• Detroit Bankruptcy Requires Life Support

    Should Detroit Sell Its Art?

    Apr 11 • Behavioral Economics, Economic Debates, Economic History, Financial Markets, Government, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 41 Views

    During 2009, a still life painted by Henri Matisse was sold at a Christie’s auction for $46 million. The Detroit Institute of Arts owns Poppies, also a Matisse oil on canvas but a bit larger.

    Municipal Bankruptcy dilemmas

    From: the DIA

    A municipal bankruptcy like Detroit’s creates so many obvious and less evident dilemmas. Most simply, the state, the city and a federal judge are making decisions about the city’s obligations to its citizens, to the people it pays salaries and to those who have loaned it money. They also have to decide whether to sell a few paintings.

    On the spending side…

    We hear a lot, for example, about Detroit’s underfunded pensions. Teachers and policemen explain how they have worked for a lifetime in giving, relatively lower paying, professions. The one thing they depended on and planned for was the retirement income they were promised. Now, that money could disappear because of bankruptcy decisions.

    The city has salaries to pay. It has schools to maintain. It has roads to repair, streetlights to turn on, buses to run. Now, with less available and minimal if any borrowing capability to compensate for a shortfall, city services have to contract.

    On the revenue side…

    We have the people who purchased the bonds that Detroit sold to fund its expenses. As with any bond, Detroit got the money, and the buyer got the bond and the promise of interest and principle repayment. A retired couple could have purchased Detroit’s bonds. Like the teachers and policemen, that couple also could need the revenue that relates to the bankruptcy settlement but might get close to 75% of what they invested.

    We also have institutional investors. Banks, investment banking firms, hedge funds all could be owners of Detroit’s debt. Their willingness to loan Detroit money at least partially related to their expectation that they would be paid back. While they do not have the personal heart tugging stories of individuals, their willingness to loan money to municipalities has a very personal impact when you think of the services it funds. Buyers of municipal debt need to know their contracts will be enforced. Otherwise, cities and towns and states will have to pay a lot more to borrow in the future.

    And finally, there are the paintings.

    If you could get $50 million for a painting, you would longer have it as your city’s treasure. You would no longer have it for school children to see, for tourists to visit and as a source of pride. Are those intangibles worth more than the dollars you could get for those unfunded pensions and bondholders?

    Bankruptcy is indeed an example of the basic problem of economic scarcity that every society, rich and poor, has to solve. When there is not enough for everyone to have all they want and need, who should get what and how much?

    Sources and Resources: Because of the DIA paintings debate, Detroit’s bankruptcy is again in the news. For the focus on the museum, articles I read were from WSJ and the New Yorker, both potentially paywalled. However, Reuters gave some good facts about the potential for casino revenue and here is more background at econlife. Also, I totally recommend going to the DIA website to see the magnificent artwork they own.

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  • GDP growth Nigeria rebasing

    Why Would the Nigerian GDP Double Overnight?

    Apr 10 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Government, Innovation, International Trade and Finance, Labor, Lifestyle, Macroeconomic Measurement • 50 Views

    We might have to say BRINC rather than BRICS.

    As a developing nation with the highest GDP in Africa, South Africa has been the “S” in BRICS (Brazil, Russia, India, China). Now though, Nigeria has raced ahead. During one weekend in April, the market value for all goods and services Nigeria produces jumped by 89% to $510 billion.

    The reason is not because spending in a GDP component–government, gross investment, consumer goods and services, and net exports–is surging. Instead, Nigerian statisticians decided it was time to update what they included. Called “rebasing,” they added industries that, when they last revised their GDP in 1990, had not even existed. 

    In “Measuring Better,” the Nigerian Bureau of Statistics presented their rebasing “roadmap:”

    GDP Rebasing in Nigeria

    From: the Nigerian National Bureau of Statistics

    “Rebalancing” might better describe how the GDP was transformed. Invisible before, now $600 million from Nollywood films and the spending of 120 million mobile phone subscribers became a part of GDP totals. Whereas before, oil and gas occupied 32% of production, now the sector shrunk to 14%. Suddenly, with a meaningful consumer sector, the Nigerian economy looked more diversified.

    And just as quickly, Nigeria’s world per capita GDP rank changed:

    GDP Nigeria Rebasing Compared to Other Nations

    Blogs talking about rebased GDPs have suggested that Nigeria’s new numbers better reflect what they really produce. After all, we just did the same thing in the US when we added R & D, music production and other intangibles to our gross investment GDP component and then increased past GDPs because of the change.

    Our bottom line? For Nigeria, moving toward greater accuracy and a new position in world GDP tables, rebasing appears to be a big step. For us, though, we should keep in mind economist Morton Jerven and his book, Poor Numbers. Looking at statistics, he suggests a dose of skepticism. Just because we have a precise number does not mean that it is accurate, especially for African development.

    Sources and Resources: To understand the meaning of Nigeria’s GDP rebasing, I suggest moving between the media analyses here and here and their own report and then looking at our econlife post on Poor Numbers.

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  • Salamander ant prey

    The Big Impact of a Little Salamander

    Apr 9 • Economic Thinkers, Environment, Government, Lifestyle, Regulation, Thinking Economically • 55 Views

    The woodland salamander made me think of Adam Smith.

    In North American forests, wherever it is dark and damp, under a rock or a log, a very hungry salamander could be devouring her daily diet. Eating 20 ants, 2 flies or beetle larvae, and maybe a half of a springtail, she can be called a voracious predator.

    Woodland Salamander and Greenhouse Gases

    From: US Forest Research Station, March 11, 2014.

    Although the woodland salamander is only several inches long and weighs less than an ounce, she might have the ability to save the world. The reason is that she primarily eats “shredding invertebrates.” Because the bugs that are shredding invertebrates decimate and then consume teeny bits of leaves, they unsettle the forest leaf litter that might have remained covered by wet debris and then reabsorbed into the soil. Unsettled, the litter with its high carbon content enters the atmosphere as does some methane. The shredding vertebrate could be a big source of carbon emissions.

    Here is where the salamander comes to the rescue. Almost all of their prey are “shredding invertebrates.” Researchers in one study have now hypothesized that the more bugs salamanders consume, the lower the level of greenhouse gases. And according to a recent study, based on a small scale reproduction of the phenomenon with a control group, the impact could be considerable because there are lots of woodland salamanders.

    Observing the dynamics of a market system during the mid-18th century, Adam Smith explained how participants naturally and productively interact. So too with salamanders and their eco-system.

    And finally, 2014 is the year of the salamander.

    Sources and Resources: Providing abundant and interesting detail, a NY Times article summarized recent salamander research. If though, you would enjoy seeing the research on which the article is based, I recommend this Welsh/Best paper and the USDA forest service blog.

     

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  • Paying for citizenship and deficit reduction

    Unusual Ways to Achieve Deficit Reduction

    Apr 8 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Thinkers, Government, Innovation, Labor, Macroeconomic Measurement, Thinking Economically • 58 Views

    Hoping to diminish their country’s deficit, last year, Malta’s President and Parliament decided to sell citizenship. The price tag is $891,000 and the perk is that Malta is in the EU. Consequently, you get an island home with a back door leading to the European Union. That means easy travel to the other 27 member states as well as to the 69 countries that offer visa free entry to EU citizens. Malta has contracted with a consulting firm to vet applicants. The firm charges a $95,000 application fee and gets a commission for every approval.

    In the Caribbean, St. Kitts and Nevus, Antigua and Barbuda and Dominica also have citizenship price tags. For St. Kitts and Nevus, you could give $250,000 to a retired sugar workers fund or a $400,000 real estate donation.

    Paying for US citizenship actually has been proposed by Nobel Prize winning economist, Gary Becker. In a Wall Street Journal opinion column, he and Edward Lazear suggested that people pay $50,000. Assuming we would continue at an annual rate of one million legal immigrants, a $50,000 per person fee would raise $50 billion. Becker and Lazear like the idea because of its market-based approach.

    Currently we do have a much smaller program. The US will exchange 2 years permanent residence and citizenship in 5 years for a $1 million investment in a business with 10 or more people or $500,000 targeting an economically depressed area.

    Our bottom line? A market-based solution to the immigration debate deserves some consideration. With deficit reduction one of its positive externalities, paying for citizenship has potential.

    Sources and Resources: Between Slate and the NY Times, you can get a pretty good description of Malta’s “golden passport” program and its broader implications. Then, trying to take it a step further, Becker and Lazear provided a new approach that deserves some debate.

     

     

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  • gender gap women's sports and March Madness

    Does It Matter That Men Boast?

    Apr 7 • Behavioral Economics, Demand, Supply, and Markets, Economic Growth, Gender gap, Innovation, Labor, Tech, Thinking Economically • 67 Views

    Teaching at a girls’ school, I continually run into the problem of modesty. My women know the answers and yet go to the board saying they might not be right.

    Now, an academic study from researchers at Columbia, Northwestern’s Kellogg School and the Booth School at Chicago have quantified the impact of women’s tendency to understate their potential while men overstate what they can do.

    Limited to the lab, the experiment’s design guaranteed no gender performance differences. “Employers” knew what they were looking for as did the “job candidates.” To mimic the real world and create incentive, the “employers” were paid for selecting the best candidates as were the “employees” who got the most jobs.

    What happened?

    There were several scenarios. One conveyed no information; people just knew gender. In the second scenario that the researchers called “Cheap Talk,” job candidates were supposed to self-report their results. Then, in the third twist, actual test data was presented to employers.

    In each instance the results reflected the “employer’s” confirmation bias. If he or she (male and female!!) thought the male would be more able, then that person hired the male, thereby validating the preconception. Consequently, in the first 2 “rounds” of hiring, whether based on no information or self-reporting in which the men inaccurately inflated their ability, the women were half as likely to get the job. Perhaps even more unsettling, even when presented with hard data, still more men were selected.

    In most hiring decisions, “employers” prior beliefs were disproportionately weighted.

    confirmation bias and hiring men

    From: “How stereotypes impair women’s careers in science”

    Battling confirmation bias becomes even more daunting when industry norms reinforce the bias. Described in yesterday’s NY Times article on tech gender bias, male attitudes demean women. As a result, they have little incentive to change their behavior. It was encouraging, though, to read about how women in technology have confronted the problem and are fighting the battle by starting their own firms and challenging inappropriate tweets, apps and less obvious but equally egregious behaviors.

    As a behavioral economist might say, the confirmation bias that social norms have supported is gradually changing.

    Sources and Resources: Especially having just read the NY Times Business Section lead article, “Technology’s Man Problem,” I recommend and especially enjoyed, “How stereotypes impair women’s careers in science.”

     

     

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