...for credit cards, that is. Well, sort of. As of today, the Credit Card Accountability Responsibility and Disclosure Act comes into force. Among other things, banks will now have to offer 45 days' notice before changing terms(!), payments have to be applied to the highest-interest balance first(!!), and banks can no longer retroactively raise interest rates on credit card balances(!!!). Shocking, I know, that this bill got passed in the first place. For someone who doesn't carry a balance, though, this doesn't really affect me, other than the threat from banks that they'll start paring back rewards programs -- which they were already doing anyway -- and start charging annual fees to make up for lost revenue -- but won't, because they would then lose all their customers.
Now if only we could get some sort of financial reform passed....
Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts
Monday, February 22, 2010
Sunday, December 20, 2009
Growth for the Sake of Growth
Congratulations, Tiger Woods! Not for your numerous extramarital affairs, but for stimulating our nation's economy! You see, your scandal has increased the number of tabloid sales in the United States, which means people are spending more money, which means we're closer to getting out of the recession!
...I hope all of you can see that this is pretty ridiculous. And yet this is the same line of thinking that many economists actually use. Keynesians, like Paul Krugman, seem to think that if we just spend more, we'll be able to get the economy back to health. And while they might not mention tabloid sales as a way to increase consumer spending, buying more junk (ahem, "Chinese-made imports") ought to solve the problem. In fact, if the government paid people to dig holes and then fill them up, this would also be enough to stimulate demand and bring the economy out of a recession.
GDP is not the economy. GDP is simply a number invented by economists to measure the economy. As I've said before, breaking windows will increase GDP, but it doesn't make the economy any stronger. In fact, it makes it weaker. Growth for the sake of growth is misguided and ultimately futile. We should be concentrating not on quantity, but quality. The new service jobs that have replaced outsourced manufacturing jobs pay far less. People have more stuff, but it's all poorly made. Are we actually better off?
...I hope all of you can see that this is pretty ridiculous. And yet this is the same line of thinking that many economists actually use. Keynesians, like Paul Krugman, seem to think that if we just spend more, we'll be able to get the economy back to health. And while they might not mention tabloid sales as a way to increase consumer spending, buying more junk (ahem, "Chinese-made imports") ought to solve the problem. In fact, if the government paid people to dig holes and then fill them up, this would also be enough to stimulate demand and bring the economy out of a recession.
GDP is not the economy. GDP is simply a number invented by economists to measure the economy. As I've said before, breaking windows will increase GDP, but it doesn't make the economy any stronger. In fact, it makes it weaker. Growth for the sake of growth is misguided and ultimately futile. We should be concentrating not on quantity, but quality. The new service jobs that have replaced outsourced manufacturing jobs pay far less. People have more stuff, but it's all poorly made. Are we actually better off?
Saturday, November 21, 2009
"Free" Music
Recently I received an email advertising 10 free songs if you spend $100 or more at this particular website. I also got $5 from Amazon not too long ago that I can use to "buy" any MP3s I'd like. Am I the only one who thinks these are completely worthless?
It's not because I believe music should be free (somebody put a lot of effort into making music), and it's not merely because it costs no money whatsoever to make an additional MP3 file, though at least with a CD you get something tangible. With an MP3 file you get nothing more than a "license" that allows you listen to a song; you don't own the file itself. With a CD you get to own a physical disc, a booklet with artwork, and importantly, several legal rights that you don't get with MP3s, like the right to lend your CD to a friend or the right to sell your CD to somebody (both covered under the first-sale doctrine). Both of these actions are expressly prohibited by sites that sell MP3s because "all Products are sublicensed to you and not sold," meaning that the first-sale doctrine does not apply to your MP3 file. In fact, the way this agreement is worded is such that you may only "play ... Products as much as reasonably necessary (emphasis added) for personal, non-commercial use," so technically you don't have even have the right to play your music as much as you want!
There's a reason why MP3s usually cost less than CDs. It's not just because it costs less to make an MP3 file (i.e., nothing) than to press a CD, and it's not just because it costs less to distribute an electronic MP3 file than it is to distribute a physical CD. It's because you're getting something that's inherently less valuable.
But don't tell that to the iTunes crowd happy to pay $11.99 for the license to listen to a collection of "Products" that gives them fewer rights than the identical CD album that they can own for $10.99.
It's not because I believe music should be free (somebody put a lot of effort into making music), and it's not merely because it costs no money whatsoever to make an additional MP3 file, though at least with a CD you get something tangible. With an MP3 file you get nothing more than a "license" that allows you listen to a song; you don't own the file itself. With a CD you get to own a physical disc, a booklet with artwork, and importantly, several legal rights that you don't get with MP3s, like the right to lend your CD to a friend or the right to sell your CD to somebody (both covered under the first-sale doctrine). Both of these actions are expressly prohibited by sites that sell MP3s because "all Products are sublicensed to you and not sold," meaning that the first-sale doctrine does not apply to your MP3 file. In fact, the way this agreement is worded is such that you may only "play ... Products as much as reasonably necessary (emphasis added) for personal, non-commercial use," so technically you don't have even have the right to play your music as much as you want!
There's a reason why MP3s usually cost less than CDs. It's not just because it costs less to make an MP3 file (i.e., nothing) than to press a CD, and it's not just because it costs less to distribute an electronic MP3 file than it is to distribute a physical CD. It's because you're getting something that's inherently less valuable.
But don't tell that to the iTunes crowd happy to pay $11.99 for the license to listen to a collection of "Products" that gives them fewer rights than the identical CD album that they can own for $10.99.
Sunday, September 13, 2009
Buying Toilet Paper on Sale
An analogy that's always stayed in my head is that when toilet paper is on sale, people are excited and rush out to buy as much of it as they can. But when stocks are on sale, people are fearful and try to get rid of all their shares. A little incongruous there? Just maybe.
Speaking of toilet paper, lately, I've been on a quest to buy toilet paper for the bathroom at my uncle's grocery store. Since I'm acting as a corporate procurer of supplies, I've been trying to buy the cheapest toilet paper, softness be damned. (In any case, how do toilet paper manufacturers get those extra-soft tissues for your behind? By cutting down old-growth forest in the Canadian wilderness.)
You would think it would be pretty easy to choose the cheapest toilet paper. All you have to do is the choose the pack that comes with the cheapest per roll. But this is the beginning of a valuation quagmire so stealthily laid by the evil toilet paper companies!
Not all toilet paper rolls are created equal. Some rolls have many more sheets than others. This is something that few people have likely thought about, and it's a stealthy and easy way for companies to increase their profit margins. And those double rolls and triple rolls you see in the store aisle nowadays? That's another way for companies to increase their profits, by fudging the number of sheets that a double or triple roll contains. I haven't even talked about whether some brands are wider than others.
But let's talk about it. Below is a table of data that I collected during a recent shopping trip. (I've cut out a lot of other data to make the table fit.)
As you can see, brands differ greatly on how many sheets there are per roll, ranging from a low of 88 sheets per roll to a high of 176. Since Meijer, the generic store brand, which is a regular roll type, has 176 sheets per roll, we can assume that regular rolls originally had 176 sheets per roll. Note that the only brand that also has 176 sheets is Angel Soft double roll -- 20 sheets magically disappeared from the Angel Soft triple roll! Hmm, is that why companies are so eager to advertise double and triple rolls over regular rolls....?
The best way to determine how cheap toilet paper is is to look at cost per sheet. In the table above, I've listed the inverse of that, sheets per dollar; the higher, the better. As you can see, Angel Soft double roll is the cheapest per sheet; incidentally, it is also cheapest per roll. But Cottenelle is second-cheapest per roll and third-cheapest per sheet.
These aren't big changes, admittedly. But think about it from the toilet paper company's perspective: maybe you'll save only a penny or two if you cut off a few sheets per roll, but multiply that by millions of rolls, and you're talking some serious change. Is it a coincidence that Cottonnelle has exactly 7/8 the number of sheets in a regular roll?
This phenomenon of items getting smaller and smaller is nothing new. Ice cream used to come in 2 quart (i.e., half-gallon) containers. Then they became 1.75 quarts. Then they became 1.5 quarts. Wrigley gum used to have 17 sticks per pack. Now they have 15 sticks. It's a tactic that works because consumers are stupid. Don't be one of them.
Speaking of toilet paper, lately, I've been on a quest to buy toilet paper for the bathroom at my uncle's grocery store. Since I'm acting as a corporate procurer of supplies, I've been trying to buy the cheapest toilet paper, softness be damned. (In any case, how do toilet paper manufacturers get those extra-soft tissues for your behind? By cutting down old-growth forest in the Canadian wilderness.)
You would think it would be pretty easy to choose the cheapest toilet paper. All you have to do is the choose the pack that comes with the cheapest per roll. But this is the beginning of a valuation quagmire so stealthily laid by the evil toilet paper companies!
Not all toilet paper rolls are created equal. Some rolls have many more sheets than others. This is something that few people have likely thought about, and it's a stealthy and easy way for companies to increase their profit margins. And those double rolls and triple rolls you see in the store aisle nowadays? That's another way for companies to increase their profits, by fudging the number of sheets that a double or triple roll contains. I haven't even talked about whether some brands are wider than others.
But let's talk about it. Below is a table of data that I collected during a recent shopping trip. (I've cut out a lot of other data to make the table fit.)
| Brand | Type | Rolls | Sheets/Roll | Sheets/Reg. Roll | Cost/Roll | Sheets/Dollar |
| Angel Soft | 2 | 24 | 352 | 176 | $0.19938 | 883 |
| Angel Soft | 3 | 9 | 469 | 156.33 | $0.25111 | 623 |
| Charmin Ultra Soft | 2 | 12 | 200 | 100 | $0.31542 | 317 |
| Charmin Ultra Strong | 2 | 12 | 176 | 88 | $0.31542 | 279 |
| Cottenelle | 2 | 24 | 308 | 154 | $0.24979 | 617 |
| Meijer | 1 | 4 | 176 | 176 | $0.29750 | 592 |
| Quilted Northern | 2 | 12 | 286 | 143 | $0.29042 | 492 |
As you can see, brands differ greatly on how many sheets there are per roll, ranging from a low of 88 sheets per roll to a high of 176. Since Meijer, the generic store brand, which is a regular roll type, has 176 sheets per roll, we can assume that regular rolls originally had 176 sheets per roll. Note that the only brand that also has 176 sheets is Angel Soft double roll -- 20 sheets magically disappeared from the Angel Soft triple roll! Hmm, is that why companies are so eager to advertise double and triple rolls over regular rolls....?
The best way to determine how cheap toilet paper is is to look at cost per sheet. In the table above, I've listed the inverse of that, sheets per dollar; the higher, the better. As you can see, Angel Soft double roll is the cheapest per sheet; incidentally, it is also cheapest per roll. But Cottenelle is second-cheapest per roll and third-cheapest per sheet.
These aren't big changes, admittedly. But think about it from the toilet paper company's perspective: maybe you'll save only a penny or two if you cut off a few sheets per roll, but multiply that by millions of rolls, and you're talking some serious change. Is it a coincidence that Cottonnelle has exactly 7/8 the number of sheets in a regular roll?
This phenomenon of items getting smaller and smaller is nothing new. Ice cream used to come in 2 quart (i.e., half-gallon) containers. Then they became 1.75 quarts. Then they became 1.5 quarts. Wrigley gum used to have 17 sticks per pack. Now they have 15 sticks. It's a tactic that works because consumers are stupid. Don't be one of them.
Thursday, August 13, 2009
Breaking Windows Left and Right
My response to the cash-for-clunkers program has been lukewarm at best, but I couldn't figure out exactly why I didn't very much like the program. I think I've now figured out why.
Frederic Bastiat was a French economist and theorist in the 1800s who created what is known as the "broken window fallacy," which goes something like this: A boy throws a rock and breaks a shopkeeper's window. The shopkeeper will have to spend $50 to have it repaired. The townspeople gather around and sympathize with the shopkeeper, but then they suggest that this will give some additional work to the window-maker. This additional work will give him some more money that he can spend on buying bread, which helps the baker. The baker, now that he has some extra money, will go out and buy a new pair of shoes, benefiting the shoe-maker, and so on. Far from being a tragedy, it seems as though the broken window is a good thing that will benefit the community because it creates more opportunities for work, thereby giving people more money to spend.
The fallacy is the fact that we're considering only one side of the equation. Yes, it is true that the window-maker, the baker, and the shoe-maker will all benefit from the extra money that the shopkeeper will have to spend repairing the broken window. But what if the shopkeeper was going to spend that $50 on a new coat? The coat-maker, if he had gotten that $50, would then have gone out and spent it on a new chair, and the chair-maker would have used that money to buy some books to read, and so on. The window-maker won, but the coat-maker lost, and the shopkeeper has to spend $50 repairing a window when he could have spent that money on something that would have given him more enjoyment. Society is in fact worse off because nothing has changed except that the shopkeeper now has a broken window.
If you have ever taken introductory economics, you would have learned the difference between stocks and flows. The people who say cash-for-clunkers will stimulate the economy aren't lying -- GDP will indeed increase. But this is increasing flows (GDP) at the expense of stocks (the total amount of wealth the country has).
If it were actually a good thing that the boy broke the window, then we should be encouraging young boys everywhere to be breaking windows left and right. This would give the window-makers a huge amount of work and will increase GDP and stimulate the economy! In fact, why stop there? If we want even more GDP growth, we should create a huge, destructive war that will put everyone to work. I think there's a certain country in the Middle East beginning with "I" and ending with "q" that the US could invade... oh wait, we already did that. How beginning with "I" and ending with "n"...?
No matter how hard we might try, you cannot create wealth using schemes and gimmicks. Wealth comes from hard work. Unfortunately, until we clear out the sickness that is still infecting the American and the world economic system, it's going to be a long time until we can have any true, sustainable growth.
Frederic Bastiat was a French economist and theorist in the 1800s who created what is known as the "broken window fallacy," which goes something like this: A boy throws a rock and breaks a shopkeeper's window. The shopkeeper will have to spend $50 to have it repaired. The townspeople gather around and sympathize with the shopkeeper, but then they suggest that this will give some additional work to the window-maker. This additional work will give him some more money that he can spend on buying bread, which helps the baker. The baker, now that he has some extra money, will go out and buy a new pair of shoes, benefiting the shoe-maker, and so on. Far from being a tragedy, it seems as though the broken window is a good thing that will benefit the community because it creates more opportunities for work, thereby giving people more money to spend.
The fallacy is the fact that we're considering only one side of the equation. Yes, it is true that the window-maker, the baker, and the shoe-maker will all benefit from the extra money that the shopkeeper will have to spend repairing the broken window. But what if the shopkeeper was going to spend that $50 on a new coat? The coat-maker, if he had gotten that $50, would then have gone out and spent it on a new chair, and the chair-maker would have used that money to buy some books to read, and so on. The window-maker won, but the coat-maker lost, and the shopkeeper has to spend $50 repairing a window when he could have spent that money on something that would have given him more enjoyment. Society is in fact worse off because nothing has changed except that the shopkeeper now has a broken window.
If you have ever taken introductory economics, you would have learned the difference between stocks and flows. The people who say cash-for-clunkers will stimulate the economy aren't lying -- GDP will indeed increase. But this is increasing flows (GDP) at the expense of stocks (the total amount of wealth the country has).
If it were actually a good thing that the boy broke the window, then we should be encouraging young boys everywhere to be breaking windows left and right. This would give the window-makers a huge amount of work and will increase GDP and stimulate the economy! In fact, why stop there? If we want even more GDP growth, we should create a huge, destructive war that will put everyone to work. I think there's a certain country in the Middle East beginning with "I" and ending with "q" that the US could invade... oh wait, we already did that. How beginning with "I" and ending with "n"...?
No matter how hard we might try, you cannot create wealth using schemes and gimmicks. Wealth comes from hard work. Unfortunately, until we clear out the sickness that is still infecting the American and the world economic system, it's going to be a long time until we can have any true, sustainable growth.
Monday, August 3, 2009
The Bull's Still Climbing Those Stairs
Is the stock market ever going to fall? I keep on thinking it could be like 1930, but no amount of wishing from me is going to make that happen. It could be like 1968, which would be especially fitting since the S&P crossed 1000 today.
I've done some more reading and thinking, and I could be wrong about the stock market over the medium and even long term, at least in nominal terms. I've been thinking we could see a major decline, but there's no reason why it couldn't meander for years like it did in the 70s. And in fact, that might be the likelier case, what with the government very interested in propping up the market. If the Dow stays around 10,000 for years, it'll seem like investors haven't "lost" money, though in fact inflation and currency depreciation will belie that. The market could even rise to new highs but still be in a bear market after taking into account real-/currency-adjusted values. So I'm still bearish on the market long term, but this would have different implications on how to trade it.
If shorting the market isn't going to work, we need to look at other asset classes. Besides gold and silver, which I think are the best ways to make money in the coming years, there are commodities, bonds, and the dollar. Considering that the inflation/deflation debate hasn't been resolved yet and probably won't be for at least another one to three years, I'm not as enthusiastic on commodities; you would also need to consider the demand and supply data for them, which aren't as relevant for a semi-currency like gold. Treasuries seem to be a sure bet -- interest rates can only go up from here -- but my worry is that the government will intervene to keep them down. If the government is successful, you'll make no money in nominal terms but lose money in PPP-adjusted terms due to the necessary depreciation of the dollar. If the government is not successful, you'll make money in nominal terms, but you could still lose out in real terms if the market loses confidence in the dollar as a result. Consequently, I think shorting the dollar would be a better bet, since your downside risk should be lower than if you were shorting Treasuries.
Any way you cut it, the future doesn't look very bright for the US, or for the world for that matter. If you can't save the world from disaster, you should still at least try to save yourself.
I've done some more reading and thinking, and I could be wrong about the stock market over the medium and even long term, at least in nominal terms. I've been thinking we could see a major decline, but there's no reason why it couldn't meander for years like it did in the 70s. And in fact, that might be the likelier case, what with the government very interested in propping up the market. If the Dow stays around 10,000 for years, it'll seem like investors haven't "lost" money, though in fact inflation and currency depreciation will belie that. The market could even rise to new highs but still be in a bear market after taking into account real-/currency-adjusted values. So I'm still bearish on the market long term, but this would have different implications on how to trade it.
If shorting the market isn't going to work, we need to look at other asset classes. Besides gold and silver, which I think are the best ways to make money in the coming years, there are commodities, bonds, and the dollar. Considering that the inflation/deflation debate hasn't been resolved yet and probably won't be for at least another one to three years, I'm not as enthusiastic on commodities; you would also need to consider the demand and supply data for them, which aren't as relevant for a semi-currency like gold. Treasuries seem to be a sure bet -- interest rates can only go up from here -- but my worry is that the government will intervene to keep them down. If the government is successful, you'll make no money in nominal terms but lose money in PPP-adjusted terms due to the necessary depreciation of the dollar. If the government is not successful, you'll make money in nominal terms, but you could still lose out in real terms if the market loses confidence in the dollar as a result. Consequently, I think shorting the dollar would be a better bet, since your downside risk should be lower than if you were shorting Treasuries.
Any way you cut it, the future doesn't look very bright for the US, or for the world for that matter. If you can't save the world from disaster, you should still at least try to save yourself.
Saturday, April 4, 2009
All Attempts to Cheat Death Will End Poorly
Business cycles are natural. To interfere with them is unnatural. Yet there is a fixation by economists searching for a magical explanation of business cycles that will enable us to banish them to the ash heap of history. Why don't we also try getting rid of winter? All the arguments made in favor of ending business cycles can be used to argue equally for the end of seasons. But the attempt to find a "solution" to business cycles will end in failure, just as it will should we ever try to ban winter. Fortunately, we've matured enough to realize that winter arrives every year and there's not much we can do about the seasons. Why can't we see the same thing with the economy? It's ridiculous to try to find a "solution" to winter; the same goes for recessions.
In all business cycles, we have booms and busts. Typically a bust is called a recession; very bad busts are called depressions. When times are good, businesses expand and jobs are easy to find. The stock market consistently rises. At the extreme end of this, at the very top of the economic boom, people start talking about how "it's different this time," or how we are "entering into a new economy." Inefficiencies and misallocations accumulate as businesses expand and invest. Businesses might end up hiring too many people, for example, or they might decide to invest in a project that realistically will never return a profit -- they invest in it because nobody wants to be left out. It might be somewhat unsafe, maybe not a very good idea, but if those people are doing it, then we can and should do it too. Eventually, somebody realizes that no, this doesn't make sense, these businesses can't actually turn a profit on these projects. Costs are too high, sales are too low, we can't afford this. The money that flowed so freely to fund every single hot idea -- regardless of whether it was a good idea or not -- suddenly dries up. Businesses lay off workers, consumers cut back spending, and the economy falls into a recession. The mismanaged businesses and the ones that made bad mistakes shut their doors. All the fluff is blown away. The shrewd investors and businessmen will see the new opportunities that start popping up everywhere -- and they will lay the groundwork for the next expansion.
When left alone, the business cycle clears out the rot and allows the economy to become even stronger. To make another analogy, think of a forest fire. Nature ensures a forest fire every so often in order to clear all out the dead brush. When humans interfere, the dead brush accumulates to such an extent that when the next fire starts -- and it always will -- the resulting forest fire will be completely devastating.
Forest fires and recessions are a painful thing to go through, but they are every bit necessary. The problem, of course, is that it is a painful process. Politicians want to be to be reelected, and doing nothing during a recession appears makes one appear indifferent to the suffering of the people. Constituents want to avoid pain, and they too want action during a recession. The irony is that in their quest to avoid pain today, people end up having to endure a deeper and longer lasting pain tomorrow.
It's quite clear what I believe we should do during a recession: nothing. Unfortunately, this is completely unrealistic in the world we live in; we will just have to accept that people will meddle in things they should not.
In all business cycles, we have booms and busts. Typically a bust is called a recession; very bad busts are called depressions. When times are good, businesses expand and jobs are easy to find. The stock market consistently rises. At the extreme end of this, at the very top of the economic boom, people start talking about how "it's different this time," or how we are "entering into a new economy." Inefficiencies and misallocations accumulate as businesses expand and invest. Businesses might end up hiring too many people, for example, or they might decide to invest in a project that realistically will never return a profit -- they invest in it because nobody wants to be left out. It might be somewhat unsafe, maybe not a very good idea, but if those people are doing it, then we can and should do it too. Eventually, somebody realizes that no, this doesn't make sense, these businesses can't actually turn a profit on these projects. Costs are too high, sales are too low, we can't afford this. The money that flowed so freely to fund every single hot idea -- regardless of whether it was a good idea or not -- suddenly dries up. Businesses lay off workers, consumers cut back spending, and the economy falls into a recession. The mismanaged businesses and the ones that made bad mistakes shut their doors. All the fluff is blown away. The shrewd investors and businessmen will see the new opportunities that start popping up everywhere -- and they will lay the groundwork for the next expansion.
When left alone, the business cycle clears out the rot and allows the economy to become even stronger. To make another analogy, think of a forest fire. Nature ensures a forest fire every so often in order to clear all out the dead brush. When humans interfere, the dead brush accumulates to such an extent that when the next fire starts -- and it always will -- the resulting forest fire will be completely devastating.
Forest fires and recessions are a painful thing to go through, but they are every bit necessary. The problem, of course, is that it is a painful process. Politicians want to be to be reelected, and doing nothing during a recession appears makes one appear indifferent to the suffering of the people. Constituents want to avoid pain, and they too want action during a recession. The irony is that in their quest to avoid pain today, people end up having to endure a deeper and longer lasting pain tomorrow.
It's quite clear what I believe we should do during a recession: nothing. Unfortunately, this is completely unrealistic in the world we live in; we will just have to accept that people will meddle in things they should not.
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