THE DISMAL SCIENTISTS

The Power of a Good Analytical Argument

2012-01-30T17:19:00.000-05:00

I love a good analytical argument, especially when it is simple and well written.

Higher Taxes Help the Richest, Too

By ROBERT H. FRANK

Published: January 28, 2012

Letting tax cuts expire would have little effect on the wealthiest Americans’ ability to spend, but would ultimately give them better roads and cleaner air.

http://www.nytimes.com/2012/01/29/business/higher-taxes-help-the-richest-too-economic-view.html

Let the Election Time Viral Emails Begin!

2012-01-05T12:55:00.000-05:00

OK. Soif you are going to send out a viral email to try and explain the US budget anddebt issues by making an analogy between the US government debt and householddebt, at least make a serious attempt.

The following was emailed to me the other day promising to answer all my questions. Yeah, right.At the very least, I hope you will learn more from my attempt.

___________________________

CANNOT BE BETTER EXPLAINED….TAKE THIS TO THE BANK.

This rather brilliantly cuts thru all the political doublespeak we get. It putsit into a much better perspective.

Lesson # 1:

* U.S. Tax revenue: $2,170,000,000,000
* Fed budget: $3,820,000,000,000
* New debt: $ 1,650,000,000,000
* National debt: $14,271,000,000,000
* Recent budget cuts: $ 38,500,000,000

Let's now remove 8 zeros and pretend it's a household budget:

* Annual family income: $21,700
* Money the family spent: $38,200
* New debt on the credit card: $16,500
* Outstanding balance on the credit card: $142,710
* Total budget cuts: $385

Got It ?????

OK now Lesson # 2: Here's another way to look at the Debt Ceiling:

Let's say, You come home from work and find there has been a sewer backup in your neighborhood....and your home has sewage all the way up to your ceilings.

What do you think you should do ......

Raise the ceilings, or pump out the crap?

Your choice is coming Nov. 2012

__________________________________________________________

My edited version. Additions to the original in bold with an explanation.

* U.S. Current dollar GDP: $15,492,000,000,000 (US Household Net Worth: $58,000,000,000,000 and doesn’t include value of federal and state land, infrastructure, and equipment)
* U.S. Tax revenue: $2,170,000,000,000 (Social Insurance & Retirement revenue: $900,000,000,000)
* Fed budget: $3,820,000,000,000 (Social Insurance & Retirement spending: $1,750,000,000,000; Military spending: $768,000,000,000)
* New debt: $ 1,650,000,000,000
* National debt: $14,271,000,000,000 (Outstanding public debt: $9,657,000,000,000, of which $4,656,000,000,000 owed to foreign investors, and Intergovernmental holdings: $4,614,000,000,000)
* Recent budget cuts: $ 38,500,000,000

Tax revenues are significantly lower because the economy has sustained a long period of above average unemployment and underemployment that decreases personal, corporate, and social insurance and retirement taxes. Spending is significantly higher because of increased unemployment compensation and spending on other means tested income security programs that more people are qualifying for given the current economy. Spending is also significantly higher for the military where spending is 2 times greater than spending in 2002. The part of the national debt owed to the public, corporations, and foreign investors is about 62% of GDP or 16% of national net worth. The largest foreign holder of US debt, China, holds 11.7% of the public debt; Japan holds 10%.

Let's now remove 8 zeros and pretend it's a household budget:

* Value of family’s current annual assets: $154,920 (Family’s total net worth: $580,000)
* Annual family income: $21,700 ($9,000 put aside for health care, job loss, an elderly member of the household)
* Money the family spent: $38,200 ($17,500 spent on health care, job loss, retirement spending; $7,680 spent on insurance and protection)
* New debt on the credit card: $16,500
* Outstanding balance on the credit card: $142,710 ($96,570 owed to creditors, of which $46,560 is owed to foreign creditors at low fixed interest rates, and $46,140 that you borrowed from yourself – no interest, so not like a credit card)
* Total budget cuts: $385

Remember, your annual family income is down because you and your spouse were unemployed at various times throughout the year. Also, because your annual income was lower, you weren’t able to set aside as much for health care and Uncle Ernie’s retirement. Your spending was higher because your kids lost their jobs and moved back in with the family. You are still paying for your retired Uncle Ernie’s expensive habits and he just turned 90 (good for him, but you didn’t think he’d still be living with you for the past 15 years).

You had to dip into your retirement nest egg to borrow $46,140 which you treat as borrowed money to be paid back if things improve (no interest rate costs). You have also borrowed another $96,570 over the years, about $50,000 from your neighbors and local businesses/banks (like a credit card but at very low fixed interest rates). You borrowed $46,560 from foreign lenders (like a credit card issued from a foreign bank, but again, at very low fixed interest rates). Despite what you may have read in another viral email, of the debt you owe to foreigners, you owe about 11% or $11,370 to China and $9,790 to Japan. Therefore, of your total debt including money you borrowed from yourself, you owe China about 8%.

I'm pretty sure that if we posted the actual balance sheet of the average American household, our analogous household above would stand up pretty well.

And regarding Lesson 2? Is that really the best we've got?

What is college for?

2011-12-16T12:06:00.000-05:00

"In particular, the university curriculum leaves students disengaged from the material they are supposed to be learning. They [students] see most of their courses as intrinsically “boring,” of value only if they provide training relevant to future employment or if the teacher has a pleasing (amusing, exciting, “relevant”) way of presenting the material. As a result, students spend only as much time as they need to get what they see as acceptable grades (on average, about 12 to 14 hour a week for all courses combined). Professors have ceased to expect genuine engagement from students and often give good grades (B or better) to work that is at best minimally adequate."

Opinion

The Stone: What Is College For?

By GARY GUTTING

Published: December 14, 2011

Our views on the "failure" of higher education may be based on a basic misunderstanding of its essential function.

http://opinionator.blogs.nytimes.com/2011/12/14/what-is-college-for/

Intellectuals and Politics

2011-12-09T08:33:00.001-05:00

We discussed something similar in Health Economics on Thursday...

NYT Opinion
The Stone: Intellectuals and Politics... Good politicians don't need to be intellectuals, but they should at least have intellectual lives.
By GARY GUTTINGPublished: December 7, 2011

"It’s often said that what our leaders need is common sense, not fancy theories. But common-sense ideas that work in individuals’ everyday lives are often useless for dealing with complex problems of society as a whole. For example, it’s common sense that government payments to the unemployed will lead to more jobs because those receiving the payments will spend the money, thereby increasing demand, which will lead businesses to hire more workers. But it’s also common sense that if people are paid for not working, they will have less incentive to work, which will increase unemployment. The trick is to find the amount of unemployment benefits that will strike the most effective balance between stimulating demand and discouraging employment. This is where our leaders need to talk to economists." (emphasis added)

Link to full article:
http://opinionator.blogs.nytimes.com/2011/12/07/intellectuals-and-politics/

Presidential candidates slip on Econ 101

2011-11-09T10:53:00.000-05:00

Interesting read on CNN.com today...

Economics: Presidential candidates slip on Econ 101 - Nov. 9, 2011

The Social Contract

2011-09-23T09:33:00.000-04:00

Check out Krugman's op-ed today on The Social Contract (http://www.nytimes.com/2011/09/23/opinion/krugman-the-social-contract.html).

Also check out Elizabeth Warren's explanation of the social contract, one of the best simple descriptions I've heard and I hope some of our political leaders plagiarize it.

http://www.youtube.com/watch?v=htX2usfqMEs

Rising Income Inequality: The Class Warfare Debate

2011-09-23T09:21:00.000-04:00

The following is my comment to Paul Krugman's blog post titled, "Millionaires, the Middle Class, and Taxes" on 9/21 in the NYT.

http://krugman.blogs.nytimes.com/2011/09/21/millionaires-the-middle-class-and-taxes-actual-numbers/

Regarding the often quoted argument that the wealthiest Americans (previous comment noted Top 400) pay more nominal dollars in tax today than they did in the 90s despite higher tax rates in the 90s - and isn't that better?...
Consider this, due to deregulation of the banking system and many pro-business regulations in the 2000s, the top 0.1% of the population (>$2,000,000) saw their incomes grow over 14% per year while 90% of taxpayers saw their incomes grow at 0.8% per year from 2002-2007 (CBPP). Regardless of the tax rate on the wealthiest Americans, when 1% of the population owns almost 23% of the total economic pie (Dungan & Murdy, 2010), the top 1% is going to pay a lot in taxes. Tax rates should not be the basis for a class warfare debate, the fact that the top 1% takes home 23% of the economic pie (largest since late 1920s) should be the debate and maybe the underlying point of Buffet's comments regarding a millionaires tax increase.

Former Christie Lecture Speaker Now Chair of Council of Economic Advisors

2011-08-30T09:34:00.000-04:00

Alan Krueger was the 2004 Christie Lecture Speaker at Millersville University. Yesterday, he was named the Chair of the White House's Council of Economic Advisors.

Who Is Alan B. Krueger?

http://www.freakonomics.com/2011/08/29/who-is-alan-b-krueger/

Majority of Congress with no education in economics

2011-08-29T08:54:00.000-04:00

The Employment Policies Institute (EPI) found that only 8.4 percent of lawmakers majored in economics or a related field.

http://thehill.com/homenews/news/177897-report-three-fourths-of-congress-has-no-education-in-business-economics

CNN got it wrong again...

2011-08-17T18:20:00.001-04:00

This is a copy of an email I sent to CNN to correct an error regarding their report on China's ownership of US public debt. I know this is an old issue that I wrote about last year, but they messed up the definitions again and misled viewers.
___________

Regarding your story on China's ownership of US public debt on 8/17/2011 (5pm):
Again, you do not have the correct numbers or definitions of US government debt and are misleading viewers for the sake of a sensationalized report. US public debt is $9.95 tril - not $4.5 tril as reported. What you reported is the portion of the public debt owned by foreign countries. Of the debt owned by foreign countries, China owns $1.2 tril, about 25% - but only 11% of the "public debt"... and just slightly more than Japan's share of our public debt at just under 10% (which they have owned for many years without even a mention from your crack team of journalists). China IS NOT the "largest owner of US public debt". They are the largest owners of US public debt held by foreign countries.

When you say "public debt" on the air, most listeners, viewers, and maybe some TV journalists, don't know that this definition is different from the "national debt" and is really the portion of the national debt net of intergovernmental holdings. What YOU actually reported on earlier this evening was the national debt minus intergovernmental holdings... minus publicly owned debt held by US citizens, governments, and corporations which leaves you with the portion of the national debt held by foreign nations. Since most people think you are talking about the entire national debt, to then say that China owns 25% is very irresponsible and given that this information is easily available and verifiable, you should be called out and sanctioned for what seems like a purposefully misleading attempt to sensationalize the issue.

This information and the correct definitions are available at http://www.treasurydirect.gov

Please, please, please do your job and correct the report. Help this country by educating viewers!

I will be reprinting this email in a post on my blog www.dismalscientists.com

Mike Gumpper, PhD
Professor of Economics
Millersville University

Elasticity of Supply and Demand - The Market for Oil

2011-06-29T08:49:00.003-04:00

I am routinely asked to comment for local and regional news outlets about oil and gas prices. Many in the media are often quick to blame speculators, hedge funds, and the oil company's for spikes in oil and gas prices. Yet, the cause for spikes in oil prices have far more to do with basic supply and demand. But as we recently discussed in my micro class, the key to explaining changes in oil and gas prices is the concept of elasticity.

Elasticity is a measure of the responsiveness of one variable to a change in another. In the case of demand, the elasticity of demand refers to the responsiveness of consumers (their percentage change in quantity consumed) to a percentage change in the price. In the case of supply, the elasticity of supply refers to the responsiveness of producers (their percentage change in quantity supplied) to a percentage change in the price. Oil, and one of its important byproducts, gasoline, are relatively unique in that they are very inelastic in both supply and demand, especially in the short run (most supply disruptions, political conflicts, weather, natural disasters, etc. are short term).

Yesterday, Becker and Posner both wrote about this topic in their blog. Becker's post is particularly helpful for understanding the concept of elasticity as it applies to the oil market. I recommend economic teachers take a look at this post.

Fluctuations in Oil Prices, Speculation, and Strategic Reserves-Becker 6/28/2011

The Economist’s Guide to Parenting: Full Transcript

2011-06-15T11:09:00.001-04:00

Radio broadcast coming up on June 24th.

The Economist’s Guide to Parenting: Full Transcript

Feldstein: Economy worse than it appears, blames Obama - Jun. 8, 2011

2011-06-08T14:16:00.004-04:00

CNN headline is a bit misleading... Feldstein actually believes, like many economists including Nobel winners Stiglitz and Krugman, that the Obama stimulus wasn't large enough. Put the recession and the stimulus package into perspective - we spent $800 billion to try and fix a $14.5 trillion economy, that's a little over 5%.

If you are a business owner and your company started to fail on a scale equal to the recent recession but you felt it was worth saving and could again be successful with the right investment or capital infusion, would you think 5% of the company's worth would be enough to get it done? And what if you could borrow against your company's value at historically low interest rates (as many US companies have done over the last few years)? I have yet to meet a business owner who, once the stimulus is put into perspective, doesn't start to question their own position on the issue.

Feldstein: Economy worse than it appears, blames Obama - Jun. 8, 2011

Update: Spring Slump

2011-06-06T17:55:00.001-04:00

by Matt Malick

Last week, the Standard & Poor's 500 Stock Index fell 2.3% to cap a five-week losing streak, the longest since July 2008. Overall, the market has fallen 4.7% from its April 29, 2011 three-year high of 1,363.61. Meanwhile, the S&P Goldman Sachs Commodity Index has fallen 8.4% from its April 8, 2011 high.

Treasuries, on the other hand, have flourished. The price of the two-year has risen each of the last eight weeks with the yield falling to 0.43%, the lowest level since November 9, 2010. Meanwhile, the ten-year benchmark bond has once again fallen below 3% to yield 2.99%.

Given the tense negotiations between Republicans and Democrats over the near-term debt ceiling limit and long-term structural deficit problems, people are only willing to accept these low yields as a “safe haven” investment (return of capital instead a return on capital).

Clearly, recent economic indicators ranging from employment to manufacturing activity have demonstrated an economy that has slowed.

We wrote on April 15, 2011 in The Hijacking of Ben Bernanke that “we disagree with some analysts who anticipate continued commodity inflation as far as the eye can see. We fear that a sustained rise in food and gas prices will stall the nascent recovery, leading to another economic slowdown that would itself drive down commodity prices.” In our view, this is exactly what has come to fruition.

Given the level of pessimism among investors and market pundits and the reasonable valuation of stocks (Bloomberg data calculates the S&P 500 trading for 14.8 times earnings), we still believe we are in the midst of a multi-year bull market. The recent pullback is most likely a healthy breather for a market that has avoided a noticeable correction for too long.

Update: Japan

2011-03-16T09:21:00.002-04:00

by Ben Atwater and Matt Malick

Every market correction has a catalyst, which this time may be the horrific earthquake and tsunami in Japan. These unfortunate events are certainly tragic and we hope the human toll gets no worse.

For more benign reasons, beginning in April of last year, the market underwent a fairly frightening slide amidst below-consensus economic data and substantial media coverage highlighting the continuing European debt problems. During this period, the market quickly dropped 17% and stocks were once again not for the faint of heart. But, the slide ended as quickly as it began and the market produced above average returns in 2010.

When the S&P 500 hit its recent peak of 1,343.01 on February 18th, the index was trading 4% above its 50-day moving average, 8% higher than its 100-day moving average and 13% over its 200-day moving average, all signs of a frothy market.

It is not unusual to see market corrections that challenge these moving averages, so a technical correction (a 10% to 20% drop from the peak) may be underway with the S&P closing today at 1,281.87, almost 5% below the February 18th high.

The Japanese stock market has fared far worse. According to The Wall Street Journal, “the Nikkei Stock Average finished 11% lower [on Tuesday] at 8,605.15 after sliding more than 14% earlier in the day, pressured by news of explosions at Tokyo Electric Power Co.'s Fukushima Daiichi nuclear power plant's No. 2 and No. 4 reactors, on top of previous blasts at the Nos. 1 and 3 reactors. Coming on top of a 6.2% fall Monday, the performance is the Nikkei's worst since its Oct. 16, 2008, drop of 11.4%, in the aftermath of the global financial crisis.”

CNBC.com reported yesterday that “Japan’s earthquake couldn’t have come at a worse time for U.S. investors hoping for resurgence in the country’s market and economy. Last month, they poured over $1 billion into Japanese exchange-traded funds, second only to U.S. energy funds . . . according to Biriniyi Associates data.” It is always unpredictable why, how and when the contrarian case will play out, but it usually does.

Clearly, all bets are off until there is some resolution, or at least de-escalation, of the emergency at the Fukushima Daiichi plant. However, absent a more intense nuclear disaster, we believe that a correction will offer unique near-term buying opportunities among certain equities.

More Millionaires than Australians

2011-01-23T20:56:00.002-05:00

Two articles from a Special Report on Income Inequality in the latest issue of the Economist.

More millionaires than Australians: http://www.economist.com/node/17929057

The rise and rise of the cognitive elite - Brains bring ever larger rewards:
http://www.economist.com/node/17929013

Globetrotters

2011-01-13T09:15:00.000-05:00

Written by: Ben Atwater and Matt Malick

Most investment strategies today include at least a modest allocation to foreign equity markets.

While specific percentage recommendations will vary among advisors, a logical starting point is the fact that the United States currently represents about 40% of the global stock market. This rationale would lead to 60% of a portfolio’s equity exposure devoted to international markets, perhaps a bit too bold for most investors.

For a more realistic proxy of how managers allocate their clients’ portfolios, Morningstar reports that the typical target date mutual fund allocates somewhere between 20% and 45% of its total equity holdings outside the U.S.

Why do so many investors look overseas?

For starters, many point to the potential diversification benefits from allocating capital to all corners of the globe. Theoretically, economies and stock markets around the world should not flourish or decline in tandem.

Furthermore, international investing has exploded simply because that is where the growth has been. While United States gross domestic product (GDP) contracted at a 2.6% rate in 2009, India expanded at a 7.4% clip and China grew by an impressive 9.1%.

As a result, emerging market mutual funds are now enormously popular, a contrarian indicator. According to Bloomberg News, “Individual investors are pouring money into emerging-market stocks at the fastest pace since 2007. The last time investors were this bullish, the MSCI Emerging Markets Index sank 11 percent in three months, data compiled by EPFR Global and Bloomberg show.”

Overall we would not quibble with the notion that international diversification is favorable when constructing a portfolio. We do take issue, however, with the method by which most financial advisors seek access to global markets.

Readers of our past market commentaries are familiar with our distaste for “outsourced” investment management, i.e. financial products such as mutual funds, due to limited transparency, high fees and tax inefficiency. Yet in our experience, most portfolios rely heavily on international and emerging market mutual funds for exposure to companies that trade directly on foreign stock exchanges.

Drawing a distinction between domestic and foreign equity investing is hardly as black and white as one might think. According to the below chart from Ned Davis Research, of companies in the S&P 500 that report foreign earnings, 30.9% of their revenue and 54.4% of their profits were derived from overseas in 2009, a significant rise from 2000. Moreover, 507 non-U.S.-domiciled multinational companies currently trade on the New York Stock Exchange, as well as many thousands of American multinationals. In today’s integrated world economy, an investor can strategically seek international diversification through individual companies.

MetLife (MET), for example, recently closed a $15.5 billion acquisition of Alico from the beleaguered insurance giant, American International Group (AIG). AIG sold Alico, an otherwise healthy business, to help repay its taxpayer-funded bailout. The deal allows MET, already the largest U.S. life insurer, to significantly expand its presence in Asia, Europe and Latin America. Nearly all of Alico’s business is outside the United States. The company recently predicted that operating results would rise as much as 45% next year, helped by the acquisition.

A recent Bloomberg Businessweek article profiled Coca-Cola (KO), and its attempt to expand its African beverage business. “Coke has been in Africa since 1929 and is now in all of its countries; it is the continent’s largest employer, with 65,000 employees and 160 plants. In 2000 about 59 million African households earned at least $5,000, which is the point when families begin to spend half their income on nonfood items, according to a recent McKinsey report. The study suggests that number could reach 106 million households by 2014. Coke plans to spend $12 billion in the continent during the next 10 years, more than twice as much as in the previous decade,” according to Bloomberg Businessweek.

For Diageo (DEO), the British spirits maker, Africa was among its fastest growing regions last year, growing 10 percent and representing 13 percent of total sales. At a time when Diageo is shuttering factories in Ireland and Scotland as a meager European economy takes its toll, they intend to invest 100 million pounds ($158 million) to expand in Africa next year.

We have more confidence in Coke and Diageo’s ability to uncover opportunity in Africa than we do in an emerging market mutual fund manager sitting at a desk in Minneapolis.

Among our portfolio of companies, perhaps Procter & Gamble (PG) maintains the most ambitious plan for international expansion. P&G has articulated a growth strategy of, “touching and improving the lives of more consumers in more parts of the world, more completely.” Put in more measurable terms, P&G would like to sell its products to 5 billion consumers by 2015 and achieve $175 billion in sales by 2025. And the 173-year-old company appears to be on the right track, increasing its global household penetration – the percentage of households using at least one P&G product – nearly two percentage points in its most recent quarter, to 61%.

A significant contributor to international investment returns is often currency exchange rates. For example, let us consider an American investor who purchases shares of a mutual fund that invests in Mitsubishi UFJ Financial Group, the largest bank in Japan. In times when the U.S. dollar drops relative to the Japanese yen, this investor should prosper as the profits Mitsubishi UFJ earns in yen are repatriated to U.S. dollars. Obviously, the opposite holds true as a strong dollar hinders returns.

Yet by investing in individual companies that do business overseas, we benefit or suffer from the very same currency effects. For instance, Coach (COH), the New York-based maker of handbags and leather goods, booked 22% of its fiscal 2009 sales in Japan. In its most recent quarter, Coach’s Japanese sales rose 13.8% to $173.1 million, which included a 10.6% positive impact from currency translation.

The most compelling argument in favor of multi-national American companies may be their track record for allocating capital overseas before most Wall Street strategists see an opportunity. For instance, Procter & Gamble began marketing its brands in China in 1988, long before emerging markets became en vogue among asset allocators. Today, P&G is the largest consumer products company in China, with about $5 billion in annual sales and a strong record of profit growth.

By owning individual businesses rather than investment products, an investor can essentially cut out the middle man and the commensurate extra layer of management fees. Individual, multinational companies offer the geographic and currency diversification that come from foreign investing, along with the transparency, tax efficiency and control that are so often lost in investment products.

What are we doing?

2010-12-08T11:41:00.014-05:00

I thought that most of the Republicans who won seats in this past election were in favor of decreasing the deficit and national debt? That's also what most of my Republican friends were complaining about and why they decided to vote against Obama and his agenda for the last two years. The only right thing Republican supporters can do now is denounce the Republicans as hypocrites [read "politicians"].

Bush made the argument, when he proposed his tax cuts in 2001, that the average American family would see a tax decrease of approximately $1800. Everyone cheered and middle class America said “thank you”. Only problem was that most middle and low income households got nothing from the Bush tax cuts while the top 1% of households saved tens of thousands. Shame on us for not understanding basic math (although not a surprise - see http://www.nytimes.com/2010/12/07/education/07education.html). But how does that infamous Bush-ism go…(click on YouTube video below)

Obama said yesterday, in defense of his deal with Republicans, that if the Bush tax cuts were to expire on December 31^st of this year, the average American household would pay $3000 more in taxes. WHAT? Are you kidding me? I can't believe Obama is using the same deceptive math to defend keeping the Bush tax cuts (what am I saying, of course I believe it). I guess George was wrong... or was he right?... we can't get not fooled again?

Tax Package Will Aid Nearly All, Especially Highest Earners
http://www.nytimes.com/2010/12/08/us/politics/08impact.html

Question from a teacher about the elasticity of supply

2010-11-17T10:41:00.002-05:00

Question: My students are currently studying demand, supply, and price. When we were discussing the elasticity/inelasticity of demand and supply, a question arose regarding if any good/service exists which possesses both perfectly inelastic demand and supply. I've given it considerable thought and the only goods/services I could think of which would fit the criteria are utilities (ie. electricity), water, waste water treatment, etc. I believe demand for these goods/services is inelastic as would be supply (no substitutes, few suppliers, oligopolistically competitive market structures, etc.). This line of reasoning would apply to their stock as well. Are there any other examples? Am I correct or totally off-base?

Response:

You are not totally off-base but your question mentions a common misunderstanding when it comes to the determinants of the elasticity of supply.

In your question you state "perfectly inelastic supply and demand". To that question the answer is no, both functions would be vertical and I know of no good that is perfectly inelastic in demand and supply. One often cited example of perfectly inelastic demand is insulin. Yet insulin is relatively elastic in supply.

Are there goods that are highly inelastic in demand and supply? Yes, but also keep in mind that the usage of elasticity you are referring to is a general, relative measure where one good is compared to another. Examples would be goods that have very few substitutes on the demand side and are very difficult to produce on the supply side (technologically intensive, raw materials are difficult to get quickly, production techniques cannot be modified easily). A good example is gasoline relative to, say, cigarettes or insulin. All are highly inelastic on the demand side but gasoline producers are not able to respond as quickly to a price increase as cigarette or insulin producers. Therefore gasoline has a more inelastic supply than cigarettes or insulin.

The difficulty for students when it comes to the elasticity of supply is to explain the concept without using an elasticity of demand determinant (like available substitutes, time frame for purchase, or proportion of budget). Elasticity of supply is the responsiveness of the producer to a change in the good's price and is therefore determined by production flexibility -ability to quickly and easily/cheaply increase or decrease quantity supplied. The fact that a product is elastic or inelastic to consumers does not necessarily mean anything when it comes to the elasticity of supply. Hence substitutes, few suppliers, or oligopolistic market structures are not determinants, by themselves, of inelastic supply. A monopolist could produce a good that has an elastic supply... think of Google's near monopoly over internet advertising. If the price for internet ads were to increase, it would be relatively easy for Google to respond with an increase in the quantity supplied.

Utilities are inelastic in demand but depending on time of year or day, may be fairly elastic in supply. Again, what's important is that elasticity is a relative concept.

The Rhetoric of "Class Warfare"

2010-09-15T10:32:00.004-04:00

In the middle of my morning routine of flipping back and forth between Sports Center and Squawk Box on CNBC while nursing my second cup of coffee, I listened to Wilbur Ross and Joe Kernan discuss the pros and cons of the Bush tax cuts. This wasn't the first time I heard the argument from wealthy conservatives that allowing the Bush tax cuts to expire was akin to starting a new "class warfare" pinning the so called rich against the very people they help by creating jobs - but something about the way it was being discussed this morning made me mental.

What is debatable about this issue is the effect the change in tax rates might have on an economic recovery. But because economists and policy makers are uncertain about the effects, given the already uncertain state of the economy, the discussion has disintegrated to guilt, blame, and fear - things our politicians and news media outlets are good at creating and disseminating. I'm not surprised, just depressed.

It truly amazes me to hear wealthy business owners, like Wilbur Ross, argue the class warfare angle as the reason to extend the tax cuts when the majority of the people who helped him become a billionaire make less than $20 per hour. In fact, income inequality has never been higher in the US. The Bush tax cuts actually created a significant amount of the inequality we have today. Ending the tax cuts for the wealthy won't create class warfare, the class warfare started in 2001 and 2003 with the tax breaks for the wealthy (see "How Progressive is the U.S. Federal Tax System? A Historical and International Perspective" by Emmanual Saez and Thomas Piketty in the Journal of Economic Perspectives; Winter 2007, Vol. 21 Issue 1).

Let's get back to debating the economic merits of tax cuts but if, as many economists are saying, the expiration of the tax cuts will have little effect on the pace of the recovery, then maybe we should look at this issue as an argument for improving equity instead of projecting the decision to end the Bush tax cuts as a personal attack on "freedom, free enterprise, and success".

Comments on Illegal Immigration

2010-09-08T20:36:00.002-04:00

The following are my comments to questions presented by a local reporter for a story on illegal immigration.

--Companies that hire undocumented workers pay them roughly half of what legal workers earn. Companies that do not hire illegal immigrants say they cannot compete because they pay their workers fair wages. Yes, in general, companies that hire mostly illegal immigrants will have a competitive advantage, all other things being equal. But the comparison is not that simple. Economic research suggests that illegal immigrants are as much as 30% more productive than similar legal workers of the same age and education (See William Ford's research in Economic Education Quarterly, 2007). Often, the lack of competitiveness argument due to illegal workers partially masks other inefficiency or demand problems facing firms or industries.

--The unemployment rate for construction workers is double the overall rate. Some people say this is due in part to companies using illegal labor. Unlike farm or other unskilled, low-paying jobs, unemployed, legal workers covet construction jobs, which are generally higher-paying.
It is clear that the unemployment rate for construction workers is high due to the current global economic slowdown and the current housing crisis. It would seem logical that if unemployment is high for legal construction workers, it is also high for illegal construction workers. There is no evidence that the ratio of legal to illegal construction workers is any different than it would be during better economic conditions. In order to support the above statement, one would need to know what the unemployment rates are like for legal and illegal construction workers during better economic conditions.

--If companies using undocumented workers build a house, it can translate into lower prices for home buyers. In this economy, would consumers pay more for a house if they knew it was built by legal workers? Some consumers may be willing to pay more for a house based on the type of labor used to build the house. This behavior is similar to consumers paying more for "Buy American" products or products that are "green". Unfortunately during tough economic times, demand for these higher priced alternatives is low. In addition, I'm not sure we would benefit from encouraging this behavior. If people have to spend more to buy a home, then it is reasonable to assume that many will cut back on new furnishings and appliances or may have to tighten the family budget. Hence, one group's benefit, legal construction workers, is another group's loss. In order generate net benefits for society from a tightening of labor laws, the gains for legal construction workers would have to outweigh the losses from home buyers and other business that cater to new home owners.

--Many people say that illegal immigrants are necessary to do low-paying jobs, such as farm work. What could happen to the economy if all illegal immigrants were forced to leave the country? I don't beleive there is much debate among economists that eliminating illegal immigrants from the labor force will slow down the growth of the economic pie. It is also likely to increase the prices of many goods and services which will result in a change in how families and businesses allocate their budgets. These changes will have unintended consequences in other parts of our economy that may result in greater costs than the benefits to workers in those industries that compete with illegal immigrant labor.

--Illegal workers do not pay taxes but use schools, roads and health care. What is the impact on the local, state and national economy? How much potential tax revenue is lost? For specific numbers on net tax revenue implications, I'd suggest researching the economics literature. One place to start might be the Center for Immigration Studies.
As for a general comment, illegal workers pay more taxes than most people think. Studies by the Social Security Administration indicate that a relatively large number of illegals pay payroll taxes and income taxes using fake social security numbers or by obtaining an individual tax identification number from the IRS just to avoid being detected as an undocumented worker; and many don't file for a refund even if they are owed one for the same reason. This is an interesting phenomenon since illegal immigrants cannot collect social security. Also, let's not forget many illegal immigrants pay property taxes and taxes on utilities indirectly when they rent, sales taxes when they consume goods and services, and excise taxes on gasoline, utilities, telecommunications, liquor, and tobacco products. Although illegal immigrants may still create a negative net tax burden, part of that is due to the relatively low wages they earn, not the taxes they do not pay. If illegals were made legal, their tax burden on society would likely be larger as they would qualify and take advantage of more government assistance as well as those who are currently paying income taxes to avoid detection would likely pay no income tax under current rules.

The Effects of a Changing Chinese Labor Market

2010-08-12T17:30:00.000-04:00

I realize that my posts to this blog tend to be focused on the merits of free trade. I've spent time discussing price ceilings and floors, and the disincentives produced by trade quotas, tariffs, and price gouging laws. However, it is an idea that many Americans just don't seem to grasp, or they choose not to, or are even coaxed into ignoring the facts by political pundits and opinion makers promoting their agendas.

With that said, we are beginning to see how the growth of China is reversing the global trade dynamic. We already benefit from cheap manufactured goods, but I believe that the world is on the verge seeing China's growth bear a different kind of fruit for the rest of us. This sentiment is supported by an article in the July 29, 2010 issue of The Economist magazine. The cover article explores The Rising Power of China's Workers .

The article, at once, reveals that China's working class is pressing for better conditions, higher wages, and better benefits, while reminding Americans of our own history. It was only a century ago that American workers were fighting for the same goals. We reap the benefits of the struggles of our ancestors. We are able to enjoy a high standard of living, one that allows us to purchase inexpensive manufactured foods produced in emerging markets.

But, it is our penchant for a good deal that is allowing those Chinese workers to fight for rights of their own. What are the inevitable results? With higher wages, Chinese-made products will become more expensive. Traders will look for alternatives and domestic producers will seize a new opportunity to compete. Chinese workers will use their deeper pockets to purchase products that might have been previously unattainable. That money we spent on cheap Chinese goods will begin to make its way back to us.

Now, conservative political leaders, and supporters of American manufacturers will continue to argue that "Buy American" is the best policy. While it is true that type of policy can have immediate positive impact on a failing economy, the long run consequences are too much to bear.

Update: Ten Reasons to be Bullish

2010-05-19T06:53:00.001-04:00

by Matt Malick

Since the summer of 2009, analysts and strategists of all stripes have been looking for a “correction” to the historic stock rally that started in March of 2009. It seemed that every major player on the Street - bull and bear alike - had been predicting a 10% to 20% market adjustment. Throughout history, short-term market declines have been commonplace during multi-year bull markets. Unfortunately, theorizing about a normal correction and actually living through a gut-wrenching drop in stock prices are different stories altogether.

In late April, the Standard and Poor’s 500 index hit its near-term high of over 1200. A 10% correction from that level would put the index at 1080 and a 20% correction would take the index to around 960. The S&P 500 presently stands at about 1125. While there is no guarantee that we are now experiencing the much-anticipated 10% to 20% correction, these figures indicate that further short-term losses would be exactly what most market experts have been predicting.

The added market volatility over the last several weeks is doing its job. It is bringing intense fright and discomfort to investors. The confidence that was building in the market is evaporating. The major financial news networks are tripping over themselves to line-up interviews with all of the prominent bears. Fund managers have turned bearish, individual investors have reaffirmed their unwillingness to enter equity markets, and bullish investors have begun to second-guess their theses . . .

Remember, sentiment has historically been an effective contrarian indicator, i.e. the crowd is normally wrong. In early 2000, everyone was heralding a new technological revolution that was going to increase productivity and send stocks to the moon. In early 2009, the consensus held that the U.S. was on the verge of a depression and that stocks would pile-up ever greater losses. In both of these extremes, the consensus was wrong.

Despite the endless stream of negative headlines over the past several weeks, here are ten reasons to be bullish about the intermediate-term prospects for the stock market:

The Standard and Poor’s 500 and the Dow Jones Industrial Average are still more than 20% below their all-time highs of October 2007
The yield on the 10-year U.S. Treasury Bond is 3.46%
The estimated earnings yield (2010 estimated corporate earnings divided by price) on the S&P 500 is 7.25% . The estimated 2011 earnings yield on the S&P 500 is 8.55%
Gold has reached another all-time high (over $1,210 per ounce), even as countless television commercials tout the opportunities available to individual investors to avail themselves of “cash for gold” (the greater the percentage of a population that is involved in a mania, the less chance it is sustainable)
The overwhelming consensus - from Ph.D. economists to the shoeshine man – is that government sovereign debt is the crisis du jour (you are rarely bitten by the snake that you see)
In April, the government reported that payrolls rose for the 4^th straight month, posting the best month for employment in 4 years
In the fourth quarter of 2009, U.S. GDP growth reached 5.6% and in the first quarter of 2010 U.S. GDP growth hit 3.2%
Well over 80% of S&P 500 companies that have reported 1^st quarter 2010 earnings have once again surpassed analysts’ earnings expectations
In April, U.S. retail sales climbed for the seventh straight month
U.S. consumer spending has increased for six straight months through March

As you well know, it is impossible to predict day-to-day stock market moves. Right now, the “headline risk” in the market is extraordinary. Recently, it has been difficult to find a positive report anywhere. However, over the intermediate-term, we continue to believe that stocks are out of favor, especially when employing a buy-and-hold strategy. The recent market turmoil is decreasing enthusiasm and will thereby likely prolong the sustainability of market gains over the next few years.

"The Deep Hole"

2010-03-22T09:04:00.001-04:00

Update on post from February 18, 2010:

Pennsylvania Pensions: From Surplus To A Deep Hole

http://www.npr.org/templates/story/story.php?storyId=124825100&f=1002&sc=igg2

Post from 2/18/2010:

The following post is a comment on this story from NPR:

Study: States Must Fill $1 Trillion Pension Gap

Unless states like Pennsylvania pass legislation to increase retirement age, reduce retirement benefits, or significantly increase employee contributions, higher taxes or significant cuts in other government programs are the only reasonable options to the pension gap problem. Assuming state lawmakers who, most if not all, have pensions through the state's defined benefit retirement system are unlikely to pass legislation that will lower their retirement benefits to account for their failure to properly fund the system in the first place (or at least incur some of the loss in investment returns due to the recession -like almost everyone else), dramatic cuts in education, healthcare, etc. are the only likely options. Since education is one of the largest state expenditures, it is unfortunate that the likely outcome is that the current generation of students will suffer at the expense of state employees' retirement. Arguably, future tuition and fee hikes will not go to improving educational outcomes but will go to current and future retirees to offset what they lost in investment returns during the recession. Other public and private employees in defined "contribution" plans have also suffered significantly from the recent recession and will bear the full effect in their retirement years but current law requires that we make those in the state's defined benefit system whole in their retirement. I'm sure many law makers and university employees in the state retirement system haven't thought through the unintended consequences yet.

Regrettably, this is just one problem in a long list. Decades of short term thinking aimed more at maximizing votes for the next election than at long term improvements in the standard of living are strangling our economy and will very likely leave future generations progressively worse off. Don’t blame the politicians; they are playing the game we asked them to play. We will only vote for politicians who can bring home the spending and lower our taxes without thinking about the consequences on future generations.

Two interesting articles on education

2010-03-15T20:31:00.004-04:00

The New Poor, In Hard Times, Lured Into Trade School and Debt
http://www.nytimes.com/2010/03/14/business/14schools.html?partner=rss&emc=rss

Rising College Costs: A Federal Role?
http://roomfordebate.blogs.nytimes.com/2010/02/03/rising-college-costs-a-federal-role/

Energy Tax Ads Prey on the "Economically" Challenged

2010-03-02T12:50:00.006-05:00

Have you seen these ads:

http://www.api.org/aboutapi/ads/#TelevisionAds

Do you think the people in the American Petroleum Institute's (API) ads about the Obama administration's repeal of tax subsidies for oil and natural gas companies have any idea what the issue is really about? You've probably seen these ads and may have even agreed with the sentiments of the "average American taxpayer" being interviewed.

I suggest reading this article from the Houston Chronicle, "Key Energy Players Pump Up the Volume."

I understand that the API is a lobby group for Exxon Mobil, Chevron, BP, Marathon Oil, Shell, Sunoco, as well as others, and that they are going to spin the argument in favor of their clients, but the amount of spin in this case is outrageous.

First, to say that the Administration's proposals will increase taxes is misleading. Congress passed the Energy Policy Act in 2005. The act created corporate tax deductions for the oil and natural gas industries for things like drilling expenses, paying foreign taxes, cost of inputs to recover more oil and gas out of wells, lost value of property after oil and gas reserves are removed, among others. These tax deductions are otherwise known as subsidies that lower the costs of production. The Obama proposal plans to eliminate these tax deductions, essentially returning their corporate profit taxes back to their pre-2005 rates. Now if you are Exxon Mobile, a company that has reported the largest quarterly net income on the planet, the elimination of corporate profit tax deductions may seem like a tax increase especially when compared to last year, or 2008. But the Administration is really talking about removing tax deductions, deductions that were difficulty to justify in the first place, and requiring them to pay taxes like they did prior to this act.

Second, the API claims that "raising taxes" on the oil and gas industry will cost America jobs. It may relative to last year, but not on net. The statement has no context unless you talk about the potential jobs lost in years 2005-2010 that resulted from other spending cuts or other tax increases necessary to offset their tax deduction. Actually, it is more likely that the government just borrowed the money they gave to the oil and gas industry from 2005-2010. Does it make you feel any better that we pushed the cost of their tax deductions into the future, with interest? Also, you cannot just talk about jobs lost in oil and gas without talking about job increases in nuclear power which has been earmarked for the taxes collected from oil and natural gas industry. And what about alternative energy markets? These markets have been at a competitive disadvantage relative to oil and gas energy as a result of the tax subsidies. Any microeconomics student knows that when the price goes up for one good, the demand for its substitute increases. Increased demand for alternative energy means jobs and business opportunities.

Lastly, the subsidies to oil and gas keep prices lower and some think that's great for consumers. But this comes at the expense of the environment and our national security. I thought most of us were on board with the idea that we wanted to get off our reliance on oil? The tax subsidies keep prices artificially low, adding to our reliance and hurting the opportunities for products and businesses who use alternatives. Also keep in mind that the artificially lower oil and gas prices come at the expense on other tax increases, reduced government spending, or more national debt, all of which translates into a higher price we all share. Lastly, keep in mind that those lower oil and gas prices are really helpful to the big industrial users of energy, more than residential users, and that we pay a higher price because the tax subsidies are paid with our tax dollars as individuals, not corporations, provide the bulk of government revenue.

I wonder if the people in the ads would reconsider if they just thought about the economics.

The Business of Bears

2010-02-26T16:09:00.004-05:00

by Matt Malick

Over the last two years, the press has obsessed over stories about and interviews with the experts that “predicted” the financial crisis. In most cases, “predicted” is a relative term. After all, many of these forecasters were anticipating a financial crisis for five, ten or even twenty years. The analogy that “a stopped clock is right twice a day” is apropos.

Presently, it is interesting that many of these same commentators have not changed their views. They are now predicting a double-dip recession, a debt crisis, persistently high unemployment, a governmental breakdown, and unsustainable national debts and deficits.

Because markets and economies generally move in cycles of boom and bust, it would seem likely that our economy will recover, just as it has historically done over and over again. More importantly, the majority of the economic evidence is showing stabilization or growth, which has been the trend for more than six months.

So, why would a cadre of analysts remain so vocally negative and bearish? The answer: it pays. Let us take a look at two of the most prominently negative commentators.

The Atlantic Monthly’s website in early February reported on the perks enjoyed by one of these economists. “Nouriel Roubini . . . was christened ‘Dr. Doom’ by no less an authority than The New York Times. The notorious nickname has helped Roubini become a global economic rock star, recently seen partying with models in St. Barts.”

When not painting the town red with fashion models, Roubini works with economic models as a Professor of Economics at New York University’s Stern School of Business, as a columnist for Forbes.com, and as the cofounder and Chairman of economic consultancy RGE Monitor.

According to a March 30, 2009 article in the now defunct Portfolio Magazine, RGE Monitor successfully monetizes its prognostications: “Subscription prices range from $10,000, for ‘reading rights,’ to more than $100,000, which includes personal meetings and consultations with Roubini or his staff.”

So, is the persistently negative Roubini more right than wrong? That is difficult to ascertain, but a review of his many predictions indicates to us that his record is highly spotty.

The London Times reported on October 4, 2008, during the height of the financial crisis, that he “told a London conference that hundreds of hedge funds are poised to fail as frantic investors rush to redeem their assets and force managers into a fire sale . . . He said: ‘We've reached a situation of sheer panic. Don't be surprised if policymakers need to close down markets for a week or two in coming days.’”

In hindsight, neither of these predictions materialized. Very few hedge funds failed and markets across the world remained open throughout the crisis.

Another persistent naysayer is Nassim Taleb, the author of two highly successful and critically acclaimed books, Fooled by Randomness and The Black Swan.

The fundamental point of Taleb’s Black Swan framework is that highly improbable and unforeseen events happen more frequently than experts acknowledge and that these events have a disproportionate impact on outcomes. Therefore, according to Taleb, predictions are nothing more than a fool’s game.

Hypocritically, for someone who does not believe in predictions, Taleb has spent most of his career in the investment management and trading professions.

In August of 2009, on the cable financial news network CNBC, Taleb predicted that “choking debt, continued high unemployment and a system that rewards bad behavior will hamstring an economic recovery,” according to CNBC.com.

Recently, Taleb had an interview published in ai5000 Magazine, where he revealed a fabulous calculation about investor Warren Buffet: “George Soros has 2 million times more statistical evidence that his results are not chance than Buffett does. Soros is vastly more robust. I am not saying that Buffet does not have skill – I’m just saying we don’t have enough evidence to say Buffett isn’t doing it by chance.”

Like any other successful person, Mr. Buffet has had luck on his side, but we are doubtful that Mr. Taleb can quantify such good fortune. This made-for-media comment just happens to (randomly) correspond to the launch of the paperback edition of The Black Swan and also helps to promote Taleb’s next book, for which he has received a multi-million dollar advance.

In The Great Crash 1929, John Kenneth Galbraith astutely observes, “It requires neither courage nor prescience to predict disaster. . . Historians rejoice in crucifying the false prophet of the millennium. They never dwell on the mistake of the man who wrongly predicted Armageddon.”

Our current view of the market and the economy happens to coincide with that of hedge fund manager Barton Biggs, who described his framework in a recent Bloomberg interview: “I am often wrong, always in doubt.” But Mr. Biggs presently feels that “People are nervous and apprehensive . . . and if you are an optimist, as I am – that things are going to work out – that’s what provides an opportunity.” And as a professional “go anywhere” hedge fund manager, Mr. Biggs has a significant financial incentive to be correct, not just blindly optimistic.

Oscar Wilde believed that, “The basis of optimism is sheer terror.” While Wilde viewed the glass as half empty, Winston Churchill expressed a similar sentiment when he said, “I am an optimist – it does not seem to be much use being anything else.”

View our previous market commentaries at www.atwatermalick.com.

Our investment approach is straightforward, transparent and independent. We invite you to work with us.

Trends Impacting Millersville University

2010-02-22T09:51:00.009-05:00

Based on Millersville University Fact Book data from Fall 2000-Fall 2008, Millersville has increased the number of students faster than it is hiring faculty to teach (1). Student-Faculty ratios have increased, yet due to the significant increase in temporary part-time faculty, the rate of increase in “published” student-faculty ratios is small (6,7). There is a much larger increase in student-faculty ratios when one looks at the number of students relative to full-time permanent faculty and a significant increase in the likelihood that students will be taught by temporary instructors (8,9). In contrast to published statements on Millersville's website, the MU Fact Books indicate that the number of full-time permanent faculty has decreased (2,4).

In order to keep pace with increases in enrollment, the university has hired more temporary instructor rank faculty (3,4). Relatively to tenured and tenure track faculty, temporary instructor rank faculty are generally less credentialed and experienced. Although there are competent temporary instructors teaching on campus, temporary instructors have little to no incentive to invest additional time in university service, scholarship, or student advisement beyond teaching their contracted courses.

In addition, data from the Pennsylvania State System for Higher Education (PASSHE) indicate that today's students are bearing significantly more of the cost of their education than students of just a few years ago. Hence, while paying more and being taught, advised, and mentored by fewer permanent full-time faculty, students are complaining more about crowded classrooms, computer labs and facilities, more students per faculty academic advisor, and increased difficulty finding classes during registration.

Despite hiring less expensive faculty labor resources, there is no evidence of any reduction in costs passed on to students. One explanation is that the number of executive and professional staff has increased faster than enrollment (5,11). During this 8 year period, the university hired 41 additional faculty members, all of which, on net, were temporary instructor faculty (most part-time)(4). Also during this period, the university hired 39 additional executive and professional personnel.

Combine all of these trends and the outlook for Millersville University to maintain its reputation as a competitive, quality, public higher education institution is in jeopardy.

Fall 2000-Fall 2008:

Enrollment at MU is up 14.2% on an FTE basis.
Full Time Permanent Faculty are down 4%
Temporary Faculty are up 66%
41 new faculty employees were added over this 8 year period. On net, 100% are temporary faculty and temporary employees replaced an additional 21 positions that were full time or part time permanent in Fall 2000
Executive and Professional staff increased 20.5%
Fall 2000: Student-to-Faculty ratio = 16.8 to 1; the Student-to-Exec&Prof staff ratio = 36.1 to 1
Fall 2008: Student-to-Faculty ratio = 18.4 to 1; the Student-to-Exec&Prof staff ratio = 34.2 to 1 (more students per faculty member while more executive and professional staff per student)
Fall 2000: Student-to-Full Time Permanent Faculty member ratio = 20.8; Fall 2008: Student-to-Full Time Permanent Faculty member ratio = 24.0 (15.6% increase which may be a better measure of the actual impact of increasing student/faculty ratios)
Fall 2000: Student-to-Temporary Faculty member ratio = 73.0; Fall 2008: Student-to-Temporary Faculty member ratio = 50.2 (31.2% decrease which translates into a significant increase in the likelihood that a student is taught by temporary faculty members).
In Fall 2000, there were 3 temporary faculty to every 10 tenured or tenure track faculty. In Fall 2008, there were 5 temporary faculty to every 10 tenured or tenure track faculty, an increase of 71%.
In Fall 2000, the percentage of executive and professional staff to tenured or tenure track faculty was 59% and in Fall 2008 it was 73.4%, a 24% in 8 years.

The statistics above are from the Millersville University Fact Books published online at www.millersville.edu/~ir/. This site is accessible without login if you are on the university network. If outside the university network, you will have to request login credentials from Institutional Research. This is public information. Most of the statistics reflect the period Fall 2000-Fall 2008. I encourage all readers to review the data themselves and report any errors or suggest alternative interpretations.

Terms:

FTE: "full time equivalent" students measures enrollment at the university based on counting the number of full time students (30 credit hours in an academic year for undergrad and 24 hrs for graduate students). Therefore, two students, each attending the university for 15 credit hours over an academic year are counted as 1 FTE.

Full Time Permanent Faculty: 99% of these faculty are either tenured or tenure track. These faculty are eligible for promotion subject to review of their qualifications in a competitive process. These faculty are expected to engage in scholarship and university service.

Temporary Faculty: 85% of temporary faculty are part time. These faculty are are generally less likely to have a terminal degree, are generally less experienced teachers, have little or no expectation of scholarship, and are less likely to be involved in university service. Temporary faculty do not receive benefits.

Executive and Professional staff: These employees include executive management, deans, and professional employees of, for example, the Registrar, Bursar, Finance and Administration, Personnel, Human Resources, Admissions, and Financial Aid.

State Employees Retirement System

2010-02-18T11:40:00.004-05:00

The following post is a comment on this story from NPR:

Study: States Must Fill $1 Trillion Pension Gap

Unless states like Pennsylvania pass legislation to increase retirement age, reduce retirement benefits, or significantly increase employee contributions, higher taxes or significant cuts in other government programs are the only reasonable options to the pension gap problem. Assuming state lawmakers who, most if not all, have pensions through the state's defined benefit retirement system are unlikely to pass legislation that will lower their retirement benefits to account for their failure to properly fund the system in the first place (or at least incur some of the loss in investment returns due to the recession -like almost everyone else), dramatic cuts in education, healthcare, etc. are the only likely options. Since education is one of the largest state expenditures, it is unfortunate that the likely outcome is that the current generation of students will suffer at the expense of state employees' retirement. Arguably, future tuition and fee hikes will not go to improving educational outcomes but will go to current and future retirees to offset what they lost in investment returns during the recession. Other public and private employees in defined "contribution" plans have also suffered significantly from the recent recession and will bear the full effect in their retirement years but current law requires that we make those in the state's defined benefit system whole in their retirement. I'm sure many law makers and university employees in the state retirement system haven't thought through the unintended consequences yet.

Regrettably, this is just one problem in a long list. Decades of short term thinking aimed more at maximizing votes for the next election than at long term improvements in the standard of living are strangling our economy and will very likely leave future generations progressively worse off. Don’t blame the politicians; they are playing the game we asked them to play. We will only vote for politicians who can bring home the spending and lower our taxes without thinking about the consequences on future generations.

The Erosion of Quality and Value in the PA State System for Higher Education

2010-02-16T19:38:00.005-05:00

The data suggest that the legislative philosophy regarding the benefits of taxpayer funded higher education has changed as more and more of the cost is borne by students and their families. The state system is enrolling more students faster than it is hiring faculty and building capacity to teach. In addition, the system has not added faculty to keep pace with the increase in enrollment and the faculty category that has increased the most are relatively less credentialed and experienced temporary and instructor rank faculty. Students are being taught by more part time instructors with little to no incentive to invest additional time in university service, scholarship, or student advisement beyond their contracted course. While paying more and being taught, advised, and mentored by fewer advanced faculty, students are experiencing more crowded classrooms and computer labs, more students per academic advisor, and increased difficulty finding classes during registration. Any savings from hiring cheaper labor resources has been offset by relatively large increases in the number and compensation of management and administrative employees. Combine all of these trends and the outlook for the state system and Millersville University to maintain their reputations as competitive, quality, public higher education institutions is in serious jeopardy.

It appears that across the country, states are squeezing their higher education budgets. Most associate these problems with efforts to deal with the effects of the recession. In addition, many states like Pennsylvania are constrained by constitutional balanced budget requirements forcing them to make spending cuts during tough economic times. No doubt tough economic conditions require sacrifices. However, a closer look at the data for our state system suggest that the recent recession may only be exacerbating pre-existing trends that have been and will continue to slowly deteriorate the quality and value of an education from a state system school -even after we recover from the recession. Some of these trends have been going on for over a decade. Is this evidence of years of mismanagement by the state legislature and Board of Governors who are making decisions for the entire system in the isolated and politicized environment of the state capital? Or is this evidence of a conscious change in philosophy regarding the commonwealth’s commitment to higher education? Maybe it's evidence of both.

The following paragraphs are meant to help provide perspective and to educate students, parents, and taxpayers as to the significant trends that are shaping the future of Millersville University and the state system. Some may look at the evidence and argue that Millersville is not like other state system schools and that we are somehow immune to these trends. Yet growing student and faculty concerns suggest these trends have already impacted the campus and that it will be increasingly difficult for Millersville to offer a quality education in this environment. The following paragraphs do not offer solutions nor do they address the serious budget problems resulting from our recent recession. However, by understanding the trends of the last decade, students, parents, and taxpayers may be able to make more informed decisions regarding future policy and leadership in a way that can restore the value and quality state system schools are known for.

Trend #1
The Erosion of Value: The Hidden Shift in the Cost of Attending a State System University

In economic theory, there are two basic rationales for explaining why government (taxpayers) should provide funding for what appears to be a service where all the benefits go to the individual. The first argument is that a more educated citizenry is a more productive and healthy citizenry and although the student collects most of the benefits in the form of a future job and salary, other state residents benefit from the overall increased productivity and economic output of a more educated and healthy population. The rationale is that since we all benefit, it would be in our best interest to subsidize higher education to encourage more people to get a college education to grow an even bigger economic pie. The second argument for taxpayer funding of higher education is that if everything were left to the free market, very few students would be able to afford a college education because of a market failure in student loan markets. Very few lenders, and only at very high interest rates, would lend money to students for a college education with no collateral simply based on a promise that they will study hard, get a good job, and pay the lender back in a few years. Students from wealthier families may not have a problem securing a student loan, but the vast majority of students now attending our state system universities would not be in college if not for taxpayer assistance. Hence, all states have either state owned or state supported colleges or universities. In PA, we have both.

However, times have changed and students attending state system schools like Millersville and the other 13 schools that make up the Pennsylvania State System for Higher Education (PASSHE) are paying significantly more for their education than did students in years’ past. In addition, government or taxpayer support for higher education is significantly lower. Yes, it is true that the appropriation for the state system has increased from $400 million in 1997 to almost $500 million in 2009, but these numbers alone hide the fact that there are more students attending state system schools and the effects of inflation.

In the graph that follows, you will see four lines that represent the two sources of funding for a student’s education, tuition & fees and the state appropriation from taxpayers. These figures are presented in actual dollars and in real dollars (inflation adjusted) per student. During the 1983-84 academic year, students paid $4,770 in tuition & fees (green triangle line) and received $3003 per student in state appropriation (blue diamond line). These lines represent actual dollars in each given year. By 2008, students paid $12,700 in tuition & fees and received $4600 per student in state appropriation. In other words, in the mid 1980's, the state appropriation represented 38.6% of the full cost and by 2008, the state appropriation only accounted for 26.6% of the full cost. Certainly, the cost of higher education has increased but the data suggest that policy makers and taxpayers have different attitudes about the public's commitment to higher education.

The other two lines adjust actual dollars for changes in the rate of inflation using the Consumer Price Index (CPI). In other words, the inflation adjusted dollars tell you how much money you would need in a given year to buy as much education as you did in the previous year given higher prices. If students are paying more out of their pocket than the inflation adjusted amount, it suggests they are being overcharged on an inflation adjusted basis. If students receive less from government than the inflation adjusted amount, then they are being under subsidized.
From 1984-1991, the amount of revenue coming from tuition & fees increased and remained consistent with the rate of inflation. Then, around 1992, the amount of revenue from tuition & fees began to rise faster than the rate of inflation. This opened up a gap of approximately $2000-$2500 per student between what students were actually paying in tuition & fees and what they needed to pay had tuition & fees just kept pace with general inflation.

From 1984-2000, the state appropriation per student remained consistent with the rate of inflation. Then, round 2001, the inflation adjusted appropriation per student began to decrease. This opened up a gap of approximately $1500 per student between the appropriation needed to keep pace with inflation and what they actually received from the government. This trend can only be seen once you account for increasing enrollments and the rate of inflation.

For over 10 years, the state government has underfunded the state system and shifted more of the burden on to students. By the end of the 2008 school year, students were contributing over $12,700 in tuition & fees while the inflation adjusted amount was just over $9,800. In addition, they were receiving approximately $4,600 in state funding while the inflation adjusted amount was $6,200. As compared to students of years’ past, current students are over paying by almost $3,000 and are under funded by almost $1,600 per student - the hidden shift that has increased the burden on students and families and eroded value for today’s students.

Trend #2
The Erosion of Quality: Increased Use of Temporary and Instructor Rank Faculty to Teach Courses

Faculty applying for promotion must show that they are outperforming the majority of their peers in the areas of teaching, scholarship, and service. Beyond the obvious measures of performance in these areas, faculty also have to show that they are involved with students beyond the classroom by being an academic advisor, advising research projects and honors theses, advising clubs and organizations, mentoring athletes, and advising co-ops and internships. As an incentive to become a better teacher, a more prolific scholar, or a more involved member of university governance, a promotion in rank comes with a pay increase.

Faculty in the instructor rank are generally not eligible for tenure or promotion. Many of the faculty in the instructor rank are considered the equivalent of temporary part-time employees. Part-time temporary instructors do not receive benefits. If we only take into account pecuniary costs, instructor rank faculty are significantly cheaper to employ and allow the university system to accept additional students at a lower instructional cost per student. However, instructor rank faculty relative to tenure-track faculty are generally less likely to have a terminal degree, are generally less experienced teachers, have little or no expectation of scholarship, and are less likely to be involved in university service. If we take into account the quality of educational services and the increased advisement and service burden on tenured and tenure track faculty to fill the non-teaching role of the instructor, all while enrollments are increasing, the full cost of instructor rank faculty is considerably higher.

Over the last 10 years, enrollment in the state system has increased 18.2% while the total number of teaching faculty has only increased 5.2%. Out of the four ranks of faculty, the number of assistant, associate, and full professors has increased only 1.8%. Full professors, those professors with generally the most experience and academic achievements actually decreased by 4.9% over this period while the number of instructor rank faculty has increased by 36.3%. Out of the 247 faculty hired between Fall 99 and Fall 08, over 66% were temporary instructor rank faculty. Cleary, the trend in the state system has been to add or replace relatively expensive tenured and tenure track faculty with relatively inexpensive instructor rank faculty.

Putting the issue of quality aside, hiring less expensive labor resources might make sense if students and parents were paying less to be taught by more instructor rank faculty, but they are not. If we take into account the full cost of instructor rank faculty, students, parents, and taxpayers are not getting the same quality education but are paying more for it.

Trend #3:
The Erosion of Quality II: The Increasing Number and Cost of Management and Administrative Personnel

Management and administrative employees provide essential services to students and faculty and are critical for the university’s operations. But one has to ask if the trends that follow are in keeping with the essential mission of the institution and continued taxpayer support.

Management employees represent university presidents, provosts, vice presidents, and deans. SCUPA employees represent administrative positions in, for example, financial aid, registrar’s office, residence life, admissions, career services, and academic services. From 1999-2008, the number of management employees increase 24.2% while the number of SCUPA employees increased 28.9% (recall that enrollment in the state system increased 18.2% during this period).

Over this same 10 year period, total personnel expenditures (salary and benefits) increased by an average of $29,368 per management employee, $19,532 per SCUPA employee, and $20,380 per faculty employee. Hence the data show that the number of management and administrative employees is growing faster than faculty employees and enrollment. In addition, their share of personnel expenditures per employee is growing faster than faculty employees.

In 1999, 18.6 management and administrative personnel were employed to provide services to every 1000 students in the system. Despite many technological and informational advances during this period like online class registration and online college and financial aid applications, more management and administrative personnel were employed per 1000 students. By 2008, 19.7 management and administrative employees were employed for the same 1000 students (refer to the table below). In contrast, the number of faculty employees per 1000 students has declined. In 1999, 46.6 professors were employed to provide educational services to 1000 students. By 2008, only 39.2 were employed.

If you include instructors (the employee group with the largest percentage increase), there are still fewer instructional employees per 1000 students today as compared to 1999. Conclusion, students and parents are incurring more of the financial burden to attend a state system school only to be taught, advised, and mentored by fewer advanced faculty.

Conclusion

In summary, the data suggest that the legislative philosophy regarding the benefits of taxpayer funded higher education has changed as more and more of the cost is borne by students and their families. The state system is enrolling more students faster than it is hiring faculty and building capacity to teach. In addition, the system has not added faculty to keep pace with the increase in enrollment and the faculty category that has increased the most are relatively inexpensive, less credentialed, and less experienced temporary and instructor rank faculty. Any savings from hiring cheaper labor resources has been offset by relatively large increases in the number and compensation of management and administrative employees. Students are being taught by more part time instructors with little to no incentive to invest additional time in university service, scholarship, or student advisement beyond their contracted course. While paying more and being taught, advised, and mentored by fewer advanced faculty, students are experiencing more crowded classrooms and computer labs, more students per academic advisor, and increased difficulty finding classes during registration. Combine all of these trends and the outlook for the state system and Millersville University to maintain their reputations as competitive, quality, public higher education institutions is in serious jeopardy.

Four Reasons

2010-02-02T11:27:00.002-05:00

The following financial market commentary was written by Matt Malick and Ben Atwater of Atwater Malick LLC. Ben and Matt have developed a sound and unique investment philosophy for their clients. They regularly write market commentaries and I plan to post them here for interested followers. You can learn more about them at www.atwatermalick.com .

Last week, the S&P 500 saw its third consecutive weekly drop and has tumbled 7 percent since reaching a 15-month high on January 19^th. The index is down 3.5 percent year-to-date, having suffered its first monthly decline since October and the biggest since it plunged 11 percent in February 2009. According to the Stock Trader’s Almanac, the performance of the S&P 500 in January is a reliable predictor of how it will fare during the full calendar year. Before last year, when the index dropped 8.6 percent in January and then rose 23 percent for the year, the so-called January barometer made only five erroneous predictions since 1950. However, below are four reasons we believe that the recent selloff is part of a temporary correction amid a rally that began in March 2009 and will eventually reconstitute itself and lead to a multi-year bull market:

One gauge of investor sentiment, the Chicago Board Options Exchange Volatility Index (VIX), also known as the fear index, rises when buyers are speculating that equities will retreat, because the gauge, according to Bloomberg News, moves in the opposite direction of the S&P 500 more than 80% of the time. The VIX opened Wednesday the 20^th, the first day of the selloff, at 18.51 and it ended this week at 24.56, a 33% increase. In its 19-year history, the average reading on the VIX, also according to Bloomberg News, has been 20.28. Clearly, the fear index reflected relatively little investor nervousness coming into the sell-off, a potential warning of the correction we are now experiencing. Overall, this explosion in the VIX indicates to us that investors have moved from complacency to panic too fast, often a contrarian indicator.
According to Michael Santoli, writing in the Monday, January 25, 2010 edition of Barron’s, “Citigroup strategist Tobias Levkovich points out that inflows into bond mutual funds over the past six months are three standard deviations above their 10-year average, an extreme level of change that has typically had nasty implications for the asset class in question.” In other words, the extreme favoritism individual investors are showing toward bond funds is converse to the disrespect they are showing equity funds. According to TrimTabs Investment Research, December was the fifth month in a row in which mutual fund investors pulled more money out of domestic equity mutual funds than they contributed. December’s net outflow came to $7.2 billion, bringing the total since the beginning of March to $29 billion. If the market does not resume its bull market run, this will be one of the only times in anyone’s memory when mutual fund investors predicted the market’s subsequent move.
While professional investors have been better market timers than individual investors, they have also displayed an unimpressive track record. And although sentiment has improved significantly from its lows, financial market practitioners are still mostly negative. Bloomberg News reports that 43 percent of respondents in a quarterly global poll of market professionals who are subscribers to the Bloomberg Professional Service say the international economy is improving, up from 37 percent in October. Thirty-eight percent said their country’s benchmark stock index will rise in the next six months; 33 percent say it will vary little and 27 percent say it will fall. This subdued sentiment leads us to believe that professional money managers have not fully committed capital to equities, meaning there is still a great deal of money on the sidelines.
Earnings, which fundamentally should drive stock prices over the long-term, have been very strong so far this earnings season. For example, six of our companies announced earnings this week and, in five cases, these companies exceeded the average analyst estimates. More broadly speaking, Bloomberg News reports that “a record nine-quarter earnings slump for S&P 500 companies is projected to have ended in the fourth quarter with a 73 percent increase in profits.” Also according to Bloomberg, nearly 80% of the U.S. companies that have reported earnings since January 11^th have beaten analysts’ estimates (153 out of 192 companies).

Friday’s GDP report further evidenced a stronger recover than many have yet contemplated. Bloomberg reported, “The 5.7 percent increase in gross domestic product at an annual rate reported by the Commerce Department in Washington today exceeded the 4.8 percent median forecast of economists . . . Separate reports [on Friday also] showed consumer sentiment and a barometer of business activity rose more than forecast in January.

Overall, the market appears to be in the process of a natural correction following a huge rally. This correction most likely has some distance to travel. But, as far as we can tell, the recent pullback has no fundamental economic or earnings-based rational whatsoever. This means that the market is acting irrationally, based on pessimism and fear, no reason to abandon our long-term optimism.

Pennsylvania Scientists and Economists' Call for Action

2010-01-27T09:57:00.004-05:00

I recently received a request to join Pennsylvania scientists and economists in signing a "call to action" letter on global warming that will be presented to state legislators in the coming weeks. I thought readers might be interested in the letter and my reasons for not signing the letter. Below is the "call to action" letter and my response to the organization follows.

You can get more information about the letter and the organization at http://www.ucsusa.org/global_warming/solutions/big_picture_solutions/pennsylvania-call.html
Pennsylvania Scientists and Economists' Call for ActionWe, the undersigned scientists and economists living and working in the Commonwealth of Pennsylvania, support the U.S. Scientists and Economists’ Call for Swift and Deep Cuts in Greenhouse Gas Emissions, which calls on our nation’s leaders to act quickly to cut emissions sufficiently to protect against the worst effects of global warming and states that such action creates economic opportunities for the nation.
New climate science research shows that we are feeling the effects of climate change faster and more intensely than the models projected when the statement was drafted, underscoring the need for urgent action to reduce emissions.
Taking action to move to cleaner sources of energy and reduce global warming emissions will inevitably have short-run consequences for some industries and some regions, which will need resources in order to adapt. Fortunately, climate action also creates economic opportunities for the Commonwealth, including new jobs in the energy efficiency and renewable energy industries, and the opportunity for Pennsylvania to become a world leader in renewable energy technology. Moreover, energy efficiency can help consumers to save on transportation, heating and electricity costs, and policies can be designed to assist consumers and industries make the transition to a clean energy economy.
On the flip side, without strong leadership and action, Pennsylvania could experience significant changes because of global warming, changes that will create adaptation costs for the Commonwealth. For example, by the end of the century, without action:

Many Pennsylvanian cities would expect dramatic increases in the number of summer days over 90°F, putting vulnerable populations at greater risk of heat-related health effects and curtailing outdoor activity for many.
Snowmobiling conditions would disappear from the state, and widespread ski resort closures could result as winters become too warm for snow-natural or human-made.
Yields of native Concord grapes, sweet corn, and favorite apple varieties would decrease considerably as temperatures rise and pest pressures grow more severe.
Climate conditions suitable for prized hardwood tree species such as black cherry, sugar maple, and American beech may decline or even vanish from the state.

The good news is that the Commonwealth is well placed to take advantage of the new economy created by strong climate change policy. Many Pennsylvanian entrepreneurs in the energy efficiency and renewable energy sectors are already experiencing growth throughout the state.
We cannot wait until the economy recovers to begin reducing global warming emissions. We respectfully urge the Congress of the United States to act rapidly and sensibly. As Congress crafts comprehensive climate and energy legislation, key provisions in the bill should:

Require global warming pollution reductions commensurate with the scientific urgency–on the order of 35 percent below today’s levels by 2020 and 80 percent by 2050.
Require polluters to buy credits for their global warming emissions at an auction, and use the auction revenue for the public’s benefit by investing in programs that can help reduce emissions and ease the transition to a clean energy economy.
Require 25 percent of our nation’s electricity to be generated from renewable resources by 2025.
Exclude loopholes that would let polluters delay or avoid needed emissions reductions, especially unlimited carbon “offsets” or a price ceiling that limits the fee for emissions.

We hope you will demonstrate your commitment to responsible stewardship of America's environment for our children and grandchildren by supporting scientifically and economically sound climate and energy policy.

Jean Sideris
Outreach Coordinator
Climate Program
Union of Concerned Scientists
Cambridge, MA

Jean,
I agree that climate change is happening and that the actions of humans are accelerating climate change. I also agree and support actions that will mitigate the external costs associated with climate change. However, I do not agree that the policies highlighted in the letter are the policies that will create the greatest net benefit to society. I have been reading about some innovative and lower cost solutions to mitigate climate change and I believe we should also consider the theory that reversing course now on “global warming pollution” will have very little affect on the estimated external costs and therefore we should be looking at ways to cope with a warmer planet. Unfortunately, when politicians, lobbyists, and scientists who discard their “scientific cloak” (as Buchanan (JLE, 1959) would have described them) get a whiff of what seems to be public opinion or conventional wisdom, whether right or wrong, their actions tend to stifle innovation, research, and better policy.

In my opinion, it is far more important that we seek out solutions to the externalities of global warming that result in the greatest social benefit at the least possible social cost and I believe we haven’t explored all options yet. I also believe that if this argument were presented to some of the economists who have not signed this letter, you might see a different level of support. In fact, if this point were emphasized more in your letter, I would sign.
Mike Gumpper

Tax on Tuition

2009-12-16T08:52:00.007-05:00

Many city and municipal governments are struggling to balance budgets (most have balance budget requirements unlike the federal government) in the wake of this recession. Tax reveune is down and government spending is naturally high given that more citizens qualify for income assistance programs during tough economic times. The balance budget requirements of local governments handcuff cities into raising taxes and/or cutting government services at that absolute wrong time. Hence, many local and state governments are getting creative about how to raise taxes. As the state of PA contemplates legalizing table games, cities desperate for revenue are trying anything, like taxing college tuition.

http://www.nytimes.com/2009/12/16/education/16college.html

Given that most schools get federal funds and students at the University of Pittsburgh, for example, receive over $4500 per student in funding from the state of Pennsylvania, it does show some ingenuity on the part of Pittsburgh city planners to try and siphon off federal and state funds back to the city's budget. But at what cost? The city is going to take a lot of heat from a potentially vocal constituency that often has a lot of time on its hands.

A more equitable tax on students might be to tax university endowments and the profits of the for-profit colleges and universities. The University of Pittsburgh has one of the nation's largest endowments for a public university (yet they still enjoy a significant taxpayer subsidy from PA residents). I'm sure Carnegie Mellon's endowment is considerable too. State owned universities and community colleges have little or no endowment and get a considerable amount of their funding from state taxpayers.

Also, just in principle, I would be bothered by the fact that my tax dollars that partly fund higher education across the state would be siphoned off by the city of Pittsburgh to pay for retired city employees.

Dubai

2009-12-01T12:41:00.003-05:00

The following financial market commentary was written by Matt Malick and Ben Atwater of Atwater Malick LLC. Ben and Matt have developed a sound and unique investment philosophy for their clients. They regularly write market commentaries and I plan to post them here for interested followers. You can learn more about them at www.atwatermalick.com .

In many ways, Dubai was the ultimate example of the debt-fueled excesses that led to the global financial crisis as it rapidly expanded infrastructure, transportation systems and residential and commercial real estate. Now that the global economy has slowed and the availability of credit has contracted, Dubai’s state-run companies are seeking to delay the repayment of debt, which many traders essentially view as a default.

We are following the situation as it unfolds, in particular as it relates to the long-term investment thesis behind each of our “focus list” stocks. Although global stock markets have sold-off in response to the news, losses have been relatively modest thus far, and we are not making any immediate changes in our client portfolios. Frankly, outside of potential portfolio exposure in financial stocks, we expect the direct impact of the these events on our companies to be nonexistent. But, the indirect effects on the financial markets are indeterminate and impossible to predict. Any action at this time would be emotional rather than enlightened.

For those of you who are interested in learning more about Dubai, here are links to an excellent two-part 60 Minutes story from August of 2008, when Dubai’s growth was at its peak. We find it particularly entertaining to watch this report with the benefit of hindsight.

http://www.cbsnews.com/video/watch/?id=4312234n&tag=contentMain;contentBody

http://www.cbsnews.com/video/watch/?id=4312039n&tag=contentMain;contentBody

The "Largest" Unregulated Negative Externality

2009-09-17T07:21:00.010-04:00

Most of the significant, and even some of the not too significant, negative externality problems have been identified and regulated in some way. We still debate the proper type and role of regulation, but at least we have made attempts at internalizing the costs of many pollution problems, second hand smoke, drunk driving, noise, and even dog poop. But there is one negative externality that has gone relatively untouched as far as attempts at regulation and that's obesity. Some cities have regulated the use of trans fats in cooking. The next step may be to tax the negative externality causing products, products high in high fructose corn syrup.

The economic argument is pretty straight forward. A negative externality is a cost bestowed on a party who did not participate in the original market transaction. In economics, these costs are referred to as external costs and should be considered a cost of production just like land, labor, and capital. If I decide to drive my gasoline powered car, I incur private costs such as the gas, car maintenance, depreciation, risk of an accident, etc. But I also create an external cost in that the emissions of CO2 and NOx from my tailpipe add to the greenhouse effect and smog. This external cost is an important cost when calculating the social cost of my behavior and if unaccounted for, constitutes a market failure. Obesity also has private and external costs. The existence of external costs means that obesity creates a market failure too.

One way to change my behavior about driving too many miles in my car, is to tax gasoline. The tax should be equal to the damage (external cost) caused by me consuming that gallon of gas. Although the demand for gas, and food for that matter, is fairly inelastic, people may still respond by reducing their consumption.

Yes, like taxes on gasoline, taxes on food are regressive (the poor would pay a larger portion of their income on these taxes) so there are equity concerns. However not all food would be taxed and maybe other income security policies could mitigate some of the distributional issues. However from an efficiency standpoint, taxes on foods and beverages high in sugar make the most economic sense.

Proposed Tax on Sugary Beverages Debated

By WILLIAM NEUMAN

Published: September 16, 2009

The debate over a tax on sugary soft drinks — billed as a way to fight obesity and provide billions for health care reform — is starting to fizz over.

The tax would apply to soft drinks, energy drinks, sports beverages and many juices and ice teas, but not sugar-free diet drinks.

President Obama has said it is worth considering. The chief executive of Coca-Cola calls the idea outrageous, while skeptics point to political obstacles and question how much of an impact it would really have on consumers.

But a team of prominent doctors, scientists and policy makers says it could be a powerful weapon in efforts to reduce obesity, in the same way that cigarette taxes have helped curb smoking.

The group, which includes the New York City health commissioner, Thomas Farley, and Joseph W. Thompson, Arkansas surgeon general, estimates that a tax of a penny an ounce on sugary beverages would raise $14.9 billion in its first year, which could be spent on health care initiatives. The tax would apply to soft drinks, energy drinks, sports beverages and many juices and iced teas — but not sugar-free diet drinks.

The group’s review of research on the topic, appearing in The New England Journal of Medicine, was released on Wednesday, the same day that Senator Max Baucus, the Montana Democrat, made public his health care reform plan, with an estimated cost of $774 billion over 10 years. The Baucus plan would be paid for by an array of taxes and fees on high-end group insurance plans, drug and medical device makers, and other sources, with no mention of any tax on sugary beverages.

The scientific paper found that a beverage tax might not only raise revenue but have significant health effects, lowering consumption of soda and other sweet drinks enough to lead to a small weight loss and reduced health risks among many Americans.

The study cited research on price elasticity for soft drinks that has shown that for every 10 percent rise in price, consumption declines 8 to 10 percent.

John Sicher, the publisher of Beverage Digest, a trade publication, said that a two-liter bottle of soda sells for about $1.35. At 67.6 ounces, if the full tax was passed on to consumers, that would add 50 percent to the price. A 12-can case, which sells today for about $3.20, could rise by $1.44, a 45 percent increase.

“A one cent per ounce tax would create serious problems and potentially adversely impact sales for the American beverage industry,” Mr. Sicher said.

The proposed tax faces a formidable hurdle in Congress, where several members have voiced strong opposition and few if any have said more than that they would be willing to consider it.

The soft drink industry has adamantly resisted the notion that its products are responsible for a national increase in obesity or that a tax would help curb the problem.

And even a supporter of a beverage tax said it was not clear if it would have a direct effect on the waistlines of Americans.

“I think we should be satisfied that soda taxes would be having a modest effect on consumption but would generate billions of dollars that could be used to mount public health campaigns,” said Michael Jacobson, executive director of the Center for Science in the Public Interest, an advocacy group that favors such a tax.

He said that if the tax was levied on the manufacturers of the sugary drinks they might be able to spread the cost among many of their products, from chips to granola bars to diet sodas, which would keep sugary drink users from feeling the full impact.

Nonetheless, discussion of the tax has the beverage industry on the defensive.

Muhtar Kent, the chief executive of Coca-Cola, was asked about the tax on Monday during an appearance at the Rotary Club of Atlanta and he responded by calling it “outrageous.”

“I have never seen it work where a government tells people what to eat and what to drink,” Mr. Kent said, according to a report by Bloomberg News. “It if worked, the Soviet Union would still be around.”

The industry began to coordinate its response in June when it created an organization called Americans Against Food Taxes.

On its Web site, nofoodtaxes.com, the group calls itself “a coalition of concerned citizens” opposed to “the government’s proposed tax hike on food and beverages,” including soda and juice drinks. Calls to a media contact listed on the site reach the American Beverage Association, an industry organization whose board is made up of top executives from the major soft drink manufacturers.

Americans Against Food Taxes bought a full-page ad last Sunday in The Washington Post. It was fashioned as an open letter to Congress, saying “Don’t tax our groceries.” It has also been running commercials on cable networks, including CNN, MSNBC and Fox News, according to Kevin W. Keane, senior vice president for public affairs at the beverage association.

Mr. Keane said that the association was heading the antitax group and that the beverage industry was paying for its activities.

He took exception to any efforts to single out sugary drinks in the fight against obesity.

“When it comes to losing weight, all calories count, regardless of the food source,” Mr. Keane said. “The bottom line is that the tax isn’t going to make anybody healthier. It’s not going to make a dent in a problem as complex and serious as obesity, and we’re certainly not going to solve the complexities of the health care system with a tax on soda pop.”

Talk of a soda tax is just the latest headache for an industry that has been struggling with flat or declining sales for many products, from sodas to bottled water.

Across the country, many schools have removed soda vending machines saying they should not be plying children with sugary drinks.

Last month, the American Heart Association urged people to reduce their intake of sugary foods and beverages to lower the risk of conditions like obesity and high blood pressure — singling out soft drinks as a prime culprit.

Even President Obama has voiced a cautious openness to the tax.

“I actually think it’s an idea that we should be exploring,” he said, in a recent interview in Men’s Health magazine. “There’s no doubt that our kids drink way too much soda. And every study that’s been done about obesity shows that there is as high a correlation between increased soda consumption and obesity as just about anything else.”

But Mr. Obama acknowledged that there would be significant resistance to such a tax.

Kelly D. Brownell, the lead author of the study and director of the Rudd Center for Food Policy and Obesity at Yale, said in an interview that a penny-an-ounce tax would have an immediate and powerful impact on the nation’s elevated obesity rate.

He said that a tax was justified in part because conditions like obesity and diabetes are often treated with public funds through programs like Medicaid and Medicare. Revenue from the tax could help pay for such care.

Acknowledging how difficult it would be to get a tax through Congress, he said state or local governments could take the first step.

That would follow tobacco, which has been heavily taxed by states in an effort to reduce smoking and defray the costs of smoking-related illnesses.

Representative Bill Pascrell Jr., a Democrat from northern New Jersey, who supports a soda tax said that House lawmakers had considered including it as part of their health reform bill but decided it was too divisive. “It didn’t look like we had the votes,” he said.

Economics of Misbehaving in School

2009-09-11T18:43:00.002-04:00

Great piece from NPR's Planet Money. The Economics of Misbehaving

To behave or make mischief? For many school kids it comes down to a kind of cost-benefit analysis. Act out and get noticed? There are rewards associated with being popular or the class clown. This Planet Money report focuses on the inner economic life of students.

http://www.npr.org/templates/story/story.php?storyId=112739889

Seven Consensus Opinions

2009-09-08T13:30:00.002-04:00

The following financial market commentary was written by Matt Malick and Ben Atwater. Matt and Ben recently started their own firm, Atwater Malick LLC. Matt was a student of mine and has a really insightful take on what's happening in the market. Ben and Matt have developed a sound and unique investment philosophy for their clients. They regularly write market commentaries and I plan to post them here for interested followers.

“We are standing by a wishing well / Make a wish into the well / That's all you have to do / And if you hear it echoing / Your wish will soon come true.” – Snow White, from Snow White and the Seven Dwarfs (1937)

Today we are examining what we perceive to be the most widely held consensus opinions among business journalists, economists, analysts, and investment managers. Below are seven thoughts that nearly everyone seems to agree on regarding the present market and economy:

1) “The American consumer will never be the same.”

Clearly, the average American’s personal balance sheet has taken a significant hit over the last couple of years with lower home values and diminished investment accounts. Americans have also accumulated bloated home equity and credit card debt, and now a rising unemployment rate is adding insult to injury. But, it is also true that many Americans have now deferred substantial spending for nearly a year. Consumers have cut clothing purchases and vacations, neglected to update household necessities, haven’t replaced aging cars or upgraded housing. It is difficult to quantify this pent-up demand, but it could uncoil like a spring.

We would also venture to say that spending has become ingrained in our national culture, for better or worse. While a higher national savings rate would be a healthy long-term phenomenon, you can’t change a zebra’s stripes and we are not convinced that Americans will sustain high savings.

2) “A ‘V’ shaped recovery will not happen.”

As the United States has emerged from previous recessions, GDP growth has gone from a negative reading to an above-average annual reading because many people and businesses defer purchases during a recession and manufactures and retailers permit inventories to deplete. When we begin feeling more comfortable, we tend to start buying again. But after this recession, most observers predict that we will emerge with below-trend GDP growth, i.e. less than 3% annual growth in the year after the recession; whereas a “V” shaped recovery would lead to annual GDP growth of 5%-plus during the ensuing year, which is more in-line with other post-recession periods. There will undoubtedly be a struggle between the competing forces of postponed purchases and the need to save more.

3) “The federal deficit is out of control and will only get worse and worse and worse.”

The prospects are certainly dim, but with an improved economy and structural changes on the revenue and expenditure side, hope is not lost. Many people do not fully understand the federal budget. The vast majority of federal expenditures can be attributed to Medicare, Medicaid, Social Security and national defense. Moderate, but intelligent, structural changes in these four areas can go a very long way toward changing our long-term fiscal outlook. Couple this with improving GDP growth, which leads to an expanding tax base, and the federal budget takes on a different complexion. Don’t forget, ten years ago, the Treasury was running budget surpluses and even “retired” the 30-year bond as a funding mechanism. Unfortunately, this turned out to be a Brett Favre-like retirement.

4) “The stock market has rallied too far, too fast, and September is historically the worst month for the market. Watch out below!”

We are somewhat skeptical because nearly everyone thought and still thinks that the market will lose substantial ground in the near-term (i.e. a 20% correction). Investors most likely withdrew funds from the market in anticipation of this predicted swoon. If decent economic news prevails and asset managers think they are missing something, they will undoubtedly flood more money into the market.

We agree that the market rally is overdone for certain speculative stocks. But, in our view, quality is still underpriced in this market. There are many legendary franchises “on sale” with price-to-earnings ratios below fifteen times and dividend yields is excess of 3%.

5) “Problematic inflation is nearly inevitable as a result of the immense fiscal and monetary stimulus.”

This viewpoint is wildly inconsistent with the other opinions on this consensus list, but many people hold them in concert nonetheless. If a weak economy were to prevail for the foreseeable future, the probabilities favor a deflationary environment, not an inflationary one. Post-bubble periods are indicative of deflation, i.e. the United States in the 1930s and Japan in the 1990s.

The Federal Reserve and other central banks around the world have the tools at their disposal to fight rising core inflation, as long as the political will exists. However, if we do experience a more robust recovery, we believe that commodity-driven inflation is a distinct possibility. We foresee inadequate capacity in world commodity supplies to support even modest worldwide economic growth.

6) “Unemployment will exceed 10%.”

This is certainly looking highly probable. But in a note to clients at the near-term market bottom on March 9, 2009, we wrote:

“While it is impossible to predict the precise future of labor markets, we can all but guarantee that the unemployment rate is going to get worse, probably considerably so, before it gets better. But what does this imply for the markets? As Mark Twain said, “History doesn’t repeat itself, but it does rhyme.” Our last truly dire economic situation was in the early 1980s when unemployment was not only high, but inflation was also rampant. In November of 1981, the unemployment rate crossed the 8.0% mark to land at 8.3% (similar to today [March 9, 2009]). At that time the Dow was trading around 850. Over the next 14 months, unemployment continued to rise, finally peaking at 10.8% in November and December of 1982. While the Dow temporarily dropped to around the 800 level, the stock market took off while unemployment continued to rise. By the end 1982, an awful year for employment in the U.S., the market was over 1,000 and it never looked back.”

If history does indeed rhyme this time around, we would not expect a market decline strictly as a result of a rising unemployment rate. However, if unemployment does continue to rise over the next 6-12 months, it will inevitably be a roadblock to a sustainable economic recovery.

7) “Commercial real estate is the next shoe to drop.”

We find it amusing that only a small handful of market pundits were able to predict the first shoe that dropped (residential real estate), but now, all of the pundits believe they can predict the next shoe to drop.

Contrarian investing does not mean disagreeing with every opinion in the marketplace. Without a doubt, we expect some of the above consensus predictions will come to fruition. But, we are highly skeptical that all of these will ultimately materialize. Overall, our reading of sentiment is that many people continue to be very negative on the economy and the markets. To us, this means there is still opportunity to make smart, long-term investments that precede future money flows into the stock market.

View our previous market commentaries at www.atwatermalick.com.

Federal Budget Forecasts and Amnesia

2009-08-26T17:52:00.004-04:00

The national debt is expected to grow by approximately $9 trillion over the next ten years according to the Obama Administration's own forecasts. The Concord Coalition recently projected a 10 year debt of closer to $14 trillion. Either way you look at it, these are historically large numbers but numbers that often lack political and historical context when discussed in the media by political operatives.

Many Republicans are quick to criticize the President for these large deficits but always fail to suggest what the deficits might be had they controlled the White House and Congress. Maybe the Republicans believe they could have helped us get out of the longest recession since the Great Depression by spending only $8 trillion, maybe $7 trillion? Pick a number. No doubt Democrats would take the opportunity to criticize Republicans for spending too much.

No matter how you slice it, federal deficits increase during a recession if only because tax revenues are down and automatic stabilizers like unemployment compensation and other income security programs increase. Throw in a large tax cut for households and businesses, and I have no doubt that Republicans would be facing a very similar budget outlook. Recent evidence suggests this might be true.

During the Bush Administration, the national debt increased from $5.67 trillion on 9/30/2000 to $10.02 trillion on 9/30/2008 (http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm). During his presidency, Bush's budgets averaged over $350 billion in deficits and added over $2.5 trillion to the national debt (http://www.whitehouse.gov/omb/budget/fy2010/assets/hist01z1.xls). Yet during most of this period, the Bush Administration presided over a growing economy and a soaring stock market until the last year of his term. I also recall Bush Administration spokespeople boasting about the millions of jobs created during his term. So how is it that his presidency left us with a national debt almost twice as large as when he took office? It took 40 years to create the deficit Bush began office with and only 8 years for it to double. Did Republicans forget about that? President Obama hasn't even had a chance to reside over a growing economy yet. I'm not trying to deflect the discussion or defend our current administration, the looming national debt may very well be the catalyst for our next crisis and we need to get real about the idea of raising taxes.

Politicians and political pundits are blessed with amnesia, it's the only logical explanation besides suggesting that they blatantly misrepresent the facts or manipulate the truth.

Looking Back on the Economic "Tragedy"

2009-08-26T12:32:00.004-04:00

We’ve heard about the potential causes. We’ve cast blame. Now we are trying to sort out the guilty from the innocent. And we all seem to know who to point the finger at, you know “those guys” who caused all the problems. But besides the Madoff’s and Stanford’s, the AIG’s and Fannie Mae’s, who else should we blame? You? Me? Maybe we all should look in the mirror, not because we are negligent, but because we are human.

It’s human nature to want to improve one’s quality of life. For some, a better quality of life might be to live simply and sustainably off the land, for others a better quality of life is a Harvard education, a seven figure salary, and a summer house in the mountains. Economics has nothing to say about whose quality of life is better, nor should a free society. But what economics does say is that everyone has the same underlying objective and that people will, more often than not, make decisions in ways that help them achieve their version of a better life. This is what the study of economics is really about, how do we achieve all of our wants, goals, and desires for our families, our communities, and our planet with the limited resources that we have to work with? It is a difficult and never ending problem, you might even call it a curse, but it’s what defines us as humans.

As we go through life making choices, we evaluate costs and benefits, both present and future. One of the costs that we are always taking into account is the value (price) we place on risks. Hence, it’s logical to expect people to respond predictably to incentives regarding the price of risk. And herein lies the economic tragedy.

Except for a short period defined by the tech bubble recession and September 11th, the nation’s economy was strong for about 18 years. Since the end of 1991 and until recently, unemployment was never higher than 7.5%, the Dow has grown 215%, per capita personal disposable income is up over 45%, prices have risen on average 1.8% per year, and median home values are up 40%. Historically, the last two decades were pretty good and the relative consistency of these numbers over this extended period led many to believe it could be sustained. “Housing prices always go up,” we were told. “The stock market always returns an average of 8% in the long run,” said investors. Couple this notion with subtle deregulatory policy changes and for many decision makers, the cost of taking on more risk went down.

Businesses took on more risk. Banks took on more risk. Homeowners took on more risk and consumers took on more risk. Some took on the risk of growing too fast, borrowing too much, investing too blindly, and insuring too little. Some risks were naively underestimated while others were fraudulently manipulated and too make matters worse, most were unaware of the “tragedy” that was taking place.

In 1968, Garrett Hardin, a biologist, wrote one of the most cited and read economic articles of all time, The Tragedy of the Commons. In the article, he used simple mathematics and logic to explain how a community with open pasture land (commons) would eventually fall apart because individual farmers were simply making economic decisions to improve their way of life. Each rancher saw that adding one steer to the open pasture yielded benefits greater than costs because the costs were shared by the community. The problem was that individual farmers were not accurately taking into account the hidden costs to the commons. Since all the ranchers were making the same decision, the costs were much higher and eventually there were too many cattle for the pasture to sustain.

As businesses and consumers evaluated the cost of taking on added risk in their own personal decision making, they underestimated the cost caused by others in the economy doing the same thing. Since so many people were taking on added risk, the real hidden cost of risk to the individual decision maker was much higher. Many were making decisions without taking into account the added cost to everyone in the economic system and the tragedy was inevitable.

Like a wild fire, the economy began to burn out of control. Those who miscalculated or manipulated the cost of risk the most were almost immediately eliminated. Others got caught up in the inferno as it spread. But like the aftermath of a forest fire brings new life to the forest floor, the financial crisis appears to be extinguished and as stated by Bernanke “green shoots” are starting to appear.

What should we take away from our latest economic crisis? Like Hardin argued in 1968, some regulation is necessary to protect the commons. He poignantly referred to it as “mutual coercion, mutually agreed upon” meaning that even free markets need publicly agreed upon rules (coercion) that need to be enforced (agreed upon) even though we may not like it.

How Much Should You Pay for that Chocolate Bar?

2009-08-20T17:13:00.005-04:00

Have you heard about this economic news? Can you imagine our beloved, sweet-tooth-curing, sugary snacks becoming more expensive?

The story describes a bit of a political standoff between some of the major American food manufacturers and the United States government. Companies, such as Hershey and Kraft, want the government to increase sugar import quotas. This would allow more foreign-made sugar to be imported into the United States (it is important to note that the U.S. already imports a hefty amount of sugar from Mexico, but there is no quota, due to NAFTA). The result would be greater competition and lower prices on sugar.

More importantly, this story is a great tie-in to my earlier post, "The Economics of Price Gouging." It also relates directly to Mike's February post called, "Buy American."

In particular, the sugar quota, just like any trade quota or tariff imposed by a government, represents a PRICE FLOOR. In essence, what the government has done is created an artificial, minimum price that is above the equilibrium price of the sugar market. Now, the government didn't set a specific price, but the current quota limits the amount of sugar suppliers available to Hershey, Kraft, and the like, and keeps the price at a level greater than what the food manufacturers and confectioners would normally pay in a free market. the domestic sugar price has no chance of coming down because government has restricted competition.

Now, the argument used by food manufacturers and confectioners, is that there is a shortage of sugar, due to the quota system. This is faulty economic thinking. Sugar manufacturers were quick to point out that there is plenty of American sugar to buy. OF COURSE THERE IS! Government has created a market where prices are artificially high. The suppliers who CAN benefit from those high prices are quick to supply more sugar.

The problem is NOT a SHORTAGE of sugar. The problem IS that GOVERNMENT is keeping prices at a level that Hershey and Kraft don't want to pay.

For what reason? To protect American sugar producers.
Who pays the price? We do, with higher prices at the grocery store cash register.

The Price of Everything

2009-08-20T07:22:00.006-04:00

I just finished reading a great book for anyone wanting an easy read about basic economic logic. The book is not a text but a fictional narrative about a college student who stands up to a big box retailer who appears to be price gouging following an earthquake. The student is befriended by the provost of the university who is an economist and they have conversations as the student nears graduation and his valedictorian speech to the student body.

The main story in the book goes great with Bill's posted economics lesson on price gouging.

The book contains some great ideas for teaching economics and is a pretty good story that will keep readers interested. I recommend the book for high school economics and college principles courses.

The Price of Everything: A Parable of Possibility and Prosperity
by Russel Roberts
Princeton University Press (July 28, 2008)

So what about these “green shoots”? Are they ever going to grow?

2009-08-19T09:51:00.000-04:00

Much has been made about Ben Bernanke’s “green shoots” but not much is heard about when they might turn into trees. Are there any signs that the economy is recovering?

The short answer is, thankfully, yes. But like a gardener needs to meticulously tend to green shoots, especially in the early stages of growth, the economy’s “gardeners” need to do the same.

Over the last few months, much of the optimism for the economic recovery has centered on key macroeconomic variables that show they are slowing down in their rate of decline. Normally we wouldn’t be all that happy over continued job loss or negative industrial demand, but right now we need to take baby steps.

In recent surveys of economists and business leaders, most respondents seem to be a little more optimistic about a recovery than just a couple of months ago. Slightly more than half feel that the economy has hit bottom while some still feel that the recession will extend into 2010. Either way, the forecast has improved. I, too, am optimistic that the worst is over and here are a couple of reasons why.

Better Balance Sheets: Both households and businesses have been putting a lot of emphasis on improving their balance sheets. Consumer credit outstanding has declined steadily since its high in July 2008. Some of this could be the result of defaults and write-offs and as long as unemployment remains high, continued write-offs are expected. But lower consumer debt is also coupled with a steady increase in savings deposits over the same period. In addition, consumers’ financial obligations ratio, a ratio of household financial obligations as a percentage of disposable income, has also declined to 18.5% and is back to a level not seen since 2004. Given the economic uncertainty, many businesses and consumers have put off major purchases. Like consumers, many businesses have been aggressive at lowering costs to maintain margins. Many firms are holding historically high levels of cash just waiting for opportunities to invest.

An Inevitable Durable Goods Cycle: As consumers feel more at ease with their household finances and as unemployment stabilizes, as many believe it will, consumers will begin to replace durable goods. Businesses will also take the opportunity to use their cash to prepare for the next expansionary cycle by upgrading factories, redesigning stores, and preparing new product displays. These events precede an economic recovery so look for firms to increase spending on infrastructure and marketing.

Cheap Money: The Federal Reserve has continued a policy of maintaining low interest rates and high bank reserves. These policies have already helped the financial sector recover and will be a catalyst for growth once consumer confidence improves.

Low Inflation: Nothing helps a recession end like the recession itself. As consumer and industrial demand declines during a recession, commodity prices, producer prices, and consumer prices fall. This helps firms manage the bottom line and helps them make strategic investments in preparation for the next cycle. Consumers welcome the relief of lower prices as they struggle to manage household finances.

Now, I wouldn’t be an economist worth my weight in salt if I didn’t stop here and say, “but on the other hand” (that’s why Truman asked for only one-armed economists). There is one key variable in this discussion that will make all of this more difficult to achieve in the short term and that’s unemployment. Nothing will improve consumer confidence more than a decline in unemployment. Not only does lower unemployment indicate that we are putting people back to work, it helps those who were afraid of losing their job feel a little more confident about the immediate future. This will have a tremendous effect on the speed of the recovery.

Of course there are many other variables that I haven’t discussed that may play a role in this recovery like the effectiveness of fiscal stimulus, large federal deficits, inappropriate government intervention, and the global economic recovery. But that’s why I love teaching economics, always new things to talk about.

ECONOMICS LESSON: The Economics of Price Gouging

2009-08-10T15:30:00.000-04:00

Given the current economic climate in the United States, many citizens are worried about their financial well-being. When citizens are confronted with rising prices on staple products, necessary items, and generally inelastic goods, they turn to the media, government, or anyone who will listen to their complaints. We see reports in the newspaper, or on television, about "price gouging" and unsympathetic businesses hurting middle class America. But is so-called "price gouging" really a bad thing? Or, is government control of prices really doing more harm than good?

This clip by John Stossel of ABC's 20/20 was made in the wake of Hurricane Katrina. But its message and reasoning are founded in Adam Smith's view of a free market economy, and certainly apply to America's current economic situation. It offers a great introduction to the topic of price ceilings and government intervention in the economy.

So, what is a PRICE CEILING?

A price ceiling is a legal maximum price that can be charged for a good or service.
When a price ceiling is set below the equilibrium price, it will cause shortages.
Price ceilings occur when government is dissatisfied with the outcomes of free markets.

The figure below represents an artificial rent ceiling, such as the rent control policies of New York City in the 1950s:

When government limits the price of rental units to $400 per month, the suppliers are only willing to provide 3000 units. The market, on the other hand, is demanding 6000 units. As you can see, the Rent Ceiling, represented by the red line, has resulted in 3000-unit shortage. In addition, when 3000 units are available to rent, consumers are willing to pay $625 per month. Since the price established by government is only $400, landlords are experiencing a loss of $225 per month, per unit. That is a $675,000 loss per month by all property owners in this market.

Some questions to think about...

What are some additional economic and societal effects of this situation?
How might third-parties be affected by this?

Points to Ponder

Government can also set prices greater than the equilibrium price created naturally by the market. This type of price control is known as a PRICE FLOOR and results in surpluses. Suppliers are willing to supply at the artificially high price, but consumers won't buy.

Government doesn't have to set a specific price for shortages or surpluses to occur. Interventions such as trade barriers, tariffs, and subsidies can have the same effect.

Change in Funding for Higher Ed in PA

2009-06-29T11:10:00.002-04:00

Interesting article and comments. I've posted about the relationship between the 14 state-owned universities and the 4 state-related universities before. Take a look at the comments - most taxpayers still do not understand this relationship.

http://chronicle.com/news/article/6706/in-42-million-blow-governor-removes-4-pa-universities-from-bailout-bid?utm_source=at&utm_medium=en&commented=1#c043298

Also, as a result of the changes to PA's Right to Know Laws, the financial statements for Penn State are public record for the first time (despite billions of dollars in state subsidies). http://www.scribd.com/full/16134763?access_key=key-1mkep44zfcrcimzsk0rs

Mutual Fundosaurus

2009-04-28T09:14:00.009-04:00

The following financial market commentary was written by Matt Malick and Ben Atwater. Matt and Ben recently started their own firm, Atwater Malick LLC. Matt was a student of mine and has a really insightful take on what's happening in the market. Ben and Matt have developed a sound and unique investment philosophy for their clients. They regularly write market commentaries and I plan to post them here for interested followers.

For many years, stocks have been a common method of building financial wealth. When purchased at a fair price and sold at a full valuation, stocks can produce stellar returns. In fact, even after the recent equity bear market, the S&P 500 has returned 7.41% annually over the past 20 years ended March 31, 2009 with dividends reinvested in the index.

Because of strong potential returns, stocks have gained ever greater popularity over the years, and the financial services industry has responded by devising clever ways for the “average” investor to participate in the stock market. These include common trust funds, mutual funds, variable annuities, exchange traded funds (ETF’s) and hedge funds. Along the way, the industry created countless other financial products as well. Some have stood the test of time and others have not.

As the famous investor Barton Biggs reminded us in a November 11, 2008 Fortune article, “there is no asset class too much money can't spoil.” While he was referring to hedge funds, we think this adage also applies to mutual funds. The first mutual fund was organized in 1924 as a method of pooling investors’ assets together to purchase a diversified portfolio of individual stocks. Early mutual funds allowed “small” investors to own a diversified basket of equities at a time when it was not yet cost-effective for everyday folks to directly purchase and monitor individual stocks. In exchange for limited transparency and control, mutual fund clients gained diversification and professional oversight of their portfolios.

Over the years, there have been dramatic changes in both the mutual fund industry and the options available to individual investors. The charts below show the explosion of mutual funds and of mutual fund assets in the United States.

Source: 2008 Investment Company Institute Fact Book

While the mutual fund industry has grown exponentially, technology and the Internet have expanded the options available to individual investors. Through the advent of discount online brokerage sites, retail investors are now able to purchase individual stocks for modest commissions. And thanks to the free flow of information through the Internet, investors and independent investment advisors can more easily access vast amounts of pertinent data about publicly-traded companies, including all Securities and Exchange Commission regulatory filings. Therefore, the opportunity now exists for individual investors to directly own interests in the companies that mutual funds are frequently trading.

So why are mutual funds still so widely used? We think a clue lies in the flow of mutual fund assets. As you can see from the charts above, total assets invested in mutual funds at the end of 2007 were roughly $12 trillion. But according to data from the 2008 Investment Company Institute Fact Book, total sales of mutual funds throughout 2007 were $24 trillion – almost twice the level of assets. Now that is salesmanship.

You can partially attribute this to the natural ebb and flow of money in the economy. Fortunes are accumulated and spent, funds are redeemed to pay for financial goals, and new millionaires are made each day. But in our view, the vast majority of this phenomenon can be attributed to (1) the transactional incentives built into the financial services industry and (2) performance chasing.

As you know, mutual funds are the tool of choice for most financial salespeople. These funds often carry hefty expense ratios and sales loads and can therefore be highly profitable when the salesperson closes a deal. Unfortunately, the profitability of a transaction sometimes ranks higher on the priority list than simplicity, transparency, and prudent advice.

According to a study called the Quantitative Analysis of Investor Behavior by financial research firm Dalbar, from January 1, 1988 through December 31, 2007, the average equity fund investor earned an annualized return of only 4.5%, while the S&P 500 returned 11.8%. We think this is attributable to “performance chasing,” a common reason investors churn mutual funds. This occurs when an investor sells a poorly performing fund in favor of the hottest performing fund. Reversion to the mean and Murphy’s Law dictate that the purchase of this “best of breed” fund will happen at exactly the wrong time, right before the fund starts to underperform.

Cell Phones for the Poor

2009-04-15T12:21:00.006-04:00

Following discussions about social insurance programs in my Public Finance course, a student emailed me a news item about a government program to provide cell phones for the poor. I had never heard of such a program but after a simple Google search, I found Safelinkwireless.com.

During my search to find out more, I came across many negative comments about how this is just another wasteful government program. Many were concerned about how much it would cost taxpayers and some seemed to already know that the phones would be going to the same people who cheat and defraud other welfare and income security programs. I also read many statements saying that having a cell phone is a luxury and not a right. Some of my students shared these same sentiments.

Let's look at this public assistance program using positive economic analysis (objective and scientific).

What's the estimated cost? In Tennessee, one of the states offering the program, there are 800,000 estimated eligible people. The phone can be bought in most grocery stores for $20 and then there is the cost of the 42 minutes per month. Even if we assume the government is paying retail for the phone, I'm going to guess that 500 minutes per year would cost no more than $50. So for $70 per person per year or $56 million for all of the eligible people in Tennessee (assuming they all sign up), the people already qualifying for some level of government assistance would have a free cell phone.

So the questions are, what are the benefits and is there a potential net gain to society?

I beleive that if you really try to estimate the productivity and cost saving benefits that you have personally experienced using your own cell phone and then multiply that by hundreds of thousands, you might agree that there are significant potential benefits from a program like this. Take a look at this paper: http://www.newmillenniumresearch.org/archive/Sullivan_Report_032608.pdf

Will there be people getting a cell phone in this program who are not deserving? Sure, that's a predictable and quantifiable cost of any government assistance program but we cannot get caught up in the relatively small number of individuals who try to game the system - it's just another cost. We should always try to minimize fraud and abuse (again if benefits outweigh costs), but if the benefits still outweigh the costs, then the program generates a net gain and both the size of the economic pie and the distribution of the pie are arguably better than before.

Could It Be?

2009-03-15T20:55:00.008-04:00

The following financial market commentary was written by Matt Malick and Ben Atwater. Matt and Ben recently started their own firm, Atwater Malick LLC. Matt was a student of mine and has a really insightful take on what's happening in the market. Ben and Matt have developed a sound and unique investment philosophy for their clients. They regularly write market commentaries and I plan to post them here for interested followers.

Could It Be?

As investors, we are constantly asking ourselves tough questions. Lately we have been grappling with the unthinkable.

Could it be that the major credit rating agencies will continue their abysmal predictive record?

Standard & Poor’s, Moody’s and Fitch are the three primary bond rating agencies and have enormous influence over Wall Street. The highest rating they bestow is Triple-A. As enablers of the great financial crisis that we are now facing, these agencies rated sub-prime mortgage-backed securities and collateralized debt obligations as Triple-A based on the ridiculous models that their firms created.

These firms once rated The American International Group (AIG) as a Triple-A credit, all the while AIG piled on mind-boggling obligations through credit default swaps (CDS), which last quarter led to the largest loss in American corporate history - $61.7 billion.

Without these colossal errors, our economy would be in a much better position. But, Standard & Poor’s, Moody’s and Fitch are not new to overlooking the elephant in the room. Remember Enron and WorldCom? Enron was rated an investment grade credit right up until the day it declared bankruptcy. WorldCom maintained its investment grade rating until three months before its bankruptcy.

Now these rating agencies are on a downgrading spree, cutting the ratings of vast amounts of mortgage-backed securities, many insurance companies and many banks. In fact, they recently downgraded the debt of both General Electric and Warren Buffet’s Berkshire Hathaway. If their track record holds, then they are likely to be wrong once again.

Could it be true that bears make money, bulls make money and pigs get slaughtered?

Wall Street banks, the rating agencies and the regulators all embraced the concept that thousands of bad mortgages bundled together as one security were transformed into a good security; after all, it was “diversified.” In an already overleveraged economy, faith in the all-encompassing power of broad diversification pushed us over the edge as the Wall Street banks leveraged their balance sheets thirty-to-one and bet the farm on these bogus mortgage-backed securities. Much of this was based on the misguided belief that housing prices could not decline.

Just as speculators participated on the way up to unsustainable heights, we now have others trying to push us down to new lows. The latest game in town is to drive fear about the prospects of certain companies by manipulating the credit default swap market. Credit default swaps are unregulated insurance that will theoretically pay if a company’s bonds default. The higher the premium on a credit default swap, the higher the implied risk that a company will fail. However, the market for these instruments is just small enough that unscrupulous players can create fear. Traders are shorting certain stocks (betting the stock’s price will fall) and then bidding up credit default swaps in an effort to fool the market into thinking that these companies are in irreparable trouble and then profiting handsomely from their short positions.

For example, according to a Merrill Lynch report issued on Friday, March 6^th, the credit default swap market was indicating that Warren Buffett’s Berkshire Hathaway had a greater risk of default that the country of Vietnam and that General Electric was at greater risk of default than Russia (a country that actually did default on its debt in 1998).

If the track record of outrageous greed holds, then these scare tactics should ultimately fail. Just this week, many of the stocks that have been victims of this strategy have rebounded strongly. Let us hope that this is a sustainable stock market rally.

Could it be that individual investors are as wrong as ever?

The American Association of Individual Investors released its most recent survey of investor confidence. The survey is the most negative in its twenty-two year history, with 70% of the respondents bearish about the market’s prospects. The last time that 70% of the respondents agreed on something, it was in January of 2000, near the top of the technology stock bubble. At that time, 70% of respondents were bullish on the market’s prospects. Again, let’s hope their track record holds.

Could it be that there are two tiers of financial institutions, the awful and the OK?

The assumption before this week was that every financial institution was fatally flawed. Perhaps this is an overstatement. Of the Wall Street banks, we have thus far found that Bear Stearns, Lehman Brothers and Merrill Lynch were among the awful, but it appears that Morgan Stanley and certainly Goldman Sachs are among the OK. In terms of the super-banks, we know that Citigroup is awful, that Bank of America is perhaps somewhere between awful and OK, but it is increasingly appearing that perhaps Wells Fargo and J.P. Morgan are OK.

If our country truly has a large contingent of OK, i.e. well managed financial institutions, then there will be the opportunity for many positive surprises in the weeks and months ahead, much like we’ve seen this week.

Could it be that stocks are priced appropriately for a bear market bottom?

According to a recent Goldman Sachs study that analyzed the twelve previous bear markets beginning in 1929, assuming a March 2009 end to the present bear market, we are at very normal levels for a bottom. The historical average peak-to-trough price decline was 38%. We reached 56%. The average peak price-to-earnings ratio was 25.6. We reached 22.4 back in October of 2007. And finally, the historical average trough price-to-earnings ratio was 13.9. We reached 13.4.

Only time will tell, but there are numerous questions worth considering. The counter punch is that our economy and our markets are weakening at unprecedented rates with much of the rest of the world in even worse shape. Is this time different?

View our previous market commentaries at ww w.atwatermalick.com.

Foreign Holders of US Government Debt

2009-03-09T21:36:00.003-04:00

I've heard too many misquoted figures lately regarding how much US government debt China currently owns. I've also heard correct figures but without any context. Here are the figures from the end of 2008.

China is the largest foreign owner of US government debt however as a percentage of total outstanding debt, China's stake is relatively small, too small to have any significant effect on the US economy or interest rates.

For an up to date accounting of all foreign holders of US government debt, visit the Treasury's website: http://www.treas.gov/tic/mfh.txt and for a breakdown of the entire national debt visit: http://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm

The Fuel for the Financial Crisis Fire

2009-02-23T13:25:00.003-05:00

Many of the people I've talked to about the financial crisis like to suggest that the cause for the financial crisis was the change in lending practices of Fannie Mae during the Clinton Administration (1999). Although these changes did increase the risk on the balance sheet of the largest mortgage lender in the US, I don't feel this played a significant role in getting us to where we are now.

The reason, because in 1999 and until April 2004, the amount of capital that could be leveraged by investment banks was capped. However, this rule changed on April 24, 2004 for any investment bank over $5 billion in market capitalization. Banks who qualified were now allowed to almost double the amount of leverage. Who qualified under this little known rule change? Just 5 companies.... maybe you remember them: Bear Sterns, Lehman Brothers, Merrill Lynch, Mogan Stanley, and Goldman Sachs.

So before the rule change, the fuel that could be put on the fire was at least known and limited, after the rule change, the fuel [read potential disaster] almost doubled.

This is a slideshow by the NY Times. What's great about this is the actual audio from the meeting when this rule change was debated and passed.

"The Day the SEC Changed the Game"

http://www.nytimes.com/interactive/2008/09/28/business/20080928-SEC-multimedia/index.html

Econ Forum 2/23/09 @ Millersville University

2009-02-23T09:16:00.002-05:00

An Inconvenient Monetary Base?

2009-02-20T11:47:00.007-05:00

Recently, a student of mine shared with me a YouTube video of a Glenn Beck (Fox News) piece on... well, that's what I'm not sure about.

You tell me, what's the chart about and what point is Beck trying to make?

http://www.youtube.com/watch?v=C7Xu3xUkpEE

If you said that the chart is about our national debt and Beck is making the point that it's immoral to leave such a large national debt as the one he appears to point to in the chart... well, you are wrong. Join the majority of people who watch Beck and, sadly, I think Beck believes this too. However, I do agree with the point Beck is trying to make about the national debt, if only it had anything to do with the debt.

What Glenn Beck actually has in the unlabeled chart is the "Adjusted Monetary Base and Reserves" from the St. Louis Federal Reserve Bank (go here to see the actual chart: http://research.stlouisfed.org/fred2/series/AMBNS).

The adjusted monetary base is a measure of the currency in circulation and the cash reserves banks have in an account with the Federal Reserve (both required and excess reserves). In essence, this is the Fed's balance sheet, specifically the Fed's liabilities. In September 2008, this measure began to grow faster than during any other time since the beginning of the Federal Reserve System. There are a couple of reasons for the excessive growth in the monetary base since September 2008. First, the Fed has been adding to the excess reserves of banks by buying distressed bank assets and replacing them with Treasury bills. The Fed then engages in open market operations and buys the Treasury Bills, giving the banks excess cash. Hence, what was not on the Federal Reserves balance sheet before the crisis is now on their balance sheet, some of which is in the form of bank reserves. The idea here is that with these excess reserves (instead of "toxic" assets) and added liquidity, the banks will have the ability and incentive to make new loans.

Second, and I feel the most significant factor in the growth of the monetary base, is that the Fed began to pay interest on the reserves of banks starting in October 2008. Before this time, any bank reserves held by the Fed came at a significant opportunity cost because they did not earn interest. Hence banks only kept their "required" minimum reserves in their account with the Fed. Since the change, banks began putting their excess reserves in their Fed account. Why? Well, to earn interest and because the Fed appears to be a much safer place to put money than in the hands of borrowers in such an uncertain economy. Yes, this policy does seem to go against the idea of getting banks to loan money, but the Fed argues that this measure is important in their ability to manage interest rates in this environment (for the Fed's explanation read: http://www.newyorkfed.org/markets/ior_faq.html).

So think about it. If you are a bank and you had excess reserves before this rule change, you might consider loaning the money out to the public or other banks, albeit cautiously. But now that the Fed is paying interest, and although it's not a great return on excess reserves, given the alternative which is to lend to the public in this economic environment, I think I'd go with the Fed too. Hence, the Fed's balance sheet has soared and the Adjusted Monetary Base has soared and that's what Beck had in his chart as he went up his "An Inconvenient Debt" lift.

What's this all mean? Well, for one, this does not have much to do with the national debt which is what I took away from Beck's video. It means that there is a significant amount of bank reserves waiting for some stability in the economy and when that happens, it would be logical to expect banks to lend to the public. With a significant amount of potential lending, there is a risk of inflation but we are a long way from there and the Fed has tools to control the amount of lending when the time is right.

I know, I know... you question the Fed's ability to control or time anything... that will have to wait for another post.

Stimulus Bill = Government Jobs for Recent Grads

2009-02-18T15:23:00.011-05:00

It is even hard for the experts to predict how many and where new jobs will be created from the stimulus bill. But it seems obvious to me that in order for the government to manage various aspects of the stimulus bill, they will need to hire workers. I think this is one place where job creation is almost certain. I asked one of my students, Jillian Golomboski, to find out some information and here is what she has to report.

With the troubled state of the economy, it is scary as a student to think about attempting to find a job after college graduation. However, the recently passes stimulus bill is predicted to save or create 3.5 million jobs across the US which some people are optimistic about. As a college student in hopes of getting a job after graduation, or as a graduate in the middle of a job search, it would be nice to have a way of finding the government jobs that are being created.

These jobs can be searched for at USAjobs.gov which is a government website that is similar to other job search engines but is specific to government positions. This website is a great place to find new jobs that are opening due to the recently signed stimulus bill. On the site, you can search for a specific position you may be looking for, a certain city you may want to live in, or both. You can also find info about which jobs are currently in high demand. The website allows you to post a resume so recruiters can contact you or you can apply for positions online and send your resume in yourself.

As a member of the site, USAJOBS will keep you updated by sending you alerts and updates on the latest listings. The site will give you tips on searching for jobs so you can find the position you are looking for and the site has guides that can help you with the basic tasks of applying for a job.

In addition, studentjobs.gov is a website that can be helpful for current students. It can help you find internships in both government and non government organizations. It also connects you with different websites to search for careers, many of which are government related.
written by Jillian Golomboski

Lesson on "Real" vs. "Nominal"

2009-02-17T11:49:00.000-05:00

Here's a lesson idea that builds off my post in "More Than Just Invisible Hands" about the hidden shift in state funding for students attending the state system universities (Post on February 7, 2009, "The Hidden Shift in Higher Education Funding").

If you want to adjust a series of current dollar values (a.k.a "nominal") like wages, prices, or investment returns, for inflation (a.k.a. "real"), you first need a price index. A price index is created by taking a basket of goods or services and tracking the purchasing power needed to buy the same basket over time. The basket, theoretically, doesn't change resulting in a consistent measure of inflation. There are many price indices available for use depending on what you want to adjust for inflation. The Bureau of Labor Statisics is a good source for price indices and so is Economagic.

The Consumer Price Index is a common price index used to adjust many statistics for inflation. One example is the Cost of Living Adjustment (COLA), that adjusts the amount retirees receive in Social Security benefits. The purpose of the SS system is to provide retirees with an adequate amount of income to live on consistent (to a point) with the standard of living they had when they retired. If SS benefits were not adjusted for inflation, then the purchasing power of the money they receive would buy less and less over time.

There are other price indices that may be better measures of inflation for specific goods or services. If you were interest in adjusting wages for inflation then you would use the "employment cost index" and you could choose a version of the ECI for the particular occupation or industry.

In the post, I was interested in adjusting the appropriation from the state and the cost of tuition and fees for a general measure of inflation so I chose the CPI for all goods and services in the Mid-Atlantic region (since the data represents PA).

Here is an excerpt from my excel spreadsheet.

Year	Nominal State Appropriation per FTE student	CPI - PA,NJ,DE,MD	Real or Inflation Adjusted Appropriation per FTE Student
1983-84	$3,003	105.6
1984-85	$3,182	110.7	$3,148
1985-86	$3,349	112.6	$3,202
1986-87	$3,449	118.9	$3,381
1987-88	$3,497	125.6	$3,572
1988-89	$3,596	129.9	$3,694
1989-90	$3,751	139.4	$3,964
1990-91	$3,711	144.4	$4,106
1991-92	$3,980	147.5	$4,195
1992-93	$3,916	151.3	$4,303
1993-94	$4,196	155.4	$4,419
1994-95	$4,432	159.1	$4,524
1995-96	$4,553	164.3	$4,672
1996-97	$4,567	166.4	$4,732
1997-98	$4,572	169	$4,806
1998-99	$4,736	172.9	$4,917
1999-00	$4,869	177.5	$5,048
2000-01	$4,921	179.9	$5,116
2001-02	$4,842	185.3	$5,269
2002-03	$4,575	189	$5,375
2003-04	$4,294	197.8	$5,625
2004-05	$4,376	204.9	$5,827
2005-06	$4,408	211.6	$6,017
2006-07	$4,564	219.03	$6,229
2007-08	$4,669	218.19	$6,205

FTE = Full Time Equivalent student

As you can see, once you adjust the nominal appropriation for inflation, it starts to fall short of the inflation adjusted value around 1988. By the end of 2008, the two measures are $1600 apart.

To calculate the "real" column, use the following equation:

where t = year of the inflation adjusted value

By adjusting the data for inflation, we can see that despite the nominal value per student increasing every year, the inflation adjusted value should be much more. In other words, the actual contribution from the state subsidizes a lot less of a college education in 2008 than it did in 1984 and students are paying more for their education.

"Buy American" - Really?

2009-02-15T19:15:00.008-05:00

Watch CBS Videos Online

I'm watching the 60 minutes episode regarding the "Buy American" aspects of the stimulus package and cannot help but post a comment on the policy. This is a shortsighted policy and it exemplifies the general public's lack of understanding about economics and trade.

By forcing firms to buy American made steel, prices for US steel will rise. The policy eliminates some of the world's largest producers of steel from our markets and removes some of the competitive pressure keeping our steel producers productive and efficient - the same competitive pressure that has led to a resurgence of the US steel industry in the last decade.*

Any microeconomics student will tell you that both of these factors will lead to higher domestic prices. Higher domestic steel prices will decrease the supply of steel intensive products and this will in turn increase the prices of many durable goods. So although this policy may have short run positive effects specific to the domestic steel industry, it has the potential to have much larger and longer lasting costs to the entire economy. On net, the economy, the taxpayer, and the consumer lose.

Many like to argue that one reason to protect domestic industries is that free trade really isn't free - that other countries are playing by a different set of rules and we need to support our domestic industries. But I would ask, why do we care? If China is using its wealth or its citizens' tax dollars to subsidize its steel industry, then what they are basically doing is transferring their wealth to us. We can buy cheap subsidized steel (or cheaper steel from other parts of the world who are trying to compete with China). Caterpillar can build cheaper earth moving equipment. Harley-Davidson can produce cheaper bikes. As the economy turns, builders can use cheaper steel in their buildings. Consumers will buy cheaper washers, dryers, and cars. The money US corporations and consumers save on cheaper steel can go to shareholders, new technologies, and new products. Will the US steel industry be hurt? Yes, but the argument from above is now reversed. The US economy, taxpayer, and consumer stand to benefit by more than what the steel industry loses. On net, this is a win for the US economy.

It is certainly hard to think about the big picture when it’s your husband, wife, or friend who is laid off. But there may be better ways to deal with the problem then protectionist trade policies. “Buy American” will, on net, reduce our GDP and make consumers worse off. So instead, let’s try to conservatively estimate the cost we will likely incur from a “Buy American” policy and use that money to instead create an “Educate Americans” policy where workers who lose their job can receive education and training in other industries and professions or we can invest into new research and development. This way, we are investing into human capital and R&D that have the potential to increase the economic pie and we are not incurring a cost that basically only benefits one industry. Think about this too… what does “Buy American” get us in the long run when the economy recovers... higher steel prices and less efficient steel producers who were protected from their competition?

What will be the reason for government assistance then... bad government policy?

* What's funny about this is that the American steel industry and Nucor are praised during the episode for their resurgence over the last decade. It can be argued that the lack of a bailout of the steel industry over a decade ago and the subsequent bankruptcies of many inefficient steel companies is one of the main reasons for industry's new competitive outlook. Although painful for the people and families associated with the industry at that time, the survival, health, and productivity of the US steel industry today is a direct result.

Even Calvin Needs a Stimulus Bill

2009-02-11T18:49:00.003-05:00

I saw the cartoon years ago (big Calvin and Hobbes fan). Recently, this was posted on Greg Mankiw's Blog and it reminded me of how much I enjoy Calvin and Hobbes cartoons.

The Hidden Shift in Higher Education Funding

2009-02-07T17:44:00.026-05:00

I recently took a look at the Factbook for the PA State System for Higher Education. As an economist and an employee of a state university, I was interested in the breakdown of funding over time. I noticed that the data regarding state funding and tuition reveune were not adjusted for inflation. After adjusting for inflation, this is what I found:

Click on graph to view

The graph above shows how there has been a significant shift in pushing more of the cost of a college education in the state's "true" public university system on to the student. The magnitude of this "hidden" shift can only be seen once the data are adjusted for inflation.

Educational and General revenue (E&G) per full time student (FTE) is based on tuition and fees. From 1983-1991, the amount of revenue coming from students increased but remained consistent with the rate of inflation. Then in 1992, the amount of revenue from tuition and fees began to rise faster than the rate of inflation. Explanations for the increase in tuition and fees might include the rising costs of higher education (faster than the rate of inflation) and the expansion of the state system. However based on the data regarding the state's appropriation, another explanation emerges - a change in political philosophy resulting in more of the cost burden being borne by students and less by taxpayers.

If, as many in the state legislature have claimed over the years, the reason for increasing tuition and fees ABOVE the rate of inflation is due to the rising cost of a college education, then why not attempt to split the burden between students and taxpayers? After all, the idea of a public higher education system is to provide the state's residents with a more educated and productive labor force (positive externalities) as well as a government solution to the market failure in credit markets for educational loans. But after looking at the inflation adjusted data, it's clear that the cost burden has shifted on to students.

From 1992-2001, the state's budget appropriation per student remained consistent with the rate of inflation. Yet, at the same time, revenue from student tuition and fees was approximately $2000 more than the inflation adjusted amount. Thus for almost a decade, students continued to contribute more to the state system's operations while taxpayers saw no change.

Then, after keeping pace with the rate of inflation from 1984-2000, the inflation adjusted appropriation per full time student began to fall short. Coincidentally, this was the first year for the new Chancellor, Judy Hample. With tuition and fees running above the rate of inflation and appropriations running below, a gap has opened up and the student is falling through.

By the end of the 2008 school year, students were contributing over $12,700 in tuition and fees while the inflation adjusted amount was just over $9800 and they were receiving approximately $4600 in state funding while the inflation adjusted amount was $6200. On an inflation adjusted basis, they were over paying by almost $3000 and under funded almost $1600 in the 07-08 academic year - the hidden shift that has significantly burdened students.

Funding for State Universities in PA

2009-02-07T16:43:00.002-05:00

Given recent news regarding the state budget, I thought that I’d post an op-ed that I wrote 2 years ago. Recently, Governor Rendell asked each of the state owned universities to set aside over 4% of their current budget just in case the state wants it back. Yes, these are very difficult times and all parts of government need to sacrifice, but many taxpayers are unaware of the relationship between the various “public” colleges and universities in PA. At a time when state funding is being cut and the true state university system has no other choice but to let it affect quality, is it time to ask the wealthier “state-related” universities to dip into their endowments?

_____
Excerpt from op-ed published in March 2007:

Along with all of the other consumers, property owners, and workers in the state, my tax dollars partially fund the education of students attending the 14 state-owned universities known as the State System for Higher Education (PASSHE). Our tax dollars also partially fund the education of students attending the 4 state-related universities, Penn State, Pitt, Temple, and Lincoln as well as students attending select private institutions.

According to the Department of Education’s Summary of State Appropriations for February 2007 (available at www.pde.state.pa.us), taxpayers spent approximately $465 million on the 14 state-owned universities (PASSHE), $644 million on the 4 state-related universities, and $83 million on select private colleges and universities. Based on published enrollment figures, PASSHE received approximately $4,266 per student. Penn State received approximately $4,093 in taxpayer dollars per student, Pitt received $4,941, Temple received $4,985, and Lincoln received $4,095 per student.

Taxpayers might not realize that although their tax dollars support the education of over 250,000 students, the institutions are not created equal. The University of Pittsburgh has the 8th largest endowment of any public university in the country at $1.6 billion and Penn State ranks 12th with an endowment over $1.2 billion according to the National Association of College and University Business Officers.* Combined, Pitt, Penn State, and Temple have an endowment of over $3 billion, over $20,000 per enrolled student. PASSHE, the 14 state-owned universities, has a combined endowment of $209 million, approximately $1,900 per enrolled student.

All of these institutions provide tremendous benefits for the Commonwealth and the students who attend. Yet as budgets shrink and taxpayers demand more accountability, I feel it is important that taxpayers understand the economics and politics of higher education funding in the Commonwealth.

*Data from 2007