How Radio Gave State Residents A National Identity

Increasingly, people ceased to refer to themselves just as Pennsylvanians, Coloradans, Californians, Oregonians, or Texans; radio brought the nation into their homes and gave them a national identity. A single event, a boxing match, an inauguration, a football game, a concert, a comedy sketch, a political speech, or a sermon, gave Americans the chance to share in a common experience.

The above is an excerpt of a quotation appearing in Matt Young's blog post, "The Radio boom and economic effects" on Better Economics.

John Stossel Video Excerpt on Crony Capitalism

https://www.youtube.com/watch?v=wWsa3xbBgKA

If We Don't Know Where We're Going, How Can We Get There, Or What Is Affordable Health Care?

It only took Uwe Reinhardt, a Princeton economics professor, frequent NY Times health care contributor and Obama health reform supporter, a year into Obama's health care reform to understand that to get anything successfully accomplished the parties involved need to understand the goals and objectives. Read the following excerpt from Reinhardt's post (and also his complete post) on The New York Times Economix blog, "What Is ‘Affordable’ Health Care?"

Health insurance is just a means by which needed health care can be made “affordable” to Americans when they fall ill. Therefore the proper target of health policy should be the family’s total outlay on health care, including out-of-pocket spending. That total outlay on “needed health care” should be made “affordable.”

Which requires us to define concretely, for practical purposes, what we mean by “health care” and “affordable,” pedantic as that may sound. Politicians should be forced to be utterly clear about it.

Usually we think of “health care” loosely as the services performed or products prescribed by health care professionals, notably physicians. But those services and products range all the way from pure consumption goods widely regarded as the recipient’s financial responsibility (e.g., purely cosmetic surgery or Botox injections) to acutely needed care widely viewed as a social good that should be available to everyone, regardless of ability to pay for it (e.g., health care after a serious accident or heart attack).

In between lies an entire spectrum of health care products and services which some people regard as “medically necessary” but others not. For example, is in vitro fertilization a “needed” health care service? Is Viagra a “needed” health care product?

Of course, I see it as a failure of the Obama administration to take a leadership role in setting the health care reform objectives and specifics. See my previous post, "Obama Does Not Know How To Be A CEO."

Is There A Benefit To More Medical Care And More Health Insurance?

A comment I posted on Megan McArdle's Atlantic blog, Asymmetrical Information, "Firming Up the Argument" and on Marginal Revolution blog, "How many people die from lack of health insurance?" by Tyler Cowen. They both wrote about the lack of benefit of increasing health insurance coverage.

It is easy to change the cause of death, but it is very difficult to delay death. The major changes that have decreased mortality and increased life expectancy are farming (vs hunting), washable clothing, clean water, antibiotics and job safety. Most of the recent gains in life expectancy are probably due to better prenatal care than anything afterward. We are probably at the stage where the cost benefit is outside the medical field. Reductions in accidental deaths, homicides, and suicides would probably do more to increase life expectancy in the US than more medical care.

Are we at the point in US medical care where the marginal benefit to society from more health care no longer is greater than the marginal cost? Is there really a need for more medical insurance coverage? Maybe the reason medical care is getting so expensive in the US is that we are at the point in medical care where we have to spend more than the benefit, where each dollar's worth of gain cost more than a dollar.

Can Three People Agree On The Meaning Of "Fairness"?

Comment I posted on Carpe Diem, "What Does German Beer Have to Do with Fairness?" by Mark Perry.

"Fairness as equal treatment does not produce fairness as equal outcomes," by Thomas Sowell.

[My comment.]
I do not think three people could agree on what "fairness" means.

In golf and horseracing, there is handicapping, which is an attempt to remove beginning advantages to give all an equal chance of winning.

In the US, philosophically, we want to believe that all groups are capable of the same results, i.e. the same percentage of doctors, lawyers, police officers, firefighters, millionaires, successful entrepreneurs, CEOs, college graduates, homeowners, etc.

If one believes handicapping is "fair" to undo socio-economic or competitive disadvantages, then group outcomes should be statistically equal. For these believers, unequal outcomes at the group level indicate ineffective handicapping. It indicates a need to improve the "fairness" of the handicapping process to produce equal outcomes.

If one believes, "equal treatment" does not allow for handicapping, does not include school admission preferences, affirmative job action, remedial help, extra time on tests, etc., then equal outcomes will not occur because family socio-economic status predicts many of the outcomes and groups sort by socio-economic status in the US.

Different people can disagree whether "fairness" of equal treatment includes "handicapping".

There is also often a failure to distinguish the characteristics of the subgroup at the hiring or acceptance level from the characteristics of the whole group, and we often focus on subgroup "fairness" in place of group "fairness".

For example, suppose two groups, A and B, are very similar, except the top ten percent of Group A want to become lawyers and the top ten percent of Group B want to become doctors. What is a fair outcome at the top medical schools and top law schools?

By measurements of skills, test scores, grades, etc, we should expect more Group A's to be admitted to top law schools than Group B's. Additionally, we should expect more Group B's to be admitted to top medical schools than Group A's. Should medical and law schools allow the disparate outcome or should they equalize their admission rates for Groups A and B?

Different religions, race, country of origin, socio-economic status etc. groups rank careers and other aspirations differently and those rankings within the groups will sort each group differently. If one group ranks firefighting as a career over retail store management and the other group ranks retail store management higher, is it fair to want each job category to contain the same percentage of each group? Are the gate keeping tests and hiring processes that result in different outcomes "unfair" when group career preferences differ? Is it "unfair" if different career choices have different total life earnings effects?

What Makes The Banking Business Different From The Non-Financial Business?

A major business difference between banks and non-financial companies occurs at the Gross Margin (aka Gross Profit Margin) level. Gross Margin represents the difference between sale revenues and the cost of goods sold as a percent of the revenues. In banking, this measure is called the Net Interest Margin. It represents the difference between the average interest rate the bank receives on loans and the average interest rate the bank pays out for its deposits and other borrowed funds. Gross and net interest margins do not include other business expenses.

For the 3rd quarter of 2009, the Net Interest Margin for all banks in the US averaged 3.36 percent. See St. Louis Fed data and the following chart.

Source: St Louis Fed

(Click chart to enlarge.)

In non-financial industries, a 40 percent or higher gross margin is common. (See Wikipedia Gross Margin).

The low margin in banking compared to non-financial industries leaves little room for recovery from management mistakes, makes banking a high volume, low profit business and pressures banks to use high leverage.

For example, suppose a bank lends a $100, the borrower defaults and the bank recovers $0 and is out the $100. Let us say the bank has a net interest margin of 3.33 percent. The bank needs to make 30 other loans that do not default just to make back the principal (equivalent to a $100 cost of the goods sold) it lost from the defaulting borrower.

Now let us look at a non-financial company, such as a retailer than has a 50 percent gross margin. The retailer is selling an item for twice as much as it costs. The retailer is selling an item that costs $50 for $100. Let us say that someone comes in to the store, takes the item and leaves without paying for it. Shoplifting an item is equivalent to a borrower who gets funds from a loan and does not pay it back to the lender bank.

If the retailer sells another item, it will make back the $50 it paid for that item and have $50 left to cover the expense to the item it lost.

Non-financial companies have an easier time recovering from bad business decisions that lead to losses than banks. A few sales in a non-banking business can quickly recoup losses made from unfortunate events or bad business decisions.

In banking, many successfully repaid loans (sales) are needed to recover from bad luck and poor management decisions.

The lower margins in banking pressure banks to create high volume businesses, which requires more funding and necessitates high leverage and loan securitizations. Additionally, the profit dynamics of the banking industry makes managements' business mistakes more likely to be devastating to the firm with a much lower chance of recovering from a mistake.

Unless reformers explicitly deal with the banking industry business pressures of low margins, high volume and high leverage, their proposals will fail and future banking crises will occur.

People that blame incentive compensation packages for making bankers want high volumes to get high bonuses are naïve and simplistic. Banks paid incentive compensation packages because banking is a high volume business. Similar logic pertains to loan securitization, which allows banks to increase their volume of lending business.

Business forces in banking created the needs for the common practices that many blame for the financial crisis and these same forces left bankers with little room to recover from mistakes.

Reforming and restructuring the banking industry by narrowing bank business opportunities, decreasing leverage, and restricting banker behavior based on symptoms and not causes, will do nothing to improve the banking industry environment in the US.

Exactly the opposite of many proposals, such as the Volcker Rule, are needed to improve and protect the banking industry. Banks need more avenues of high profit margin businesses, more ways to leverage funds to increase volume, and more ways to generate income, such as fee, trading and investment banking income that are not dependent on loan repayment. Additionally, banks need better ways to recoup their funds from defaulting loans and unfortunately, the President and his cabinet have done just the opposite.

As banks transition into business models that allow them to generate income in higher margin businesses, leverage will decrease, the risk of financial calamity will decrease, uses of incentive bonuses will decline and the likelihood of another financial crisis will diminish.

Based on what I have read and heard in the media so far, I am not hopeful that regulatory changes to the financial industry will occur that actually help prevent future crises.

Elizabeth Warren's Views Increase Financial Product Costs To Consumers

My comment to "Fine Print, Deceptive Pricing, and Buried Tricks" by Mark Thoma on Economist's View blog:

The explanation is too simplistic and continues the paternalistic attitude of Elizabeth Warren. Her paternalism includes her call for plain vanilla products and her call for a consumer financial product protection agency. She is a firm believer that consumers need protection and are unable to fend for themselves in a multi-product marketplace. Her view about credit cards is only one view and is probably wrong. If she were running an auto company, she would never understand why they have different models, different options, and different colors and have cars that sell for different prices. She wants us to return to the days when only white refrigerators were available and all Ford Model-T cars were black.

She tends in many of her examples to use only the consumers after they triggered a provision instead of the broader marketplace of all the product users at time of card issuance. She does not understand the false positive effect.

For instance, universal default does positive things. As Citi learned, it helps sell credit cards. The consumer is rationally responding to the positive effects of Universal Default at the time of card issuance. It allows Citi to issue cards at a lower rate than it would otherwise to individuals where Citi is unsure of their credit default risk. The uncertainty to Citi at time of card issuance of future default risk would normally require Citi to issue cards at a higher interest rate to people of both high and low risk for which Citi lacks enough information to distinguish from each other. Universal default shifts the risk from a guess at issuance time to an actual future event that increases credit risk, such as a future credit card default or late payment on another card.

Additionally, universal default acts as incentive to some cardholders to maintain their higher credit rating, which motivates some cardholders to maintain better credit. These people might not have taken the card without the motivating provision.

Looking only at the cardholders after their interest rate increased because of a trigger of the universal default provisions is the wrong universe of individuals. These people did things that if they had done it prior to the issuance of Citi's credit card would have resulted in an initial higher interest rate to them or a denial of their application for the credit card. They benefitted both from having credit for the period prior to their universal default trigger and for having a lower interest rate than their ultimately revealed credit rating deserved.

Sure, they are upset at having to pay a higher rate, but the alternative would have been a higher rate earlier in their credit use or no credit at all. Furthermore, other individuals are attracted to the credit card because of the extra motivation it provides to maintain a good credit rating.

Unsurprisingly, when Citi removed the positive benefits of its cards their card issuance rate declined. They removed the lower interest rate, the motivator for keeping good credit and the no false positive effect, i.e. putting lower credit risk people in with the higher risk higher interest rate people,

Nobody likes paying more for anything. We do not need an Elizabeth Warren for that. She focuses on only those who are paying more without focusing on those who are paying less and she is misleading. If a cost benefit to all credit card holders were done, she would see that many more cardholders benefit from lower rates due to universal default that the high interest rate to the small number who trigger universal default. Those that trigger universal default would have paid more in higher interest rates much sooner than they did by triggering the provision.

The Elizabeth Warrens and those that share her paternalistic and narrow understanding of the economics of banking have unnecessarily increased credit card costs to all of us.

US Productivity Imperiled By President's Budget And Escalating Debt

Today our productivity growth is imperiled by the anti-investment tilt of the president's budget plan for escalating federal debt. Even conservative estimates of effects of federal debt on interest rates (by Eric Engen of the Federal Reserve and me in the 2004 National Bureau of Economic Research Macroeconomics Annual) suggest that the last Obama budget blueprint would lead to a one-percentage-point rise in Treasury interest rates as the economic recovery takes hold. The consequence—lower business investment and real GDP 4% lower than it would otherwise be by the next presidential election—compromises our future.

From "Toward a Different Fiscal Future" R. Glenn Hubbard in the Wall St. Journal.

Mr. Hubbard is dean of Columbia Business School, and he was chairman of the Council of Economic Advisers under President George W. Bush.

Five Job Creation Myths

"Five myths about how to create jobs" by James Manyika and Byron Auguste, Washington Post, Sunday, February 7, 2010.

Historical Look at Labor Market During Recessions: Dallas Fed Reserve

To put the recession’s labor- market impact into perspective, we compare the past two years to previous downturns, including the Great Depression. We also examine the data commonly used to assess labor market conditions. While unemployment rates and nonfarm payroll losses are widely reported, a firm grasp of what they measure is critical to understanding what they tell us about the current state of the labor market.

The above excerpt and the following charts are from Economic Letter—Insights from the Federal Reserve Bank of Dallas, Vol. 5, No. 1, January 2010, Federal Reserve Bank of Dallas, "A Historical Look at the Labor Market During Recessions" by Enrique Martínez-García and Janet Koech.

 

 

  

  

  

A historical look shows that the labor market impact hasn’t been as severe in the current recession as it was in the Great Depression. While the latest episode has a lot in common with the post-World War II experience, it’s unusual in the length and depth of its labor market reach. It was the acceleration of employment losses after October 2008 that transformed an otherwise average recession into the worst episode since World War II.

Read the entire article here.

Finra Investigating Mary Schapiro's Pay As CEO

Finra’s board of governors will review allegations that Securities and Exchange Commission Chairman Mary Schapiro — along with other senior Finra executives — received excessive compensation when she was chief executive of the self-regulatory organization for the brokerage industry.

From InvestmentNews, "Finra executives overpaid? Its board wants to know" by Sara Hansard.

Economics Defined!

From Despair, Inc.

Future Medicare Costs Exaggerated In Obama's Budget To Make ObamaCare Look Prettier [Updated Diagram Weblink]

For the first time by any administration in memory, the Obama budget forecast rejects the Medicare Trustees’ projections for long-run healthcare cost growth. Why would the White House do this?

The Obama administration’s fiscal year 2011 budget continues a pattern of ignoring independent analysis and rigging economic assumptions to meet political goals. For the first time by any administration in memory, the Obama budget forecast rejects the Medicare Trustees’ projections for long-run healthcare cost growth. The reason: the Trustees’ projections undercut the administration’s narrative that increased federal control over private sector healthcare could painlessly reduce Medicare and Medicaid costs. The Obama budget instead assumes long-term health cost growth at twice the rate projected by the Trustees.

***

...population aging is by far the biggest contributor to entitlement spending over the next several decades and will be the principal cost driver through the mid-2050s. Partly as a result of these analyses, Orszag’s successor at the Congressional Budget Office, Douglas Elmendorf, altered the agency’s presentations to more accurately reflect aging’s role.

In other words, even if healthcare overhaul managed to “bend the cost curve” and reduce per-capita health spending, the surge of retirees collecting Medicare, Medicaid, and Social Security benefits would still push government spending ever upwards. Thus, the facts undermine the administration’s argument for greater regulation over private-sector healthcare.

From "Obama Budget Rigs Healthcare Numbers" by Andrew G. Biggs in the Journal of the American Enterprise Institute.

How Do Dating Women Estimate A Man's Financial Worth?

Women find a man more attractive if he is sitting in an expensive car than if he is sitting in a modestly priced car, according to a study reported in the British Journal of Psychology by Dunn, M., & Searle, R.

The finding confirms common wisdom and is not particularly surprising. Every dating man and every dating woman knows men with money are more desirable. More interesting are the questions the researchers did not study or attempt to answer.

Do males pay for the 'added' benefit associated with expensive cars through higher car prices? Do the carmakers reap higher profit margins as a result? What percentage of an expensive car's price is due to the attractiveness factor?

If the 'attractiveness' value of a 2 - 3 year old prestige car in good condition remains comparable to a new car, the residual (trade-in) value of a prestige car, as a percent of original value, will be higher than for a non-prestige auto. Both cars' physical value will depreciate, but the 'attractiveness' value should remain and lower the percentage depreciation loss of an expensive car. We should expect cars with 'attractiveness' value to retain more of their original value after a few years than cars without an attractiveness factor.

The higher residual values of expensive cars lead to lower leasing costs versus buying, which increases the number of potential male owners in lower income groups. More male owners will help maintain higher profit margins and higher residual values.

For women, there is a negative effect. More leasing will remove the accuracy of the wealth-filtering signal of expensive cars by allowing less wealthy men to drive the expensive cars.

Consistent with the study, common wisdom is that expensive cars maintain their trade-in value better than less expensive cars.

Since leasing does not require as much income or wealth as buying and muddies the signal sent to women about an owner's richness, women should be less impressed by expensive cars that are widely leased versus purchased. I wish the researchers had expanded their study to look at different makes of expensive cars to see if different expensive cars had different attractiveness effects to women.

I would expect that women would rank the attractiveness of males with prestige cars that have a higher proportion of leasing lower than the attractiveness of men with prestige cars that have a lower proportion of leasing.

Additionally, it would be interesting research to see what if any corrective actions women take to prevent and discover male deceit about wealth signals.

It is a marketplace, requiring price discovery, with asymmetric information about wealth. A more comprehensive study could show how dating women improve their information and accuracy of estimates of a man's wealth.

Where Are Obama's Foreign Exchange Advisers?

Obama is saying is that the U.S. would be better off if the dollar weakened against the yuan. This is nothing but shoddy thinking. A weaker currency can never make an economy stronger. A weaker currency may make U.S. exports cheaper, but a weaker currency also makes imports more expensive. Devaluing one's currency is thus a fool's game, since it benefits one segment of society (exporters) but harms everyone else (consumers, who have to pay more for the imported goods they purchase).

From "Obama clueless on FX rates" by Scott Grannis on Calafia Beach Pundit.

US Budgeting Process A La Carte

1. We're still hungry! Is there more to eat?

2. Yuck! It taste awful. Can't we have something else for dinner?

The Fallacy Of "Helping the Environment"

the earth constantly changes according to natural law and that no particular state is preferred. Nature, less man, has no purpose - it just is. Given these facts, what exactly do people mean when they wish to "help the environment"?

The above excerpt is from "The Fallacy of 'Helping the Environment', Can the Earth be Dirty, and True Human Sustainability" by Doug Reich on The Rational Capitalist Blog.

Thoughts On Why Closed-End Funds Often Trade At NAV Discounts

Closed-end funds have investment advisers who can change the holdings of the fund consistent with the investment strategy.

Closed-end funds do not regularly redeem shares. Redemption occurs at the termination date of the fund.

Closed-end funds, because they need not worry about redemption, can buy infrequently traded shares. When a readily available market price is unavailable, funds employ a pricing methodology.

Closed-end funds pay a dividend, sometimes in excess of the dividends received from the fund's investments. The shortfall comes from the investment capital of the fund.

Buying a share in a closed end fund is buying the right to the fund's termination value (not to its NAV, Net Asset Value) and the dividend payouts of the funds. The value of these rights can deviate from NAV without violating efficient markets.

Suppose a fund is holding $1000 and has 10 shares. Each share's NAV is $100. If the fund will terminate in one year and does not invest in anything other than cash, the fund will trade at a discount to that $100 per share. The fund is giving up an investment opportunity, which let us say is 10 percent. A $1000 payment made one year from now is worth (discounted value) about $909.09 today. Its efficient market price is to trade at a 9.09 percent NAV discount.

If the fund buys illiquid and infrequently traded securities, then the premium or discount to the NAV can reflect a disagreement between the market price and the methodology used to value the underlying investments. During the financial crisis, financial institutions discounted anticipated cash flows and valued CDOs at $X. The market placed a lower value on the CDOs because it anticipated a higher default rate. The market and the financial institutions used different estimates of future payments to derive values, resulting in different valuations of the same CDOs.

If the investment adviser creates uncertainty about the fund's future investments, the increased risk above the riskiness of the current holdings can result in a discounted market price to NAV.

Additionally, closed-end funds can borrow and there is increased leverage and loan default risk to consider. There are also tax effects since closed-end funds do not pay taxes and shareholders pay the taxes on the investments, which can have a positive or negative value and can cause funds to trade at premiums or discounts.
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High Caloric Restaurant Meals Are Not Cause Of Obesity

Although people do eat more when they eat in restaurants, Matsa and Anderson found that diners compensate for those typically highly caloric meals by curtailing what they eat at home during the rest of the day.

From "Are Restaurants Really Supersizing America? Restricting restaurant meals may not trim Americans’ expanding waistlines" based on the Research of Michael Anderson And David A. Matsa on Kellogg Insight.

It is also unlikely that posting calorie counts of foods at stores and restaurants will help fight obesity. People keep their daily total calorie consumption relatively constant.

Clay Shirky Video On Social Media Information Overload

Web 2.0 Expo NY: Clay Shirky, "It's Not Information Overload. It's Filter Failure." His website is shirky.com