Monday, November 30, 2009

Obama's Advisors Lack Business Experience And Wisdom

The following chart shows that President Obama's cabinet lacks the business experience and wisdom of every other president's cabinet since Teddy Roosevelt's cabinet, 110 years ago.

The above chart is from THE ENTERPRISE BLOG, "Help Wanted, No Private Sector Experience Required" By Nick Schulz and originally from a JP Morgan research report.

Schulz concludes:
When one considers that public sector employment has ranged since the 1950s at between 15 percent and 19 percent of the population, the makeup of the current cabinet—over 90 percent of its prior experience was in the public sector—is remarkable.

Addendum: [See my December 27, 2009, post, "Obama Does Not Know How To Be A CEO."]

Sunday, November 29, 2009

Side By Side Comparison Of House And Senate Health Reform Bills

The Henry J Kaiser Foundation produced a side-by-side comparison of the House and Senate health reform bills, HR 3962 and HR 3590, respectively. The foundation intends to keep the site updated as the bills are modified.

The health care bills' comparison is available here.

Friday, November 27, 2009

Structural Employment Changes In Recessions

My comment to a post by Arnold Kling, "The Great Depression as a Recalculation" of his summary of an interview with Bruce Greenwald by Robert Huebscher, "Bruce Greenwald on Structural Problems in the Economy and Unemployment" follows:
Bruce (by the way, he is far more intelligent and knowledgeable than I am) is talking about sector changes in employment. Whether or not his example of agriculture is correct, during times of economic retrenchments, some industries suffer more and reduce employment more than others. When the economy rebounds, the new economic growth does not entirely reverse an industry's previous employment and production declines and undo a particular industry's employment losses. The employment and production growth occur in different areas due to changes in demand, changes in production efficiency and capital investment that affect the need for labor.

Bruce and Arnold do not mention that there are also changes that occur within sectors. There is a constant churning of labor in the economy, which can result in significant changes in the characteristics of the labor force within an industry. As companies let employees go, companies hire new employees with different attributes.

In times of increasing unemployment and a slowing economy, there is an excess of employee applicants for jobs. Employers could lower salaries and benefits in response to the excess of available workers. Most of the time, it appears that wages and benefits do not decline (sticky wages). Instead, employers raise the requirements for their open positions. They are able to hire workers with more education and more experience at or slightly above the previous wage paid for the position, but at a lower wage than they would have paid before the economic slowdown. During recessions, there are often complaints of workers being overqualified and underutilized for positions they have, but it allows some companies to use the newly available unused talent within their business to achieve competitive advantages. During the Depression, some jobs added a high school degree as a new requirement.

As employers accumulate more experienced, more skilled, and more educated workers, the employers expand, restructure and modify jobs to increase efficiencies. Additionally, companies can use the workers' experience and unused skills to expand their institutional knowledge, focus on other aspects of the industry and reduce a competitor's advantage. The internal changes to the talent pool within an existing industry allow it to respond to competitive changes proactively, dynamically and flexibly.

It was the internal industry and employee skill changes during the recession Depression that allowed industries to grow post WWII.

One could argue that the rigidities of job definitions, job responsibilities, and hiring and firing rules caused by the unionization of the US auto industry prevented the auto industry from making the necessary internal structural job modifications, increase workers' experience and gain institutional skills in times of previous economic recessions and auto sales slowdowns. The inability of the auto industry to avail itself of cheap talent, without reducing wages, during recessionary times hindered its competitiveness and allowed new competitors to take away significant market share.

Basel II Banking Rules Had Perverse Effects

International banking rules such as Basel II have had the perverse effect of imposing the greatest capital restrictions on the smaller and less diversified banks that posed the least risk to the system, while the large “super-spreader” institutions were given more leeway. Borrowing an analogy from sexually transmitted disease, Mr Haldane says: “Basel vaccinated the naturally immune at the expense of the contagious; the celibate were inoculated, the promiscuous intoxicated.”
From "Organic mechanics" by Clive Cookson, Gillian Tett and Chris Cook published November 26, 2009 on

Tuesday, November 24, 2009

Price Discrimination Does Or Does Not Explain Everything

Price Discrimination Explains Everything by Arnold Kling.

Price Discrimination Does Not Explain Everything by Adam Ozimek.

The Stimulus Problem Is Who Got It

Tom Lindmark on But Then What blog says about the stimulus, "a lot of the commentary that I’ve seen suggests that it’s not a size problem with stimulus so much as it is one of execution. The stimulus was captured by the political class and directed towards those projects which would provide the maximum return in reelection cash....

The problem isn’t that there wasn’t enough money handed out, it’s who it was handed out to."

Read Tom's complete post, "The Stimulus Fallacy."

Monday, November 23, 2009

Do SAT Math Scores Show Societal Bias Hinders Female Scientists Career Objectives?

Mark Perry on Carpe Diem posted a blog, "800 SAT Math Scores: Male-Female Ratio is 2.22:1" that shows that on the Math portion of the SAT, males outnumber females by over 2 to 1 at the 800 level. The male excess ratio tapers off until the 580 score level where females begin to outnumber males. Mark believes this shows why females are under-represented in the sciences.

Mark says:
If we are trying to explain the over-representation of males in science, math and engineering departments at MIT and Harvard, especially if that group represents those who score 800 on the SAT math test, the explanation seems pretty clear, convincing and straightforward: males are over-represented by a factor of more 2:1 for SAT math test scores of 800 points.
I posted a comment on the Carpe Diem blog in response with the belief that the SAT scores do not show, as Mark Perry indicates, that there is not a societal and cultural bias that is causing the under-representation of females in the sciences.

My comment:
If there is a societal and cultural bias such that females feel less feminine or attractive if they show high math or science ability or interest, some of the females most aware that they possess above average math and science abilities will attempt to hide these traits to increase their attractiveness and femininity. Similar results will occur if the females believe it is unfeminine to score higher than their desired boyfriends score.

Potentially high SAT math and science female scorers will most likely know based on past school test scores that they have the capability to score high on math and science tests.

One would expect these previously high math and science scoring females to underperform intentionally (not necessarily consciously), with the greatest underperformance occurring at the highest score levels. It is the highest female math and science score achievers who would have felt the biggest negative effect of the cultural and societal bias against female success in math and science. As female test takers approach the average, they will have had felt fewer negative effects from their previous math and science scores. The high female scorers will have the most motivation to limit their effort and underperform based on their abilities.

The SAT score results are therefore consistent with the assumption that there exist cultural and societal factors limiting female achievement in the math and sciences. It is the societal bias that will cause the appearance of an excess of males at the highest test score results and the tampering off as the scores approach the middle.

Sunday, November 22, 2009

Does Excessive Drinking Cause Accidents Or Are They Both Symptoms Of Risk Taking Behavior?

My comment I posted on Jeffrey Miron's Blog "Libertarianism, from A to Z" in response to Miron's discussion of New York State legislature's attempt to pass a tougher DUI law and make it a felony to drive while intoxicated with a child in the vehicle. Additionally, the proposed law would require first-time convicted drunken drivers to buy a device that prevents them from driving their cars if they have been drinking.

My comment:
Your [Jeffrey Miron] paper, "Does the Minimum Legal Drinking Age Save Lives?" showed that MLDA laws have a minimal impact on teenage drinking. Do DUI laws decrease the incidence of drunk driving? Or drunk driving accidents? Are alternatives such as the designated driver campaigns more important in changing behavior?

As you mention, police will and are currently letting some offenders off with a warning, offenses are bargained down and offenders continue to drive.

Additionally, there is a cause and effect issue. Do people who have aggressive, asocial, risky behaviors, such as tailing, speeding, ignoring stop signs and red lights, turning without signaling, etc. get into accidents and they also drink because it is a risky behavior or is it the drinking that causes the accidents? While I am in no way approving drinking and driving, I think it is more often a concurrent behavior and not a cause.

The law is probably more punitive than preventive. It is also a law that provides more comfort to the general population by the public's perception that the government is doing something than by the law actually achieving any reduction in the aberrant behavior.
Some people regularly take more risks in their daily lives and engage in more anti-social behavior than others and have more negative impacts on themselves and society than the average person. Of course, it would be very nice to avoid or at least minimize the negative societal outcomes.

Often, some risky behaviors are looked at as the causes of the harm, when in fact the risky behaviors are really manifestations of the same underlying psychology that caused the harm and are not the causes. These behaviors occur concurrently and are often seen as causes because they are associated with the harm, but prohibition of these actions will not stop negative effects because they are concurrent manifestations and not causes.

Excessive drinking and risky, accident-prone driving are probably caused by the same psychological characteristics and one probably does not cause the other.

Saturday, November 21, 2009

Did Contract Rigidities And Law Function As 'Social Suicide Pacts' During The Financial Crisis?

Modification-proof contracts boost commitment and can help overcome information problems. But when such rigid contracts are ubiquitous, they can function as social suicide pacts, compelling enforcement despite significant externalities. At the heart of the current financial crisis is a contract designed to be hyper-rigid: the pooling and servicing agreement (PSA), which governs residential mortgage securitization. The PSA combines formal, structural and functional barriers to its own modification with restrictions on the modification of underlying mortgage loans. Such layered rigidities fuel foreclosures, with spillover effects for homeowners, communities, financial institutions, financial markets, and the macroeconomy.

This Article situates PSAs in the context of theoretical and policy debates about contract rigidity, bond contract modification, and contractual bankruptcy.
From a recent article, "Rewriting Frankenstein Contracts: The Workout Prohibition in Residential Mortgage-Backed Securities" by Anna Gelpern, American University Washington College of Law, and Adam J. Levitin, Georgetown University - Law Center. [Free Download].

The paper suggests a few strategies:
These strategies include narrowly tailored legislation that renders the problem terms unenforceable on public policy grounds, administrative restructuring mandates, and special bankruptcy regimes.
(HT: The Conglomerate Blog)

Wednesday, November 18, 2009

Harvard Medical School Dean Says Congressional Health Reform Gets An 'F' Grade

Jeffrey Flier, Dean of the Harvard Medical School, gives the Congressional health reform proposals a failing grade in an opinion piece in The Wall Street Journal.
Flier writes:
In discussions with dozens of health-care leaders and economists, I find near unanimity of opinion that, whatever its shape, the final legislation that will emerge from Congress will markedly accelerate national health-care spending rather than restrain it. Likewise, nearly all agree that the legislation would do little or nothing to improve quality or change health-care's dysfunctional delivery system.
From "Health 'Reform' Gets a Failing Grade" by Jeffrey S. Flier, Dean of the Harvard Medical School, in Wednesday, November 18, 2009, Wall St. Journal.

Health Plans Have Cost Overruns

cost projections are notoriously unreliable, and history is filled with examples of federal programs - especially in health care - that cost far more than originally predicted.
Read "U.S. health plans have history of cost overruns" by David M. Dickson in the Washington Times.

Tuesday, November 17, 2009

College Early Decision Option Decreases Student Diversity: Negatively Impacts Asians And Hispanics

A recent research paper, "The Early Decision Option in College Admission and its Impact on Student Diversity" by Heather Antecol, Claremont McKenna College and Janet Kiholm Smith, Claremont McKenna College, (free download) finds that the early decision application process for college admission favor the wealthy and whites and negatively impacts the diversity of the college student body, particularly Asian and Hispanic enrollment.

From the paper's abstract:
Many schools rely on early decision (ED) as an admission practice. Schools that adopt ED are able to generate additional resources by attracting wealthier students who, upon admission, make binding commitments to attend and to forego shopping for competing aid offers. An unanswered question is whether the resources generated from this price discrimination practice are used by schools during the regular admission process to attract more diverse students. We document the admission practices for private national universities and liberal arts colleges and analyze how the choice to use ED, and how varying levels of reliance on it for enrollment, affect racial and geographic diversity. While, in theory, it is possible for ED to enable greater diversity over some range of early enrollment percentages, we find that the overall heterogeneity of the students falls monotonically as schools enroll larger percentages of their students through ED. Higher ED enrollment percentages appear to strongly and negatively affect Asian American and Hispanic students and positively affect white students. [Emphasis added].
How can colleges justify the continued existence of using early decision application processes when the resulting student body negatively affects two major ethnic groups, Hispanics and Asian Americans?

Monday, November 16, 2009

Excellent Peter Bernstein Video On Risk

The international management consulting firm, McKinsey & Company, has posted an excellent video of the famed author and expert Peter Bernstein discussing risk in a January 2008 edition of McKinsey Quarterly.

The 12 minute video is available on the McKinsey website here. It is worth watching.

After seeing this video, you will understand much more about risk and our current crisis and all explained in simple non-mathematical language.

It is clear that if people of Bernstein's caliber and knowledge were running our financial institution regulatory and oversight agencies, we would not have had the banking and securities industry crisis we had.

I thank McKinsey & Company for producing and making available this terrific video.

Average And Poor Families Are Economically Better Off Today Than A 100 Years Ago

Recently, the press, bloggers and some economists have put too much emphasis on income equality. They focused on measures that indicate how much richer the rich are than the average person or the poor, instead of the quality of life of the average or poor person in the US.

Most people, on a day to day basis, do not care if someone in another part of the country can own a yacht or airplane. Most people just care about their own and their family's daily lives. It is satisfying the needs of their families and themselves that is their major concern.

With that frame of mind, Mark Perry's post on Carpe Diem is very relevant, "The "Good Old Days" Are Now and It Gets Better All the Time, Thanks to Free-Market Capitalism."

The basic thrust is that living standards for the average person are much better today than they were in 1901. A much smaller share of personal income is spent on food and other essentials and a much larger share is available for discretionary spending today than in the past.

Saturday, November 14, 2009

Best Blog Post Questioning The Need For Fed Independence

Where is the argument or evidence that a wholly unaccountable Fed would, in fact, “do what’s best for the economy in the long-run”?
Read the complete Organizations and Markets' blog post, "Fed Independence and Comparative Institutional Analysis" by Peter Klein, 13 November 2009.

Thursday, November 12, 2009

Banks To Prepay 3 Years FDIC Insurance Assessments Approved

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today voted to require insured institutions to prepay slightly over three years of estimated insurance assessments. The pre-payment allows the FDIC to strengthen the cash position of the Deposit Insurance Fund (DIF) immediately without immediately impacting earnings of the industry.

Read the complete FDIC press release here.

The FDIC final rules on prepaid assessment are available here.

Full Text of HR 3962 As Passed By House, "The Affordable Health Care for America Act"

Weblinks to the full text of the amended House health reform bill as passed by the House of Representatives, "The Affordable Health Care for America Act," or HR 3962 on the Thomas legislative website here and as a PDF here on the GPO website.

The document is over 2000 pages and the PDF can take a few seconds or more to appear. I will also post the weblinks to the documents on the left sidebar of this blog.

Security Analysts Forecasts Are Not Informative

This study examines whether security analyst earnings forecasts are informative. A widely held view supported by several empirical studies is that security analyst earnings forecasts are informative. We present evidence drawn from more detailed analyses of security returns than used in past studies which shows analyst forecasts are not particularly informative. This finding agrees with the recent finding of Altinkilic and Hansen (2009), that analyst recommendations are not informative. We also show that analysts forecast tend to piggyback on the news and recent events. We examine whether our conclusions also apply in the case of bold forecasts, more accurate forecasts, more timely forecasts, and forecasts from analysts at more reputable brokerages. However, in all cases we find forecast revisions to be information-free. We conclude from the combined findings that security analysts are not information agents in securities markets, contrary to the conventional view.
From "Evidence that Analysts Are Not Information-Intermediaries" (free download), AFA 2010 Atlanta Meetings Paper by Oya Altinkilic, University of Pittsburgh - Katz Graduate School of Business, Vadim S. Balashov, Tulane University, and Robert S. Hansen, Tulane University - A.B. Freeman School of Business.

Wednesday, November 11, 2009

Ten States Facing Budget Disaster

Nov 11, 2:38 PM EST

Pew report says states face budget deficits, economic challenges similar to California's

By JUDY LIN, Associated Press Writer

SACRAMENTO, Calif. (AP) -- A study released Wednesday warns that nine states are barreling toward an economic disaster similar to California's ongoing fiscal crisis that has been marked by IOUs and budget-busting deficits.

The budget woes could mean higher taxes, accelerated layoffs of government employees, more crowded classrooms and fewer services in the coming year for some of the nation's most populous states.

Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin join California as those most at risk of fiscal calamity, according to the report by the Pew Center on the States.
Read the rest of the AP article here.

School Selling Grades To Raise Funds

A Jobless Recovery: Casey Mulligan

Indeed, real personal consumption expenditure was higher in September 2009 than it was a year earlier (as was real personal disposable income), while work hours had fallen 7 percent. This recession cannot be understood merely as the consequence of low spending.
Read more of Casey Mulligan's "A Jobless Recovery."

McKinsey Global Survey: November 2009

For the first time in a year, a majority of respondents—51 percent—say economic conditions in their countries are better now than they were in September 2008, according to a survey in the field during the last week of October....
From "Economic Conditions Snapshot, November 2009: McKinsey Global Survey results."

Tuesday, November 10, 2009

Health Reform Is A Pro-abortion, Pro-choice Pandora's Box

Government health reform, as passed in the House, mandates employers offer government approved health insurance benefits to their employees. I think it is very likely that the government will not include mandated abortion coverage in its definition of an approved employer health insurance plan. Pro-choice supporters will regret the push for universal health reform.

The House bill, as passed Saturday night, 215-210, requires employers to offer medical insurance to their employees but restricts the government from subsidizing abortions in the public option and in the insurance exchange. The bill also gives power to the government to determine the types of health insurance that will meet the employer mandate.

Will the government definition of a qualified plan require employers' health insurance coverage to include abortion payments?

Certainly, plans without abortion coverage will be cheaper and many abortions are not for the physical health of the mother. It is often an elective procedure medically, when the mother's life and health are not at issue. Some employers will want their insurers to offer plans without the abortion coverage to save money and insurers will comply.

In addition, some employers on ethical and religious grounds will oppose paying for abortion coverage for their employees and it is likely they will win a legal battle that Congress has no right to mandate an elective medical procedure that violates an employer's ethical and religious beliefs. In the end, either way, employers will not have to provide medical insurance coverage for abortions.

Suppose abortion coverage is not initially mandated. It is constitutional and not an invasion of women's rights since the regulation will not prohibit abortions. It also will not prohibit an employee from privately purchasing health insurance, or paying directly, for abortions.

It seems to me that the government minimum acceptable mandated medical coverage will not include payments for abortions, where a mother's life or health is not in danger. Many, if not most, employers will offer the minimum government mandated coverage, without abortion coverage, to save premium money.

Under health reform, women will find that they no longer have health insurance coverage for voluntary, elective abortions. It seems to me to be a high price for pro-choice individuals to pay to get health reform.

The issue in health reform is not just, whether there are restrictions for abortion procedure payments. The issue is also, whether any of final laws will allow the government to set a minimum level of health insurance coverage in the plans offered by employers. If the government gets to approve what is covered or not in an employer's plan, it is likely that the government will not require abortion coverage.

Why Rational Markets Appeared Irrational During The Financial Crisis?

An award winning doctoral dissertation by MIT Assistant Professor Constantinos Daskalakis "The Complexity of Nash Equilibria" sheds light on the recent financial crisis and stock market gyrations. The implications of the paper also show why, in appearance, a rational market can seem irrational at times.

From the MIT article, "What computer science can teach economics" by Larry Hardesty, MIT News Office.
...Nash was the first to prove that every game must have a Nash equilibrium. Many economists assume that, while the Nash equilibrium for a particular market may be hard to find, once found, it will accurately describe the market’s behavior.

Daskalakis’s doctoral thesis — which won the Association for Computing Machinery’s 2008 dissertation prize — casts doubts on that assumption. Daskalakis, working with Christos Papadimitriou of the University of California, Berkeley, and the University of Liverpool’s Paul Goldberg, has shown that for some games, the Nash equilibrium is so hard to calculate that all the computers in the world couldn’t find it in the lifetime of the universe. And in those cases, Daskalakis believes, human beings playing the game probably haven’t found it either.

In the real world, competitors in a market or drivers on a highway don’t (usually) calculate the Nash equilibria for their particular games and then adopt the resulting strategies. Rather, they tend to calculate the strategies that will maximize their own outcomes given the current state of play. But if one player shifts strategies, the other players will shift strategies in response, which will drive the first player to shift strategies again, and so on. This kind of feedback will eventually converge toward equilibrium: in the penalty-kick game, for example, if the goalie tries going in one direction more than half the time, the kicker can punish her by always going the opposite direction. But, Daskalakis argues, feedback won’t find the equilibrium more rapidly than computers could calculate it.
In a market where prices must be recomputed due to extreme changes in circumstances, such as during the recent CDO, mortgage, credit, Bear Stearns, Lehman, liquidity, housing devaluation crises, the new environment creates uncertainties as to asset outcomes and prices. Market participants realize previous asset valuations and methodologies lost their validity and that they need to revalue.

As market participants searched for new asset values, the complexity and uncertainty of the economic situation left buyers, sellers, traders, and investors without any available easy computational methods or strategies to reprice assets. In that situation, markets will rely on observable pricing by counter-parties and others for information and strategies to find new asset values. The market went into a feedback loop with all the associated up and down gyrations until it settled on a new equilibrium price.

The wild price swings in tradable assets created a general financial market panic and increased volatility. As the markets reached their new equilibrium price points, the volatility declined to previous lower levels, and calm returned to the financial markets. Although, at a significantly lower than before the crisis price based on new economic circumstances.

According to the implications of Daskalakis's paper, the market gyrations during the crisis were a search for new equilibrium price points using feedback loops because the new prices were too difficult to compute directly and efficiently in a reasonable amount of time. Extreme asset price changes are the result of the need to use trades and feedback loops to set prices. Direct, mathematical computations of the values are too slow and are not any faster than letting the market gyrate to an equilibrium price point.

Furthermore, the slowness to reach a new price equilibrium point will allow many market observers who use simple rules of thumb to price believing that interim prices are irrational. In fact, the market was in the process of determining new prices based on the new economic information.

All 201 pages of Constantinos Daskalakis' dissertation paper in PDF, "The Complexity of Nash Equilibria" is available here.

Monday, November 9, 2009

Will NY Avoid Issuing California Like IOUs?

New York State revenues are down about 20 percent. Unless the state can cut $3.2 billion from the its operating budget by the end of the fiscal year (5 more months), next year’s deficit could reach $10 billion.

NYS Governor Patterson is proposing an 11 percent cut to state agencies for the remainder of the fiscal year, and a five percent cut to education. Budget cuts are not popular with the legislature.

Patterson's approval ratings are extremely low, and he is unlikely to get his party's nomination for reelection. Without severe budget cuts, NY faces the risk of running out of cash. If that happens it may need to pay bills with iou's and face a lower credit rating.

Unlike the federal government, states and municipalities cannot run operating budget deficits and must find ways to balance each year's budget. They have limited choices. They can cut budgets for agencies, education and state subsidized and funded programs. They can also raise fees and taxes. Neither choice is popular.

Even The New York Times is running an editorial about Albany's budget problems.

Sunday, November 8, 2009

What If A New Health Reform Law Does Not Work?

Now that the House passed health reform legislation, there is a reasonable chance the Senate will also pass health reform, and health reform will become the law of the land. As the law is implemented, it will not and could not be perfect. There will be negative effects, real and perceived, and failures to achieve some of the promised legislative goals. What changes will the government make to the law?

Suppose there are more than a few negative start-up events and the health reform law actually does not work. By not work, I do not mean according to personal experience, media reports or according to stories one hears. I mean based on hard facts. Suppose as the statistics role in on life expectancy, disease survival and cure rates, accident survival rates, infant mortality, etc., the statistics show that the US became worse off than before the passage of the law. Suppose the US health statistics move further away from other comparable countries, instead of closer.

Suppose medical costs continue to rise at the same or faster rate as previous to the passage of health reform and health insurance becomes more expensive for everyone. Suppose the number of uninsured remains high.

What will the government's response be?

It is almost impossible to conceive that the law will be repealed. How will the government respond to start-up problems, unintended consequences and a failure in the improvement of certain health criteria as promised?

Obviously, the government will pass modifications to the law to minimize transparent negative effects, but how will the Congress extend the law to fix perceived and real problems? Can we think through how the Congress and President will respond to negative health reform outcomes?

Too much focus is on the starting point of the legislation, when we all know that the law will be modified after passage. Do most likely starting legislation points end up in the same place after a few years or does the initial form of the legislation matter?

My personal belief is that there are many more possible starting points for health reform legislation than there are for ending outcomes. A Medicare for all scenario is extremely unlikely since Medicare is too expensive for the US government. More likely is a movement towards a VA Hospital system. The health care system will move towards a government run enterprise, with government run or owned health delivery systems and hospitals.

Also, since the government tries to turn everything into revenue, whether crossing a bridge or using the telephone, how will the government modify its revenues to charge us more for health care? Will they tax unhealthy foods? lifestyles? negative health predispositions, such as obesity? hypochondria, etc.?

It will be interesting at least, and possibly frightening, to watch the legislation evolve over time after its passage, if it does become law.

Saturday, November 7, 2009

Changes In Workforce Education And Manufacturing Employment Share

Is this recession any different because more workers have college education and fewer workers are employed in manufacturing? Economist Arnold Kling believes so.

Both charts above are from "Not Your Grandfather's (or Keynes’s) Economy" by Arnold Kling. Saturday, November 7, 2009.

I think the verdict is still out whether having a US economy with more jobs requiring college education and fewer requiring manufacturing skills makes a difference. Are the two criteria Kling mentions distinctions without a difference? In other words, we can parse the data about the US workforce in many ways. I would would venture we can show that the workforce has gotten taller, heavier, (or maybe the reverse because of the greater number of women entering the workforce who are shorter than men, on average, and weigh less than men, on average.) healthier, longer life expectancy, more native born with fewer immigrants, etc.

The fact that there are measurable characteristic changes in the workforce over many decades does not mean that the economic forces at play are different and that the necessary responses to a recession need to be different.

To be convincing, one needs to show more than just a change in the workforce. One has to show it modifies the demand for goods, services and labor and their supply, or that it creates some sort of friction or barriers which delay a fast response by the economy's participants to adjust prices and match supply and demand. Until labor supply and demand are in sync, the US will have higher than usual unemployment.

The Health Care Public Option Becomes More Likely

The public option for health care became much more probable on Friday, according to the closing prices on Intrade of the traded contracts, "Will a federal government run health insurance plan (a public option) be approved in the US?"

The Intrade price of the Mar 2010 contract more than doubled and jumped to jumped to $21 from the previous day's close of $10. The Intrade price of the June 2010 contract almost tripled and jumped to jumped to $35 from the previous day's close of $12.5.

The March 2010 expiration price chart. The contract ID of this contract is: 698780:

Price for Will a federal government run health insurance plan (a public option) be approved in the US? at

The June 2010 expiration price chart. The contract ID of this contract is: 698781:

Price for Will a federal government run health insurance plan (a public option) be approved in the US? at

Friday, November 6, 2009

In Recessions, Rising US Productivity Numbers Do Not Represent Real Gains

US productivity statistics are an average over the whole economy. In recessionary times, many more firms with lower productivity are closing. These are the firms whose cost of producing a product or providing a service is more expensive than their competitors.

Even without any economic growth, just by the mathematics of averaging, removing the least productive firms will raise productivity. For example, suppose there are four firms that for each unit of input, output, 2, 3, 3, and 4 units. The average is 3 units per firm per unit input (12/4). If the least productive firm cannot survive and goes out of business, then for 3 units of input, there are 3, 3 and 4 units of output from the three remaining firms. That averages to 3.33 units of output per unit of input (10/3) for an 11 percent gain in average productivity. Also, in my example, change in output is (-2) over change in input (-1), for a 200 percent gain in marginal productivity.

This measure is non-sustainable. It is just the mathematics of weak firms closing. The firms that do not close and that remain in business are not becoming more productive. The US reported productivity number does not solely represent the marginal productivity of new production. As long as the least productive firms that are closing have lower productivity than the average of the firms that remain, whether or not the remaining firms increase productivity, the economy wide productivity numbers will show an increase. The change in the economy wide number will represent the additive effect of both, the closing firms and the remaining firms. It will be higher than the true measure of the change in productivity of the firms remaining.

The change in US productivity number is exceptionally high because it represents additive factors: the effect of low productivity firms closing, the effect of remaining firms that do not increase productivity but have a higher productivity than the closing firms, and the effect of firms that can increase the productivity of their output.

The result is that firms that are continuing to produce have a productivity change number that is lower than the economy wide statistic. It is 'juiced' by removing the low productive, closing firms from the average productivity.

Thursday, November 5, 2009

New, Not Small Businesses Create Jobs

Unfortunately, in troubled economic times the language of recovery is too often tilted toward large, established companies or to "small businesses," a broad term that traditionally applies to businesses with fewer than 500 employees. The conventional wisdom is that such businesses account for half of the labor force and are therefore the engine of future job creation.

That's not quite the case. The more precise factor is not the size of businesses, but rather their age. According to the Census Bureau, nearly all net job creation in the U.S. since 1980 occurred in firms less than five years old. A Kauffman Foundation report released yesterday shows that as recently as 2007, two-thirds of the jobs created were in such firms. Put more starkly, without new businesses, job creation in the American economy would have been negative for many years.
From The Wall Street Journal article, "New Business, Not Small Business, Is What Creates Jobs" by Carl Schramm, Robert Litan And Dane Strangler.

Cash For Clunkers Mostly Pickup For Pickup Trade-ins

Billed as a way for the government to put more fuel-efficient vehicles on highways, the popular $3 billion Cash for Clunkers program mostly involved swaps of old Ford or Chevrolet pickups for new ones that got only marginally better gas mileage, according to an analysis of new federal data by The Associated Press.

The single most common swap -- which occurred more than 8,200 times -- involved Ford F150 pickup owners who took advantage of a government rebate to trade their old trucks for new Ford F150s.
Read the AP story "'Clunker' data show pickup-for-pickup trades" by Ted Bridis, Associated Press Writer.

Merchants Around Yankee Stadium Did Not Benefit From World Series or New Stadium

On Monday, about an hour before the start of the Yankees-Phillies game, about a dozen customers were eating and drinking in the Hard Rock Cafe built into the southeast corner of Yankee Stadium. Less than a block south, the steel security gates were pulled down at Stan’s Sports Bar and Stan’s Sports World, longstanding businesses that catered year-round to the crowds drawn to the old stadium.

The city’s Economic Development Corporation estimated that each home playoff game produced $15.5 million in economic activity, including $6.7 million in spending on hotel rooms and taxi rides and in restaurants, bars and stores.

But on River Avenue in the Bronx, merchants said that very little of that money was trickling their way. Mr. Alawy, who said he had pulled about $30,000 out of savings to cover his costs this year, wistfully recalled the bounty that his family reaped during the 1996 World Series, when the Yankees played the Atlanta Braves.
From The New York Times, "In the Shadow of Yankee Stadium, an Off Year" by Patrick McGeehan, November 3, 2009.

A Recession Benefit: 18 To 24 Year Olds Attending College At All Time High

The Free exchange has an interesting post, "The skill-building recession."

From the post:
The share of 18- to 24-year-olds attending college in the United States hit an all-time high....
If the recession ended up boosting educational attainment at all levels, that would be the shiniest of silver linings. Deteriorating attainment in recent decades has played a role in growing inequality and poor performance of key parts of the real economy.
Read the complete blog post here.

Wednesday, November 4, 2009

This Recession Not A Paradox Of Thrift: Krugman, Keynesians Got It Wrong

it seems more likely that the reduced consumer spending was mainly a reaction to layoffs and hours cuts. The roots of this recession go a lot deeper than the paradox of thrift.

Read Casey Mulligan's piece on The New York Times Economix, "The Recession and the ‘Paradox of Thrift’." Also reprinted on Casey Mulligan's blog, supply and demand (in that order).

I will add that layoffs will also cause a decline in home prices, increase unemployment, increase the rate of mortgage defaults, and these consequences will substantially contribute to, if not directly cause, the financial crisis. Read my previous post, "Factors Affecting Mortgage Defaults."

There are economists, such as James Hamilton, who see the previous sharp rise in oil prices as the cause of the layoffs and the recession. See my previous post, "2007-08 Oil Price Run-up Caused Recession" on Oct 16, 2009.

Despite the severity and the numerous depression alarms from the media and government, this recession may be much more mundane than we have thought so far. The recession could be just a sharp response to the economic shock caused by a significant increase in oil prices. The high unemployment is a response to a US structural change in response to high oil prices (exacerbated by additional cost of proposed cap and trade laws) and to a production shift away from residential real estate.

Fama/French Bust Justin Fox's Rant Against Efficient Markets

Eugene Fama and Kenneth French's retort to Justin Fox's book that put the blame of the financial crisis on the failure of the efficient market hypothesis.
The book [The Myth of the Rational Market] is fun reading, but its main premise is fantasy. Most investing is done by active managers who don't believe markets are efficient. For example, despite my taunts of the last 45 years about the poor performance of active managers, about 80% of mutual fund wealth is actively managed. Hedge funds, private equity, and other alternative asset classes, which have attracted big fund inflows in recent years, are built on the proposition that markets are inefficient.
From Fama/French Forum Blog, "Is Market Efficiency the Culprit?"

A Picture Of Auto Sales

Thanks to EconomPic for the auto sales chart of year over year sales change.

(Click chart to enlarge.)

October auto sales annualized to 10.3 million cars per year.

Tuesday, November 3, 2009

Britiain Breaking Up Big Banks

The British government is moving to break up parts of major financial institutions bailed out by taxpayers, with a restructuring plan expected to be unveiled as soon as Tuesday. The move highlights a growing divide across the Atlantic over how to deal with the massive banks partially nationalized during the height of the financial crisis.
From "British plan breakup of bailed-out banks: Some want U.S. to follow suit to increase financial competition" by Anthony Faiola, Washington Post Foreign Service, Tuesday, November 3, 2009.

US Higher Infant Mortality Caused By More Premature Births

High rates of premature birth are the main reason the United States has higher infant mortality than do many other rich countries, government researchers reported Tuesday in their first detailed analysis of a longstanding problem.
From "Premature Births Behind Higher Infant Death Rates in U.S., Report Says" by Denise Grady, The New York Times, November 3, 2009.

Venture Capitalists Use High School Rules

Like other, more commoditized industries, venture capital (VC) has no obvious natural or regulatory barriers to entry; a new VC firm is free to open up shop in any place it wants. Because of the low cost of entry, incumbent VC firms are forced to defend their territory using a combination of economic and social tactics—such as creating exclusive cliques for deal referrals and even ostracizing those incumbent VC firms that decide to associate with outsiders.
From "In with the 'In' Crowd: In venture capital, high school rules prevail" based on the Research of Yael Hochberg, Alexander Ljungqvist And Yang Lu, Kellogg School Of Management.

Blows Between Mankiw And Krugman

Another round of economic columnist body blows by Mankiw about Krugman, "Taking out the Trash:"
I don't usually respond to illogical cheap shots from around the blogosphere (life is too short). But when the cheap shot comes from a Nobel prize winner in economics, I will make an exception.

Paul Krugman says...
Read Mankiw's entire piece here.

I do not personally know either men, and I do not have an opinion about their economics or personal beliefs. I do, however, find Krugman uses his platform at the New York Times to engage in personal attacks, while Mankiw relies on economic arguments.

Monday, November 2, 2009

Medicare Rates Are Price Controls

A comment I posted on EconLog, "It's the Prices, Stupid" by Arnold Kling about Medicare rates versus private medical costs.
Medicare is not a market price. It is a government set price. Price controls create economic distortions in supply, demand, investment, etc. The fact that transactions take place at the price control price, Medicare rate, without looking at the market place distortions is misleading.

MRI machines are expensive and can cost in the millions. Since they use strong magnetism, special areas are constructed for them and specially trained technicians are needed to run the machines.

The proper economic question is does the Medicare price reimburse a MRI owner over the useful life of the machine for the purchase costs plus facilities cost plus all operating costs including staff salaries, electricity, repairs, etc., plus a return on investment for the use of that money as an investment in a MRI machine.

If the Medicare price per patient times the number of patients is below the fair reimbursement price, then if the Medicare rate were the only price, no one would buy new machines as the old ones disappeared, unless there is some other way to make up the shortfall.

One possible outcome to a shortfall is that the number of available machines in an area will be reduced to increase utilization rates of the remaining machines and wait times will increase. Old machines would continue in use well beyond their normal useful lives, and costs would be cut in rents (MRI machines would be located in the cheaper rent areas), MRI staff and staff salaries would be cut, etc to reduce expenses of operation as much as possible. Many other costs associated with MRI machines would also be reduced.

Another possibility is that MRI owners will look to other areas to subsidize the shortfall in the Medicare price. A likely response that immediately comes to mind is that MRIs are part of a patient diagnostic process and other patient treatment areas will cost more or occur more frequently to offset the Medicare MRI reimbursement shortfall, e.g., knee and back surgery. Another possibility as suggested by others is that non-Medicare patients will be charged more for the MRI to make up the shortfall.

People with detailed knowledge about MRI associated costs use can compute the price to charge to allow the purchase and operation of an MRI machine with a realistic wait time and reasonable return on the capital funds used. This number will allow the operation and replacement of an MRI machines under conditions acceptable to the medical profession and the public. If the price is acceptable to the market place, the machines will continue to be used and replaced.

The price that allows a fair return of investment is the relevant number. Price control numbers, and that is what the Medicare rates are, are not a relevant price, except to economists to analyze market place distortions. It would be very interesting to see what the patient price should be for a new MRI machine to cover all the associated expenses and achieve a fair return on the funds. I am sure that the number exists somewhere.

Unintended Consequences Of Making Drugs Illegal

Division of Labour Blog, "Drugs: Should They Be Legal or Illegal?" by Art Carden.

I particularly like the following Carden observation:
Drugs are stronger and more dangerous precisely because they are illegal. This is explained by the fact that low-potency drugs become relatively more expensive to supply when enforcement increases. The demand for narcotic effects is extremely inelastic; as we ramp up enforcement, people come up with newer and better ways to serve the demand. One way they do this is by increasing the potency of the product.

Califrornia High Tax, Big Spending Problem

"The Big-Spending, High-Taxing, Lousy-Services Paradigm: California taxpayers don’t get much bang for their bucks" by William Voegeli, City Journal, Autumn 2009.
In 1956, the economist Charles Tiebout provided the framework that best explains why people vote with their feet. The “consumer-voter,” as Tiebout called him, challenges government officials to “ascertain his wants for public goods and tax him accordingly.” Each jurisdiction offers its own package of public goods, along with a particular tax burden needed to pay for those goods. As a result, “the consumer-voter moves to that community whose local government best satisfies his set of preferences.” In selecting a jurisdiction, the mobile consumer-voter is, in effect, choosing a club to join based on the benefits that it offers and the dues that it charges.