Tuesday, March 31, 2009

A Day in the Life

A forthcoming book, reviewed in the new issue of the Economist, chronicles what work looks like for a considerable cross-section of us. In The Pleasures and Sorrows of Work, British writer Alain de Botton lets us take a peek at working life for those employed in occupations perhaps unknown to us. The vast collection of jobs examined include cookie baker, accountant, painter, career counselor, and--yes--even rocket scientist. But through this process the author digs deeper to consider the underlying meaning of work.

The book also contains more than 100 photographs by photographer Richard Baker. Be sure to check out this gallery of images that did not make it into the book.

Monday, March 30, 2009

Detroit Papers Begin Their Grand Experiment Today

Today is the first day of the Detroit papers' grand experiment: home delivery just three days a week, and new e-reader online editions. The papers are trying to find a viable strategy that stops short of recent decisions by papers like the Ann Arbor News and the Seattle Post-Intelligencer to stop their printing presses for good.

The e-reader editions are pretty cool, and thoroughly worth checking out. Here's the one for the Free Press, and another for the Detroit News.

(Hat-tip: http://twitter.com/9nineteen.)

Would You Rent Your Car Here?

Would you rent your car here?

(Taken on Abovian Street in Yerevan, Spring 2007, by E. Claar.)

George Akerlof won the 2001 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, which he shared that year with Michael Spence and Joseph Stiglitz. Akerlof, Spence, and Stiglitz were recognized for their work in the area of asymmetric information: when two parties do not equally share all of the relevant information available to their decision-making situation.

Most of the time, in a market of any kind, both potential trading parties know exactly what they will be getting from the exchange. When you buy a cup of coffee, especially from a vendor you know and trust, you know what you will be getting (the coffee), and the barista knows what she will be getting (your money). Moreover, once the money and coffee have been handed over, both of you are the better for it. You obviously wanted (needed?) the coffee more than your money, and the barista was much more interested in your money than in keeping the coffee for herself.

Economists love these kinds of interactions, by the way. Two people are now happier (you, with your hot caffeine jolt) and the barista (with your money, and hopefully a nice tip besides). As evidence, the two of you probably both say, "Thank you." And life goes on for the rest of us, in our ignorant bliss.

But there are some markets where potential buyers and potential sellers do not both have access to all of the information relevant to a potential transaction. That's a case of "asymmetric information" (see above). And where it is found, some potentially mutually-beneficial trades now prove impossible (and ones that would certainly have transpired in a world where everyone knew everything).

Think about that cup of coffee again. Suppose you are not buying it at your favorite coffee shop in your hometown, but instead from a stranger in another city. And not at some mega-corporate-branded place like Starbucks. How would you know what you'd be getting? Or that it really would be worth the $4.50 being asked of you?

Used car markets work (or, rather, don't work) like this. Buyers want reliable transportation because they need to go places. On the selling side of the market, though, there are always two kinds of cars: good ones (I'll call them "cherries") and bad ones ("lemons"). And only the sellers know which variety they are attempting to unload.

So all of the sellers try to price their cars as though they are cherries--whether they are or not. Now, consumers don't know which specific cars are which, but they are certainly aware that there are lemons out there to be avoided. Knowing this, there is no way that they will be willing to pay the full asking price for any of the cars, because any car they buy could be a lemon.

Now think of the unfortunate, honest, cherry owners. They might be asking for $9000 for a car that really is worth $9000. But nobody out there is willing to pay $9000 for any car, even a cherry, for fear of ending up with a lemon. So the cherry owners give up, and pull their cars out of the market.

For economists, that's a terrible shame. A win-win trade will not take place because of the uncertainty the potential-buyers face, given they have less info than the sellers do.

Akerlof won the Nobel largely for his work in exactly this situation, called the "lemons problem." You can read more about it--and its inevitable conclusion--at the Nobel site.

Sunday, March 29, 2009

Another Economist a Management Guru: E.F. Schumacher

This week the Economist has a new feature on E.F. Schumacher, another of the magazine's management gurus. And like Herbert Simon, featured a week ago, Schumacher is also an economist.

Schumacher is best known for one book. Small Is Beautiful: A Study of Economics as if People Mattered was first published in 1973, and made a passionate case for allowing individuals to express their entrepreneurial spirits and creative ideas, regardless of whether they are "entrepreneurs" who have started their own businesses, etc. Schumacher believed any organization -- big or small -- could benefit by giving its people the opportunity to be creative in an environment designed to encourage and reward their creativity. For Schumacher, every firm--even the biggest ones--can benefit from seeing themselves as collections of smaller entities, all functioning together for the benefit of the whole.

Schumacher is yet another economist profiled in the new The Economist Guide to Management Ideas and Gurus by Tim Hindle. The book profiles more than 50 of the leading thinkers in management science. Besides economists, the book also covers some household names in the field like Peter Drucker and Michael Porter. It includes over 100 pathbreaking ideas.

Friday, March 27, 2009

Michigan State University Study Finds Charter-School Students More Likely to Attend College

A recent study by researchers at Michigan State University found that students attending charter public schools were more likely to graduate, and then matriculate at college, than their non-charter counterparts. The study used data from Florida and Ohio, plus data from five major cities where charter schools are present.

I sit on the board of Black River Public School, an innovative K-12 charter school here in Michigan. There's no doubt in my mind that Black River offers an excellent program that is available free of charge (just like any other public school) to any student in West Michigan who wants to attend.

More precisely, the school welcomes any student who wants to attend it, and who can also win a spot in our school's annual lottery. When the price of something is zero dollars (as is the case with charter schools), and the quantity demanded exceeds the quantity supplied, then other rationing schemes must be used. And charters traditionally have used lotteries, since other potential rationing schemes seem patently unfair.

But let me return to the study's conclusion: that students attending charter schools are more likely to walk through commencement exercises, and then attend college. Again, I'm confident most charters have outstanding programs. In fact, if a charter school is rotten, the state and the school's chartering organization will shut it down. In fact, Michigan's charter authorizers have closed 38 charter public schools since the Michigan public school academy law was enacted in 1993.

In studies like this one, though, there is a potential for selection bias. What I mean is that since the scholars at MSU were studying the choices that students have made (whether or not to go to college), after they have already made them, it's almost impossible to know whether there is a treatment effect of attending a charter or not.

On one hand, maybe attending a charter makes students more likely to attend college. That is, maybe it really is something about the charter experience that makes the difference.

But on the other hand, perhaps the sorts of students who end up in charter schools are already more inclined to attend college--even before they darken the door of the charter.

And it's not difficult to imagine how this might happen. Normally, students (and their parents, of course) explore charter schools as an alternative option from the traditional public school. So merely by exploring charters as an educational option, students and their parents reveal that education is important to them. And perhaps children from those families--where education is viewed as important already--are exactly the sorts of children who apply to attend college regardless.

So is there a treatment effect? Does attending a charter increase the likelihood that a given student will attend college? Or does a charter simply address the needs of students who probably plan to go to college anyway? Selection bias can be pesky indeed when trying to isolate a treatment effect.

In Case You Missed It: Prince Charles Sees Mumbai Slum as Model for Urban Living

In a recent speech at his Foundation for the Built Environment, Prince Charles held up Mumbai's Dharavi slum as a model from which we can learn much about how to improve on urban living. According to the Prince, Dharavi--Mumbai's biggest slum, and the one featured throughout Oscar darling "Slumdog Millionaire"--has much to teach us about urban planning and living.

According to the Prince, wealthy Westerners--if they live in large apartment buildings and condo complexes in urban centers--are themselves living in poverty, because they miss out many of the rich social benefits that living in a communal shantytown can bring. Theirs is a social poverty, and is built on a lifestyle that is not forward-looking in terms of environmental sustainability.

Yet, large shantytowns like Dharavi do not exactly measure up to what one might call sustainable living by any global standard. As David Masters points out on the green web site Fairhome, the Mumbai community holds nearly a million people on just 520 acres, and has roughly one bathroom per 1,400 people.

Wednesday, March 25, 2009

EU President Charges US Economic Strategy Paves "Road to Hell"

Czech Prime Minister Mirek Topolanek minced no words Wednesday. Without spin or nuance, the Czech leader--currently serving as EU president in their six-month rotating system--made clear the contrast between the current economic strategies of the US and the EU. Addressing the European parliament, Topolanek asserted that the US strategy is the "road to hell." Topolanek did not stop there. According to CNN:
"The path the United States has chosen is historically discredited," he said, advising Americans to "read dusty history books" so as to avoid repeating "the errors of the 1930s" and the Great Depression.
Now, maybe the Czech leader was just smarting from a no-confidence vote (101-96) in the Czech parliament one day earlier, forcing his resignation. Nevertheless, his words make clearer still the Transatlantic conflict of economic visions the G-20 must face in April. And the EU is working hard to manage the fallout from the comments.

Here's a CNN report:

"Secret" New Lions Logo

With lots of Googling and detective work, one can kick up the new logo for the Detroit Lions:
Will the new logo be a winner? More interesting: Will the Lions?

YouTube Blocked in China

From CNN:
China has blocked the popular video-sharing Web site YouTube but did not offer a reason for the ban.

Google, which owns YouTube, said it began noticing a decline in traffic from China about noon Monday.

By early Wednesday, site users insider China continued to encounter an error message: "Network Timeout. The server at youtube.com is taking too long to respond."

"We do not know the reason for the blockage and we are working as quickly as possible to restore access to our users," said Scott Rubin, a spokesman for Google, which owns YouTube.

It's not the first time users in China have been unable to access the site. In March 2008, China blocked YouTube during riots in Tibet. . . .

Many in the country speculated the latest ban may be an attempt to filter access to footage that a Tibetan exile group released. The videos show Tibetans being kicked and beaten, allegedly by Chinese police officers after the riots. . . .

China, with 298 million Internet users, has routinely blocked access to Web sites it considers politically unacceptable, including the Voice of America and The New York Times. The Chinese government has also censored television broadcasts, including those by the BBC and CNN, during coverage of issues such as its policy in Tibet and Taiwan.

The Chinese government did not directly address whether it has blocked YouTube.

"China is not afraid of the Internet," said Foreign Ministry spokesman Qin Gang on Tuesday. "We manage the Internet according to law ... to prevent the spread of harmful information."

YouTube, which allows users to upload and share videos, has been banned periodically in other countries as well. Bangladesh, Pakistan, Thailand and Turkey temporarily shut off access to the site after users uploaded content the countries' governments considered politically embarrassing.

Tuesday, March 24, 2009

Take That, Macroeconometricians! Psychics Are the New Economic Forecasters, and Business is Good

Maybe fast food and movies aren't the only surprising inferior goods out there. In a poor economy, people are turning to fortunetellers for economic advice, and business is up.

Disclaimer: I think fortunetelling is hogwash.

US Makes Plans to Monetize Debt

In the nations with the worst inflation rates (historical examples include Brazil, Bolivia, and now, Zimbabwe), there is often little independence between the central bank the the nation's treasury. In such a circumstance, it becomes easy--too easy--for the country's government to pay its own bills by simply printing money. And in such a case, the money printing is real, literal, waiting-for-the-ink-to-dry money printing. Need to purchase some new rocket launchers? Print some currency. Or pave a few roads heading into a general election to help your party's popularity? Start the money-printing presses.

A fairly obvious implication of such a strategy is that the nations with the highest rates of inflation rarely have annual budget deficits of any significance. After all, why would a nation need to borrow anything to meet current budget shortfalls, when it has no budget shortfalls? A country with lots of money printing rarely borrows much, if at all.

Now, most nations are far too principled to resort to plain old money printing to finance some of their current spending. And to guard against such temptations, countries arrange their governmental financial institutions to limit the likelihood of such activity. The simplest way--and the arrangement we have here in the United States--to forestall such misdeeds is to make the nation's fiscal authorities (the ones in charge of taxing, spending, and borrowing) independent from the monetary authority (the central bank). So we have an independent Fed: a central bank that calls its own shots in the conduct of monetary policy.

Nevertheless, there is a way for a nation to do the equivalent of "money printing" even if the nation has constructed its institutional arrangement to make literal money printing either difficult or illegal. That is, even with a Fed and Treasury that operate independently, it is possible for virtual money printing to take place.

That practice is called debt monetization (or "monetizing the debt"). And here's how it would work.

As a matter of a central bank's daily ordinary functions, bond traders that work at a central bank's trading desk routinely purchase and sell government securities. In fact, its is through buying and selling securities in this manner that central banks like the Fed increase or decrease the nation's money supply. Want more money out there? Buy securities and pay for them. Want a little less out there? Sell securities, then collect the payment afterward and keep it.

So how could a country take advantage of this arrangement? Well, suppose a national treasury knows it does not have sufficient funds in the coffers to pay its bills. And either because of recession or politics, higher taxes are not viewed as a viable option. Then if the treasury printed some new bonds (the instrument governments use to borrow money), and those brand new bonds ultimately were purchased by the central bank using an increase in the money supply to make its payment, then the central bank and the treasury would have achieved monetary alchemy: they would have created new money where there had been none before--new money the treasury will use for bill paying. Voila.

Despite our best intentions, debt monetization happens most of the time, even right here in these United States. But in most years, the money supply grows by considerably less than the size of the deficit. So some of the debt is monetized, but not much.

But now we are in new territory. The US has major budget shortfalls, and right now our normal go-to lenders (such as China) are not as keen to lend to us as in the past.

Faced with such conditions, the Fed and US Treasury are orchestrating multiple deliberate debt monetizations. Despite the Fed's independence, Bloomberg reports today that
The Federal Reserve is likely to target the newest, most-traded Treasury securities for purchase . . . . The central bank may announce as early as today which maturities it will buy as part of its plan to acquire $300 billion of Treasuries during the next six months.
So why does this matter? After all, if the Fed monetizes some debt in most years anyway, without necessarily even trying, is there any legitimate cause for concern?

The potential--though perhaps latent--challenge is inflation. Despite concerns today of a deflation, money printing is ultimately inflationary. Moreover, money printing is inflationary whether it is the literal variety or the "monetizing the debt" variety. For this reason, debt monetization is also referred to in the literature of monetary economics as "seigniorage," and in the literature of public economics as "inflationary finance." The public economists--especially the public choice economists--like to call it an "inflation tax."

And inflation is what makes monetizing the debt begin to hit you in the pocketbook. Every time that the monetary authority adds one more dollar by purchasing a new bond, the value of any dollars you are holding in your bank account, or that you receive in your paycheck, falls a little. More dollars => dollars are less valuable. And the more this happens, the more your purchasing power is eroded.

A more important, yet less immediately obvious implication is that over time, our nation's productive resources and activities will be used less to make the goods you and I as consumers want, and more of the goods that government wants. If the government can always "print" more money, it will always be able to buy what it wants (tanks, missiles, roads, etc). And the more that it does this, the less purchasing power you and I will have to buy the things we want. More business plane trips for government officials means fewer pleasure plane trips for the rest of us.

So are the Treasury and the Fed out to get us? Probably not. But right now, in the current climate, their focus is upon more short-term concerns, and also on taking big actions designed to improve immediate circumstances for bigger economic players than you and me.

Sunday, March 22, 2009

World's Cheapest Car Now Available--But You'll Have to Put Your Name in the Hat for the Privilege of Buying One

The world's cheapest car, the Tata "Nano," is being unveiled in Mumbai, India on Monday, March 23. Dubbed the "People's Car," the Nano is expected to make widespread automobile ownership possible in India for the first time.

But, for a while anyway, it looks like the quantity demanded will be larger than the quantity supplied at the announced price of a mere US$1,979. According to this article, the company expects to be able to supply a quantity of two or three cars for every 100 demanded. So the company will be resorting to an additional rationing tool besides price: a lottery system.

Some lament the additional negative externalities that will be created in the forms of air pollution and traffic congestion as more and more people begin purchasing and operating the cars. And these are serious negative consequences, to be sure. Nevertheless, it really is a remarkable success that a form of transportation so many of us take for granted is now attainable for many in India, too. Here is how Karishma Vaswani put it, in a wonderful article for the BBC:
This is a chance for millions of Indians . . . to participate in India's economic boom, and to get a chance to move up, and move on in life.

It is a chance to finally be a part of the great Indian dream.
Oh, and here is a video of the Nano:

2009's Top Ten (Bottom Ten?) Dictators

From PARADE: A rogues gallery of the globe's ten worst dictators (with ten "dishonorable mentions").

Saturday, March 21, 2009

Where Does US Money Comes From? And Is Inflation a Concern?

Where do funds come from to finance deficits, including bailouts and stimulus spending? Do we print money to pay for stuff, or is it more subtle? And how much do we rely upon lending nations like China? Paul Solman explains it for NEWSHOUR on PBS like no one else can.

And if you have trouble viewing the embedded video, here is a direct link.

W MI Company Closes Doors--Plans to Reopen in Another State

A Grand Rapids woodworking supply shop has announced plans to suspend its operations in Michigan. Owner Steve Johnson has put together a shortlist of 12 states for relocation:

"We've crossed off the Midwest because of the economy," Johnson said. "We are going to wherever the economy is strong and the climate is nice."

They have narrowed their list of potential states to 12. They have printed up a map, and crossed off states as the list narrows.

What's left is Texas, Florida, North Carolina, South Carolina, West Virginia, Georgia, Colorado, Wyoming, Alabama, Nevada, Missouri and Northern California.

Funny: I'm not surprised that 11 of the 12 states on their short-list are ranked higher than Michigan in the new ALEC-Laffer State Economic Competitiveness Index.

Economics Nobel Laureate Herbert Simon Featured as a "Guru" in Latest Issue of the Economist

Herbert Simon (1916-2001), winner of the 1978 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, has been featured as one of management's "Gurus" by the Economist.

Simon worked in the area of behavioral economics long before it became sexy. For example, Sim
on realized that it is unreasonable to assume that economic agents will always be able to choose rationally in decision-making situations that are complex beyond the agents' abilities to understand the situation at a reasonable cost--in terms of study, effort, data gathering, etc. As a result, when faced with such complexity, most of us will defer to rules of thumb in making our decisions, especially when those rules appear to yield reasonably happy outcomes over and over. Thus we appear to act more-or-less rationally, even when we may not make the very wisest choice available.

magazine's recent feature on Simon is taken from their book, Guide to Management Ideas and Gurus. The book profiles more than 50 legendary thinkers in management including Simon--himself a U of Chicago-educated economist--and features more than 100 innovative ideas.

The Economist Releases New Index of Political Instability

The Economist Intelligence Unit, an affiliate of the Economist, has released its latest Political Instability Index. The index assesses 165 nations' likelihoods of experiencing political unrest.

Global economic conditions are making the world a less politically stable place. This time around, 95 countries are thought to be high-risk, compared to just 35 in 2007. And in the most vulnerable nations, a mix of poor government and a bad economy prove to be a volatile combination (e.g., Zimbabwe).

Friday, March 20, 2009

Understanding Madoff Is Child's Play

You know that expression, "Explain it to me like I was six years old"?

Well, the talented folks at Jimmy Kimmel Live summarize the Bernie Madoff scandal, with the help of Sesame Street's Ernie and Cookie Monster:

Wednesday, March 18, 2009

Incumbent Party of Aliyev Seeks to Overturn Presidential Term Limits in Azerbaijan

According to the constitution of the former-Soviet republic of Azerbaijan, presidents are limited to two terms in office. Now, as president Ilham Aliyev approaches the end of his second term, his party's stance is that such limitations are "a violation of voters' rights." The New Azerbaijan Party--Aliyev's party and the ruling party in Azerbaijan's parliament--has recently proposed more than 20 constitutional amendments, including one designed to end presidential term limits.

Many are wary that the move is less motivated by a concern for "voters' rights," and more concerned with the incumbent majority party's desire to maintain and enlarge its control. There was similar deep concern in December when the government banned all international radio broadcasts over FM waves--effectively ending transmissions of BBC World Service, Radio Free Europe, and others. And there were widespread demonstrations by the minority parties following the Summer 2005 elections, owing to a suspicion that the incumbents had ensured a less-than-free-and-fair vote.

So what do you think? Are term limits such as this good for democracy? Or are they a limitation on the ability of the people to exercise their right to choose?

A few background notes: Oil-rich Azerbaijan is a secularized Islamic state, located between Armenia and the Caspian Sea. Because of its oil production, various parts of Azerbaijan (such as Baku--the capital--and Sumgayit) routinely make top ten lists of the planet's most-polluted places.

The country is locked in an ongoing dispute over a region called Nagorno Karabakh. This region, officially located within the interior of Azerbaijan, has been inhabitated for centuries by ethnic Armenians who have now declared themselves an autonomous republic--complete with a parliament, flag, and visas for visitors.

Monday, March 16, 2009

75 Years Later, Ukraine Seeks Famine Awareness

In the early 1930s, while the United States was busy wrestling the great depression, Ukraine suffered a famine that left roughly 10 million Ukrainians dead. Today, Ukraine seeks to promote awareness of the episode. And they also seek recognition of the famine as something deliberately carried out by Stalin's regime, rather than a mere peacetime accident. I would urge anyone interested in knowing more about this period in Soviet history to read this article by Clifford J. Levy that appeared in today's International Herald Tribune.

There is also a sobering new exhibit making the case that the Ukrainian famine was genocide. "Holodomor: Genocide by Famine," is a traveling exhibition comprised of 101 dramatic, informative laminated panels. The exhibit will be on tour until November 2009, and is already scheduled for openings at universities and churches throughout Canada, the United Kingdom, Australia, Lithuania, Ukraine, and the United States. Thus far, 14 nations have labeled the famine as genocide.

Sunday, March 15, 2009

For the Ides of March: William Safire's Literary Take on "Animal Spirits"

In today's New York Times Magazine, William Safire gives us all a literary history lesson on "animal spirits."

When Times Are Tough Locally, It Can Be Easy to Overlook How Tough They Might Be for the Poorest Among Us Globally

This nice article from the Economist highlights the three main avenues through which the global downturn--even though it got started in the high-rent financial districts of Western markets--is hurting the poorest globally. They might not have bought mortgages they can't afford from less-than-moral dealers, but the poor are nevertheless experiencing even greater pain.

The global meltdown affects poor countries in three ways. First, capital: as investors in the West rebuild balance sheets, private capital flows dry up, hurting marginal borrowers like the poor. . . . For the poor, the other kind of external capital is aid. . . .

The second effect of the meltdown is the dive in commodity prices. Most poor states still rely on commodities for big shares of their foreign exchange and tax revenues. . . .

The third area where the meltdown is being felt is labour. Those poor countries that do make things for export are suffering from the fall in world trade. . . . Many countries also export workers who send back remittances. . . . Some countries depend on them.

Saturday, March 14, 2009

Worth Checking Out: "The Institute"

Anthony Bradley is the creator and editor of a blog called The Institute. Dr. Bradley describes himself as . . . "a Covenant Theological Seminary grad, with a Ph.D. from Westminster Theological Seminary, working for a think tank, and teaching grad students." His dissertation "covers the topic of black liberation theology."

The Institute has decent traffic, and it's not hard to see why. Professor Bradley--who calls himself a "kind'a post-modern guy"--and the other regular contributors make The Institute a worthwhile stop.

Friday, March 13, 2009

Demands for Housing Assessments Up, and Municipalities Are Feeling a Pinch

I attended a very nice property tax workshop yesterday in the state capitol complex in Lansing. It covered the implications for all of us, including those in government who rely upon property tax revenues, of falling housing prices--especially in a state with plenty of other economic challenges.

The best thing about the day was that it helped me better understand a time-series diagram included in this excellent article from the Grand Rapids Press. The point of the article is that demand is up--way up--for housing reassessment. Given that housing values have fallen, lots of people are interested in having their property value reassessed in the hopes of having a lower property tax bill.

Here's the diagram:

Now let me tell you what the article does not, which will help the diagram make more sense. The red line that rises and then falls is straightforward: it represents an average home's assessed value (i.e., 50 percent of its market value). Of course, since housing-market values rose, peaked in 2006, and have been dropping since, the red line follows an identical pattern. And normally a house is assessed for its value only at the moment it is sold.

But once a home has changed hands, a homeowner's taxable value on that piece of property is not normally linked after that to housing prices. Instead, a homeowner's taxable value--and long as she does not sell--normally grows either at the growth rate of the consumer price index or at a rate of 5 percent, whichever of the two rates is smaller. And that's what the blue line represents. For example, if you purchased an average home in 1997 for a market value of roughly $230,000, then your taxable value at that moment would have been half of that: $115,000 (as depicted). And normally, if you kept your house, then the taxable value of your house over the period would have grown according to the blue line. Note that the red line would have been irrelevant to you since (1) you were holding onto the piece of property--not selling, and (2) the market value of your house was growing faster than your taxable value. You would have been happy to be taxed according to the blue line, and not the red one. This rule is driven in Michigan by something called Proposal A (1994).

Now here's where it gets interesting for government officials relying on property-tax revenue for their municipalities. By law, for any household, the red line cannot be lower than the blue line. More specifically, for any given home, its taxable value cannot be higher than 50 percent of its market value. So governments throughout Michigan are facing the very real possibility that their property tax revenues will drop for huge sections of the state, as dropping market values of homes force the taxable value of homes downward.

The two lines are especially close for counties in the greater Detroit area, and also for Kent (which includes Grand Rapids), Ottawa, and Muskegon counties on my side of the state. Which explains why the local assessors in the article are especially busy with reassessments.

Thursday, March 12, 2009

Wednesday, March 11, 2009

Armenian Currency Loses 30 Percent of Value as Central Bank Abandons Intervention Efforts--Partial Rebound on IMF Loan News

Last week, Armenian monetary authorities abandoned efforts to maintain the value of the nation's currency, the dram (the Armenian word for "money"), against other currencies. The Central Bank could no longer afford to continue to purchase drams, resulting in a one-day depreciation of the dram of about 30 percent relative to the US dollar.

Later in the week, the dram experienced a partial rebound on news that the IMF had granted Armenia $540 million in emergency loans.

Click here for the latest value of the dram relative to other world currencies.

Assessing Risk: Visualizing the Numbers

A new article online at the BBC site will help you visualize what it means when you hear a news report about how some activity, food, or drink increases or lowers risk:
From bacon to booze, risks often make headlines: "CANCER UP X PERCENT IF YOU DO Y" - you know what I'm talking about. So I've devised a simple but different way of seeing stories, with a click-by-click Risk-o-meter.

Eurovision Organizers Dump Georgian Entry

As noted in an earlier post, Georgia's entry in this year's Eurovision pop song contest took a thinly veiled swipe at Russian prime minister Vladimir Putin. Now contest organizers have banned the entry, and the Georgians must either rework the lyrics, or submit a different song.

Tuesday, March 10, 2009

Europe Finding New Reason to Dislike US: Philosophical Differences over How to Deal with Economic Challenges

As the Group of 20 (G-20) industrialized and emerging nations prepares for its summit in London in early April, it appears that much of Europe disapproves of the "stimulus package" approach to current economic challenges.

As you no doubt know, here in the U.S. we recently passed a stimulus bill totaling $787 billion. Other nations have followed this strategy, with Malaysia the latest to arrive at the stimulus party. Today they passed their own stimulus package, with a price tag of 60 billion ringgit ($16.2 billion), roughly nine percent of their GDP.

But the Europeans are unconvinced stimulus spending is the best strategy, and nowhere is this contrast of views more clear than between the United States and Germany. Germany and other European nations would prefer a more forward-looking approach, focused upon how we might best address future possible threats in the financial sector--the source of much of our current distress.

Fed Chair Ben Bernanke echoed the sentiments of the Europeans yesterday, calling for comprehensive reform of the ways that we conduct oversight of the financial sector, as opposed to a piecemeal approach that could potentially leave unaddressed the risks that courted current market woes. He went on to claim that without such reform, sustainable economic recovery may not be possible.

Now, exactly what a new system of regulation might--or should--look like is not at all clear. But given Bernanke's comments, there may be some common ground for G-20 conversations in London after all.

Monday, March 9, 2009

Having Trouble Staying Focused? Pharmaceutical Companies Increase (Market) Concentration

This morning, pharmaceutical giants Merck and Schering-Plough announced merger plans. Merck will acquire Schering-Plough, in a deal worth about $41 billion.

Will the marriage prove a winner? Many anticipate more such unions between larger pharmaceutical companies, citing excess capacity among larger firms, in an industry in which recent innovations have come from smaller upstart firms.

Alas, the historical track record of mergers is not good. Nevertheless, at the start of many such marriages, there is the (perhaps faint) hope for what economists refer to as economies of scale. Simply put, these "economies" can arise when it is possible for a firm to reduce its average production costs as it adds to capacity. In this case, by streamlining things like research, production, distribution, marketing, etc., it may be possible for the larger merged firm to be more cost effective than its separate predecessors.

But the streamlining is not without short-term pains for some. As the firms consolidate operations, early estimates by the Merck CEO are that there will be a reduction in employment of 15 percent, and most of those layoffs will happen outside of the US, which makes companies like Fulford, a Schering-Plough subsidiary, nervous about the future.

Saturday, March 7, 2009

Center on Philanthropy Estimates that Proposed Limits on Tax Deductions Could Cut Charitable Giving by $4 Billion

The Indiana University Center on Philanthropy estimates that if the president's proposed limits on tax deductions for charitable contributions go through, charities might experience a drop in contributions as large as $3.9 billion. The administration is proposing capping the rate at which families making over $250,000 may use charitable contributions as deductions in calculating their taxable incomes.

Still more chilling:
But the center cautioned that giving is far more likely to be affected by the condition of the stock market than by President Obama’s tax proposals. It noted that every time the stock market declines by 100 points, giving declines by $1.85-billion. Charitable donations rise by that same amount when the stock market increases.
(Hat-tip: Rob Moll)

Worth Checking Out: Kruse Kronicle

Michael Kruse is a small business consultant living in Kansas City, Missouri. He describes his always-provocative blog, Kruse Kronicle, as "commentary and reflection on ministry and culture in the twilight of Western Christendom."

Mr. Kruse holds both an MBA and a master's degree in sociology, and is currently writing a book that integrates business and economics with faith. He also serves as vice-chair of the General Assembly Council of the Presbyterian Church (USA).

He has a great sense of humor. Here's his list of interests:
history, digital photography, writing, technology, soccer, jesus, emerging culture, road trips, practical theology, economic issues, urban hiking, presbyterian pcusa, annoying the cat, annoying presbyterians

Friday, March 6, 2009

The Efficient Market Hypothesis Debate Continues

The efficient market hypothesis--that the price of an asset (like the price of a share of stock) captures all available information about that asset--is taking a beating again in light of recent market volatility.

Here's a nice feature from the Economist:

"THE past ten years have dealt a series of blows to efficient-market theory, the idea that asset prices accurately reflect all available information. . . . There is now widespread acceptance that investors can behave irrationally, creating very large anomalies."

Thursday, March 5, 2009

Follow-Up: CNN's Richard Quest on Quantitative Easing

As I noted earlier today, the Bank of England announced its plans to engage in "quantitative easing": to purchase £75 billion of assets from private banks over the next three months (about US$105 billion).

Here's a lighthearted take on quantitative easing that only CNN's Richard Quest could provide:

One of My Favorite Economists: Irving Fisher

While not the household name that either Milton Friedman or John Maynard Keynes has become, Irving Fisher is one of my all-time favorite economists. And if you ever took a course in macroeconomics that studied the quantity theory of money or its basis, the equation of exchange, you were studying Irving Fisher.

Well, the Economist has published a wonderful piece about Fisher, in light of recent economic conditions:
"As parallels to the 1930s multiply, Fisher is relevant again. As it was then, the United States is now awash in debt. No matter that it is mostly “inside” or “internal” debt—owed by Americans to other Americans. As the underlying collateral declines in value and incomes shrink, the real burden of debt rises. Debts go bad, weakening banks, forcing asset sales and driving prices down further. Fisher showed how such a spiral could turn mere busts into depressions."
Yes, Irving Fisher was quite an economist. He even discovered the Phillips curve before Phillips did:

I. Fisher - I Discovered the Phillips Curve

Super-Pushing on a String? Bank of England Attempts "Quantitative Easing"

Since the early 1980's, most Western central banks have made interest rates their target variable for the conduct of monetary policy. Generally speaking, when an economy appears sluggish, a nation's central bank may try to lower interest rates. In doing so, the monetary authority hopes that businesses will take advantage of the lower rates to borrow money in order to finance new projects. From a business's point of view, lowering the rate makes its anticipated cost of financing smaller than the stream of increased revenues they expect as a result of undertaking the project.

If an economy appears to be overheating, which risks inflation, a central bank may instead do the opposite: attempt to raise interest rates so that firms forgo projects that would not be profitable at higher interest rates.

Now, let me try to illuminate what happens when a central bank "changes" interest rates. It's not as though the central bank changes the "price tag" of a loan. Instead, it manipulates the quantity of funds that commercial banks have available for loan-making, in an effort to manipulate the price at which loans are given.

For example, if a central bank wants loans to be cheaper (i.e., if it desires lower interest rates), then it increases the reserves that commercial banks have available from which they can make loans. And the way a central bank does this is by purchasing assets (such as government securities) from a commercial bank, and paying for them by making the commercial bank's reserves increase by the amount of the purchase--by electronically increasing the commercial bank's reserve account that it holds with the central bank. Hopefully, when banks find themselves with more to lend out, the price of a loan--the interest rate--will fall.

Bottom line: a central bank increases the supply of loanable funds banks have on hand in an effort to manipulate the price of a loan downward (bigger supply => lower loan prices). The central bank will continue to buy securities in this manner until it has manipulated the interest rate down to the desired value.

This works in exactly the opposite manner if a central bank wants loans to grow more expensive (i.e., wants to manipulate interest rates upward) in a hot economy that is courting inflationary risk. Instead of buying assets from banks and paying for them by electronically increasing banks' reserve accounts with the central bank, the central bank sells securities to banks--and reduces the banks' reserves as payment.

Bottom line: a central bank decreases the supply of loanable funds banks have on hand in an effort to manipulate interest rates upward (smaller supply => higher loan prices). And the central bank will continue to sell securities in this manner until it has manipulated the interest rate up to the desired value.

Traditionally there have been two major lines of debate regarding the role of a central bank where broader economic fluctuations are concerned. The first is whether a central bank should be involved in such manipulations at all. But let's leave that for another day.

The second debate concerns whether efforts to jumpstart a sluggish economy through low interest rates are as effective as attempts to reign in a hot economy using high loan rates. And the answer is "no."

Think of reigning in an economy through high loan rates as "pulling on a string." Raise interest rates high enough and nobody will borrow. Pulling on a string works.

Now think of cutting targeted loan rates as "pushing" on that same string. Sometimes, when firms are sufficiently pessimistic about future conditions, a nation's banks can't even give loans away (i.e., make loans at an interest rate of zero percent). Pushing on a string sometimes doesn't work.

So what's a central bank to do once they've cut their targets for interest rates as low as rates can be cut, yet the economy is still stagnant?

The answer is a practice called "quantitative easing." What it means is that a central bank can decide to ignore or forget about interest rate targets, and simply continue to purchase assets from banks, thereby adding still more funds to commercial banks' reserves. For example, in addition to cutting its target interest rate to 0.5 percent today, the Bank of England has announced that it will purchase an additional £75 billion of assets (roughly $105 billion) from banks over the next three months.

Some refer to the practice of quantitative easing as "money printing" because central banks have the power to create the funds they use to buy assets ex nihilo -- "from out of nothing." Remember, the payment is made from a central bank to a commercial bank simply through an accounting "blip": electronically making the commercial bank's reserves grow.

Well, on the bright side, the practice of quantitative easing isn't exactly "money printing" like we have seen recently in Zimabawe, where the government has had the printing presses going so much that they've experienced annual inflation recently of 231 million percent, and have needed to print a Z$100,000,000,000,000 bank note (that's 100 trillion, if you lose track of the zeroes). Nevertheless, quantitative easing adds liquidity to the banking system, as would literal money printing.

So, is quantitative easing a good idea? Does it work? We have only one historical test, and the evidence from that episode is unclear. And a serious inflationary or hyperinflationary spiral is a real danger as an unintended consequence.

Perhaps extreme times sometimes warrant extreme measures. But whether we find ourselves in times that are sufficiently extreme to call for "super-pushing on a string" is an open issue indeed.

Wednesday, March 4, 2009

Increase in Demand for an Undergraduate Economics Degree

The number of declared economics majors at Oberlin College (one of Hope College's sister schools in the Great Lakes Colleges Association) is up by 25 percent, reports NPR's All Things Considered:
"Host Robert Smith finds a similar surge in the classrooms of American University and across the country. So is undergraduate economics getting sexier? In a word: yes."
(Hat-tip: Michael Kruse)

Heavy Job Losses Again in February, While Other Indicators Better than Expected (and a really cool map)

According to ADP's Employer Services measure, a survey based upon payroll numbers, employers cut the number of US jobs by 697,000 in February, which was worse than expected.

But other numbers looked somewhat better, giving a glimmer of hope. Consumer spending, saving, and income were all up in January, according to the Department of Commerce.

Nevertheless, unemployment rates are soaring in the US, rivaling numbers from the recessions of 1973-75, 1979-80, and 1981-82. And for a really cool map of what is happening to unemployment rates throughout the nation, take a look at this. Generally speaking, current local unemployment rates appear to be related to recent local unemployment rates, a region's reliance on manufacturing jobs, and the local severity of the housing bubble.

Tuesday, March 3, 2009

Does Technology Grow Your Optimal Number of Friends?

With the advent of Facebook, Twitter, texting, and mobile phones, it feels like we can be more connected with our friends than ever before. And perhaps we can hold closely a greater number of good friends.

According to Oxford anthropologist Robin Dunbar, what limits our social connectivity isn't our access to technology, but our brains. Dunbar says that our brains limit us to successfully managing about 150 relationships in our wide circle of friends. And the number within our inner-circle is normally about 15: five friends held especially close, and another layer of ten just beyond.

Of course, technology makes it possible for any of us to increase both of these numbers. But do we?

New studies using data from sources such as Facebook suggest that Dunbar's 150 doesn't change, even as technology makes more friends possible. The average number of Facebook friends is 120. The new data also indicate that the average number of a person's most-close friends doesn't change either. In two-way communication (email or chat), an average person communicates regularly with just five or so Facebook friends.

So why don't we harness the new technologies to garner and keep more friends? Dunbar suggests it's a limitation of our brains to manage our social networks and connect with the others we choose to include in them.

But it might also be the case that we simultaneously pursue multiple things that we care about (jobs, family time, fitness, faith), and friends are merely one of the pursuits competing for our time. Faced with this situation, on average most of us draw the line at about 150 "friends," and about 15 in our inner circles.

And if you are reading this, you are in my 15. Honest.

Monday, March 2, 2009

What Does "Doing Without" Mean in 2009? Perhaps More Trips to the Movies and More Big Macs

In economics, "inferior goods" are goods that consumers buy less of as their incomes rise, instead opting for more desirable alternatives. For example, many college students swear they will never buy mac and cheese, or ramen noodles, ever again once they have their first "real" job. For them, macaroni and cheese, and ramen, are inferior goods. They plan to buy less as their incomes grow.

As incomes fall, the opposite happens: inferior goods begin to look more appealing than they did during times of higher income. For example, soup has often been identified as a product that does well during poor economic times. (And during good economic times, the marketing folks at Campbell soup have needed to work extra hard to remind us to buy their red and white cans: you may remember the "Soup is good food" campaign from headier economic times.)

Well, evidence is growing that fast food, and even trips to the movie theater, may be the new inferior goods. Even though they are hardly "necessities," and not that long ago were considered a bit of a treat, it seems that American consumers are turning to them as they become more concerned about their current and future income prospects. And it is certainly possible that "getting by on less" nowadays means eating at Burger King instead of Applebee's.

Sunday, March 1, 2009

Charities Nervous About Proposed Limits on Tax Deductions for Giving

US charitable organizations are nervous about proposed limits on tax deductions for contributions. Under the president's plan, families making over $250,000 would see the rate at which they are permitted to itemize such deductions capped at 28 percent--regardless of which bracket they find themselves in (estimated to be about 35 percent in 2010, and about 39 percent in 2011).

Now I hope that our national generosity of spirit will not be dampened in the event that the proposal goes through. After all, cheerful giving is the best kind of giving. But it is certainly possible that, at the margin, there could be disincentive effects. And CNBC's Maria Bartiromo is convinced the effects will not be small. Check out the language she uses: