Saturday, December 23, 2006

The Fixed Pie Fallacy

Quote of the day, from economist Milton Friedman:

“Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.”

In terms of globalization and international trade, we see the “economic fallacy of the fixed pie” in operation all the time, just listen to Lou Dobbs on CNN every night. Many people think that China or Japan are somehow benefiting at our expense because of trade, or because of a current account deficit with those countries. Many people think that the gains from globalization somehow lift up the standard of living in China or India, by bringing down the standard of living in the USA; or that the gain in wages in other countries comes at the expense of a decline in American workers’ wages, etc.

But all of those beliefs are all based on the fixed pie fallacy. There is NOT a fixed, static amount of wealth or wages in the world, which is what the fixed pie fallacy assumes.

Stand back from economics and trade and think instead about life expectancy or literacy. There is certainly not a fixed amount of “life expectancy” in the world, nor is there a fixed amount of “literacy.” It is certainly possible for the life expectancy or literacy rates in 0ther countries to INCREASE, without DECREASING life expectancy or literacy in the US! That is, advances in life expectancy or literacy in China do NOT come at the expense of the US, because there is NOT a fixed amount, and the most likely outcome is that advances will continue to take place in BOTH countries.

Likewise, since there is not a fixed amount of wealth or prosperity in the world, globalization and trade will benefit BOTH the U.S and China.

Economics of Gift-Giving

From the Armchair Economist: Economics and Everyday Experience, by Steven E. Landsburg:

"I am not sure why people give each other store-bought gifts instead of cash, which is never the wrong size or color. Some say that we give gifts because it shows that we took the time to shop. But we could accomplish the same thing by giving the cash value of our shopping time, showing that we took the time to earn the money.

My friend David Friedman (son of Milton Friedman) suggests that we give gifts for exactly the opposite reason – because we want to announce that we did not take much time to shop. If I really care for you, I probably know enough about you to have an easy time finding the right gift. If I care less about you, finding the right gift becomes a major chore. Because you know that my shopping time is limited, the fact that I was able to find something appropriate reveals that I care. I like this theory."

Econ vs. Marketing


From an email from an MBA student: The textbook for our MBA marketing class says: "A negative balance of trade is considered harmful because it means U.S. dollars are supporting foreign economies at the expense of U.S. companies and workers." She also cites my blog posting the other day about trade and the balance of payments, where I state that there is no "trade imbalance" once we account for trade flows and capital flows.

"I find it interesting that these two ideas seem to conflict one another. It appears that the marketing book does not take the flows of capital into account. I am curious about your thoughts on this."

It's a very interesting question, and here are some thoughts:

1. As you mention, the marketing textbook has not considered the capital inflow that accompanies the "negative balance of trade." There is ALWAYS a positive balance on the capital account to offset any "negative balance of trade" on the current account (merchandise), as the graph above clearly demonstrates.

2. About the second part of the sentence, you could ask the question "harmful to whom?" Keep in mind that both U.S. consumers and U.S. firms shop wisely (ruthlessly?), and buy imports when those products give them the best value. If you buy a cashmere sweater from China, or travel on vacation to Canada, or Starbucks buys coffee from Brazil, those transactions make the buyers better off and the foreign sellers better off, so I don't think any of those traders consider their behavior to be "harmful."

3. About the last part of the sentence - "US dollars supporting foreign companies at the expense of U.S. companies," - not true when you consider the total picture: merchandise and capital.

Think about a U.S. company exporting to Japan, and invoicing for 100m yen. Upon receipt of the 100m yen, the U.S. firm realizes that the yen are "worthless" in the U.S. in terms of purchasing power. You cannot spend Japanese yen at Target, Macys, Wal-Mart or McDonald's. You cannot purchase U.S. stocks or bonds or mutual funds with yen.

A firm in China or Japan exporting to the U.S. and invoicing for $1m finds itself in the same situation of holding currency that is "worthless" in terms of domestic purchasing power in those countries. The Japanese firm holding $1m in Japan has only 3 choices:

a. Hold and hoard the dollars. This would actually be the best of all possible options, but is also the most unlikely option. If Japanese companies would accept, hold and hoard "green pieces of paper with dead presidents' pictures" in return for their production of merchandise, we could just print an infinite supply of dollars and acquire their output for green pieces of paper. So although that is one possible option, we'll assume that is unlikely to happen, which leaves two realistic options.

b. Buy U.S. merchandise, or U.S. financial securities. We will buy about $125 billion of Japanese imports this year, which would put $125 billion of dollars in the hands of Japanese firms. The firms in Japan will buy about $75 billion of merchandise from the U.S. and $50 billion of U.S. financial assets (stocks, bonds, real estate, foreign direct investment (FDI) in US firms, treasury bonds, etc.). In that sense again, there is a “negative balance of trade” with Japan of $50 billion for MERCHANDISE ONLY, but a capital inflow of $50 billion, and the balance of payments with Japan is ZERO.

c. The firms receiving the dollars could also sell those dollars for Yen, in which case somebody else in Japan, has the same two options above. That is, if the firm that originally received the dollars has no interest in U.S. merchandise or assets, it could sell the dollars to somebody else in Japan who DOES have an interest in buying U.S. products or securities. But the dollars spent overseas ALWAYS COME BACK TO THE US to buy our merchandise or assets.

Bottom Line: The view that a “negative balance of trade is considered harmful,” is incomplete at best, and probably more likely inaccurate from an economic way of thinking.

For one concrete example: Toyota directly employs nearly 40,000 people in the U.S. and Toyota's investment in the U.S. is valued at more than $18 billion, and it purchases $30 billion of parts annually from U.S. companies. To say that our “negative balance of trade with Japan of about $50 billion annually (merchandise only)” totally ignores the $50 billion of capital inflow INTO the U.S. supporting jobs, output and production IN the U.S.

Economic Week in Review

Reports released during the week indicated that the U.S. economy grew slower during the third quarter (2.0%) than previously reported (2.2%) for real GDP growth. The Producer Price Index (PPI)—a closely watched indicator of wholesale prices—rose sharply, primarily as a result of higher energy costs. However, overall inflation was unchanged in November. In other reports, the index of leading economic indicators increased, the struggling housing industry received a welcome bit of good news, and orders for durable goods grew. For the week, the S&P 500 Index fell 1.1% to 1,411. The yield of the 10-year U.S. Treasury note rose 2 basis points to 4.62%, and the 30-year mortgage rate rose 3 basis points to 5.68%. For the week, the dollar was up slightly vs. the Yen, and down slightly vs. the pound and euro.

Read more details here.

Friday, December 22, 2006

Embrace Globalization

From today's Washington Post, an excellent article on globalization by William H. Overholt, Director of the Center for Asia Pacific Policy at the RAND Corporation, here are some excerpts:

"Globalization has brought countries with about 3 billion people from subhuman conditions of life into modern standards of living with adequate food, basic shelter, modern clothing rather than rags, and life spans that are over 60 rather than under 45. In the early 1950s China's life expectancy was 41 years, in 2005 it was 72.7 years. This is the greatest reduction of inequality that has happened in human history."

"A few years ago it took 40 hours of labor to produce a car. Now it takes 15. That translates into a need for fewer workers. Protectionists who blame China for such job losses are being dishonest. In fact, both China and the U.S. have lost manufacturing jobs due to rising productivity, but China has lost 10X more -- a decline of 25 million Chinese jobs, from over 54 million in 1994 to under 30 million ten years later."

"Lower prices due to imports from China alone -- ignoring all other similar results of globalization -- probably raise the real incomes of lower income Americans by 5 to 10 percent. That's something no welfare program has ever accomplished."

MP: An important part of globalization is learn how to expand your perspective and embrace "global thinking." Most of the Lou Dobbs protectionists think about globalization from the extremely narrow viewpoint of American workers in the manufacturing sector who have either lost their jobs or earn less income due to global competition, while ignoring the millions and billions of beneficiaries of globalization: American consumers saving billions of dollars from global imports, American companies being more profitable and expanding output, production and employment due to globalization, millions of workers around the planet who are now better off because of globalization, etc.

Think about this thought experiment: You wave a magic wand, and sickness and disease vanish tomorrow, and life expectancy is extended by 50 years on average. On a net basis, the world would be a MUCH better place, without sickness and disease, without question. However, certain groups would be displaced and worse off in the short-run: doctors, nurses, hospital administrators, etc. who would lose their jobs.

Free trade and globalization are much the same: the world is a MUCH better place with free trade and globalization, on net, than a world without globalization and no trade, even though some are worse off in the short run, an inevitable result of ALL PROGRESS. Those who oppose globalization are lot like those who would oppose, out of self-interest, improvements and advances in medicine that would eliminate disease.

In the 1700s, there were probably protectionists in Europe on a populist crusade about the cheap imports from the USA, and a loss of some European jobs due to globalization and outsourcing to the USA, just like the protectionists today on a populist crusade about cheap imports from China, and outsourcing to India?

Thursday, December 21, 2006

Embrace Trade Deficit, Embrace Capital Inflow

From today's WSJ, an editorial by Bear Stearns's chief economist

"For decades, the U.S. trade deficit has been a political and journalistic lightning rod, inspiring countless predictions of America's imminent economic collapse. The reality is different.

Our imports grow with our economy and population, while our exports grow with foreign economies, especially those of industrialized countries. Though widely criticized as an imbalance, the trade deficit and related capital inflow reflect U.S. growth, not weakness -- they link the younger, faster-growing U.S. with aging, slower-growing economies abroad.

With all the negativism about the U.S. economy, it's easy to forget its attractiveness. Foreigners are as eager to invest in the U.S. as we are to buy goods and services from them -- it's a two-way street. The trade deficit is the mechanism allowing consumption and investment in the U.S. to grow faster than in Europe and Japan."

Bottom Lines:

1) As the graph above clearly shows, there really is NO trade "imbalance" when you account for trade flows of merchandise (current account) and trade flows of capital (capital account). The $800 billion trade deficit on our current account is exactly offset by an $800 billion capital account surplus. In other words, the Balance of Payments is always ZERO, -$800b (current account) + $800b (capital account) = 0. Trade accounts are based on double-entry accounting, so there can never be a deficit without an offsetting surplus, and there can be no trade "imbalance."

2) The "trade deficit" on our current account (merchandise) gets all of the attention, and the "trade surplus" on the capital account (investments) gets little attention. A Google news search for the phrases "current account deficit" and "capital account surplus" shows that "current account deficit" appears 4X as frequently as "capital account surplus," even though they are "two sides of the same coin."

3) We get the best of both worlds: a) we get to shop globally for the best and cheapest products the world has to offer and b) we attract investment capital from all over the planet that helps finance the expansion of our companies, and helps finance your student loan, mortgage or car loan.

Embrace the trade deficit, and embrace the capital inflow that results from the trade deficit.

Ford Falls to #3, Toyota Rises to #2

DEARBORN, Michigan — The Ford Motor Company expects Toyota to unseat it for good next year as the No. 2 company, behind General Motors, in the American car market, a position Ford has held since the 1920s, according to internal Ford projections.

Those projections show that company officers believe that Ford will permanently fall to third place as soon as January. The shift appears to be happening much faster than Ford had previously signaled.

Read more here.

Minimum Wage Increase is a Done Deal

President Bush signaled support for raising the federal minimum wage, suggesting the White House is looking for an early deal with Democrats on one of their priorities next year.

"I support the proposed $2.10 increase in the minimum wage over a two-year period," Mr. Bush told reporters at a year-end news conference, calling it an "area where we can work together" with Democratic leaders. At another point, he said that along with education, it is a "key" area where "we've got to work together" with Democrats.

Isn't that a perfect example of "bipartisan consensus?"

P.J. O'Rourke on bipartisan consensus: "I like legislative gridlock. What I hate is bipartisan consensus. Bipartisan consensus is like when my doctor and my lawyer agree with my wife that I need help."

Question: Why not pass legislation to index the minimum wage with automatic annual increases at the rate of inflation?

Answer: Probably because it doesn't give politicians any future political payoffs. The current bipartisan consensus about the minimum wage illustrates a typical pattern: Democrats propose a minimum wage increase, Republicans at first resist, but eventually concede and give reluctant, delayed support, but then BOTH parties can take credit for "helping" the unskilled workers by pricing many of them out of the labor market with an increase in the minimum wage. With an indexed minimum wage, the political payoff to both parties would end forever.

Wednesday, December 20, 2006

PayPal vs. Google Checkout

When Google introduced Checkout in June, it was seen as a formidable rival to PayPal, eBay's online payment service. And with Google aggressively promoting Checkout during the holiday season and beyond, its use with some merchants has already surpassed PayPal's.

When Google introduced Checkout in June, it charged merchants 20 cents plus 2 percent of the purchase price for every transaction. PayPal charges 1.9 percent to 2.9 percent plus 30 cents a transaction, while credit companies typically charge about 1.95 percent and 30 cents for every purchase.

Google recently got more aggressive. On Nov. 8, it waived transaction fees for all merchants, regardless of whether or not they were Google advertisers, through the end of the year.

Read more here.

Raising Unemployment for the Unskilled?

From the NY Times, an article "Raising the Floor on Pay:"

"On the verge of controlling Congress, the Democrats are making a much-delayed increase in the minimum wage their signature attempt to lift incomes and quiet widespread economic anxiety.

The Democrats plan to introduce a bill in Congress next month that would increase the federal minimum for the first time in a decade — to $7.25 an hour in the spring of 2009, reaching that level in three steps from the present $5.15 an hour.

More than 13 million workers earning less than $7.25 an hour today, or just above that, would get raises."

Problem: Demand curves for unskilled workers slope downward, so a 40% hike in the wage for unskilled workers would mean that there were would be FEWER than 13 million jobs after an increase in the minimum wage. Many of those workers would probably be getting pink slips instead of raises.

And if it was possible to legislate raises for the 13 million unskilled workers currently earning $5.15 per hour, why are politicians being so stingy? After all, wouldn't a raise to $17.25 per hour be a lot better for the 13 million workers than just $7.25? Or $27.25 per hour?

Quote of the Day

From Cafe Hayek:

"The general case for freedom in international exchange is like the case against putting sand in the gears of a machine."

~C. Lowell Harriss, emeritus professor of economics at Columbia University, writing in 1953.

Economic Analysis of Profling

Economist Walter Williams on racial profling:

Let's look at a few cases of "profiling" that cause little or no controversy. Mortality rates for cardiovascular diseases were approximately 30 percent higher among black adults than among white adults. The Pima Indians of Arizona have the world's highest known diabetes rates. Prostate cancer is nearly twice as common among black men as white men. Would anyone bring racial profiling charges against a doctor who routinely ordered more frequent blood tests and prostate screening among his black patients and more glucose tolerance tests for his Pima Indian patients?

It Was a Tax Hike for the Rich, Not a Tax Cut

A lot of people claim that the 2003 tax bill was a "tax break for the rich," including Paul Krugman of the NY Times. (Do an advanced Google search for Paul Krugman and the phrase "tax cuts for the rich" and you'll get 29,000 hits. Do it for George Bush and you'll get 182,000 matches.)

Not true, according to several recent studies released by the government, and reported in
today's WSJ:

According to the IRS annual study of income tax data, just released for 2004:


  • Americans who earned more than $1 million in adjusted gross income paid $178 billion, or an average of $740,000 per filer, in income taxes in 2004.
  • That's a 33% increase in taxes for that group since 2002, the year before the 2003 tax cuts in marginal income-tax and dividend and capital gains rates.
  • The wealthiest 1% paid almost 37% percent of all individual income-tax payments in 2004, up from 34.27% in 2003.
Meanwhile, a separate report from CBO that tracks monthly tax collections shows that tax revenues keep increasing. In the first two months of Fiscal 2007 through November, tax revenues climbed by 9% compared to the previous year, and this is on top of the increase in tax revenues of 15% in 2005, and 12% in fiscal 2006. The federal budget deficit is down to 1.8% of GDP -- lower than the average for the last 25 years.

Bottom Line: It wasn't a "tax cut," it was a tax increase in revenues. And it wasn't a "tax cut for the rich," it was a "tax hike for the rich." Tax revenues are at an all-time high, and "the rich" are paying more than ever, what's to complain about?

Largest Cash Crop: Marijuana

U.S. growers produce nearly $35 billion worth of marijuana annually according to a recent report, making the illegal drug the country's largest cash crop, bigger than corn ($23 billion) and wheat ($7 billion) combined.

Only prohibition and the drug war's distortion of the laws of supply and demand make an easily grown weed worth as much as gold. If growing wheat was illegal and there was a "war on wheat," wheat would probably be worth a lot more than $5 per bushel.

Tuesday, December 19, 2006

Property Taxes Explode as Home Prices Rise

Property tax collections have exploded over the last four years according to a new report by Gerald Prante, an economist at the Tax Foundation.

Adjusted for inflation, property taxes have increased by 12 percent, Prante said. "It's about 27 percent in nominal terms since 2000." By comparison, property taxes increased by just 2 percent from 1994 to 2000. Soaring property taxes around the country have pushed lawmakers to seek reforms.


Does Studying Econ Make You More Conservative?

Well, yes, or at least more classically liberal. See Harvard economist Greg Mankiw's answer, here's an excerpt:

"Some of the striking insights of economics make one more respectful of the market as a mechanism for coordinating a society. Because market participants are motivated by self-interest, a person might naturally be suspect of market-based societies. But after learning about the gains from trade, the invisible hand, and the efficiency of market equilibrium, one starts to approach the market with a degree of admiration and, indeed, awe."

Like a course in music appreciation, economics helps students develop an appreciation of the market, the "capitalist rainforest."

Speed Limits on the Information Superhighway

Don't most people want connections to the Internet to be faster, and not slower? Well, not in the Islamic Republic of Iran, if the government has anything to say about it, which, well, of course they have a lot to say about it, since they set the rules of Internet access, and just about everything else in Iran.

TEHRAN - Iran's internet service providers (ISPs) have started reducing the speed of Internet access to homes and cafes based on new government-imposed limits, a move critics said appeared to be part of a clampdown on the media.

An official said last week that ISPs were now "forbidden" by the elecommunications Ministry from providing Internet connections faster than 128 kilobytes per second (KBps), the official IRNA news agency reported. He did not give a reason.

Wouldn't want people surfing too fast, would you?

Read more here.


$3000 Shark's Tooth?

There were more than 30 bids, and the price was bid up to over $3000 on Ebay for this flawless 6-inch shark's tooth from a 60-foot prehistoric megalodon (approx. 5 millions year ago), but the reserve price was not met. Megalodon sharks were the largest predatory fish to have ever lived.

Biggest Swiss Army Knife Ever


Weighs 20 pounds, has 85 tools and costs $1000. Read a review here.

The Right Minimum Wage: $0.00

When the media give us a portrait of a typical minimum-wage worker, they are almost always wrong. They usually portray a mother or a father with at least two children, who are unable to make ends meet on the $10,300 provided by the minimum wage. In fact, the great majority of "minimum wagers" are much different, say the American Enterprise Institute (AEI).

The number of people on the federal minimum wage of $5.15 per hour is many fewer than most people imagine:
  • In 2005, there were only 1.9 million workers earning the minimum wage (out of 145.6m workers in the U.S., or only 1.3% of the labor force).
  • 63% work only part-time and are not full-time workers, and a majority (53%) are under the age of 25 -- most of them students or weekend workers.
  • Within this disproportionately large pool of youth "minimum wagers," 2/3 come from families with at least one other family member earning income.
  • 80% of minimum wagers belong to families above the poverty line.
  • Average income of the family of a young individual earning minimum wage is just over $64,000.
Who are the losers from a higher minimum wage, and who will actually gain?
  • Less than 13% of the benefits from a federal minimum-wage increase would go to poor families, while 63% would go to families earning more than twice the poverty line, and 42% to those 3X above the poverty line.
  • A hike in the minimum wage will hurt low-skilled workers most because those jobs will be increasingly difficult to find.

As Milton Friedman said, "Minimum wage laws are defended as a way to help low-income people," when "in fact, they hurt low-income people... The minimum wage law requires employers to discriminate against persons with low skills."

The real problem with unskilled workers is not that they are underpaid, but they are "underskilled." And how best to develop skills? Get and keep a job, which is hard to do when an unskilled worker has been priced out of the labor market by an increase in the minimum wage. That is why the NY Times wrote an editoral once titled: "The Right Minimum Wage: $0.00 per Hour."


Tragedy of the Commons, College-Style

Another example of how common ownership of property or resources leads to misuse of property and tragic results:

"The Berry College (Georgia) Student Government Association (SGA) used student activity funds to purchase 20 bicycles for student use on campus.

The bright red bicycles, each with an identifying plate reading “Berry Bike,” were available to al students on a “first-come, first-served” basis, making them a common property resource. In spite of the relatively favorable environment for common-property bicycles at Berry College, it took less than two months for many of the bikes to be lost, stolen, or abused.

Read more here.

From Republican to Libertarian

Former Republican Congressman Bob Barr in an interview with Reason Magazine about why he left the Republican party to join the Libertarian Party:

"And I chose to join the Libertarian Party because at this time in our nation’s history, it’s fundamentally essential to join a party, work with a party, that’s 100 percent committed to protecting liberty. In order to have any chance of saving the Constitution and our civil liberties, we need a party dedicated to that cause."

Monday, December 18, 2006

Sometimes the Cure is Worse Than Disease

The Sarbanes-Oxley Act powerfully illustrates the law of unintended consequences. Due to hasty drafting by Congress in the wake of the Enron and WorldCom scandals, Sarbox has cost the U.S. economy over $1 trillion, according to one study published by the AEI-Brookings Center. To add insult to grievous injury, it is unconstitutional.

Even the statute's co-author, Rep. Mike Oxley, has conceded that Sarbanes-Oxley was hastily written and enacted. In its rush to "do something" about corporate scandals, Congress overstepped the bounds of its authority. It is time to call Congress back, both to help our economy and reaffirm that our constitutional system imposes clear limits on the government's urgent desire to "do something." Congress must be reminded that the "solution" is at times worse than the problem.

Ken Starr, dean of Pepperdine University's School of Law in
Saturday's WSJ.

Minimum Wage = Maximum Unemployment

Minimum wage floors price out the low-skilled workers they are meant to help, according to the Institute for Research on the Economics of Taxation.

According to the Labor Department, as of 2004:
  • Fewer than 3% of hourly wage workers were paid at or below the federal minimum wage.
  • About half were under 25, and about a quarter are teenagers.
  • Fewer than 2 percent of workers 25 or older get the minimum wage or less.
  • About 60 percent of these low-wage workers were in the leisure and hospitality industry, primarily food services and drinking places, where wages are supplemented by tips.

History shows that raising minimum wage levels only hurt (often intentionally) low income workers, says IRET:

  • The 1931 Davis-Bacon Act, requiring "prevailing" wages on federally assisted construction projects, was supported by the idea that it would keep contractors from using "cheap colored labor" to underbid contractors using white labor.
  • Apartheid South Africa enacted a minimum wage to price low-skilled black workers out of selected trades.
  • In the 1950s, New England textile manufacturers supported Sen. John F. Kennedy's efforts to increase the federal minimum wage to prevent competing mills from starting up in the low-wage South.

Today, the biggest backers of the minimum wage are unions. One reason: they seek to block low-wage workers from competing with higher-skilled, higher-priced, union members.

Source: "Minimum Wage = Minimum Employment," Institute for Research on the Economics of Taxation, November 2006.


Upward Sloping Demand Curve?

Ursinus College, a small liberal arts institution in eastern Pennsylvania raised tuition and fees 17.6 percent, to $23,460 in 2000. Then it waited to see what would happen.

Ursinus received nearly 200 more applications than the year before. Within four years the size of the freshman class had risen 35 percent, to 454 students. Applicants had apparently concluded that if the college cost more, it must be better.

Read more in the NY Times article "In Tuition Game, Popularity Rises With Price."

Double Taxation Just Got Worse

The United States is the only developed country that taxes it citizens while they are overseas. Americans abroad are also taxed in foreign countries where they reside. And it's gotten worse recently. President Bush signed into law a bill that sharply increases tax rates for Americans abroad with income of more than $82,400 a year. The legislation also increases taxes on employer-provided benefits like housing allowances.

But with new tax pressures facing American expatriates due to the new legislation enacted this year, international tax lawyers say they detect rising demand from citizens to renounce ties with the United States — "renunciants."

"The administrative costs of being an American and living outside the U.S. have gone up dramatically," said Marnin Michaels, a tax lawyer with Baker & McKenzie in Zurich.

See the article "More Americans abroad giving up citizenship for lower taxes," in the
Intl Herald Tribune.

Bottom Line: If you tax something, you get less of it. If you subsidize something, you get more of it.

Free Housing in Mumbai: Private Philanthropy

From the International Herald Tribune:

MUMBAI: In this Indian capital of glamour and commerce, there is a city of high-rises and a city of shanties.

At one extreme is the growing number of towers housing the rich and the aspiring. At the other extreme is a multiplying labyrinth of slums, covering a third of the city and sheltering more than five million people in squalid conditions, with a shortage of water and toilets, a surfeit of disease and the constant odor of feces mixed with garbage.

But now a housing boom in this fast-growing economy is entwining their destinies. To make room for more high-rise buildings, investors are doing what was once left to philanthropists: giving slum dwellers free apartments.

Under an inventive government program in Mumbai, builders raze entire slum neighborhoods and use part of the land for tenements to house the original residents. The apartments measure 225 square feet — the size of a typical shanty. In return, the developer wins the right to build lucrative towers on the rest of the land and pays nothing but the cost of the slum resettlement.

So far, 100,000 such apartments have been built in Mumbai, housing 600,000 people.

Sunday, December 17, 2006

China's Stock Market, +60% This Year

We hear a lot of complaints about China's policy of keeping the dollar overvalued, making Chinese goods cheap for Amercian consumers and businesses. Given the passion of American consumers and firms to get the best price, I don't think you'll find too many buyers of China's products complaining about low prices, most of complaining is coming from U.S. producers how have high prices, and would like more business from buyers who actually prefer low prices.

Another benefit of a strong dollar that is often overlooked is the incredible value in recent years of China stocks, see graph above from MSCI for China's stock market, which has tripled in recent years (measured in USD). In 2006 YTD, US investors in China have gotten a whopping 60.34% return! Not bad, more than 4X the return from US stocks (14% YYD).

Bottom Line: We not only save money by buying China's cheap products, but we can make money by investing in Chinese companies.

More on the Economics of Diamonds

From an article in today's NY Times, Measuring a Diamond’s True Price:

"The lust for that glittering gravel, extending unbroken from African thieves to British royals to domestic Bridezillas — is manufactured. Hard carbon, as even Nicky Oppenheimer, the charming chairman of DeBeers, has admitted, has no intrinsic value except as grit.

DeBeers, which manages the cartel that has kept diamond prices up far more efficiently than OPEC ever did with oil, fosters that romance. It has run the “A Diamond Is Forever” ads since 1948 and still quietly advises gullible grooms that it is “customary” to spend two months’ salary on a ring.

I got married this month, and my long-suffering bride was kind enough to go along with my refusal to buy a diamond: she has an opal engagement ring and a sapphire wedding ring."

Top 20 Law Schools

According to SSRN, by download counts for all papers authored by individuals affiliated with the law school during the last 12 months, based on data through 12/1/2006:

1. Harvard University - Harvard Law School
2. Columbia University - Columbia Law School
3. University of Chicago - Law School
4. University of Texas at Austin - School of Law
5. University of California, Los Angeles - School of Law
6. Stanford Law School
7. Yale University - Law School
8. Emory University - School of Law
9. George Washington University - Law School
10. Ohio State University - Michael E. Moritz College of Law
11. University of Minnesota - Twin Cities - School of Law
12. Georgetown University - Law Center
13. University of Illinois - College of Law
14. Vanderbilt University - School of Law
15. New York University - School of Law
16. University of Pennsylvania - School of Law
17. University of California, Berkeley - School of Law (Boalt Hall)
18. Duke University - School of Law
19. University of Southern California - Law School
20. George Mason University - School of Law

How To Grade Final Exams

It's that time of year, the end of fall semester, and college professors all over the country are spending a lot of time grading papers and final exams. One method of grading papers is outlined by a law professor, and shown in the picture above, here is the post, which is mentioned on Greg Mankiw's blog.

Ahmet Ertegun, R.I.P.


In 1947, Ahmet Ertegun, the 24-year-old son of a distinguished Turkish diplomat, borrowed $10,000 from his dentist and, with his older brother Nesuhi, formed Atlantic Records.

Over the next 50 years, Ertegun would discover, sign, popularize, and produce Ray Charles, Bobby Darin, Aretha Franklin, the Rolling Stones, Otis Redding, Bette Midler, Wilson Pickett, Percy Sledge, Booker T. and the MGs, Sam and Dave, Cream, the Bee Gees, Led Zeppelin, the Coasters, John Coltrane, Charlie Mingus, Roberta Flack, the Spinners, the Allman Brothers, Genesis, Foreigner, Pete Townshend, Stevie Nicks, Buffalo Springfield, the Blues Brothers, Tori Amos, and Phil Collins, among others.

Ahmet Ertegun, founder of Atlantic Records and a major force in American music, died Thursday at the age of 83. Read more in Slate.

Bangalore Bungalow?

Rent a 4,000 square foot, 4 BR home in Bangalore for $671 per month (30,000 rupees), including "separate servants quarters," see the listing here on Craigslist.

Quote of the Day About Shanghai


"As a city, Shanghai is like a beautiful young bitch who loves money."

~Chinese author Mian Mian