particular concern to these observers are that credit default swaps trade in the largely unregulated over-the-counter market as bilateral contracts involving counterparty risk and that they facilitate speculation involving negative views of a firm's financial strength. Some observers have suggested that credit default swaps would not have made the crisis worse had they been traded on exchanges. I conclude that credit default swaps did not cause the dramatic events of the credit crisis, that the over-the-counter credit default swaps market worked well during much of the first year of the credit crisis, and that exchange trading has both advantages and costs compared to over-the-counter trading. Though I argue that eliminating over-the-counter trading of credit default swaps could reduce social welfare, I also recognize that much research is needed to understand better and quantify the social gains and costs of derivatives in general and credit default swaps in particular. [hyperlink added]

Stiglitz On Consequences Of Death To The US Dollar

The strength of the dollar is becoming riskier and riskier. The growing U.S. deficit and the ballooning of the Federal Reserve’s balance sheets leave many worried that in their wake will come inflation, undermining the long-term attractiveness of the U.S. currency.

...should we care? What are the consequences?
From the November/December issue of The National Interest by Joseph E. Stiglitz, "Death Cometh for the Greenback," October 27, 2009.

Joseph E. Stiglitz is University Professor at Columbia University and the 2001 winner of the Nobel Prize in Economics. He served as chief economist of the World Bank from 1997 to 2000. (HT: Wayne Marr, a Twitter Follower)

Remember Smart Grids: Power Project Could Link US Grids

A proposal to link the three US power grids could create the country’s first renewable energy trading hub.

The Tres Amigas system would involve the construction of a 'super station' in New Mexico that would link the Eastern, Western and Texas Interconnects. By using the latest grid technologies, the Tres Amigas Super Station (Tass) would also enable renewable energy to be transmitted around the US more easily.
Read "Power project could link US grids" by Pauline McCallion on, 26 Oct 2009.

Great Depression Was Good For Health

the recessions of 1921, 1930–1933, and 1938 coincided with declines in mortality and gains in life expectancy.The only exception was suicide mortality which increased during the Great Depression, but accounted for less than 2% of deaths. Correlation and regression analyses confirmed a significant negative effect of economic expansions on health gains. The evolution of population health during the years 1920–1940 confirms the counterintuitive hypothesis that, as in other historical periods and market economies, population health tends to evolve better during recessions than in expansions.
From "Life and death during the Great Depression" by José A. Tapia Granadosa, Institute for Social Research, University of Michigan, and Ana V. Diez Rouxb, School of Public Health, University of Michigan.

Not all better health outcomes are about providing more medical care or more health insurance. A lack of money causes lifestyle changes and fewer doctor visits which seem to improve healthiness.

More Roads And Public Transportation Do Not Relieve Traffic Congestion

Guess what happens when we build more highways?

People who live nearby, drive more. More trucks use the road to transport goods and more people move into the area and drive. In the end, there is little likelihood that a new highway will ease traffic congestion. The researchers also find that public transportation has no impact on traffic congestion.

They conclude that "that an increased provision of roads or public transit is unlikely to relieve congestion."

From the September 2009, NBER Working Paper No. w15376, "The Fundamental Law of Road Congestion: Evidence from US Cities" by Gilles Duranton, London School of Economics & Political Science, Department of Geography and Environment, and Matthew Turner, University of Toronto.

Capitalism Trumps Racism

A new political thriller from PBS, “Endgame,” provides the little-known, true back story of apartheid’s end in South Africa, with credit given to a for-profit mining company. Foreseeing that deteriorating conditions in South Africa would likely result in a total loss of their assets, Consolidated Goldfields initiated secret discussions between representatives of the white South African government and the exiled black African National Congress (ANC), paid for and hosted at the company’s estate in England. These talks resulted in Nelson Mandela’s being set free after nearly 30 years in prison, and the public promise by South African President F.W. de Klerk to end the government-sanctioned system of discrimination known as apartheid.
From "Memo to Obama: Capitalism Trumps Racism" by Mary Theroux on The Beacon Blog.

And we thought it was community organizers and protesters.

Monday, October 26, 2009

Cap And Trade The Butcher?

People will need to consider turning vegetarian if the world is to conquer climate change, according to a leading authority on global warming.
UN figures suggest that meat production is responsible for about 18 per cent of global carbon emissions, including the destruction of forest land for cattle ranching and the production of animal feeds such as soy.
From "Climate chief Lord Stern: give up meat to save the planet" by Robin Pagnamenta, Energy Editor, TimesOnline, October 27, 2009.

I read that pets and pet food are also contributors to global warming. When we do get serious about taking actions to prevent and undo global warming, many people are going to be surprised by the changes to their daily routines and lives that will occur. It will not be just switching to hybrid or hydrogen cars, but will intrude much more into their lives, homes and actions.

It will affect what we eat, where we work, what we wear and what we do for leisure. We may even wear some kind of global warming gauge and have a daily global warming limit. It may even affect the number of children we can raise. Hopefully, it will not get to such a stage.

Sunday, October 25, 2009

Are Increasing Medical Costs Just Upfront Preventative Costs?

Are Increasing Medical Costs Just Upfront Preventative Costs?

Do increasing medical costs reflect a switch to preventive medicine, such as an increased reliance on pharmaceuticals to prevent disease?

The transition to preventive medicine using drugs raises an interesting point that we may be misreading the signals in health care cost increases.

Medicare and most government programs are monitored on a cash basis accounting method. If a person will likely have a future high medical expense, such as hospitalization for a heart attack, that expense is not recognized until the actual event, the heart attack and treatment occur, sometimes many years into the future.

A switchover to an expensive heart attack preventive drug, such as a statin, increases the current costs but decreases future treatment and hospitalization costs.

There is an overlapping period where health care costs increase to reflect the expense of a disease as it occurs and the expense of a prevention measure, such as a drug that will prevent future occurrence of the disease. Annual health care costs will increase until the preventative effects of the drug (or other measure) lower the disease incidence in the at risk population.

On an actual costs basis it looks like health care costs are rising, but on an accrual costs basis, based on expected disease incidence, costs are declining.

As medicine switches to more preventative treatments, the current cost of prevention is added to the medical costs of those who will get the disease because they are beyond a preventative stage. Medical costs rise on a cash and actual outlay basis, but the unrecognized expected future costs of treating the disease decline.

Assuming that preventative treatments costs increase until they are equal to the disease treatment costs and the goal is quality of life and life expectancy improvements and not cost savings; the switchover to prevention increases current annual costs for the benefit of lowering future annual costs. In other words, prevention does not lower medical costs but improves health outcomes.

Medical costs look like they are increasing because medicine is in a transition period of switching to more prevention measures as oppose to disease treatment measures and medical costs do not incorporate the cost savings from the disease prevention. What we need is a budgeting process similar to most companies and government where they separate capital expenditures from operating expenses. We need to look at prevention measures as capital investments in cost saving measures, current treatment expenses as operating expenses and we need to accrue future treatment expenses.

If we redid the medical costs books on an accrual and capital investment basis, I think we would find that costs are not increasing as much on an inflation adjusted basis as we believe. The costs increases are a reflection of poor accounting during a period of introducing prevention methods and are actually investments to lower future medical costs.

The above is based on a comment I left on Econlog, "Tyler's Triple on Health Care" by David Henderson.

Lasting Earnings Effects Of Entering Labor Market During High Unemployment

Entering Labor Force During Recession Has Enduring Effect on Wages:
For the 1982 Cohort, $100,000 NPV Loss in First 20 Years of Career

We often hear about people who are unlucky in love, but what of those who are unlucky in the business cycle? What is the impact of being born two decades before a significant economic downturn, such that you graduate from college and enter the labor force in the middle of a period of high unemployment?

As the class of 2009 is keenly aware, entering the labor market during a recession has immediate negative effects. Job offers are harder to find: according to the National Association of Colleges and Employers, less than 20 percent of the class of 2009 graduated from college with a job offer in hand, compared to 25 percent in the class of 2008 and more than 50 percent in the class of 2007. Whereas year to year starting salaries on average tend to increase, with the tough competition in this year’s labor market, average starting offers for the class of 2009 are slightly down.
Read more of "Birth date, business cycles, and lifetime income" by Peter Orszag, Director OMB, Thursday, October 22nd, 2009, here.

Public Workers Enjoy Golden Nest Eggs

One detective worked enough overtime his final year to get a $140,000-a-year pension that was 75 percent more than his base pay. A husband and wife who retired from the police department have annual pensions totaling $257,000.
Read the complete LoHud news article here.

It is time to bring some economic sense and reform into government worker pensions and benefits.

Murphy's Law of Economic Policy Applied To Health Care

ECONOMIST ALAN Blinder once proposed Murphy's Law of Economic Policy, which goes in part: "Economists have the least influence on policy where they know the most and are most agreed." The health-care debate is threatening to show Blinder's law in action.
Read the complete Washington Post editorial, "The third-best reform: How Congress ducks the problem of tax-free health insurance" published Sunday, October 25, 2009.

Friday, October 23, 2009

In Memoriam: 1983 Beirut Terrorist Attack Killed 241 Americans

On Oct. 23, 1983, a suicide truck-bombing at Beirut International Airport in Lebanon killed 220 U.S. Marines, 18 sailors and 3 Army soldiers; a near-simultaneous attack on French forces killed 58 paratroopers.

The early reports said 161 Americans killed, but in the following days of the bombing, reports of the death toll increased.

The pullout of the US troops a few months later and the lack of a decisive US military response may have consequently contributed to the rise of anti-American Middle East terrorists and the 9/11 attacks on the World Trade Center. From Wikipedia, on the lack of a forceful US response to the terrorist attack.
In fact, there was no serious retaliation for the Beirut bombing from the Americans,[16] besides a few shellings. In December 1983, U.S. aircraft from the U.S.S. Enterprise CVN-65 battle group attacked Syrian targets in Lebanon, but this was in response to Syrian missile attacks on planes, not the barracks bombing. Multi service Ground support units were withdrawn from Beirut post attack on the marine barracks due to retaliatory threats.

In the meantime, the attack gave a boost to the growth of the Shi'ite organization Hezbollah. Hezbollah denied involvement in the attacks but was seen by Lebanese as involved nonetheless as it praised the "two martyr mujahideen" who "set out to inflict upon the U.S. Administration an utter defeat not experienced since Vietnam ..."[17] Hezbollah was now seen by many as "the spearhead of the sacred Muslim struggle against foreign occupation".

Amal militia leader Nabih Berri, who had previously supported U.S. mediation efforts, asked the U.S. and France to leave Lebanon and accused the U.S. and France of seeking to commit 'massacres' against the Lebanese and creating a "climate of racism" against the Shia.[18] Islamic Jihad phoned in new threats against the MNF "pledging that 'the earth would tremble' unless the MNF withdrew by New Year's Day 1984.[19]

The Marines were moved offshore where they could not be targeted. On February 7, 1984, President Reagan ordered the Marines to begin withdrawal from Lebanon. This was completed on February 26, four months after the barracks bombing; the rest of the Multinational Force was withdrawn by April.

FDIC Asks For Bridge Bank Powers To End Too Big To Fail

The FDIC tells Congress that the way to allow the orderly closing of too big and too interconnected to fail institutions is to grant powers to the FDIC to allow the transfer of the bank's assets to a "bridge bank."
We [FDIC] have recommended that a special resolution process for systemically significant financial firms include an option to create a bridge financial institution. This tool, which is available as well in bank receiverships, allows the receiver to transfer assets and contracts from the failed firm to the bridge institution in order to retain franchise value and to avoid dumping financial contracts on the markets. Under the proposed resolution process, financial market contracts could be transferred to the bridge institution run by the governmental receiver without triggering netting and liquidation rights. This could prove vital to avoid a market melt-down. The bridge financial institution also can maintain other systemically significant functions such as payments processing, securities lending, and the settlement of ongoing government securities or other transactions. Most critically, the bridge financial institution allows time to avoid a sudden loss of critical services and promotes market confidence.

The bridge financial institution option, and the continuity it can provide, requires access to liquidity for ongoing operations. To achieve this, the proposed special resolution process includes ready access to liquidity for the bridge financial institution from a resolution fund provided from assessments paid by the industry. In contrast, under the Bankruptcy Code, a Chapter 11 debtor who will incur post-petition expenses to maintain operations must often borrow from lenders, usually at unfavorable rates. Debtor in possession financing can be particularly costly, or unavailable, for large financial firms in bankruptcy since their assets are so dependent on market liquidity and confidence and the bankruptcy filing itself greatly reduces their asset value. The result is that there may be less funding to preserve valuable ongoing operations for sale. According to some commentators, the lack of debtor in possession financing following the Lehman bankruptcy filing led to many possible Chapter 11 reorganizations becoming Chapter 7 liquidations. Under the proposed resolution system for systemically significant financial firms, the bridge option with its access to liquidity will provide continuity, while better preserving the value of financial assets for the benefit of creditors.

The FDIC's current authority for insured banks and thrifts to act as receiver and to establish a bridge bank to maintain key functions and sell assets offers a good model. A temporary bridge bank allows the FDIC to transfer needed contracts to the bridge bank and preserve key banking operations, which can be crucial to stemming contagion. At the same time, by closing the bank and placing it into receivership, the FDIC assesses the losses against shareholders and market participants who should appropriately bear the risk. By preserving the going concern value of the financial assets, it also encourages interest by other firms in purchasing the operations and assets of the firm, which can reduce losses to the receivership.
The above is from an October 22, 2009, Statement of Michael Krimminger, Special Advisor for Policy, Federal Deposit Insurance Corporation on Too Big to Fail: The Role of Bankruptcy and Antitrust Law in Financial Regulation Reform before the Committee on the Judiciary; Subcommittee on Commercial and Administrative Law; U.S. House of Representatives.

Thursday, October 22, 2009

FRB Atlanta Believes The US Will Have A Jobless Recovery

On the Federal Reserve Bank of Atlanta Blog, "The growing case for a jobless recovery" by By David Altig, senior vice president and research director at the Atlanta Fed.
Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing:

Of course, none of this is proof positive that we are in for a "jobless recovery," but, to me [David Altig], the odds appear to be increasing.

The SEC Dark Pool Proposal Will Increase Volatility And Decrease Liquidity

The SEC issued a proposal to require more disclosure from dark pools.

Of course, the issue is, will the SEC proposal reduce or increase liquidity and price volatility. Additionally, what will be the unanticipated consequences of the SEC's action?

The existence and growth of dark pools shows that there are economic gains in lower transaction costs (in the broad sense that include search and public disclosure costs) to both the seller and buyer users of dark pools.

Lower transaction costs increases the frequency of trades, decreases price movements per transaction, and increases trading volumes. More trades increase the transmission of new information into the price even if the first trades are in the dark pools. Dark pools are not a closed system. The participants also trade in public exchanges and transmit information from dark pools to public prices and vice versa.

Dark pools also enable a buyer to pay more and a seller to receive less because the economic gains from trade prices need not be adjusted for the higher public exchange transaction costs. Effectively, a wider band around a given price is created where a transaction will occur, making it more likely that a trade will occur at a desired price in dark pools.

Since a dark pool avoids real-time public disclosure of price, volume, identity, and dark pool, there must be an economic gain or a reduction in costs to the participants in not revealing their transactions. The SEC proposal will remove this economic benefit and impose a cost on dark pool participants, which will lower trading frequency and volumes.

The proposal will decrease liquidity of shares, which are also actively traded in dark pools, raise the costs of incorporating new information into the pricing of shares, narrow the price band where trades will occur, and increase transaction price volatility of shares.

The open question is how high the extra cost of disclosure will be and to what extent will it affect dark pool and public exchange trades.

Future Of The Oil Refiners, Distributors And Retailers As US Moves Away From Oil

As The US government pushes the country to use less oil, the oil industry will disinvest and simultaneously attempt to protect its existing profits and margins, as any business would do.

There is an interesting, well thought out post on the predictable economic future and response of oil refiners, oil distributors, gasoline stations and other oil retailers, "Another Big Win For Energy Economics 101: Demand Destruction Isn’t Good For New Investment" on The Sunshine Report Blog by Mark Sunshine.

From the Sunshine Report blog:
As gasoline demand drops refineries won’t be the only businesses whose investments are underperforming. There is going to be a lot of excess distribution and retailing capacity. So far the Wall Street Journal has only reported on excess refinery capacity. Distribution and retailing are the next segments of the industry that will experience overcapacity and the end of its “golden era” (to the extent that there ever was a golden era). That means that the U.S. will have too many tank farms, too many truckers that move refined products and too many gas stations that sell gasoline and diesel to consumers.
Read the entire blog posting here.

Wednesday, October 21, 2009

Regulate OTC Derivatives by Deregulating Them

As a result of the current financial crisis, there have been multiple calls for strict new regulation of over-the-counter (OTC) financial derivatives. In a new article entitled Regulate OTC Derivatives by Deregulating Them [free download], I propose instead that we consider returning to the common law approach to “off-exchange” derivatives—“deregulate” them by refusing to allow traders who use OTC derivatives contracts only to speculate, and not to fulfill a bona fide hedging purpose, to enforce their contracts in the courts. After all, there is no cheaper form of government intervention than refusing to intervene at all, even to enforce a deal.
From The Harvard Law School Forum on Corporate Governance and Financial Regulation blog post, "Regulate OTC Derivatives by Deregulating Them" by Lynn A. Stout, UCLA School of Law, October 20, 2009.

The complete paper, with the same title as the blog post, is available free here.

Real World Example Where Fewer Government Rules Improved Outcomes

Instead of trying to micromanage every aspect of safe driving with signs, signals and laws, a better approach would be to utilize what should be the smartest part of the car -- the driver. Just like a poorly designed door needs a sign to tell you whether or not to "push" or "pull" it, a poorly designed intersection needs to tell you when to stop or go. So, a better way to design an intersection seems counterintuitive: reduce the number of signs and signals.
From "Want To Design Smarter Intersections? Use Less Control, Not More."It is as an anti-government concept as one can get. Let people work it out for themselves when they get to the intersection. They do and the intersection is much safer.

Our Subprime Federal Goverment: City Journal

Earlier this month, a congressional oversight panel released its first analysis of the Obama administration’s $75 billion Home Affordable Modification Program (HAMP), an effort to keep 4 million families from losing their homes. The analysis shows that the Treasury, in trying to keep people in homes they can’t afford, is relying on the same perverse principle that inflated the housing bubble in the first place: namely, that it’s fine to borrow recklessly to buy a house, because house prices can only go up and up. Trying to maintain a bubble mentality, rather than help people adjust to life after the bubble has burst, will hobble economic recovery.
From "Our Subprime Federal Goverment" by Nicole Gelinas, City Journal, 20 October 2009.

Is The American Dream A Myth? My Comment.

A comment I posted on Economist's View blog, "Is The American Dream A Myth?"
Most economists fail to understand the sociological aspects of Americans' belief in upward mobility and consequently the researchers are usually answering the wrong question. The numbers of people that move upward are not important for the question of beliefs. The upward mobility myth exists because everyone knows some disadvantaged individual, or heard the true story of some disadvantaged individual, who went on to achieved success, fame and money.

Neither the government nor our institutions prevent any person from a lower socioeconomic group from going to Harvard, starting a business that makes them rich, becoming a movie star or sports figure, etc. Yes, maybe it is harder for them than for others in a different socioeconomic grouping, but we do not have a law or a social caste system that automatically prevent their chance at success.

Furthermore, it is the difficulty and selectivity of the success story that gives the myth its endurance and longevity. If it were trivial for someone to achieve success, then the myth would cease to exist. The myth is hope. It is like a lottery ticket, only with much better odds. If everyone can easily win, it cannot become a myth, a hope and an aspiration. Additionally, the real world includes randomness and luck for success, which means the better looking, smarter or richer person does not always win and sometimes the underdog can come out ahead. Everyone has a chance at success.

During the Great depression of the 1930s, the successful movies were not those that showed wealthy people suffering hardships because they lost their wealth and were equal to the poor. Instead, the successful movies were those that showed wealthy people in their elegant homes.

All the economic researchers that find excessive inequality in the US fail to include the value of all the government programs, such as food stamps, Medicaid, child health benefits, housing subsides, etc.

The lower socioeconomic groups in the US are much better off then their counterparts in the rest of the world, and are much better off than past generations even in the same lower socio-economic grouping. Fifty years ago, the US poor had no electricity, phone, TV, indoor plumbing, no food stamps, no medical care (Medicaid), etc. Does anyone really believe that things did not get better for the lower socioeconomic groups in the US?

Economists know the poor are better off today than they were in the past. Poor people do not care about their income ranking. They care about having food on the table, clothes for their children, medical care, a roof over their head, etc. Most of the lower socioeconomic groups have these items.

Is it really an important issue for the US that some people can afford huge houses, eat in expensive restaurants and buy expensive cars, while others eat in diners, live in apartments and buy used cars? I think there are much more pressing issues in the world.

Tuesday, October 20, 2009

Largest US Average Weekly Wages Decline Since 1978.

Average weekly wages for the nation fell 2.5 percent over the year in the first quarter of 2009. This is the largest over-the-year decline in U.S. average weekly wages dating back to 1978....
The largest wage losses occurred in New York County, New York, with a decline of 23.4 percent from the first quarter of 2008...
From the Bureau of Labor Statistics, "Average weekly wages: first quarter 2008–09."
Note that the government measure of wages does not include the employer cost of employee benefits. In this recession, most likely, employees have also seen a reduction in employer payment of employee benefits. See my earlier post,"Government Wage Statistics Miss Reduction of Employee Benefits."

Looking At The Causes Of The 2009 US Deficit

Source: AEI

From "A Peek Inside the Deficit" by Veronique de Rugy Tuesday, October 20, 2009, The Journal of the American Enterprise Institue:
Yes, the recession led to a shortfall in tax revenue, but the deficit is mostly a product of enormous amounts of government spending.

According to the Congressional Budget Office (CBO), the United States’ deficit for fiscal 2009, which runs from October 1, 2008 to September 30, 2009, was about $1.4 trillion. A mere 3.2 percent of the Gross Domestic Product (GDP) in 2008, the deficit was a whopping 9.9 percent of GDP by the end of fiscal 2009. This is a 209 percent increase, $943 billion of additional deficit. It is even a 207 percent increase over the CBO’s September 2008 projections for the fiscal 2009 deficit.

The Sarbanes Oxley Act Caused A Decline In Corporate Cash Flows

We find that average cash flows decline by 1.3 percent of total assets after SOX. These costs are more significant for smaller firms, for more complex firms, and for firms with lower growth opportunities. Annually, these costs range from $6 million for smaller firms to $39 million for larger firms. Further, we document that net SOX-related costs are not limited to one-time expenses associated with internal control design and implementation. In aggregate, for the 1,428 firms in our sample, these costs exceed $19 billion per year or about $75 billion over the four-year post-SOX study period. Profitability is lower for up to four years post-SOX.
"How Costly is the Sarbanes Oxley Act? Evidence on the Effects of the Act on Corporate Profitability" (Free Download) by Anwer S. Ahmed, Texas A&M University - Mays Business School, Mary Lea McAnally, Texas A&M University - Department of Accounting, Stephanie J. Rasmussen, University of Texas at Arlington, Connie D. Weaver, Texas A&M University.

Student HS Outcomes Unaffected By Teacher Education And Experience Levels

This research examines whether teacher licensure test scores and other teacher qualifications affect high school student achievement. The results are based on longitudinal student-level data from Los Angeles. The achievement analysis uses a value-added approach that adjusts for both student and teacher fixed effects. The results show little relationship between traditional measures of teacher quality (e.g., experience and education level) and student achievement in English Language Arts (ELA) or math.

Similarly, teacher aptitude and subject-matter knowledge, as measured on state licensure tests, have no significant effects on student achievement. Achievement outcomes differ substantially from teacher to teacher, however, and the effects of a good ELA or math teacher spillover from one subject to the other.[emphasis added].
"Teacher Effectiveness in Urban High Schools" by Richard Buddin and Gema Zamarro, WR-693-IES, August 2009, Prepared for the Institute of Education Sciences.

Monday, October 19, 2009

Did Herbert Hoover Start The Great Depression?

Lee E. Ohanian, Professor of Economics, Director of the Ettinger Family Program in Macroeconomic Research at UCLA, published research showing Herbert Hoover's policies started the 1930s Depression.
Our current crisis continues to draw parallels to the Great Depression (Eichengreen and O’Rourke 2009) and has refocused attention on the 1930s. Several features of the US Depression, particularly its early phases, represent challenges to economic theory. These features, describe below in more detail, suggest that non-monetary, non-banking factors were important – in particular Herbert Hoover’s cartelisation and wage-setting policies.
Read Ohanian's complete article, "Herbert Hoover and the start of the Great Depression"

Case Against Credit Derivatives As Insurance

M. Todd Henderson, University of Chicago Law School, makes the case that credit derivatives should not be regulated as an insurance product in his article "Credit Derivatives Are Not ‘Insurance’ " on The Harvard Law School Forum on Corporate Governance and Financial Regulation blog on Saturday October 17, 2009.
The superficial similarity of credit derivatives to typical insurance products, like property or life insurance, has caused some politicians and pundits to argue that credit derivatives are a form of insurance and should be regulated as such. The former director of the Commodities Futures Trading Commission (CFTC), which regulates most derivative products, declared: “A credit default swap . . . is an insurance contract, but [the industry has] been very careful not to call it that because if it were insurance, it would be regulated.” New York State went even further. New York State Insurance Commissioner Eric Dinallo testified before a House Committee investigating credit derivatives: “the insurance regulator for New York is a relevant authority on credit default swaps,” because “[w]e believe . . . [they are] insurance.” Although New York has delayed its regulatory plans pending a federal review of credit derivative regulation, the question of whether credit derivatives are insurance remains an open and much bandied about one that needs to be analyzed.
He also has a July 2009, University of Chicago Law & Economics, Olin Working Paper, No. 476, with the same title, "Credit Derivatives Are Not 'Insurance' ."

From the introduction to the paper(Ungated):
The collapse of the housing bubble and the resulting credit crunch has caused untold harm to the economy and the lives of millions by destroying trillions of dollars in global wealth. The search for causes and remedies has begun in earnest, and chief among these is the largely unregulated credit derivatives market. Regulation of one form or another is the proposed solution in many quarters, and one of the prominent proposals is insurance regulation. At the very least, the analogy between credit derivatives and insurance is often made, and this faulty comparison may lead regulators astray, regardless of the mode of regulation ultimately chosen. This Essay explores the suitability of insurance regulation to the credit derivatives market, concluding that it is a bad fit along many dimensions. Regulation of some sort may indeed be needed to remedy some fairly obvious market failures, but insurance regulation and regulators have little if any role to play in any new regulatory regime.

Should The Government Charge Interest On Student Loans?

Education is an investment in the future of the US. Better educated people on average earn more, pay more taxes, start more businesses, file more patents, create more inventions and innovations, and employ more people over their lifetime.

Does it make any sense for the government to impose an additional cost on their education by charging interest on loans for education purposes?

Interest represents the cost of deferring today's consumption until a later date. It makes sense for individuals and households who have budgetary constraints. It makes no sense for the US, which does not have the same budgetary constraints as an individual. It also does not accurately reflect a risk of default since student loans are not dischargeable in bankruptcy, the government can make the unpaid loans legally collectible during a person's entire life. The government also has access to all enforcement remedies including IRS data and refunds, liens and wage garnishment.
Like many recent college grads, Steven Lee finds himself unemployed in one of the roughest job markets in decades and saddled with a big pile of debt. He owes about $84,000 in student loans for undergrad and grad-school costs.

But what Lee's angry about isn't the slings and arrows of an outrageous economy, and it isn't the idea that he owes a ton of money for all the learning he's received. It's the interest rates on his government-backed student loans, which range from 6.8 percent to 8.5 percent.
From an article in the October 18, 2009, Chicago Tribune, "Interest on loans rankles college grads" by David Lazarus.

Sunday, October 18, 2009

Beware The Reverse Brain Drain To India And China

the average age of the Indian returnees was 30 and the Chinese was 33. They were really well educated: 51% of the Chinese held masters degrees and 41% had PhDs. Among Indians, 66% held a masters and 12% had PhDs. These degrees were mostly in management, technology, and science. Clearly these returnees are in the U.S. population’s educational top tier—precisely the kind of people who can make the greatest contribution to an economy’s innovation and growth. And it isn’t just new immigrants who are returning home, we learned. Some 27% of the Indians and 34% of the Chinese had permanent resident status or were U.S. citizens. That’s right—it’s not just about green cards.
From "Beware The Reverse Brain Drain To India And China" by Vivek Wadhwa, an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Executive in Residence at Duke University.

Hopefully, the recession played a part in the return of the sampled 1203 returnees and the exodus of highly educated immigrant workers will slow down when the US economy recovers.

Read the complete TechCrunch article here.

Update: See The Wall St. Journal article, "Immigrant Scientists Create Jobs and Win Nobels" by Susan Hockfield.

Saturday, October 17, 2009

Are Flu And Anti-viral Vaccines Ineffective? Is Any Perceived Benefit A Statistical Sampling Error?

Jackson’s [Lisa Jackson, physician and senior investigator with the Group Health Research Center] findings showed that outside of flu season, the baseline risk of death among people who did not get vaccinated was approximately 60 percent higher than among those who did, lending support to the hypothesis that on average, healthy people chose to get the vaccine, while the “frail elderly” didn’t or couldn’t. In fact, the healthy-user effect explained the entire benefit that other researchers were attributing to flu vaccine, suggesting that the vaccine itself might not reduce mortality at all. Jackson’s papers “are beautiful,” says Lone Simonsen, who is a professor of global health at George Washington University, in Washington, D.C., and an internationally recognized expert in influenza and vaccine epidemiology. “They are classic studies in epidemiology, they are so carefully done.”
Read the complete November 2009, Atlantic magazine article, "Does the Vaccine Matter?" by Shannon Brownlee and Jeanne Lenzer.

How much other health care is ineffective? What does the study portend for expanding health insurance coverage to those who voluntarily choose not to insure themselves? Will the US extend health care without seeing any population health benefits?

Highest And Lowest State And Local Combined Sales Tax Rates

A map and chart of the highest and lowest combined State and average local sales tax rates from the Tax Foundation:
Source: Tax Foundation

Tennessee is surprisingly the highest average combined rate at 9.41 percent, but the city of Chicago surpassed it at 10.25 percent and could possibly be the highest combined city and state sales tax in the US. (HT: TaxProf Blog).

See the complete Tax Foundation posting of the chart and map by Kail Padgitt here.

Does Insider Trading Ban Do More Harm Than Good?

In light of the SEC's recent Galleon Group insider trading charges, Harvard Senior Lecturer and blogger, Jeffrey Miron cites several reasons that make the case that securities laws than ban insider trading do more harm than good. Read his post, "Should Insider Trading be Illegal?."
Insider trading can act as a check on malfeasance within a company; insiders who know the books are being cooked, for example, can start dumping their stock, alerting the market that something is up.

New York State's Laws Make Health Care Expensive

From the Wall Street Journal: "Why Health Care Is So Expensive in New York" By Stephen T. Parente And Tarren Bragdon.
Mario Cuomo and Blue Cross destroyed the individual insurance market in the state. Now Congress wants to impose the same rules on 50 states.
Read the complete article here.

Myths About The Subprime Mortgage Crisis

Unfortunately, many of the most popular explanations that have emerged for the subprime crisis are, to a large extent, myths. On close inspection, the explanations offered are not supported by empirical research (Demyanyk and Van Hemert 2008; Demyanyk 2009a, 2009b).
From "Subprime mortgages: Myths and reality" by Kent Cherny and Yuliya Demyanyk, 17 October 2009. Read the complete article here.

Friday, October 16, 2009

Raising Legal Drinking Age To 21 Did Not Save Lives Or Reduce Teen Drinking

Raising the minimum legal drinking age to 21 years old did not saves live or significantly affect teenage drinking.

See NBER paper:

Does the Minimum Legal Drinking Age Save Lives? by Jeffrey Miron & Elina Tetelbaum, Economic Inquiry, April 2009, Pages 317-336 (gated).

From the article abstract:
State-level panel data for the past 30 yr show that any nationwide impact of the MLDA [minimum legal drinking age] is driven by states that increased their MLDA prior to any inducement from the federal government. Even in early-adopting states, the impact of the MLDA did not persist much past the year of adoption. The MLDA appears to have only a minor impact on teen drinking.

2007-08 Oil Price Run-up Caused Recession

The oil price increases of 2007-08 affected overall US consumption spending and caused of the 2007:Q4 to 2008:Q3 recession, according to the Federal Reserve Bank Of Atlanta research paper, "Causes and Consequences of the Oil Shock of 2007–08" by James D. Hamilton, CQER Working Paper 09-02, October 2009.

The paper's abstract:
This paper explores similarities and differences between the run-up of oil prices in 2007–08 and earlier oil price shocks, looking at what caused the price increase and what effects it had on the economy. Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007–08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. In the absence of those declines, it is unlikely that we would have characterized the period 2007:Q4 to 2008:Q3 as one of economic recession for the United States. The experience of 2007–08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.
Read the complete paper here.

Also, see my April post, "Did The 2007-08 Oil Price Shocks Cause The Current Recession?"

Video: The Onion News Network's Funny Satire Of Obama Diplomacy

From The Onion:
Obama To Enter Diplomatic Talks With Raging Wildfire 2:38
White House officials are confident the President will be able to convince the wildfire to stop incinerating large swaths of land and American homes.

The 5 States With The Highest Foreclosure Rates And The 5 States With The Lowest Foreclosure Rates

Nevada's foreclosure rate is 200 times higher than Vermont and 100 times higher than North Dakota. See The five state with the lowest foreclosure rates and the five states with the highest foreclosure rates in the following chart.

Click on the chart to go the the article and the source chart.

Will Deficit Neutral Federal Health Reform Force States To Increase Everyone's Taxes Or Go Bankrupt?

Congress and President Obama are proposing health reform that is deficit neutral only at the federal level. It appears that some medical and health insurance costs are pushed to the states both by legislation and by the necessity to provide comparable medical benefits at the state level. The extra cost will force states to increase taxes or end other programs. The very solution to the health care expense that the federal government and the President are politically unwilling to take.

From The Chattanooga Times Free Press, Wednesday, Oct. 14, 2009, "Bredesen warns cost to state could exceed $3 billion" by Andy Sher:
NASHVILLE — Gov. Phil Bredesen warned Tuesday that pending federal health care legislation could cost Tennessee far more than the $735 million “best estimate” his administration previously has cited.

The $735 million would stretch over five years, but “in addition, there are huge unknowns for the states in this reform,” Gov. Bredesen said, estimating that those costs, if realized, could exceed another $3 billion from 2014 to 2019.
Read the complete Chattanooga Times Free Press article here.

Thursday, October 15, 2009

NY Times: As City Adds Housing for Poor, Market Subtracts It

It [NYC} has already financed the creation or preservation of 94,000 units, including 72,000 for low-income households, city officials say.

But those efforts have been overwhelmed by a far larger number — the 200,000 apartments affordable to low-income renters that New York City has lost over all, because of market forces, during the mayor’s tenure.
Read the complete October 14, 2009, New York Times article By Manny Fernandez here.

CBO Testimony On The Economic Effects Of Legislation To Reduce Greenhouse-Gas Emissions

CBO Director Douglas W. Elmendorf's testimony on the "Economic Effects of Legislation to Reduce Greenhouse-Gas Emissions" before the Committee on Energy and Natural Resources United States Senate 0n October 14, 2009.

Elmendorf makes the following key points:
  • Climate change is an international problem. The economic impacts of climate change are extremely uncertain and will vary globally. Impacts in the United States over the next 100 years are most likely to be modestly negative in the absence of policies to reduce greenhouse gases, but there is a risk that they could be severe. Impacts are almost certain to be serious in at least some parts of the world.

  • The economic impact of a policy to ameliorate that risk would depend importantly on the design of the policy. Decisions about whether to reduce greenhouse gases primarily through market-based systems (such as taxes or a cap-and-trade program) or primarily through traditional regulatory approaches that specify performance or technology standards would influence the total cost of reducing those emissions and the distribution of those costs in the economy. The cost of a policy to reduce greenhouse gases would also depend on the stringency of the policy; whether other countries also imposed similar policies; the amount of flexibility about when, where, and how emissions would be reduced; and the allocation of allowances if a cap-and-trade system was used.

  • Reducing the risk of climate change would come at some cost to the economy. For example, the Congressional Budget Office (CBO) concludes that the cap-and-trade provisions of H.R. 2454, the American Clean Energy and Security Act of 2009 (ACESA), if implemented, would reduce gross domestic product (GDP)below what it would otherwise have been—by roughly ¼ percent to ¾ percent in 2020 and by between 1 percent and 3½ percent in 2050. By way of comparison, CBO projects that real (inflation-adjusted) GDP will be roughly two and a half times as large in 2050 as it is today, so those changes would be comparatively modest. In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP. Projected GDP impacts include declines in investment, which only gradually translate into reduced household consumption. Also, the effect on households’ well-being of the reduction in output as measured by GDP (which reflects the market value of goods and services) would be offset in part by the effect of more time spent in nonmarket activities, such as childrearing, caring for the home, and leisure. Moreover, these measures of potential costs imposed by the policy do not include any benefits of averting climate change.

  • Climate legislation would cause permanent shifts in production and employment away from industries focused on the production of carbon-based energy and energy-intensive goods and services and toward the production of alternative energy sources and less-energy-intensive goods and services. While those shifts were occurring, total employment would probably be reduced a little compared with what it would have been without a comparably stringent policy to reduce carbon emissions because labor markets would most likely not adjust as quickly as would the composition of demand for different outputs.

  • CBO has estimated the loss in purchasing power that would result from the primary cap-and-trade program that would be established by the ACESA. CBO’s measure reflects the higher prices that households would face as a result of the policy and the compensation that households would receive, primarily through the allocation of allowances or the proceeds from their sale. The loss in purchasing power would be modest and would rise over time as the cap became more stringent and larger amounts of resources were dedicated to cutting emissions, accounting for 0.2 percent of after-tax income in 2020 and 1.2 percent in 2050.

  • The expected distribution of the loss in purchasing power across households depends importantly on policymakers’ decisions about how to allocate the allowances. The allocation of allowances specified in H.R. 2454 would impose the largest loss in purchasing power on households near the middle of the income distribution. Which categories of households would ultimately benefit from the allocation of allowances is more uncertain in 2020 than in 2050. A large fraction of the allowances in 2020 would be distributed to households via private entities, and the distribution of the allowance value would depend on whether those entities passed the value on to customers, workers, or shareholders. In contrast, most of the value of allowances in 2050 would flow to households directly.
Read the entire testimony here.

Video: John Mack On Saving Morgan Stanley

A 26 minute video and brief summary of a speech at the Wharton School by CEO John Mack on Saving Morgan Stanley .

Regulations Or Contractual Provisions To Control Systemic Risk?

Is the solution to 'too big to fail' financial institutions, more government regulations and supervision or Coasean contractual provisions for mandatory conversion of debt to equity and capital?
"When the government came in to rescue these large banks, it essentially made whole all of the debt of the banks, including the subordinated debt," [Wharton finance professor Marshall] Blume says. "That creates a problem for the future." In theory, creditors holding subordinated debt are paid only after senior debt holders get all they are owed. That extra risk makes subordinated debt holders more cautious in lending. Rescuing them encourages them to take unwise risks, according to Blume.

One potential remedy, he says, is to require that financial institutions that take on debt incorporate provisions to automatically convert it to shares of stock under certain crisis conditions. Removing debt and expanding equity would bolster balance sheets. And this approach would impose discipline, since stockholders generally suffer bigger losses than debt holders in a bankruptcy or other crisis. Moreover, stock holders have a say in corporate governance; debt holders do not.
"'Too Big to Fail': Can Regulation Control Systemic Risk?" Published: October 14, 2009 in Knowledge@Wharton.

Wednesday, October 14, 2009

Distinction Between Regulatory Supervison And Industry Regulation

A Financial Times article makes a valid distinction between government regulation of an industry and government supervision of industry. Successful regulation protects the public interest, while government supervision is ineffective shadow management.

John Kay, in a Financial Times article on October 13, 2009, "How the skies proved the limits of regulation," discusses how regulatory supervision requires knowledge of the industry, leads to regulatory capture and government employment of industry insiders. Regulations does not require regulators have industry knowledge because their goal is to protect a public interest and does not require that the regulators have industry experience.
Supervision is shadow management with a public interest orientation, its purpose to ensure universal adherence to good behaviour. Regulation is narrowly focused on specific issues of public concern. Supervision demands knowledge of the industry, regulation demands knowledge of the public interest and public concerns.
Read the complete article here.

52 Percent Lower Chance Of Dying At Top-rated Hospitals

The largest annual study of patient outcomes at each of the nation's 5,000 nonfederal hospitals found a wide gap in quality between the nation's best hospitals and all others. According to the study, issued today by HealthGrades, the leading independent healthcare ratings organization, patients at highly rated hospitals have a 52 percent lower chance of dying compared with the U.S. hospital average, a quality chasm that has persisted for the last decade even as mortality rates, in general, have declined.
Read the HealthGrades study press release here.

Read the complete study report, The Twelfth Annual HealthGrades Hospital Quality in America Study October 2009.

Unfortunately, I did not notice any mention of the relative cost of medical care at the hospitals to see if costs affected outcomes.

Union Workers Have Huge Healthcare Tax Loophole

The employer cost of union worker health care is 2.4 times the employer cost of non-union employees. This is a huge untaxed windfall to union employees and their employers. Employers get to deduct the cost of employee benefits, such as health care, but employees do not pay taxes on value of the benefits.

According to the Bureau of Labor Statistics data, the average hourly cost for a private sector union employee's health care is $4.20 per hour, and $1.73 per hour for a non-union worker.

The extra employer cost also did not diminish union worker pay. Union workers make about 20 percent more per hour than non-union workers. The average hourly union worker salary and wage is $22.91 per hour versus $18.98 for non-union employees.

Employer share of union health care cost rose 88 percent from 2001-09 versus 66 percent over the same time for non-union worker employers. Private sector union workers are 8.5 percent of the workforce, but account for almost 20 percent of private sector health care employer costs.

Congress should go forward with its proposed tax on 'Cadillac' health plans and tax this inequality in health care benefits.

Tuesday, October 13, 2009

Lowering Traffic Congestion Improves Infant Health: Benefit of EZ-Pass

There is a positive externality and unintended consequence to automatic toll collection. "Traffic Congestion and Infant Health: Evidence from E-ZPass" by Janet Currie and Reed Walker, NBER Working Paper No. 15413,October 2009.
We find that reductions in traffic congestion generated by E-ZPass reduced the incidence of prematurity and low birth weight among mothers within 2km of a toll plaza by 10.8% and 11.8% respectively.
Read the NBER abstract here.

Monday, October 12, 2009

Video: Economics Nobel Prize Winner Elinor 'Lin' Ostrom Press Conference

Lin Ostrom Press Conference Video

Elinor Ostrom press conference

October 12, 2009

Elinor Ostrom, the Arthur F. Bentley professor of political science and professor of public and environmental affairs at Indiana University, will receive this year's Nobel in Economic Science. The announcement was made Monday morning in Stockholm, Sweden. Ostrom is the first woman ever to receive the award. She will share it with Oliver E. Williamson, who is at the Walter A. Haas School of Business at the University of California, Berkeley. The two will share the prize for their separate work on economic governance, organization, cooperation, relationships and nonmarket institutions.

Ms. Ostrom’s work focuses on the commons,such as how pools of users manage natural resources as common property. The traditional view is that common ownership results in excessive exploitation of resources — the so-called tragedy of the commons that occurs when fishermen overfish a common pond, for example. The proposed solution is usually to make users bear the external costs of their utilization by privatizing the resource or imposing government regulations such as taxes or quotas.

Accompanied by Indiana University President Michael McRobbie, Professor Ostrom met with reporters Monday morning in a studio at the IU-Bloomington Radio/TV Center. That press conference was carried live via satellite and stream lived on the Internet.

Did Unions Cause Our Health Insurance Crisis?

As usual, Jake of the EconomPic blog posted an interesting chart. He shows that the cost of employee benefits, from 2001 to 2009, increased a lot, while wages and salaries remained relatively flat.

My comment that I posted on his site, based on the same BLS data:

Health benefits are 11.4 percent of union members total compensation, but only 6.6 percent of non-union workers.

In 2001, health benefits for union workers, were 8.1 percent and for nonunion workers, 5.2 percent.

Health insurance costs for union workers rose more than for non-union workers.

What motivates unions to negotiate for more expensive health benefits instead of higher wages?

Are unions responsible for the above inflation run up in US health insurance costs and our current health insurance crisis?
I find it interesting that no one mentions the role unions may have played in letting health care costs go unchecked.

The run up in health care benefits costs was 50 percent higher for union workers than non-union workers from 2001-2009.

Could it be that since so many health care workers are unionized that the private sector unions had incentives to push for increases in health care costs to allow the unions to negotiate for higher health care worker wages and benefits?

Saturday, October 10, 2009

CBO Ignores 'Implicit Tax' Negative Economic Effects In Scoring Baucus Health Bill

The Congressional Budget Office, by budget scoring convention, ignores the economic effects of the increases in marginal tax rates in the Baucus health bill, according to Harvard economics professor Greg Mankiw.

He shows that the 'implicit tax' in the phase out of the subsidies in the Baucus bill amounts to an additional income tax in the low 20 percent range on top of all existing taxes.

Mankiw's conclusion:
households facing an increase in marginal tax rates ... will not ignore them. This means that the healthcare reform bill will likely have a more adverse budgetary impact than CBO estimates.
Read Mankiw's blog post, "Marginal Tax Rates from Health Reform."

Read CBO's analysis of the "America’s Healthy Future Act of 2009" and letter to Chairman Baucus here.

Friday, October 9, 2009

Assets Bubbles Are The Great Unknown

The Federal Reserve doesn’t really understand asset bubbles.

Unfortunately, neither does anyone else.
From Catherine Rampell's New York Times article, "The Fed Doesn’t Really Understand Asset Bubbles." Her complete article is available here.

Rampell's article is based on Federal Reserve Vice Chairman Donald Kohn's speech, "Monetary Policy Research and the Financial Crisis: Strengths and Shortcomings". He gave the speech at the Federal Reserve Conference on Key Developments in Monetary Policy, Washington, DC on October 9, 2009.
Our limited knowledge of the determinants of asset prices and their effects on credit has made it more challenging to respond to the crisis and explain our actions to the public. We have had to relax our standard assumptions that financial assets are highly substitutable, and that their rates of return can be readily arbitraged.
Or as Captain Kirk said, "To boldly go where no man has gone before."

Kohn's complete speech is available here.

Job Openings At Lowest Recorded

Bloomberg is reporting:
The number of unfilled positions fell by 21,000 to 2.39 million, the fewest since records began in 2000, the Labor Department said today in Washington. Openings were down by 2.4 million, or 50 percent, since peaking in July 2007.
Read the complete article here.

Read my related post, "Low Number Of US Job Openings: Is There A Structural Problem?" about the low level of job openings here.

AFA Videos Of Interviews and Lectures With Top Financial Economists

The American Finance Association has streaming videos and transcripts of edited versions of interviews with Harry Markowitz, William Sharpe, Paul Samuelson, Robert Merton, Myron Scholes, Jack Treynor, Kenneth Arrow, Eugene Fama and Fred Weston. [Link updated on April 13, 2018.]

The AFA also has streaming videos of lectures on the HISTORY OF FINANCIAL THOUGHT with Perry Mehrling on Fischer Black, Stewart Myers on Corporate Finance in the 1970's, Maureen O'Hara on Market Microstructure, Mark Rubinstein on Great Moments in Financial Economics: The Hidden History.

The videos and transcripts are available here. Enjoy!
(HT: Peter Klein, Organizations and Markets)

Thursday, October 8, 2009

Consumer Financial Protection Agency Will Increase Rates, Reduce Credit And Jobs

Under plausible yet conservative assumptions the CFPA [Consumer Financial Protection Agency Act of 2009] would:

• increase the interest rates consumers pay by at least 160 basis points;
• reduce consumer borrowing by at least 2.1 percent; and,
• reduce the net new jobs created in the economy by 4.3 percent.
Read "Evans and Wright on The Effect of the CFPA Act of 2009 on Consumer Credit" on the Truth and the Market blog by Joshua Wright, Assistant Professor of Law at George Mason University School of Law.

Evans and Wright paper available (ungated) here.

More Medicare Insurance Claims Denials Than Private Sector

From Mark Perry's blog, How Do We Keep Gov't. Honest? Medicare Denies More Insurance Claims Than the Private Sector:
Medicare led the group with the greatest percentage of insurance claims denied (6.85%), more than double the denial rate for private insurers like UHC (2.7%), Coventry (2.9%), Humana (2.9%) and CIGNA (3.4%).
Read the complete post here.

Business Success Is Mostly Luck And Not Managerial Excellence

A number of studies have assessed the degree to which firm performance, both good and bad, persists across time. But none, to our knowledge, has compared the observed number of sustained superior performers to the number that we would expect by chance. Doing so is vital because research...suggests that luck strongly affects firm performance in a world in which boundedly rational decision makers face strategic choices that involve high levels of causal ambiguity, complexity, and uncertainty.
From the paper, "How Long Must a Firm be Great to Rule Out Luck? Benchmarking Sustained Superior Performance" by Andrew D. Henderson of the University of Texas at Austin, Michael E. Raynor and Mumtaz Ahmed of Deloitte Consulting LLP.

The authors looked at 20,000 companies and found:
On the basis of this analysis, one of many findings was that, among firms with 11 years' worth of data, 4.3% would rank in the top decile five or more years by pure luck. Thus, among the 856 companies with 11-year records, 37 would be expected to achieve that number of top rankings merely by chance, meaning that any of the 45 firms in that select group would present an 82 percent likelihood of being a false positive.

What would it take to get the number of false positives down to an acceptably low proportion, say about 10 percent, not only for that group of firms but in general? That would require that a firm be in the top 0.2 percent -- in other words, that it rank above 99.8% of all other firms over the same span of years. In all, 150 firms achieved that rank out of the more than 20,000 companies in the database.
Read the complete Academy of Management press release here.

CBO October 7 Analysis Of Baucus Health Reform Bill

October 7, 2009
Honorable Max Baucus
Committee on Finance
United States Senate
Washington, DC 20510

Dear Mr. Chairman,

The Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation (JCT) have completed a preliminary analysis of the Chairman’s mark for the America’s Healthy Future Act of 2009, incorporating the amendments that have been adopted to date by the Committee on Finance. That analysis reflects the specifications posted on the committee’s Web site on October 2, 2009, corrections posted on October 5, and additional clarifications provided by the staff of the
committee through October 6. CBO and JCT’s analysis is preliminary in large part because the Chairman’s mark, as amended, has not yet been embodied in legislative language.
Read the complete CBO analysis here or below.

10 7 Baucus Letter

Wednesday, October 7, 2009

The Hubris Of Government Healthcare Reform: Exit, Voice, and Loyalty

It takes tremendous hubris by Congress, the President and his advisers to include modifications to the current health system that failed at the State level to control medical costs and to lower the number of uninsured.

To get a feel for past state failures to achieve what the federal government is now attempting in healthcare reform read the Wall Street Journal's opinion piece, "The Lesson of State Health-Care Reforms."
Like participants in a national science fair, state governments have tested variants on most of the major components of the health-care reform plans currently being considered in Congress. The results have been dramatically increased premiums in the individual market, spiraling public health-care costs, and reduced access to care. In other words: The reforms have failed.
Many businesses over the years thought they had a better product or plan than the competition. Congress and the President believe their proposed changes to US healthcare are better than the current system. Businesses know that many products and ideas work on paper. When talking it over with friends, family, fellow business owners, advisers, or investors, the ideas work. Many early reviewers, the true believers, love the prototype.

Sadly, the consumer and the marketplace often disagree with entrepreneurs. The consumer does not see the benefit. The product does not do what it advertised. The production and delivery costs are much higher than anticipated. The quality is inferior. The business cannot find the right kind of employees. In the end, many potentially great businesses and products fail.

The concept's originator did not, could not, anticipate all the significant real world effects that affect success or failure. Even if they did see potential problems, their hubris prevented them from admitting the possibility of failure. Their drive to succeed blinds them of reality's marketplace cruelty. Our President and Congress would do well to learn that good intentions do not guarantee an idea's success

Similarly, many existing businesses, after a period of success, fail because they lose their consumer relevancy, prices get too high, quality deteriorates, or better, cheaper substitutes become available. Consumers use their option to 'exit' the business and product and use something else to meet their needs. For elected officials, 'exit' is voting for another candidate at reelection time. Government agencies and programs do not respond to consumer choice.

We now have Congress and the President embarking on a new healthcare adventure. No one can understand all the effects and ramifications of a new US medical insurance and health system. Congress, as we know, responds to reelection politics and not to the marketplace.

Politicians would do well to learn the concepts in the book, "Exit, Voice, and Loyalty" by the economist Albert O. Hirschman. Our elected officials confuse the voice of dissatisfaction with the current healthcare system with a mandate to change our healthcare system. They should become fearful, if they are not already, of the power of 'exit'.

The more our politicians include mandates in the change to current medical care in the US, the more they limit individuals' abilities to go outside the government legislated system. The more Congress reduces the electorate's ability to choose an alternative to Congress's vision of healthcare, the more likely it is for US citizens to 'exit' the Congressional system by voting against those who favored the medical system change.

In private enterprises, consumer choice is visible in a business's profits and losses, acts as a check and a powerful force against bad business ideas. The only equivalent in public enterprises is to vote the officials out of elected office. Healthcare is too much of the US economy, people's daily lives, household costs and concerns not to be a significant impact on the next election, unless employment deteriorates a lot more or there is an overseas US military escalation.