Economics on the small scale

Friday, May 19, 2006

The Efficient Markets Myth

There is a Myth that all available information that could affect The value of a given stock is instantly reflected in the price of shares for that stock and therefore the Stock Market is a efficient means of determining the correct price for stocks.

The idea is that Wall Street (and to a lesser extent: Main Street) has lots of really smart people paying attention to these companies and competing in trying to figure out how to make money buying and selling shares of these public companies.

The instant new information became available, the theory goes, one or more of these really smart people would figure out how this new information will affect the company's financial future and buy or sell shares until the price is back in balance with the company's actual value.

Now, this makes a lot sense, and I've no doubt that this scenario actually occurs on a daily basis on Wall Street. But does that mean that this makes the Stock Market as a whole an efficient means of determining the price of any given share of any company ?

I don't think so.

Figuring out the future is hard; a gamble really. What happens if the smartest analysts mis-interpret the data and buy when they should be selling ? Or end up buying at too high a price, or sell when they should have been holding ?

(the best case scenario for them is that they make less money than they could have, but they still make money).

The not-as-smart analysts are going to make worse errors in how they interpret the data, though through sheer dumb luck some might stumble onto the correct price [range?] occasionally.

Now let's back up a little bit. The not-as-smart analysts are still in the game to make money and if their own analysis isn't cutting it, maybe they can ride the coattails of the smartest analysts by mirroring all of their transactions.

Now, if you're one of the smartest analysts, those not-as-smart analysts acting as parasites on your work could be another potential source of profit if you can get them to take positions that you can cash in on. Figuring out how to con the greedy and the lazy is easier than figuring out the financial future of some very complicated companies or even simple companies whose financial future hinges on fortune's favor.

If the smartest analysts engage in that game, who can glean whose gains were got from where ?

Are there actually really smart analysts paying attention to all the data that could affect the financial future of each and every single major publicly traded company ? There are probably thousands of professional analysts for each of the Fortune 500, but how many are there for each company in the next 5000 major companies ? Are they all as high in quality? Are they watching all the relevant data ? All of the time ? Are they all in a position to act on their analysis in a profitable way ?

What about non-professionals who buy and sell with only the most cursory of analyses (if any) and laxest of discipline (if any)?

But even the smartest analysts aren't constantly alert to information that may change the future, they won't be able to always correctly predict the data when they get it, and if they had the incredibly vast resources necessary to play the stock market in this way, they wouldn't need to put in the necessary effort at analysis to make serious money, they could just skim it off of the top.

The bottom line is that Stock Markets aren't all that efficient for determining the value of a given company. Some companies, particularly the Fortune 500, maybe, since that's where the money is. But maybe not even then as it's hard to figure out what the future may hold.

The Moral is that if you let the Efficient Markets hokum theory deter you from doing your own analysis of what the value of a company is, and therefore what its stock price should be, you're likely to get taken to the cleaners.

Tuesday, April 25, 2006

45-year mortgages

Via Daniel Gross, comes this snippet from the WSJ:
Neil Garfinkel, partner and real-estate specialist with law firm Abrams Garfinkel Margolis Bergson in New York and Los Angeles, says borrowers pay much more in interest with longer amortization mortgages than they save.

For a $300,000 loan at 7%, he said, the monthly payment for a 30-year schedule would be $1,995.91, and for a 45-year would be $1,829.10, for a savings of about $166.81 a month or a little over $2,000 a year. But the interest paid over the full term would be $418,526.69 for a 30-year loan and $687,714.82 for the 45-year loan.

"Will it help consumers get into bigger houses? I don't really know," Mr. Garfinkel said.

To answer Mr Garfinkel's question, let's start with this Amortization Calculator and recalculate the $1,995 monthly payment by plugging in the principal and interest rate. Now, let's reduce the principal until we get $1829 as the monthly payment.

The number I got was $275,000. So for the opportunity to buy less than 10% more house, would you pay more than 50% more in interest ?

Thursday, April 20, 2006

Broadcast Television is Dead, long live Publishing

In this discussion of where Disney Television is heading,
Grant calls the new Disney Business model "multiplicity", and maybe that's the industry buzz word for it.

But to me, it sounds like Disney is positioning itself as a 'Publishing House' for video shows rather than as a 'broadcaster' of video.

Goodbye TV Guide, hello NYTimes Best-Seller list.

Housing is not an investment that appreciates

Want to know the reasonable upper limit of the value of a house ?
Figure out who is likely to buy such a house to actually live in it and figure out the maximum mortgage payment they can afford to pay, then figure out how much principal that currently buys them.

The big factors are going to be the likely buyer's income and current mortgage interest rates.

Now given that real median family income has been declining somewhat in the past few years, Income gains have not pushing up housing prices except perhaps at the high end.

That means that the housing appreciation of the past few years has largely been due to lower interest rates, and consumers pushing the envelope of what they can afford.
The former is coming to an end, and will likely take a bite from the latter.

Housing is an important investment to own, but it's one where -absent a housing bubble- you'll be lucky if you break even when you sell, if you take into account inflation.

That doesn't mean you can't get lucky. But you're better off planning for disaster than planning on being lucky.

Tuesday, April 18, 2006

Medical Care In America

Let's compare and contrast:

From Dr Brewer:
It took me a while to conclude that a single-payer health system was the best approach. My fear had been that government would screw up medicine to the detriment of my patients and my practice. If done poorly, the result might be worse than what I'm dealing with now.
Doctors in private practice fear a loss of autonomy with a single-payer system. After being in the private practice of family medicine for 8 1/2 years, I see that autonomy is largely an illusion. Through Medicare and Medicaid, the government is already writing its own rules for 45% of the patients I see.

The rest are privately insured under 301 different insurance products (my staff and I counted). The companies set the fees and the contracts are largely non-negotiable by individual doctors.

The amount of time, staff costs and IT overhead associated with keeping track of all those plans eats up most of the money we make above Medicare rates. As it is now, I see patients and wait between 30 and 90 days to get paid.
There are powerful forces that oppose a single-payer system -- the health insurance industry for one. The insurance industry got its share of the Medicare drug benefit pie, as did the pharma industry. It would have been better and simpler for the government to design one plan with a standard drug fee schedule that everyone could understand, as the government does with care that doctors provide to Medicare patients. But that's not the way it happened.

Doctors have been supportive of the idea of universal access to care, but not necessarily a single-payer system. Some fear delays in obtaining necessary testing and surgeries. What I suspect they fear most is a loss of income and the fear of the unknown.

A single-payer system would admittedly lower fees for subspecialty care, such as radiology and cardiology. But if more doctors went into family medicine or obstetrics and fewer into subspecialties like plastic surgery, that shift might help correct the physician manpower imbalances that exist now. That wouldn't necessarily break my heart.

I suspect doctors would be more likely to support a single-payer system if national malpractice reform was part of the package -- which it should be.

I used to think a single-payer system would keep my income down and inject bureaucracy into my medical decision-making. But with the efficiency it could bring, it would at worst be an economic wash; more likely, the trimmed costs would more than make up for any foregone revenue. As for autonomy, I'm already struggling to maintain it amid the interference of insurers.

Melanie suggested a comparison with Costa Rica:
For a country not usually thought of as a fully developed nation, Costa Rica's lack of a standing army and its historical commitment to the social and educational welfare of its citizens have provided the foundation for a "highly developed medical system, internationally speaking" asserted plastic surgeon Dr. Arnoldo Fournier. He continued, "It's not the surgeons who have provided this, but the entire history of our country that gives us this advantage."

Dr. Logino Soto Pacheco, Chief of Surgery at Hospital Mexico, premier cardiac surgeon in Costa Rica and one of the foremost in the world, claims that Costa Rica is unique in its world position in health care. "I have studied every health care system in the Americas, and I can assure you that nowhere else can compare to what Costa Rica offers its citizens," he stated emphatically. Who would doubt these words from the man who assembled the Costa Rican surgical team which performed the first successful heart transplant in Latin America.

With a government-sponsored network of 29 hospitals and more than 250 clinics throughout the country, the Caja Costarricense de Seguro Social (CCSS) has primary responsibility for providing low cost health services to the Costa Rican populace. Though presently somewhat overburdened, like most of the Costa Rican infrastructure, this system has worked well for Costa Ricans for the past 50 or so years. Open not just to Ticos, the CCSS provides affordable medical service to any foreign resident or visitor. Foreigners living in Costa Rica can join the CCSS by paying a small monthly fee--based on their income-- or they can buy health insurance from the State monopoly Instituto de Seguro Nacional (INS) valid with over 200 affiliated doctors, hospitals, labs and pharmacies in the private sector.

Now, I don't really trust her link, so let's cross-compare using World Health Organization data

Costa RicaUSA

Total population: 4,173,000

GDP per capita (Intl $, 2002): 7,966

Life expectancy at birth m/f (years): 75.0/80.0

Healthy life expectancy at birth m/f (years, 2002): 65.2/69.3

Child mortality m/f (per 1000): 11/9

Adult mortality m/f (per 1000): 129/76

Total health expenditure per capita (Intl $, 2002): 743

Total health expenditure as % of GDP (2002): 9.3

Figures are for 2003 unless indicated. Source: The world health report 2005


Total population: 294,043,000

GDP per capita (Intl $, 2002): 36,056

Life expectancy at birth m/f (years): 75.0/80.0

Healthy life expectancy at birth m/f (years, 2002): 67.2/71.3

Child mortality m/f (per 1000): 9/7

Adult mortality m/f (per 1000): 139/82

Total health expenditure per capita (Intl $, 2002): 5,274

Total health expenditure as % of GDP (2002): 14.6

Figures are for 2003 unless indicated. Source: The world health report 2005

To summarize: a tropical country that is not typically considered fully developped has a health care system that's measurably nearly as good as the U.S.A's hodge-podge health-care, and they're doing to it using a third less GDP per capita.

Friday, April 14, 2006

Observations on America

Observations From a female financial banker from North Africa, courtesy of Lounsbury:
1. Americans are loud, and tend to speak yet louder when your English is imperfect.
2. Americans are fat, eat at strange hours and serve individual portions large enough to feed whole families.
3. The idea that everything has to be big for the sheer sake of being big has taken over.
4. There are an amazing number of Spanish. (Latinos)
5. American insularity is almost like racism. Americans only listen to and watch American things. We [Maghrebines] grow up with French, Spanish, English, Arabic, Berber. Americans grow up with hamburgers.
6. The current crisis over immigration is strange as all Americans are immigrants.
7. The energy in the country is amazing, incredible.
8. The cars in the country are far too big. And they look fat.
9. American [cable] TV selection is strange; there are many channels but they show the same thing. With Euro and Arab Sats, we have too much variety, in America it is amazing how little variety there is. I always imagined in America there would be more variety [on TV, radio].
10. US Advertising is ridiculous. Too much, everywhere.
11. American children are too fat, and this is very dangerous.
12. The public libraries are excellent and amazing. If we had this in the Maghreb, poor children would be able to do so much more.
13. Public schools look like fortresses. [Ahem, the area in question was NYC]
14. It is criminal that The Lounsbury’s cousin [by marriage I do protest] Carol is allowed to teach children.

I'll comment later.

The Internet Makes You Richer (and Television ?)

Via Brad Delong comes this little tidbit from this abstract:
Only about 0.2% of consumer spending in the U.S. ... went for Internet access in 2004 yet time use data indicates that people spend around 10% of their entire leisure time going online... Based on expenditure and time use data and our elasticity estimate, we calculate that consumer surplus from the Internet may be around 2% of full-income, or several thousand dollars per user.

Yes Indeed, people get a lot of value out of the Internets.

However, I'd love to see how it compares against Broadcast TV and Cable TV.
The big reason I fled from TV after my College Freshman year was because TV had the ability to capture my attention for (much too) long periods of time with shows (and commercials) that were not worthwhile to watch. Actually, this was probably true when I was younger too, but College is when it became problematic.

Which brings up a different point; Broadcast TV is "free" (besides the cost the equipment and electricity, just like home Internet access) except for a 27% tax on your leisure time in the form of commercials. And the reason that companies buy expensive Television advertisement is that they believe it makes them richer by inducing you to spend on things that you would not otherwise buy.

So my personal belief is that watching TV makes you poorer. I'd love to see if what I believe is measurable doing the same sort of study(PDF) as Austan Goolsbee and Peter J. Klenow have put together.

Tuesday, April 11, 2006

Intersection of Anthropology and Economics?

I'm not sure yet about this Intersection of Anthropology and Economics blog.
For instance, take this post about Lifestyle design:

The problem: many millions of people in First World societies will live entire lifetimes without "gainful employment."

The assignment: Create a lifestyle that makes possible gainful unemployment. Build a lifestyle that will involve, express, and otherwise engage someone who will never work.

I'm actually involved in something similar on a small-scale: figuring out how to make a weekly Soup Kitchen volunteer effort into an on-going concern. Volunteering is a lifestyle choice, so if you want to use the talent, skill and work ethic of volunteers, you have to figure out how to make it a productive and worthwhile effort for them. It can't be too much or too little. So (some of) the considerations given are actually on-topic for putting gainfully employed people to work for free for you.

On the other hand, I am violently allergic to the premise:

We are running out of jobs. So says David Heuther in BusinessWeek.

Mr. Huether says manufacturing jobs are at their lowest level in the U.S. in 50 years. (This despite the fact that productivity is at an all time high.) And this is not only an American problem. The loss of manufacturing jobs is happening in 9 of 10 of the top economies (U.S., Japan, Germany, China, Britain, France, Italy, Korea, Canada and Mexico). Yes, even China is losing jobs, 4.5 million of them since 2000! I know. Surely, some of the jobs have migrated to the non-manufacturing sectors. We would expect this in a service/knowledge/innovation economy. We would expect this in a marketplace where consumer tastes and preferences are fragmenting and long tail markets are expanding. But I would be very surprised if nonmanufacturing jobs were making up the difference. I suspect we're still a couple of million jobs shy. Structural unemployment is a fact of our world, and it is a problem that will get steadily worse.

It's true that Manufacturing is decreasing in importance as an employment source, in a similar manner to that of Farming; due to productivity gains more than anything. And structural unemployment is unavoidable. But chronic unemployment is not unavoidable, and it is very dangerous to society.

People need to be able to meaningfully trade their labor for the ability to survive and prosper. that's essentially the definition of 'gainful employment'. A balanced exchange is symbiotic, an imbalanced exchange is parasitic. gainful unemployment is parasitic. gainful unemployment, something for nothing, is practically the definition of parasitic behavior.

Back to the Soup Kitchen example, so long as the volunteers can see a reasonable benefit (e.g., a social safety net) for a reasonable amount of effort, it is not a parasitic use of their labor even though they are not being paid.

Dean Baker weighs in on the CPE

Dean Baker weighs in on the CPE:
The reporting on the battle over a new law in France, that would make it easier to fire young workers, has been especially weak. The coverage has included numerous assertions that making it easier to fire workers will reduce the unemployment rate. (The story goes that firms will more readily hire new workers, if they know that they can fire them later, if they find it necessary.)
In fact, the evidence on this point is extremely weak.
As I was discussing this recently, this isn't about firing workers who aren't performing as they should. This law would allow --even encourage-- employers to fire young workers without cause every two years lest they lose their 'temp' status. Essentially, anyone under 26 years of age would be 'guest workers' in their own country, without the labor force protections that they are otherwise entitled to.

This is labor reform in the same vein as Mr. Bush's Social Security reform.

Friday, April 07, 2006

Today's Money Quote

courtesy of Dan Gross in Slate:
The dissatisfaction with Snow [by the Republican leadership] stems from the fact that he doesn't seem to convince enough Americans that it's raining when they're getting pissed on. Sure, the headline figures on gross domestic product, inflation, and the unemployment rate look fine. But median income hasn't budged in several years, and the tax cuts aren't trickling down. The richest of the rich are getting richer. As David Cay Johnston reported yesterday in the New York Times, "more than 70 percent of the tax savings on investment income went to the top 2 percent, about 2.6 million taxpayers." The Federal Reserve Consumer Finance Survey found that between 2001 and 2004, the top 1 percent increased their share of the country's net worth, from 32.7 percent to 33.4 percent. As people who rely on wage income are subject to the slow-motion wage and benefits cram down, Snow—and the Bush administration—have had nothing to offer except health savings accounts, income inequality, and capital gains tax cuts.