Category: Current Affairs

What is the hot Christmas toy this year?

Just click here to see it. It is called “Lunar Stunt Car.” I can’t for the life of me imagine what is special about it, though of course I am not the typical buyer in this market. It is already hard to get in stores, but of course they are not raising the price, creating yet another puzzle in price theory, in fact they are advertising that it is on sale.

My best guess: They keep the prices low to generate publicity, to drive a fad, and the artificial scarcity makes it an especially sought-after item. Furthermore it may generate trips to the toy store, leading parents to buy other toys, although whether these gains rebound to the Lunar Stunt Car manufacturer is unclear. That all being said, once the toy takes off, I still don’t see why they don’t raise the price to capture higher profits.

Joe Lieberman vs. Howard Dean

Score one for Lieberman, read Jacob Levy’s comparison of the two on economic policy. Dean recently called for the “re-regulation of business”, Lieberman countered with the following:

“Howard Dean doesn’t understand how Bill Clinton created 22 million jobs in 8 years. By responsibly deregulating markets, Bill Clinton allowed exporters to sell more American products to foreign markets and brought competition to existing monopolies.

“Howard Dean would usher in a new era of big government with his re-regulation proposal. He would give us a treacherous trifecta of policies that turn back the economic clock: new trade barriers, a larger tax burden on our middle class, and now bigger bureaucracy. Either he doesn’t know how to turn the economy around, or this is another reckless mistake.

“We need to toughen the integrity of our marketplace, put real enforcers in regulatory posts, and put wrongdoers in jail. We don’t need to cripple the economy with a whole new set of broad re-regulation as Howard Dean proposes.”

It is a shame that Lieberman has no chance within the Democratic party.

The forthcoming energy bill

Here is Andrew Sullivan, quoting John McCain and commenting on him:

“I’m not saying that this bill won’t generate some energy. It will certainly fuel the coffers of big oil and gas corporations. It will propel the wealthy special interests. And it will boost the deficit into the stratosphere. Indeed, this legislation can be fairly called the Leave no Lobbyist Behind Act of 2003.
There are also four proposals known as ‘green bonds’ for construction of commercial buildings that will cost taxpayers $227 million to finance approximately $2 billion in private bonds. One of my favorite green bond proposals is a $150 million riverfront area in Shreveport, Louisiana. This river walk has about 50 stores, a movie theater and a bowling alley. One of the new tenants in this Louisiana Riverwalk is a Hooters restaurant. Yes my friends. Here we have an energy bill subsidizing both hooters and polluters.” – Senator John McCain, on the monstrosity otherwise known as the Energy Bill. How any principled, small-government, free-market Republican could vote for this vast waste of public money is beyond me. But we’re beginning to realize that GOP has nothing to do with small government or fiscal sobriety. It’s a vehicle for massive debt and catering to the worst forms of corporate welfare. Thank God for McCain. Bush should veto this bill, until it is de-porked. He won’t, of course. He has yet to veto a single big-spending bill. He doesn’t seem to give a damn about what is happening to the fiscal health of this country.

For a less polemical assessment, but ultimately a similar evaluation of the substance, see the ever-reliable Lynne Kiesling, start at this permalink and scroll downwards for running commentary and links.

Addendum: Senators from both parties criticize the bill as well, read here.

Howard Dean disappoints me

After years of government deregulation of energy markets, telecommunications, the airlines and other major industries, Democratic presidential candidate Howard Dean is proposing a significant reversal: a comprehensive “re-regulation” of U.S. businesses.

And what are the proposed candidates for such a re-regulation?

…utilities, large media companies and any business that offers stock options. Dean did not rule out “re-regulating” the telecommunications industry, too.

He also said a Dean administration would require new workers’ standards, a much broader right to unionize and new “transparency” requirements for corporations that go beyond the recently enacted Sarbanes-Oxley law.

Somehow either Dean or the source article left out mutual funds.

OK, some of these are complex issues, where you might argue that laissez-faire is impossible, and that more regulation could be better than current hybrid structures. But we are not choosing policy today. For the time being, forget the detailed debates, and ponder what this suggests about Dean’s instincts, what kind of campaign he will run, and what kind of voters he will appeal to. Ugh, and the libertarians should have never wondered whether Dean might be a small government guy in disguise.

Blood supply and the FDA

Have you ever heard of Chagas disease? It is rare in the United States but common in Latin America, where 18 million people are infected and 50,000 die of it every year. Some little thingie crawls down your mouth and sucks your blood when you are sleeping (lovely), beware the thatched hut, and next thing you know, maybe about ten or thirty years later, your weakened heart or organs explode. There is no known vaccine, cure, or treatment.

Chagas is now making its way into the United States blood supply. Ideally, all donated blood should be screened for Chagas. But, can you believe this, the FDA needs to approve all blood tests of this kind. They haven’t approved any test for Chagas, nor have they shown much urgency in this regard, here is the full story.

About 30 tests are currently in use in Latin America, but none would appear to meet the FDA’s accuracy guidelines. In the meantime it appears someone would prefer that we have no test at all.

The New York Times put it as follows:

The failure of the blood industry and its regulators to develop a test since it was endorsed by a Blood Products Advisory Committee in 1989 seems to be a combination of bureaucratic inertia and divided responsibility for such a decision. Blood banks cannot use a test that the F.D.A. has not approved. The agency usually defers to its advisory committees, which have many experts from blood banks as members.

“It’s a political process that is not always fully engaged,” said Dr. Stuart J. Kahn of the Infectious Disease Research Institute, a Seattle group hunting cures for tropical diseases.

Whatever you think of the FDA as a regulator of drugs, this kind of bureaucratic control is hard to understand. Now it is longer enough for you to beware the thatched hut, you have to worry about the blood supply as well.

People hate flexible prices

They really do. Consider L. Chester Carter, who raised the prices of his ice and gasoline after Hurricane Isabel, only ten cents more a gallon for gasoline. He also took on the added burdens of running generators, bringing in ice, and cooking for emergency workers. He nonetheless claims to have experienced a public outrage against his pricing behavior, here is the full story.

His description of what happened is perhaps more to the point:

“What I did was what the state and federal governments couldn’t do: Stay open and deliver services to the general public,”

Here are links to my earlier postings on price-gouging. We now hear that more than 40 price-gouging complaints were levied in Virginia, after this year’s storms. Virginia officials are considering writing the state’s first anti-gouging law, comparable to a law already on the books in Florida.

No doubt, this is voter-driven. This example, if nothing else, should tip us off about what kind of economic policy you can get in a democracy.

Addendum: Kevin Brancato discusses other anti-gouging laws.

Terrorism futures are back

Yes, those terrorism futures, here is a story from cnn.com. The old group, Net Exchange, is behind the current revival, but this time without a Pentagon connection.

The idea is being marketed as a research tool:

In response to the highly charged criticisms that ended the Pentagon’s association with the project, Polk [a Net Exchange spokesman] noted the market is designed mainly as a research tool, not unlike the Iowa Electronics Markets, which have done a pretty good job of predicting the outcomes of presidential elections.

“It is potentially an interesting alternative to Gallup polls or to specialists reporting from the region,” Polk said. “It’s a way of going directly to individuals in the region or outside who have knowledge or interest in the political and economic events in the area.”

Polk said Net Exchange would initially limit the amount of money traders could invest in the market, so that people won’t be profiting from violence or upheaval in the region.

What’s more, the futures contracts would be based on general questions, such as the likelihood that the King of Jordan will be overthrown at some point during the second quarter of 2004, for example, rather than on specific acts or events, which could lend themselves to manipulation by terrorists.

My prediction: These markets require legal tolerance, given that they otherwise violate anti-gambling rules or fall under regulatory jurisdiction. I’ll bet that this revival is shut down pretty quickly.

My view: Most of the movements in asset prices are noise, rather than based on fundamentals. The main problem with the idea is that the price movements, even if “unbiased” in the mathematical sense, feed us a steady stream of misinformation about world affairs. I also could imagine public panic resulting, or bad events being accelerated into greater likelihood, imagine how Jordanese politics is altered if the betting market says the King of Jordan is a goner.

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.