Category: Economics

Not one of us in the family adhered to this agreement.

The elderly, for a start:

The most inappropriate gifts, costing 50 per cent more than their value to the recipients, come from elderly relatives. Sensibly, many elect to give cash instead. Unsurprisingly, friends and partners give less wasteful gifts. It’s interesting to note that the most wasteful presents are those that cost roughly between Pounds 25 and Pounds 50 – expensive enough to assuage the guilt of a hurried choice, but cheap enough not to require double-checking with those close to the recipient.

Read more here.

Addendum: This year my mother and sister (their idea) stipulated that we would not exchange Christmas presents.  Of course these agreements are easiest to make in exactly those cases where you need them least.

Hart, Oliver and Holmstrom, Bengt. “A Theory of Firm Size and Scope,” available at http://econ-www.mit.edu/faculty/download_pdf.php?id=514

Mullainathan, Sendil, and Scharfstein, David. “Do the Boundaries of the Firm Matter?” American Economic Review (May 2002) available at http://econ-www.mit.edu/faculty/download_pdf.php?id=283

Rotemberg, Julio. “Altruism, Reciprocity, and Cooperation in the Workplace,” 2002, available at http://www.people.hbs.edu/jrotemberg/altorgs5.pdf.

Rotemberg, Julio. “Fair Pricing,” available at http://www.people.hbs.edu/jrotemberg/angpri8.pdf

Baker, Malcolm and Wurgler, Jeffrey. “A Catering Theory of Dividends,” Journal of Finance (2004), available at http://pages.stern.nyu.edu/~jwurgler/

Baker, Malcolm and Ruback, Richard. “Behavioral Corporate Finance: A Survey,” found at http://www.wcfia.harvard.edu/seminars/pegroup/BakerRubackWurgler.pdf

Hall, Brian and Murphy, Kevin J, “The Trouble with Stock Options,” Journal of Economic Perspectives, Summer 2003, also at http://www-rcf.usc.edu/~kjmurphy/HMTrouble.pdf

Murphy, Kevin J. and Zaboznik, Jan. “CEO Pay and Appointments,” American Economic Review, May 2004, also at http://www-rcf.usc.edu/~kjmurphy/CEOTrends.pdf

Jense, Michael, Murphy, Kevin J., and Eric Wruck. “Remuneration: Where We’ve Been, How We Got to Here, What are the Problems, and How to Fix Them,” available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=561305#PaperDownload

Crandall, Robert W. “An End to Economic Regulation?” available at http://www.brookings.org/views/papers/crandall/20030721.pdf

Crandall, Robert and Whinston, Clifford, “Does Antitrust Improve Consumer Welfare?: Assessing the Evidence,” Journal of Economic Perspectives (Fall 2003 ), 3-26, available at http://www.brookings.org/views/articles/2003crandallwinston.htm

Happy reading…!

No:

The big increase of women in the workforce can be traced back to an increasing number of wives of well-to-do men pushing into the labor market.  These women typically earn high hourly wages.

Meanwhile, among women whose husbands earned hourly wages in the bottom fifth of the distribution, the growth in labor market participation slowed down — contrary to the overall trend.

In 1969 the annual incomes of working wives showed no correlation with the wages of their husbands.  Wives of high-income earners earned above average wages, but they worked fewer hours than average.  In the late 1980s, however, wives of high-income earners worked almost the same amount as wives of husbands with lower incomes.

That is from the new and excellent Cowboy Capitalism: European Myths, American Reality.  Here is my previous post on the book.

Macro Securities Research, a company affiliated with Robert J. Shiller,
the Yale economist, has reached an agreement with the Chicago
Mercantile Exchange to list pairs of derivative instruments that are
essentially index funds linked to home prices in certain markets. One
instrument in each pair will rise as its market index rises; the other
will rise as the same index falls. That will let investors bet on the
direction of housing prices. Similar, but less sensitive, vehicles are
being offered by HedgeStreet, a firm in San Mateo, Calif., that offers
small-scale derivatives speculation online.

Here is the full story; note that economists still lack a good explanation why such markets are not more common or met with greater enthusiasm.

…it could be that Americans’ failure to save is caused by mechanics,
not morals. At least that is one conclusion of a recent paper by four
economists: David Laibson and James J. Choi of Harvard and Brigitte C.
Madrian and Andrew Metrick of the University of Pennsylvania.

The
scholars examined what happened at four companies that switched the way
they pitched 401(k)’s to employees. When employees were offered the
option of signing up for a 401(k) upon hiring, participation rates
after six months ranged from 25 percent to 43 percent. Not bad. But
when the same companies instituted default enrollment – people were
automatically enrolled in the plan when hired but could opt out –
participation rates after six months were 86 to 90 percent. In other
words, changing the position of the on-off switch essentially doubled
the rate…

Professor Laibson suggests other possible uses of default mechanisms
to increase national savings. For example, what if income tax rebates
were automatically channeled into individual retirement accounts,
unless people chose to opt out?

So even if the bad news is that
we don’t save enough, even with all the vehicles and tax breaks,
there’s still some good news. To increase savings, we don’t have to
engineer a fundamental transformation of the American character.
Instead, we may just have to tweak the institutional levers that have
the effect of channeling cash in different directions.

As Professor Laibson said: "People will save if it’s on the path of least resistance."

Here is the full New York Times story.  Here is the original research.  On the other hand, this paper says that eighty percent of Americans are saving an optimal amount, Arnold Kling offers useful commentary and critique.

Just what Iraq needs, more angry people.  From The Economist:

THE queue of
angry motorists stretches for miles. Baghdad’s petrol stations are
drier this month than they have been since just after the American-led
invasion of Iraq in 2003. Some drivers wait for as much as 24 hours,
sleeping in their vehicles. When told that there is no petrol, some
have lost their tempers and started shooting. How, asks a furious
driver, can an oil-producing country run out of fuel?

Ask an
insurgent, and he will assure you that the American army steals the oil
for its tanks. Others might blame the lack of capacity at Iraqi oil
refineries or the fact that the insurgents keep blowing up the
pipelines. But the most important reason is that the government has
fixed the price of petrol at approximately zero–barely one American
cent a litre.

Officials and
petrol-station owners with access to subsidised petrol have a choice.
They can do the proper, legal thing and give the stuff away. Or they
can let it leak onto the black market, where prices are between ten and
100 times higher. Or they can smuggle it out of the country where,
global oil prices being rather steep at the moment, it sells for a tidy
sum. Many have chosen the more lucrative options.

Iraqis may
imagine that their situation is unique, but it is not. Other oil-rich
nations, such as Nigeria, also have governments that try to keep petrol
artificially cheap and therefore suffer chronic shortages. Iraq has
additional supply constraints, however, in the form of fanatical
saboteurs.

Thanks to David Theroux for the pointer.

Debt won’t hurt, Treasury Chief says…President Bush’s plan to partially privatize Social Security probably won’t raise interest rates or adversely impact financial markets, even if the program entails borrowing hundreds of billions of dollars to finance it, Treasury Secretary John W. Snow said yesterday.

I see four scenarios:

1. The Modigliani-Miller theorem holds and the new borrowing will be offset by the reduction in long-term Social Security liabilities.  The transition will run smoothly.

2. Financial markets will get successively more scared as the proposal progresses.  Congress will postpone action and the plan will die a natural death.  A subsequent President will address the shortfall with a combined tax boost/benefit cap.

3. Moderate Republicans from the Northeast will back out for fear of losing their seats.  Few if any Democrats will cross the line.  A subsequent President will address the shortfall with a combined tax boost/benefit cut.

4. Bush will line up an increasingly partisan Congress and push the reform through.  The U.S. will have a short-term financial crisis, as Paul Krugman has warned.

My prediction: #1 and #4 are unlikely, I put my money on #2 or #3.

My take: I don’t know of any policy, in the history of the world or the United States, that has relied successfully on the realism of the Modigliani-Miller theorem.  The theorem did deserve two Nobel Prizes, but it does not describe the world we live in, not even the market for U.S. government securities.  Keep in mind, the theorem also implies that open market operations will not even influence the price level.

My questions: If we can borrow all that new money "scot-free," will we truly reduce future expenditures on social security benefits?  Or will those funds simply be diverted, either explicitly or implicitly, to finance the Medicare shortfall?  Which way would you, as a bondholder, bet?

Here is the full story.

Here is my preliminary reading list for the spring semester; the class is for Ph.d. students and some Masters students.  I always have them read one atheoretical, typically lousy management book for purposes of contrast.  I then ask them why abstract theory is any better.  Most of all I try to teach the core mechanisms of microeconomics.  I believe in enforced self-constraint, no matter what the academic level, so they have a brief quiz on the assigned readings every week.  Additional reading suggestions would be welcome, I have turned on the comments function for this purpose.  If you wish, check out part I of the class from this fall, can you guess who taught that…?

Japanese manufacturers became experts at miniaturizing and creating multiple-function devices (like, say, refrigerators that let you browse the Web) simply because the average consumer really needs the room. "Space is everything," says Farber. "Many years ago, I sat down with a person — an American — who was trying to sell telephone extensions into the Japanese market. His sales pitch was that every family needs five phones — one for every room in your house. Japanese people looked at him and said, ‘Well, my apartment is so small that when my phone rings, I just reach across the room and pick it up.’ He wasn’t doing so well."

There’s a subtle secondary manner in which real estate prices have shaped consumer behavior in Japan: housing is so expensive that young people have virtually no means of renting or owning their own homes; even after they’ve joined the workforce, they continue to live with their parents for years or even decades after graduation. Given that the average American spends up to one-third of his or her take-home wages on shelter, by sponging off Mom and Dad, young Japanese men and women have significantly more disposable income to spend on themselves; a $600 Louis Vuitton purse — or a $3,000 ultrathin 1.2-pound laptop — becomes instantly affordable when you’re living rent free.

Here is the full story, courtesy of www.geekpress.com.  And don’t overlook the key role of Japanese schoolgirls:

"A couple of months ago, Newsweek Japan did a special issue that listed the 100 most influential Japanese people in history," says Douglas Krone with a chuckle. "Along with ancient emperors, best-selling authors, inventors and scientists, they listed ‘Japanese Schoolgirls,’ because they’ve been so influential, inside of Japan and out."

…at $1.2 trillion, Italian GDP is roughly the size of China’s, and Italy’s total foreign-trade value of $750 billion is only slightly smaller than that of the mainland.

The bottom line: Yes China is an important country, but we should keep matters in perspective. [Question — hey, then why don’t you have an "Italy fact of the day" installment? — Answer — because China has started selling soy underwear.]

The quotation is from today’s Wall Street Journal, Op-Ed page, "Yuan-derful," and see the Marketplace section on the soy underwear.

Here is a touching story, of how dedicated to a wife a man can be, although the ending is slightly tragic and comical.

Thanks to Natasha (my wife) for the pointer.

Percentage of Chileans retiring over the next thirty years who are expected not to save enough to participate in Chile’s privatized social security plan:

"almost fifty."

By the way, they are all likely to receive governmental welfare of some kind.  Don’t think that social security privatization in the U.S. will eliminate a comparable issue closer to home.  Of course we are a wealthier country but we also have higher standards for treating our elderly.  If you favor privatization, you favor in reality privatization plus a supplemental support system from some level of American government; add this into your costs.  Read Will Wilkinson on this point.

Here is the on-line version of the Chilean article, read here also.  Both pieces provide good coverage of the Chilean experience, and in my view a balanced treatment.  Read also my earlier post on the preconditions for successful Chilean reform.

Women’s laps, in Japan (where else?), and thanks to www.geekpress.com and Brock Sides for pointers.

An island has just been sold, it consists of 6000 acres, a castle, a mine and the right to subdivide and sell ocean-view lots.  The price, a mere $26,500.   Cheap?  Maybe if it existed in the real world but this island is the most expensive piece of unreal estate yet to be sold – it exists only as part of the computer game Project Entropia.

I must admit to still being surprised by stories like this but I cannot imagine that I will think so in another few years, even less that my sons should not think this all perfectly normal.  My prediction: within two years expect to see a bitter divorce battle fought over who gets the house – the virtual house.  And within four years expect a bitter divorce battle fought over who gets the kids.

Thanks to David at Cronaca for the link.