Category: Current Affairs

Looking for a new job?

Mexicans in Tijuana will pay you up to $1500 a piece to drive them across the border. If you are caught you receive no more than a slap on the wrist, the first time you are caught that is.

At the most, 1 in 50 vehicles is searched. Today’s Wall Street Journal describes smuggling as “a mini employment boom” for single mothers, military personnel, and especially teenagers.

My prediction: This can’t last forever.

Or, if you are looking for another job, you can drink pesticides, for $200 a day. I’d rather drive across the border.

What is the real mutual fund scandal?

It’s not market timing, not according to Mark Hulbert. He writes:

Market timing, as the phrase has traditionally been used in the stock market, refers to shifting a portfolio from equities to cash in the hope of sidestepping a market decline, then moving back into the market in anticipation of a rally. There are many approaches to market timing; they vary according to the techniques used to forecast rallies and declines and in the frequency of the switching. Market timers’ track records also vary widely.

Strictly defined, market timing has little to do with the fund industry’s current troubles.

In part, late trading allows some shareholders to trade after the market close. But much of the real problem is — stale pricing:

Some mutual funds have been accused of allowing certain investors to take advantage of out-of-date securities prices used by funds in calculating their net asset values. Because those stale prices were sometimes too low or too high, investors who frequently switched into and out of these funds could realize substantial profits at the expense of other shareholders.

This stale-price arbitrage, as the practice is sometimes called, happens most often in international stock funds. When funds calculate their net asset values at 4 p.m., they generally use the prices at which their portfolio stocks traded most recently. For international funds, those prices can be several hours out of date.

Here is a related New York Times article, on Eric Zitzewitz, who is developing means of measuring asset values more correctly, to prevent stale pricing. The problem: fund managers themselves engage in the practice, and so they are reluctant to adopt these innovations. The solution?: Enforce current laws, already on the books.

See also my earlier post, on how much the mutual fund scandals cost investors.

Everything you always wanted to know about currency boards…

Here is an extensive web site on currency boards and dollarization, maintained by Kurt Schuler (conflict of interest notification: he is a former student of mine).

If you doubt Kurt’s thoroughness, follow the link to a piece on currency boards in St. Helena, yes that’s right the place where Napoleon went. The site also offers an extensive discussion of what went wrong in Argentina, again all links run through the main page. Thanks to the Mises blog for the pointer.

Score one for humanity

Yes, Kasparov comes back to take the third game from Fritz. Here is the link.

The computer played weakly and aimlessly throughout, showing that the machines are still often inept at positional play and strategic thinking. Kasparov, after a horrid blunder in game two, was masterful. The machines have not yet taken over!

The bottom line so far: In the first two games the machine pulled out a draw and a win, largely because Kasparov committed uncharacteristic outright blunders. It is clear that the machine is not capable of outplaying Kasparov from scratch. The deciding game is this Tuesday, and it is up to Kasparov, who will have black, whether he should play for a win, and thus risk losing, or settle for a draw.

Which states donate the most money?

Here is the list, done in per capita terms.

Mississippi, the poorest state in the nation, is number one. Then comes Arkansas, South Dakota, Oklahoma, and Alabama, all relatively poor states. The richer states, Connecticut, New Jersey, and Massachusetts, all lie near the bottom.

Andrew Sullivan tells us that the giving states are those that tend to support Bush and the Republicans, suggesting that Republicans are more generous. Well, sort of, church giving is driving these results. Here is the distribution of giving for 2000, churches get 36.5% of all American donations, the single largest category. Art and culture get 11.4%. No doubt, religious states both give more and support Bush more.

What does the mutual fund scandal cost?

The mutual fund scandals have received significant publicity in recent times, but how much are they really costing us? The current (November 24th) issue of Fortune offers a useful article on the topic (subscription required):

According to Stanford University business professor Eric Zitzewitz, market timing costs long-term shareholders $5 billion a year, and late trading costs $400 million per year. These losses may add up to 1% or less in lost returns in a given year, he says. That equates to about $10 for each $1,000 invested in a fund.

Of course, in economic terms, the real social cost is given by how much this limits or distorts investment, rather than by the size of the transfer away from investors. The magnitude of this distortion is harder to judge, but investors have been moving out of the funds, and many of them cite the scandals as a factor.

As a very rough exercise, compare this change in returns to the Bush tax cut on dividends. The previous top rate on dividends had ranged up to almost 40 percent, now it is 15 percent. So, tricky questions of incidence aside, you get to keep 25 percent or so extra of your gross dividend return. If the dividend rate on the stock is, say, 4 percent, you gain about one percent on your investment asset value, each year, from the tax cut. Which may be just about how much you are losing back to the mutual funds.

Some work on Eric Zitzewitz’s home page suggests that market timing can costs investors as much as two percent a year (this seems high to me, plus it is odd that Fortune then cites him as saying one percent). Yet another source, taken from his home page, cites a loss of 0.6 basis points on domestic funds, and a startling 5 basis points on international funds.

Plus you must pay expense ratios, which average at least 1.5% a year. Upfront sales commissions, a one-time fee, average more than 4.5% and sometimes run as high as eight percent of asset value or more.

Now mutual funds do not comprise the entirety of investment, by any means, but under this estimate the costs of mutual fund fees and chicanery, on a given investment, could be much more than the benefit reaped from the Bush tax cut.

There are two ways to look at this. First, all these fees may reflect marginal costs within a rational equilbrium. In that case the tax cut will provide a modicum of relief and encouragement.

Second, these fees reflect investor insensitivity to their true returns. This would suggest that the dividend tax cut, in the broader scheme of things, hasn’t done much to stimulate additional investment. I’ll guess-timate that this latter option is more relevant than the former.

Man vs machine, game II

Gary Kasparov (the human!) commits a gross blunder, hanging a pawn, in an even position. The computer pounced and won. chessbase.com will be one source of information, try also www.X3dchess.com.

The bottom line: Two games left in the match, and I hope you knew to bet on the machine. At this point you have to conclude that Gary, while the best human chess player in the world, is not the best guy to put up against a computer. Too much emotional baggage, it would appear.

Deficit Disorder to get Attention?

Bruce Bartlett predicts that Howard Dean will run as a fiscal conservative on the Robert Rubin model. He quotes from Rubin’s new book

“The view over the next few years that fiscal discipline was being restored contributed to lower interest rates and increased confidence, and that led to more spending and investment, which in turn led to job creation, lower unemployment rates and increased productivity.”

and writes:

There I think you have the Democrats’ 2004 economic playbook. We are going to hear it over and over again. Howard Dean is already preparing to run as a fiscal conservative. With Rubin at his side, once he gets the Democratic nomination, he is going to get support from some of those ordinarily expected to support the Republican candidate.

The fact that Dean, the presumptive Democratic nominee, plans to forego matching funds means he will have to go to Wall Street and the business community for campaign contributions, which will reinforce the need for him to make fiscal responsibility a key issue. With his left-wing base secured by Iraq and Bush hatred, they will say nothing critical of Dean’s move to the right on fiscal policy.

The Colombian paradox

There is no logical paradox here, just a series of facts that I, upon reflection, find shocking.

Read this opening sentence from yesterday’s New York Times:

This strategically situated Andean country, with Latin America’s fifth-largest economy, had for years posted solid economic growth while controlling its foreign debt.

But not all is well in this economic paradise:

…heavy government spending in recent years, some of it for a military buildup encouraged by American officials, has led to serious economic problems that are worrying Wall Street and Colombia’s president, Álvaro Uribe. The economic difficulties, particularly a burdensome public debt, threaten one of Latin America’s few economic bright spots.

I don’t mean this as Times-bashing (a popular sport in the blogosphere), the description offered in this article in consistent with other sources I have read. Oddly, Colombia has flourished economically in spite of some minor difficulties in its recent past and present, namely the following:

1. “A 40-year insurgent campaign to overthrow the Colombian Government escalated during the 1990s.” From a CIA Factbook.

2. “…large swaths of the countryside are under guerrilla influence”, same source and link.

3. Colombia is the kidnapping capital of the world. I wrote the following in late October:

About 90 percent of all kidnappings take place in the ten riskiest countries…with Colombia a clear leader, reporting 10 kidnappings a day, more than half of the total. The police in Colombia admit that 1500 kidnapped hostages are held currently, the true number is likely much higher. Kidnapping is estimated to be a $200 million tax-free business in Colombia.

4. The Lonely Planet Guide, an adventurous source, hardly a bible for the Club Med set, describes the country as “off limits to all but the most foolhardy travelers.”

Get the picture? Yes, I am puzzled at how resilient the Colombian economy has been. And the reported statistics presumably do not include the illegal drug trade, and thus they underestimate how well the country has been doing.

You can’t always trust the dictionary

The 11th edition of Merriam-Webster’s Collegiate Dictionary, published in June, defines a “McJob” as “a low-paying job that requires little skill and provides little opportunity for advancement.”

Merriam-Webster’s announced yesterday, much to the chagrin of McDonald’s, that they would not revise this definition.

Here is a more balanced perspective:

McDonald’s is paying considerably higher than the minimum wage in most regions, and many franchises are now offering health and dental benefits. The average manager in a company-owned McDonald’s starts in the mid 30s. As for dead-end jobs, with one-eighth of the American work force having worked for a McDonald’s at some point, the company has rightly been called America’s best job-training program. Young people are taught cleanliness, punctuality, and basic business skills. Over half of the company’s middle and senior management started as hourly workers.

My take: Right now 12 million people work in the restaurant industry, many of them in the fast food sector. So many people work for McDonald’s because the company, adjusting for all relevant factors, offers them a higher wage than is available elsewhere.

This growth rate deserves publicity too

Confounding President Bush’s pledges to rein in government growth, federal discretionary spending expanded by 12.5 percent in the fiscal year that ended Sept. 30, capping a two-year bulge that saw the government grow by more than 27 percent, according to preliminary spending figures from congressional budget panels.

And no, it is not just the war against terrorism:

Much of the increase was driven by war in Afghanistan and Iraq, as well as homeland security spending after the attacks of Sept. 11, 2001. But spending has risen on domestic programs such as transportation and agriculture, as well. Total federal spending — including non-discretionary entitlement programs such as Social Security, Medicare and Medicaid — reached $2.16 trillion in 2003, a 7.3 percent boost, according to the Congressional Budget Office.

Here is the full and sad story. You would think that with a (quarterly) growth rate of 7.2 percent, the rate of growth of major spending categories would be lower than that figure, but alas not.

Henny Youngman once said:

“What good is happiness? It can’t buy money.”

Here is an insightful review of Gregg Easterbrook’s new The Progress Paradox: How Life Gets Better While People Feel Worse. Why is it that we are wealthier than ever before, but not much happier?

The reviewer, drawing on Easterbrook’s text, suggests a few answers. Bad news sells, and progress always brings new problems. People will always envy their neighbors and compare their lot in relative terms. The bottom line?:

“We are built to be effective animals, not happy ones,” evolutionary psychologist Robert Wright has written.

I’ll blog more about this book when my copy arrives.

Game I, man vs. machine

It is a draw, here is one account, here is a link to the moves and other background. Kasparov had a clear edge, in my view, but was unable to convert his position into victory. The computer played its typical perfect defense and Kasparov’s advantage slipped away entirely. They then settled for a draw by perpetual check.

Bottom line: This has to be heartening to the computer fans. Kasparov can’t expect many better chances to win. Three more games to go, and now the computer has white.

Addendum: Here is an easier link to the moves, with quality analysis. I would have played 21. Q x c6, more resilient than it looks, instead of Kasparov’s 21. Ng3.

Christmas gifts

OK, the end of the year is approaching, here are my “best of” lists:

1. Classical music CD: Bach, St. Matthew’s Passion, conducted by Paul McCreesh. As good a recording as you will find, and this is arguably the best piece of music ever. One voice to a part, as they did it in Bach’s day, but never stale or musty.

2. Popular music CD: Outkast, Speakerboxx/The Love Below. Starts at hip-hop but spans the entire musical map, from an immensely talented duo.

3. Book, fiction: J.M. Coetzee, Elizabeth Costello. The finest novel yet by this year’s Nobel Laureate in literature, deep and philosophical, but also a great read.

4. Book, non-fiction: Michael Lewis, Moneyball: The Art of Winning an Unfair Games. Baseball puts me to sleep, this book is actually about human irrationality and performance. Everyone should read it.

5. DVD: Jean-Luc Godard, Band of Outsiders. OK, so he was (is?) a commie. Still, he understands the power of cinema in a way that few other directors do. The screen sparkles in every frame, the release is of course by Criterion.

And if you really want to go on a shopping spree, here is an article about notable art masterpieces still in private hands. I would recommend the Pollock at $50 million, except that the owner is not selling at that price.

Secondary consequences

Substitutes are everywhere, and the do-not-call list appears to be reviving door-to-door salesmen:

“I think companies are looking for new distribution channels for their products,” said Amy Robinson, a spokeswoman for the Direct Selling Association, a Washington, D.C.-based trade group. “Direct selling has traditionally been undervalued by Wall Street, but many realize its strength. It’s a niche market, but $28.7 billion in sales last year make it nothing to scoff at.”

Here is the full story. No, there does not appear to be a one-for-one substitution, but I’ll take an unwanted phone call over a knock on the door anyday. Let’s also not forget about spam, which threatens to cripple the use of email, as an additional unwanted substitute.