a singapore economist

Refereeing tips

2006-10-27T13:24:00.000+08:00

If the first thought that come to mind was football, then this post will not be helpful. It provides advice to academic economists on how to write critiques of other economists' research.

From Tyler Cowen of Marginal Revolution:

Here are my tips:

1. Assume that no referee reports are truly anonymous. It is fine to be critical but always be polite.

2. Unless it is immediate junk, read the paper once and return to it a week later with deeper thoughts and a fresh mind.

3. Your report should not assume that the editor has a working knowledge of the paper in his mind.

4. Respond within a month. First it is considerate to the author. Second, the less "fresh" the task is, the more painful it will be.

5. A properly critical and useful "accept" report is harder to write. Don't look for excuses to quickly reject a potentially good paper.

6. The editor might have chosen you as referee for a reason. You need not go along with the editor's grand plan or desired outcome, but be aware it may exist.

7. Don't check the references to see if you are cited.

Here is a short article full of good advice. Here is the longer piece (which I have not read) on how to publish in top journals. Thanks to Elaine Hawley for the pointer.

Hiatus until January

2006-10-25T00:09:00.000+08:00

Due to a major uptick in work and travel obligations, a singapore economist will be on hiatus, probably until January. Thanks for taking the time to visit.

What not to do around a $139 million asset

2006-10-22T01:49:00.000+08:00

From Slate:

Casino mogul Steve Wynn ripped a hole through his $139 million Picasso painting while gesticulating at a cocktail party, reports the New York Post. Nora Ephron gave her own first-person account of the damage: It was "a black hole the size of a silver dollar … with two three-inch long rips coming off it in either direction." Wynn had just agreed to sell the painting; now, the deal is off.

Ranking MBA programmes

2006-10-19T20:15:00.000+08:00

I recently posted on a study by the Economist that ranked NTU's MBA programme 77th best worldwide and NUS's MBA programme 99th best worldwide (4th and 11th best in Asia, respectively). In response, a reader commented: “Frankly speaking, to someone who's aiming for a top-10 MBA program in the US, who cares?”

Who cares indeed. A glib but nonetheless truthful response is that there must be some people who find the rankings informative/interesting/entertaining or why would the Economist spend the time and effort to produce the list in the first place? After all, people do apply to NUS and NTU and many don’t get accepted.

Nonetheless, I suspect that the commenter was trying to make the following point: only the “top-10” schools are worth attending in terms of financial rewards, making NUS and NTU irrelevant. Ok, that is a valid opinion and perhaps a predictable one for an ambitious MBA student. Still I wonder why the reader thinks that only the very "best" schools will provide the proper rewards. Is it true that lesser ranked schools don’t deliver a financial payoff? There is also a more fundamental question: what are the top-ten schools? There are several rankings that differ significantly because each is constructed with different criteria such as interviewing CEOs, deans, recruiters, business school graduates, and/or weighing admissions and placement data. So which rankings are the "right" ones?

Fortunately, I came across a paper that has already done the heavy lifting on this topic: The Best Business Schools: A Market-Base Approach by Joseph Tracy and Joel Waldfolgel, published in The Journal of Business in 1997.

From the article:

This article introduces a market-based methodology for evaluating the performance of MBA programs. We seek to distinguish the quality of a program from the quality of its students. We judge a program’s performance by its value added, measured by the graduates’ salaries, after accounting for student characteristics and job attributes.

The crux of their research is: which MBA programmes best increase your earning potential? This is a different question than the one implicitly or explicitly answered by other ranking methods: which programmes have the highest paid graduates? We all know that Harvard MBA graduates earn a lot of money. But is the Harvard MBA programme the primary reason? Or do people with high earning power choose to attend Harvard?

Article continued:

...we focus on the degree to which business programs are successful in producing high-salary jobs for their graduates. Given the competitive labor market for MBAs, salaries will reflect the willingness of employers to pay for the attributes embodied in a program's graduates. A program which attracts high-quality students may generate high salaries for its graduates without adding value to them.

Here is the bottom line. Using statistical techniques, they find programmes that are either "undervalued" or even unranked by the other ranking methods:

While four of our top five programs have been highly ranked elsewhere, 10 of our top 20 programs are unranked elsewhere. Like many other rankings, we place Stanford, Harvard, Chicago, Virginia, Pennsylvania, Northwestern, and Michigan in the top 10. In contrast to other rankings, we also place Oklahoma State, New Mexico, and Wake Forest in the top 10. By emphasizing program value added, our procedure identifies several programs that have been overlooked by other rankings because they do not recruit the very top students.

The authors use their procedure to rank 63 American MBA programmes.

Finally, some advice to students on how to use their rankings to choose a programme (however, note that this study was conducted with data from the early 1990s):

It is important to recognize that the value-added estimates, and associated rankings, are based on the current allocation of students to programs. Thus, our rankings should be understood to reflect the value added currently conveyed to the students at each of the programs, not the value added that would unconditionally be transmitted to any students at these programs. For example, while our results indicate that Oklahoma State has higher value added than, say, Dartmouth, students at Oklahoma State have, on average, lower GMATs and less work experience. Our evidence does not indicate whether Dartmouth students would fare better at Oklahoma State. Because different programs attract students of systematically different quality, a potential student interested in choosing a program with the most value added should compare value across programs with students of roughly his or her quality.

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How to Write Well

2006-10-18T07:47:00.000+08:00

Greg Mankiw's advice to economists on how to write for a general audience:

When I was CEA chair, I sent the following guidelines to my staff as they started drafting the Economic Report of the President. A friend recently emailed me a copy, and I thought I would share them with blog readers. They are good rules of thumb, especially for economists writing for a general audience.

ERP Writing Guidelines

Stay focused. Remember the take-away points you want the reader to remember. If some material is irrelevant to these points, it should probably be cut.
Keep sentences short. Short words are better than long words. Monosyllabic words are best.
The passive voice is avoided by good writers.
Positive statements are more persuasive than normative statements.
Use adverbs sparingly.
Avoid jargon. Any word you don’t read regularly in a newspaper is suspect.
Never make up your own acronyms.
Avoid unnecessary words. For instance, in most cases, change
o “in order to” to “to”
o “whether or not” to “whether”
o “is equal to” to “equals”
Avoid “of course, “clearly,” and “obviously.” Clearly, if something is obvious, that fact will, of course, be obvious to the reader.
The word “very” is very often very unnecessary.
Keep your writing self-contained. Frequent references to other works, or to things that have come before or will come later, can be distracting.
Put details and digressions in footnotes. Then delete the footnotes.
To mere mortals, a graphic metaphor, a compelling anecdote, or a striking fact is worth a thousand articles in Econometrica.
Keep your writing personal. Remind readers how economics affects their lives.
Remember two basic rules of economic usage:
o “Long run” (without a hyphen) is a noun. “Long-run” (with a hyphen) is an adjective. Same with “short(-)run.”
o “Saving” (without a terminal s) is a flow. “Savings” (with a terminal s) is a stock.
Buy a copy of Strunk and White’s Elements of Style. Also, William Zinsser’s On Writing Well. Read them—again and again and again.
Keep it simple. Think of your reader as being your college roommate who majored in English literature. Assume he has never taken an economics course, or if he did, he used the wrong textbook.

Disappointing Results from Deregulation

2006-10-17T08:31:00.000+08:00

From Economist's View:

Disappointing Results from Deregulation

The deregulation of electricity generation has been problematic:

Competitive Era Fails to Shrink Electric Bills
by David Cay Johnston, NY Times

A decade after competition was introduced in their industries, long-distance phone rates had fallen by half, air fares by more than a fourth and trucking rates by a fourth. But a decade after the federal government opened the business of generating electricity to competition, the market has produced no such decline. Instead, more rate increase requests are pending now than ever before...

Article continued:

The disappointing results stem in good part from the fact that a genuinely competitive market for electricity production has not developed. ... The Federal Energy Regulatory Commission and five other agencies, in the draft of the report to Congress, are unable to specify any overall savings. “It has been difficult,” the report states, “to determine whether retail prices” in the states that opened to competition “are higher or lower than they otherwise would have been” under the old system. ...

Under the old system, regulated utilities generated electricity and distributed it to customers. Under the new system, many regulated utilities only deliver power, which they buy from competing producers whose prices are not regulated. For example, Consolidated Edison, which serves the New York City area, once produced almost all the power it delivered; now it must buy virtually all its electricity from companies that bought its power plants and from other independent generators. The goal is for producers to compete to offer electricity at the lowest price, savings customers money.

Independent power producers, free-market economists and the Clinton Administration cheered in 1996 when the federal government allowed states to adopt the new system. ... But ... A truly competitive market has never developed, and, in most areas, the number of power producers is small. ...

[C]ritics say that, as in California five years ago in a scandal that enveloped Enron, the auction system can be manipulated to drive up prices, with the increases passed on to customers. What is more, companies that produce electricity can withhold it or limit production even when demand is at its highest, lifting prices. This happened in California, and the federal commission has found that it occurred in a few more instances since then. Critics say that more subtle techniques to reduce the supply of power are common ...

Richard Blumenthal, the Connecticut attorney general, said the supposedly competitive market has been “a complete failure and colossal waste of time and money.” He asked the federal commission to revoke competitive pricing in his state, but the commission dismissed the complaint last Wednesday, saying the state had not proved its case.

Advocates of moving to the new system say that, in time, the discipline of the competitive market will mean the best possible prices for customers. Alfred E. Kahn, the Cornell University economist who led the fight to deregulate airlines and who, as New York’s chief utility regulator in the 1970’s, nudged electric utilities toward the new system, said that he was not troubled by the uneven results so far.

“Change,” Professor Kahn said, “is always messy.” ...
Stubborn adherence to a policy that isn't working can be even messier. Free, unregulated markets are best when it results in an efficient outcome, but the necessary conditions for competition are not met in these markets and oversight is needed to prevent and penalize price manipulation.

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Milton Friedman argues for drug legalization

2006-10-14T09:04:00.000+08:00

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NTU's MBA programme ranked top 3 in Asia

2006-10-13T08:22:00.000+08:00

NTU's MBA programme is ranked 77th worldwide, and NUS's MBA programme is ranked 99th worldwide.

NTU's MBA programme ranked top 3 in Asia
Channel NewsAsiaBy Asha Popatlal
12 October 2006

SINGAPORE: Nanyang Technological University's MBA programme has been ranked the top three among Asian universities and the best offered by a Singapore university.

The rankings come from the Economist Intelligence Unit's list of top business schools worldwide, which was just released.

Nanyang Business School made the overall list for the third year running; moving up in worldwide rankings from 83rd to 77th position.

The university says it finds it especially gratifying as significant weight is given to salaries earned by full-time MBA graduates, and European and American universities tend to do better in this respect, as Western economies have higher income levels.

Nanyang Business School also scored well when it came to student and faculty quality, student diversity and educational experience.

More economic drivel from the news

2006-10-12T12:26:00.000+08:00

If retail sales are up 8% since 2004 and the trend is expected to continue, what would you expect to happen to the cost of renting retail space? If you answered -- rents will increase -- then give yourself full marks. This journalist fails because judging from his article's title he seems surprised by such an outcome.

Retail and F&B sectors set for higher growth even as rental goes up

Owners of the retail space see how well the retailers are doing and that they want to rent more space. Then why is it surprising that the owners raise rents?

Retailers bagged good sales in the first half of this year and the trend is set to continue.

However, analysts say strong demand for prime retail space is likely to push rentals up by some five percent over the next 12 months.

The scarce resource in this case is the retail space, which is relatively fixed in the short run. There are plenty of merchants or prospective merchants though. As such, the land owners have the power to extract some of these new earnings by raising rents.

Retail and F&B sectors set for higher growth even as rental goes up
Channel NewsAsia
Wong Siew Ying
11 October 2006

SINGAPORE: Retailers bagged good sales in the first half of this year and the trend is set to continue.

However, analysts say strong demand for prime retail space is likely to push rentals up by some five percent over the next 12 months...

Retail sales was up by nearly 8 percent compared to 2004, while F&B spending rose by 2.8 percent...

This is largely due to tourism arrivals, healthy economic growth and high employment rate.

The retail sector is expected to do well again, with sales rising by 5.3 percent in the first half of this year...

Most shopping complexes are almost fully leased and analysts forecast an increase in rental due to the high demand...

There are more small specialty shops and street level shopping, and analysts say such retailing formats will encourage youngsters to set up their own business and give larger departmental stores something to think about...

Incentives matter: divorce in Japan

2006-10-10T01:15:00.000+08:00

The divorce rate in Japan has increased steadily until 2003, when the rate began to dip:

The increase is credited to cultural changes that have made divorce a more acceptable option. The recent decrease seems to be economically motivated: women are putting off divorce to take advantage of a law passed in 2003 to take effect in 2007 that allows for a better divorce settlement. If this explanation is true, we should see a spike in the number of divorces in 2007.

From Japundit:

Japan is slated to revise its divorce law in April 2007, making women entitled to receive up to half of their spouse’s pension payments. Until now, a woman who divorced her husband could receive only a basic pension up to a maximum of 66,000 yen a month.

On the other hand, we may not see a spike in the divorce rate if husbands have responded to the law by treating their wives better. After all, this law creates financial incentives for them as well.

At least economists are honest about it

2006-10-09T07:54:00.000+08:00

"Two main lessons derived from [my experience as an economist] are:

1. Economists do not know very much

2. Other people, including the politicians who make economic policy, know even less about economics than economists do."

--Herbert Stein, "Washington Bedtime Stories", p. xi

from Arnold Kling's 1997 article There is No Labor Shortage

More bad regulation

2006-10-06T10:01:00.000+08:00

Are there any hoteliers out there who would like to explain how this regulation protects consumers?

Service apartment operators hope to offer shorter stays
They want Govt to remove seven-day rule to allow them to compete better
By Fiona Chan
Sep 29, 2006
The Straits Times

SINGAPORE'S service residence operators are banding together to ask the Government to allow them to rent out their apartments for stays as short as one night.

They want a rule imposing a minimum of seven nights to be ditched. It is a relic of British colonial days, they say.

The change would enable them to compete directly with hotels and keep their apartments more fully occupied…

Mr Tan [the president of Serviced Apartments Association of Singapore (SAA)] said the main reason the service apartment operators are seeking the change is not to compete directly with hoteliers, but to help meet national demand for accommodation and to fill their units on a more regular basis.

'With the impending shortage of hotel rooms, we can at least try to fill a gap and provide ample accommodation.'

An anticipated tourism boom over the next few years is sparking concern that hotel rooms will be in short supply before more hotels are built…

'We're not doing this because we want to take away business from hotels, but we do have gaps. We do have apartments that are available for a few days in between longer-term stays but we can't let them out,' Mr Tan added.

Don't buy product warranties

2006-10-05T08:24:00.000+08:00

From Marginal Revolution:

If the expected utility calculations don't convince you, maybe this will:
Neither Circuit City nor Best Buy discloses how much of its bottom line comes from extended warranty sales. But analysts have estimated that at least 50 percent and in some lean years 100 percent of profits at the electronics retailers come from extended warranty sales.
Here is the full story. The paper (but not on-line) edition notes that a desktop computer has a 37% chance of needing a repair in the first three years; if you are going to buy one warranty, maybe that should be it. But you are still best advised to buy insurance only when a) the potential loss is very large, or b) your wife insists.

Gabaix and Laibson have a very good paper on myopia, consumer ignorance, and shrouding.

Indonesia Spewing Externalities onto Singapore

2006-10-04T12:43:00.000+08:00

Fires from Sumatra have created smoggy skies in Singapore. Farmers set the fires annually to clear brush from their land.

Lifts are a public good

2006-10-03T11:34:00.000+08:00

Heng-Cheong Leong of SingaporeSurf takes issue with the Lift Upgrading Programme. Under the programme, residents of buildings with limited lift service vote whether to upgrade to lifts that stop at every floor. If 75% of residents vote for upgrading, construction moves forward, with a portion of the upgrading costs to be split among the residents. So far 1,032 blocks out of 1,063 that have been polled have voted to upgrade.

Lift Upgrading: Where We Steal Money From Everybody To Build Something I Like
by Heng-Cheong Leong

There is one aspect of the Lift Upgrading (and the estate upgrading) plan that really bothers me, and that is you don't need 100% agreement in order to go ahead with the upgrading plans.

And even though these upgrading are subsidized (with people's money, of couse), the upgrading is still not cheap.

In order to counter pro-upgrading proposals like Fok Kah Hon writing in Straits Times, urging a change of policy by not counting votes by people who don't vote, I propose thus:

That the cost of upgrading, after deducing the subsidies, should be borne entirely by people who voted yes. Those who voted no should not need to pay, althought they will still be in terrible living quarters for quite a few months or even years.

We should not simply have the rich folks imposing additional burdens to the poorer folks, in the name of a better living environment. Just because one has some additional monies sitting around in the CPF accounts doing nothing shouldn't entitle anyone to force other people to pay money for "common good" that the poor can do without.

Sometimes, when you are poor, all these "essentials" are simply just luxuries.

I won’t address Heng-Cheong’s opinion that the rich folks are imposing costs onto the poor folks. Instead I will comment on what the outcome of the proposed scheme would be.

A lift is an example of what economists call a public good. A public good is a good that is nonrival and nonexclusive. Nonrival means that consumption by one person does not affect consumption by another. Nonexclusive means that the good is accessible to everyone. Textbook examples of public goods are television broadcasts and national defense.

The best way to finance a public good is for each person to contribute his or her personal valuation of the good. This scheme is difficult to implement because, by human nature, there is an incentive to lie and to shirk fiscal responsibility. Since a lift is nonrival and nonexclusive, everyone can enjoy the lift once it is upgraded, even those that don’t contribute to the cost of upgrading. Under Heng-Cheong's scheme, it will likely be the case that people who will benefit most from an upgrade, such as the elderly and families with children, will vote yes while those that will benefit least, such as young childless couples, will vote no. Those that vote no will hope to be free riders, benefiting from knowing that others with a greater need for an upgrade will vote yes.

Instead of spreading the cost of an upgrade among all residents as under the current scheme or alternatively onto the rich as desired, the cost would be borne only by those that need it the most even though all residents would be benefactors. It is also possible that under the proposed scheme no upgrade is undertaken even though residents are willing to pay for one.

Expectations and yields

2006-10-02T00:05:00.000+08:00

The Straits Times reported an exuberant article on office rents. Interestingly, Ms. Tay of Colliers International seems oblivious to the fact that "capital values" incorporate expectations of cash-flows:

"Rents have been racing ahead of capital values, said Ms Tay. This has led to a rise in the net yields of strata office property, from 3.2 per cent in early 2004 to 5.1 per cent now."

The article is silent on what "net yields" mean, but it could refer to the typical real estate capitalization rate which is a ratio of an office building's net operating rent income to the purchase price (or capital value) of an office building. The correct purchase price to use is an equilibrium purchase price. At equilibrium, a purchase price will include expected rent movements and the associated risks involved with an office development. (Equilibrium) Capital values would therefore not be lagging rents as purported. My guess is that Ms. Tay is referring to yields derived from short-run rent increases, disregarding whether such an increase is sustainable throughout the useful life of an office building.

Office rent and occupancy rates surging ahead
They are returning at a vigorous pace to boom year levels of the mid-1990s

By Joyce Teo, Property Correspondent
Sep 19, 2006
The Straits Times

OFFICE space is the hottest ticket in town, with rent and occupancy rates rising so fast that a return to the levels of the booming mid-1990s is in sight...

The average monthly rents of prime space in Raffles Place have risen by a whopping 34 per cent from January to $6.92 per sq ft (psf) in this quarter, according to consultants Colliers International.

'If this blistering pace continues, average monthly gross rents of Grade A space in Raffles Place will surpass 2001's peak of $7.77 psf by the middle of next year,' said its director for research and consultancy, Ms Tay Huey Ying.

The Colliers report also said that the average rents in the best sites in Raffles Place could pass 1996's all-time high of $9.77 psf by 2009 or earlier...

Ms Tay said rents could still rise by a further 6 per cent to 8 per cent before the end of the year and 15 per cent to 18 per cent next year...

Occupancy rates are another sign of the market's health. Average rates across the country have risen by 6.5 per cent to about 88.6 per cent in this quarter, said Ms Tay...

Rents have been racing ahead of capital values, said Ms Tay. This has led to a rise in the net yields of strata office property, from 3.2 per cent in early 2004 to 5.1 per cent now.

Review of Suntec City Wi-Fi network

2006-09-28T00:38:00.000+08:00

A CIO magazine blogger posted an informal review of the Suntec City Wi-Fi network created for the IMF/World Bank meetings. I previously posted on the economic inefficiency of the network here. Below is part of the review.

Accessing the Wireless@SG network was a breeze while seated outside a cafe in CityLink Mall. My search for a Wi-Fi connection turned up five access points within range, four of which were labeled "Wireless@SG." Once I had selected a Wireless@SG access point and connected, I opened my browser and found the welcome screen, which requires users to first agree to a set of terms and conditions before they can get online.

My expectations were high. After all, the IDA Web site promised Wireless@SG offers connection speeds up to 512K bps (bits per second), depending on the number of users accessing the network.

An informal test showed I could access U.S. Web sites at speeds of 150K bps, not quite the maximum promised but more than adequate for Web surfing and checking e-mails. That speed also matched the network connection of my laptop’s 3G (third-generation) data card when tested from the same location.

The Wireless@SG connection was fast enough for YouTube, allowing me to watch a video clip from "The Colbert Report." Similarly, I was able to call my Tokyo colleague using Skype’s SkypeOut service. However, the call volume on my side was low -- a common problem I have observed with SkypeOut -- and, amidst the noise of the busy shopping mall, made it difficult for me to hear. In the end, I gave up on SkypeOut and used my cell phone to finish the call.

At one point, my computer was dropped from the Wireless@SG access point, forcing me to reconnect. But once again the process was painless and within seconds I was online once more.

Economics podcasts at EconTalk

2006-09-27T08:10:00.000+08:00

EconTalk contains "Economics podcasts for daily life." Each podcast contains a discussion between the host professor Russ Roberts and a guest economist on his/her area of research. The topics are usually quite interesting and are also accessible to non-economists. Here is a sample of what is available: the Economics of Medical Malpractice, Ticket Scalping and Opportunity Cost, an Interview with Gary Becker, the Economics of Inheritance.

U.S. Relaxes Air Travel Restrictions

2006-09-26T09:33:00.000+08:00

The U.S. ban on liquids and gels in carry-on bags has been modified.

U.S. Relaxes Air Travel Restrictions
NY Times
By JOHN HOLUSHA

Air travelers will be allowed to carry drinks bought at the airport onto planes and to have small amounts of liquids and gels in their carry-on bags, the Department of Homeland Security said today.

The new rules, which will go into effect Tuesday, allow travelers to carry liquids, gels or aerosols in containers of 3 ounces or less, as long as they all fit into a clear 1-quart plastic bag that can be screened at the security checkpoint. Drinks and other items purchased in the secure part of the airport, beyond the checkpoint, will also be allowed onto planes...

The decision slightly relaxes a broad ban on liquids and gels in carry-on bags. The ban was imposed last month after British officials arrested a group of people who they said were planning to bomb airplanes flying to the United States, using liquids combined on board to form explosives...

Security issues aside, what are the economic consequences of this change in policy? We should expect the retailers beyond the security checkpoint to benefit. Demand for drinks will increase and so will demand for carry-on hygienic products, causing prices and profits to increase. These benefits will be short-lived however. The property owners will charge a higher rent for the retail space as soon as contractually possible. When analyzing a change in the economic environment, a general rule is that the owner of the scarce resource is the one that benefits. Since the scarce resource is the retail space, not the retail know-how, we should expect the owners of the property to benefit exclusively in the long run from the policy change.

Markets in Everything

2006-09-25T23:33:00.000+08:00

Dog food cooking class, offered in Seoul, of all places!

(via Japundit)

Survey Finds Widespread Cheating in M.B.A. Programs

2006-09-22T13:58:00.000+08:00

More than half admitted to cheating. It's not just the business students --- 47% percent of nonbusiness graduate students also admitted to cheating. I wouldn't expect the percentage of cheaters to be very high in economics, not because the students are more honest but because the nature of economic education is not conducive to cheating.

Survey Finds Widespread Cheating in M.B.A. Programs
The Chronicle of Higher Education
By KATHERINE MANGAN

More than half of the graduate business students surveyed recently admitted to cheating at least once during the last academic year, according to a report released on Monday.

The report, "Academic Dishonesty in Graduate Business Programs: Prevalence, Causes, and Proposed Action," is based on survey responses from 5,331 students at 32 graduate schools in the United States and Canada, and is scheduled for publication this month in Academy of Management Learning & Education. The survey found that 56 percent of graduate business students -- most of whom are pursuing M.B.A.'s -- had cheated, compared with 47 percent of graduate students in nonbusiness programs.

Things that drive econ professors batty

2006-09-22T13:27:00.000+08:00

From ElectEcon:

Did the High Price Reduce the Demand for Oil?

We struggle, year in and year out, to teach our students the difference between a change in demand versus a change in the quantity demanded, and we are undercut at every turn by people who say things like the following:
[I]t is becoming clear that the laws of economics still apply to the world oil market. High prices should reduce demand and encourage new investment in supply capacity, and we can see that happening.
The above quote is from Steve Polos, writing about oil markets.

High prices did NOT cause a reduction in demand, though. What happened was that time passed. The short-run demand curve for oil is steeper than the long-run demand curve. It is now and it was a year ago. All that has happened on the demand side of the market is that we are now seeing those longer-run effects, namely a much larger reduction in the quantity demanded in response to higher prices. the short-run demand curve has shifted, but that is in response to the passage of time.

The rest of Steve's piece is interesting and good analysis about other influences on both supply and demand; too bad it confuses a change in demand with a change in the quantity demanded

Milton Friedman on licensure

2006-09-19T20:27:00.000+08:00

I have posted a couple of items concerning the societal cost of supply restrictions, namely that restricting entry raises wages and prices. In response, several readers left comments “explaining” how restrictions are needed to protect consumers. This passage from Milton and Rose Friedman’s Free to Choose nicely illustrates how common and how dubious this justification is:

Licensure is widely used to restrict entry, particularly for occupations like medicine that have many individual practitioners dealing with a large number of individual customers. As in medicine, the boards that administer the licensure provisions are composed primarily of members of the occupation licensed – whether they be dentists, lawyers, cosmetologists, airline pilots, plumbers, or morticians. There is no occupation so remote that an attempt has not been made to restrict its practice by licensure. According to the chairman of the federal Trade Commission: “At a recent session of one state legislature, occupational groups advanced bills to license themselves as auctioneers, well-diggers, home improvement contractors, pet groomers, electrologists, sex therapists, data processors, appraisers, and TV repairers. Hawaii licenses tattoo artists. New Hampshire licenses lightning-rod salesman.” The justification offered is always the same: to protect the consumer. However, the reason is demonstrated by observing who lobbies at the state legislature for the imposition or strengthening of licensure. The lobbyists are invariably representatives of the occupation in question rather than of the customers. True enough, plumbers presumably know better than anyone else what their customers need to be protected against. However, it is hard to regard altruistic concern for their customers as the primary motive behind their determined efforts to get legal power to decide who may be a plumber.

Wheaton on U.S. Housing Bubble

2006-09-18T14:50:00.000+08:00

Professor William Wheaton weighs in on a popular subject - the existence of a housing bubble in the U.S. - in the following National Public Radio interview: In Real Estate, Mind over Market Momentum?

Professor Wheaton is a well-known expert on urban economics, the author of Urban Economics and Real Estate Markets, and co-founder of Torto Wheaton Research, an affiliate of CB/Richard Ellis.

Economic vs. accounting profit

2006-09-15T07:16:00.000+08:00

Suppose that you are currently job hunting. Being a kind chap, your friend offers to give you his sock monkey business. He tells you that each month the business earns $3,000 in sales and costs $3,000 in wages for one worker. Suspicious, you ask your friend, “Why would I want to have a business that earns no profits?” Your friend says, “Look, you can dismiss the worker and make the sock monkeys yourself. Then, your profits will be $3,000 because you won’t have to pay any wages.”

Do you take the offer? If you do, you will earn $3,000 in what is called accounting profit. Your friend thinks that he’s helping you out. But your friend, by using accounting profit as a guide, is ignoring any salary you could earn working for someone else. Economic profit, on the other hand, does factor in the foregone salary as a cost. (The foregone salary is an example of opportunity cost, a fundamental concept in economics.) Suppose you could earn a salary of $4,000. Because the economic profit, $3,000 - $4,000 = -$1,000, is less than 0, you shouldn’t make sock monkeys. You should work for someone else.

Your friend may have your best interests at heart but you shouldn’t trust his financial advice. Would you heed financial advice from a newspaper that makes the same mistake?

Have cash to spare? Invest in a coffeeshop
The Straits Times
By Fiona Chan Sep 10, 2006

IF YOU are among the lucky ones to have made a small fortune selling your home in a collective sale, you may be wondering what to do with your newfound wealth.

Instead of taking the conventional route and reinvesting the money in another new residential property or two, you may do well to consider the unusual alternative of putting your money in a coffeeshop instead…

Homes generally fetch rental yields of 3 per cent to 4 per cent, but some coffeeshops can boast yields of as much as 14 per cent…

Many coffeeshop owners also manage the drink stalls themselves, thus adding to their income as these stalls usually have the highest profit margins. (my emphasis)

Maybe we shouldn’t be too hard on journalists (on second thought, they deserve it). Although the above example is straightforward, economists sometimes disagree on the proper application of opportunity cost.

Singapore escort agencies love IMF

2006-09-13T12:47:00.000+08:00

Everyone knows how economists like to party.

Singapore escort agencies love IMF

Singapore (dpa) - Escort agencies were on a recruitment drive Tuesday to provide companionship for International Monetary Fund (IMF) and World Bank (WB) delegates in Singapore for the week-long annual meeting.

Advertisements have sprung up in Singapore newspapers seeking women or "young, outgoing girls." The ads are also on the Internet.

Sought after are applicants from Singapore and other Asian women who are in their 20s, tall, "athletic" and "confident."

A check by The Straits Times found one agency looking for as many as 10 escorts, while most of the others sought five...

Agency managers told the newspaper that escorts are not obliged to offer sexual services, but what happens between women and their clients is a private matter. Prostitution is not illegal in Singapore.

The anticipated demand for escorts is expected to attract women from neighbouring countries who usually hang out at nightspots and pubs.

Optometrists behaving badly

2006-09-12T07:10:00.000+08:00

Time to stop picking on attorneys and their rent-seeking ways. Let's pick on optometrists instead.

From Division of Labor:

The other day I headed off to LensVisionDOC to get a new pair of eyeglasses being sure to take along my last prescription. I'm having no trouble with my eyesight; I just need new glasses since I stepped on this pair a couple months ago and one of the lenses keeps popping out.

I get there, pick out a nice new set of frames, sit down, wait, wait, wait, and finally someone comes by to do the transaction. But nooooooo!!!! My presciption is more than two years old and has "expired." They can't do it they say. I say, "My eyes are fine with this prescription." They say it "doesn't matter--it's the law" Of course, they have an optician right there on ~~sight~~ site who can do an eye exam. I left. GRRR. Libertarian blood pressure rising. Take...deep...breath.

Ok here's the question for all you students of political economy. Which of the following two statements is most accurate.

1. It is important for people to get regular eye exams and therefore prescriptions should expire after a time. Without this requirement, people would wear prescriptions too long and would jeopardize public safety and their own health.

2. The ~~Opticians lobby~~ Optometrists lobby wants more business for its clients and knows that requiring current prescriptions will increase the incomes of opticians.

If you think (1) is most accurate, can you tell me why eye exams aren't mandatory for all people every two years and why it is not against the law to wear eyeglasses for more than two years? If you think (2) give yourself an A in my class.

IMF and World Bank rebuke Singapore

2006-09-10T00:17:00.000+08:00

The Singapore government has said that it will shoot violent protestors. Let’s hope that this is an empty threat and that, for everyone’s sake, the authorities practice proper restraint.

IMF and World Bank rebuke Singapore
Financial Times
By John Burton in Singapore and Shawn Donnan in Jakarta
Published: September 8 2006

The International Monetary Fund and World Bank on Friday issued an unprecedented rebuke to Singapore over a ban on accredited activists invited to attend the annual meetings of the two financial institutions next week.

The IMF/World Bank suggested that Singapore had violated the terms of its agreement to host the event by blocking the entry of 19 civil society representatives, who allegedly posed a security threat.

"Singapore had promised to faciliate the entry of accredited representatives under the memorandum of understanding with us," a World Bank official said. The IMF/World Bank was only informed this week of Singapore's plans.

Article continued:

The crackdown is part of tough security measures that Singapore will implement during the September 11-20 meetings. The government will also ban all outdoor demonstrations and has warned it will shoot at violent protesters, citing the threat of terrorist attacks.

The incident represents a setback to the IMF/World Bank, which has sought to improve relations with non-governmental organisations that have accused them of conducting policies that have ignored the plight of the world's poor. A record 500 NGO representatives are accredited to attend this year's meeting...

Some NGOs alleged that the IMF/World Bank, which holds its annual meetings outside Washington every three years, had selected Singapore as the venue for this year's meeting because of its authoritarian reputation. Previous IMF/World Bank meetings have been marred by violent protests...

Among those banned by Singapore were representatives from the UK-based World Development Movement, Thailand's Focus on the Global South, the Freedom from Debt Coalition in the Philippines and the Forum on Indonesian Development (Infid).

The IMF/World Bank said these "individuals have been cleared to attend the annual meetings by their respective governments and we have accredited them according to our standard procedure."

"We strongly urge the Singapore government to act swiftly and reverse their decision on entry and access to the meetings for these representatives," the IMF/World Bank said in a joint statement…

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Doing business: Singapore is No 1

2006-09-09T02:13:00.000+08:00

From New Economist:

Singapore overtook New Zealand as the most business-friendly economy in the world in 2006, while the United States held steady in third place, according to the World Bank's Doing Business 2007 report - published today.

a singapore economist: I added a table of Singapore's ranks from the study.

New Economist post continued:

The dominance of the Anglo-Saxon and Nordic countries continues (see my post on last year's report). Other economies in the top ten for ease of doing business were: (4) Canada, (5) Hong Kong, (6) the United Kingdom, (7) Denmark, (8) Australia, (9) Norway, (10) Ireland.

The top 10 reformers were, in order, Georgia, Romania, Mexico, China, Peru, France, Croatia, Guatemala, Ghana and Tanzania. In Africa, a more business-friendly approach has seen the region move up from last place to the middle of the pack among world regions in carrying out changes that make it easier to start and run a business.

The report praised China's acceleration of reforms, which saw its ranking improve from 108th to 93rd:
Watch out, rest of the world: China is a top-10 reformer. The government sped business entry, increased investor protections and reduced red tape in trading across borders. China also established a credit information registry for consumer loans. Now 340 million citizens have credit histories.
Although reforms improved India's ranking over last year, "it still ranks relatively low at 134 and lies 41 places after China, which is reforming at a faster pace than India."

Among Europe's biggest economies, Germany ranked 21st, France 35th and Italy 82nd, down from 69th in the previous report. Meanwhile, Venezuela plunged to 164th from 144th.

Why does this matter? As the report notes:
Publishing comparative data on the ease of doing business inspires governments to reform. Since its start in October 2003, the Doing Business project has inspired or informed 48 reforms around the world. Mozambique is reforming several aspects of its business environment, with the goal of reaching the top rank on the ease of doing business in southern Africa. Burkina Faso, Mali and Niger are competing for the top rank in West Africa. Georgia has targeted the top 25 list and uses Doing Business indicators as benchmarks of its progress. Mauritius and Saudi Arabia have targeted the top 10.

Comparisons among states or cities within a country are even stronger drivers of reform. Recent studies across 13 cities in Brazil and 12 in Mexico have created fierce competition to build the best business environment. The reason is simple: with identical federal regulations, mayors have difficulty explaining why it takes longer or costs more to start a business or register property in their city. There are no excuses.
You can download a 12 page overview (PDF, 1.8Mb), press notice, rankings, country reports and details of the methodology used from the extensive webite: www.doingbusiness.org

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Thanks, Blogger

2006-09-08T11:44:00.000+08:00

My blog was locked because of some spam-bot. Blogger was kind enough to send me an email:

This system has detected that your blog has characteristics that resemble spam. Since you're an actual person reading this, your blog is probably not a spam blog. Automated spam detection is inherently fuzzy, and we sincerly (sic) apologize for this erroneous result.

You won't be able to publish posts to your blog until we review your site and verify that it is not a spam blog.

This next part was reassuring:

We'll take a look at your blog and unlock it in less than one business day.

Well, it actually took 3 business days. Thanks, Blogger.

Free Wi-Fi at Suntec City

2006-09-05T08:10:00.000+08:00

Free Wi-Fi at shopping malls around Suntec City
Channel NewsAsia

Singaporeans will be able to get free Wi-Fi internet at shopping malls around Suntec City this month.

The InfoComm Development Authority has set up the service to coincide with the IMF-World Bank meetings…

The IDA is confident the service is stable and Singaporeans will be able to use it during the busy IMF-World Bank meetings…

The IDA says it has doubled the capacity of the network to handle the high amount of users expected during the IMF-World Bank meetings.

But with most networks, the high amount of users can slow the Internet speeds.

The free service finishes at the end of September…

Wi-Fi access at Suntec City is an example of the tragedy of the commons. The tragedy occurs when a common-property resource is overused. For example, a lake is overfished if it is accessible to all. What does it mean to overfish a lake? In economics, to put it simply, it means that there are fishermen who fish the lake even though from a societal cost-benefit analysis they shouldn’t. The problem arises because fishermen, like most of us, only care about themselves; they decide to fish as long as the benefit of fishing, say the revenue earned from selling the fish, is greater than the private cost of fishing, say the cost of driving to the lake. But when a fisherman decides to fish he also imposes a cost on others by reducing the number of fish they can catch. This is the social cost of the decision to fish. From a societal standpoint it would be best if each fisherman decides to fish only if his benefit is greater than the sum of the private cost and social cost of his action. Since fishermen don’t count the social cost in their decision, there are too many fishing the lake.

The tragedy is solved if there is a single owner of the resource. In trying to maximize profits from the lake, the owner will choose an entry fee to the lake that takes into account all costs. The outcome will be fewer fishermen and fewer fish taken from the lake.

In the case of Wi-Fi access at Suntec City, the Wi-Fi network is the common property. Each potential network user will only consider his or her private cost and not the cost imposed on others, namely, slower download speeds for everyone. Since access to the Wi-Fi is free, there will be too many users and the download speed will be slower than if the Wi-Fi network were privately owned and managed.

Some cool graphs: Starbucks vs. McDonald's

2006-09-04T08:20:00.000+08:00

The number of Starbucks stores worldwide, with three new stores opening daily.

Here is a breakdown of the number of Starbucks per country.

Starbucks still has a long way to go before obtaining McDonald's ubiquity.

Via Marginal Revolution

Does Abortion REALLY Lead to Reductions in Violent Crime?

2006-09-01T09:06:00.000+08:00

In 1973, the United States Supreme Court ruled in the case Roe vs. Wade that a woman has a constitutional right to an abortion during the first six months of pregnancy. From MSN Encarta:

The Roe decision aroused extreme reactions in the public. The decision was strongly endorsed by many women’s rights groups that had long sought to guarantee a woman’s right to choose an abortion. However, the decision was fiercely opposed by others, many of whom maintained that life begins at conception…

Since the Roe v. Wade decision, abortion has become one of the most divisive political issues in the United States…

Naturally, when economists Steve Levitt and John Donohue supposedly found evidence that a drop in the crime rate was linked to the decriminalization of abortion, the research was hotly debated by both economists and non-economists alike.

From EclectEcon:

Most of us by now are familiar with the hypothesis put forward in Freakonomics by Steve Levitt and Stephen Dubner (summarizing earlier research by Levitt et al.) that following the decision in Roe v. Wade, violent crime rates declined.

Fewer of us know that there was a coding error in the original work that cast some doubt on the original results. Levitt redid the study and found even stronger results, but those are now being questioned. One among those who have questioned Levitt's most recent results is, guess who, John Lott. Here are excerpts from a recent news story about his results.

Freakonomics, co-authored by Stephen Dubner and published last year, says legalized abortion led to a large drop in murder and other violent crime in the late 1980s and early '90s, and continues to reduce crime.

The book suggests that if the aborted fetuses had instead been born, they would have become adults more likely to commit crimes because they were unwanted by their mothers.

Article continued:

... But Lott says the Levitt study did not fully consider the increase of children born out of wedlock. His theory is that with the option of abortion, women became more likely to have premarital sex, but then had their babies and raised them as single parents.

Children born out of wedlock have had smaller investments in "human capital" by their parents and are more likely to get into trouble when they grow older, Lott says.

... Before legalized abortion, more than 70 percent of children born out of wedlock ended up in families with a father, but the fraction fell to 44 percent in 1984, according to the paper.

In an interview, Lott acknowledged that legalization of abortion in the '70s did have a "slight impact" on reducing crime — but not when the effect of unwed mothers is included in the analysis. Levitt, on the other hand, estimated abortion will account for declines of 1 percent a year in crime over the next two decades.
My own priors have been revised -- they're pretty flat now.

Side note: Lott is suing Levitt for defamation for a passage in Freakonomics about Lott's research. For all the gory details click here.

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India rejects Singapore's plan to invest more in India's ICICI bank

2006-08-31T08:05:00.000+08:00

India rejects Singapore's plan to invest more in India's ICICI bank.

Temasek, GIC Bid to Buy 20% of ICICI Spurned by India
By Kartik Goyal

Aug. 28 (Bloomberg) -- India's central bank blocked Singapore's two investment arms from doubling their combined stake in ICICI Bank Ltd., the nation's most valuable lender, curbing the city-state's plans to expand in faster-growing regional economies. Temasek Holdings Pte. and the Government of Singapore Investment Corp. sought to buy a 10 percent stake each in ICICI Bank, said Vinod Rai, special secretary for financial services in the Ministry of Finance. They currently own a 9.7 percent stake worth $1.1 billion.

According to the article, Singapore has specifically requested India to treat Temasek Holdings and GIC as separate entities.

The Reserve Bank of India's rejection was based on its "interpretation" of the India-Singapore agreement, the finance ministry's Rai said. Temasek had a 7.4 percent stake in ICICI Bank and GIC owned 2.3 percent of the Mumbai-based lender as of July 29, said Rakesh Jha, an official in the bank's investor relations department. In a June 2006 accord signed by Singapore Prime Minister Lee Hsien Loong and his Indian counterpart Manmohan Singh, GIC and the Ministry of Finance-owned Temasek were to have been treated as separate entities.

Nonetheless, the Reserve Bank ruled that the 2005 agreement allowing the Singapore entities to be treated as "independent and unrelated" entities didn't cover investment in banks.

Singapore and India may have to revisit the terms of the agreement, but I don't expect this decision to adversely impact Singapore's investments in India. According to the Federation of Indian Chambers of Commerce and Industry, Singapore is India's largest trading and investment partners in ASEAN.

University Graduate Blues

2006-08-31T06:36:00.000+08:00

It's not a good time to be a recent university graduate in the United States:

The source of this horrible looking graph is Economics Bound (via Economist's View).

Markets in Everything*: funeral strippers

2006-08-29T00:58:00.000+08:00

From Japundit:

Chinese officials have decided to crack down on the practice at some rural villages of hiring strippers to perform at funerals. The practice is intended to attract more attendees to funerals because many people believe that a greater number of people improve the deceased’s chances for better afterlife. They also think that more people bring luck to the survivors as well.

Local officials [have been] told they must submit plans for funerals within 12 hours after a villager dies. Exotic dancing is off the menu - and residents can report “funeral misdeeds” on a special hotline for a reward of USD $35.

* (category blatantly but respectfully borrowed from Marginal Revolution)

Why do gas prices react so fast to rises in oil prices?

2006-08-29T00:07:00.000+08:00

Some of you may recognize Hal Varian as the author of a popular intermediate microeconomics text. From Brad DeLong's blog:

Prices at the Pump
Hal Varian
NYTimes

THE recent gyrations in oil prices offer a textbook illustration of how financial markets and commodity markets interact. Oil prices are notoriously volatile, particularly when times are tense in oil-producing countries -- just about all the time these days. So when BP announced this month that it might have to suspend as much as 8 percent of the nation's oil production because of corrosion in pipes on the North Slope of Alaska, the price of crude oil immediately shot up by 3 percent and wholesale gasoline prices simultaneously increased by about 2 percent.

But why? Even if it will cost more to produce gasoline in the future, gasoline being sold today was made with cheaper oil. This must be a rip-off, right? Actually, no. The reason behind the quick price change is a phenomenon known as storage arbitrage.

Article continued:

To spell out the argument, imagine that you own a storage tank full of gasoline that is currently worth $2 a gallon at wholesale prices. It is widely believed, however, that the price of gasoline will be $2.10 next week. You would be crazy to sell your gasoline now: just wait a few days and the higher price will be yours. But if everyone waits a few days, there is no gasoline to be sold now and the resulting shortage pushes the price of gasoline up. How high does it have to go? The answer is $2.10 a gallon. That is the price necessary to induce those who have gasoline to sell it now rather than to wait till next week.

This argument does not depend on whether you think the gasoline market is a paragon of perfect competition or an evil oligopoly. All it requires is that you believe that people who own gasoline, like just about everybody with something to sell, prefer to receive a higher price rather than a lower price. Even if the price of gasoline were set by a perfectly benevolent conservationist, we would expect to see the same pattern of price movements. If oil will be scarcer in the future because of the BP pipeline shutdown, we would want to conserve the already-produced gasoline that we have now. That means that the price of gasoline has to rise right away to prevent hoarding and to encourage conservation.

Storage arbitrage arguments were featured in a recent article in the Sunday Business section of The New York Times with the headline "Is a Futures Stampede Keeping Oil Prices High?" The article described a provocative report written by Ben P. Dell, an analyst at Sanford C. Bernstein & Company, that blamed speculation in oil futures markets for high oil prices. Mr. Dell's argument was that inexperienced institutional investors had been investing in contracts for future delivery of oil, driving up futures prices. If the price of oil to be delivered in the future goes up, it has to pull the current spot price up as well....

Milton Friedman argued that speculation normally helps to stabilize prices rather than destabilize them.... If speculative trading tends to push prices higher when they are already high and lower when they are already low, then traders must be buying high and selling low. That would mean that traders have to lose money on average.... To the contrary, speculative traders try to buy low and sell high, activities that by their nature tend to push prices up when they are too low and down when they are too high.... If speculators start to worry that the price of oil could soon be significantly lower, some of that stored oil would come back on the market, pushing spot prices down, and offering welcome relief to consumers.

IIRC, there are some signs of a rocket-feather asymmetry: that gasoline prices rise quickly when oil prices rise, and fall more slowly when oil prices decline...

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a singapore economist is mentioned at TODAYonline

2006-08-28T15:26:00.000+08:00

a singapore economist is mentioned in a TODAYonline article on fostering cooperation between the MSM and alternative media. Evidently, a singapore economist is one of several blogs "dedicated to informed commentary."

Glad to be included but one question occurred to me: Why doesn't TODAYonline use hyperlinks?

Rich Singaporeans

2006-08-27T06:28:00.000+08:00

Forbes has published its inaugural list of the 40 richest Singaporeans:

Here are the top ten richest.

Here are ten of Singapore's largest publicly traded companies and the people who run them.

Company	Tycoon (Rank)	Market Cap (US$Mil)	Industry	Perf YTD (%)
United Overseas Bank	Wee Cho Yaw (4)	$14,800	banking	4.8%
OCBC	Lee Seng Wee (5)	12,600	banking	-5.2
City Developments Ltd.	Kwek Leng Beng (3)	5,200	real estate	4.0
Venture Corp.	Wong Ngit Liong (24)	2,000	electronics	-14.5
Olam International	Murli Kewalram Chanrai (7)	1,400	agriculture/trade	-5.3
Raffles Education	Chew Hua Seng (11)	820	schools	48.8
Labroy Marine	Tan Boy Tee (12)	780	shipping	74.1
Wing Tai Holdings	Cheng Wai Keung (18)	760	retail/textile	13.6
Hyflux	Olivia Lum (17)	680	water purification	-24.4
OSIM International	Ron Sim Chye Hock (15)	570	health products	26.0

More on Free Markets

2006-08-25T11:57:00.000+08:00

Have you ever had a bad experience with a lawyer? Did you have to chase him or her to get things done? Didn’t return your calls? Didn’t seem that interested in seeing that you were satisfied? Did you think about switching to another lawyer? Probably not, because you realized that there was a good chance the next lawyer would be shoddy, too. Thank the restrictions on supply for your suffering: Lawyers do not have to compete hard for your business since there are too few lawyers.

Shoddy service and high prices do not have to be the modus operandi. Here is what happens when regulations are removed from a market (from Cafe Hayek):

A Deregulation Success Story
Don Boudreaux

Three years ago New Jersey's government eased many of the regulations that it had long imposed on auto-insurance suppliers and consumers. Today's New York Times has a report on the consequences:

For the first time in decades, prices for coverage are falling in the state [New Jersey] and insurance companies are fighting for drivers’ business. Roadside billboards cry out with special deals; radio and television are peppered with car insurance advertisements.

It is a mammoth change in a state where auto insurance has been a long-running nightmare and it puts New Jersey in line with auto insurance practices in most of the country.

More tellingly, it provides a case study in what happens when competitive forces are unleashed and markets are allowed to operate more freely. And while some drivers are worse off, the vast majority of consumers have gained from the changes.

Throughout the country, New Jersey and Massachusetts stood out for their heavy regulation. Some of the biggest insurers shunned the states. But that started changing in New Jersey when state officials, worried that even more insurers would leave, finally decided to give the industry much more flexibility with prices and
driver ratings.

Article continued:

The insurers had always seen great potential in New Jersey with its largely affluent population and one of the greatest concentrations of cars in the nation. They increased their pressure in a long campaign for change, and Gov. James E. McGreevey and the State Legislature stepped back and let market forces work. It was not radically different from the way auto insurance was sold in most of the country. But in New Jersey it was revolutionary.

The insurers have been pouring millions into advertising. Television stations in New York and Philadelphia blanket the state. In the New York market, which extends as far south as Trenton, spending by auto insurers more than tripled to $17.4 million in 2005 compared with 2003, according to Jon Swallen, the director of research at TNS Media Intelligence in Manhattan. In Philadelphia, spending in the same period rose nearly fourfold to $17.2 million.

In place of the few rigid rate categories, insurers are now employing computer programs to come up with hundreds, if not thousands, of gradations in prices. The insurers say these programs, now in use in most states, enable them to better match prices to the risk presented by each driver.

A result, generally, is that better drivers pay less and worse drivers pay more. That has been widely accepted because there are far more drivers with unremarkable records than ones checkered with crashes and speeding tickets.

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World Bank Says Singapore Should Waive Ban on Outdoor Protests

2006-08-22T16:18:00.000+08:00

World Bank Says Singapore Should Waive Ban on Outdoor Protests
By Linus Chua

Aug. 22 (Bloomberg) -- The World Bank says Singapore should allow outdoor protests at its joint meetings with the International Monetary Fund next month, after the city said it would only permit demonstrations at a designated, indoor area.

"The bank's preference is that civil society groups should be able to peacefully express their views outside of the conference facility in a way that doesn't cause disruption," World Bank Singapore representative Peter Stephens said in an interview. "We have our preference and Singapore has its laws, so we're trying to find an area that's acceptable to all."

Singapore forbids the public assembly of more than four people without police permits and is unused to the mass rallies associated with global trade and finance summits. At the 2005 World Trade Organization meeting in Hong Kong, police used tear gas to quell crowds and arrested more than 1,000 people, while 600 were injured during IMF meetings in Prague in 2000 after cobblestones were pulled from the streets and flung at police.

Article continued:

"We have made maximum effort to facilitate the involvement of civil society organizations, within the framework of our laws," the Singapore government's committee organizing the meetings said in an e-mailed response to questions.

"We are unable to waive the current rules which prohibit outdoor demonstrations and processions, so as not to compromise the high level of security that will be in place during the conference," it said.

Terror Risk

Singapore police last month said groups accredited by the World Bank and IMF would be allowed to hold demonstrations in a designated area of the downtown convention center hosting the Sept. 12-20 meetings. All other protests will need police permission.

"Being held indoors means the number of people would be restricted," said Ruki Fernando, a spokesman for the Asian Forum for Human Rights and Development, a Bangkok-based human rights group. "There can't be activities such as cultural dances, street theater, which require big spaces."

Under Singapore law, permission must be sought for public assemblies and speeches. The government says the rules help maintain harmony in the city, where 36 people were killed in 1964 race riots between the Chinese and Malay communities.

Still, the government said it may work with the IMF and World Bank on protests during the meetings, expected to be attended by European Central Bank President Jean-Claude Trichet and more than 16,000 other officials.

"The World Bank has suggested some alternatives for consideration and we will examine the practicality of these," according to the statement from the S2006 Organising Committee. "Any alternative with a realistic prospect of being adopted must be within the framework of our laws and must not compromise security, which remains our foremost priority."

Unions, NGOs

The meetings have already attracted significant interest from lobby groups. As of Aug. 17, about 200 representatives of "civil society organizations," or CSOs, had been accredited to participate in the meetings, and a further 200 had submitted applications, the World Bank said in an Aug. 18 e-mail.

That would represent a record in terms of participation by CSOs, which include non-governmental organizations, community and religious groups, and labor unions. "We're still in discussions with the authorities regarding logistical issues," William Murray, the IMF's spokesman in Washington, said in an earlier e-mailed response to questions about Singapore's decision on outdoor protests.

Showcase

For Singapore, the meetings are an opportunity to showcase the city as a financial center and base for doing business in Asia. Singapore is ranked second, after Hong Kong, in terms of economic freedom by the Heritage Foundation, and was named the best place in the world for Asians to live in a survey released in April by human resource consultancy ECA International.

Still, the city also has a reputation for being rule-bound and punitive, meting out penalties for misdemeanors ranging from spitting to littering. Amnesty International says the government curbs freedom of expression and in a 2005 report on human rights in the city, the U.S. Department of State cited "restriction of freedom of assembly and freedom of association" as a problem.

"It is a good opportunity for the Singapore government to show the international community that Singapore is in line with international laws in this aspect, not just in their infrastructure and economy," Fernando said.

Both the IMF and World Bank said Singapore's law on public assembly wasn't a factor in choosing the city-state as a venue for the meetings, which will be held at Suntec Singapore International Convention & Exhibition Centre.

The indoor protests will be restricted to part of the lobby area, the police said last month.

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Do Singaporeans Believe in Free Markets (for Lawyers)?

2006-08-21T06:27:00.000+08:00

According to a recent government study, there is a shortage of lawyers in Singapore. The study estimates that Singapore will need approximately 140 to 150 additional legal professionals each year from 2010 to 2015. To address this shortage, the Ministry of Education has granted permission to the Singapore Management University to open the country’s second law school (the other law school belongs to the National University of Singapore). Additionally, restrictions on foreign-trained lawyers will be eased.

Blogger Mr. Wang, a practising lawyer, argues the government has tightened restrictions on the supply of new lawyers while at the same time there was an unforeseen increase in the demand for legal services. Much of the debate on this issue focuses on the government’s inability to accurately predict how the market for lawyers will change in the future and the resulting consequences.

I agree with the view that the government’s micromanagement of the market for lawyers is doomed to fail. There will always be unforeseeable events that will make any government prediction inaccurate, particularly since it takes several years to train a new lawyer. However, I think that this line of argument is misplaced. The problem is not poor forecasting skill, it is the interference in the market in the first place. Under the current scheme, even with perfect foresight, even if there are 150 more lawyers trained annually, there will still be too few lawyers due to artificial restrictions. The supply of lawyers is restricted in several ways:

Restricting the founding of new law schools

Restricting the number of students accepted into the law schools

Limiting the number of accredited foreign law schools

Mandating the minimum honours necessary to practise

Requiring the passage of qualifying exams in some cases

These restrictions suppress the number of lawyers and drive up the wages of lawyers. As a result legal services are more expensive than necessary. And it is likely that the people that suffer most are those in need of the simplest legal work, such as drafting of wills, mortgages, or other simple contracts. You see, lawyers are drawn to highly profitable areas of practice such as in the financial sector which leaves fewer lawyers for mundane legal tasks. Consequently, the price of these simple services is too high. It does not need to be this way. There are Singaporeans who would choose to become lawyers and would earn a viable income offering these services if only the market for lawyers were free of interference. Not every lawyer has to be top of the class or from an elite university because, clearly, not all legal tasks require a top scholar.

Under a free market, in addition to lower prices, there is no need for government studies and predictions. The market will adjust itself naturally by signalling when there are too many or too few lawyers. When there are too few lawyers, high wages will attract students to law school. When there are too many lawyers, low wages will tell students that law school is not a good choice financially.

Even though removing restrictions will benefit society as a whole, it is hard to imagine there will be any changes to the current system. The reason: practising lawyers have strong financial incentives to lobby against the removal or weakening of any restrictions.

You can have your cake and eat it too (if you were a Roman restaurateur)

2006-08-19T07:30:00.000+08:00

There is an economic model that predicts that a restaurateur will choose to serve low-quality food when many of his customers are tourists. The intuition is this. The restaurateur would like to sell the high-margin, low-quality food as long as he doesn’t risk losing future business. This strategy is sound in areas with heavy tourist-traffic because tourists tend to be one-time customers. The downside to this strategy, of course, is that the locals know the restaurant serves lousy food and will not eat there. Now, if there were only a way to get both those tourists and those local customers…

Diner Beware: Turisti Pay More in Roman Restaurants
By PETER KIEFER
NY Times

ROME, Aug. 8 — Any tourist here knows the sensation: that gnawing feeling that Italians do not pay $3 for a tiny cappuccino or $4 for an unordered basket of bread.

To no one’s surprise the suspicion often reflects reality, as restaurateurs will admit in candid moments. It might be an extra 30 cents for an espresso, or a $5 tithe tacked onto a bottle of wine. It may even mean the substitution of lower grade ingredients...

Fuzzy math on an unitemized receipt, an inflated bread and cover charge, pricing discrepancies between the English menu and the Italian one or even that stupefying, disproportionate service charge for taking your coffee seated at a table instead of standing at the bar.
If it is not your wallet that is suffering, it may be your palate...

This is how the racket works: an unscrupulous waiter will flag an order of say, pasta carbonara or amatriciana, as having come from a foreigner and not a proper Roman. It is then up to the kitchen to proceed with whatever cost-cutting tricks it deems necessary. That can include anything from diluting the sauce to using precooked pasta to substituting lower grade or even day-old ingredients for the appropriate ones. “If the menu outside says it is seven euros for a plate of pasta carbonara — then it’s seven euros for everyone,” he said. “But if you try and give a real Roman the low-quality version they will throw it back in your face...” (my emphasis)

More on (not) outperforming the stock market

2006-08-18T08:33:00.000+08:00

In a previous post about GIC, I discussed the misguided belief that an investor can consistently outperform the market. In short, I wrote that there are no opportunities to make easy money, even for the shrewdest of investors, when there are many others searching for these same opportunities. Recently, I came across this passage from Charles Wheelan's naked economics:

According to Morningstar, a firm that tracks mutual funds, roughly half the U.S. actively managed diversified funds beat the S&P 500 over the past year. Look what happens as the time frame gets longer: Only 30 percent of actively managed funds have performed better than the S&P 500 over the past five years, and only 15 percent of such funds have done so over the past twenty years. In other words, 85 percent of the mutual funds that claim to have some special stock-picking ability did worse over two decades than a simple index fund... (his emphasis)

Bottom line: be very skeptical of anyone who claims that an investor can outperform the market consistently.

Orchard Road site has been sold

2006-08-17T10:35:00.000+08:00

The highlighted comments link nicely to the previous post on Orchard Road development and timing options.

Lend Lease Places Highest Bid for Singapore Site

Aug. 16 (Bloomberg) -- Lend Lease Corp., Australia's largest property developer, placed the highest bid of S$617.2 million ($391 million) for a downtown Singapore retail site, the city- state's government said.

The site, located along the Orchard Road shopping belt, can be developed into a 39,410-square-meter (424,052-square-foot), 16-story building, of which 60 percent has to be set aside for retail and entertainment, Singapore's Urban Redevelopment Authority said in an e-mailed statement today...

"This will set a new benchmark for Orchard Road,'' said Nicholas Mak, research director at Knight Frank Pte, a property consulting company in Singapore. "The bidding was very bullish because the developers are expecting positive spillovers from the integrated resorts...

"The number of tenders as well as the maximum price of S$617.2 million is a very clear indication of the developer's confidence in the potential growth of Orchard Road and the retail cum tourism scene in Singapore," said Li Hiaw Ho, executive director at CBRE Research, a property brokerage in Singapore.

Wait and See: Development on Orchard Road

2006-08-15T05:12:00.000+08:00

It might be puzzling to some that the site above the Orchard Road MRT station (the Orchard Turn site) as well as the carpark above the Somerset MRT station (the Somerset Central site) have stood idly by as the rest of Orchard developed, grew and aged. Why did these sites remain vacant, their vacant status being way below their “highest and best use” for many years? Some of you might have guessed that the value of these plots is not captured by the net present value of rents, which would surely indicate that development should be undertaken immediately. There is something more. This something more is what economists commonly refer to as a timing option. In this case the option is the owner’s right to defer development of the site. This flexibility, which is ignored by NPV calculations, is particularly valuable when there is significant uncertainty because it allows the owner to wait for just the right moment to act. The timing options of these two sites were held exclusively by the Singapore government through the Urban Redevelopment Authority of Singapore (URA) (the Somerset site is currently up for tender).

Post continued...

Many would agree that retail/office sites like those of Orchard Road depend a lot on what’s going on around the area. The government knows this, the developers know this and in all likelihood, the government knows what the developers are thinking. A location that is primarily retail is not exactly like a residential site. You especially need vibrancy, you need foot traffic, and you need something that attracts people. You like that shoppers window shop and comparison shop. (The benefit of “co-location” to generate a critical mass of customers is part of what is known as agglomeration economies.) To illustrate, on a micro-level, small retail establishments rely on anchor tenants to draw crowds, this explains why tenant-mix is often deemed as being important to a shopping centre. The same goes for a street like Orchard Road, but on a larger scale. I bet that the success of any future development goes hand in hand with any revitalization planned. This is also why a great deal of interest in these sites is generated when the URA holds exhibitions about what it has in store for Orchard Road via its Development Guide Plan (DGP). Developers like to be convinced of the likely success of these plans. The URA knows that developers also care a lot of what’s going on and what is expected in the years to come regarding office and retail rents, consumer spending and confidence and generally what’s going on in the international and domestic economy. So URA has to time its sales right. It does this via the Reserve List System. Under this system, a developer who is interested in purchasing a site submits a bid to the URA. If the bid is high enough, it effectively provides a signal that the market may be ripe for the picking. The URA then puts the land up for tender. When the URA sells the sites, they have already exercised the timing option. All things considered, a sale will go through when the price is right, when it exceeds the URA’s reserve price – in a sense, the government is immunised from any downside financial loss.

When a developer wins the tender to a site, there is a new timing option. The value of this option is limited, however. URA requires the Somerset site to be developed within 9 years after its sale. The value of the developer’s option decreases with time. To that extent, it seems all probable therefore, the sites will be sold when confidence is pretty high, almost all interested developers will see that such optimism continue into the foreseeable future and construction is likely to be swift. For there is no turning back once the leasehold-clock starts ticking.*

What does a developer pay? Basically, the price of a plot of land reflects how a winning developer quantifies his expectation. Essentially, the price is derived from two things: (a) future rents and (b) price appreciation of the future development. It also reflects how these expectations are evaluated via the probability of success of the DGP programmes and the capitalised value of future rents that follow.

*There can be recourse but not without an exorbitant cost.

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Econ 101 series from café salemba

2006-08-15T02:54:00.000+08:00

Members of café salemba are posting "lectures" on introductory economics.

Milton Friedman t.v. series available on-line

2006-08-13T02:32:00.000+08:00

Andrew Chamberlain of the The Idea Shop points out that legendary economist Milton Friedman's television show "Free to Choose" is now available on-line for free.

Andrew writes:

At the end of the day, all the important things in life are ideas—not the junk we spend our days trying to accumulate. These videos have got plenty of good ones. Do your kid’s generation a favor, and pass it on:

Original 1980 Series (10 Volumes):
Volume 1: Power of the Market
Volume 2: The Tyranny of Control
Volume 3: Anatomy of a Crisis
Volume 4: From Cradle to Grave
Volume 5: Created Equal
Volume 6: What’s Wrong With Our Schools?
Volume 7: Who Protects the Consumer?
Volume 8: Who Protects the Worker?
Volume 9: How to Cure Inflation
Volume 10: How to Stay Free
Updated 1990 Series (5 Volumes):
Introduction by Arnold Swarzenegger
Volume 1: The Power of the Market
Volume 2: The Tyranny of Control
Volume 3: The Failure of Socialism
Volume 4: What’s Wrong With Our Schools?
Volume 5: Created Equal

Bloggers and Politics

2006-08-11T09:50:00.000+08:00

"You know, we‘re going to get attacked because fact is [they] don't like the rights of people-powered politics. They don‘t like regular [people] taking charge of their own politics, getting involved. They can't control it, the message is out of control, who votes is out of control.

And this is not something that they care for. They want to squash it before it gets too big. They can't do it, because there are no leaders to squash. It's a broad-based movement. There are [thousands] of people involved. And they‘re going to either have to deal with it, learn to live with it, or they're going to suffer very miserable lives as a result."

Does this sound familiar, Singapore? Any guesses what this person is speaking of?

Words in brackets were changed to hide the passage’s origin. Click on Read more to see the original version.

Here is the original statement:

"You know, we're going to get attacked because fact is that people inside Washington, D.C., don‘t like the rights of people-powered politics. They don't like regular Americans taking charge of their own politics, getting involved. They can't control it, the message is out of control, who votes is out of control.

And this is not something that they care for. They want to squash it before it gets too big. They can't do it, because there are no leaders to squash. It‘s a broad-based movement. There are millions of people involved. And they're going to either have to deal with it, learn to live with it, or they‘re going to suffer very miserable lives as a result."

No, this isn’t about Singapore although the similarities are striking. The speaker is the American political blogger Markos Moulitsas, commenting on the unexpected defeat of 18-year U.S. Senator Joe Lieberman by newcomer Ned Lamont in the Democratic primary of Connecticut. Moulitsas’s popular blog Daily Kos strongly backed Lamont. As a result of this campaign some believe that the Democrats must now listen to the voices in the blogosphere. See here for more analysis.

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Markets in Everything*

2006-08-10T00:06:00.000+08:00

Chinese 'anger bar' is a big hit
BBC News

A bar in eastern China has come up with a novel way of attracting clients - they are allowed to beat up the staff.

The Rising Sun Anger Release Bar in Nanjing lets customers smash glasses, rant and even hit specially trained workers, state media reported.

The owner, Wu Gong, told China Daily that he was inspired to open the bar by his experiences as a migrant worker.

Most of his customers were women working in the service or entertainment industries, he said.

The bar employs 20 men who have been given protective gear and physical training to prepare them for the job.

Clients can ask the men to dress as the character they wish to attack...

(h/t to The Peking Duck)

* (category blatantly but respectfully borrowed from Marginal Revolution)

Are Long Queues Good for Starbucks?

2006-08-09T03:38:00.000+08:00

No, according to Starbucks. Those long queues have hurt sales. Here is Marek Fuchs of TheStreet.com:

Starbucks, long a quality operation, reported disappointing sales and had a weather-related explanation that twisted anyone who listened into a nasty knot. In sum: The hot weather hurt sales because it helped sell more cold drinks, which take longer to make than hot ones. Lines grew too long for the cold, hurting the hot.

Why aren’t long queues a profit opportunity for Starbucks? Can’t Starbucks raise prices for cold drinks during the summer? Aren’t those Starbucks power drinkers willing to pay a little more to avoid a queue? Maybe Starbucks should introduce something like Disneyland’s FASTPASS.

Well, not so fast. Daniel Gross of Slate provides an explanation for why sales are down that is quite different from the company line, one that may impact Starbucks for longer than a hot month or two:

What gives? For years, betting on the ability and willingness of high-end consumers to spend was a winning formula for both retailers and investors. The ranks of the mass affluent were growing, their wallets filled thanks to tax cuts and rising home values. And thanks to the phenomenon of trading up, plenty of people on the lower rungs of the income ladder were splurging on things they were passionate about: golf clubs or shoes, for example. Now the powerful trend seems to be going in the opposite direction. Well-off consumers are reining in spending, and there is likely to be a growing phenomenon of consumers trading in steaks at Morton's for Whoppers at Burger King. As the Wall Street Journal reported, "Burger King Chief Executive John Chidsey told investors during a conference call that the Miami-based chain is benefiting from a slowdown in spending at sit-down restaurants that is prompting some consumers to trade down to fast-food chains." ...

Clearly, the bite of inflation, rising interest rates, slow wage growth, low savings, and higher prices is starting to work its way up the income ladder. After all, people with higher incomes pretty much spend everything they make, too. In fact, there's a degree to which upper-crust consumers could be feeling the pinch disproportionately. Depending on where they live, how they work, and what they spend, consumers experience inflation differently. Someone who takes a subway to work won't feel the pain of rising gas prices, while someone who drives a pickup 70 miles to work each day certainly will. A person who takes a loan to buy a gas-guzzling power boat will find that the cost of buying and operating the boat has gone up dramatically; someone who buys a kayak made in China will find that the price of boating is falling.

Merrill Lynch economist David Rosenberg has examined the spending and consuming habits of his colleagues and clients on Wall Street and has created his own "Wall Street core inflation index," which tracks the rise in prices of the necessities of yuppie life: "jewelry, spas, lawn care, health care, sporting goods, housekeeping services, tuition, airlines, hotels, salons, legal/financial services, and dry cleaning." His conclusion: The price of spoiling yourself rotten is rising rapidly. "The Wall Street core CPI is running at 4%, nearly double what it is for Main Street," he wrote in a report on July 28.

In other words, forget about the heat and the Frappuccinos. Sales at Starbucks and its sister high-end retailers may be faltering because the cost of living well is rising more rapidly than the overall cost of living.

Happy 41st Birthday, Singapore!

2006-08-09T02:19:00.000+08:00

(picture via Espion)

A traditional shophouse painted in Singapore's national colours.

How AOL Lost Its Dominance

2006-08-07T03:06:00.000+08:00

AOL to offer free e-mail service
By Aline van Duyn
August 2 2006
The Financial Times

AOL on Wednesday made its boldest effort yet to ditch its reputation as an internet dinosaur reliant on a dying dial-up connection business by making its aol.com e-mail addresses free to people signing up for high-speed broadband from other providers.

The move marks AOL’s attempt to square up to Yahoo, MSN and Google – its biggest online competitors – which have long provided free e-mail and other services and have been snatching AOL’s millions of departing customers.

This is a good example of technological progress eliminating barriers to entry. AOL established itself in the mid-1990s when the cutting-edge technology was dial-up. AOL was successful because its software was particularly user-friendly when computers were a new technology. It also provided popular services such as instant messaging, which, back in the day, could only be used to chat with other AOL subscribers. (Economists call this barrier to entry a network externality: subscribers are better off as more people join the network. Potential entrants don’t have the critical mass to compete.)

Now, the market has changed. Computer users have become more savvy. MSN and Yahoo provide free email and instant messaging services. And software such as Trillian allows users from differrent networks to chat. And, of course, along came broadband. The old, stodgy AOL is now losing customers in droves.

Do You Think Long Queues are Good for Starbucks?

2006-08-05T08:01:00.000+08:00

(picture from The Big Picture)

The Shipping Container

2006-08-04T05:22:00.000+08:00

Singapore is home to the world’s busiest port. In 2005, over 423,267,000 tonnes of cargo passed through. Much of its success is due to its geography: it's located along the Straits of Malacca, on the main shipping route between Asia and the West. But Singapore also seized the opportunities provided by containerisation. Singapore deepened its harbor to allow giant bulk carriers. It installed infrastucture such as gantry cranes and automated its operations. Each year, Singapore sees more than 20 million shipping containers past through its port. Amazingly, fewer than 10 of these containers are misplaced or damaged.

Here are excerpts from economist Virginia Postrel's review of Marc Levinson’s book The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger:

Just as the computer revolutionized the flow of information, the shipping container revolutionized the flow of goods. As generic as the 1's and 0's of computer code, a container can hold just about anything, from coffee beans to cellphone components. By sharply cutting costs and enhancing reliability, container-based shipping enormously increased the volume of international trade and made complex supply chains possible.

''Low transport costs help make it economically sensible for a factory in China to produce Barbie dolls with Japanese hair, Taiwanese plastics and American colorants, and ship them off to eager girls all over the world,'' writes Marc Levinson...

For consumers, this results in lower prices and more variety…

When the first container ship set sail 50 years ago, businesses and regulators treated distribution not as a single process but as a series of distinct modes: ships, trucks and trains. Every time the transportation mode changed, somebody had to transfer physically every box or barrel.

''By far the biggest expense in this process was shifting the cargo from land transport to ship at the port of departure and moving it back to truck or train at the other end of the ocean voyage,'' writes Mr. Levinson, a Wall Street economist and former economic journalist. This ''breaking bulk'' could easily consume half of the total cost of shipping.

Goods often had to wait in warehouses for the next stage. Those transfers and delays made shipping slow and schedules uncertain. They also created opportunities for damage, mistakes and more than a little theft. (Whiskey was one of the first products shipped by container because it was so subject to pilferage.) Different companies in different industries facing different price regulations for different goods handled each step.

Today, by contrast, ''you can call one of the big international ship lines, tell them to pick up your container in Bangkok, which is not a port, and tell them to deliver it in Dallas, which is not a port, and they will make the arrangements to get it to a port and get it on a ship and get it off at another port and get it onto a train or truck and get it where it needs to be,'' Mr. Levinson said.

You can lead a horse to water...

2006-08-02T16:32:00.000+08:00

Save water or face hikes, Malaysians told
Aug 02, 2006
The Straits Times
KUALA LUMPUR - THE Malaysian government has warned consumers that if they do not conserve water, it will be forced to raise the water tariff.

Energy, Water and Communications Minister Lim Keng Yaik cited depleting resources and rising costs for treatment and distribution as factors.

'At the rate water is being wasted, in two years the supply of water in Selangor will not be sufficient. We may have to import water from Pahang,' Datuk Seri Dr Lim said…

A National Water Conservation Campaign was launched to reduce domestic consumption by 10 per cent over the next two years in a country where, according to Datuk Seri Dr Lim, people use water 'as if there is no tomorrow'.

In Malaysia, at least 300 litres of water are used per person per day, and in urban areas the usage is even higher at about 500 litres, compared with the recommended basic water need of 50 litres.

The main reason for the high usage, especially in Selangor, Kuala Lumpur and Putrajaya, is that water comes cheap. (my emphasis)

An average family in the main towns pays around RM30 per month - and this is even lower in rural areas where privatised service providers are absent.

The government campaign will also study water consumption patterns to understand limitations in conservation and to act on the most wasteful activities.

Minister Lim Keng Yaik should save Malaysian tax ringgit by foregoing the government campaign and buying an intro economics textbook. Maybe his opportunity cost of reading a textbook is high so I will just tell him what the problem is: The price of water is too low right now, and government threats will not change that. The price of water does not reflect its scarcity. When the price is too low, there is no incentive to conserve it. Raise the price and water will be used more efficiently.

What is Economics Good for Anyway?

2006-08-01T08:18:00.000+08:00

This excerpt is taken from David Friedman's Price Theory textbook. It is available on line.

WHAT IS ECONOMICS GOOD FOR ANYWAY?

Looking at the title of this section, it may occur to you that it belongs in the first chapter of the book, not the last. As a believer in rational behavior, I should perhaps have explained to you why economics was worth learning before expecting you to spend a lot of time and trouble learning it. Unfortunately, if I had told you what economics was good for before you read the book, you might reasonably enough have dismissed my claims as no more than deceptive advertising. You may still conclude that, but at least you now have some evidence on which to base your conclusion.

There are at least four different reasons to learn economics. The first is that economists, in the process of developing a theory of human behavior based on rationality, have done quite a lot of useful thinking about how it is rational to behave. While we may know very little about what your objectives are or should be, we know quite a lot about how, given a set of objectives, they can best be attained. Once you understand concepts such as marginal cost, marginal value, sunk cost, and present value, you should find them to be useful tools in making decisions about how to organize your life. When you finally realize that you have invested six months of effort and heartache pursuing a member of the opposite sex who has no interest at all in you, you can sum up your situation--and reluctantly reach the correct conclusion concerning what to do about it--with the observation that "Sunk costs are sunk costs." When deciding whether to spend another few weeks looking for a better buy in a house or a car, you can put the issue more clearly by asking, not whether you have found the best possible buy, but whether the expected return from additional search is greater or less than its marginal cost.

A second reason to learn economics is in order to understand and predict the behavior of other people, especially the effects of the behavior of large numbers of people, in order to take account of it in planning your own life. This should be useful whether you are an investor trying to make money on the stock market, a general trying to keep his soldiers from running away, a homeowner trying to discourage burglars, or a student trying to predict future wages in different professions. In none of these cases will a knowledge of economics by itself be enough to answer your questions--you always need facts and judgment as well. But in all of those cases and many more, economics provides the essential framework within which knowledge and judgment can be combined to reach, perhaps, a correct conclusion--or at least a better conclusion than could be reached without economics.

A third reason to study economics may be that you expect to be a professional economist: someone employed to teach economics, to create economic theory, or to apply economic theory to questions that your employer wants answered. Obviously I believe that being an economist is an attractive profession; if I did not, I would be doing something else for a living. As a missionary, I hope some of you have come to the same conclusion. Of course, as an individual concerned with his rational self-interest, I hope that I have not persuaded enough of you to become economists to reduce my income significantly--or that if I have, you will have the consideration not to enter the field until after I have retired, or at least signed a long-term contract.

The fourth reason to learn economics is that it is fun. Once you understand the logic of economics, you can make sense out of elements of the world around you that you could not otherwise understand, which is entertaining as well as useful. You can also make the process of extracting a rational pattern from apparent chaos into a game played for its own sake--even in cases where it is likely enough that there is no pattern there to be extracted.

It may occur to you that I have omitted a fifth reason to learn economics, one that many textbooks would put first: to make yourself a better citizen and a better informed voter. It is true that understanding economics makes you much more likely to perceive correctly the consequences of actual or proposed government policy. But while that may be a good reason for me to teach you economics, it is not, unless you are quite an extraordinary individual, a good reason for you to learn it. In a society as large as ours, your vote, as I have pointed out several times, has a very small chance of affecting anything. If you are extraordinarily altruistic, the large number of people benefited by an improvement in government policy may balance, for you, the tiny chance that your actions will produce such an improvement. If you expect to be unusually influential--perhaps because your name is Kennedy or Rockefeller--you may conclude that the public benefit of making yourself an informed citizen justifies the cost. If neither is the case, it is unlikely that the effect on you of the public benefits produced by your improved understanding of economics will be worth the private costs.

Wal-Mart, Labor Unions, and China

2006-08-01T04:41:00.000+08:00

Wal-Mart does not allow labor unions in its stores in the United States. Here is its explanation why, taken from their web page:

A Walmart labor union is redundant because we firmly believe in developing an environment of amicable relations and promoting a free expression of the ideas, comments, and concerns of our associates.

In China, the government has forced Wal-Mart to accept unions. Maybe this is a defeat in name only because unions in China are known to side with management, according to Berkeley economist Harley Shaiken.

Official Union Set Up in China at Wal-Mart
By DAVID LAGUE
NYTimes
Published: July 31, 2006

BEIJING, July 30 — Workers at Wal-Mart Stores have formed their first trade union in China, after demands from the government that the company allow organized labor in its stores, according to reports in the official news media over the weekend.

Wal-Mart, the world’s largest retailer, has long sought to bar unions from its stores, particularly in the United States. But the government-controlled All-China Federation of Trade Unions has campaigned to set up branches in China, where Wal-Mart employs 30,000 people at 60 outlets.

Any new union in China is unlikely to resemble its counterparts in the West. Labor activists often accuse the tightly controlled All-China Federation of siding with management rather than workers...

Harley Shaiken, a labor economist at the University of California, Berkeley, said that China’s state-backed unions were known for supporting, rather than challenging, foreign corporations...

“The union will likely be quite compliant with management,” Mr. Shaiken said. “There might be a nudge now and again, but the union structure is designed to encourage this investment, not to challenge it.” ...

Of the 15 countries in which the company owns work sites, she said, some Wal-Mart employees in Argentina, Brazil, Mexico, Britain and Germany are union members. The United States is the “clear exception,” where no employees are union members, she added.

Singapore to ban outdoor protests at IMF meeting

2006-07-31T08:55:00.000+08:00

I decided to post this article for our foreign readers because I haven’t seen the story in the major foreign newspapers.

Singapore to ban outdoor protests at IMF meeting
A.P. Friday, July 28, 2006
Singapore will not allow outdoor demonstrations during the upcoming annual meeting of the IMF and World Bank, but will set up an indoor venue for registered civil groups, the police chief of staff announced Friday.

Soh Wai Wah told a news conference that outdoor protests during the Sept. 11-20 meetings would compromise security, could be exploited by terrorists, and disrupt the day-to-day activities of the area, making things "unpleasant" for residents.

"In the current security climate, the priority is to ensure the safety and security of our residents, visitors and delegates to the meetings," Soh said.

But in recognition of the IMF/WB's tradition of "constructive engagement" with accredited civil society organizations, Singapore will set up a private area in the lobby of the conference venue for these groups to gather and engage with delegates.

"The police recognize the importance of the participation of civil security organizations in the event. We have made maximum effort to facilitate their involvement, within the framework of our laws," Soh said. "However, we are unable to waive the current rules which prohibit outdoor demonstrations and processions, so as not to compromise security."

Under national law, permits are required for any outdoor gathering of more than four people, Singaporean or foreigner, amounting to an effective ban on protests and demonstrations. Singaporeans can freely hold indoor meetings without a permit as long as the topic does not deal with race or religion. Foreign groups or foreign speakers must apply for a permit.

Soh said the civil groups must be accredited by the World Bank to gain access to the indoor venue.

The police official said Singapore was mobilizing its entire police force and its police national service to provide 24-hour security for the meetings, which are expected to gather 16,000 delegates and visitors. Security measures would include aerial monitoring of the venue and screening of visitors to the country.

"If any laws will be broken, the police will not hesitate to take firm and fair action to prosecute or to arrest any individuals. The action that we take will be proportionate to the actions of any lawbreakers," Soh said.

Home Affairs Minister Wong Kan Seng said earlier this year that Singapore could use severe punishments _ such as caning _ against protesters who commit violent acts such as vandalism, arson or causing harm during the IMF meetings.

Wal-Mart to Abandon Germany

2006-07-30T05:25:00.000+08:00

Wal-Mart to Abandon Germany – New York Times

Wal-Mart Stores, admitting defeat in Germany’s giant but cutthroat retail market, announced Friday that it would sell its 85 stores here to a German retailer, incurring a loss of $1 billion.

For those of you who aren’t familiar with the American company Wal-Mart, it is the largest retailer in the world. It has been extremely successful in the U.S., Canada, and Mexico but has had mixed results in other countries. The company receives constant criticism for, among other things, using its size to push around its suppliers. It appears that Wal-Mart was less successful when the suppliers had less to lose.

While Wal-Mart’s vast size gives it enormous leverage in purchasing clothing and other goods, it must buy much of the food for its German stores locally. And there, it lacks the muscle of Aldi, which has 4,100 shops and a presence in nearly every town in the country.

The article also mentions a couple of cultural gaffes committed by Wal-Mart such as instructing clerks to smile at customers. Seems Germans aren't used to service with a smile. Maybe Germany needs a 4 million smiles campaign like the one Singapore instituted to greet the attendees of the IMF and World Bank meetings in September.

Do Economists Have Any Answers?

2006-07-29T01:22:00.000+08:00

Mark Thoma of Economist’s View writes

Do Economists Have Any Answers?

I am asked repeatedly what the solutions are to the problems that occur with globalization and increasing inequality, but the answers I give are not the answers people are looking for. Economists have done a good job documenting and highlighting the problems, but have had far less to say on how to overcome them.

There are some questions in economics that are not yet well understood. Many smart people have spent long careers searching for good answers and are still looking. And the answers that we currently have aren’t panaceas. Mark’s analogy is eye-opening:

I know a lot of you like to beat us up because we don't have the answers, and it's useful to motivate us to look all that much harder, but I'm not any more embarrassed for our profession because we can't solve every problem than doctors are who can't cure the common cold. And (this will make some of you mad) they, like us, have to listen to a lot of folk remedies that supposedly work, be told they are idiots, etc. And though every once in awhile the folk remedy is valid, generally the suggestions come from people who really don't understand all facets of the problem. You can't argue with them, they really believe their folk remedies work, so it's best to listen to them attentively, smile and nod, and not engage.

I don't think that economists can take the approach of pleasant disengagement. A public ignorant of basic economics is vulnerable to charlatans and quacks. One often opens the newspaper or clicks on a blog and reads opinions and remedies offered with unwarranted fervor and conviction, or even worse, with insidious intention. Economists have to better inform the public of the policies that work and those that don’t. Unfortunately, economists face a real dilemma professionally. Blogging and writing for a broad audience is not rewarded and often is frowned upon. Academic research is what drives careers.

Traffic Congestion in Singapore

2006-07-26T14:40:00.000+08:00

Traffic congestion plagues almost all large urban areas. It's one instance in which economists believe there is reason for government intervention. Singapore is one of the few countries that regularly intervene.

Driving to work is what economists call a negative externality: an action taken by one person that affects the well-being of another. For example, my decision to drive my car to work makes the road a little more crowded, making your commute a little bit longer. My contribution to traffic congestion is small, but when there are thousands of other drivers like me, the problem becomes huge.

Economists dislike negative externalities because they cause inefficiencies. This simply means that people drive even though they shouldn’t from a societal point of view. For example, if you calculate that the benefits of driving - such as a more comfortable and flexible commute - outweigh its costs, such as petrol and maintenance, you would drive to work.* But you have left something out of the calculation, namely, the cost of a longer commute that you inadvertently impose on others. This is why too many people drive: some people drive even though the benefits of driving are not greater than the total cost to society.

To discourage people from driving, the government can intervene to make commuting more expensive to better reflect its true cost. In the US, the government often does not intervene in the market, maybe because individuality rules. As expected there are huge rush-hour backups in cities like New York and Los Angeles. On the other hand, in Singapore, given its small size, urban planning is viewed as essential and has allowed the implementation of two programs designed to reduce traffic congestion, Electronic Road Pricing (ERP) and the Vehicle Quota System.

The ERP is an electronic system that charges drivers when they use certain roads at certain times of day. Each car in Singapore has a device called an In-vehicle Unit that sits on the dashboard. Before driving the car, the driver inserts a type of debit card called a CashCard into the device. Money is deducted from the CashCard automatically when the car passes through traffic checkpoints across the city. In May 2006, passing through central business district checkpoints cost between S$.50 and S$3.50 (US$.32 and US$2.22), depending on the hour of the day and the location.

Under the Vehicle Quota System the government controls the number of cars on the road by limiting the number of new car registrations based on traffic conditions. The government then sells the registrations in twice-monthly auctions. In December 2004, there were 7,332 registrations available. There were 8,605 bids, with an average winning bid of S$20,893 (US$12,745).

So how does car ownership in Singapore compare to major U.S. cities? According to an AC Nielson survey the rate of car ownership in Singapore is 39%. According to the US Census Bureau, the lowest rate of car ownership in a large U.S. metropolitan area is 58% in New York City. Chicago and Los Angeles have car ownership rates of 89%, which ranks 8th.

How do commuting times compare? The average commuting time in Singapore is 33.6 minutes. The average commuting time in New York City is 38.4 minutes, in Chicago 32.7 minutes, and in Los Angeles 28.5 minutes. The U.S. numbers are actually too low because they include city residents only and not suburbanites who commute to these cities.

These numbers provide some evidence that the Singapore programmes have been effective. Of course, these numbers are suggestive and only meant to provide food for thought.

* Costs should include the opportunity cost of driving, the value of your best alternative such as taking the train.

Mr. Wangs says so about a singaporean economist

2006-07-25T14:49:00.000+08:00

Mr Wang Bakes Good Karma has mentioned a singaporean economist. Thanks, Mr. Wang!

Check out Mr. Wang's blog if you are interested in Singapore current affairs. Pay particular attention to his legal analysis as Mr. Wang is a lawyer.

the first link to a singapore economist!

2006-07-25T04:08:00.000+08:00

Mark Thoma of Economist's View has added a singapore economist to his blogroll. Thanks, Mark!

If you haven't checked out Mark's blog, I highly recommend it. It's a must read for me every morning.

How good or bad is the GIC's performance? (hint: it's a trick question.)

2006-07-24T14:06:00.000+08:00

The Government Investment Corporation of Singapore (GIC) is an investment management company established in 1981 to manage Singapore’s foreign reserves. According to its web site, GIC “strives to achieve good long-term returns on assets under our management, to preserve and enhance Singapore's reserves” by “invest[ing] internationally in equities, fixed income, foreign exchange, commodities, money markets, alternative investments, real estate and private equity.”

Although GIC is state-owned, it has never publicly disclosed details on the performance of its investments until recently. GIC announced that the average rate of return on its investments was 9.5% in U.S. dollars over the past 25 years. Following this disclosure there has been extensive debate in the Singapore blogosphere over whether such a return is good or bad. For one particular example see Mr Wang Bakes Good Karma: Sad Performance in which Mr. Wang describes GIC's performance as "dismal," "sad," and "shocking." Strong words for sure but can they be supported by facts?

What can be said about GIC's performance? Unfortunately, not much. To say a return of 9.5% is bad or good has no meaning since we do not know the riskiness of GIC's investments. This may seem surprising to those who envision Wall Street as chock full of investors who earn great returns based on their smarts and savvy. But the truth is that investors are constrained by the effects of what economists call the "efficient market hypothesis." In a nutshell, this hypothesis says if there is a large number of reasonable investors then the price of a stock reflects all available information. As a result no one can "beat the market" because the price is a good measure of the stock's value. That is, if a stock is priced at $5, then there isn't anyone lurking around who knows that the stock is really worth $10. To put it succinctly, there are no opportunities to make easy money, even for the shrewdest of investors, when there are many others searching for these same opportunities. Economists have a lot of faith in this particular hypothesis; it is supported in varying degrees by enough research papers to sink a battleship.*

As a result of the efficient market hypothesis we know that investors face a tradeoff between risk and returns: an investor can only expect to earn higher returns if he or she is willing to hold riskier stocks. To evaluate the performance of an investor, we ask whether an investor could have obtained higher returns while incurring the same amount of risk.

Against this backdrop, there is now something we can say about GIC's performance if we are willing to make a big leap of faith or two. Turning back to GIC's website, we see that the GIC lists prudence as one of its core values: "Prudence means being conscious that we have a broader fiduciary responsibility than most fund managers; that we are in the public eye and must therefore consider investment risks and reputational risks; that we exercise sound judgement and discretion." Let's intepret this statement to mean that GIC's objective is to avoid "too much" risk and be conservative. (Big leap of faith number 1.) Now that we have assumed the amount of risk GIC is willing to accept, we can measure its performance by comparing GIC's returns to an appropriate benchmark. That is, we can compare GIC's returns to the returns of stocks of similar riskiness, and, a singaporean economist cannot emphasize this enough, from the same time period, the past 25 years. Let's take the S&P 500 index and Dow Jones Industrial Average as our benchmarks. (Big leap of faith number 2.) Over the past 25 years, the average yearly return of the S&P 500 index is 9.3%. The Dow Jones Industrial Average average yearly return is 10.3%. So it seems that GIC's return of 9.5% is in the ballpark.

So why is asking whether GIC's performance is good or bad a trick question? It's a trick question because judging performance is more than looking at absolute returns. We need to know at the very least GIC's risk tolerance and its portfolio, which are not available, to make an objective evaluation.

* Alternative theories of market behavior have been developed but most economists continue to think in the framework of efficient markets.

sporadic posting for the time being

2006-07-23T16:32:00.000+08:00

a singapore economist will post sporadically for the time being. I hope to post on a regular basis sooner rather than later.

through an economist's looking glass

2006-07-23T09:08:00.000+08:00

a singapore economist has become familiar with the state of the Singapore blogosphere. Frankly, I am underwhelmed. I see lots of ranting sprinkled with speculation and anecdotes, particularly in the realm of finance and economics. Singapore, there is a need for critical thinking supported by data. To that end, a singapore economist hopes to be the looking glass for those who are interested in an economist's view of the world, a view guided by objective analysis, facts and figures.