life hereafter

random musings from a wannabe economist

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.

I am really tired to turning on the news or reading an article talking about the evils of the “free market” and how we need to put more regulation in place to prevent business from taking advantage of consumers.

When someone says “free market” what do they think of? We’ll, they probably think of the United States and the New York Stock Exchange. More recently, they also probably think about corruption, greed, the big banks, bailouts and absolute failure. Unfortunately, the United States doesn’t actually operate a free market. What we think of as the “free market” today is really a carefully orchestrated process which when you really think about it, no one should have tried to interfere with in the first place.

A truly free market means:

• No Acts of Congress to make buying a house (or anything) more affordable.
• No bailouts for Citi Bank, Bank of America, AIG and Detroit
• No Fannie and Freddie
• No Federal Reserve
• No Federal “Stimulus” program aimed at restarting an unsustainable cycle of consumer spending
• NO GOVERNMENT INVOLVEMENT IN MONETARY POLICY WHAT-SO-EVER
• No artificially inflated housing market (prices must decline to the level at which people are able to consume them)
• A currency which is actually based on something other than government decree (e.g., the gold standard)
• Falling prices and a rising standard of living, just like we had before 1914

However, since we have none of that, we do not have a free market. We have a managed (and chaotic) market. Legislation is passed which misallocates resources which results in an unsustainable boom. This boom eventually busts. This bust is then followed by MORE legislation which attempts to artificially prolong the boom…

The biggest culprit in ALL of this has been the ever expanding, and completely misguided Federal Government. The (hopefully) well-meaning yet continual intrusion into the lives of individual citizens and organizations has caused a serious misallocation of resources and risk. Every-time a subsidy or tax is placed on something a decision is made by investors and consumers. Subsidize or tax something too much a misallocation of resources occurs. For example, provide a subsidy on corn and all of the nations farmers will produce corn, even when it wasn’t profitable before. Next thing you know, corn is in everything because it is suddenly cheaper than other alternatives. Take a look at the food you eat and the products you put in your car, more likely-than-not whatever you consumed today probably contained a good portion of corn-product in it. (Ethanol, Corn Syrup, Corn Starch v. Gasoline, Sugar, Flour)

How about another example? Lower interest rates to zero (a range they would not normally be in if the market dictated terms) and suddenly it becomes very cheap to invest in long-term projects such as buying a house or expanding machinery in a mill. The problem is, everyone now makes the mis-informed decision to take on these large scale investments, however the underlying economic fundamentals are not there. Meaning, there are only so many resources which can be consumed at any given time. Eventually the number of houses, or number of machines you can put in your plant will run out creating scarcity where they never should have been any. This in turn raises prices to a level they should never have been at. With no underlying economic fundamentals to support this artificial growth and inflation, and with a limited number of dollars to go after certain things eventually it will all come crashing down. So, we can see here where a simple thing like trying to stimulate the economy by setting an artificial interest rate, eventually causes collapse. Had the economy been allowed to set its own interest rates and prices, everyone would have been better off.

We were told since children that the business cycle is part of what a free market means. And that we need good economic stewardship (read: regulation) in-order to prevent the bust. One thing is for certain, you can not eliminate the boom-bust cycle without eliminating the factors which cause this cycle. Get over the notion that inflation is just something caused by rising oil prices and deflation is the devil. Rising prices are the result of the managed monetary policy put in place by the Federal Reserve. (i.e., Too much cheap money chasing too few actual goods and services.)

Everything world governments have done to date only serves to prolong the eventual day of reckoning. Suddenly those commercials where people are paid in gum (something tangible) don’t seem like such a bad idea.