Category Archives: Economics

On inequity and awareness

From Science:

The findings, Ross says, suggest that low-status gorillas use the game as a sort of ego boost. They can hit a high-status individual without repercussions, she says, and that gives them a feeling of superiority, even if it’s only temporary. And that means that gorillas are aware of inequities in their society, Ross says, marking the first time that such cognition has been observed in gorillas in a nonexperimental setting. The researchers will report their findings online tomorrow in Biology Letters.

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Inside debt what?

Alex Edmans at Wharton was brave enough to publish this:

The vast majority of theoretical research on executive compensation has focused on justifying compensating CEOs with equity-like instruments alone, such as stock and options. This emphasis has been likely been driven by the long-standing belief that, empirically, executives don’t hold debt. However, this belief arose not because CEOs actually don’t hold debt, but because disclosure of debt compensation was extremely limited and so researchers missed this component of compensation. Indeed, recent empirical studies (e.g. Bebchuk and Jackson 2005, Sundaram and Yermack 2007, and Gerakos 2007) found that CEOs do in fact hold substantial amounts of debt in their own firm (known as “inside debt”), in the form of defined benefit pensions and deferred compensation. In some cases, CEOs hold even more debt than equity. While the above papers had to hand-collect data on debt compensation, given limited disclosure, the Security and Exchanges Commission recently mandated disclosure of debt compensation starting from March 2007, which has allowed more systematic studies (e.g. Wei and Yermack 2010)

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Regulatory arbitrage, earmarks edition

Today’s NYT:

Just one day after leaders of the House of Representatives announced a ban on earmarks to profit-making companies, Victoria Kurtz, the vice president for marketing of a small Ohio defense contracting firm, hit on a creative way around it.

To keep the taxpayer money flowing, Ms. Kurtz incorporated what she called the Great Lakes Research Center, a nonprofit organization that just happened to specialize in the same kind of work performed by her own company — and at the same address.

One day!

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Girl Economist

Is another recommended blog. Her latest post has this good insight:

I will simply close by saying that within the discipline, a hard core of theory has evolved, with sometimes too little attention paid to the historical and institutional contexts that gave rise to the phenomena upon which the theory is based. Over time and in the absence of falsifiable propositions, the preservation of theoretical consistency has tended to dominate and counter trends that would otherwise tend to reconcile theory with reality. The isolation of theory from reality, bolstered by a liturgy conducted in a language that few outside the religion understand, may have, in turn, allowed certain aspects of the theory to be uncritically co-opted by certain groups to further their causes at the expense of the general public’s interest and general welfare.

New eyes, untrained and unbiased by indoctrination into the hard core of economic theory and its accompanying heuristics and corollaries, may well be exactly what economics needs to become a true and more useful science.


A thought on Social Security

Forecasts from the Congressional Budget Office estimate that over time the share of GDP will rise from 5 to 6 percent. This may be a relatively minor increase in context of other expanding entitlement programs, and it is probably politically infeasible to cut benefits or enact major structural changes for the generation of people that are 30-40 years old and up. But why not phase the program out (either in whole or in part) after that? Young people like myself have decades to plan ahead for a retirement without Social Security, and as living standards continue to increase I am fairly confident in saying that even a Social Security that drastically reduces benefits for people in my demographic cohort would not leave us worse off.
Addendum: Here is the CBO Director’s blog.

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On abortion

Consider any other medical procedure. Literally, any other medical procedure. Is there any other medical procedure that we regulate with such vigor? Why or why not?

Libertarians who support the status quo pro-life regulatory efforts have a real tough question to answer there.

I will say that I think that restrictions on abortions are a subsidy to men at the expense of women.

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When does Apple get together with Detroit?

Or more directly, when will auto manufacturers build vehicles with cameras embedded in them? We already have the Iphone, or the Flip camera; why hasn’t anyone thought to put these in vehicles?

This simple mashup could have profound implications for Americans dealing with law enforcement. With an embedded camera setup, citizens now can operate on equal footing with law enforcement and have a far easier time proving claims of law enforcement misconduct. Other security needs are also met with the use of embedded cameras; it raises the costs of property crime, as criminals are now faced with the reality that without being able to destroy the video data they are leaving behind powerful incriminating evidence.

The technology for this is already in the market and it is modular, which means that auto manufacturers don’t even need to think about this. There are plenty of firms that make aftermarket addons for automobiles; you could develop a device as an addon suitable for even the most ancient of vehicles.

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Why would Columbia Police Department delay the execution of 57% of SWAT search warrants between 2007-2010?

Brennan David at the Columbia Tribune writes:

Columbia’s SWAT team served 106 narcotics search warrants between Jan. 1, 2007, and May 11, 2010. The Tribune, through an open records request, received 99 of those search warrants; the others were considered closed records for various reasons.

Of the 99 SWAT narcotics search warrants granted by the Boone County Circuit Court to Columbia police, officers executed 43 percent of them within hours of being issued. Of those, 65 percent resulted in one felony arrest, and 18 percent resulted in misdemeanor arrests.

But the percentage of warrants producing a felony arrest dropped drastically to 37.5 percent when investigators waited one day before serving the search warrant. In those cases, 50 percent produced misdemeanor arrests.

“This does not surprise me,” Dresner said. “I think the nature of drug sales is that it is a very immediate transaction. For consumers and dealers, once there is a product available, it travels fast, and sales occur very quickly.”

What isn’t being said here is very important. It’s that the police have financial incentives to delay the execution of a warrant, particularly when illicit substances are present. They’d rather serve the warrant when they might find a suspect in possession of large quantities of cash, which they can seize through a civil procedure without the trouble of obtaining a conviction. This is particularly true when cannabis exclusively is involved; it is not a dangerous substance, and complaints relating to its distribution are usually related to the amount of traffic, not the hazard of the plant itself. The proceeds of these seizures can be retained for the Columbia Police Department’s budget through a loophole that allows the federal government to appropriate these seizures and disburse cash and equipment back to the Columbia Police Department. In the last ten years, the Columbia Police Department has received roughly $210,000 from the Department of Justice’s Equitable Sharing Program, though that figure does not capture the full amount of money benefiting law enforcement free of legislative stipulation and civilian oversight. The Missouri Constitution (Article 9, Section 7) mandates the proceeds of these seizures be sent to education, but with the involvement of the federal government and the laxity of legislative oversight this constitutional requirement is circumvented with ease and negligible oversight.

In other words, the Columbia Police Department has for years been pursuing low-level crimes with SWAT raids not for the purpose of making this community safer, but for the purpose of obtaining funding for all the things their budget doesn’t give them. As the United States Appellate Court for the Fifth Circuit said in 1992:

As was obvious at the oral argument of this appeal, each member of the court was deeply disturbed by the actions of the federal and state agents in appropriating Scarabin’s money — candidly acknowledged by counsel for the DEA — actions that would have constituted illicit money laundering if perpetrated by private parties. We were even more distressed by the revelation that those activities were not merely condoned but were actively advocated and supported by officials of the DEA in positions to make and implement policy.

Money laundering indeed. I want to point out that civil forfeiture came into the law enforcement toolbox during the 1980’s, when the government started taking on the Mafia and other large, sophisticated organizations. We forgot, however, that when we went beyond the Constitutional protections against unwarranted search and seizure that our law enforcement stopped acting like law enforcement and began behaving like the criminals they sought to prosecute.

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Feds file civil forfeiture actions against Madoff employees

Forbes reports:

The feds have launched civil forfeiture actions seeking $5 million allegedly held by two former back-office workers at Bernard L. Madoff Investment Securities LLC. U.S. prosecutors in Manhattan say Annette Bongiorno and Joann “Jodi” Crupi both spent more than 25 years working for Bernard Madoff’s now tarnished investment firm.

Bongiorno handled BLMIS clients’ questions about their investments, and allegedly oversaw fabrication of documents like account statements and trade confirmations. The government wants her to fork over $1.1 million in accounts at mainstream banks like HSBC; the nearly $300,000 she spent on a 2005 Bentley and a 2007 Mercedes Benz; and $1.3 million that went to a swanky condo. According to court papers filed by prosecutors, Bongiorno began spending much of her time in Florida and working a heavily reduced schedule starting as early as 1995, but was still making six-figure annual salaries over the course of the firm’s last decade of existence.

Crupi was responsible for client redemptions and allegedly was involved in funneling investors’ money through a chain of bank accounts controlled by BLMIS as part of its elaborate Ponzi scheme. The feds say she’s on the hook for the $2.25 million in cash she used to purchase a home in Mantoloking, N.J., and $26,500 in rental income she’s earned after buying that property.

Here’s the problem. It clearly appears that these employees are guilty of real crimes; if Forbes is right that Bongiorno for instance oversaw the fabrication of documents, then there should be plenty of ground for criminal charges. Civil forfeiture actions are inappropriate; any restitution for the crimes should come through fines tied to a criminal sentencing for Bongiorno and Crupi.  Keep in mind that we get the same result (forfeiture of property tied to illicit income) either way.

Civil forfeiture actions are inappropriate because they presume guilt, and because they’re an easy way for prosecutors to avoid the work of actually obtaining convictions in a court of law. Civil forfeiture does not require a trial, just a civil hearing, at which the defendants have to prove the innocence of their property instead of the government proving the guilt of the defendants beyond a reasonable doubt.

Civil forfeitures sound innocuous (after all, why not just take the property implicated in illicit transactions?) but in practice is a mechanism that allows the government, on both the federal and the state levels, to just take property from people without the due process protections that a criminal trial entails. As you might guess, civil forfeiture ends up being used even when there is no actual crime alleged against a citizen and this happens a lot more than one might guess (millions of dollars of forfeitures are vested against people who are never convicted of a crime every year).

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Steven Eisman testifies about the subprime nature of the for-profit education industry

Here is another must read from Steven Eisman in front of the US Senate Committee on Health, Education, Labor, and Pensions yesterday (June 24). I excerpt:

My testimony today comes largely from a recent presentation I gave at an investor conference entitled “Subprime goes to College”. The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.

The for-profit education industry accounts for 9% of the students, 25% of all Title IV disbursements but 44% of all defaults. And the President of the largest for-profit institution is paid nearly 25x the compensation level of the President of Harvard. There is something wrong with this statistical progression.

In the past 10 years, the for-profit education industry has grown 5-10 times the historical
rate of traditional post secondary education. From 1987 through 2000, the amount of total Title IV dollars received by students of for-profit schools fluctuated between $2 and $4 billion per annum. But when the Bush administration took over the reigns of government, the DOE gutted many of the rules that governed the conduct of this industry. Once the floodgates were opened, the industry embarked on 10 years of unrestricted massive growth.

He continues:

The bottom line is that as long as the government continues to flood the for profit education industry with loan dollars AND the risk for these loans is borne solely by the students and the government, THEN the industry has every incentive to grow at all costs, compensate employees based on enrollment, influence key regulatory bodies and manipulate reported statistics – ALL TO MAINTAIN ACCESS TO THE GOVERNMENT’S MONEY.

In a sense, these companies are marketing machines masquerading as universities. And when the Bush administration eliminated almost all the restrictions on how the industry is allowed to market, the machine went into overdrive. How do such schools stay in business? The answer is to control the accreditation process. The scandal here is exactly akin to the rating agency role in subprime

There are two kinds of accreditation — national and regional. Accreditation bodies are non-governmental, non-profit peer-reviewing groups. Schools must earn and maintain proper accreditation to remain eligible for Title IV programs. The relationship of the for profit education industry and the national accrediting boards is, in my view, similar to the relationship between the rating agencies and investment banks. There, Wall Street paid the rating agencies handsomely for ratings on subprime securitizations that turned out to be overly optimistic. Here, the industry, we believe, controls the national accrediting bodies by actually sitting on the boards of those very same institutions. The lunatics are running the asylum.

Eisman predicts massive waves of defaults; his estimate is that students will owe some $330 billion in loans and fees on defaulted loans over the next ten years.

The entire testimony is worth reading, and I thank Rick Puig for the pointer.

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Holy shit, Governor Christie

This is perhaps the most impressive gubernatorial performance I have seen this year. New Jersey Governor Christopher Christie slams teachers unions for gutting education reforms in the state legislature and state legislators for capitulating to a public sector union that is more interested in enriching themselves than educating children. It is an impressively angry performance, and is a must-watch. The video of his speech is here. Here is the NYT covering Gov. Christie in April, and I excerpt:

It’s fair to say that no governor in memory in any state has pushed back as hard at public employee unions — mostly teachers but police officers, too — as Mr. Christie. That’s made him an instant Republican hero, hailed by the conservative columnist George Will as “the nation’s most interesting governor.”

So the question is whether this is about Mr. Christie and New Jersey, or about the rest of us as well. And the answer is yes.

It’s a New Jersey story, of course, because that’s where government bloat and dysfunction have become an art form. And it has a particular New Jersey cast because the governor’s office is so powerful that the governor can assert himself statewide while others can only posture and threaten.

HT: Jack “Attack” Soltysik.

Addendum: the link to the video appears to be broken, but the google cached video is here.

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No budget? No Problem!

Found this brochure for an asset forfeiture conference aimed at state and local law enforcement. The location of the conference is Hollywood, Florida during April 15-16 2009. The brochure advertises a variety of seminars designed to educate local law enforcement about the forfeiture process and how to turn seizeable property into money that goes to law enforcement budgets.

Most tellingly, the brochure starkly proclaims that law enforcement can become self-funding free of legislative constraints:

In last twenty years economists from Oliver Williamson to Ronald Coase famously declared “Incentives matter”. And we are learning that they do matter very much, particularly in terms of how institutions and structures function. If structures like representative democracy need clear and distinction separation of powers to function well (if at all), then they need to happen through incentive-compatible channels. Democracy itself breaks down when executive branch agencies conduct their affairs in obscure and impermeable fashions, obtain funding without regard for legislative stipulation and judicial mandate, and lose the incentives to listen to the communities that they serve.

Because when the federal government helps law enforcement pay their bills free of our consent, we lose the ability to shape the policies that guide our law enforcement. Now federal dollars incentivize law enforcement to prioritize cases and methods that result in property they can seize, rather than prosecute crimes of violence that are less lucrative. We serve search warrants on people who have never been implicated in the least hint of violence with paramilitary squads in the land where Patrick Henry once declared “Give me freedom or give me death”. In Missouri, our legislators and judges told us that crimes where fines or forfeiture happened would be prosecuted fairly and the money given to schools, to help the young do greater things that we can. This is no longer the case, and we are incalculably poorer for it.

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From the referrals, re: Rand Paul’s naive libertarianism

Saw an incoming link from a site called AesopsRetreat to my posts earlier about Rand Paul and racism. They excerpt this line:

“I could say alternatively that racism by businesses has serious negative externalities in practice and I’m ok with government regulation on those grounds.

A commenter on the thread notes:

Rand Paul will win on REAL ISSUES that are of concern to the voters.

Racism is not an issue in 2010. This is not 1964.

Well, perhaps racism is not an issue in 2010, if you are white and live in Kentucky. If those two stipulations don’t apply, perhaps it is more obvious that racism and the violence that accompanies overt displays of racism are pretty scary prospects.

Perhaps I should restate my argument for clarity. I point out that a transaction between an individual and a business not not just implicate the property rights of the individual and the business. The city or governmental entity that issues a business license on behalf of its citizens has a property right interest in ensuring that business is transacted in ways that do not reflect badly on the community and ensure the public safety.

Hence building codes, health codes, etc. Libertarians rarely challenge building codes or health codes from a philosophical point, but if they want to argue that businesses should be allowed to conduct racist business practices, they should maintain consistency and advocate for the abolition of all ground-level regulations that come with obtaining a business license.

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A quick but revealing anecdote on productivity

I have a friend who is nearly done with his degree in mechanical engineering. He found a summer job writing contract specifications or something similar for an engineering firm bidding on a government contract. The firm contracted him for a lump sum, assuming that the writing the contract would take him 160 hours. Using Microsoft Word, he finished this task in 20 hours.

When I heard this story, I asked him to think about the aggregate inefficiencies in this economy that exist because people don’t know how to use word processors.

What do you think?

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Wise words from Tyler Cowen

From Marginal Revolution:

Macroeconomics really is just a theory.  Politicians are reluctant to spend more money, in tough times, on the basis of a mere theory.  Advocates of fiscal stimulus make it sound as simple as solving an undergraduate homework problem and I think they sometimes genuinely do not realize how much the rest of the world, including politicians, views them as simply being very convinced by their own theory.  There are plenty of historical examples with confounding factors and I’ve linked to some of them lately.  One default hypothesis is that the ranges of fiscal policy being discussed, whether looser or tighter, aren’t going to matter much one way or the other.

I would recommend anyone who takes theory out into the real world to read those words carefully. I find the sentiment is good grounding particularly for econ people who don’t understand why even intelligent politicians don’t make economically sensible policy choices.

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