Category Archives: Economics

Derek Zoolander, spherical cows, the Guardian, and econophysics

Wonderful explanation of the logical fallacy associated with dismissing theories based upon modeling assumptions that are not literally true… HT to Scott Cunningham.

In Zoolander, the titular character is presented with a model of a building.  He inspects the model and responds with anger and indignation:

Derek Zoolander: What is this? [smashes the model for the reading center] A center for ants?

Mugatu: What?

Derek Zoolander: How can we be expected to teach children to learn how to read… if they can’t even fit inside the building?

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Financial versus Mathematical literacy

It is rare when I actually take the time to read Baylor’s student newspaper, the Baylor Lariat, and even rarer when I post a critical response to a Lariat article. However, I couldn’t resist commenting on an editorial from earlier this month entitled, “Baylor should implement class to ready students for real world”. In this editorial, the members of the Lariat editorial board opine that Baylor should require a one-hour credit “Life Skills” course in lieu of a basic math course such as “Ideas in Mathematics”. Basically, such a course would be designed to cover very basic personal finance principles, such as budgeting, paying off student loans, buying insurance, saving for retirement, etc. I think this is a manifestly bad idea; let me explain why.

While I am not aware of an empirical literature concerning mandated personal finance courses at colleges and universities, many states have experimented with personal finance and minimum math requirements at the high school level. A recent (2014) Harvard Business School working paper entitled “High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses” provides a thorough empirical analysis of personal finance and minimum math requirements and finds that mandated personal finance courses at the high school level do little to improve outcomes that are generally associated with financial literacy (e.g., such as building wealth through asset accumulation, prudent credit management, etc.), whereas “… individuals who were exposed to greater math requirements in high school are more likely to accumulate assets, have more real estate equity, are less likely to be delinquent on their loans, and are less likely to undergo foreclosure.”

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Bank of Japan Introduces Negative Interest Rates

The Bank of Japan’s (somewhat counterintuitive) stated goal for implementing it’s new (negative interest rate) policy is “…to push down borrowing costs to stimulate inflation”. While I certainly do not claim or pretend to be a monetary economist, a policy that punishes savers and rewards borrowers doesn’t seem like a particularly good script for long-term economic success. I think it’s a tacit acknowledgment that the Japanese economy is struggling with deflation.  See https://www.boj.or.jp/en/announcements/release_2016/k160129a.pdf for the official policy statement issued by BOJ…

BOJ Introduces Negative Interest Rates for First Time
wsj.com|By Takashi Nakamichi and Megumi Fujikawa
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As Interest Benchmarks Go Negative, Banks May Have to Pay Borrowers

I never thought that I would ever live to see the day when interest rates turned negative, creating a world where investors pay for the opportunity to lose money over time and banks pay interest to borrowers…

As Interest Benchmarks Go Negative, Banks May Have to Pay Borrowers

“As Euribor, a key benchmark used to set interest rates, seems to sliding toward zero and below, banks in some European countries are looking at previously inconceivable problem: They may soon have to pay interest to customers who borrow from them.”

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Are Shareholders Obsolete?

Corporate Governance

Are Shareholders Obsolete?

In his January 2, 2015 Wall Street Journal essay, columnist Holman Jenkins makes a compelling case for the principle of shareholder value maximization by noting that owners seeking to maximize the value of their businesses end up doing a pretty decent job of satisfying customer and employees along the way. Think of this essay as a 2015 sequel to Milton Friedman’s famous New York Times Magazine essay (published September 13, 1970) entitled “The Social Responsibility of Business is to Increase its Profits” (see http://bit.ly/Social_Responsibility_of_Business for Friedman’s essay; Thomas Coleman provides important context in his recent (2013) essay about Friedman entitled “Corporate Social Responsibility: Friedman’s View @ http://bfi.uchicago.edu/feature-story/corporate-social-responsibilty-friedmans-view)…

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What’s the “future” for price at the pump?

Lately, futures prices for crude oil and refined products such as gasoline and heating oil have been in a free-fall.  For example, the January 2015 futures contract for “RBOB Gasoline” is trading at the equivalent of around $1.64 per gallon.  As shown in the following graph, this represents a price drop of roughly 85-90 cents per gallon since September:

RBOB Gasoline

AAA reports that today’s national average is $2.639 and could fall to $2.50 within the next couple of weeks.  Nationally, the average markup from the near term futures contract price to prices at the pump has averaged 62 cents per gallon since January 2000 (which is when AAA began tracking this information).  Therefore, if futures prices hold at (or fall further from) current levels it seems quite likely that the price at the pump may be headed even lower.

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Terrorism risk insurance

Clearly insurance is an enabling technology; without insurance many if not most large-scale commercial activities would grind to a halt. In a Business Week article entitled “The Unexpected Threat to Super Bowl XLIX“, Wharton professors Howard Kunreuther and Erwann Michel-Kerjan point out that that if Congress decides not to renew the Terrorism Risk Insurance Act (TRIA) (set to expire on Dec. 31), there is a chance that the Super Bowl might not be played. Will Warren Buffet step in as an insurer of last resort if TRIA is not reauthorized?  Also, Gordon Woo raises some excellent points about possible private sector alternatives to TRIA in his blog posting entitled “RMS and the FIFA World Cup: Insuring Against Terrorism“.

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