Posts Tagged ‘Economics’

The election: economics or demographics?

June 12, 2012

Article in the NY Times concluded that Obama has a tailwind because shifting demographics work to his advantage  …

This fall’s election will be a  contest pitting “demographics versus economics.”

White working-class voters have gotten seriously squeezed by high unemployment and stagnant or declining incomes.

But, the number of working-class whites is shrinking and minority voters have edged up as a share of the population … the combined effects of immigration and disparate birthrates.

Comprising 89 percent of the electorate in 1976, whites had fallen to 74 percent four years ago. During the same period, Hispanics grew from 1 percent of the electorate to 9 percent.

In 12 battleground states, the proportion of votes cast by working-class whites, a group Mr. Obama lost lopsidedly in 2008, will drop by three percentage points this fall.

A number of states are urbanizing and losing their historically large rural conservative vote.

Somehow, it doesn’t seem like a good trend when “working class” people — regardless of their race — simultaneously get squeezed economically and lose their voting clout …

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Timing is everything …

January 18, 2012

Interesting op-ed in the WSJ over the weekend: The Truth About Bain and Jobs

The article’s punch line: Job creation and destruction are both relentless. The small difference between the two is what we call prosperity.

Painstaking research by economists Steven J. Davis and John Haltiwanger revealed a side of America’s dynamism that isn’t always pretty.

Between 1977 and 2005, years roughly overlapping Mr. Romney’s business career, some 15% of all jobs were destroyed every year, even as total jobs grew by an average of 2% a year.

Job creation and destruction are both relentless, the authors showed in paper after paper.

The small difference between the two is what we call prosperity.

Good point !

For me, a second point hit very close to home:

Nobody—not even those whose billions were earned in private equity  —envisioned the astounding rise in business values in the gilded ’80s and ’90s.

When Mr. Romney was asked by his boss to start Bain Capital in 1983, the Dow was at 1086.50.

When he left on Feb. 11, 1999 to run the Olympics, it was 9363.46.

His is not the only recent fortune owed partly to this accident of timing (Warren Buffett’s and many others come to mind).

Indeed, if we’re being honest, Mitt here is representative of a generation of professionals whose serendipity it was to have spent the 1970s on our education and then to be spit into the job market just as one of history’s great economic liftoffs was taking place.

But, when private-equity investors sniff a profit opportunity, they are probabusually one step ahead of everybody else.

Of course, I like the swipe at Warren Buffett who, in my opinion, is way over-rated.

But, the author reminds me that I owe a lot to timing, too.

As Grandma Homa used to say: “Sometimes it’s better to be lucky than to be smart.”

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Have I got a deal for you …

January 3, 2012


Big victory for the middle class.

President Obama got his 2-month payroll tax holiday.

So, 150 million folks get $1,000 in 2012 tax savings.


The program is only for 2 months, so the committed tax savings are only $167.

Still better than nothing, right?

Not so fast

How is it being paid for?

Well, first, “paid for” is a misnomer … it’s being offset in the governments 10 year hypothetical budget.

Hypothetical because the Senate hasn’t passed a 2012 budget, let alone a 10-year budget.

OK, let’s pretend.

The 2-month payroll tax holiday is being offset (over 10 years) by an increase in mortgage fees,

Every new or refinancing  loan going through Fannie Mae or Freddie Mac – that’s over 90% of all mortgages – get tagged with an added  fee (20 basis points, .2 %)

According to NPR, the added fee works out to about $17 per month for an average mortgage of about $200,000.

So, let’s work the nums.

“Average” folks who don’t have or don’t get or don’t refinance a mortgage walk away with $167 free and clear.

That’s a good deal.

“Average” folks who initiate a loan or refinance through Fannie or Freddie get hit with $17 in added monthly fees as long as they hold a mortgage … assuming that the added fee never goes away – a pretty safe bet.

Let’s pretend the average guy stays mortgaged for 30 years.

What’s the financial impact?

Well, the nominal cost of the mortgage adder is over $6,000.

But, to be fair, let’s discount it back to a present value.

For 30 years, the mortgage cost adder has an PV of over $3,100.

So, for the average guy with a new or refinanced mortgage, the payroll tax holiday will COST him a NPV loss of almost $3,000.

Still wonder why the economy is in trouble?


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Not everyone can be the marginal cost consumer…

September 30, 2011

Punch line: Netflix got into a hole by initially giving away its video streaming offerings … in essence, pricing based on marginal cost.

That can work, when everybody isn’t a marginal customer …

Excerpted from The Atlantic by Megan McArdle:
The Qwikster and the Dead

Netflix tried to build their streaming video service by giving it away for free, as an add-on to their snail-mail service. 

This was a good way to add customers.  But the history of the internet indicates that once you convince people something is supposed to be free, or close to it, you will have a devilishly hard time getting them to pay for it. 

People decided that they were supposed to be able to stream unlimited movies for free.

This never made any sense; people were confusing the marginal cost with the average cost. 

You can always get a sweet deal if you are the customer who gets marginal cost pricing

Medicare does this — reimburses hospitals at above their marginal cost, but below their average cost, so that private insurers have to pick up most of the hospital overhead. 

European countries do this with prescription drugs: reimburse above the marginal cost of producing the pills, but below the total cost of developing the pills, so that the US has to pick up most of the tab for drug development.

The problem is that as voters and as customers, we often get the notion that marginal costing can be extrapolated to everyone. 

So liberal policy wonks want to save money by putting everyone on Medicare, or some equivalent program that uses the government’s monopsony pricing power to get lower prices for everyone.

But, it doesn’t work that way.

Everyone cannot be the marginal cost consumer. 

Someone has to cover things like overhead and development costs. 

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