life hereafter

random musings from a wannabe economist

As anyone who has ever flown in, once seen, or thought about an airplane, I feel as though it is my patriotic duty to add my inflation adjusted $0.02 into the mix.

In-case you have been hiding under a rock for the past week, Spirit Airlines announced that they will charge up to $45 for passengers bringing carry-on bags onto it’s jets this summer. The announcement has been met with much controversy and has even sparked a new Bill in congress entitled the BAG Act (whose cutesy title makes me gag a little so I won’t repeat it here.)

The great Senator from New York (no, the other one… yes, Schumer… near-sighted protector of consumers everywhere… ok, no? yeah, the CARD Act was short-sighted wasn’t it… ok, that’s a whole other debate, let’s move on…) has received commitment from five domestic airlines that they will not follow suit and also charge for carry-on bags. Unfortunately, the Senator may be on the wrong side of this issue. Closer inspection shows that the argument isn’t so simple.

This is a problem that airlines brought on themselves. Ever since they began charging for checked bags individual consumers decided to outsmart them and bring ever larger bags into the cabin itself. A cabin which was never designed to hold the quantity of cargo it now contains. This causes multiple headaches, it slows down the check-in process, slows down security, slows down boarding and slows down disembarkment. It now takes a solid half hour to board an A-390 as little old women struggle to lift 45-lb suitcases above their heads and into the over-head bins.

Spirit decided to apply a tried-and-true (and effective) economic principle using a (dis)incentive to force people to make a conscious choice about what they are doing. Do I REALLY need my bag with me in the cabin, slowing everyone down, or can it go below?

Of course no one wants to pay any added fees for anything, but perhaps we should all take a good look at what Spirit was trying to accomplish. Maybe folks bringing 40-lb bags into the cabin should pay the fee for the added convenience (for themselves) and inconvenience (for everyone else.)  Then we can all return to sanity and vacationers can check their over-sized and overstuffed bags. While we are at it, airlines should also enforce the rule that your first carry-on goes under your seat. No more putting your coat and purse in the overhead so that your little feets can stretch comfortably. (I’m looking at you.)

I came across something during my Sunday shopping routine that really bothered me today. Recently I have been drinking those V8 Splash, vegetable juice hidden in fruit juice, things. I noticed they make a “light” version which has half the calories and sugar content as the regular version. Upon closer inspection I determined that the actual juice content of the “light” version was 42% juice while the regular version was 100% juice. Could this be? V8 is cutting down on the calories and sugar by simply adding more water to the regular product and selling it at the same price? So simple! So genius!

I noticed the same thing with Tropicana Orange Juice. New “light” version where the only decernable difference in the two products is the fact that the light version is only 50% juice!

It is so, companies have found a way to get consumers to self-select even in the juice aisle. For those of you who are price conscious, my recommendation is to simply buy the regular version and add your own water. (It’ll last longer that way!)

Time for me to take a moment to talk about my favorite topic, the  way we measure our unemployment rate and misinformed reactions. Take this headline from earlier today:

Rally loses steam on Wall Street after early surge fueled by jobs report.

This “rally” was a 148 point rise in the DOW moments after the market opened. And for what? The apparent decline in the unemployment rate from 10.2% to 10% and the smallest amount of job losses (~11k) since the recession began in December 2007.

Take a moment to deconstruct the above statement. The media jumps all over these numbers and makes the following fallacies in their interpretations:

1. The unemployment rate went down. Good.
2. The amount of job losses this month was better than last month. Good.

At first glance this all sounds good. However, here is what the thought process should be:

1. The unemployment rate went down. Why? Was it because more Americans found work? Or, was it because some Americans have been unemployed for more than six months and are no longer considered in the standard measure for unemployment calculations?
2. The amount of job losses this month was better than last month. However, there were still job losses. Taking this little tid-bit and thinking about the unemployment rate, we can see that it is more likely that Americans are either underemployed or are no longer considered “in the labor pool.”

Is it too much to ask for this type of reporting?

Heading over to the Bureau of Labor Statistics website we can see that the raw data for the U-4¹ unemployment measure shows no decrease in unemployment.

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¹ The U-4 measure is the total number of “unemployed” persons plus “discouraged” workers. Discouraged workers are those who have not found work and are no longer considered a part of the labor pool.

Happy Black Friday everyone. Do your part to stimulate our grossly mis-informed measurement of the economy by spending your money on all those door-buster sales!

I just read an interesting passage in The Undercover Economist which directly applies to the current healthcare debate even though it was published back in 2005.

Hartford, the book’s author, describes the current failure of the “free market” in providing an adequate healthcare system in the United States as four-fold:

1. Imperfect information, patients know more about how likely they are to make a claim than insurance companies. In the market this can be solved through self-selection. Younger and potentially more healthy individuals would self-select less coverage with a higher deductable. Older and potentially less healthy individuals would self-select greater coverage.  Due to the fact that the majority of Americans get their healthcare coverage through their employers, healthier employees subsidize less-healthy employees in the form of higher average premiums.
2. Patients have a lack of understanding regarding the full cost as they generally do not have to foot the bill. This leads to a situation where doctors run every expensive test possible, since hospitals are businesses you know. Patients, wanting to get better as quickly as possible would like to have the tests run, even though they might not understand the full cost. Health-insurance companies, also business and also very aware of the cost push back and use varied tactics to deny coverage.
3. Company provided healthcare benefit plans are ineffective based on the one-size fits all approach taken by Human Resources. These plans are ineffective for the same reasons outlined in number 1.
4. The programs run by the Federal government (e.g., Medicare, Medicaid) are extremely costly. On the order of seven times more expensive than other developed countries providing a similar level of care.

It is important to also note that Hartford points out that government run systems are not all that much better for patients. For example in the UK there is a organization which determines which procedures to cover and in which situations. This is based on the number of quality living years a treatment would provide compared to another treatment, even for very different diseases. Once again, the patient is not in control of their care, a bureaucracy makes all the decisions.

Hartford’s solution? Combine the current “market-based” system with some minor government intervention.   Require patients to pick up more of the up-front cost of healthcare, putting them in control of the decision making while providing a safety net in the event something major happens.

Government mandates and establishes as Health Savings account for individual citizens linked to a debit card. Patients are able to contribute money tax free to these accounts up to a certain limit. For individuals who do not pay any taxes or who face hardships preventing them from contributing a certain minimum amount, say $1,500, would receive that benefit from the government. (This is still cheaper per capita for the government than the programs they run now.) Individuals would use this money to pay for things like routine medical visits and simple diagnostic tests. By forcing patients to use this money to cover the “everyday” expenses individuals will take a more active role in their healthcare and really think hard weather it is worth the time and money to run 50 tests.

Finally, individuals would buy catastrophe insurance. This insurance would kick-in to cover the costs in the event that a major medical emergency such as surgery or a life-threatening illness affects the individual.

The benefit with this system is that younger individuals who are generally healthier would be able to save money in their early years to cover expenses in their later years. A 21-year old saving an average of $1,500 per year for 34 years would have $51k by age 55. Employers can even still provide a “benefit” through this plan by contributing a certain amount tax free to the employees savings accounts. I do not believe that individuals should be able to invest this money due to the fact that losses may result in a problematic situation. These accounts can be housed in regular banks in high-interest savings accounts and linked to a debit card for easy healthcare-related purchases.

Hartford notes that a similar system has been in place in Singapore for the past 20 years and seems to be working just fine. I think this is a very compelling alternative to both the current system and any proposed government run system.

Do you ever wonder what school children will read in history textbooks 50 years from now?

Will they actually call this the Great Recession and outline the programs put in place by the Bush/Obama administrations aimed at restarting lending (TALF), propping up asset prices (TARP) and creating jobs (ARRA)? Will they look back the way we did at the Tennessee Valley Authority (TVA), Works Projects Administration (WPA) and Federal Deposit Insurance Corporation (FDIC) and think, “wow, they really did a lot to get them out of such a tough economic time…” Or will history books actually reflect the generally accepted belief that these programs only served to prolong the depressed economic climate of the time, as most reputable historians and economists think today about the Great Depression…

Did we learn from our mistakes? Only time will tell… (I’ll see you at the Tick Tock Diner in New York City on November 22nd 2059.)

Article: CNN Money: Washington’s inconvenient truths

Please indulge me as I discuss another misinformed article on CNN Money / Fortune. I believe the intent of the article was to analyze the effect the recent “economic recovery” will have on the mid-term elections tomorrow. Unfortunately,  somewhere along the way someone took a seriously wrong turn…

Instead of injecting capital into banks who were unlikely to lend the money back out in such a dismal credit environment, Sinai argues the government should have supported housing prices — the root of the crisis — by directly intervening in the mortgage market.

While this statement starts off with a valid point it quickly takes a turn into incompetance. Yes, a mid-tier cause of the crisis was housing prices, however it wasn’t the housing prices were falling which was a problem, it was the fact that housing prices were way too high. The price of housing increased much too fast at an unsustainable pace due to artificial demand. (Artificial demand factors include low interest rates, Fannie Mae & Freddie Mac, and legislation encouraging lending to individuals who would not normally recieve a loan.) By supporting housing prices at a level created by artificial demand, you only serve to delay the enevitable attempt at economic equilibrium.

Of course, Fed monetary policy, which has kept interest rates at effectively zero, has also “had a significant effect on the economy,” says Sinai, producing a stock-market rally that caused wealth gains, and boosting investor confidence. And a lower dollar, he notes, has helped exports, which showed a healthy increase in last week’s GDP figures.

I’ll save for another time the problems with the way in which we measure Gross Domestic Product (GDP.) Once again, Sinai is only correct, but not for the right reasons. Fed monetary policy has had a signifigant impact on the economy, but it hasn’t resulted in the types of tangile gains to which he alludes. Yes, the dollar is low (read: weak) which helps exports but does nothing for the millions of things the United States imports every day. As a net importer the short-term result here is that we all pay more for the things we do not produce at home.

The “healthy” increase in last week’s GDP figures are the result of some one-time consumer driven incentives to make purchases in the 3rd quarter. (e.g., cash-for-clunkers, first-time home buyers tax credit, etc.) Let’s wait until the 4th quarter numbers to see how sustainable this really was.

Additionally, the Fed’s actions and their impact on the economy have not really had time to completely work their way through the system and make themselves known. I’m sure in two years we will all be feeling the effects of an inflated money supply in the prices we pay for gasoline, food and  other goods. And then we’ll know just how much the Fed’s monetary policy has helped everyday Americans.

As the economy improves, economists will give a pat on the back to Bernanke — even as they worry about inflation and what will happen when he takes his foot off the money accelerator.

Have we learned nothing? Didn’t people say this exact same thing about Greenspan back in the earlier part of the century? Aren’t we cursing him now for the period of extreme low interest rates that lead to these asset bubbles in the first place? My, how quickly we forget…

The best part of this entire article is the wonderful commentary from the Internet community at-large. People throw around the term inflation when they mean rising prices. They talk about how the stimulis has positively impacted the economy, yet provide no concrete examples other than, once again, rising asset prices with no fundamental economic growth.

Please remember, an economy largely based upon consumer spending with no underlying rise in the standard of living to support such spending is not a strong, or sustainable, economy.