Archive for the ‘Economics’ category

Optimizing Government Rebates

April 8, 2008

The government has decided to put out a stimulus package and give people “tax rebates” in the hopes people will spend the money and jump-start the economy. An individual can get around $600 in rebates in the form of a government check that can be deposited into a bank account and then spent as you wish, or not spent at all or spent on paying back loans. And here’s the sticking point. With so many people out there struggling to pay their monthly loan or mortgage bills and other obligations, it seems likely a good percentage of the rebate checks will end up being used to pay off debt. This, of course, was not the government’s intention. The money was intended to provide a stimulus to the economy and to be spent out in the market for goods and services.

Behavioral economist Dan Ariely of MIT, whose book I have cited previously, wondered about this too, and has some great points. He mentions the government’s use of the word “rebate” and notes how when something is called “rebate” people are much less likely to spend it than when it is referred to as, say, a “bonus.” The reason is that a rebate is something you overpaid and you should have never spent to begin with, while a bonus is something extra you get, that you wouldn’t have had otherwise. While technically this shouldn’t make a difference as it’s the same amount of money either way, people look at it in different ways and are more likely to spend “bonus” money and keep “rebate” money. But Ariely is modest and doesn’t purport to know everything. Instead of outright saying the government should have sent people debit cards of the Visa or Mastercard variety (and with “spend the government’s money” printed on them) instead of a check, which, given what we know about people’s behavior, would likely lead to a much more effective stimulus than a “rebate” check, he suggest to test different “methods of delivery” so we can determine which is the most effective one. It’s the kind of thing a company that can’t afford to waste money would do. Or anyone else who wants to get the most bang for the buck for that matter. Then again, it has never been the government’s strength to put forward the most effective solutions.

But let’s get back to the debit card idea. I think it’s a great suggestion – the government could even put an expiration date on the card, some nice text that makes spending even more likely (as suggested above) and could thereby ensure that the economy gets to see the money in the right way and at the right time.

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Economic Apocalypse Now

March 13, 2008

The NYT writes

…Almost everything seems to be going wrong for the American economy at once. People are buying less, but most things are costing more. Mortgage rates are rising, the dollar is falling and prices of key commodities like oil are leaping from one record high to the next.

On Thursday, the dollar plumbed new lows against the Japanese yen and several other major currencies; the price of an ounce of gold jumped above $1,000 for the first time; and lenders raised home loan rates once again. Government figures showed retail sales fell in February as consumers cut back on cars, furniture and electronics.

Stocks fell sharply after the retail sales report was released early in the day, and a large investment fund said it was nearing collapse. The volatility that has defined the market lately continued unabated…

Newspapers are fond of gloomy sounding titles these days, so I had to best them. But yes, Gold just pierced the $1,000 barrier and the dollar has slid to a record low of $1.56 against the Euro. Now, $1.56 is REALLY low. Back in the early 90s the dollar was low too – down to an equivalent of about $1.40 per Euro. Yet, that was a time when the U.S. was just coming out of a recession, not sliding into one, oil was at just over $10 a barrel, and the stock market was entering its fastest and steepest run-up in history. Just for price comparison purposes, the “true” value of the dollar, meaning the value that would buy you an equivalent basket of goods and services here and in Europe is about $1.10-1.15 per Euro, so the dollar is almost 40% away from where it should be. That’s all relative of course, and depends on your interests. Some people would argue with where it “should” be.

Greg Mankiw noted that real interest rates just turned negative recently, a phenomenon that typically drives people to move their assets into more inflation-proof goods or commodities (hence the run-up in gold) and leads capital to seek out markets with better returns (i.e., people sell dollar denominated assets and buy stocks and bonds denominated in other currencies). That again puts pressure on the dollar, which, in turn stokes the flames of inflation, thereby creating a vicious cycle. So what’s the Fed to do? Fight inflation or try to jump-start the economy?

Charts below courtesy of the Financial Times (a year ago would have been a good time to buy gold…).

SIEPR Economic Summit

March 9, 2008

I was over at the SIEPR Economic Summit on Friday and ran into Craig Newmark (Craigslist, there as panelist) and Meg Whitman (former CEO, eBay, just attending) right after I walked in the door. Also there were: Larry Summers (ex-Harvard president and Clinton-era Secretary of the Treasury), Steven Chu (Nobel prize, Physics, Berkeley), and Henry Paulsen (current Secretary of the Treasury), among many other interesting folks. The most attended afternoon session was the one entitled “How’s Bernanke doing?” With all the negative news on the economy shaking up the headlines these days, this was, of course, not surprising.

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Gas Prices

February 29, 2008

I happened upon this picture I took back in 1999 the other day. So almost exactly 9 years ago, a gallon of regular could be had for about 85 cents in Colorado. Admittedly, even back in 1999 that was cheap, which is the reason I took this picture in the first place. In California, a gallon of regular was around $1.15 at that time. I just filled my tank today, and I paid $3.39 a gallon for regular (only the Porsche gets Premium). This translates to an average price increase of about 13% per year for the last nine years. However, prices didn’t increase gradually – we saw huge swings in short periods of time. For example, last week I paid 6% or 20 cents less a gallon than today. Such price volatility has become a staple in today’s energy market. See the chart below for how prices developed since 1996.gas prices

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Predictably Irrational

February 26, 2008

…is a new book by Dan Ariely, a behavioral economist at MIT. The New York Times has an interesting article on his book and its main thesis, that it is more often than not irrational to keep all our options open. Ariely advocates eliminating some of those options as they often consume an inordinate amount of effort and transactions cost. He illustrates his argument with a simple game where the reader is asked to look for money behind three doors on the screen. After you open a door by clicking on it, each subsequent click earns some money, with the sum varying each time. If you don’t click a door it shrinks each time you click on another door, and the neglected door eventually disappears. Your quest is to get as much money as possible, of course. As the game shows, if you keep your options open by making sure the doors don’t disappear, you earn less money than if you keep clicking on the same door all the time. Some more examples…

“…You don’t even know how a camera’s burst-mode flash works, but you persuade yourself to pay for the extra feature just in case. You no longer have anything in common with someone who keeps calling you, but you hate to just zap the relationship…Your child is exhausted from after-school soccer, ballet and Chinese lessons, but you won’t let her drop the piano lessons. They could come in handy! And who knows? Maybe they will…”