Market Power

Guaranteed Bonuses

Lucian Bebchuk in the WSJ on guaranteed bonuses:

Financial firms seeking to attract and retain talent are reported to be making a substantial use of guaranteed bonuses, and the French Economy Minister recently called for limits on guaranteed bonuses. While many now focus on how using guaranteed bonuses affects the level of pay, it is important to recognize their effect on incentives. Guaranteed bonuses create perverse incentives to take excessive risks, and they consequently could well be worse for incentives than straight salary.

Sounds like a recipe for moral hazard.  It's easy to say in theory, but when people are buffered against the downside of risk, they tend to take more risks.  A better balance is needed, one where people bear not only the benefits but also the costs of the risks they take.

Club Sports and the NHL

Jim Ballsillie has been trying to buy the Phoenix Coyotes for some time now.  Even though he has given the highest offer for the team, the NHL doesn't want him to buy it, voting him down 26-0.  Why?  Because he might move it to Hamilton, Ontario. 

Even though this is likely a move that would make the Coyotes franchise profitable, it would be geographically close to two other NHL cities (Toronto and Buffalo).  In addition, having an NHL team leave the Phoenix area for Hamilton would likely hurt future media rights negotiations.  So while it's profitable for the individual franchise, it's not profitable for the league.  His purchase offer, despite being the highest offer, was voted down by league owners 26-0.

But the official reason given by the NHL for Ballsillie's denial for admission into the NHL club is that he has questionable character.  Matt Nestor:

The NHL owners are obviously good judges of character. Some that have been approved:

P William “Boots” Del Biaggio (Nashville Predators), now headed to jail on fraud charges.

P Henry Samueli (Anaheim Ducks), now awaiting sentencing on SEC violations.

P John Rigas (Buffalo Sabres), currently in jail on embezzlement charges.

P Sanjay Kumar (New York Islanders), now serving time for conspiracy.

P John Spano (Islanders), who deliberately misled the NHL and the Islanders about his net worth.

P Bruce McNall (Los Angeles Kings), who pleaded guilty to conspiracy and defrauding six banks of $236 million.

Why would you want a successful businessman to taint such a group?

That Boy's Got a Cannon From the Arm

So where does that cannon come from?

“People think it’s about your deltoid, your biceps and triceps. But arm strength comes from your core,” MU strength and conditioning coach Pat Ivey said. “It’s your core first, then your foot placement. Your rotational power dictates how strong your arm is.

“Obviously, the ball leaves his fingertips last, but that power in his fingertips generates in your core. You have to have a good foundation, stability and good mobility through your whole body to translate that into a skill.”

The article notes the difference between Mizzou's starting QB this year, Blaine Gabbert, and last year's starter QB, Chase Daniel.  Gabbert is, the article said, a physical specimen.  Daniel is not.  He was a damn-good QB, but he was no physical specimen.  Daniel does not have the cannon that Gabbert has, but he was an effective close-range sniper.  Perhaps Daniel's core, which resembled a beer drinker's core more so than a body-builder's, was the culprit.

Let's not talk about my core.  Mine is shaped somewhat like a half-full bag of malted barley and make's Daniel's core look like Arnold Schwarenegger's core.  Let's talk about my throws.  For some reason, my throws historically fly through the air with the football pointed up. 

I've only recently been able to get footballs to turn over.  Mind you that I'm referring to tossing small footballs to my single-digit-aged boys.  Once I can get this skill mastered with a big boy ball, then I'm going to work on my punting game.

My youngest throws a nice ball.  He seems to have a natural arm to throw a football.  I haven't done anything to help him along except for playing catch, which is probably for the best.

My oldest has nice hands.  "Catch it like Chase" I told him when I was teaching him how to catch a football, referring to Chase Coffman, the former MU great at TE/WR who had the best hands I've ever seen.  I used to give my oldest a penny for every time he caught the ball "like Chase," with his hands held out in front of him.  Now I just throw the ball at his head.  Both ways have proved effective.

My youngest has always insisted on catching balls with his body, which is really a dangerous thing when dad's passes gravitate towards the nether regions.  Maybe I should start giving him pennies for each pass he catches with his hands.  Then he could afford his own cup.

So I've got a passer and I've got a catcher.  I'll be the coach because I've got a booming voice that can startle a black belt.  It's one of those skills that hasn't yet diminished with age.

Imperfect Information, Bubbles, and the Media

Gina Preoteasa sends along this Economist ink about speculative booms, the media, and imperfect information.  The focus is on this paper by Susan Glover.  The abstract.

Traditionally, models of resource extraction assume individuals act as if they form strategies based on complete information. In reality, gathering information about environmental parameters may be costly. An efficient information gathering strategy is to observe the foraging behavior of others, termed public information. However, media can exploit this strategy by appearing to supply accurate information while actually shaping information to manipulate people to behave in ways that benefit the media or their clients. Here, I use Central Place Foraging (CPF) models to investigate how newspaper propaganda shaped ore foraging strategies of late nineteenth-century Colorado silver prospectors. Data show that optimistic values of silver ore published in local newspapers led prospectors to place mines at a much greater distance than was profitable. Models assuming perfect information neglect the possibility of misinformation among investors, and may underestimate the extent and degree of human impacts on areas of resource extraction.

Here's the Economist's take.

I don't think one has to assume deliberate maleficence on the part of the press to generate unfortunate outcomes in a world (like ours) where agents use social learning mechanisms as a short-cut and rather than doing detailed research. Newspapers during the housing bubble credibly reported stories about those making a killing in housing, and television networks put together programmes showing the life of house "flippers" in a positive light. Amid bubble conditions, even insufficiently sceptical journalism could serve to amplify the signals being received by consumers, who are using the information with which they're presented to make decisions about whether or not to become involved in this or that activity.

Economic models assuming perfect information were low-hanging fruit models:  the easiest to develop and solve.  We still use them today because of their simplicity, but also because of their predictive power.  But one place that they sorely deviate from reality is in the area of information.

If you haven't read it yet, I strongly recommend Daniel Gilbert's "Stumbling Upon Happiness ," a book where Gilbert examines how people's imaginations are developed.  He argues, based upon loads of psychological research, that people's imaginations are influenced by what they have seen and experienced - i.e what they know.  That's why, he argues, that the images of the future held in the 1950's looks a lot like the 1950's.

It's also why I don't think that past science fiction predicted the future of gadgets.  It's just as likely that science fiction, by changing what people could imagine, caused the development of various products.

But I digress. So the fact that media reports, a major source of information, shape people's imaginations is not surprising.  Even if misinformation is not intentional, it's still misinformation that can make a bubble worse.  That's also why it's important to consider multiple sources even if we individually tend to come to predictable conclusions.

The Best Paragraph I've Read in Awhile

Brad Humphreys at TSE:

As an economist, I have trouble understanding the resistance to sports betting in the US. Watching sports and betting on sports are complementary activities. Sports betting is legal in the UK and the Premier League seems to function well in that environment. The NCAA's rabid anti-gambling stance arises because they continue to pay student-athletes a fraction of their marginal revenue product. As long as that continues, there will be incentives for NCAA student-athletes to shave points. Never mind that office pools contribute heavily to interest in the NCAA Men's Basketball Tournament, which happens to pay a lot of the bills at NCAA headquarters in Indianapolis. Kids, don't bet on sports. Bettin' on sports is baaaaaad, m-kay?

Is The Minimum Wage Stimulating?

According to Keynesian economic theory, an injection of funds into an economy will generate a multiple increase in overall economic activity.  My colleague, Dick Schiming, was quoted a month ago by the local television station:

Schiming says he's on the side that thinks raising the minumum wage is a good idea.Dick Schiming says, "It's going to stimulate more spending which will create more jobs in the long run."

And later in the story.

"The idea of economic stimulus is giving people more money to spend by putting money in the pocket of low income workers. They'll spend it. So in essence it can be viewed as a stimulus package."

So if you take the basic identity GDP = C+I+G+NX (spending on economic output is the sum of consumption, investment, government spending, and net exports), Dick is arguing the minimum wage will increase C. 

And it's not just Dr. Schiming making this argument (see here).  So, I ask them this:  why not set the minimum wage at $100 per hour?

A common finding in minimum wage studies is that the elasticity of demand for minimum wage workers is somewhere around -0.1 in the short run.  That is, a 10% increase in the minimum wage causes a 1% decrease in employment.  When demand is inelastic and the minimum wage increases, minimum wage workers as a group will realize higher incomes in the short run although some members of the group will have lower incomes. 

The problem with Dick's argument is that increased wage payments from businesses do not represent an injection of funds into an economy.  Think of it this way.  If I take the money out of my left pocket and put it in my right pocket, do I have more money in my pockets?  No.  I haven't changed the stock of cash in my pockets, only its distribution.  Likewise, the minimum wage workers will have more money, but business owners will have less money. 

So while that part of C driven by minimum wage workers is likely to increase, it will be offset by a likely decrease in that part of C driven by business owners and a decrease in business investment, I.

For a policy to be truly stimulating, it needs to encourage more voluntary trades.  Increases in the minimum wage causes unemployment.  That is, it discourages voluntary trades in the low skilled labor market.  Moreover, to the extent that an increase in the minimum wage increase prices of goods/services produced by minimum wage workers, it discourages voluntary trades of consumables. 

Robert Lucas on Economics

Nobel laureate Robert Lucas has penned a column defending macroeconomists against two recent Economist articles.  In so doing, he discusses the recession, the financial crisis, the efficient market hypothesis (EMH), and why economists did not forecast the severe downturn.  If you want to read the Economist articles to which he is referring, see here and here.  An excerpt.

Mr Fama arrived at the EMH through some simple theoretical examples. This simplicity was criticised in The Economist’s briefing, as though the EMH applied only to these hypothetical cases. But Mr Fama tested the predictions of the EMH on the behaviour of actual prices. These tests could have come out either way, but they came out very favourably. His empirical work was novel and carefully executed. It has been thoroughly challenged by a flood of criticism which has served mainly to confirm the accuracy of the hypothesis. Over the years exceptions and “anomalies” have been discovered (even tiny departures are interesting if you are managing enough money) but for the purposes of macroeconomic analysis and forecasting these departures are too small to matter. The main lesson we should take away from the EMH for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them.

The Economist’s briefing also cited as an example of macroeconomic failure the “reassuring” simulations that Frederic Mishkin, then a governor of the Federal Reserve, presented in the summer of 2007. The charge is that the Fed’s FRB/US forecasting model failed to predict the events of September 2008. Yet the simulations were not presented as assurance that no crisis would occur, but as a forecast of what could be expected conditional on a crisis not occurring. Until the Lehman failure the recession was pretty typical of the modest downturns of the post-war period. There was a recession under way, led by the decline in housing construction. Mr Mishkin’s forecast was a reasonable estimate of what would have followed if the housing decline had continued to be the only or the main factor involved in the economic downturn. After the Lehman bankruptcy, too, models very like the one Mr Mishkin had used, combined with new information, gave what turned out to be very accurate estimates of the private-spending reductions that ensued over the next two quarters. When Ben Bernanke, the chairman of the Fed, warned Hank Paulson, the then treasury secretary, of the economic danger facing America immediately after Lehman’s failure, he knew what he was talking about.

HT Eric Parsons.

Getting Rid of Economics at USM

The University of Southern Mississippi is proposing to eliminate its Economics Department in order to cut costs.  USM administration point to a low number of majors as the primary reason.  HT John Whitehead.

Economics is all about tradeoffs.  Even if piddling in the shower is green, I'm not going to do it.  Ew.

"The 12 most annoying types of Facebookers."  This morning I got up, grabbed a cup of coffee, Lakota Coffee of course, and went outside to get the paper.  I tried to read the local paper, but it was still too light out....