on economics

Something bad happened in Iraq, well in perspective it's not so bad, but still...

2006-08-05T08:55:00.000-07:00

Iraq

USAID hid information on construction overruns by classifying them as overhead or administrative costs, according to a new report by the Special Inspector General for Iraq Reconstruction. The finding is based on an assessment of a children's hospital in Basra,which had a budget of only USD 50 million but estimation by contractor Bechtel put the actual price of completing the project to USD98 million. (NYT)

The Word from Europe

2006-08-05T08:52:00.000-07:00

European Union

African civil society groups have called on the governments to stop negotiations on the proposed Economic Partnership Agreements(EPAs) with the EU, saying it would undermine development and lead to increased poverty. Addressing a news conference in Nairobi,the 16 civil society organizations from southern and eastern Africa said the new trade deals being pushed by the EU would make thecontinent poor. (Xinhua)

Ukraine

The World Bank has approved a USD 154.5 million line of credit to Ukraine's state bank Ukreximbank so that it can lend to eligibleprivate-sector banks, which would then offer medium-term working capital or long-term investment loans to eligible private exportersto boost their export potential. Continued growth of exports is a priority of the government, said World Bank Country Director PaulBermingham. (Reuters)

Japan proposes Free Trade Area

2006-08-05T08:51:00.000-07:00

Japan

Japan will officially propose establishing a 16-nation free trade area (FTA) in the Asian and Oceania regions during a ministerialmeeting of the ASEAN nations and its partners, scheduled in Malaysia in late August. Japan's Economy, Trade and Industry Ministerhad in April unveiled the idea of launching such FTA talks in 2008; individual talks are already under way. (Asia Pulse)

***

Garunteed this will be an anti-China group.

Indonesia - now provides health care for children and pregnant women.

2006-08-05T08:49:00.000-07:00

Indonesia

In cooperation with the World Bank the government is initiating a cash-based program to send impoverished child laborers to school.The conditional cash transfer program, which is part of the effort to eradicate poverty and the worst forms of child labor, will betried out in six provinces as a pilot project. It will also provide health care for children and pregnant women. (The Jakarta Post)

***

In other news the Indonesian Government is also considering installing seats in buses and trains for pregnant women and the elderly.

India

2006-08-05T08:47:00.000-07:00

The Indian government has announced a ban on children working as domestic servants or in roadside food stalls. The order applies to children under 14 and comes into effect in October. It also bans children from teashops, restaurants, hotels, motels, resorts, spasor other recreational centers. There are an estimated 12.6 million child workers; many work as domestic helps or in small roadside restaurants. (BBC)

***

Welcome to the 1880s!

China does what it wants

2006-08-05T08:44:00.000-07:00

China

China will punish health workers who help to abort female fetuses, despite a recent decision not to criminalize the practice.China's legislature scrapped a bill in June that would have introduced fines and prison terms for aborting girls. But an official said that did not mean there was any relaxation in the policy against selective abortion. (BBC)

Afganistan Compact

2006-08-05T08:36:00.000-07:00

Afghanistan

The multi-billion dollar "Afghanistan Compact" blueprint for partnership between the government and international community to bolster security, economic development and counter-narcotics efforts has achieved solid progress since its adoption in January, but continued global support is needed to consolidate gains, an expert panel including the UN has said. (UN News service)

***

//Activate Development Decoder//
CMD: run.file,"devdecoder"

...reading

...key suspect prhases identified

1. "achieved solid progress"

2. "continued global support is needed to consolidate gains"

3. "expert panel"

...translating

1. no real gains were made but we will make it sound better by saying they improved anyway

2. no real gains were made but we said things improved so we had better cover ourselves. this is an excuse clause.

3. group of people who cloud issues and ideas with complex language so others can't question their ideas or solutions or expense accounts for that matter.

END TRANSMISSION

- TOVARISHCH

Uruguay - Pays debt early

2006-08-05T08:33:00.000-07:00

Uruguay

Economy Minister Danilo Astori has confirmed that Uruguay made an early debt payment of USD 900 million to the IMF. He said thedecision was based on the series of payments that Uruguay was scheduled to make to the IMF in 2007 and was partly funded by therecent placement of a USD 500 million 2022 bond, with the remainder drawn down from foreign reserves. (Dow Jones)

Zimbabwe - Inflation, Devaluation

2006-08-05T08:32:00.000-07:00

Zimbabwe

Zimbabwe's central bank has announced that three zeros will be taken off every banknote to help consumers deal with inflation ofalmost 1,200 percent. Zimbabweans have three weeks to exchange existing banknotes for a new series being issued from Aug.1. The bankalso announced what amounted to a 60 percent devaluation of the currency. (BBC)

Response one

2006-05-30T10:14:00.000-07:00

Here's my comment on the first link from Adbusters.

Sorry it's poorly organised, they upset me.

***

First of all I don't think Mr Saul is an economist. Mr Saul does not like economics because it involves mathematics. I would hazard a guess that Mr Saul cannot understand the mathematics of economics and would prefer economists not to use math so he may understand the arguments and make his own arguments in a social science fashion.

Economics does involve ethics and moreover economists have a unique set of ethics. For instance economists don't tend to distinguish between 'us' and 'them'. Economists focus on ideas that make everyone better off (Pareto-efficient). We leave ideas that make 'us' better off at the expense of 'them' to politicians. E.g. Most economists are in favour of immigration. While it has been shown (mathematically!) that immigration in the USA lowers real wages for American born HS drop-outs by between 0 and ~8% (it has no effect on unemployment). No social commentator considers the tremendous benefits to immigration for immigrants. It seems unduly harsh to greatly punish would be immigrants to marginally benefit poor Americans (who are rich in comparison). Unless Americans are worth more than Mexicans (economists value the two equally, unlike other social scientists).

Further, most economists realise the negative externalities of pollution and support programmes whereby polluters pay the full cost of pollution. Kyoto is an example of an economic solution to pollution. A Carbon Market attaches a value to pollution and forces to polluters to pay the costs of polluting. Increasing the price of pollution reduces the amount of pollution.

The vast majority of economists are still macro-economists. Lately more interesting work has been accomplished in Micro so you hear more of it.

Economists ought to be apolitical. The worst economics is done by economists trying to support one political side or another. It is simply bad science to start with your conclusion in mind and work towards it. The head economist for the CAW comes to mind. You can pretty much ignore everything he says as it’s political. For instance support for auto tariffs to protect auto workers is only good for the CAW, not the economy.

Here’s another plus for economists: people actually listen to them (unlike, say, social activists). Economists are much more likely to solve a problem than a social activist. Economics students aren’t coping-out and I resent such a statement.

Uh-oh

2006-05-28T18:48:00.000-07:00

It seems Adbusters, that bastion of intellectualism, has turned its head to the dismal science. No longer content to mock businesses they are now asking questions about economics. I haven't read all they work yet but here's the links:

Why are Students Leaving Politics Out of Economics

true cost economics

I'll try to answer their questions.

#

An Economist Plays Poker –

2006-05-28T11:04:00.000-07:00

I recently went to the Brantford Charity Casino and played poker. I hadn’t really played before. I was very nervous and had trouble following the rules and remembering the hands. I kept a card that told me the hands in my shirt pocket - much to everyone’s amusement.

Afterwards, I thought about the game a bit. I should have done it the other way around of course but that’s how I roll. To be successful in poker you must have skill and luck. Luck because of the role of randomness and probability in the game and skill to figure out the probabilities and the behaviour of your opponents. Poker is, essentially, about math and psychology. It so happens that economics is, essentially, also about math and psychology.

Game Theory (GT) could be useful in determining an optimal strategy to poker however there are several problems to it:

1) GT works best in a one-on-one situation (heads-up play), most poker games are not one-on-one.

2) Most players do not play optimally themselves. This is akin to building defences against an attack your opponent could never mount while ignoring the easy solution. You want to adopt your game to your opponent, therefore you’d need a different strategy against different (categories of) players.

GT can tell us something about optimal poker strategy.

A lot of the information in a poker game is hidden. I.e. you don’t know what cards your opponent has. GT is useful when deciding whether or not to bluff. Bluffing is not a method to win pots with bad hands, it is more complicated than that. If you get caught bluffing then your opponent will be more likely to call when you have a good hand. On the other hand a player who never bluffs will never win a big pot because if he raises the other player will fold before committing much money.

There is also the reverse bluff which is playing as if you have a bad hand when you have a good hand. In this case you call the raises of your opponent but don’t raise. The opponent will try to bluff you out of the pot by betting big. You call and win a big pot.

In 1944 John von Neumann published his work on poker and Game Theory in A Theory of Games and Economic Behavior. His conclusion was that you should only bluff with a bad hand not a moderately good one.

That’s because a modest hand may beat another modest hand so it is worth calling to the showdown if the stakes are low, otherwise you should fold. But a bad hand can only win if your opponent folds. Bad hands should be played aggressively or not at all.

Bluffing also forces your opponent to call your raises more frequently which allows you to win more money with good hands. I.e. your opponent won’t fold when you raise so when you have a good hand you will make a lot.

GT is not really useful due to the imperfection of human opponents however it is useful when building poker playing computer robots. Currently the most successful ‘bot is the University of Alberta’s SparBot which manages to beat most human players.

It is possible that GT and artificial intelligence will eventually solve poker, meaning that there is a correct answer to each situation.

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Oxfam and Fair Trade

2006-05-26T09:26:00.000-07:00

I'm not a fan of fair trade. Mainly because it implies free trade is somehow unfair. Of course people only trade if it is beneficial to both parties, otherwise why bother? On the other hand in fair trade one party decides what is fair and imposes that view on other parties. Clearly this is less fair.

Oxfam lists several issues and the 'explains' them to regular folks. It does so poorly and I feel the need to correct them.

Issue 1: Dumping

"Rich countries dump subsidised produce on developing countries, driving down the price of local produce - with devastating effects on the local economy. This unlevel playing field has made many poor farmers even poorer, or forced them off their land completely." (Oxfam, Make Trade Fair)

Ironically Oxfam probably also calls for increased aid to poor countries. If the EU declared they were going to subsidise food for people in poor countries Oxfam would applaud them. There is no difference between "dumping" (as Oxfam defines it) and food aid! People in the poor country should say thank you very much, take the cheap food, do something else, and laugh all the way to the bank.

So EU food subsidies may drive farmers off their land but this is not neccessarily a bad thing!

Issue 2: Market Access

"Rich countries limit and control poor countries' share of the world market by charging high taxes on imported goods. As a result, many poor countries can only afford to export raw materials, which give far lower returns than finished products.

"For example, the rich world buys cheap cotton and cocoa and turns them into expensive clothes and chocolate - reaping all of the profit. At the same time, poor countries are threatened with having loans withheld unless they open their markets to rich countries' exports." (ibid)

It's not clear why poor countries can only export raw materials. I assume the tariffs are lower on raw materials than finished products but this isn't stated.

The rich country is engaged in high value-added work while the poor is not. I think that by definition rich countries add more value than poor countries, i.e. they produce more = more money = rich!

Is Oxfam advocating free trade now or price controls on commodities? Would they understand the differances between the two approaches to solving the problem?

Issue 3: Forced Liberalisation

"Rich countries have long used the IMF and World Bank, and aggressive bilateral trade deals, to push open the door of poor countries' markets to a flood of cheap products but now rich countries plan to use the binding rules of the WTO to kick that door down altogether. " (ibid.)

The answer to issue 2 seemed to be free trade (if we realise that controlling world commodity prices is impossible, unless Oxfam becomes the de Beers of all commodities) but now Oxfam is against free trade. They don't state why though so I can't argue with them. Could this be a new strategy of debate?

Issue 4: Labour Rights

"Globalisation and trade have drawn millions of women in developing countries into paid work. Their labour is contributing to rising global prosperity and to the profits of some of the world's most powerful companies. But women workers are systematically being denied their fair share of the benefits from their labour.

"Companies' demands for faster, more flexible, and cheaper production in their supply chains are undermining the very labour standards that they claim to be promoting.

"Women workers – and their families – pay the price. Many face insecure contracts, intense production pressure, and intimidation in the workplace. Governments, competing to attract investment and boost exports, too often exacerbate the problem. Instead of strengthening protection for labour rights, they have simply traded them away.

"Oxfam and partner organisations around the world are campaigning to end these double standards and to make trade work for women workers. (ibid.)"

Basically, free trade increases competition and makes people (not just women) work harder.

Issue 5: Patents

Increased patent protection for companies in rich countries costs developing countries $40 billion each year.

Under pressure from powerful corporations, the rich world is insisting on stringent patent protection. This will push up the price of essential products like seeds, medicines, textbooks, and software.

Vital drugs will be priced out of reach of poor people. Fourteen million people die from treatable diseases every year. Many of these lives could be saved if cheap drugs were available. " (ibid.)

I can make up stats too! Let's see, without patents the global economy decline by 34%.

The reason poor people don't have access to medicines is not becuase they can't afford them it's becuase their government's are corrupt and haven't spent any money health care infrasructure.

I would refer you to a study I read recently but can't recall it's name. basically found that after Zimbabwe refused to recognise patents for anti-retroviral drugs not a single new patient recieved medication. The problem wasn't prices, it was the ineefective health infrastructure. Mercedes could be free but no one would get any in the middle of the sahara- there's no infrastructure for them!

Further poor countries could buy generic drugs from countries that don't recognise patents such as India or Brazil, this is perfectly legal. Yet the problems remain. It is very unlikely that patents are to blame.

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Had to read the article

2006-05-13T07:31:00.000-07:00

OK, I had to read the article just to be sure I was right. And I am.

Quoting from the Economist, "Baby boom and bust" 11 May 2006:

Lately, both men have been giving considerable thought to what impact the impending retirement of the baby-boomers will have on the prices of financial assets. They have reached sharply different conclusions, which they aired in a conference last month at the Milken Institute.

I can imagine that the options are: Either boomers sell stocks and no one buys, in which case the price falls, or boomer sell stocks but other people buy them, so nothing drastic happens.

There are not enough young people in the West to buy all the shares of the boomers (and keep prices at current levels) so people in the developing world will have to buy the shares. They have a much younger population. But they don't have nearly as much money. And given America's recent behaviour young people in China, India, Dubai, Brazil etc may not be allowed to own US shares.

Or boomers will continue to work longer as life expectancy increases. Despite the fact the opposite has been the trend.

It all depends.

Article can be found here:

http://www.economist.com/finance/displaystory.cfm?story_id=6914086

Baby boomers go bust

2006-05-13T07:25:00.000-07:00

The Economist asks: "Will share prices crash as baby-boomers sell their assets to pay for retirement?"

I haven't read the article but I know the answer. It's the answer to all questions about economics.

Do you want the answer to all economic questions? Do you? You can probably handle it as it's quite simple:

The answer is: It Depends!

Read the article and let me know if I'm right.

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David Dodge to FOREX MKT: The price is wrong, biatch!

2006-05-04T07:43:00.000-07:00

David Dodge, the Governor of the Bank of Canada, told the senate that the Canadian dollar is not priced correctly according to market fundementals. He also reported that the price of oil was not "screwey" given market conditions.

David Dodge later corrected Bob Barker, informing him that according to market conditions the price of the GE Fridge was actually $1,997 not the $2,013 as claimed by Barker. Dodge was not awarded the prize.

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The International Development Review

2006-04-28T07:29:00.000-07:00

UN News

The UN is now better able to screen prospective contractors and other partners for any involvement in criminal activity -- such asmoney laundering, drug trafficking or terrorist financing -- with the donated assistance of the world's leading researcher of suchinformation, a humanitarian official announced this week. The company, World-Check, joins Eriksson, which provides communications,and DHL, which assists in logistics, as private sector partners for swifter and more effective emergency humanitarian response,particularly crucial in such large-scale disasters as the Indian Ocean tsunami of late 2004, said Kevin Kennedy, Director of theCoordination and Response Division of the Office for the Coordination of Humanitarian Affairs (OCHA).

Addressing senior economic officials from across the world gathered at UN Headquarters in New York, Secretary-General Kofi Annantoday spoke out in favor of "genuine market access opportunities" for developing countries and a rapid termination oftrade-distorting subsidies for agriculture in the developed States. He told a key ECOSOC meeting that rich countries should take"bold measures" to facilitate a successful conclusion of the currently stalled Doha trade talks. Annan's remarks were heard byfinance and development ministers and high-level officials of the World Trade Organization (WTO), the IMF and the World Bank, alongwith representatives of the 54-member Economic and Social Council.

World News

Africa

Eritrea

A senior U.N. envoy said April 26 he had failed, at the start of a visit to five drought-hit countries in the Horn of Africa, topersuade Eritrea to release 100,000 tons of food aid locked in warehouses. Last week, aid officials warned that thousands of tons offood aid from western donors might be rotting in storage because of Eritrea's restrictions on humanitarian handouts. (UN Newsservice)

Kenya

The agency spearheading the fight against AIDS, tuberculosis and malaria has agreed to new funding for Kenya despite the country'sdelay in submitting an audit for a first tranche, a spokeswoman said April 26. The Global Fund has approved a USD 70 million,three-year HIV grant and is negotiating the terms and conditions with the country. (Reuters)

Summary: Aid is ineffective. It rots in warehouses. Aid is given out on condition that it is used appropriately. If it is not used appropriately it is still given out.

Europe & Central Asia

Belarus

Thousands of Belarussians marched through central Minsk April 26 marking the 20th anniversary of the Chernobyl disaster and vowingto turf President Alexander Lukashenko out of office within two years. Liberal opposition leader Alexander Milinkevich tolddemonstrators it was up to them to create awareness, take action, and speed the pace of change. (Reuters)

Kyrgyzstan

Opposition groups and civil society activists are gearing up to hold nationwide demonstrations on Saturday to call for greaterreform in Kyrgyzstan, more than one year after public protests swept former president Askar Akayev from power. The country haswitnessed an upsurge in people demonstrating openly since last year's so called Tulip Revolution. In early April, opposition andsome civil society groups held a protest against organized crime in the country. (IRIN)

Middle East & North Africa

Israel

With donors balking at funding the Hamas-led Palestinian Government, tension between that administration and President MahmoudAbbas' Fatah, increasing violence and lawlessness, and continued settlement expansion by Israel, the situation in the Middle Easthas reached a volatile juncture, Alvaro de Soto, the UN Special Coordinator for the Middle East Peace Process told the SecurityCouncil in the monthly briefing on the issue. (UN News service)

Palestinian Authority

Concerned at the prospect of a further deterioration in the living conditions of Palestinians in the new political climate,Secretary-General Kofi Annan said April 26 that the UN would most likely increase the scale of its assistance and urged intensifieddonor support to the people, while stressing that the Palestinian Authority remains critical to averting a humanitarian crisis. (UNNews service)

#

From The The Development Executive Group.

Published by The Development Executive Group
(http://www.DevelopmentEx.com)

The Briefing is a free news and information service. Unauthorized commercial reapplication, reproduction or retransmission of the Briefing, in whole or in part, is prohibited.

Dead Chuffed

2006-04-19T09:58:00.000-07:00

I'm really quite pleased to find this on Slate.com.

Tim Harford wrote an article on confusing prices of cell-phone plans.

I'll copy and paste it below.

I had a similar thought so I'm really quite pleased because usually my thoughts are grossly erroneous.

Well here's the article:

Confusion Pricing
Why cell-phone plans are so hard to understand

For nearly two months, a glossy magazine from my cell-phone company has been lying around the house. I took it with the express intention of choosing a decent calling plan, but so far, little progress. Occasionally, I pick it up and thumb it listlessly. I admire the colorful pictures but cannot get my mind around the different pricing options.
The permutations include on-peak, off-peak, in-network, out-of-network, joint accounts, "bundles" of this and that, and a variety of additional offers conditional on my signing some form of longer-term contract. The choice is bewildering.
Usually, I have little sympathy for those who complain about the agony of having to choose. If the choice is important, such as when buying a house, then it's good to have the choice even between fine details. If the choice is not important, such as that between the 55,000 drinks alleged to be available at Starbucks, then few of us acquire gray hairs making it.

But the range of cell-phone tariffs isn't that kind of choice. All we're being offered is a number of different prices. Unlike the choice between the venti caramel latte and the small black coffee, the choice between "Any network anytime 200" and "Any network off-peak 1,000" is not a matter of taste. There's a correct answer and dozens of incorrect ones, and a computer armed with your phone bill and your company's pricing plans could work out, with hindsight, what you should have done.

With neither the computer nor the hindsight, you can end up paying far more than you should. You will also struggle to discern who is offering the best deals. So it's tempting to conclude that the confusion is deliberate.
Economists haven't had much to say about confusion pricing until recently. We find it hard to talk about the subject because the Vulcans who live inside our economic models don't get confused.

However, Eugenio Miravete, an economist at the University of Pennsylvania, has been studying how humans, not Vulcans, behave when choosing between confusing calling plans. His somewhat surprising conclusion is that customers don't leave much on the table. They are good at judging which calling plan will cost least, and good at switching if their initial guess is wrong.
I wasn't sure what to make of Miravete's research. It is limited by the availability of detailed data, so Miravete only studied the early days of confusion pricing, when the choice was between just two calling plans. My company offers 10, plus innumerable combinations of frills and top-ups. I face much more demanding calculations than the ones Miravete studiedÂhence my well-thumbed magazine and no decision.

But something strange happened after I read about Professor Miravete's intelligent, motivated subjects. I felt ashamed and was galvanized into calling my phone company. I spoke to a lady called Katie, who was very quickly able to tell me how much I was paying, and for what, before suggesting a couple of different plans that look likely to save me 10 or 15 pounds a month. Not bad for a five-minute phone call.

The whole experience suggests that confusion pricing is not really about trying to entangle every customer in an impenetrable web of complex offers. Instead, it's a very simple screening device to spot customers with money to burn. If you don't care enough about your phone bill to ask Katie for a spot of advice, then you can obviously afford to pay a little more.
I did wonder whether my life might be made even easier, though. Couldn't the phone company just use its computer to offer me the best deal, with hindsight, each month?
"I'm afraid we can't do that," said Katie, rather sweetly. "I don't know why. That is the way things have been organized for some time."

Tim Harford is a columnist for the Financial Times. His latest book is The Undercover Economist.

eBay economics

2006-04-10T20:41:00.000-07:00

I recently started selling on eBay and then I started thinking about it. Should, perhaps, have done it the other way round.

If eBay is one of the most efficient markets (as is claimed) how likely is it that one could actualy make money by selling on it?

One always hears of friends of friends who buy stuff and sell them on eBay for more than they paid. But this seems unlikely. eBay is much better for buying.

The oppurtunities for arbitrage should be pretty low too.

Profit max. may not be the goal of all sellers. A lot of people just want to get rid of junk they'd sell the item for less than they paid- this must pull all prices down.

I've found some studies on optimal eBay strategies that I plan to read.

I've noticed NBER gives away their research while John Doe sets up a website to sell his AMAZING EBAY TECHNIQUES!!!!!!!!!!! Maybe I'll just recycle NBER (and other) research into an eBook and sell that on eBay. I'd eaither be taking advantage of suckers or responding to market incentives to collect information depending on your point of view.

Would no one do the job for less?

2006-04-09T09:26:00.000-07:00

The New York Times reports that CEO's make a lot of money while workers do not. Moreover the pay of CEOs rises faster than the pay of workers.

It's gotten to the point where CEOs make a lot of money no matter what they do.

"Mr. Rohde, 57, received more than $45 million during his eight years at the helm, and was given an estimated $20 million retirement package as he walked out the door.

"Each year from 1997 to 2005, when Mr. Rohde led ConAgra, he was awarded either a large cash bonus, a generous grant of stock or options, or valuable benefits, such as extra years' credit toward his guaranteed pension.

"But the company, a food giant with more than 100 brands, struggled under his watch."

The article discusses some reasons why a CEO would make so much:

- "Compensation Consultants" recommend that CEOs be paid a lot so the CEO later hires them to consult again in the future.

- Shareholders don't complain.

- “Compensation Committees” are reluctant to withhold bonuses.

- Recruitment of “Celebrity CEOs” bids up the price of all CEOs

Now perhaps there’s an economic answer.

I’d venture to say that part of the problem is agency costs – things like shareholders not being able to contain executive pay – but there could be more to the issue.

Mr Rohde made 65 million USD in 8 years at ConAgra. He didn’t do a good job; the company actually did worse under his watch. So Mr Rohde made 65 million USD for failing to maintain growth. There should be lots of people in the labour market willing to run a large company for less than 65 million USD. Lots of these people would be capable of performing poorly.

Why couldn’t ConAgra find a CEO willing to do the job for 60 million USD? Or for that matter 30 million USD or even 8 million?

If they hired me for 8 million USD for 8 years that act alone would have saved 57 million USD. If I didn’t show up to the office the company would probably not be in any worse shape. It would probably slowly do worse just as it did.

Perhaps something is preventing qualified workers from entering the CEO labour market. With a reduced supply and reduced competition wages for CEOs have risen.

The question is, what prevents more workers from becoming CEOs?

And, as usual, I’m not sure.

People are lazy and stupid

2006-04-08T12:37:00.000-07:00

A paper by NBER Economists called Paying Not to Go to the Gym (no subscription needed) talks about the same things as the last post but for gym memberships. And of course they actually find the answers!

They find that people overestimate their gym attendance and buy memberships suitable for frequent users. They end up paying more per visit then they would if the chose an option for less frequent users.

Of course people may over-estimate going to the gym for different reasons than they would over-estimate cell phone use. They may force themselves to pay more as an incentive to use the gym more.

Lots of people get the monthly gym membership, which automatically renews each month, but keep it for over one year. They would have been better off with the annual membership. They also don't get around to cancling the membership.

Finally, proof that people are lazy and stupid!

Confusion Costs

2006-04-08T12:01:00.000-07:00

I've always found the options for different cell phone plans confusing. I've never had a cell phone and I'm not sure how many minutes I would need, I also don't know when I'll use these minutes (evening, weekends, anytime etc.). So I would have an especially hard time deciding if I should get a plan with a high monthly fee and lots of minutes or a low monthly fee and a high cost per minute and whether I'd need the more expensive anytime minutes or the evening/week-end minutes.

But even if one knew exactly when I would use the phone and for how long one would probably still have trouble choosing the optimal plan.

I understand that these menu options are designed to capture consumer surplus by having consumers (partially) reveal their willingness to pay for airtime minutes. For instance the firm can separate buyers who only want a few minutes (and thus are willing to pay more for them) from the buyers who demand lots of minutes (at a lower per unit price).

It also appears that the options may be intentionally confusing (or rather that the confusion is beneficial to the firm, it may be unintended).

People don’t really know how much they will use the phone and seem to err on the side of caution (i.e. buy more minutes then they need.) I’m not sure why but here’s some ideas:

- They just overestimate use
- They reason that they’d rather have more minutes then not enough
- It’s difficult to imagine how many minutes you spend on the phone
- They don’t want to worry about using minutes up so they get more than average
- If they buy more minutes they may use them
- Cost per call is lower if you purchase more minutes, buyer over emphasises this

Questions I have:

Would people still over-estimate their demand for minutes if the plans were less confusing? i.e. is the problem that it’s difficult to estimate usage or is the problem the menu options are not clear (imperfect information)?

Is the price difference between pay-as-you-go options and contracts greater than the cost differences? i.e. are consumers punished for only paying for as many minutes as they use?

What are the cost differences to the firm? Firms must prefer that users declare how many minutes they will use in advance- that would decrease uncertainty over actual demand.

Why is the price less per minute if you buy more minutes under a contract plan but price is constant if you pay-as-you-go? You could, in theory, receive a discount if you buy more minutes at a time.

Pay-as-you-go may have a zero monthly fee but the fixed cost of the phone is higher. Often the phone is free if you get a contract.

What’s the break down of costs and benefits to the firm? E.g. what’s the value of a contract, i.e. the value of having the customer commit to 3 years of service? What benefits does the customer receive in return for committing? Is the free phone really free or is it’s cost spread out over the 3 years of monthly payments. And man more.

What are the optimal plans and how many customers purchase the plan optimal to them?

How would one get answers to these questions?

The News in Development

2006-04-07T09:32:00.000-07:00

More Aid is being handed out:

Government aid to developing countries rose almost a third in 2005 to hit a record high of USD 106.5 billion, the OECD said April 4.
But a large portion of the increase was accounted for by debt write-offs granted to Iraq and Nigeria, Dow Jones reports. New flows
of aid from the 22 rich countries that are members of the OECD's Development Assistance Committee rose 8.7 percent to USD 83.5
billion. The Paris Club of creditor nations, which is largely made up of governments that are also members of the DAC, granted USD
14 billion in debt relief to Iraq, and a further USD 5 billion in debt relief to Nigeria. That represented a quadrupling of aid in
the form of debt relief compared with 2004. The Financial Times (UK) writes that the OECD's development assistance committee also
said last year's aid figures were boosted by USD 2.2 billion in aid to countries affected by the December 2004 Indian Ocean tsunami.

IMF chief Rodrigo Rato on April 4 proposed a multilateral forum where developing and industrialized nations can address ways to
rebalance the global economy, although he acknowledged the Fund lacked tools to force multilateral action, reports Reuters. The IMF
has so far been "insufficiently persuasive" in its advice to member countries on global imbalances, Rato said in prepared remarks at
Harvard University. The speech comes as the IMF conducts a strategic review to modernize itself and amid increasing pressure from
its 184 member countries over its effectiveness in fixing imbalances.

[I’m not sure but I think “rebalance the global economy” means “increase aid dollars.”]

Governors of the Inter-American Development Bank have agreed to analyze the possibility of the bank participating in a multilateral
initiative to cancel the debt of its poorest member states, Dow Jones reports. The committee of the IDB board of governors will
study the subject in the coming months and subsequently will present its report to the board, the IDB said in a release early this
week.

Where does it go?

Congo

The IMF has reached an "understanding" with the Republic of Congo on economic policy for 2006 and noted that tackling corruption and
reducing poverty should be priorities. In a statement after visiting the Congolese capital of Brazzaville, the IMF staff said
economic growth in the impoverished West African country would likely remain high at around 7.5 percent of GDP in 2006, down
slightly from 8 percent in 2005, driven mainly by oil revenues. "Strengthening good governance remains a major priority and decisive
steps in this area will be critical to achieve economic progress and secure an efficient, pro-poor use of public resources," the IMF
said. (Reuters)

Kenya

The World Bank is willing to assist Kenya recover assets abroad that were acquired through money obtained through corruption, World
Bank President Paul Wolfowitz told Finance Minister Amos Kimunya. A statement from the ministry said, "Wolfowitz expressed the
Bank's willingness to support the Kenya government to recover assets that were obtained through corrupt practices." It is estimated
that about 70 billion shillings (about USD 983 million) acquired irregularly has been stashed in foreign banks. (The Daily Nation)

Vietnam

The World Bank has welcomed the Vietnamese government's actions to tackle a major embezzlement scandal but said the investigation
into the misuse of foreign aid should continue. Transport Minister Dao Dinh Binh resigned and his deputy was arrested in a scam in
which millions of dollars including foreign money intended for infrastructure projects were looted in the ministry's Project
Management Unit (PMU) 18. The World Bank over the past six years disbursed around USD 80 million to PMU 18 for about 1,000 different
projects (AFP).

Egypt

Last-minute cancellation of a scheduled meeting between representatives of international rights group Human Rights Watch and the
Cairo-based Judges' Club exposed the judiciary's lack of independence from the authorities, local activists said. "The decision
reflects the grim reality faced by the judiciary in Egypt," said Nasser Amin, director of the Arab Centre for the Independence of
the Judiciary. An HRW delegation was set to meet with top members of the Club April 5. But after pressure from the authorities -- in
the form of slur campaigns in the state-run press and statements issued by top judicial bodies --the Club announced its decision to
withdraw from the meeting. (IRIN)

Or in other words:

More money is being spent on aid. Most of the governments who receive aid are somewhat less than ideal. Corruption, lack of good governance, and aid waste diminish the usefulness of aid money.

And Yet…:

… it’s impossible to question the merit of giving aid. The problem is it’s difficult to criticize aid donors because they are doing a ‘good thing.’ You’d sound like a jerk if you pointed out that aid isn’t very useful and maybe the money could be better spent.

Different Types of Traders

2006-04-07T07:20:00.000-07:00

My last post was about a method of investing commonly termed contrarian investing. That is you do the opposite of what other people are doing. When everyone is excited about something and buying it, you sell it. And when people are bored by an investment and want nothing to do with it, you buy it. Often these people will charmingly remind you that sheep get slaughtered.

The opposite of contrarian investing is trend investing. Trend investors buy on the up swing and sell on the down swing.

Then there are social traders. They buy and sell on news from peers. For instance they act on ‘hot tips’, news, commentary, recommendations. It’s possible for social traders to act as contrarian or trend traders depending on who they listen too. They don’t necessarily act as one of the two though.

My personal favourite group are random traders. They buy and sell randomly. Their returns will approximate a Gaussian (Normal) distribution. They make a good control group and are useful at showing ‘experts’ that they don’t know what they’re doing.

If you’ve ever read one of the newspaper articles where top stock pickers compete against each other they often include a random trader (sometimes called the monkey). And of course the monkey sometimes does better than the experts (who are quite clever but not quite clever enough) and the newspaper can delight in pointing this out.

I always like the random traders because they show that it’s not possible to tell if an expert is skilled or just lucky.

The Stock Market

2006-04-07T07:19:00.000-07:00

I don’t know much about the stock market but I’ve never let that prevent me from talking about something.

The stock market is where hard data hits soft emotions. You’d think the data is more important but really it matters most what other people think is important. Actually it matters most how other people act. I’ll go out on a limb and say most people have emotions. Investors swing between excited and scared while stocks surge and sink, respectively.

Lately stocks have been surging and investors have been excited. NASDAQ is at a 5-year high, the Russian stock exchange is at an all-time high as are the Indian and several other exchanges.

The Chicago Board Options Exchange’s Volatility Index (VIX) is near an all time low. The VIX is basically a measure of fear. If you are fearful of something happening in the stock market you can buy the VIX to hedge that risk. The VIX and the stock market have a negative relationship.

Of course I have no clue what will happen, I can just note that stocks are at all time highs and the VIX is near an all time low. That is, the cost of insurance against a strong correction is cheap. And cheap is good- sometimes.

Silver and Gold

2006-04-06T20:32:00.000-07:00

Gold hit 600USD an ounce.

The USD is at a 7 month low against the euro. Oil is high, commodities are high, Iran built some sort of new missile and everyone is talking about Gold.

So I won't add to the din.

Silver is looking interesting.

Silver is used in industry to manufactur electronics- it's very good at conducting eletricity. The electronics industry alone uses up 44% of all the silver produced each year. When silver is used for industrial purposes, it is used up and burned away. Total world silver supply has decreased apprx 86% in the last few years. Demand has risen for silver's intrinsic value; like gold, people just feel more comfertable holding it when life looks uncertain. But demand is also on the rise for silver's industrial value. People keep making electronics and they're making more of them each year. That uses up silver.

So let's see... what happens to price when demand goes up and supply goes down...?

Why can't I think of this stuff?

2006-04-06T16:10:00.000-07:00

This is much more interesting then what I have to say.

Basically the US bribes countries with Foriegn Aid in return for support at the UN on the security Council.

Read about it here.

Why do we have to line up for stuff?

2006-04-06T15:23:00.000-07:00

Here's something that came to mind the other day.

Prices don't change nearly as much as they should. We shouldn't really have line-ups becuase prices should just change.

Why do hotdogs cost the same at 12.00pm as they do at 3.00pm?

Why don't bars increase the cover when there are large lines and drop them when it's empty?

Why do restaurants charge the same for a meal on Friday and Saturday nights as they do on Monday nights? If they can discount lunches and breakfasts why not price discriminate based on days? This wouldn't be a bad idea. Instead of waiting an hour for a seat I could just pay more. I should be indifferent between paying more and waiting as waiting has an oppurtunnity cost to me. As long as the price increase is less that the opp. cost then I would actually be better off paying more for a meal on Fridays and Saturdays. And if the cost increase is higher than my opp. cost I would just go home. As some people would go home you'd reduce the wait time.
It seems that everyone would be better off. Customers wait less and owners make more.

It wouldn't neccessarily be inefficient as people unprepared to pay for peak service would still be served at off-peak times. In fact during off-peak times prices should fall from current levels.

Current prices must be somewhere between peak and off-peak price.

I'm not sure why this doesn't happen.

French Riots

2006-04-06T15:20:00.000-07:00

French students are rioting because of some changes to a law designed to reduce unemployment. Why would they do such a thing? The people in the street are probably not economists, or at least not very good ones. The law makes it easier for youth workers to be fired. They can be fired within the first two years of their employment without reason. This makes it more attractive to hire young workers. Currently, no one wants to hire young workers because it’s difficult to fire them. Employers have to go in front of a Labour Tribunal and explain why they are firing the worker or they have to pay very large severance packages. This makes firing difficult so employers think twice about hiring. In other words, the labour market is inflexible.

Inflexible labour markets tend to get stuck at levels of employment that are not ideal. The market adjusts very slowly. Employers don’t fire workers; they have to wait for workers to retire. Similarly in a period of expansion employers are reluctant to hire new workers because they will be stuck with them. They prefer to offer overtime.

Of course these days French workers have to compete with Asian workers who are prepared to work for much less as well as with Eastern Europeans who are now allowed to work in France without restriction.

Just in case Americans are feeling smug about the whole episode I have bad news. One constantly hears that America is the world’s most dynamic economy (whatever that means). The most advanced economy in the world etc. Yet the talk these days is all about protection.

No one has every satisfactorily explained to me how paying more for inferior products raises living standards. If not trading was the ticket to wealth North Korea and Cuba would be the richest nations on earth. Instead small open economies are the best off. Hong Kong, Singapore, Taiwan got it going on.

Far be it for me to complain about how the world works or try to change it. I’m content to just try to understand it.

First Post

2006-04-06T09:47:00.000-07:00

I'm going to try to post my (first) thoughts on economics here. I may end up posting other people's thoughts if I don't happen to have any of my own.

That's the idea though.