Holiday guests
We are pleased that Fabio Rojas is back with us for the holidays!
The Frying Pan Mystery
Instapundit is puzzled.
How much do Freddie and Fannie Mae save homeowners?
Freddie Mac and Fannie Mae receive numerous state privileges, including tax-exempt status for their securities. Many investors believe that the U.S. government would guarantee the debts of the agencies, should a crisis arise. Not surprisingly, there has been recent talk of making the agencies operate on a level playing field.
The agencies, in response, argue that they have lowered the cost of homeownership significantly. But by how much?
Wayne Passmore of the Board of Governors did a study, here is one summary. Here is the bottom line:
The report says that because of their government-sponsored status, Fannie Mae and Freddie Mac were able to borrow at lower interest rates than private sector firms by an average of about 40 basis points from 1998 through the end of this year. However, most of this benefit is passed on to stockholders not to homeowners, the report says. The effect of these two enterprises buying and repackaging mortgages has reduced interest rates by only about seven basis points.
“The GSEs’ implicit subsidy does not appear to have substantially increased homeownership or homebuilding because the estimated effect of the GSEs on mortgage rates is small,” Passmore reports.
Furthermore it is estimated that the legal subsidies account for as much as 81 percent of the value of the traded companies. Not surprisingly, the agecies have been critical of the study.
My take: A common sense understanding of tax incidence favors Passmore’s conclusions. Humongous is the right word to use in describing American capital markets. If you let one entity borrow at lower rates, there are two primary options. First, that entity makes profit without lowering overall rates much. Second, and less likely, that entity becomes big enough to lower mortgage rates by some amount. But to the extent the entity becomes large, there is a significant tax or guarantee cost associated with its size. In other words, the government would be pushing down real interest rates by subsidizing capital accumulation, which cannot generally be done at low cost.
Marriage Brokers
An article in the current issue of Legal Affairs focuses on professional match makers and the difficulties inherent in the business. It’s been estimated that there at least 6000 matches each year and the fee can be about $2000.
How good are the matches? According to the article, a preliminary study conducted by the Department of Justice suggests that mail order brides might suffer less abuse than other wives. However, match makers sometimes fail to inform prospective wives of a future husband’s history of abusive behavior, which has resulted in some cases of abuse and state regulation of the industry.
Of course, regulation of the industry seems plausible – mail order brides don’t have the social networks that enable home-grown brides to learn about their future partner, and they might be susceptible to abuse because they don’t know their new country as well. But there are other ways of dealing with this. Like job applicants, match makers could perform basic screening of candidates – a check of the person’s criminal record might be useful. Match makers who failed to do some basic screening could be held liable for some damages, a proposal to be debated by the legal bloggers. A match maker subject to these professional norms might find better matches than the old fashioned match makers.
The importance of status in business
Gregg Easterbrook directs our attention to the following two anecdotes about business, both taken from Art Kleiner’s Who Really Matters:
Why, for example, does Coca-Cola insist on keeping its original formula in a safe-deposit box that only a few top executives are allowed to open when at this point any cola company could reverse-engineer the ingredients? It’s done, Kleiner says, to make the Coke “core group” feel important. Another great anecdote: When former ITT CEO Rand Araskog published an as-told-to book of self-praise in 1989, ITT public relations panicked on learning that almost all copies were going to be remaindered. Araskog would be furious if he walked past the Strand, New York’s famed used book store, and saw his book on sale for $1. So ITT contracted for another company to buy up thousands of copies of the book and quietly destroy them.
Here is a brief review of the Kleiner book, here is Kleiner’s home page. The remainder of Easterbrook’s post contains brief reviews of other recent books of note.
Video games
I knew video games were big but I didn’t realize how big. According to this article in the NYTimes, the FIFA Soccer franchise earned Electronic Arts over 1 billion dollars of revenue – that’s comparable to what the entire Lord of the Rings trilogy will earn even though the latter is a far bigger cultural event. The average buyer of one of these games will spend 100 hours playing it so the cost per hour of entertainment time is less than a dollar which perhaps explains why the industry is growing rapidly.
Laughter
There is no doubt that laughter is a social activity. “Laughter evolved as a signal to others – it almost disappears when we are alone,” says Robert Provine, a neuroscientist at the University of Maryland the author of Laughter: A Scientific Investigation…most laughter comes in polite response to everyday remarks such as “Must be going”, rather anything remotely funny. The idea that laughter works as a kind of social glue fits with some other other observations. A baby’s first giggle comes at around three or four months, which also happens to be the time the baby starts to recognise individual faces. And the way we laugh depends on the company we’re keeping. Men tend to laugh longer and harder when they are with other men, perhaps as a way of bonding. Women tend to laugh more [almost fifty percent more] and at a higher pitch when men are present, possibly indicating flirtation or even submission.
Here is a brief on-line summary of Provine’s ideas. Oh yes, by the way, when the boss laughs, everyone laughs. Note also that smiling may be easier to fake than genuine laughter, which would suggest one reason why laughter evolved to signal social bonds.
And how about tickling? It is, according to Provine, the origin of laughter and a way for two individuals to signal that they trust each other. This seems excessively functional to a skeptical economist like myself. By the way I hate being tickled.
Thanks to Robin Hanson for the pointer to the 20 December issue of New Scientist, from which the opening quotation is taken.
Coase and Christmas
The Coase Conjecture says that the ability of a durable good monopolist to price above marginal cost is limited by its own greed. Assume that the monopolist charges a high price today and that all consumers with valuations above that price buy the good. Tomorrow, the only way the monopolist can sell more goods and thus increase profits is to lower the price. But rational consumers understand the monopolist’s incentives and thus delay their purchases until the price falls. No one gains from waiting to sell at a low price so the monopolist lowers price immediately. The argument is subject to a number of qualifications. If consumers are more impatient than the monopolist, for example, the monopolist may be able to maintain a high price for longer. Or the monopolist may be able to commit not to lower price in the future – Disney does this with its Disappearing Classics program.
Christmas ought to provide a good testing ground for the Coase conjecture. A durable goods monopolist knows that high-valuation consumers are likely to want to buy before Christmas. It follows that the monopolist will want to have a post-Christmas sale. Knowing this some consumers will wait to buy – who wins depends on time preference, ability to commit and so forth. By examining which goods fall the most in price from Christmas day to Boxing day and correlating with the characteristics of the goods, the consumers who buy them and the firms that sell them we ought to be able to develop some good empirics on when the Coase conjecture is most relevant. That at least is the Tabarrok conjecture.
Addendum: Vicki Smith reminds me that another method monopolist’s can use to prevent falling prices is a “best-price within 30 days guarantee” – that is, a promise to match their own price within say 30 days. Notice that this seems like a benefit to consumers but in fact it helps the firm commit to not decrease prices since any decrease would go to old customers as well as to new customers.
Fountain of youth?
Scientists are making some progress on this difficult problem:
Human embryonic stem (ES) cells can give rise to almost all of the body’s different cell types. They could eventually provide patients with replacement tissues – but there are some roadblocks that currently prevent researchers from putting the cells into patients’ bodies. One problem is that scientists don’t yet know how to control the cells’ transformations into other types. Another is that the cells cannot be grown without help from mouse cells, which means that they could be contaminated with mouse proteins. Ali Brivanlou of Rockefeller University in New York says that he and his colleagues may have found a partial solution to these problems. Brivanlou treated ES cells with a chemical, nicknamed BIO, from a sea snail.
Being 41, I don’t expect to enjoy the fruits of this research. But today’s children may live for a very long time indeed. That being said, my chance is not zero, so the return to exercise and good eating just went up.
Against sunset laws
Sunset laws don’t get legislation to be reevaluated anew. The laws simply stay on the books, due to inertia. Here is the full analysis, with many examples of how sunset laws have failed. So if you feel a need to constrain government, look to other tools. Thanks to Chris Mooney for the link and pointer.
The ten greatest business movies
According to Forbes, that is. Here is the list:
Citizen Kane, The Godfather: Part II, It’s a Wonderful Life, The Godfather, Network, The Insider, Glengarry Glen Ross, Wall Street, Tin Men, Modern Times.
Most of these movies portray business in a negative light. See a short comment from Professor Bainbridge and a long comment from Larry Ribstein.
Addendum: Here is some good commentary and some different picks, including a favorite of mine, Joe vs. the Volcano.
What wise men know
Frankincense, $4 per oz.
Myrrh, $5.60 per oz.
Gold, $411.20 per oz.
Value of celebrating the holidays with friends and family: priceless.
Tyler and I independently chose images for today and we both chose paintings by the northern Italian painter (c.1500), Andrea Mantegna!
Here is my pick, Adoration of the Magi, followed by Tyler’s pick the Adoration of the Shepherds (click to expand either image).
Calendar facts
1. The U.S. calendar industry accounts for $1.2 billion a year.
2. The average American buys 2.5 calendars.
3. Dog calendars are especially popular. Bush and Britney Spears calendars have not been selling well.
4. The 2004 Nuns Having Fun calendar is now sold out.
5. Women prefer larger calendars than do men.
6. 70 percent of all calendar business is done in December, talk about seasonal business cycles.
7. Many calendar prices are cut in half on December 26.
8. Many calendars cost no more than a dollar by the end of January.
9. Less than one-third of Americans plan their workday in writing. One CEO of a time management firm reports: “Most people walk into work and don’t have a plan.”
From USA Today. If you are wondering, I bought my 2004 calendar in October and it portrays Hokusai prints.
Luck and entrepreneurship
If you have been a lucky person in the past, good things will happen to you in the future. Or is it enough simply to think that you were lucky in the past? Relaxed, confident people may find it easier to discover subsequent opportunities. Read about some interesting experiments on the lucky. The bottom line: “Unlucky people are generally more tense than lucky people, and this anxiety disrupts their ability to notice the unexpected.”
And what about practical advice? It is suggested that visualizing yourself as lucky, in advance of a challenge, will improve the course of events.
Should you wait or go?
You are waiting in line, and must decide whether or not to stick it out or bolt. How do you choose?
Most people look back and see how many people are behind them in line. If the line behind them is long, they tend to stay in line and wait. And if they do quit, they are most likely to quit in the first three minutes.
Making this kind of comparison could be economically rational. A long line means that if and when you have to come back, you will be forced to wait anyway. So why not just get the waiting over with? (Note that the researchers try to control for this effect, although imperfectly.) A long line also suggests that many other people value the good or service, which again implies that waiting is worthwhile.
But that is not the primary hypothesis of the researchers, nor is it how I think. When I look back and see many people behind me, I feel that my lot in this matter is not so bad, and that I should stick it out. So I do.
The short article on this research is from the December issue of Psychology Today, but the article itself is not yet on-line. Here is the home page of one of the researchers, including a full citation to the article in Journal of Consumer Research. Here is a on-line summary of the work.