Category Archives: business economics

The Newspaper Business

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The newspaper business is going to die within the next twenty years. Newspaper publishing will continue, but only as a philanthropic venture.

That was me, writing in 2002.

“We’re in a post-profit era for newspapers,” Mutter says, noting the not-entirely-economic reasons behind recent rich guy purchases of the Globe and the San Diego Union-Tribune, not to mention the Koch brothers’ interest in the L.A. Times.

That is Lydia DiPillis, writing on August 5 of this year. She claims, however, that the Washington Post is not a charity case, even though she uses the term “money pit” to describe its current business condition.

Richard Epstein on Freddie, Fannie

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He writes,

There is no way that a statutory scheme that was intended to nurse Fannie and Freddie back to health as private corporations can be used unilaterally by the government to devour the interests of the very private shareholders that they were intended to protect. Government actions that don’t comply with the minimum standards of the APA should have no force and effect. Thus, even if the 2008 transaction stands, the 2012 transaction should be nullified, and the private and common shares restored.

I have no understanding of the legal mechanics. But in economic terms, I do not think that the point of conservatorship was to “nurse Fannie and Freddie back go health.” That would be like saying that you are going to nurse the parrot back to health in the famous Monty Python skit.

Fannie and Freddie were dead as private corporations, because investors would no longer lend to them at interest rates that were low relative to the rates that they could earn on assets. Fannie and Freddie have spent the last five years borrowing at rates that they only could have obtained with full taxpayer backing. The spreads that they enjoyed between the rates on their investments and the rates at which they have borrowed are in no way due to risk-bearing by shareholders. The taxpayers are the risk-takers, and the taxpayers deserve the rewards.

Epstein may have some points in terms of legal technicalities. But I think it’s a stretch to say that unless those technicalities are dealt with, the entire rule of law collapses and shareholders will never again have rights. You have plenty of rights if your management does not drive your highly-leveraged company into ruin, so that the only way it can stay out of bankruptcy is to get the government to put its full faith and credit behind your paper.

Julio Rotemberg’s Theory of Fed Behavior

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Simple, but brilliant.

This paper focuses on a particular force that may help account for the qualitative changes in monetary policy across these periods. This force is the tendency of the Fed to act as if it were penitent when critics successfully argue that “bad outcomes” are a product of Fed “mistakes.” The description of past policy as having involved mistakes is a staple in the literature discussing Federal Reserve actions.1 Critics who seek to blame the Fed for bad outcomes typically go beyond saying that a particular policy move was unwise. Rather, they tend to argue that a particular pattern of Fed behavior is responsible for a series of unwise policy moves, and it is this pattern that they paint as being mistaken. The Fed then tends to become averse to this, now successfully vilified, pattern of behavior.

I think that all organizations act this way. When something bad happens, the organization goes overboard to make sure that it does not happen again. This may or not be constructive, given all of the potential bad things that might happen. Fits in with “fighting the last war” syndrome.

From a conference on the Fed’s 100th anniversary. Other papers here, and also a speech from Ben Bernanke.

The Theory of the Firm: Hospital-Provided Health Insurance

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Sarah Kliff writes,

Insurance plans and hospitals are typically at loggerheads. They squabble over claims that the hospitals submit and insurers sometimes deny…

Now, a growing number of large hospital systems are betting that, with a little help, they can do that just as well — or even better…Seeing health insurance companies as the middlemen, these hospitals are only too eager to squeeze them out.

Often, there is a lot of back-and-forth between hospitals and insurance companies over paying a claim. The hospitals think that by vertically integrating they can get rid of the unnecessary paperwork.

I think that Ronald Coase and Oliver Williamson might be a bit more skeptical. Or at least I would. The hospital half of the insurance-hospital hybrid still has an incentive to do find ways to raise charges. And the insurance half still has an incentive to find ways to reduce charges. They no longer have the cost of dealing with each other at arms length. Instead, they face the cost of creating internal alignment. Do not assume that this cost will be trivial.

Nothing is ever Democratized

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So says Nick Pinkston.

Did inkjet printers democratize printing? Does Amazon have a bunch of HPs printing off their books? No way – they have very specialized machines doing this, and the same is true for everything in engineering. Remember that old saying: “Good, Fast, Cheap – pick two” – this applies to all engineering problems. You optimize for “good” and “fast”, and this comes at the expense of “cheap” – which means it’s not democratized (few people can own it).

…
you may democratize prototype-grade 3D printers, but then others will be make huge, fast printers that are able to beat your per-unit cost by an order of magnitude – but at high capital cost.

Pointer from Tyler Cowen.

His skepticism about 3D printing sounds right to me. But the claim that nothing is ever democratized sounds too strong. Computers became democratized. Internet access became democratized. In some sense, wealth has become democratized.

What I mean by democratized is that lots of people were able to use them to be productive. Not everyone, of course. And if people look at their well-being primarily in comparison to others around them, then a democratized increase in well-being is mathematically impossible.

The Stock Market

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Even after yesterday’s 2-1/2 percent drop, the S&P 500 is still higher than when I wrote

if the stock market is up on the basis of little or no positive economic news otherwise, then that sort of says that the reason people are buying stocks is because the market has been going up. That’s not what one would call a sustainable model.

The financial pages say that markets have realized that the Fed cannot keep monetizing large deficits forever. And this is news because…..?

I am one economist who makes a point of not giving an economic interpretation to stock market moves.

Yet another idea for an Education Start-up

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So, I tried to read my free review copy of The UnStoppables, by Bill Schley. I hate his writing style, but I think that on substance the book, which is a guide/pep-talk for entrepreneurs, is actually good. In talking about how to come up with a business idea, Schley suggests asking yourself these questions (p. 22):

1. I wish I could, so why can’t I?

2. What if?

3. How come no one ever fixed that?

4. Why does this have to be such a pain?

For a long time, I have wished that I could better navigate the world of online learning. What if there were a guide for online learning that students could use to find the best resources and that educators could use to benchmark the competition and share resources? There are lots of great learning videos online, but there is a lot of garbage, and it’s not easy to get straight to the best. How come no one ever fixed that? As a teacher, I find it very difficult to share learning resources with other teachers–using some of their videos, adopting some of their online quizzes, etc. Why does this have to be such a pain?

On my recent vacation, I saw how Rick Steves and tripadvisor.com have gone a long way toward solving these problems for travel. So my latest idea for an education start-up is something like a Rick Steves or tripadvisor.com for online learning resources.

The Rick Steves model ensures consistency of how evaluation takes place, and it gives you the voice of a dedicated, opinionated consumer. The tripadvisor.com model uses crowd-sourcing, so you get less consistency of methodology but broader, timelier coverage.

Let’s assume the Rick Steves model, and take first-year statistics as the prototype. If you were Rick, you would list the topics that you think generally belong in such a course. Then go through all the online materials available from Khan, Kling, Udacity, Coursera, Carnegie-Mellon, etc., and create a model itinerary for students. If one of these brands just dominates in every topic within first-year statistics, then recommend that brand. Otherwise, for each topic, list the top three explanatory videos, the top three sets of interactive exercises, etc.

It is important to remember that your perspective is that of a typical student, not that of someone with an advanced background in statistics. Your advanced background may lead you to over-rate deep, brilliant lecturers (like Udacity’s Thrun) and under-rate folks like Khan who keep it simple and glide past issues that someone pursuing a Ph.D in stats would want to treat more carefully.

Two factors would make the online learning space harder to profit from than the travel space. First, the online learning world changes more rapidly. It takes a couple of years to put up a new hotel. It takes much less time to put up a new lecture or quiz on the central limit theorem. So you couldn’t sell printed books easily, since they would be out of date before they are published. Even with a web site, a lot of the work you do in 2013 will have to be tossed out or re-done in 2014.

The second factor is that it would be harder to generate revenue from advertising. Travel web sites are complementary to the existing bricks-and-mortar folks (hotels, restaurants, rental car companies), who get the concept of advertising. Bricks-and-mortar educators, on the other hand, view the online world as a competitive threat rather than as a pure complementary good. It’s not clear that a for-profit university or textbook publisher would see any point in advertising on the sort of site that I have in mind.

Burt Malkiel vs.John Cochrane on Investment Managers

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In the Journal of Economic Perspectives, Malkiel writes,

The major inefficiency in financial markets today involves the market for investment advice, and poses the question of why investors continue to pay fees for asset management services that are so high. It is hard to think of any other service that is priced at such a high proportion of value.

Cochrane writes,

After all, active management and fees have survived 40 years of efficient-market disdain. Economists who would dismiss “people are stupid” as an “explanation” for a pricing anomaly that lasts 40 years surely cannot use the same “explanation” for the persistence of active management. Economists who think the evidence favors lots of “inefficiencies” in the market are even less well placed to deplore active management. They should conclude that we need more, or at least better, active management to They should conclude that we need more, or at least better, active management to correct the market’s inefficiencies. Their puzzle is the inability of existing managers correct the market’s inefficiencies. Their puzzle is the inability of existing managers to pick low-hanging fruit. to pick low-hanging fruit.

I suppose that one can believe that there are a lot of inefficiencies in the market and also believe that active managers are so bad at finding these inefficiencies that they actually make things worse.

Anyway, read the whole essay.

Connecting Household Balance Sheets to PSST

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Interesting comment found by Glenn Reynolds. From Jeffrey Levin:

If you dig around and research start-ups you will find that the majority of start-ups are funded by second mortgages or HELOC draws. Due to the housing crash, that equity is just not there for the vast majority of people looking to start up a new business. Its one of the large reasons why commercial credit expansion has been so moribund. Without getting off the ground from seconds or HELOC’s all those startups that would have made it past year 1 and then been able to obtain standard commercial business loan never got off the ground and thus never graduated to commercial loan financing. You have to walk first before you can run. Startups don’t start in the commercial loan department (at least most of them don’t).

Recalculation means discovering new patterns of sustainable specialization and trade. Doing so requires entrepreneurial trial and error. As Levin points out, the stereotypical 20-year-old in a garage is actually atypical. Most entrepreneurs are like I was, forty years old and risking accumulated wealth. If my wealth had suddenly been halved in 1993, I doubt that I would have started a business in 1994.

And whose wealth got crushed by the housing crash? According to a paper by Edward Wolff, as cited in the WSJ blog:

The big drop in home prices between 2007 and 2010 meant a 59% loss in home equity for people under 35, compared with just 26% for people generally. That meant a massive loss of wealth, or “net worth” — what people own minus what they owe. People ages 35-44 saw a 49% fall in home equity.

Thanks to Mark Thoma for the pointer.

Wesley Mouch Update

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Veronique de Rugy writes,

In 2009, Fisker received a $529 million federal loan from the Department of Energy’s ATVM program. According to the New York Times, two years after receiving the loans, the company repeatedly missed production targets and other deadlines. They’ve now fired 75 percent of their workforce and hired bankruptcy advisers. It has not built a car since July 2012. That lead the DOE to suspend their support, after having guaranteed $192 million of the $529 million loan. Like Solyndra, taxpayers will foot that bill, minus the $21 million that the government managed to seize from the company’s cash reserves.

At the time that the loan was made, I hailed it.

Forget a carbon tax. Forget cap and trade. Steven Chu is going straight to picking winners and losers.

Two months later, I was still ecstatic.

The American people are being forced to participate in a venture capital fling in which they take most of the down side and none of the up side. And it is not being debated. Nobody has to come before the public and explain themselves. If you call yourself a progressive, are you proud of this?

If there were any justice in the world Steven Chu would be occupying a cell with Bernie Madoff.