Archive for February, 2007|Monthly archive page

Sex and Inflation


from Merrill Lynch’s chief economist, David Rosenberg]

Gender gap in the CPI? Focus on firms that cater to women

After sifting through the January CPI report in more detail, we discovered a disparity between the pricing power of retail establishments that cater to women and those geared towards men. Now there is no doubt that some men like to shop for bedroom and dining room furniture and some women love to ride motorbikes, so this may be seen as a sweeping generalization. But there may be an investment theme embedded in the CPI report that transcends “what the Fed should and shouldn’t do” because core inflation came in 50 basis points above expected. This investment theme stems from the fact that segments of the retail sector that are geared towards women happen to be experiencing faster pricing trends; and just the opposite for retailers that cater to men. We actually calculated (see chart below) a female and male inflation rate and the former is now running at 3.6% year-over-year while the latter is running just 0.2%. In other words, retail pricing power in female-oriented goods and services is running almost 20 times stronger than that of males. The major takeaway is that equity investors who have a core holding in US consumer stocks may want to take note of some fascinating economic and demographic trends taking place that are fuelling this divergence.

[stolen from the lbo-talk mailing list]

Humanistic Japanese Capitalism

OK. Capitalism is not really humanistic.

Mehri, Darius. 2005. Notes From Toyota-Land: An American Engineer in Japan (Ithica: Cornell University/ILR Press) certainly makes Toyota seem pretty inhuman, but this not from the New York Times certainly makes Japan seem light years ahead of the US.

Uchitelle, Louis. 2007. “Job Security, Too, May Have a Happy Medium.” New York Times (25 February).

“If cost-cutting is necessary in Japan, there is a pecking order, says Yoshi Tsurumi, an economist at Baruch College in Manhattan and a consultant to Japanese companies. Dividends are cut first, then salaries — starting at the top. Finally, there are layoffs — if attrition is not enough to shrink staff. “The matter of flexibility is important,” Mr. Tsurumi said, “but the Japanese notion is to retrain and transfer people within an organization”.”

International Speculative Bubbles

One of the constant themes in my books is the underlying deflationary nature of capitalism, which has to be put off by various means, such as expansionary monetary or fiscal policy, which often have unforeseen consequences.

Japan has been suffering a slowdown for some time. Very easy monetary policy has been used to keep demand higher. Low Japanese interest rates have caused people to borrow money in Japan, then trade Japanese currency for other currencies, and then finally invested where returns are higher.

This procedure, known as the carry trade, seems to have helped to finance a lot of the recent corporate buyouts, which produce a bubble elsewhere. At the same time, the carry trade tends to reduce the value of the yen, promoting Japanese exports.

How long such imbalances can continue is an open question. What follows is a New York Times article explaining the situation:

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The Strange Distorions of Cost-Benefit Analysis

In my book, Manufacturing Consent, I described how business-friendly forces have pushed to eliminate any regulations that cannot survive cost-benefit analysis, where virtually all non-monetary benefits are dismissed and those that are counted are low-balled, which the costs to business are overestimated. In the beautifully-named GWOT (Global War on Terror), the costs of actions are ignored while the benefits are greatly magnified. Here is Dick Cheney’s take on this.

Suskind, Ron. 2006. The One Percent Doctrine: Deep Inside America’s Pursuit of Its Enemies Since 9/11 (NY: Simon and Schuster).

61: Cheney sat for a moment, saying nothing. “We have to deal with this new type of threat [that Pakistani scientists were helping Al Qaeda build a nuclear bomb] in a way we haven’t yet defined,” he said, almost to him”

62: “With a low-probability, high-impact event like this …. I’m frankly not sure how we engage. We’re going to have to look at it in a completely different way” “If there’s a one percent chance that Pakistani scientists are helping al Qaeda build or develop a nuclear weapon, we have to treat it as if it is a certainty in terms of our response,” Cheney said.

Pharmaceutical Tragedy: boo-hoo for a greedy corporation

Genentech’s stock fell on the news that its already modestly priced drug, Avastin, could work effectively at lower doses, potentially dropping the monthly price of treatment from $8,800 to a mere $4,400.

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The Degradation of Science: From Bell Labs to Patent Trolls

Bell Labs was once a jewel of American science. After the Justice Department broke up the Bell System, AT&T let Bell Labs deteriorate until it spun them off as part of Lucent.

Lucent, in turn, deteriorated until it was bought up by Alcatel, which seems to be now behaving as a patent troll.

Alcatel just won an enormous patent suit against Microsoft — $1.52 billion for using Bell Labs work on the MP3 format. The suit manner may or may not hold up, but I presume that Alcatel is now preparing suits against others, finally figuring out how it can commoditize the work of Bell Labs.

Economics as a Science of Modeling: A Skeptical View

Modern economics, as it is practiced today, is sometimes called a science of modeling.” New York Times discusses a science book here that is skeptical about modeling. Much of his critique seems equally applicable to economics.

Dean, Cornelia. 2007. “The Problems in Modeling Nature, With Its Unruly Natural Tendencies.” New York Times (20 February 20).

“When coastal engineers decide whether to dredge sand and pump it onto an eroded beach, they use mathematical models to predict how much sand they will need, when and where they must apply it, the rate it will move and how long the project will survive in the face of coastal storms and erosion.”

“Orrin H. Pilkey, a coastal geologist and emeritus professor at Duke, recommends another approach: just dredge up a lot of sand and dump it on the beach willy-nilly. This “kamikaze engineering” might not last very long, he says, but projects built according to models do not usually last very long either, and at least his approach would not lull anyone into false mathematical certitude.”

Pilkey, Orrin H. and Linda Pilkey-Jarvis. 2007. Useless Arithmetic: Why Environmental Scientists Can’t Predict the Future (NY: Columbia University Press).

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Did George Bush Kill Anna Nicole Smith? Where is the Press When We Need It?

Well, no. He did not have to. Even so, the death of Anna Nicole has done wonders for the administration. Reporters breathlessly following her demise have no reason to pursue the build-up to the war in Iran.

What do the deaths of another few thousand soldiers mean compared to this tragedy of Anna Nicole? True, the demise of Anna Nicole does not rise to the importance of the O. J. Simpson trial, but compared to the minor threat of war for both Iranians and Americans, this heroic reporting on Anna Nicole is praiseworthy.

I do have one bone to pick with the press. In his recent talk to the American Enterprise Institute, our President explained how he would pursue the war in Afghanistan:

“I said earlier that oftentimes people support the Taliban, or sometimes they support the Taliban in Afghanistan because it’s the only job they can find. If that’s the case — and I believe it’s true — we need to help these folks provide an economy that gives hope. And so one way we can do this is what we call reconstruction opportunity zones that exist on both sides of the Pak and Afghan border. These zones will give residents the chance to export locally made products to the United States, duty free.”

Got that? Free trade will win the war. All you have to do is expand this enterprise zone to include Iraq and the Iranians will have no choice but to join — hopefully before the bombs fall.

Obscene and Ostentatious Wealth

Frank, Robert and Daniel Michaels. 2007. “One ‘World’s Biggest Jet,’ Please: Airbus to Sell Giant A380 to a VIP Customer; $300 Million, Interior Extra.” Wall Street Journal (16 February): p. W 1.

“Now an individual customer is raising the bar, signing up for the largest passenger plane in history. European jet builder Airbus has signed a letter of intent with a Middle East buyer for one of its new A380s, which sell for about $300 million, according to John Leahy, Airbus’s chief commercial officer for customers. Commercial versions of this plane can be configured to seat as many as 853 passengers on two decks. But this buyer, whom Airbus declined to identify, will spend an additional $100 million to turn the craft into a more exclusive conveyance Airbus calls The Flying Palace.”

“New York-based jet-interior expert Edése Doret says he is designing the A380 for the customer, who he says is a head of state. While the jet hasn’t yet been built — Airbus is as much as two years behind schedule for the A380 — Mr. Doret says his plan includes two dining areas, a 600-plus-square-foot master bedroom and a game room. His plans also call for a lounge with giant curtains that will mimic tents of the Arabian desert, and a fiber-optic mosaic that will depict a shifting desert scene. Mr. Doret says he is including a whirlpool tub, believed to be the first in the air. To comply with Federal Aviation Administration regulations, the tub will have a rapid drainage system that can empty the standing water in seconds to a tank in the cargo hold. The plane is also slated to include a missile-defense system, he says.”
“Being says the majority of private buyers for new planes are from the Middle East, but that Americans, Europeans, Russians and Asians are also starting to place orders. The company says seven of its orders from private customers are for Dreamliners, and the other four are for 747-8s, the planned update to its storied jumbo jet.”

Is the New York Times Learning about the Economy?

Sure, the paper screwed up on Iraq and is not doing much better on Iran, but maybe it is learning about economics.

Barrionuevo, Alexei. 2007. “Rising Electricity Prices Set Off Regulation Debate.” New York Times (17 February).

“Utility rates had been capped in Illinois for 10 years, but the state agreed last year to raise them as part of an effort to open up its electricity markets to competition. Maryland, New Jersey and a half dozen other states are also removing caps. But residents in this part of Illinois are seeing some of the highest rate increases in the country — in some cases, 100 percent to 200 percent higher.”

“In Maryland, the decision by the public utility commission to allow a rate increase of 72 percent this year prompted a special session of the General Assembly to provide relief. And in Virginia, lawmakers voted Feb. 6 to abandon the state’s decade-old experiment by halting its planned market opening in 2011.”

“The idea at the time was that by the time the rate freezes would expire, the competitive pressure would drive prices down and they would expire with a whimper rather than a bang,” said Lawrence J. Makovich, managing director for global power at Cambridge Energy Research Associates.”

Frank, Robert H. 2007. “A Health Care Plan So Simple, Even Stephen Colbert Couldn’t Simplify It.” New York Times (15 February).

Okay, it is just a columnist rather than a news story, but he offers a nice twist based on New England Journal of Medicine article by Ezekiel J. Emanuel, M.D., Ph.D., and Victor R. Fuchs, Ph.D.

The idea is to bribe the insurance companies, offering them what they would have earned, then reducing that amount over time.