Archive | Economy

Death-Bet Insurance

Death-bet insurance involves a person taking out life insurance, and then turning around and selling the policy to a stranger – a hedge fund, for example, via intermediaries – who pays the premiums and collects after the insured’s death.  Growing in popularity as a system of side-bets on the insurance markets, it has also been controversial particularly as it raises questions about whether it violates the rule of having an insurable interest.  On the other hand, it puts a bundle of immediate cash into the old person’s hands.  The overall investor problem is that if the insured person does not die on schedule, then the investor has the double-whammy of having to wait for payout and pay premiums in the meantime or lose the payout.

Insurance companies have been suing the third party investors, the investors have been countersuing the insurance companies, and in some cases, relatives of the deceased insured have been suing to claim that the insurance proceeds really belong to them.  There have been several articles in the WSJ and elsewhere describing the contests that have arisen particularly as the business model has been under pressure on account of bad actuarial assumptions about how long the insureds would live.  There is a good piece on the whole litigation mess in today’s WSJ:

The life-policy secondary market was one of many sent reeling by the global financial crisis of 2008-09, but it also has been hurt by revised actuarial tables, which show older people living longer, and the mounting litigation.

Apart from several hundred suits that have been filed by insurers, suits also have been filed by relatives of some of the deceased elderly, alleging that death benefits belong to the family members.

With much of the litigation in early stages, legal experts say it is unclear how

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Death of a Deregulatory Democrat

Economist Alfred Kahn died this week at 93.  Kahn had a remakrable career as an academic, administrator, and government official.  A noted regulatory scholar, he served as Dean of the College of Arts and Sciences at Cornell and Chairman of the New York Public Service Commission.  In 1977, President Carter tapped Kahn to chair the Civil Aeronautics Board where he had a profound effect on the shape of the airline industry.  Though a liberal Democrat, Kahn oversaw deregulation of the airline industry and championed reforms that eventually shuttered the CAB.

Though air travel is often no picnic, and the  industry is more turbulent than it was in the days of price regulation, it’s much cheaper thanks to Kahn’s efforts.  By some estimates, airline deregulation saves consumers as much as $20 billion per year and helped democratize air travel.  Airfares have climbed of late but, as this WSJ editorial notes, “fares are still lower today in real terms than they were in the 1970s.”

Kahn leaves an important legacy that illustrates the pro-consumer side of deregulation. He understood that deregulation is often the best way to help the “little guy.”  Regulatory agencies may be erected to advance the public interest, but are often “captured” and serve incumbent firms instead.  Competition, on the other hand, can discipline industry participants and help protect consumers.  Kahn also counseled care in deregulatory efforts.  He discovered the devil is in the details, and that partial deregulation can be worse than staying put.  A “mixed system” of partial deregulation, he warned, can be the “worst of all possible worlds” — a lesson regulators and deregulators alike would do well to remember. [...]

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Picture Books for Teaching Economics Concepts to Young Children

Greg Mankiw’s blog points us to a discussion about picture books that teach basic economic concepts to very young children, by Yana van der Meulen Rodgers, including recommendations offive picture books for children ages pre-school to age 8 or 10.  She is an international economist mostly addressing women’s labor market issues, but with young children of her own, found herself also turning to these pedagogical questions.  (State board of education requirements have various goals in place for teaching to the very young such notions as the difference between wants and needs, etc.)

I found the list interesting in part because the books seem to focus on such questions as envy, distribution, fairness, and what it means to be poor.  Going by the Amazon links, there doesn’t seem to be much in them in the way of concepts of efficiency and overall welfare maximization.  Let alone anything related to incentives or property rights.  I wonder if that is a reflection of van der Meulen Rodgers’ own predilections, a function of the the social and political priorities of state boards of education – or perhaps efficiency is intrinsically a more difficult concept to convey than distributional fairness.

I find that last thought intriguing as a teacher of law and economics to first year students in a seminar elective.  Many of the students, particularly those for whom this seminar was their second or third choice elective (i.e., didn’t really volunteer for the course), find the notion of efficiency hard to grasp.  Their instinctive reaction is common to law students – try to change the subject back to something they do understand, or at least shift the conversation so that they can relate it to something they already know something about, fairness and distribution.  I patiently explain that in this class, we’re assuming that [...]

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Trickle Up Economics, An Xtranormal Cartoon

Here is an Xtranormal cartoon about trickle-up and trickle-down economics. Glenn Reynolds is mentioned about a half minute into it.

“Trickle Up Economics”

UPDATE: Here is the San Francisco Fed’s study, suggesting about a 0.4% increase in the unemployment rate because of extending benefits for up to a total of 99 weeks. It also documents the huge increase in the percentage of long-term unemployed in the recent recession and its aftermath. [...]

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The Political Economy of the Euro Crisis

Chris Caldwell, of the Weekly Standard and the Financial Times, took up Western Europe as his journalist beat at a time, in the 1990s, when all the cool kids were off doing Eastern Europe, the former Soviet Union, and the Balkans.  Coverage of Continental Western Europe by newspapers like the Times meant a cushy assignment in Paris, with reporting limited mostly to cultural topics, if not food and fashion.  It used to drive serious policy types I knew in Paris crazy – the Times, in particular, treated Paris not as a source of serious economic and political reporting, but as one Parisian friend put it to me, sort of Disneyland.  As for Germany – you must be kidding – save for a spin through Berlin, no 1990s journalist would want to spend a moment covering German policy, because it would require knowing something about … economics, currencies, exports, and all that boring stuff.

Christopher more or less had the place to himself for quite a while as an American journalist.  At the same time, I’m sure it was not easy to find places to publish serious pieces on the political economy of Western Europe.  However, persistence paid off, and Christopher is author of the most important book, to my mind, on Europe in a long time – Reflections on the Revolution in Europe: Immigration, Islam, and the West – as well as columns in the FT.  He’s a friend, and I’m a fan.

In this week’s Weekly Standard, he has an essay specifically on the political economy of the euro-zone crisis, Euro Trashed: Europe’s Rendezvous with Monetary Destiny.  He notes that the European Union is built on a theory of successive crises, and that the euro was foreseen, perhaps intended, to provoke a crisis that would lead toward greater [...]

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Closed End Funds Regress to the Mean

Back in October 2008, I wrote my first of several posts on closed-end funds:

Closed-end mutual funds, which have a fixed number of shares and are traded on stock markets, have been absolutely clobbered by the turmoil in the financial markets. Not only have their underlying net asset values gone done, but many of them are trading at historically high discounts to net asset value. There are even some municipal bond funds that normally trade at premiums that are currently trading at 25% or so discounts (in part because they are leveraged, but still, a 25% discount on a fund that will likely eventually regress to its historical mean of a small premium leaves a lot of room for error).

I’m not a fortune teller, so I don’t know whether this is a good time to invest or not. But I do know that if I owned an open-end fund, especially if I had a tax loss I could take, I’d be shopping around for a similar closed-end fund with a massive, historically unprecedented discount. For example, why own an open-end emerging markets income fund when you can own EDD at a 32% discount? (Disclosure: I don’t own this fund.) Why own an open-end corporate bond fund when a couple dozen closed-end corporate bond funds are selling at 25% discounts? And so on.

EDD is now selling at a 5% discount, and has risen over 100% since my post. In my next post, I obliquely referenced a closed-end muni bond fund, BPS, that sold for as much as a 50% discount to net asset value at the height of the panic, and now sells at a 3% discount, with the shares having risen almost 200% since Oct. 10, 2008, a rather extraordinary return for an investment in municipal bonds.

I [...]

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Cancun and Copenhagen, and Carbon as Pure Regulatory Object

Co-Conspirator Jonathan has already remarked below on the seeming collapse of the media-academic-NGO-international organization-et al. global warming coalition in-between last year’s Copenhagen meeting and this year’s much-subdued Cancun event.  I broadly agree with Jonathan, and with Margaret Wente, on whom he comments, on the policy merits.

I also think the right approach to climate change is not some massive project for the most far-reaching, long-term, costly, uncertain attempt at governance through the demands of climate for the whole globe.  It is wrong as a global political project, doomed not to just fail but to transmute into some set of spectacularly bad unintended consequences, and wrong as a question of management of long-run uncertainties.  It is noteworthy that even the voice of the global establishment, bien pensant global opinion, the Economist, is now saying what should have been said a decade ago – you have to manage the problems as they arise through mitigation, not some exercise in doomed global political glory to seek to head it off on the front end.

I say all that as background, not to try and persuade anyone, but simply to be clear what the starting point of the discussion is for me (be warned, this is a long post).  As far as the future of the global project over climate change is, I would point you to Walter Russell Mead’s new blog essay on Cancun (h/t Instapundit) (for the glass-half-filled view, see this news story from the NYT; note that it is filed from DC and NY, not Cancun).  It is useful in large part because it lays out something on which I have commented occasionally in the course of writing about the UN and its member states as a (non-) governance mechanism, and its “public choice” pathways of rent-seeking, income [...]

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Microfinance as Subprime

Having done a fair amount of work in microfinance and closely related areas (development finance involving business clients with larger-than-microfinance loans) in the developing world, I am overall a big fan.  As many people are.  The question that has long loomed, however, is whether it can or should scale upwards to become a full-fledged part of the global capital markets, or whether it should remain a highly subsidized development activity for very poor people or, most plausibly, some of both.  I wrote about this problem in an article in 2002 – asking whether sufficient attention had been given in the conceptualization of microfinance to the question of whether it was supposed to serve as:

  • a genuinely economic connection between very poor people and the capital markets, or instead
  • a kind of “faux-market” in which the tools of the market were deployed as a form of artificially sustained discipline over the efficient use of resource, but nonetheless massively subsidized and, in that sense, never genuinely part of the global capital markets but instead always some sort of philanthropy.

I, like everyone else I have known in this field, have wanted to see some of the first, some of the second and, most crucially, some kind of “venture philanthropy” merger of the two that would somehow combine:

  • the discipline of genuine capital markets to induce efficient use of capital to promote geniune economic growth;
  • access to much larger pools of capital than are available to government aidagencies or NGOs, through the commercial capital markets;
  • subsidies or guarantees to facilitate the entry of for-profit entities into the sector, in order to help them gain experience with loan-making, monitoring, default, and other costs of microfinance, and to overcome the problem of microfinance’s problematic diseconomies of scale compared to other commercial lending;
  • the many social
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The NYT’s Room for Debate Blog on Investing/Lending to Finance Lawsuits

The often very interesting Room for Debate blog at the New York Times has a new discussion on the question of whether it is good policy to allow outsiders to invest in someone else’s lawsuit.  Here’s the opening to how the question is framed:

With litigation costs rising, many plaintiffs and their lawyers do not have the money to hire expensive experts or pay for years of trial preparation. To fill this need,specialized litigation lenders are stepping in to bankroll lawsuits — often providing millions of dollars at very high interest rates because conventional banks typically do not offer such loans.

Richard Epstein, Anthony Sebok, Paul Rubin, Laurel Terry, and Susan Lorde Martin take part.

My overall take is that this creates yet another system of side bet financing, in which there are the typical problems of not having an insurable interest.  The counterargument is that the liquidity provided allows for more socially efficient litigation to take place; the response is that a liquid but also disconnected system of derivatives creates downstream bad incentives.  One does not have to reach to the financial crisis to find examples; the tobacco settlements – pathbreaking achievements in their way in structured finance – solve some problems but create some new ones. [...]

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“New Stimulus Plan Without Congressional Approval”

Jack Balkin provides the details in an excellent post on the Federal Reserve’s announcement that it will buy $600 billion in Treasury bonds. As Balkin puts it, “Last Tuesday, the people made clear: no more big bailouts to banks, no second stimulus, no runaway federal spending.” Yet the Federal Reserve is doing all three.

Balkin characterizes the Federal Reserve as an example what Sandy Levinson and he “call distributed dictatorship. Bernanke and the Fed do not control every part of American policy. They cannot order troops to go to war, for example. But in their specific area of expertise and authority–the use of the Fed’s resources for economic policy–he and the Fed are effectively accountable to no one. And that is why Bernanke did what Obama and Congress could not do–ordered a second 600 billion dollar stimulus package for banks and other bondholders….”

One more reason why Rep. Ron Paul’s bill to audit the Federal Reserve is a good idea. And a good starting place for progressives, libertarians, and conservatives to work together to start shutting down the bipartisan system of crony capitalism and corporate welfare that helped cause the current economic problems. [...]

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Commerce in the Commerce Clause: A Response to Jack Balkin

A recent issue of the Michigan Law Review features Jack Balkin’s article Commerce. (109 Mich. L. Rev. 1 [2010].) The article argues that in the original meaning of the Constitution, “commerce” was understood to include a broad variety of social relationships, including relationships that had nothing to do with economic activity. Accordingly, writes Balkin, the original meaning of the interstate commerce power justifies not only the entire New Deal, but almost every expansion of congressional power since then.

In a reply article for the Michigan Law Review‘s on-line supplement, First Impressions, Rob Natelson and I challenge Balkin’s analysis. We argue that “commerce”–as it was actually used in the Constitution–includes mercantile exchange, and a few closely-related activities, such as navigation.

For example, for dictionary definitions of “commerce,” Balkin relies entirely on the 1785 edition of Samuel Johnson, whose first word in the definition of “commerce” is “intercourse.” We look at the 1786 edition of Johnson, as well as six other influential dictionaries of the period. All of these dictionaries have less expansive definitions.

In addition:

Balkin entirely fails to address a decisive historical fact: during the ratification debates, the Constitution’s advocates repeatedly and clearly represented to the general public many areas over which the new government would have no power at all, at least within state boundaries. Their lists included education, social services, real estate transactions, inheritance, religion, manufacturing, agriculture and other land use, business licensing, most road building, civil justice within states, local government, and control of personal property outside mercantile commerce. All of these are within Balkin’s broad definition of “commerce,” but control over all, the Federalists informed the public, were outside federal authority.

As for whether the expansions of federal power during the presidencies of FDR, LBJ, GHWB, BHO, et al., are constitutionally justifiable, we [...]

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Diamond, Mortensen and Pissarides Win Economics Nobel

The 2010 Nobel Prize in Economics has been awarded to Peter A. Diamond, Dale T. Mortensen, Christopher A. Pissarides for their work on “search markets,” and labor markets in particular.  The press release announcing the choice reads:

Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year’s Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.

On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labor market.

This year’s three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates’ models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.

Search theory has been applied to many other areas in addition to the labor market. This includes, in particular, the housing market. The number of homes for sale varies over time, as does the

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The Secret Committee to Save the Euro

The weekend WSJ has a fascinating, lengthy piece of extended investigative financial journalism – “On the Secret Committee to Save the Euro, a Dangerous Divide.” Congratulations to WSJ reporters Marcus Walker, Charles Forelle, and Brian Blackstone for outstanding research and writing.  Here’s a bit from the opening; if you have access to the Journal, and follow anything related to these issues, this is an impressive piece of reportage.

Two months after Lehman Brothers collapsed in the fall of 2008, a small group of European leaders set up a secret task force—one so secret that they dubbed it “the group that doesn’t exist.”  Its mission: Devise a plan to head off a default by a country in the 16-nation euro zone.

When Greece ran into trouble a year later, the conclave, whose existence has never before been reported, had yet to agree on a strategy. In a prelude to a cantankerous public debate that would later delay Europe’s response to the euro-zone debt crisis until the eleventh hour, the task force struggled to surmount broad disagreement over whether and how the euro zone should rescue one of its own. It never found the answer.

A Wall Street Journal investigation, based on dozens of interviews with officials from around the EU, reveals that the divisions that bedeviled the task force pushed the currency union perilously close to collapse.

I asked in a post a week or so ago why the default of a sovereign euro-zone member on its euro-denominated debt was threatening to the currency itself in principle, as a structural currency matter (leaving aside all issues related to things like the holders of the debt being largely other euro-zone banks, etc.).  The most interesting answers people gave mirrored what this article suggests as to why the eurozone might have broken [...]

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Clunk (Again)

A new study confirms what many had concluded about the “cash for clunkers” program: It failed.  Here’s the abstract:

A key rationale for fiscal stimulus is to boost consumption when aggregate demand is perceived to be inefficiently low. We examine the ability of the government to increase consumption by evaluating the impact of the 2009 “Cash for Clunkers” program on short and medium run auto purchases. Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of “clunkers” in the city as of the summer of 2008. We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009. However, almost all of the additional purchases under the program were pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended. The effect of the program on auto purchases was significantly more short-lived than previously suggested. We also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.

(Hat tip: Tyler Cowen) [...]

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An Optimistic Scenario for the Stock Market and the Economy

Predicting the stock market is either impossible or extraordinarily difficult, so I generally refrain from doing so — in print. Even apparently successful investors who trade daily or weekly are wrong nearly as often as they are right. So with the caveat that the chances of my being right are at best not appreciably better 50-50, I wanted to share an optimistic scenario for the stock market over the next 2-3 years.

Typically, a Democratic majority in the House of Representatives has been bad for the stock market and the economy and Republican control has been good (in the past, I have run, but not published, the numbers back to 1854). The reverse is generally true for the presidency.

There have been two switches from Democratic to Republican control of the House since 1950: in the 1994 election and in the 1952 election.

Cumulative returns in the S&P 500 over the two years following the 1994 Republican takeover (1995-96) were 69.8%. (The three-year returns for 1995-97 were a staggering 127.0% [+38%,+23%,+33%].)

Cumulative returns in the S&P 500 over the two years following the 1952 takeover (1953-54) were 54.7%. (The three year returns for 1953-55 were 98.4% [-1%,+56%,+28%], but the Democrats retook the House in the 1954 election.)

Indeed, the best year for the S&P 500 since World War II was 1954 (56.0%), the second year after a Republican takeover of the House. The best year since 1976 was 1995 (38.5%), the year after the last Republican takeover of the House.

So will we get a huge stock market increase this time, as we have the last two times that Republicans have taken the House? Maybe, maybe not.

If the Republicans take the House, why might we get a strong stock market?

(1) an end to disastrous new government efforts [...]

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