Going to the gas station is such a pleasure these days, which is exactly the wrong way to think about low gasoline prices, according to Allan Sloan, who wants us to  "jack them up, sharply, by adopting a big honking tax on gasoline." This part of his argument is highly entertaining:

Unless we can summon the political will to slap a big tax on gasoline, we'll be setting ourselves up for the next spike in oil prices. History shows that there will be a spike, whether it comes from a world economic recovery or a terrorist strike against oil facilities or something else that we can't predict.

So ... unless we jack up gas prices, we will be setting ourselves up for a big increase in gas prices!

I realize that there is more to the idea than just this silly argument, but the other arguments seem pretty silly to me, too. Like the one where Sloan suggests that he would "let the market ... guided by a high gas tax ... rule." The market Sloan has in mind is the one that produces  high-mileage vehicles and lots of customers to buy them. Even if the federal government has to create that market with a "big honking tax on gasoline."

In fairness, nothing about oil and gasoline seems to resemble a functioning market. Remember when we were speculating about $200/barrel oil earlier this year? Oil is now selling for $54/barrel. Of course, Saudi Arabia thinks that's too low because it would rather get a higher price. Here is how we arrive at the new "fair price" of $75/barrel:

Saudi oil minister, Ali Naimi, argued [in Cairo this weekend] that oil prices should be around $20 a barrel higher than they are now. Mr. Naimi's remarks represented an unusual departure for Saudi Arabia, which has long avoided the appearance of trying to set the price of oil. Saudi King Abdullah also used the $75-a-barrel price tag in an interview on Saturday with a Kuwaiti newspaper. Other OPEC ministers quickly seized on the $75 target, saying that current prices were too low to sustain needed investments in oil exploration and production in higher-cost areas.

The big question is whether the OPEC countries can actually pull off a price maintenance strategy. Even if they succeed, $75 sounds a lot better to me than $150 or $200, unless Allan Sloan gets his way, in which case it won't make any difference.

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Everyone seems to be linking to Tyler Cowen for thoughts on Paul Krugman's Nobel Prize in Economics. Tyler offers a nice summary of Krugman's accomplishments and a nifty pocket interpretation of the award: "This was definitely a 'real world' pick and a nod in the direction of economists who are engaged in policy analysis and writing for the broader public." That's the sort of thing you can use at a cocktail party.

I don't have much to add, other than the fact that I used to read Krugman's books. In fact, I was reading Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations when I decided to become an academic. My wife saw me reading the book and asked about it. When I told her what it was, she said something like, "you need to become a law professor." Or maybe that's just what I heard. Maybe she really said, "you are a geek."

Anyway, Krugman was fun to read back then. I find his NYT columns less interesting because I don't enjoy reading overtly political commentary as much as veiled political commentary.

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EESA is a week old and already irrelevant--or at least the TARP part where the Treasury is supposed to be buying up bad mortgages and mortgage-backed securities.  As world markets continue to tumble, it's clear that EESA has had little positive impact on bank lending or market confidence.  We always knew that buying up bad bank assets was only an indirect way to pump up bank capital.  Now, it looks like more drastic measures are afoot.

Yesterday, central banks coordinated emergency interest rate cuts in an attempt to spur lending globally.  The Treasury is now considering 3 aggressive moves to get bank lending back on track: 

1.  injecting capital directly into banks by buying equity stakes  ;

2.  guaranteeing interbank debt; and

3.  extending deposit insurance to all bank deposits. 

The interbank debt guaranty is a UK proposal, where such a guaranty is being implemented.  The move to buy equity stakes raises strong doubts as to the efficacy of last week's plan to buy up mortgage assets.  Existing EESA authorization is likely broad enough to encompass purchase of bank equity stakes.  EESA's definition of "troubled assets"--authorized to be purchased under TARP--includes "any other financial instrument that the Secretary . . . determines . . . is necessary to promote financial stability."

Keep your fingers crossed.

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Yesterday the Federal Reserve agreed to provide AIG with an additional loan for up to $37.8 billion to help improve the liquidity of its securities lending business.  This amount is in addition to the $85 billion loan from the Fed, $61 billion of which has apparently already been drawn down by AIG.  On the one hand, the additional loan to AIG is just another in a series of steps aimed at trying to shore up troubled companies.  On the other hand, its timing has sparked renewed concern and outrage on the part of the public.  This is because the new loan came just one day after Congress expressed its own outrage and frustration with AIG executives not only for their seeming refusal to admit any wrongdoing, but also for spending some $440,000 on a retreat just days after the federal bailout—called "pretty despicable" by the White House press secretary.  The Washington Post blog is filled with comments about AIG, and the comments are almost uniform in their stinging criticism.  There were at least two overarching concerns captured by the comments.

First, commentators suggested that the Fed’s decision appears to confirm the public’s suspicion that government will provide money to ailing companies without being willing or able to hold management accountable.  Thus, many comments consisted of complaints that, instead of seeking ways to hold management accountable for what Congress viewed as improper behavior, the act of providing additional funding appeared to be rewarding them or at the very least not sanctioning such behavior. As one post noted, “the AIG Executives are probably saying to themselves, ‘what is Congress going to do to us, nothing.’” In this regard, this issue with AIG adds to the perception not only that corporations are being bailed out for their own mistakes, but also that corporate executives feel free to make those mistakes without any fear of repercussions.  To be sure, AIG offered many reasons for their decision to host the retreat.  Apparently the retreat had been planned before the bailout and was aimed at rewarding independent life insurance agents for their successes.  Then too, an AIG spokesperson pointed out that the retreat was important because it rewarded those aspects of AIG that were self-sustaining, thereby increasing the likelihood that they would remain healthy.  Hence, AIG executives did offer some business justifications for the retreat.  Moreover, there may be no connection between the retreat, the companies need for additional cash, and the government's decision to provide that cash.  Yet when viewed together, the decisions feed into the public’s perception that their tax money will be lent to executives who will not be held accountable.

Second, as one person put it, “this is exactly what the taxpayers were concerned about . . . life as usual for the Wall Street executives while we, on Main Street and other streets, suffer the consequences.”  This comment captures two sentiments.  The first is the concern that these kinds of retreats represent standard business practices, even though many—though not all—of those who commented on such practices found them to be problematic.  The second is the concern that such practices will remain unchanged despite the fact that many in the public will have to make changes in their way of life.  Indeed, it seemed that even those who recognized that it may be appropriate to reward people for their service to the corporation had problems with such a reward coming on the heels of an $85 billion bailout.  Initially an AIG spokesperson indicated that several AIG firms planned to go ahead with other social and business events, and pointed out that these kinds of events happen all the time.   His comments sparked outrage because they seemed to confirm the public’s fear that they would be asked or required to tighten their belts without any corresponding tightening on the part of executives.

To be sure, AIG’s CEO said that he would be “reevaluating” the costs of all operations "in light of the new circumstances" underwhich the company would be operating, and in fact apparently AIG now has canceled another scheduled retreat.  Nevertheless, this back and forth with AIG feeds into the generally negative public perception about the bailout, its implementation, and those in charge of that implementation, making it that much harder to restore confidence.

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In a true "sign of the times," the national debt clock, which sits in Times Square and keeps tabs on the national debt level, has to be replaced because it has maxed out--that is, it does not have enough digits to capture our national debt level because that level has passed the 10 trillion dollar mark.  The plan is to install a new debt clock that can calculate our debt up to a quadrillion dollars.  That would be 1 plus 15 zeros or one thousand million million dollars.  A number that is almost incomprehensible.  And yet the change is symbolic not only of the difficulties we face with keeping track of our growing and staggering debt obligations, but also of the manner in which this current economic crisis will impact our future. 

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Central banks around the world -- even China! -- are cutting interest rates. So what exactly is supposed to happen now?

Bankrate senior financial analyst Greg McBride has a nice analysis of the implications of the rate cut for consumers. His bottom line: this hurts savers (lower CD rates) and doesn't incite new borrowing, but helps some people who have an adjustable rate mortgage. Hmm.

Most of the talk about the rate cut looks like this from Don Rissmiller, of Strategas Research Partners in New York: "A coordinated rate cut is symbolic as much as anything else. It's the most traditional tool that central banks have at their disposal, its readily understood by everyone in the markets, and by deploying it, they therefore hope to instill confidence."

Instill confidence. That is the mantra. Watch David Wessel of the WSJ ...

So if everyone believes that the rate cut is mostly symbolic, why would we think that it should instill confidence?

No need to answer that. It's a rhetorical question. Just note that the rate cut didn't stop markets around the world from sliding further. FT sums it up nicely: "Markets shrug off rate cut."

UPDATE: I posted this, went to get some lunch, and came back to find that the market has done an about face. CNBC commentators are speculating that stock traders are seeing some hopeful signs in the credit markets.

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So Warren Buffett has decided to invest in Goldman, to the tune of $5 billion for the purchase of preferred shares and warrants to purchase up to an additional $5 billion in common shares.  While there is certainly lots of things going on in the markets right now, it is interesting to ponder what that investment means.

It seems like a tremendous vote of confidence in Goldman, and in fact prompted others to invest some $5 billion in the company.  Though Business Week cautions that the deal is “hardly a glowing statement about Goldman’s health and upbeat prospects,” and warns that the company is likely to face years of financial trouble.

It also could be viewed as a revelation that private investors actually can help boost the financial markets, and hence maybe the investment undermines the notion that we need government intervention.  And yet in a CNBC interview, Buffett admitted that he would not have been willing to invest in Goldman if he didn’t believe that some government help was on the way, calling such help “absolutely necessary” to “avoid going over the precipice.”  So in this regard it may be a signal that government intervention is necessary to encourage private help. Moreover, Buffett’s decision appears to confirm what we have been hearing from the feds—that broader and more sweeping intervention is necessary, even for companies otherwise able to attract private funds.

The decision also appears to say something about Goldman’s management.  Indeed, Buffett admitted that other entities have asked for his financial help, but he has declined.  So why Goldman when he has steered clear of others?  Buffett said it was the right price with the right terms.  But that wasn’t all it took for him to step forward.  He also said it was the “right people,” suggesting that he trusted Goldman’s management in a way that he did not trust the management of other companies, particularly those who seemed incapable of making a realistic assessment of the risk they were facing. 

As Gordon points out, this issue of trust is important, and a nagging question with the bailout plan is, if we give companies billions of dollars, how do we trust that they have the leadership and governance apparatus to navigate their way out of their financial crisis?  In other words, how do we find or make sure that they are the “right people”?

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Like Usha, I have been trying to puzzle through what the executive compensation provision of the new bailout/rescue bill really means and how it will work in practice.  Although part of the problem may be that its precise contours continue to evolve.  Indeed, in an interview with CNBC tonight, Barney Frank, chair of the House Financial Services Committee, indicated that while there would be no dollar limits on executive compensation, he was fighting hard to make sure that the bill would at least ensure that shareholders get a say on pay and that there would absolutely be no golden parachutes.  To be sure, these are the kinds of provisions that long have been advocated by shareholder advocates and the public, but it is not clear if they will serve to curb the kind of rising executive compensation packages that concern many.  Though perhaps people will view it as a step in the right direction. 

And even as I puzzle through these issues, what is not a puzzle to me is the apparent growing consensus that the bill needs to address executive compensation in some manner.  Of course because things are still evolving, it is still possible that the executive compensation issue will not be a part of the legislation.  And yet even Paulson now has indicated that the new legislation must address the executive compensation issue. 

As I mentioned, this kind of growing consensus should not be surprising.  Indeed, as an initial matter, executive compensation has been a hot button issue for some time, especially when it seems like executives are being rewarded while shareholders and tax payers suffer.  So it is little wonder that this would be an issue on the forefront of people's mind.  Second, unlike the complex nature of mortgage-backed securities, credit default swaps, and other financial instruments, it is likely that the public views the executive compensation issue as relatively straightforward, and hence a relatively easy piece of the legislation (or hole in the legislation) upon which to focus their attention.  Third, given how long the business community and other sectors have grappled with how best to curb rising executive pay and prevent inappropriate pay packages, there is no reason to think that the issue would have been addressed post-legislation or otherwise in some other context.  Hence this may have presented the perfect opportunity for those who have long pushed for some federal legislation in this area. 

Again, it is not clear what kind of impact the provisions on executive compensation will have, and it is also not clear that such provisions will even make it into the final bill.  But it does seem clear that the issue of executive compensation and the seeming failure to address that issue resonates with many people, and hence could play a central role in their perception of the validity of the bailout plan.

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The government bailout of Fannie and Freddie is big news, and while you're digesting what has happened and what you think about it, let me point you to the following takes:

• Did Paulson kill Frannie?  Sorkin and Salmon weigh in.
• The WSJ's fantastic - and very old-style-WSJ - tick tock
• .Remember the legal authority Paulson got to take over Frannie?  Well, he said he wouldn't use it.  Chris Dodd's reaction: "“We accepted him at his word that all he needed was the authority and that he wasn’t going to exercise it. Then he used his authority very aggressively."  What we may have here, my friends, is an interbranch disagreement.
• It's still true that bailout ground rules are sorely needed.
• Frannie fooled famous investors like Bill Miller (and economists like DeLong, I might add).  And Miller's "cool it, guys" strategy sounded kind of convincing to me.
• Radar provides a guide for the perplexed.

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In case you've been wondering where you should spend that last bit of your conference budget, we'd like to note that the American Association of Wine Economists hits attractive spots in the US and Europe every year.  They've got a name-brand president in Orly Ashenfelter, a board of heavy hitters and wine-region academics (one of whom calls the society "the definition of tenure"), a journal, and a terrible website.

Every industry presents some interesting case studies, I figure.  But I think lawyers, allegedly big institutionalists, haven't institutionalized societies to study sports, movies, cuisine, and so on the way that other social scientists have.  What are the implications for interdisciplinarity, I wonder?

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Some folks in the Solicitor General's office think that you best prepare for oral argument by thinking of answers to the twenty possible questions the judges might ask.  For economics workshops, it turns out, you need to come up with a few - but not many - more responses.  My colleague Justin Wolfers reminds us of George Stigler's classic articulation of the thirty-two possible questions in an economics workshop.  I'm trying to remember the last time I didn't ask "What empirical finding would contradict your theory?," number 20 on Stigler's index.

Josh Wright has his own take here.

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"I can't afford a second car.  I can't get out of my lease. I can't get rid of this because no one wants to buy it."

This quote from a New York Times story about how America's romance with the SUV is going through a severe and perhaps irreversible "rough patch" not only because of high gas prices, but also because of guilt over the damage such cars inflict on the environment.  Just this week I saw several stories appearing to confirm this rough patch from those highlighting consumer's increased desire for hybrid cars, to those revealing several auto-makers' intent to cut back on lease programs, which historically had spurred Americans ability to obtain the popular SUV.  Even Ford, which popularized the SUV in the 1990s, has announced its intent to shift its focus to smaller cars.  And hence the quote is an entertaining and candid assessment of how the economy and other forces are impacting the car industry and, in turn, impacting the car buyer.  And the quote suggest, many people, for many reasons, can no longer afford the SUV--and this includes many who are currently driving them.  As a result, many people have or will have to make the shift to a smaller car.  To be sure, there is some debate about whether or not the apparent shift to the economically and environmentally friendlier smaller car will be a permanent one.  Moreover, to the extent American's tended to have a love affair with their cars, the New York Times story wonders if any passion will endure in this shift to the compromise car.

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The news has been abuzz this week after President Bush signalled he would not veto the housing bill, H.R. 3221, which was passed soon after by the House of Representatives.  The Senate is also expected to pass the bill today or tomorrow.  The bill is characterized as the bailout bill, bailing out not only Freddie Mac and Fannie Mae, but also homeowners with mortgages on the brink of foreclosure.  I want to talk about only two aspects of the very large bill, described today in a NYT article Housing Bill Has Nearly Something for Everyone.

The "bailout" part of the housing bill comes from the section allowing homeowners to rewrite their existing mortgages into 30-year fixed mortgages for an amount equal to 90% of the market value of their homes.  Obviously, this provision helps those with mortgages for over 90% of the market value of their homes.  However, 10% is not all that's at stake here, given that many homeowners at 100% mortgages based on much higher market values.  So, someone with a $300,000 mortgage on a $300,000 house whose value has slipped to $250,000 can swap for a mortgage for $225,000.  Sweet, huh?  Except that your lender has to agree.  So of course I'm interested in knowing whether lenders will take the bird in the hand of the $225,000 mortgage (which must be qualified for and will be guaranteed) rather than take their chances in the foreclosure process that they will get a better deal.  It may be that bill saves all parties these transaction costs and creates a win-win situation, but if that's the case, wouldn't the parties have negotiated a settlement on their own?  Is the federal guarantee really the deal-maker?  For homeowners to take advantage of this renegotiation, their mortgage payments must be 30% or more of their monthly income, but they must be able to qualify for the new loan.  I have seen figures that this provision would help maybe 300,000 out of the 3 million facing foreclosure.  (Borrowers also must be residents of the house, not "flippers" or other investors.)

Of course, one of the problems of having a mortgage that is too high is that one way to escape is to sell your house.  But, we need buyers for that, and most buyers have their own houses that someone will buy.  So, if fewer people are buying houses, it sort of ruins the whole circle of real estate life.  So, another provision of the bill is that first-time homebuyers can get a $7500 tax credit.  In theory, this will give homebuyers $7500 more for a down payment.  So, if I'm deciding whether to buy a house in August, will the ability to get $7500 in a tax refund (or less, depending on my tax situation), spur me into the purchase?  Perhaps if I am perfectly liquid.  If I have the $7500 in savings but don't want to touch it, then I might be willing to deplete my savings knowing that I can refill it in April.  But are we really talking about truly liquid homebuyers?  Or are we talking about the stereotypical first-time homebuyer scraping together a downpayment?  Will we see "first-time home buyers tax credit anticipation loans"?  Oh, and the $7500 is really an interest-free loan, which must be repaid.

BTW, I received a letter yesterday from my mortgage lender saying that I was pre-approved for a very large home equity loan.  In the words of Robert Earl Keen, "the road goes on forever and the party never ends."

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On August 4, Utah will become the first state to institute a mandatory four day work week for most of its employees.   This week Fairfax county in Virgina annouced announced plans to consider the four day work week.  This reflects a growing trend.  Many other local and county government as well as businesses have either already implemented or are considering a four day work week.  And although there are some downsides to the concept, a recently released Brigham Young University study of 15 cities indicates that the four day work week can be a win-win-win—generating positive benefits for businesses, employees, and residents.

For businesses, the four day work week enables them to reduce costs, while also apparently improving productivity.  Indeed, Utah hopes to save $3 million out of its $11 million budget by switching to the four day week.  By shutting down for one day, the four day week enables entities to save money on heating, air conditioning, and other operational costs.  The BYU study also suggests that the four day week increases workers productivity.  A four day work week generally means changing from five eight hour days to four ten hour days.  Some have expressed concern that this longer work day would translate into a decrease in productivity, particularly towards the end of the day.  Instead, the BYU study reveals that workers have been more productive.  Part of the reason may be that the three day weekend increases the likelihood that workers will start their work week refreshed and ready to go, thereby increasing their morale and efficiency.

For employees, the four day week enables them to cut down on gas prices associated with commuting.  To be sure, the four day work week can pose challenges for employees, particularly those that use public transportation and have child care arrangements that do not accommodate the longer work day.  Despite these challenges, the BYU study reveals that the four day week appears to enhance the work-life balance for many employees.  Indeed, four work days means three days at home, and often people can use their extra day to run errands or otherwise spend time with their family. 

Interesting, one of the biggest critics of the four day work week has been citizens concerned that the quality of services as well as access to services would decline with a four day work week.  The BYU study found, however, that on the whole people believed that the quality of services had improved with the four day week—perhaps because employees are happier!  Another issue for citizens is that many have come to rely on five days of access.  Some agencies have responded to this concern by remaining open five days, which means that not every employee has the same day off. Others, like Utah, keep a few emergency services available five days a week, but otherwise close down on Friday.  Thus, citizens have to get use to planning around less daily access, but longer hours during the day—potentially not such a bad trade-off.

Another “win” for the four day week is the environment.  Indeed, environmentalists argue that reducing the work week means fewer cars on the road which translates into a reduction in greenhouse gas emissions and other air pollutants.  It also means less exposure to such pollution.

Thus, the four day work week is actually a win-win-win-win, which is why you see more and more entities, employees, environmentalists and even citizens urging their government to shorten the work week.

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Kent Greenfield offers a sardonic perspective on the Freddie-Fannie bailout over at Huffington Post:

I've discovered the secret to having this administration care about your financial well-being:

1. Mismanage your finances, especially by overextending yourself by investing in dubious investments;

2. Be too big to fail.

Luckily, many of us have already begun to take these principles to heart. Americans are notoriously poor savers, and household debt now stands at historic highs.... So under the first condition for government assistance, we're all doing poorly, that is, well. We are piling up debt by putting our money in poor investment instruments.

Personally, I have piled up debt investing in things such as vacations for my family, gasoline for my SUV, and a flat-screen television. There is absolutely no chance that any of these investments will pay off. Fannie Mae has nothing on me.

The second condition is more problematic. I have not amassed enough debt that anyone outside my own family would care. If my "investment" by way of VISA in a new Wii for the living room doesn't pay off, I will have no one to rescue me.

Personal bankruptcy, perhaps? Lots of people are doing it. Unfortunately for Kent, it's not as good as it used to be.

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Here and here are some quick must-reads on Fannie Mae and Freddie Mac, their relation to the mortgage meltdown, and a great case for regulating mortgage markets.  And here's something just for fun.

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It seems like everyday I hear a new story about the impact of increased gas prices, from stories about the impact on different industries such as restaurants and airlines, to stories like those Christine pointed out, about how increased gas prices impact people's driving and spending habits.  On Monday, the Washington Post did a story that was all over the local news about one way rising gas prices impact public schools and their ability to provide school buses for students, prompting one local school board to consider making students walk longer distances in order to save money on fuel costs.

According to the Washington Post story, not only have school systems' costs for fuel associated with school buses doubled in four years, but a one penny rise in gas prices costs the school system $33,000 a year.  Hence, the increased gas prices are having a real impact on school budgets, many of which are already hurting.

To respond to the problem, one local county school board considered a policy givng their superintendent the option of making students walk further in the event of a fiscal mergency.  Raising the maximum walking distances for students translates into costs savings because it means fewer buses or bus runs.  The policy was approved, but not without controversy.  As it stands, the current policy is that elementary school students are not permitted to walk more than a mile, while middle school students cannot walk farther than a mile and a half, and high school students cannot walk farther than two miles.  Parents contended that extending these walking distances raised safety concerns, especially for those students who may have to walk along busy streets.  Then too, extending these distances could mean that many students would lose their bus ride altogether.  Apparently the last time the walking distances were extended some 2,000 students lost their ride.  To be sure, at least one person pointed out that, given the nation's problem with obesity, increasing walking distances could be a good thing.  Then too, the costs savings could translate into important benefits for the schools, freeing up money to hire new teachers, for example.

In the end, however, the story is yet another demonstration of how rising gas prices translates into difficult choices.

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With gas prices hovering around $4 most places, gas users seem to be doing some silly things to save on gas.  No one enjoys paying more for gas, and unfortunately, most of us depend on a certain amount of gas each week to get to work, school, etc., regardless of our income.  But the marginal increase in gas prices seems to be disporportionate to the efforts of drivers to buy cheaper gas.  A few weeks ago in Champaign, a gas station sold gas at 20 cents cheaper for a certain amount of time.  Some cars waited in line for 30 minutes, idling in the summer heat, to buy ten gallons of cheaper gas.  And of course we know those who drive farther to get gas that is cheaper by a few cents.  The more expensive grocery store in town here has been giving fuel discounts at its branded pumps for each $50 spent there.  I have to admit, I was snookered until I realized I was paying much more for groceries to get a smaller fuel discount.

The NYT recently had an article about owners of luxury cars who are starting to by the cheaper grade of gas even though their owner manuals recommend the highest grade of gas.  I was hoping the article would say that this was OK (my owner manual tells me to buy the highest grade, and I'd like to switch, too), but the article quoted a driver of an Acura saying the savings (twenty cents a gallon) was worth the pinging in his engine.  That just doesn't seem like a good trade-off.  Doesn't the pinging mean something bad is happening?  I don't know how many gallons of gas the average driver uses a week, but is the $2-4 dollar savings worth jeopardizing a very expensive car?  And don't you picture the driver then going through the Starbucks drive-thru in his pinging car?  Surely luxury vehicle drivers can shave off $3 in expenses per week somewhere else.

Around the same time, the NYT also reported that roadside assistance crews were seeing their workload double or even triple as drivers drive too far on low tanks to avoid refueling and then run out of gas.  (I hear my Dad from 1985 telling me "It costs the same to keep it full as to keep it empty.")  Most interesting was the suspicion of some assistance organizations that some drivers were calling them just to get the free gallon of gas.  People are really thinking that calling roadside assistance, waiting on them, and perpetuating a fraud is worth $4? (And it wasn't at $3?)  Apparently one cagey driver in Dallas called the courtesy van three times in one day! 

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The event studies that I see most often track changes in stock prices given changes in other events of interest.  Are takeovers good or bad?  Let's see what happens to the stock prices of the target or acquirer upon the announcement.  And so on.

I've often thought it would be useful to get a good event study in international law - which is often thought to be ineffective.  But if stock prices jumped or fell upon the conclusion of a treaty or the announcement of an international regulatory initiative like Basel's principles yesterday or whatever, that would be evidence that international law does matter, at least to investors.

The well-known problem with this sort of thing, however, is that international legal developments are rarely surprising.  Regulations are announced, comments are sought, and then final rules are promulgated.  Treaties are ratified slowly, and what matters anyway?  The beginning of the negotiations?  The announcement of a breakthrough?  The signing ceremony?  The ratification by enough countries so that the treaty enters into force?  Ratification by the United States?  Investors will often have taken account of the impact of the regulation or treaty by the time in enters into force, making event studies of regulation (and treaties) difficult to do.

Litigation, however, is a legal event around which an event study can be constructed.  Jeffrey Lax and Matthew McCubbins did one for the FDA's tobacco regulation rules.

But even litigation can be tricky.  The WSJ Law Blog reports that Bell Canada's stock price jumped not because of a decision by the Canadian Supreme Court reviewing a decision scuttling its buyout ... but because of the oral argument on appeal.  Hope those investors are good at discerning outcomes from skeptical questions by the chief justice.

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We can all keep shorting Iceland - the country just got a pretty small bailout from other Scandanavian central banks.  But is it time to go long on Blockbuster?  The Times buried its story today on how the company just declared an increased profit, words I confess I didn't really expect to hear ever again.  They did it not by renting more DVDs, although they are doing that online now, nor by getting into other rental businesses, though it appears that Grand Theft Auto IV will be good to the company, but by ... cutting administrative costs.  If Fake Steve Jobs is right about the transient nature of these sorts of efficiencies, Blockbuster may not be posting increased profits for much longer.

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In the context of her commentary on the Federal Reserve's proposed rules to prohibit certain unfair credit card practices, Washington Post columnist Michelle Singletary referred to all credit card users as "suckers--that is, losers."  Singletary compared credit card users to gamblers in Las Vegas, and thus explained that even when you think you can "play and win," "the odds are never in your favor."  As a result, she noted that even if the proposed rules eliminate some problematic credit card practices, the issues involved with using plastic will persist.  In Singletary's view, therefore, there is simply no way to actually "win" the credit card game--hence the loser label.

Singletary's comments sparked a lot of reaction from the many credit card users unhappy with being labeled a sucker.  Potentially the biggest objectors were those who pay off their balances in full every month, sometimes accumulating "reward points" that could lead to free trips or other benefits.  These card users objected to being classified as "chumps" and lumped together with the credit card users who carried over their balances or made late payments and thus got stuck with high fees or periodic rate increases. 

But in an article today Singletary defended her characterization of all credit card users as suckers, including those who pay off their balances every month.  Indeed, she pointed out that according to several studies, credit card usage alters people's spending habits.  Thus, for example, not only do people tend to spend more money when they use a credit card instead of cash, but people also are willing to pay more for the things that they purchase.  Hence, according to Singletary, an MIT Study found that people "were willing to pay up to 100% more when they paid with a credit card instead of a check or cash."  While the notion that relying on a credit card could lead to more spending may seem a bit intuitive, one researcher pointed out that such a notion actually contradicts "standard economic theory, which argues that the method of payment should have no effect on spending."  Thus, even when you pay off your balance every month, it is likely that you spent more than you would have if you'd used cash.

Apparently, people who pay off their credit card balance every month tend to be more financially literate.  So it's little wonder that they'd resist being classified as a sucker.  People's tendency to resist the sucker label also may be reinforced by current marketing related to credit cards.  Like the commercial where long lines of people use their credit cards to the beat of cheerful and "hip" music only to be rudely disrupted by the person who dares pay by cash or check.  In the end, regardless of how one defines it, it appears that using credit cards is costly even for those who thought they were using their credit card responsibly.

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Just catching up with Diana Nyad's commentary on the NFL draft from last Thursday, and I am wondering if I have ever heard a dumber statement on Marketplace. (Despite its name, this is a program that is not immune to stupidity about markets.)

Nyad is outraged by Jake Long's new $57.5 million contract with the Miami Dolphins because it approximates the terms of Tom Brady's contract. Nyad is not criticizing the Dolphins for being bad negotiators. She is criticizing the NFL for not imposing salary caps: "Maybe a two-year rookie cap would make sense. Everyone would benefit." Really? Jake Long would benefit from a cap? How about all of the other linemen, who can use Long's new contract as a base in their next negotiation?

Kai Ryssdal asked the obvious question: "What about letting the market work. The team owners are willing to pay. Why shouldn't the players take advantage?"

Nyad: "I just think it's an unfair market value.... It creates a false market value. Tom Brady is setting the market value. Now you've got a rookie ... he's the highest paid lineman in the league and he hasn't played a down yet! It's wrong!"

Someone help me out here: what is a "false market value" in this context? Is there any information failure that would cause us to want to protect the Dolphins from their obvious mistake?

By the way, if you follow the link to the audio, you will be treated to a baffling comparison to the market for newly minted lawyers.

I wonder how much Diana Nyad is paid to be the Marketplace "Business-of-sports analyst." Whatever the amount, I smell "false market value."

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William Easterly thinks that “home grown” development solutions, attempted by local leaders through “trial and error” are the only solutions that could make the lives of the poor better. He worked at the World Bank for a long time, and clearly hated being there, because he’s against the use of the bank and the IMF resources to require governments to implement any set of reforms. That’s any. No leveraging loans to insist on free markets, lower internal trade barriers, civil society reforms, human rights, you name it. Easterly thinks that bureaucracy, because it’s a bureaucracy, can’t solve problems – even the smart development bureaucrats in Washington, and definitely the venal local bureaucrats of the developing world. I vaguely tire of this sort of overkill - are government bureaucrats really so different than corporate bureaucrats for, say, Tata, who do plenty of poverty alleviation? Are their incentives so very different? Easterly appears to buy the whole canard about turf and budget maximization, about which there is very little empirical evidence – I’ll bet just as much as there is for a division of a water utility. Still, you can listen to him go to town on development aid in this interesting podcast.

But I’m interested in the similarity between Easterly, the development aid skeptic from the right, and Dani Rodrik, the skeptic from the left. Rodrik is also a “many paths” kind of economist. He is a critic of the Washington Consensus for development. But he believes in development aid, and runs a program that fast tracks its graduates to the IMF and World Bank. Here’s a post by Rodrik on Easterly and vice versa. Is this an example of how very different ideological approaches can end up taking very similar intellectual paths?

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After Obama advisor and Chicago economist Austan Goolsbee made the news for his off-the-cuff, disputed, but quite plausible comments to a Canadian diplomat, Josh Wright over at Truth on the Market asks:

how important are economic advisers anyway? ... As a general matter, I think it is perfectly appropriate to give credit to the principal for the quality of the agents he or she is able to attract....[but] I’m significantly discounting the possibility that Goolsbee is exhibiting much of a constraining effect on Obama or that his presence should be relevant to the free trade credentials of the candidates.

Matthew Yglesias, btw, thinks that Goolsbeegate is ending up being very important, though he's focused on the politics, not on the advice.  I think that economics advisors, like most advisors, make little picture, rather than big picture differences, and mostly only after the election, when they're appointed to a job where they can make some substantive decisions that higher ups are too busy to review.  Economics advisors are, in short, mid-level bureaucrats - and it can be nice to be a mid-level bureaucrat, but it's not like you get to steer the country towards anarcho-syndicalism or anything.

At any rate, it's a good time to point you to Goolsbee's recent commencement address, where he genially tries to define the nature of economic inquiry:

We really don’t deal with the loftiest ideals of humanity. We deal with humans at their most mundane. We aren’t about narratives and inspiration or how people would behave in their finest hours. We are about how people behave in the everyday marketplace. I think we are especially hated because of the nagging fear on the part of idealists that we might be right about people. Our world view begins with a few of the following points:  First, economists typically ignore what people say and only look at what they do....Economists are perfectly comfortable in a world of choosing between the lesser of evils. In our world, everything is an evil. Nothing is perfect....Next, economists don’t take anecdotes for answers....We spend lots of time thinking about causality and indirect effects...

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Modern pyramid schemes often are quite sophisticated in hiding the ball from the participants, mainly by focusing on the mystical qualities of their exclusive products. Quest Net, on the other hand, barely makes the effort to disguise its lack of substance. Take a look at the "Opportunity Overview" page. Judging by the quality of the disclosure, the generic products distributed by Quest Net are not an important part of the opportunity.

The description of the company emphasizes the business opportunity first, and the products are clearly an afterthought:

Our Story began in 1998, with a dream to touch and change lives around the world by harnessing the power of the Internet.

From the beginning, we were committed to providing customers with an innovative business opportunity through an e-commerce platform, like none other before. Nearly a decade later, we can proudly say - We did it!

We have developed an entire range of unique, exclusive and reliable products that are retailed online around the world using our scientifically designed business plan. Our customers have enjoyed the most advanced business tools for almost a decade - simplified online enrolment, a virtual office containing powerful business tools to manage and regulate your business, secure payment options, all fully integrated on an advanced e-commerce platform.

Even as the late 90s experienced the dot com bust with the demise of various headline grabbing online businesses, we have continued to quietly make our presence felt through a stable and steady growth and an ever increasing global customer base.

We started off with a single product, a collectible numismatic coin, that went on to define an entire product range of collectible coin sets and medallions over the next few years. It was only natural to then expand into watches and jewellery that have today developed into a world class brand representing quality, exclusivity and value. With continued success and a burgeoning loyal customer base, we further expanded our product range to include vacation packages, wellness products and state of the art telecom products and services.

In the last nine years, we have grown to become one of the largest and most profitable network marketing companies in the world.

Get the picture?

Success, success, success!!!

What do you do?

Who cares?! We are great at it!

Quest Net has been banned in Sri Lanka, Iran, and Afghanistan. The story of the company in Afghanistan was recounted on Friday's Marketplace, including a protest by Quest Net investors, who shouted "Quest zindagee!" ("Quest is life!") outside of President Hamid Karzai's palace. We even get a feel good story about the Taliban: "There is one group that seems able to stop Quest. When Zaman's friends came south to recruit in Kandahar, the Taliban left a letter on their door. It said: Get out, or we'll kill you. And the 'businessmen' quickly retreated."

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Charles Handy is commenting again over on Marketplace. You may remember Handy's interesting views on markets, which we discussed here. Yesterday he offered an intriguing commentary on the optimal size of organizations:

Americans think big. This has helped make them the most powerful nation on Earth, but bigger is not always better, either for our bodies or, I suggest, for our organizations. If I were to visit a symphony orchestra and ask them about their growth plans for the future, how would they respond? They would talk about their plans to extend their repertoire and to bring their work to new audiences, not about increasing the number of violinists. The same holds true for a school or a hospital. Once they get to the appropriate size, they strive to be better not bigger.

Why should it be different for business? Why does almost every business that I know seek to grow in size, year after year, in fact, as if there were no limit? Why can't they be content with doing more with less? I ask because large organizations are not usually, or even often, nice places in which to spend the best part of our lives. Humans are most comfortable in clusters of 10 to 12, family-sized groups. Put them in armies of hundreds and thousands and they cease to be individuals, but only human resources, just numbers in jobs. Humanity too easily yields place to bureaucracy.

An executive in the project I am working on at the Drucker School in Claremont, California calls the business he created a "bonsai" organization, after those small Japanese trees. These trees need to be trimmed and reshaped, but they don't grow beyond their ordained size. So it is, he says with his organization, and if you really have to be bigger, then maybe the challenge is to create woods of bonsai trees. This way, the economies of scale and the personal ambitions of our leaders won't run up against the constraints of human nature, because if we aren't careful, organizations can become the prisons for our souls.

Notice the implicit assumption of Handy's first sentence: that organization size is culturally contingent. Is it? I suspect the folks at orgtheory.net might have some insights, but I am so accustomed to thinking about this issue through the lens of Ronald Coase's Theory of the Firm that Handy's first sentence struck me as a surprising starting point.

Handy's commentary also prompted thoughts of Louis Brandeis and his series of Harper's Weekly articles that were compiled under the title Other People's Money--and How the Bankers Use It. Brandeis was concerned about trusts, and he rails against large business organizations in expansive language. Brandeis was right to be concerned about monopolies, of course, but "woods of bonsai trees" do not occur spontaneously in nature. Indeed, Brandeis never figured out how to create a Japanese garden through regulation. The landscape of creative destruction is much messier.

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Faculty profiles are interesting and all, but they're even better when they let you to predict your marathon times as you age - and compare them to a noted Yale economist's.  Or, say, chart the decline of your chess abilities.  Or make stock price predictions based on your own macroeconomic and company-specific assumptions.

All of this is a way of saying that Ray Fair has a cool website.  He's the guy who is currently predicting that the Republicans will lose the 2008 presidential election by two percentage points, as Jack Balkin noted. (See also John Cassidy.)

Anyway, it's pretty interesting.  And you can also find out that Emily Oster, much discussed development economist, is a relative of M. Fair's.

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Marketplace launched what promises to be an interesting series of commentaries yesterday by Charles Handy, founder of the London Business School and currently visiting at Claremont Graduate University's Drucker School of Business. In the first commentary, Handy addresses "Adam Smith's Great Conundrum":

Adam Smith, the father of economics, 250 years ago, said: "An investment is by all right-minded people to be commended, because it brings comforts and necessities to the citizenry. But, if continued indefinitely, it will lead to the endless pursuit of unnecessary things."

Now that I am living for a while in California, I am staggered by the amount of "unnecessary things" that I see in the malls that dot the suburbs. America is no different from anywhere else, of course -- just more so.

The conundrum is this: All that stuff creates jobs -- making it, promoting it, selling it. It's literally the stuff of growth. What I'd love to ask Peter Drucker is: How do you grow an economy without the jobs and taxes that these unnecessary things produce?

Maybe we should blame Adam Smith, but what I'd love to ask Handy is: how do you know that those things you see in malls are "unnecessary"? What do you mean by that term, anyway? When you begin with such fuzziness, the result is predictable incoherence:

The market, unfortunately, does not differentiate between good and bad. If the people want junk, the market will provide. So we have to fall back on the conscience of our business leaders.

Notice how Handy separates "the market" from "the people." It's a strange vision of the world in which the market is dictated from the top down rather than bubbling from the bottom up. From that vantage point, it makes sense to blame business leaders for making "unnecessary things," but that clearly was not what Adam Smith had in mind. Smith was worried about the citizenry's "endless pursuit of unnecessary things," not the market forces that would service the pursuers.

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Economists love prediction markets and, perhaps not totally relatedly, are often put in charge of Latin American countries.  But political prediction markets gave Clinton an 8% chance of winning in New Hampshire and pegged the GOP's chance at holding on to the Senate in 2006 at 85% three hours after the polls had closed.  Why are they often wrong?  And why did Anil Hara claim that there's no evidence that economists lead countries successfully?

Troubling questions, I suppose.  But luckily, economists have their defenders.  Here's Cass Sunstein, a law professor, on why prediction markets actually do work (the takeaway is "sure they are sometimes wrong, but sometimes they are not") and Daniel Drezner, a political scientist, on why it is possible that economists are effective leaders (the takeaway is "correlation isn't the same thing as causation").

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I usually make New Year's Resolutions. But why? Justin Wolfers offers some possible explanations. Two of his suggestions resonated with me:

A clean slate: we rarely respect the irrelevance of sunk costs  in our behavior. The New Year is a clean slate. If my behavior is history dependent (why not eat the chocolate cake if I’m already overweight?), then the clean slate allows my behavior to escape past poor behavior.

Cheap Talk: New Year’s resolutions are simply hot air, stated at around 11:55 pm, on a night involving plenty of alcohol. They are rarely respected, and there is no way for them to be enforced. They are a ritual, but not more important than kissing a loved one 5 minutes later.

Lots of commenters over there are pooh-poohing resolutions: "I just feel if there is something I really want to do I will commit to it any time of the year." While I am sympathetic to this idea, I also know that behavioral change is costly, and I find that having temporal focal points is useful in harnessing my emotional and spiritual reserves.

This is one of the main benefits of observing the Sabbath. It is a weekly opportunity to reevaluate and start anew. So I use the Sabbath for incremental changes and less frequent milestones -- e.g., moves, New Year's Day, the start or end of a semester, birthdays -- to launch more ambitious self-remodeling projects.

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Have you seen StickK.com? If not, this story from the Yale Daily News offers a nice description of the concept:

Stickk.com, a new Web site developed by Yale economics professor Dean Karlan, law professor Ian Ayres and Jordan Goldberg ’06 SOM ’09, will allow users to create contractual commitments with family, friends and employers in order to reach personal goals such as losing weight, quitting smoking or earning better grades. Currently in the planning stages and with a launch date set shortly before 2008, the Web site harnesses the same basic concept as other user-generated, Web-based companies such as MySpace, Facebook, and YouTube.

The site allows users to create personal profiles viewable by the public or a private “support network,” members of which can comment on their progress — or lack of it, Goldberg said. He said he hopes the site will provide built-in accountability for users attempting to achieve difficult goals.

The name of the site, Goldberg said, comes from its use of the “carrot and stick” approach.

“We are trying to motivate people to accomplish personal goals by having users literally put something on the line,” Goldberg said. “We’re not simply a motivational site. We’re actually giving them the necessary tools for success.”

Those tools include a rewards program, under which users can pre-purchase items — such as a big-screen TV — through the Web site, Goldberg said. The transaction only goes through if the user accomplishes his or her goal.

A group of friends can also create a group contract in which each commits a certain amount of money to a pool. The entire pot goes to only those friends who accomplish their goals, Goldberg said.

Eric Posner questions the enforceability of the supposed "contractual commitment," but I suspect that absence of consideration is a losing argument. Customers are paying for the service, right?

Tyler Cowen is skeptical on other grounds:

I've long predicted this won't work; one group of potential customers doesn't really want to change, the other group is unwilling to give up control.  It's not exaggerating to say that human nature is on the line here, and that if I am wrong this is probably the most important idea you will ever encounter.

So is Cowen objecting to making this a business? Or is he objecting to the idea that such commitments work? As to the latter, I have had my own vicarious experience with this, and I blogged about it in 2004:

A friend of mine recently asked me for a favor. He wants to lose weight, and he has a strategy: stop drinking beer. The only problem is that he does not trust himself to follow through on his resolution when his only incentive is to lose weight. That's where I come in.

He asks if I am supporting George Bush's reelection campaign. Well, not exactly, though I certainly am not voting for Kerry. Close enough. He hands me $250 and tells me to donate that to the Bush campaign if he breaks his resolution ... and he assures me that he will be honest about that. The thought that his actions might in any way support Bush's reelection is so abhorrent to him that he is now confident of his ability to abstain from drinking beer, at least until he reaches his weight goal.

As I note in the comments, my friend reached his goal and got his cash back. Of course, this raises the issue of why one would need to go to StickK.com when private ordering is so readily available.

Based on the news story excerpted above, the response I would expect is that StickK.com harnesses the power of community. Hmm. The interesting thing about that response is that our attention has shifted from the potential loss of money to the possibility of shame. If that is the motivation, my friend could have just announced his weight-loss intentions to the entire University of Wisconsin Law School community. Alternatively, he could have started a blog and posted about how he was trying to lose weight. (Ahem.)

Which brings me back to comment on the business model. Why would anyone need the product that StickK.com is selling?

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Robert Frank has an interesting column in the WSJ today, reporting a survey by Prince & Associates, a Connecticut-based wealth-research firm, on the price of marriage. Here are the results:

The survey polled 1,134 people nationwide with incomes ranging between $30,000 to $60,000 (squarely in the median range for nationwide incomes). The survey asked: "How willing are you to marry an average-looking person that you liked, if they had money?"

Fully two-thirds of women and half of the men said they were "very" or "extremely" willing to marry for money. The answers varied by age: Women in their 30s were the most likely to say they would marry for money (74%) while men in their 20s were the least likely (41%).

... In the Prince & Associates study, 61% of men in their 40s said they would marry for money....

The matrimonial price tag varies by gender and age. Asked how much a potential spouse would need to have to be money-marriage material, women in their 20s said $2.5 million. The going rate fell to $1.1 million for women in their 30s, and rose again to $2.2 million for women in their 40s....

Men have cheaper requirements. In the Prince survey, their asking price overall was $1.2 million, with men in their 20s asking $1 million and men in their 40s asking $1.4 million.

Frank calls the price tag "surprisingly low, given the new landscape of wealth." He continues, "While $1 million or $2 million may sound like a lot to people making $30,000, it's hardly enough to transform someone's life or make them 'rich' by contemporary billionaire standards."

Hardly enough to transform someone's life!

Apparently, it's been a long, long time since Robert Frank knew anyone who was making $30,000/year.

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Although I am usually reluctant to give gift c