“Violent criminals, long-term welfare recipients, the chronically sick, and politicians”

Posted by Marc Hodak on September 17, 2009 under Economics | Be the First to Comment

What do these people have in common?  According to Bryan Caplan:

Check whether the marginal human is, over his entire lifetime, self-supporting in present value terms.  A small fraction of people – such as violent criminals, long-term welfare recipients, the chronically sick, and politicians – probably don’t pass this test.  But even people who earn minimum wage probably do.

Unfortunately, “present value” is a term that is alien to most people, which makes them more likely to fall for the value-destroying programs of the politicians.

Caplan’s wit may have been inspired by Mel Brooks

The Broken Glass Fallacy

Posted by Marc Hodak on August 18, 2009 under Economics, Invisible trade-offs | Be the First to Comment

Driven to distraction

Driven to distraction

As anyone who has studied it knows, Cash for Clunkers program doesn’t accomplish any of its stated goals.  It does not materially reduce energy consumption because the difference between the mileages of the cars getting traded in versus the cars getting bought does not account for:

– The fact that the net difference in energy use and carbon dioxide emissions, etc. must more than outweigh the energy needed to build the new car, which includes mining the basic materials, transporting them to the factories, running the assembly plant, etc.

– The fact that one is likely to drive a high-mileage car with less concern for energy because it’s more energy efficient.

Once the environmental rationale gets swept away, then we are left with two items.  One of them is:  Even if it doesn’t help the environment, at least it creates jobs.

Wrong.  The $15,000 used to replace perfectly good “clunkers” with new cars is money that could have been used to buy other stuff–1,000 nice steaks, 2,000 peach cobblers, 5,000 romantic candles, etc.  The money you spent on a car is no longer available to the butcher, baker, and candlestick maker, which impoverishes them and the people selling to them about as much as it enriches the auto makers.  And because the cash-for-clunkers program represents a centrally planned, non-market allocation of resources, 11 or 12 B-B-CM jobs may easily have been destroyed for every 10 auto jobs created.  The difference, of course, is that most of the 10 jobs were union jobs in plants one can point to, whereas the 11 jobs destroyed were at dispersed bakeries, paraffin processors, etc. around the country–those that are not seen.

So, once the ‘environmental’ and ‘jobs creation’ rationale gets swept away, we are down to one:  It gives the sponsors of the bill the ability to funnel taxpayer money to preferred union constituents.

An economist summarizes the health care debate

Posted by Marc Hodak on July 3, 2009 under Economics, Invisible trade-offs | 2 Comments to Read

And does a great job of it.  He leads with a great punch:

“The American people overwhelmingly favor reform.”

If you ask whether people would be happier if somebody else paid their medical bills, they generally say yes. But surveys on consumers’ satisfaction with their quality of care show overwhelming support for the continuation of the present arrangement. The best proof of this is the belated recognition by the proponents of health-care reform that they need to promise people that they can keep what they have now.

My own summary:  I’m amazed at the number of otherwise intelligent people who favor reform on the theory that we can’t individually afford the skyrocketing costs of health care, but that we can afford it collectively, and that by increasing the degree to which I’m paying for your health care and you’re paying for mine, we’ll bring those overall costs under control.

“We don’t want to discourage it. We just want to tax it.”

Posted by Marc Hodak on June 14, 2009 under Economics, Politics | Be the First to Comment

Compare this item of health care reform being proposed by the Administration:

“The president does not want to dismantle privately owned plans. He doesn’t want the 180 million people who have employer coverage to lose that coverage. He wants to strengthen the marketplace,” Sebelius added.

with this:

President Obama, in a pivot from some of his harshest campaign rhetoric, told Democratic senators yesterday that he is willing to consider taxing employer-sponsored health benefits to help pay for a broad expansion of coverage.

Versus this more recent pronouncement of Obama’s second:

Vice President Joe Biden opposed proposals being discussed by some lawmakers to tax health insurance benefits provided to people by employers as a way to pay for an overhaul of the $2.5 trillion U.S. healthcare industry.

Which indicates that Obama is waffling either on his committment to not tax these benefits, or to consider taxing them, or that Biden hasn’t gotten the most recent memo.  History shows that all three are possible, even at once, in terms of political positions.  As economic propositions, though, the government will have to make a trade-off:  reduce private health care by taxing it, or paying for public health care by raising the money elsewhere.  Reality, unlike politics, won’t allow you to have it both ways, let alone all three.

A brief history of money in the U.S.

Posted by Marc Hodak on May 26, 2009 under Economics, History | Be the First to Comment

The world is far too complicated for me to figure out beyond my little niche in corporate governance.  So, I’m always looking for high quality material to inform me on the larger issues.  Gold, Money, and the U.S. Constitution by Eugene Holloway is such material.

It’s easy to bemoan the actions of private or political officials out of context, or to argue polemical abstractions.  By weaving the history into the law, Holloway provides a richer understanding of why things evolved the way they have, and a sense (warning, really) of where things are likely to go from here.  An excellent read.

Note:  I have linked to the last of four parts, but additional links to the prior three parts are right on that page.

Collision of conflicting incentives

Posted by Marc Hodak on May 5, 2009 under Economics, Reporting on pay | Be the First to Comment

Good bankers have an incentive to go to the places that offer them the most.  That’s simple.

Banks, like all companies have a powerful incentive to keep their best producers.  Right now, American banks with little prospect of soon repaying TARP are losing talent to hedge funds, foreign banks, and other non-government owned entities in droves.

The government has the incentive to avoid embarrassment about how much bankers get paid in times when banks are in trouble.  Officials have necessarily focused on large institutions, especially TBTF firms, and have crafted all sorts of brain-damaged rules to try to contain the pay of bankers at those firms.  However,  those rules don’t distinguish good bankers from poor ones within these large institutions.  That’s because compensation regulation is driven by headlines, while compensation is more complicated than headlines can capture.  Which gets us to another incentive.

The media has an incentive to provide blaring headlines, which is how they sell stories.  One way to do that is to tap into the deep vein of envy that exists among the masses.  Most readers love to hate the “rich,” especially if they feel they can blame the rich for themselves being worse off.

This brings us full circle in the ecology of incentives.  Headline-driven media does not allow fine distinctions between good and bad bankers.  The compensation constraints intended to punish whole firms or industries invariably punish those that deserved their pay.  These deserving ones feel the same outrage at being punished for their success that the envious masses feel about the underserving ones getting paid anything at all.  In a bad environment, the best ones leave first.

Alas, there is a tension between economic news, which is sold with headlines, and economics, which is inherently nuanced.  That is why readers and presidents prefer one-handed economists.  Which is why only hacks do well in the media and in any administration.  The good ones do their best under the constraints of politics, pick up some real world experience, and go back to the cocoon of their ivory towers.

The rest of us are left anxious and confused.

Stimulus done right

Posted by Marc Hodak on April 8, 2009 under Economics | Be the First to Comment

Stimulus spending in Iraq, via Michael J. Totten:

“It’s a well-executed and targeted display of money as power,” Captain Boyes said. “It’s a weapon system. It’s great. We have to interact with the locals. Not only is the platoon leader going out to find a viable candidate for this grant, he has to spend that time analyzing the business, talking to the shop owner and seeing what the business needs. The money can be used for anything to start a business. It can be used to expand a business, to hire new employees, anything like that. They’ll go in there and talk to the shop owner and ask him what are the top three needs.”

Long Street Sadr City 2.jpg

Sadr City

“We typically don’t put any dollar amount on it,” Captain Looney said. “We say what are your top three needs to improve your business? And we’ll ask them how much that will cost. Most of the time they have a well thought-out plan. They’ll give us exactly what they need, how much each item costs, and we’ll bounce that off what we know from our own experience and how much we know it should cost. We’re not going to let them say it costs 5,000 dollars for a small generator. We’re not going to be raked over the coals. Most people are honest. They give us a fair estimate of the costs. As soon as we give them the money, they use the money immediately to improve their location.

“I can take you to a hookah bar and chai shop,” he continued, “where we’ve given them a grant and they made drastic improvements to the outside. That had a great impact because it showed what U.S. forces are willing to do for Iraqis. It’s a cultural and social hub of this neighborhood. Many people see what we’ve done for them. We didn’t just make an investment with one person, the business owner. There may be hundreds of local men in the area who go to this hookah shop every week, and we made an impact with all of them.”

Park Sadr City.jpg

Park, Sadr City

“We see it as a business opportunity for them and a security opportunity for us,” Captain Boyes said. “We’ve increased the general atmospherics. People are more open to talking to us or giving us a phone call and giving us information. We have had actual tangible results where people have called up and told us where IEDs were placed. And the only reason he called us is because his brother received a microgrant.”

What is lost on most voters in the more comfortable quarters of civilization is that any form of government spending is a “display of money as power.”  Unfortunately, our’s is not quite as well-executed or targeted.

Obama vs. the market

Posted by Marc Hodak on March 5, 2009 under Economics | Be the First to Comment

People are beginning blame the 20% drop in the Dow since January 20th on the Big O.  Barry Ritholtz disagrees.  He says that you can’t blame the first 44 days of stock price declines on Obama if you don’t blame the ’00-’03 bust on Bush.  Point.

There are some differences, though (many differences, actually, but some count more than others).  The market is forward-looking.  In principle, the only thing that will change a market value is new information.

What was the new information driving the market’s drop in Bush’s first few years?

Read more of this article »

Wall Street bonus results are in (drumroll)

Posted by Marc Hodak on January 28, 2009 under Economics, Executive compensation, Politics | Read the First Comment

OK, Andy, you can stop hyperventilating now about how much certain other New Yorkers are making.  The media and politicians have been fretting about how much Wall Street bonuses would be this year.  The nominees were:

1)  Up three percent (!)

2)  It should be zero (Barney Frank)

3)  Down about 25 percent (Alan Johnson, Wall Street comp specialist)

4)  Down 30 to 50 percent (yours truly)

And the correct answer is (drumroll, please):  down 36.7% per worker; 44% overall

I’d like to think that our AG’s obsession with how much these bankers make has contributed a little to this comeuppance.  Alas, the market’s work is swift while the wheels of justice grind on at their deliberate pace.  I’m sure Andy and Co. will press ahead, however, making it as difficult as possible to pay anything to those greedy bastards on Wall Street, tamping those bonus dollars down for as long as possible.  Of course, Andy’s own job is secure.  It’s up to his compatriots to figure out what to do with the $1 billion in state tax revenue and $275 million in city taxes that have evaporated with those bonuses.

Why did Obama win the presidency?

Posted by Marc Hodak on January 25, 2009 under Economics | Read the First Comment

For this quiz, your choices are:

1)  Because of his well-articulate vision for a reshaped country

2)  Because of deep voter concerns about the state of the economy and strong disapproval of President Bush

3)  Because the media was in love with Obama

4)  Because he bought it

Would it be redundant to say my money’s on #4?

My favorite aspect of the ’08 election, by far, was the irony that McCain, running as a reformer, was shackled to campaign finance reform spending limits that he himself had created.

Obama, on the other hand, was able to go for the big bucks, outspending McCain 2-to-1.  I know, the fact that Obama could ignore spending limits after promising not to do so perhaps points to #3 as a contributing factor.  But it still comes down to the cash, baby.