Tuesday, October 26, 2010

$3 Billion Trillion Shortfall In State Pension Plans: $1.5 Billion Trillion Shortfall If Drastic Pension Policy Changes Enacted

From "Policy Options for State Pension Systems and Their Impact on Plan Liabilities" by Joshua D. Rauh, Northwestern University - Department of Finance and Robert Novy-Marx, University of Chicago - Booth School of Business:
We calculate the present value of state pension liabilities under existing policies, and separately under policy changes that would affect pension payouts including cost of living adjustments (COLAs), retirement ages, and buyout schedules for early retirement. Liabilities if plans were frozen as of June 2009 would be $3.2 trillion if capitalized using taxable municipal curves, which credit states for a possibility of default in the same states of the world as general obligation debt, and $4.4 trillion using the Treasury curve. Under the typical actuarial method of recognizing future service and wage increases, liabilities are $3.6 trillion and $5.2 trillion using municipal curves and Treasury curves respectively. Compared to $1.8 trillion in pension fund assets, the baseline level of unfunded liabilities is therefore around $3 trillion under Treasury rates. A one percentage point reduction in COLAs would reduce total liabilities by 9-11%, implementing actuarially fair early retirement could reduce them by 2-5%, and raising the retirement age by one year would reduce them by 2-4%. Even relatively dramatic policy changes, such as the elimination of COLAs or the implementation of Social Security retirement age parameters, would leave liabilities around $1.5 trillion more than plan assets under Treasury discounting. This suggests that taxpayers will bear the lion's share of the costs associated with the legacy liabilities of state DB pension plans. [Bold added]
Ungated version of paper available here and here.

Climate Change Raises Indigenous Species Quandary For Environmentalist

From "When to welcome ‘invading’ species: Climate refugees challenge environmental distinctions between friend vs foe" by Janet Raloff on ScienceNews:
As climate changes, some environments are becoming hostile to the flora and fauna that long nurtured them. Species that can migrate have begun to move into regions where temperatures and humidity are more hospitable. And that can prove a conundrum for officials charged with halting the invasion of non-native species, says Jon Jarvis, a biologist who for the past year has headed the National Park Service.

One problem: What’s native? Species move at will as conditions change. What’s native in one century may be gone five generations later. Newly arrived species, meanwhile, may be environmental refugees.

“Policies that are currently in place view those [immigrants] as exotics,” Jarvis says — invading homesteaders that should, at all costs, be evicted. But such species may be on the move simply “because this is their last refuge,” he points out.
Read the complete ScienceNews article here.

Monday, October 25, 2010

The Marginal Value Of US Medical Service Is High So Medical Prices Are High

A comment I posted to "Health Care Prices: Ignored Once Again?" by Chris Fleming on HealthAffairs Blog:
It is the prices stupid, but if researchers only look at the cost of the medical service, as the authors mentioned above do, they miss the total economic price that a patient pays.

Opportunity costs to patients have to be included. Opportunity costs help explain the value of medical services to patients and why prices for US medical services appear to be high. As long as the price of a medical service has a positive marginal value to the patient, the patient will be willing to pay the higher price.

The US has very high productivity and high GDP per worker. A lost day's work has a very high opportunity cost to an American worker. Even if the worker receives sick pay, a day's absence from work often means for many a backlog of work when they return. An extra few day's work missed by going to the doctor more often for treatment or staying in the hospital longer is very expensive to an American worker. It is also not just the number of visits, but also the lost productivity due to the time it takes a patient to get better. For example, imagine a patient with a bad knee who can get knee surgery in a couple of weeks versus one who has to wait a few months for the surgery. The longer waiting time surgery might be cheaper, but the opportunity cost of the lost worker productivity until the surgery has to be included in the comparative cost. Medical costs studies as a rule do not include these opportunity costs to the patient and the employer.

American workers are willing to pay more for medical services because US medicine is more efficient and reduces the number of days of wait until treatment, of missed work due to doctor visits, uncured illness and hospital stays. This is why we visit the doctor less and have fewer days of hospital stay.

Opportunity costs extend to relatives of the patients. Often a parent is taking a child to the doctor or staying home with the child until the child gets well. Likewise, adult children often assist with the care of their elderly or sick parents.

I would say that the reason these studies were ignored is that they presented an interesting fact but also an incomplete story. Show me a comparative study that analyzes medical prices that includes patient (or caregiver) opportunity costs.

My gut feeling is that prices of medical services in the US are at a level where the marginal value to patients equals the marginal costs, including opportunity costs, to patients.
Also see my later post, "Health Care Costs And Worker Opportunity Costs" relating to this topic.

Improving Mother's Literacy Improves Disadvantaged Child's Academic Performance

From NIH news release, "Improving mothers' literacy skills may be best way to boost children's achievement" about an NIH funded study, "Family and Neighborhood Sources of Socioeconomic Inequality in Children’s Achievement" appearing in Demography by Narayan Sastry, Ph.D., of the University of Michigan, and Anne R. Pebley, Ph.D., of the University of California, Los Angeles.
"The findings indicate that programs to improve maternal literacy skills may provide an effective means to overcome the disparity in academic achievement between children in poor and affluent neighborhoods," said Rebecca Clark, Ph.D., chief of the Demographic and Behavioral Sciences Branch at the Eunice Kennedy Shriver National Institute of Child Health and Human Development (NICHD).
Ungated copy of the research paper is available here and here.

The full abstract of the paper states:
We examined family and neighborhood sources of socioeconomic inequality in children’s reading and mathematics achievement using data from the 2000–2001 Los Angeles Family and Neighborhood Study. To describe inequality in achievement test scores, we used Gini coefficients and concentration indices and multilevel regression models. There was no inequality in children’s achievement by family income once other variables in the model were held constant. Mothers’ reading scores and average neighborhood levels of income accounted for the largest proportion of inequality in children’s achievement. Neighborhood economic status appears to be strongly associated with children’s skills acquisition.

McKinsey Quarterly Drops Gate, Becomes Free But Requires Registration

Another publication, McKinsey Quarterly, will drop the gated, paid subscription model and freely open its articles to the public. If it had also dropped the required registration, it audience would be even bigger and not spied upon.

From an email sent to registered users:
In an effort to make McKinsey Quarterly content more easily accessible, in November of 2010 we will begin phasing out Premium Membership.

At that time, you will no longer need to pay to access mckinseyquarterly.com content. Instead, all content—including articles, videos, podcasts, and multimedia—will be available upon registration. In future months, we will be enriching the site even more, adding new types of content and making content more accessible.

Sunday, October 24, 2010

Outsourcing Teachers Via The Internet

From "British Kids Log On and Learn Math — in Punjab" by Julia Werdigier:
Once a week, year six pupils at Ashmount Primary School in North London settle in front of their computers, put on their headsets and get ready for their math class. A few minutes later, their teachers come online thousands of kilometers away in the Indian state of Punjab.
Read the complete New York Times article here.

A New, Faster Way To Run The Bases In Baseball

From "Winning the World Series with math: A nearly circular path could be the fastest way to home plate" by Julie Rehmeyer in ScienceNews:
Mathematicians computed that this path around the bases is, theoretically, the fastest. The red lines show the direction the runner is accelerating.
Credit: D. Carozza, S. Johnson, and F. Morgan
To run the bases faster, baseball players just need a bit of mathematics, according to research by an undergraduate math major and his professors. Their calculations show that the optimal path around the bases is one that perhaps no major-league ball player has ever run: It swings out a full 18.5 feet from the baseline.
Read the full article here.

Friday, October 22, 2010

ObamaCare Will Decrease Workforce Labor And Increase Healthcare Spending On Previously Uninsured Says CBO

From CBO Director Doug Elmendorf's October 22, 2010, presentation, "Economic Effects of the March Health Legislation" at the Schaeffer Center of the University of Southern California:
  • The legislation will reduce the amount of labor used in the economy by roughly half a percent, primarily by reducing the amount of labor that workers choose to supply.

  • The legislation will increase spending on health care for people who would have been uninsured in the absence of the legislation.

  • The legislation will decrease spending on health care for people who would be insured with or without the legislation. The magnitude of that decrease, and the extent to which it will be achieved through greater efficiencies in the delivery of care or through reductions in access to care or quality of care, are unclear.
See the complete slide presentation here, on Scribd or embedded below.

CBO Economic Effects of New Healthcare

Obesity Is Rising Around The World: McKinsey & Co.

From McKinsey Quarterly, the business journal of McKinsey & Company, "Why governments must lead the fight against obesity" by Jeffrey Algazy, MD, MPH, Steven Gipstein, MD, Farhad Riahi, MD and Katherine Tryon, MD:
The world is getting fat. In many countries, the proportion of people at an unhealthy weight has more than doubled in the past few decades. Globally, at least 1.3 billion adults and more than 42 million children are overweight or obese.
Source: McKinsey & Co.
Read the complete McKinsey Quarterly article here.

Thursday, October 21, 2010

36 Percent Decline In Teen Deadly Auto Crashes

From "Teen Drivers Have Fewer Deadly Accidents" by Todd Neale:
The number of fatal car crashes involving 16- and 17-year-old drivers has continued to drop in recent years, according to the CDC.

The annual number of deadly crashes with teen drivers fell from 2,230 in 2004 to 1,437 in 2008, a 36% decline, researchers from the agency's Division of Unintentional Injury Prevention reported in the Oct. 22 issue of Morbidity and Mortality Weekly Report.
Read the complete article here.

New FDIC Authority For Ending Too Big To Fail

From a speech by FDIC Chairman Sheila Bair, "Ending Too Big To Fail: The FDIC and Financial Reform", 2010 Glauber Lecture at the John F. Kennedy Jr. Forum, Harvard University, Cambridge, MA, October 20, 2010:
One of the most fundamental problems that led to the crisis was that a number of large banks and other financial companies were Too Big To Fail. This term is really just shorthand for the dilemma that policymakers faced in the Fall of 2008, when a number of these institutions ran into serious trouble.

We faced this choice: To let them fail, and risk destabilizing the entire financial system. Or to bail them out – imposing costs on the taxpayer and encouraging the type of risky behavior that caused the crisis in the first place. Needless to say, both of these options were highly problematic.

How did we get into this situation? One big reason is that neither bank holding companies nor non-bank financial companies, both of which figured prominently in the crisis, were subject to an FDIC-like receivership authority. That means they could not be resolved in an orderly fashion without bailing out debt and equity holders or disrupting the financial system. Instead, these entities were subject to the commercial bankruptcy process, where it takes a long time and a lot of money to determine what creditors ultimately stand to collect. For example, the Lehman Brothers bankruptcy has cost almost a billion dollars to administer so far, and many creditors still do not know where they stand. By contrast, because of our ability to plan in advance, the FDIC receivership process for insured banks and thrifts sorts most of this out over a much shorter time frame, and generally returns the failed institution to private hands right away.
The Dodd-Frank Act for the first time gives the FDIC a similar set of receivership powers to close and liquidate systemically-important financial firms that are failing.
Our proposed rule makes clear that some creditors will never be deemed essential to operations or maximizing value. It states clearly that shareholders, subordinated debt and long-term bondholders will never qualify to receive additional payments above their liquidation value under the statutory priority of claims.

It also affirms that secured creditors will only be protected to the extent of the fair value of their collateral, with any unsecured portion remaining subject to loss. By ensuring that all creditors know they are at risk of loss in a failure, this proposed rule is a solid first step in implementing the resolution authority under Dodd-Frank and ending Too Big To Fail.
Read Bair's complete remarks here.

Tuesday, October 19, 2010

Flash Crash Caused Unavoidable Taxes For Investors

From "Congress, Not IRS, Must Provide Tax Relief from Flash Crash" by James Hamilton on Jim Hamilton’s World of Securities Regulation blog:
Absent the enactment of a relief provision by Congress, the IRS is not authorized to provide for the non-recognition of gain for stop-loss orders executed on the day of the flash crash in the markets, May 6, 2010. An SEC-CFTC report said that the flash crash was triggered by large trader automated sell algorithms triggered during a an unusually turbulent day for the markets. According to an IRS Information Letter, 2010-0188, various non-recognition provisions in the Code are not applicable to the situation.
Read the complete blog post here.

Placebos In Drug Studies Contain Biologically Active Compounds

From "Study: That 'placebo effect' may have a hidden meaning" by John Carroll on FierceBiotech:
in the vast majority of cases, developers never disclose what they put in the phony therapy, which is supposed to be made up of harmless materials. But in the few cases when researchers did find the ingredients, they amazingly concluded that researchers may have hurt as well as helped the chances of their experimental therapies.

Case in point: In one study "olive oil and corn oil have been used as the placebo in trials of cholesterol-lowering drugs. This may lead to an understatement of drug benefit: The monounsaturated and polyunsaturated fatty acids of these 'placebos,' and their antioxidant and anti-inflammatory effects, can reduce lipid levels and heart disease."
Read the complete article about the study published in the Annals of Internal Medicine here.

Monday, October 18, 2010

Is The Foreclosure Rate Unrelated To The Housing Bubble And Close To Long Term Trend

Part of a comment I posted on "The Breakdown of the U.S. Mortgage Market" on Rortybomb:
Chart from Rortybomb.

Additionally and interestingly, the Mortgage Bankers Association chart shows an upward trend in mortgage foreclosures from 1979 to 2002. Defaults appear to be about 5 times greater in 2002 than in 1979.

The foreclosure drop from 2002 to 2006 can be attributed to the housing bubble price appreciation, which allowed homeowners to avoid foreclosure by selling their homes at a price that paid off the mortgage and other second lien debt.
If the home bubble had not occurred we might have seen a foreclosure rate of about 2 to 2.5 percent now, based on an eyeball estimate of the upward slope of the chart.

The high rate of current foreclosures may only be slightly higher than the expected trend line and the bubble allowed avoidance of trend line foreclosures from 2002 to 2006.

The current foreclosure rate may seem high because the housing bubble artificially allowed the foreclosure rate to deviate from the trend line and suppress it, but it may be close to trend now.

The economic and social factors that raised the foreclosure rate from 1979 to 2002 probably are an important force in today’s foreclosures and the collapse of the housing bubble and the higher than norm unemployment maybe less of a cause than common consensus believes.

Sunday, October 17, 2010

Most Effective Breast Cancer Prevention Is Having Children Early

From "Here is why having a baby reduces breast cancer risk":
Many women fail to realize the single most effective measure they can take to reduce their risk of developing breast cancer is to have a baby as early as they can and avoid any induced abortion.
Studies have shown having a full-term pregnancy or having a baby at age 18 can reduce the risk of breast cancer by 50 to 75 percent compared to those who have a baby at 30.
Read the complete article for an explanation of why carrying a pregnancy to term at a young age reduces breast cancer risk here.

Thursday, October 14, 2010

Paradoxically, US Hispanics Outlive Whites And Blacks

Hispanics in the US, who are generally poorer, less educated and more likely without medical insurance or access to medical care, have a longer life expectancy than the rest of the US population. The general consensus is that more income, more education and more medical care are associated with a longer life expectancy and thus the Hispanic paradox.

From "United States life tables by Hispanic origin," by Elizabeth Arias, Ph.D., Division of Vital Statistics, National Center for Health Statistics, Vital Health Stat 2(152), 2010.
Life expectancy at birth for the total population in 2006 was 77.7 years. Life expectancy was 80.6 years for the Hispanic population, 78.1 years for the non-Hispanic white population, and 72.9 years for the non-Hispanic black population. The Hispanic population has a mortality advantage at birth of 2.5 years over the non-Hispanic white population and 7.7 years over the non-Hispanic black population.
The results show that the Hispanic population has higher life expectancy at birth and at almost every subsequent age than the non-Hispanic white and non-Hispanic black populations. The finding of higher life expectancy for the Hispanic population seems paradoxical because on average the Hispanic population has lower socioeconomic status than the non-Hispanic white population. Given the relationship between socioeconomic status and mortality, a mortality profile similar to that of the non-Hispanic black population would seem more likely for the Hispanic population.

This seemingly paradoxical result has been found in numerous research studies using a variety of data sources, including state and national vital statistics, local surveys, and national linked mortality follow-up surveys, such as the NLMS and the National Health Interview Survey–Multiple Cause of Death (NHIS–MCD) linked data. All such studies have consistently found a Hispanic mortality advantage over the non-Hispanic white population even when differences in demographic and socioeconomic characteristics are taken into account. Research into the causes of this paradox has been extensive although not conclusive.

Private Companies Do Most Of TARP Work For Treasury Raising Conflict And Transparency Issues

From Congressional Oversight Panel news release, "Congressional Oversight Panel Examines Use of Private Contractors in the TARP" on October 14, 2010:
Despite Treasury's Efforts, Significant Concerns Remain about Accountability and Potential Conflicts

WASHINGTON, D.C. - The Congressional Oversight Panel today released its October oversight report, "Examining Treasury's Use of Financial Crisis Contracting Authority." The Panel found that Treasury's extensive use of private contractors in Troubled Asset Relief Program (TARP) programs creates significant concerns about transparency and potential conflicts of interest. Although Treasury has taken considerable steps to ensure the appropriate use of private contractors, further improvements can and should be made.

Private businesses today perform many of the TARP's most critical functions, operating under 91 different contracts worth up to $434 million. In fact, the vast majority of people working on the TARP now receive their paychecks from private companies. Fannie Mae alone employs 600 workers on TARP's foreclosure programs, while Treasury has only 220 staffers working on all TARP programs combined.

Treasury has made notable efforts to ensure that it has used private contractors properly. For example, Treasury provided for competitive bidding for most of its contracts, and it has established several layers of controls to monitor contractor performance and to prevent conflicts of interest. This praise must be viewed in context, however. The government contracting process is notoriously non-transparent, and although Treasury appears to have performed well on a comparative basis, it remains capable of improvement.
Read the full news release here.

Read the full 159 page Congressional Oversight report, "Examining Treasury's Use of Financial Crisis Contracting Authority" here or embedded below.
TARP Oversight Report

Wednesday, October 13, 2010

Technological Advancements Created The Hedonic Marriage

From New York Times, "How Marriage Survives" by Justin Wolfers:
It used to be that a typical marriage involved specialized roles for the husband and wife. Usually he was in the marketplace, and she was in the home, and this arrangement led to maximum productivity.

But today, when families have easy access to prepared foods, inexpensive off-the-rack clothing and labor-saving technology from the washing machine to the robot vacuum cleaner, there’s much less benefit from either spouse specializing in homemaking. Women, now better educated and with greater control over their fertility, are in the marketplace, too, and married couples have more money, more leisure time and longer lives to spend together. Modern marriages are based not on the economic benefits of playing specialized roles but on shared passions.

This new model of “hedonic marriage” has had an effect on who marries, and when — as research I have conducted with my better half, the economist Betsey Stevenson, has documented. In the old days, opposites attracted; an aspiring executive groom would pair up with a less-educated bride. And they would wed before the stork visited and before the couple made the costly investment of putting the husband through business school.

But today, that same young executive would more likely be half of a power couple, married to a college-educated woman who shares his taste in books, hobbies, travel and so on.
Read the complete New York Times article here.

Bush Viewed As Good A President As Obama In Latest CNN Poll

From The Wall Street Journal, "Obama's Miracle: He's Making Bush Look Good" by John Fund:
A new CNN poll finds voters still believe Mr. Obama is a better president than Mr. Bush was, but by only 47% to 45%. That's down from a whopping 23-point margin last year.

US Drills, Technology Drilled Hole To Rescue Chilean Miners

From New York Times article, "Plan B Turns Out to Be Fastest Path for Rescue" by Henry Fountain:
In the days immediately after the discovery that 33 workers trapped at the San José Mine were alive, Chilean officials cautioned that it might take up to four months to reach them with a rescue hole.

In the end, it took only about six weeks to do what mine safety experts say is a job with little precedent:
Three efforts to bore through the abrasive volcanic rock went forward simultaneously — known as Plans A, B, and C — but it was Plan B that broke through to the miners first.

"To tell you the truth, I don’t think anyone had a whole lot of faith in us,” said Brandon Fisher, president of Center Rock, a company in Berlin, Pa., that supplied the Plan B drills. “They didn’t understand the technology."
Read the complete New York Times article here.

DC School Head, Rhee, To Resign

From New York Times article, "Rhee, Washington Schools Chancellor, to Resign" by Ian Urbina and Sarah Wheaton:
Ms. Rhee quickly clashed with the teachers’ union, shuttering schools and firing hundreds of employees, from central office workers to principals. Acrimonious talks resulted in a contract with the Washington Teachers’ Union that weakened the tenure system while offering generous raises to educators who cultivated high test scores and met other standards. Tensions reignited in July when, citing the budget, Ms. Rhee fired 241 teachers, most of whom had the lowest rating under the new evaluation system.
Read the complete New York Times article here.

Tuesday, October 12, 2010

In Memoriam To The USS Cole Dead And Injured

A decade ago, on October 12, 2000, al-Qaeda bombed the USS Cole in a suicide attack. Seventeen sailors were killed and thirty-nine others were injured.

The New York Times archived article, "THE WARSHIP EXPLOSION: THE OVERVIEW; BLAST KILLS SAILORS ON U.S. SHIP IN YEMEN" is available here and the Wikipedia article is available here.

Farming Coming Out Of Recession Faster Than General Economy

"The farm economy is coming out of the recession far faster than the general economy," said Don Carson, a senior analyst at Susquehanna Financial Group, New York.

Overall, the USDA projects net farm income to climb 24% this year to $77.1 billion, the fourth highest ever. In September, farmers were being paid 62% more for hogs than a year earlier, and 32% more for milk.
From The Wall Street Journal article "Farm Belt Bounces Back" by Scott Kilman.

Monday, October 11, 2010

Are Biological Clocks The Reason Women Only Get 3% Of Startup Funding?

From "Women Don’t Want To Run Startups Because They’d Rather Have Children" by Penelope Trunk on TechCrunch:
Women are under real pressure to have kids, though. They have a biological clock. So women who are the typical age of entrepreneurs—25—need to be looking for someone to mate with. Think about it. If you want to have kids before you’re 35—when your biological clock explodes—then you need to start when you’re 30, allowing for one miscarriage, which is more probable than most young people think. If you need to start having kids when you’re 30, you probably need to meet the guy you’re going to marry by the time you’re 27, so you can date for a year, get married, and live together for a year before kids. If you need to meet that guy by 27, you are very distracted during your prime startup time. (I have done years of research to come to this conclusion. Here’s the post.)

And I’m not even going to go into the idea of women having a startup with young kids. It is absolutely untenable. The women I know who do this have lost their companies or their marriages or both. And there is no woman running a startup with young kids, who, behind closed doors, would recommend this life to anyone.

For men it’s different. We all know that men do not search all over town finding the perfect ballet teacher. Men are more likely to settle when it comes to raising kids. The kids are fine. Men are more likely than women to think they themselves are doing a good job parenting. This makes sense from an evolutionary perspective. Men have to trust that the kids will be okay so that they can leave and go get food or make more kids.
There’s a reason that women start more businesses than men, but women only get 3% of the funding that men do. The reason is that women want a lifestyle business. Women want to control their time, control their work, to be flexible for their kids. This seems reasonable: Women start more lifestyle businesses and men start more venture-funded businesses. This does not, on face value, seem inherently problematic.
Read Trunk's complete post here.

Energy In the US Is Already Pigovian Taxed

A comment I posted on "The growing fallout of the shale revolution" on Newmark's Door in response to another comment:
All energy sources in the US are Pigovian [or Pigouvian] taxed.

Petroleum based energy and other carbon based energy are already heavily taxed on a federal and state level in the US. For example, taxes are added to the price of gasoline at the pump, and gas stations, distributors, wholesalers, refiners, drillers, explorers. etc. also pay various taxes, which increase the price of energy in the US. The consumer pays all these taxes in the final price.

The fact the theses taxes are not called Pigovian or that these funds are not set aside to reduce externalities is inconsequential in their economic effect.

If one priced an externality at $X and then added that to the base cost of energy, one would find that the already existing taxes diminish the need for an additional tax to raise the relative price of energy to account for externalities.

Plus, not all externalizes are negative. Imagine the number of ambulances and emergency equipment that would be needed if after every run, batteries had to be recharged for several hours or overnight. The negative effect from needing multiple batteries, extra vehicles or other energy sources would outweigh the gain from switching away from gasoline.

Shale gas burns substantially cleaner than many other carbon forms of energy. That is a positive externality from shale. Raising the price and lowering the usage of shale gas, lessens that positive benefit of shale gas. One cannot just add the negative costs to a tax without subtracting out the positive benefits.

Like all things in life, there are trade offs.

Even with oil, there are positive externalities. It has the second highest energy density of our available energy sources, surpassed only by nuclear energy. That means, less volume, less weight, less resource production needed for energy equivalence, which all create positive externalities and which are almost never counted in the measure of carbon energy externalities.

International Comparison of Capital Structure

From "An International Comparison of Capital Structure and Debt Maturity Choices" by Joseph P.H. Fan, Sheridan Titman, and Garry Twite, NBER Working Paper No. 16445, Issued in October 2010, (ungated version available here):
This study examines the influence of institutional environment on capital structure and debt maturity choices by examining a cross-section of firms in 39 developed and developing countries. We find that a country’s legal and tax system, the level of corruption and the preferences of capital suppliers explain a significant portion of the variation in leverage and debt maturity ratios. Our evidence indicate that firms in countries that are viewed as more corrupt tend to use less equity and more debt, especially short-term debt, while firms operating within legal systems that provide better protection for financial claimants tend to have capital structures with more equity, and relatively more long-term debt. In addition, the existence of an explicit bankruptcy code and/or deposit insurance is associated with higher leverage and more long-term debt. We also find that firms tend to use more debt in countries where there is a greater tax gain from leverage, while firms in countries with larger government bond markets have lower leverage, suggesting that government bonds tend to crowd out corporate debt. Countries with more extensive defined benefit pension funds have higher debt ratios and longer debt maturities, whereas those with more extensive defined contribution fund activities have lower debt ratios. In addition, debt ratios are lower in countries that limit the bond holdings of pension funds. Finally, we do not find a significant association between financing choices and the size of the insurance industry.

Sunday, October 10, 2010

Some Demographic Groups Have Higher or Lower Loan Delinquency Rates Than Credit Scores Predict

I am posting for the first time an old comment that I posted on EconLog on June 19, 2010. The reprinted comment below was in response to a blog post "Mortgage Lending and Discrimination" by Arnold Kling on June 18, 2010:
In 2007, the Fed issued a study of credit scores, "Report to the Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit" using a national statistical sample of 301,536 individuals.


From the executive summary of the report:
The analysis also finds that some groups perform worse (experience higher rates of serious delinquency) on their credit accounts, on average, than would be predicted by the performance of individuals in the broader population with similar credit scores. For example, on average, blacks perform worse than other racial and ethnic groups with similar credit scores. Similarly, single individuals and those residing in predominantly black or low-income census tracts perform worse on their loans than do their complementary demographic groups with similar credit scores. In contrast, the loan performance of Asians, married individuals, foreign-born individuals (particularly, recent immigrants), and those residing in higher-income census tracts was better than the performance predicted by their credit scores. The results hold after controlling for the other personal demographics of these individuals and for an estimate of the individuals incomes and locations; other factors that could be important, such as differences in employment experience, were not available.
Also see this fair newspaper summary of the report:

The study was done before the housing crisis and looked at all types of credit.

Lenders by law must lend equally to all borrowers with similar incomes and credit scores. If lenders include demographics, such as race or ethnicity, in their credit decisions, or adjust credit scores by race, etc., they would be found to have unlawfully discriminated.

The Fed study shows that while credit scores work well within ethnic and racial groups to predict default, different ethnic and racial groups with similar credit scores have different default rates.

Both the Fed and banks know that some groups with similar credit scores have higher default rates than other groups with the same credit scores. The banks however cannot impose more stringent credit terms on those with the higher default rate because it would be illegal discrimination.

Prior to all the anti-discriminatory lending laws, bank lending practices were based more on actual default rates than credit scores, which is why the Boston Fed study of 20 years ago did not find higher default rates among whites due to lax lending standards. After the passage of all the anti-discriminatory lending laws, banks were forced to treat all borrowers with identical credit scores equally, even if their expected default rates were different, which is why we now see higher default rates among some minority groups.

Despite protests by the the media, politicians and and back of the envelope calculations to the contrary by several liberal economists, much of the blame for the severity of the current foreclosures and housing mess can be traced back to well-intentioned laws that interfered with mortgage lending and housing decisions.

Friday, October 8, 2010

'Good Old Days' Traced Back To 1948

A study published Monday by a group of linguists, historians, and semioticians has proved the concept of "the good old days" can be traced back to the weekend of June 19, 1948.
The study also confirmed that ... singer Peggy Lee was on the radio and the weather was just perfect.
From "'Good Old Days' Traced Back To Single Weekend In 1948" October 8, 2010, Issue 46•40, the ONION.

Credit Markets Are A Better Way To Anticipate Economic Downturns: McKinsey Quarterly

From October 2010 McKinsey Quarterly, "A better way to anticipate downturns: Credit markets, though harder to follow than equity markets, provide clearer signs of looming economic decline." by Tim Koller:
And while the savviest executives and investors know better than to get caught up in the short-term fluctuations of the economy, many others, looking for evidence of longer-term trends, still fixate on movements in the equity markets.

They shouldn’t. The fact is that those markets, well analyzed as they are, don’t predict downturns effectively. Credit markets are a better place to look for signs of impending trouble, in no small part because they have been at the core of most financial crises and recessions for hundreds of years.
Read the complete McKinsey article here.

15% Of High Schools Produce Half The High School Dropouts: 2/3 of Hispanic, 3/4 of African-American, 4/5 of Native American Dropouts

From "If Schools Were Like 'American Idol' . . . Unless we measure success by how children perform, we'll have higher standards for pop stars than public schools." by Robert Murdoch:
...the United States is home to more than 2,000 dysfunctional high schools. They represent less than 15% of American high schools yet account for about half of our dropouts. When you break this down, you find that these institutions produce 81% of all Native American dropouts, 73% of all African-American dropouts, and 66% of all Hispanic dropouts.

At our grade schools, two-thirds of all eighth-graders score below proficient in math and reading. The average African-American or Latino 9-year-old is three grades behind in these subjects. Behind the grim statistics is the real story: lost opportunities, crushed dreams, and shattered lives. In plain English, we trap the children who need an education most in failure factories.
Read the complete Wall Street Journal article here.

Thursday, October 7, 2010

State Foreclosure Laws Comparison Chart

RealtyTrac prepared a simple one page chart comparing foreclosure timelines and laws for each state and DC.

Clicking on a state provides additional information about the foreclosure process in that state.

The chart is available here.

Neither RealtyTrac nor myself make any claims about the accuracy of the information.

Veterans' Health Care Inflation Adjusted Costs To Rise By 45 To 75 Percent by 2020

From the CBO summary on the cost of veterans' health care:
The Congressional Budget Office (CBO) projects that the future costs for VA to treat enrolled veterans will be substantially higher (in inflation-adjusted dollars) than recent appropriations for that purpose, partly because more veterans are likely to seek care in the VA system but mostly because health care costs per enrolled veteran are projected to increase faster than the overall price level. Under two scenarios that CBO examined, the total real resources (in 2010 dollars) necessary to provide health care services to all veterans who seek treatment at VA would range from $69 billion to $85 billion in 2020, representing cumulative increases of roughly 45 percent to 75 percent since 2010.
Read the full 50 page CBO report, "Potential Costs of Veterans’ Health Care" here, on Scribd or embedded below.
Costs of Veterans' Health Care

Wednesday, October 6, 2010

BP Oil Spill Commission Draft Report Criticizes White House Response

From "THE AMOUNT AND FATE OF THE OIL" Draft Staff Working Paper No. 3 by National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling:
The federal government‟s estimates of the amount of oil flowing into and later remaining in the Gulf of Mexico in the aftermath of the Macondo well explosion were the source of significant controversy, which undermined public confidence in the federal government‟s response to the spill. By initially underestimating the amount of oil flow and then, at the end of the summer, appearing to underestimate the amount of oil remaining in the Gulf, the federal government created the impression that it was either not fully competent to handle the spill or not fully candid with the American people about the scope of the problem.
This working paper first tells the story of the government‟s struggle to accurately estimate the rate of oil flow from the Macondo well. It next discusses the debate surrounding the government‟s report on the fate of the oil. More extensive, peer-reviewed government reports, which will allow for greater substantive evaluation of government estimates related to flow rate and fate, are forthcoming. In the meantime, this paper discusses some of the key government estimates with a view towards eventual Commission findings regarding whether flow-rate estimates should have been more accurate from the outset, and whether the government presented information regarding the amount and fate of the oil to the public in an appropriate manner. Commission staff believe that recommendations aimed at improving the quality of information provided to the public are critical to improving public confidence, and thus to the success of future emergency responses.
Read the complete report here or below. Other BP Oil Spill Commission reports and correspondence are available here.
Amount and Fate.for Release

40 Percent Chance Christie Announces Run For 2012 Presidency On Intrade

Intrade's security for NJ Governor Chris Christie announcing his run for the 2012 US presidency last traded at 40, on October 5, 2010.

Price for Who will announce they will run for President 2012? (Open to Suggestions) at intrade.com

Treasury Estimates Tarp To Cost $50 Billion

From the executive summary to "The Troubled Asset Relief Program: Two Year Retrospective" report by the Treasury's Office of Financial Stability:
2. Executive  Summary  

October 3, 2010 marked the second anniversary of the Emergency Economic Stabilization Act (EESA) that created the Troubled Asset Relief Program (TARP) and the end of the authority to make new financial commitments.

EESA was an integral part of the government’s program to resolve the financial crisis of 2008 and early 2009. Alongside the actions of the Federal Reserve and the FDIC, and the tax cuts and investments set forth in the American Recovery and Reinvestment Act, the financial actions authorized under EESA were critical in preventing a devastating collapse of our financial system and restarting economic growth.

We now have recovered most of the investments we made in the banks. Taxpayers will likely earn a profit on the investments the government made in banks and AIG, with TARP losses limited to investments in the automobile industry and housing programs. And we have already returned hundreds of billions of unused authority to the taxpayer to help reduce our debt and future budget deficits.
The ultimate cost of TARP and our other financial policies will depend on how financial markets and the economy perform in the future. If financial and economic conditions deteriorate, prospects for TARP investments will also deteriorate. But in light of the recently‐announced AIG restructuring and when valued at current market prices, Treasury now estimates that the total cost of TARP will be about $50 billion. In addition, using the same assumptions, we estimate that the combined cost of TARP programs and other Treasury interests in AIG will be about $30 billion.
Outside of TARP, we expect to incur substantial losses from Fannie Mae and Freddie Mac (Government Sponsored Enterprises, or GSEs), through capital injections from Treasury to the GSEs through the Preferred Stock Purchase Agreements (PSPAs). These losses stem from poor credit choices and bad risk management decisions before the Federal Housing Finance Agency (FHFA) placed the GSEs in conservatorship in late 2008‐‐not actions taken in 2009 or 2010.

However, a substantial part of the government’s projected losses on its support for the GSEs will be offset by revenue from two sources. Under authority provided by the Housing and Economic Recovery Act (HERA), Treasury purchased more than $200 billion in mortgage‐backed securities guaranteed by the GSEs. Those investments are generating notable returns. In addition, as a result of its emergency financial programs, remittances from Federal Reserve operations to the Federal Budget have increased sharply in 2009 and 2010, and they are projected to remain elevated for some time. While considerable uncertainty remains, revenues from these two sources will significantly offset to likely losses elsewhere.
Read the full report here or on Scribd here.

The complete 98 page report is embedded below:
Troubled Asset Relief Program Two Year Retrospective

Tuesday, October 5, 2010

1 Out Of 2.5 Households Were Unemployed, Had Negative Home Equity Or Were Behind In House Payments Between November 2008 And April 2010

the effects of the recession are widespread: between November 2008 and April 2010 about 39 percent of households had either been unemployed, had negative equity in their house or had been in arrears in their house payments. Reductions in spending were common especially following unemployment.
From "Effects of the Financial Crisis and Great Recession on American Households" by Michael D. Hurd, The RAND Corporation; SUNY at Stony Brook University, College of Arts and Science, Department of Economics; National Bureau of Economic Research (NBER) and Susann Rohwedder, The RAND Corporation.

Monday, October 4, 2010

Saturday, October 2, 2010

Business CEOs Would Lower The Federal Budget Without Benefit Cuts

A comment I posted on Carpe Diem, "Thanks for Paying Your Federal Income Taxes, Here's Your Itemized 'Taxpayer Receipt' " by Mark Perry:

The implicit assumption in these types of budget presentations is that the only way to cut the budget is to reduce benefits, entitlements, subsidies or whole line item programs, e.g. head start. Ignored in the analysis and presentation of the US budget is a business approach to the problem.

The itemization does not break out the personnel cost, including number or employees' benefits and pensions, of the Federal and State employees involved from the payments paid to the beneficiaries and from the materials used for improvements, such as for parks, space program, highways, etc.

The implicit assumption is that the only way to cut the budget is to reduce benefits or services, but that it not how business would look at the problem. Businesses would try to reduce personnel, material and process costs without eliminating or reducing the end service and benefit to the user, consumer or beneficiary.

We do not even know if it costs the government more to run any program than the dollar value of the services or benefits that program provides.

As we have seen in the current recession, businesses can recover a large percentage of US GDP without rehiring employees by becoming more productive.

Like a company that makes too many products and does not achieve economy of scale, too many inefficient government benefit, entitlement and subsidy programs cost the government too much to run.

Before we go about cutting dollars and services to beneficiaries (whether we believe in the program or not, such as ethanol subsidies), the American people should know whether or not the government is doing its job in a cost effective, productive manner.

It would be nice to know how much money could be saved:
  1. If government employees were as productive as private sector employees at the same wages and benefits of the private sector. As I remember the older studies, the general rule was it costs the government 20-30 percent more than the private sector to do the equivalent job.
  2. If the number of government programs were simplified and combined, e.g. why is head start separate from k-12? Couldn't head start be run in schools under the same bureaucracy as k-12 with reduced overhead costs for personnel, rent, heating, etc?
  3. If all health benefit programs were combined. Why is there one bureaucracy for Medicare, another one for Medicaid, and another for child medical benefits?
  4. How much money could the government save, without reducing the value of the benefits to the recipients, if we switched all entitlement and benefit programs to a voucher system like food stamps?
  5. If we combined all the disparate benefit and entitlement programs and just paid one monetary lump sum in monthly payments to individuals for all there entitled needs, food, rent subsidy, medical expenses, etc. The same for corporate subsidy programs.
My guess is that if government were viewed as a business, a CEO could find many ways to reduce costs and to save a lot of money without affecting the consumer product or service produced by the business/government.

If we then reviewed and eliminated our import tariffs and other price support policies, we probably could reduce the cost to households for necessary items, like food and clothing.

Likewise, a similar review for corporations could reduce their operating costs. These extra dollars in the pockets of households and corporations would be equivalent to a government subsidy and reduce their need for other government benefits.

There is a lot that could be done to reduce government budgets and costs before we have to get to looking at reducing the value of benefits to the consumer.

CME Questions SEC-CFTC Flash Crash Conclusions: Calls For End To Stub Quotes

The CME Group, consisting of the CME, CBOT and NYMEX derivative markets, issued a response to the SEC-CFTC May 6 flash crash report. The CME Group disagrees with the SEC-CFTC report's conclusions that the E-mini S&P500 futures contract was the cause of the market events of May 6.

The CME response states in part:
The [Joint SEC-CFTC] report references a series of bona fide hedging transactions, totaling 75,000 contracts, entered into by an institutional asset manager to hedge a portion of the risk in its $75 billion investment portfolio in response to global economic events and the fundamentally deteriorating market conditions that day. The 75,000 contracts represented 1.3% of the total E-Mini volume of 5.7 million contracts on May 6 and less than 9% of the volume during the time period in which the orders were executed. The prevailing market sentiment was evident well before these orders were placed, and the orders, as well as the manner in which they were entered, were both legitimate and consistent with market practices. These hedging orders were entered in relatively small quantities and in a manner designed to dynamically adapt to market liquidity by participating in a target percentage of 9% of the volume executed in the market. As a result of the significant volumes traded in the market, the hedge was completed in approximately twenty minutes, with more than half of the participant's volume executed as the market rallied – not as the market declined. Additionally, the aggregate size of this participant's orders was not known to other market participants.

Additionally, the most precipitous period of market decline in the E-Mini S&P 500 futures on May 6 occurred during the 3½ minute period immediately preceding the market bottom that was established at 13:45:28. During that period, the participant hedging its portfolio represented less than 5% of the total volume of sales in the market.

Academic and empirical evidence has firmly established that stock index futures markets are significantly more liquid than alternatives, including broad-based index ETF markets. As a result, stock index futures markets typically function as the leading price indicator and fundamental broad-based equity market movements are generally first evidenced in CME's E-mini S&P 500 futures markets. The report also recognizes the inter-relationship of the E-mini S&P 500 stock index futures market and the highly correlated SPDR ETF markets.
The CME Group made the following recommendations:
  1. Require uniform price limit policies across all equity and equity derivative markets.
  2. Require the adoption of stop logic functionality or similar protocols to mitigate the impact of transitory liquidity gaps by briefly pausing the market. As described in the Report, on May 6th, CME's Globex stop logic functionality was triggered and trading of E-Mini S&P 500 futures contracts was paused for five seconds. This pause permitted market participants to provide much needed liquidity by entering, modifying or canceling orders, ultimately leading to the market rally that restored equilibrium in the equity markets that day.
  3. Eliminate stub quoting procedures in cash equities markets whereby orders to purchase or sell valuable securities can be executed at a penny or a mere fraction of their true value.
  4. Establish uniform and pre-established standards for busting or price adjusting clearly erroneous transactions.
Read the entire CME Group statement about the SEC-CFTC May 6 flash crash report here.