Minggu, 30 Desember 2012

The labor incentive effects of raising income taxes--a personal view

I like the stuff I buy.  If you raise my taxes, I will probably consult a little more so I can keep buying that stuff. This is the income effect being more important than the substitution effect.  I know that it is for me, and I am pretty sure it is for lots of others, as well.


"We are all in it together," and benefits taxes.

Tyler Cowen says that the Republican Party should propose raising taxes on everyone because, "we are all in it together."

To some extent, this is a benefits tax view--a view that we should pay to society our fair share of what we get from society.  But the implication of this is not necessarily that everyone should sacrifice in order to put us all on a sustainable fiscal path.

With Ronald Reagan's election in 1980, the US saw a sea change in tax and regulatory policy.  While the policy was suppose to benefit everyone, it clearly hasn't.  For the bottom quintile of the income distribution, income has risen about 5 percent since 1982 (the first year in which Reagan's policies bit); for the next quintile, it has risen 8 percent; for the next, 11 percent, for the next, 20 percent, and for the highest, 45 percent.  But most of the highest quintile didn't do so well--the top 5 percent has seen average household income rise by 68 percent.

These data are before tax, and come from the US Census, Table H-3.  Before anyone suggests that this means that everyone has benefited, I should point out that average income in the lowest quintile of the income distribution is $11,239, which is right at the Federal Poverty Level for a single person household.  In a benefits tax view of the world, people who haven't sufficient income to live should not be taxed (they are living at subsistence levels as it is, and taxing them makes thing worse).

So let's begin by holding the bottom quintile harmless in doing any kind of deficit reduction.  But what of the remaining quintiles?  If we look at the share of income growth by quintile (excluding the meager income growth of the bottom quintile), we find that 3 percent went to the second quintile from the bottom; 7 percent to the next; 18 percent to the next, and 73 percent to the top quintile.  So little has gone to the second and third quintile from the bottom that one could make a case that they should be left along as well.

The fourth quintile, though, has seen a material improvement in incomes, so it is probably OK to ask this group for something--this includes people who nearly everyone would consider middle class.  Nevertheless, the lion's share of the benefits of the policy changes of the early 1980s has appeared to go to the top quintile, and so the top quntile should pay the most to put us on a sustainable fiscal path.

One last calculation--the top 5 percent got 57 percent of the income growth within its quintile.

It is true that households move in and out of quintiles, but as Dalton Conley shows, not as much as we would like to think,  In any event, we have not been all in it together when it has come to benefitting from the policies of the past 30 years.






Sabtu, 29 Desember 2012

When Indian companies turn acquirers, is wealth created for shareholders of the acquiring firms?

A Sandeep
A. Sandeep, Group Editorial Director, Business & Economy, presents a quantitative study on acquisitions by Indian companies involving both Indian and Foreign targets. Do such acquisitions destroy value (as has been commonly reported by scholars and researchers in the past)? And do market sentiments alone influence the change in market value of buyers, thereby negating the effect of the very acquisitions?

Globally, the outcomes of mergers and acquisitions (M&As) have been analysed at length. However in the Indian context, due to factors such as lack of data availability in the public domain, lack of transparency in deals et al, such studies have been rare. More so, studies discussing the outcomes of acquisitions by Indian companies alone have been the rarest. We developed a methodology to collect and analyse data on acquisitions by Indian companies. We had two scenarios: (a) Indian companies buying Indian targets (referred hereon to as India-India); and (b) Indian companies buying Foreign targets (referred hereon to as India-Foreign). The performance of each acquirer on a certain parameter (market capitalisation) was tracked down and mapped during the pre and post-deal periods. Our final conclusions were arrived at by studying 167 deals involving Indian firms as acquirers. We focused on the importance of using m-cap as a performance indicator. Critically, checks were introduced on whether statistical significance differences exists between the changes in m-cap of acquirers and changes in the standard index (BSE Sensex) under various control environments (like Sensex and non-Sensex acquirers, various time windows et al).

The results we observed turned out to be quite opposite of what studies on acquisition globally have stated – that acquisitions erode wealth for the acquirers’ shareholders. The mirage of synergy playing a role in destroying hopes of acquirers’ shareholders to gain wealth have been identified and proven by a number of academic scholars, consultants and research firms. Most of them use changes in financial metrics (like market capitalisation) to arrive at a conclusion. In the NBER Working Paper titled, ‘Do Shareholders of acquiring firms gain from acquisitions? (2003)’, scholars Sara B. Moeller (Cox School of Business, Southern Methodist University), Frederik P. Schlingemann (Katz Graduate School of Business, University of Pittsburgh) and RenĂ© M. Stulz (Fisher College of Business, Ohio State University), state, “We examine a sample of 12,023 acquisitions by public firms from 1980 to 2001. Shareholders of these firms lost a total of $218 billion when acquisitions were announced. Though shareholders lose throughout our sample period, losses associated with acquisition announcements after 1997 are dramatic.” In another study for The ESRC Centre for Business Research, University of Cambridge, titled, ‘Do takeovers create value? (2002)’, researchers Magnus Bild, Mikael Runsten (Stockholm School of Economics) and Paul Guest and Andy Gosh (Centre for Business Research, Cambridge University Judge Institute of Management), report that, “on average, acquisitions destroy roughly 30% of the acquirer’s pre-acquisition value.” According to James Heskett, Baker Foundation Professor, Emeritus, at Harvard Business School, “Acquirers often end up bargaining for a seat on the loser’s bench.” In his paper titled, ‘Should We Brace Ourselves for Another Era of M&A Value Destruction? (2004)’, he sums up thus, “Research tells us that the short-term value in an acquisition accrues primarily to shareholders of acquired companies. On the other hand, short-term value is more often destroyed than created for shareholders of acquiring organisations. As many as two-thirds of all acquirers fail to achieve the benefits planned at the outset of an acquisition. In the end, M&A is about buying more volume. It is a flawed process, invented by brokers, lawyers, and super-sized, ego-based CEOs. Acquisitions are a macho exercise, not an intellectual one. Think World Wrestling Federation, not a chess tournament.”

In our study, we conclude that acquisitions – whether it be India-India or India-Foreign – create significant value for the acquirers’ shareholders. This brings us to the surprising conclusion that for CEOs of Indian companies, inorganic growth strategy is value-creating.

Also, we tested the influence of the general market movements on the m-cap movement of the acquiring companies in question. Under many-a-situation, T-tests results convinced us to reject our null hypothesis (Ho --> md = 0, where md is the difference between the statistical means of the two samples under consideration. In other words, the null is that there is no statistically significant difference between shareholder wealth change and Index change).

The need for the study was considered more urgent because of the increasing M&A activity in India and the resulting rising exposure of Indian acquirers to M&A activity. In 2000, M&A activity in India stood at $5.4 billion. This rose to $16.3 billion in 2005 ($20.30 billion in 2006, $51.11 billion in 2007, $30.90 billion in 2008, $60.7 billion in 2010) and a higher $34.4 billion in w2011. More critically, outbound M&A deals have also risen over the years. Between 1992 and 2001, Indian companies invested up to $4.97 billion in cross-border M&As (UNCTAD, 2002). This rose to $9.47 billion in 2005 alone and to a higher $31.53 billion in 2010 (though the value fell to $8.81 billion in 2011; source: Grant Thornton and Ernst & Young reports).

This paper is therefore an attempt to filling some present gaps in what has been studied, documented and analysed so far in the discipline of acquisitions in India.

Methodology

We adopted a systematic approach to the study. Based on past scholarly researches on the subject, the following decisions were taken at the start: 1. Decision on time windows (t-2, t-1, t, t+1 & t+2); 2. Decision on collection of samples (India-India deals and India-foreign deals); 3. Decision on using significance tests.

To collect data, we used databases including Thomson Reuters M&A records and Grant Thornton’s M&A Dealtracker. Only those deals that fell under the category of “acquisitions” were selected (to avoid diluting the focus/object under study by taking a combine of mergers and acquisitions). The deals under study also strictly involved acquirers that remained publicly listed during the post-deal event windows taken.

The outcome of the deals on the acquirers’ shareholders were studied in the following time windows: 1 year (t to t+1; t being date of deal announcement, and t+1 being one year from the date of deal completion), 2 years (t-1 to t+1 and t to t+2; t being date of deal announcement, t+1 being one year from the date of deal completion, t-1 being one year prior to the date of deal completion; and t+2 being two years from the date of deal completion); and 4 years (t-2 to t+2; t-2 being two years prior to the date of deal completion; and t+2 being two years from the date of deal completion).

In order to understand the outcome, we went with the most widely-held view that since the CEO is the public representation of the company, his performance is displayed in the company’s stock performance, and whatever deal-making happens, should be in the interest of maximising shareholder wealth. Therefore all changes in post-deal performance should be reflected in the company’s market capitalisation, a view also adopted by G. Wan Ng (2007), Martin Sikora, Wharton School of Business (2005), Holthausen (2005), Mauboussin (2010), Moeller, Schlingemann and Stulz (2003), and many more scholars in their respective works.

To test for significant differences between means of two sets of samples, we conducted T-tests in order to verify whether it was actually the general rise/fall of market trading sentiments that contributed to the rise/fall in the shareholder wealth of the acquirers [a practice adopted by researchers like Moeller, Schlingemann, Stulz (2003), Maditinos, Theriou, Demetriades (2009), Gersdorff, Bacon (2008), and others]. We took a precision ceiling of 95% in the process (the alternative is two-tailed and represents a 95% Confidence Interval, C.I.). The assumptions underlying this paired sampled t-test are: 1. Observations collected are independent of each other; 2. The data points are normally distributed in the population; and 3. The null hypothesis follows the strict form of “neutral/control” hypotheses used in statistical studies, and corresponds to a general or default position.

There is a spike in deal making during times when markets experience a boom (Mauboussin, 2010). Our intent was to include “normal economic” circumstances. The choice of sample collection years was therefore taken between 2001 and 2006. The reason being that first, it gives us a reflection of a large number of “normal, recent business” years to collect samples from. Second, it takes care of the exclusion of the effect of post-bubble in the Information Technology sector and the pre-bubble period and slowdown in the Indian economy – which can be understood by the very fact that M&A activity in India rose abnormally from $20.30 billion in 2006 to $51.11 billion in 2007, and then fell to $30.90 billion in 2008 before plunging to $16 billion in 2009 – the year slowdown struck the global economy – thereby giving us “normal business years” as time range to collect data from.

Findings and Observations

1. Market capitalisation change test Our findings of the tests that give a measure of shareholder wealth change in the case of India-India deals are shown in Table 2, and those for India-Foreign deals are shown in Table 3.We find that shareholder wealth is created when Indian companies turn acquirers, irrespective of whether the targets are foreign or Indian companies. Our analysis reveals that in the case of both India-India and India-Foreign acquisition samples, m-cap of acquirers rise, thereby going against observations made globally. In the case of India-India deals, the sample of 76 acquisitions create value under all four event windows: t-2 to t+2, t-1 to t+1, t to t+1 and t to t+2. There is more shareholder wealth created during the first year post-merger (t to t+1) as compared to two years post merger (t to t+2). Maximum wealth is created during the largest event window of four years, t-2 to t+2. Deal size-wise findings are quite similar. In Level 1 (value < $10 million), Level 2 ($10 million = value < $50 million) and Level 3 deals (value > $50 million), the highest appreciation for the acquirers’ shareholders are noted for the event window t-2 to t+2. This event window also corresponds to the highest average (per buyer) increase in shareholder wealth created by acquirers. Interestingly, the effect of the acquisition is also found to be higher in the first year post-deal, as compared to two years post-deal.

In the case of India-Foreign deals, the sample of 91 acquisitions create value under all four event windows. In Level 1 (value < $50 million), Level 2 ($50 million = value < $250 million) and Level 3 deals (value > $250 million), the highest appreciation for the acquirers’ shareholders are noted for the event window t-2 to t+2. The favourable effect of the acquisition is found to rise as a function of time over the two years following the deal, with rise in m-cap of acquirers being higher in the t to t+2 period when compared to the t to t+1 time frame. 2. Significance testsAfter measuring changes in shareholder wealth, we proceed to check whether the acquisitions might actually have ‘any’ role to play in the changes in m-cap of acquirers..

For four different event windows, we checked for the significance in difference between the sample means of two given samples:
(1) The change in market capitalisation of acquirers during a certain event window (t-2 to t+2, t-1 to t+1, t to t+1 and t to t+2); and
(2) The corresponding change in Sensex during the same event window considered in (1) above.

T-test on India-India deals

The Sig value (p) turns out to be less than a (0,05) in all the four event windows therefore we reject the null hypothesis. Also, the critical value of t arrived at does not fall between the critical range (tc). Therefore, we reject the Null in favour of the Alternate hypothesis. We conclude that there exists a significant difference between the means of the change in the two variables. Therefore, the change in m-cap is influenced by factors other than the change in Sensex, and one of the possible influencers could be the acquisition of a target.

In order to understand whether the inclusion of Sensex companies in the buyer group in the India-India analysis influenced our Significance test results, we divided the buyer group into two segments, depending on their inclusion in the Sensex during the announcement of acquisition.

Acquirers belonging to Sensex: Only in one time window (t-2 to t+2) was the null rejected. Therefore in a majority (75%) of event windows, it was proven that there exists no significant difference between movement of the Sensex and acquiring companies. The results turned out as expected.

Acquirers NOT belonging to Sensex: Null is rejected in all time windows. We conclude that in all four windows, there exists a significant difference between the means of the change in the two variables. Therefore, the change in m-cap is influenced by factors other than the change in Sensex, and one of the possible influencers could be the acquisition of a target.

T-test on India-Foreign deals

The Null is rejected in two (relatively shorter) event windows: t to t+1 and t-1 to t+1. We conclude that in these above stated intervals, the change in m-cap of acquirers is influenced by factors other than general market movement/sentiment, and therefore the very acquisition could be an influencer.

Acquirers belonging to Sensex: Only in one time window (t to t+1) was the null rejected. Therefore in a majority (75%) of event windows, it was proven that there exists no significant difference between movement of the Sensex and acquiring companies.

Acquirers NOT belonging to Sensex: Null is rejected in a majority of time windows (75%; except in t-1 to t+1 event window). We conclude that in a majority of these event windows, the acquisition could have caused the change in m-cap of acquirers.

Jumat, 28 Desember 2012

THE MAN WHO NEVER LOST HIS VIRGINITY!

RICHARD BRANSON IS WIDELY RECOGNISED AS AN INSTITUTION IN HIMSELF ON THE SUBJECT OF ENTREPRENEURSHIP. AND AFTER INCUBATING NEARLY 400 VENTURES IN JUST OVER FOUR DECADES, THIS MAVERICK SERIAL ENTREPRENEUR JUST REFUSES TO GIVE UP

I think entrepreneurship is our natural state – a big adult word that probably boils down to something that’s much more obvious like playfulness.
Sir Richard Branson
Founder, Virgin Group

Entrepreneurial zeal can be fuelled by several innate desires. It could be about value creation, a love for a particular industry, a passion for contributing to society, testing your ‘personally defined’ limitations or even about building a name you can leave behind when you are gone. When we are talking about Virgin Group Founder Richard Branson, the above quote perhaps summarises his main driving passion best. His secret, at the cost of sounding overtly simplistic, is that he is an entrepreneur who loves entrepreneurship itself!

When my office caught up finally with him, to question him on his definition of what makes a cult entrepreneur, we had to also keep in mind that this was a man who had regularly written for 4Ps B&M for a long time preaching exactly that. Entrepreneurship is an affair that, for Branson, began even before he started the Student magazine at the age of 16, because he had already dabbled unsuccessfully with selling budgerigars and Christmas trees by then. From its inception in 1970 to today, the group operates nearly 400 businesses across mobile telephony, travel, financial services, leisure, music, holidays and health & wellness; with total revenues at around $21 billion in 2011. This means that the Virgin group has incubated nearly 10 ventures every year on an average!

Yet, you would not find Branson anywhere among the top echelons of the world’s richest. As per the Forbes’ Billionaires’ rankings for this year, Richard Branson’s net worth was estimated at around $4.2 billion in March 2012, and he was ranked #255 in the overall rankings. The same goes for their flagship company Virgin Media, which posted annual revenues of $6.1 billion in 2011. It was ranked #359 in the Fortune 500 list for 2010, dropped further to #374 in 2011 and dropped out of the list in 2012 altogether. But if you are mustering up a list of the world’s most iconic CEOs, I am willing to bet that Richard Branson will figure in the top ten in terms of recall. This is just one of the several inherent contradictions that have gone on to define both the man and the multi-billion dollar business empire that he runs.

Is being outrageous a great branding ploy? If CEOs want to give it a shot, Branson is certainly the global benchmark, by all yardsticks. His publicity stunts are legendary; be it appearing for the Virgin Atlantic launch in pilot’s uniform, coming out in a bride’s dress with make up for the Virgin Brides venture, driving a tank up Fifth Avenue and destroying the Coca Cola sign at Times Square or jumping off the Palm’s Hotel Casino to celebrate the launch of the first Virgin American flight. His hot air balloon flights across the world are celebrated in aviation (and business) history. “Virgin Atlantic Flyer” happens to be the largest hot air balloon ever to take flight and it also broke a new record by being the fastest to traverse the Atlantic. When he came to Mumbai this year, he was quite a spectacle in traditional Indian dress on top of the common yellow & black Mumbai taxi. Branson has embraced the unconventional several times and often at great risk. The Sex Pistols is a remarkable case in point. The punk band had come up with a politically incorrect version of “God save the Queen” in the 1970s and faced a great deal of censure, with even their recording company A&M giving up on them. At that time, who else would dare to sign them up but Virgin Records? Not just that, Virgin, along with the band’s manager Malcolm McLaren, hit upon a novel idea to make the band play their anti-establishment number while on a ride across the river Thames and opposite the British parliament! Branson has often rubbed British Airways officials (the airline whose monopoly Branson sought to break when he launched Virgin Atlantic) on the wrong end. Off late, British Airways CEO Willie Walsh claimed that Branson is about to give up control of Virgin Atlantic, which posted a revenues of £2.74 billion and an operating loss of £80.2 million in the financial year ending February 2012. In response, Branson has publicly challenged Walsh and BA. He claims that if Virgin Atlantic closes down within five years, he will pay £1 million to BA staff, and BA must do the same for his staff if the airline survives (Walsh countered with a ‘knee in the groin’ wager).

Branson has a distinct preference for industries where Virgin can potentially disrupt the status quo. Conversely, he defies the concept of core competence in branding and says that Virgin is a ‘way of life’ brand, which he has deployed across businesses. Indeed, the man’s voracious appetite for risk (he is planning, quite seriously to take thousands of people into space as well as to the bottom of the ocean in the near future) and for overstretching himself in the public domain has contributed a great deal to what he is today. But there are other key aspects to the Branson magic. Arguably, the foremost among them is his managerial philosophy that puts employees first and customers second. Branson firmly believes that if employees are kept happy, they will, in turn, do what’s best for the business and its customers. In his interaction with my team, he described the key qualities of a successful entrepreneur, “Every entrepreneur should possess qualities of positive attitude in terms of understanding and solving employees’ problems, meeting their evolving needs on the professional front by communicating with them very often, being very transparent in terms of explaining the company’s new ideas of business strategies & policies, and seeking their opinion and telling them what is expected from them professionally to gain a competitive edge.”


There is the obvious catch when you are so dangerously prone to living on the edge. The competition with British Airways was a serious drain on Virgin Atlantic’s finances. Richard Branson had to sell off Virgin Records, one of his most cherished ventures; for $1 billion to Thorn EMI, so that the proceeds could be invested in Virgin Atlantic. Perhaps the greatest debacle has been Virgin Cola, which was slated to compete with the likes of Coca Cola and Pepsi. The same was the fate of Virgin Clothes, and a lot of other businesses like Virgin Wine, Virgin Money, Virgin Vision, Virgin Vodka, Virgin Vie, Virgin Jeans and Virgin Brides failed to live up to expectations. He will also be exiting the railway business in UK by the end of 2012. Amidst these failures, Branson has defiantly stuck to his core philosophy with any new venture, which is, “S**w it! Just do it!” One of his key role models was a guy who failed (Freddie Laker, who was unable to dislodge British Airways with his low cost transatlantic airline). That says a lot.

However, he also believes that risks should be calculated ones and one must take care of the downside. For instance, when he started Virgin Atlantic, he bought a second hand plane from Boeing and kept the option of returning it if the business did not succeed. This way, he would only lose around six months of Virgin Records profits. He comments to my team on risk taking, “An entrepreneur is expected to keep tabs on the daily occurrences and changes in the industry where he functions. This is, so that it allows him to minimize risks involved in a future course of action, make higher profits than otherwise and make his company a tough competitor to beat.” Also, the group businesses are managed so that even if any business fails, it does not affect the others severely.

Ultimately, like all truly successful entrepreneurs, Branson believes that a line has to be drawn on wealth creation and the ultimate aim is to give back. On Mallya’s continuing problems, he recently told a leading Indian TV channel that rather than being criticised, Mallya should be credited for all the efforts he is making to rescue the airline and that perhaps he (Mallya) was ahead of his time in the Indian market. But most notably, Branson pointed out that flamboyance might be one thing that Mallya would regret. He feels that entrepreneurs must earn respect for what they do for society and not necessarily for their material possessions. In fact, a major portion of Branson’s time and energy goes into philanthropic ventures. He is a trustee at a number of foundations and he decided to pool the energies of Virgin’s charitable foundations globally in 2004 towards the Virgin Unite initiative, which is aimed at tackling global problems like AIDS, TB and Malaria. He has also been active in global policy circles on the war against drugs, which he feels should focus on rehabilitation rather than prohibition.

Be it with adventure trips in a hot air balloon, investments in space travel or anti-AIDS programmes in South Africa, Branson’s life personifies one over arching message. A true entrepreneur should always be ready and willing to take up new & challenging ventures and move beyond his comfort zone to create circumstances to be able to take it up successfully (and manage the downside risk). And once you find a person who is more capable than you to take the business ahead, you should drop it like a hot potato and move on to the next exciting business prospect demanding your attention.

Jumat, 21 Desember 2012

California leads

From California's Legislative Analyst's Office:

The 18th annual edition of the LAO's Fiscal Outlook--a forecast of the state's budget condition over the next five years--shows that California's budget situation has improved sharply. The state's economic recovery, prior budget cuts, and the additional, temporary taxes provided by Proposition 30 have combined to bring California to a promising moment: the possible end of a decade of acute state budget challenges. Our economic and budgetary forecast indicates that California's leaders face a dramatically smaller budget problem in 2013-14 compared to recent years. Furthermore, assuming steady economic growth and restraint in augmenting current program funding levels, there is a strong possibility of multibillion-dollar operating surpluses within a few years.
The voters of California raised taxes on themselves. Most of the revenue will come from income taxes on the top 3 percent of the income distribution; there is also a small hike in the sales tax.

Will Google, Apple, Intel, Disney, etc. run away because of this?  I rather doubt it.  And comparisons to Greece now look particularly ridiculous.



Rabu, 19 Desember 2012

John Griffith on why Gretchen Morgenson should not trust Edward Pinto

He writes in American Banker:


The onslaught began last month after the agency released a sobering financial report, then accelerated last week when the New York Times reported on an alleged "pattern of risky lending" in the agency's mortgage insurance program.
The Times piece, penned by columnist Gretchen Morgenson, relays the findings of a controversial new report from Edward Pinto of the conservative American Enterprise Institute. Pinto's study takes on an important issue—the performance of FHA-insured home loans—but draws conclusions based on ideology rather than a cold appraisal of the facts. By relying entirely on one man's misleading data and unfounded opinions, Morgenson has done a grave disservice to a critical federal program.

The report in question argues that the FHA is "financing failure" for working-class families by peddling high-risk loans to unworthy borrowers, based on an analysis of loans insured in 2009 and 2010. Pinto concludes that the agency's basic business model—insuring long-term, low-down-payment loans to borrowers with less-than-perfect credit—puts homeowners at an unacceptably high risk of default with negative consequences for communities.
Nothing could be further from the truth....

.... Pinto focuses on the cost of foreclosure without considering the FHA's contribution to these neighborhoods since the crisis began. If FHA insurance weren't available under reasonable terms, it would have been much more difficult for low- and moderate-income families to get mortgage credit since the crisis began. As a result, home prices would have declined precipitously beyond already-depressed levels – by as much as 25%,according to one estimate from Moody’s Analytics – leading to far more foreclosures on all homes, not to mention additional job loss, lost household wealth and a far deeper or more prolonged recession.

That counter-cyclical support is a key part of the agency's mission, and it understandably comes with some costs. If the foreclosure crisis were a fire, Pinto would be blaming the firefighters for getting the house wet.
In the coming months, we hope there is a serious debate about the FHA's role in the housing market and the overall role of the government in housing finance. That will require us to sort facts from partisan nonsense, and here's hoping this report doesn't make the cut.




Selasa, 18 Desember 2012

Matthew Yglesias says weather doesn't matter

I just caught up with his Valentine to Minneapolis:

People appear to be deterred from moving to Minneapolis on the grounds that it's very cold, but David Schkade and Daniel Kahneman have found that people's thinking about weather and happiness is dominated by "focusing illusion" in which "easily observed and distinctive differences between locations are given more weight in such judgments than they will have in reality." They specifically looked at the weather gap between California and the Midwest and found that while Midwesterners thought the good weather in California would make a huge difference in people's lives, it doesn't in reality.
OK, maybe I am idiosyncratic.  But as a person who lived most of his life in Wisconsin (not as cold as Minnesota), and who now lives in California, I can tell you the three reasons I will most likely never leave this place:

(1) My wife does cool and useful things here.
(2) I like the people I work with very much.
(3) Weather.





George Bittlingmayer on Buffet v Asness

From comments:

Under this theory, if gross-of-tax discount rates are 10% and an investment promises $10 per year, I'll plunk down $100 for it if tax rates are zero, and $100 if tax rates are 50% and I get only $5 per year. "To be tested." Recall also, if tax rates are on nominal returns, with even moderate inflation, the tax falls on what is a compensation for inflation. The effect of higher taxes seems like an empirical question, with all due respect to both Buffett & Asness, and Richard.

I agree, it is testable.  One thing that makes testing tough, though, is trying to figure out how the market discount rate change as a result of tax policy.  IN any event my principal criticism of Asness is that if you are going to change the numerator, you also need to change the denominator.



Senin, 17 Desember 2012

Hannah Green in Think Progress on trash

She writes:


In India, there is a thriving market for trash. People make lives for themselves collecting it, sorting it, buying it, selling it: making it useful once again.
While the community of trash workers occasionally gets attention from the American media, the focus often revolves around the initial realization that people can earn a living from garbage piles, and what this says about poverty levels.
Katherine Boo’s recent book related to the subject, Behind the Beautiful Forevers, went deeper, exploring the mechanisms of entrepreneurship and exploitation in India. However, there is also a more positive side to this story that often goes uncommented on. An efficient recycling system has a long-term positive effect on society as a whole, and is also something that North America and Europe generally lack. That is a significant part of what the trash economy in India is- an informal recycling system.

Who is right: Clifford Asness or Warren Buffet?

In a Wall Street Journal piece this morning, a man named Clifford Asness says that Warren Buffet is wrong when he says the impact of taxes on investment decisions is very small.  His argument:


Consider how every business-school student, investment banker and investment analyst on Earth has been taught to choose whether to invest in a specific project or company. You make a spreadsheet (a napkin will do sometimes). You put in your best guess of the future cash flows, and you discount those cash flows back to the present at some required rate of return you believe reflects the risk entailed. Of course, opinions about the future cash flows and the proper discount rate can vary widely, but the essential methodology is ubiquitous.
Now here's the kicker: Nobody who pays taxes and has ever done this exercise has failed (while sober) to use after-tax cash flows in this calculation. Somewhere in the spreadsheet there is a number, say 20%, or 28%, or a Gallic 75%, representing the taxes you'll pay on the assumed cash flow—and you only count the amount you'll get after paying this tax. If you turn the tax rate up high enough, projects or companies that looked like good investments become much less attractive and vice versa.


Here is the problem with this argument--it focuses on the numerator of the discounted cash flow calculation, but not the denominator.  The denominator contains the discount rate, which is the opportunity cost of capital.  One can do an analysis based on before tax cash flows, in which case the denominator is the before tax OCC.  The formula for before tax cash flow valuation is



Where CF is cash flow subscripted by time t,  r is the discount rate, and E is the expectations operator.

But if one is going to take taxes out of the denominator, he must also take it out of the numerator.  This means the ATDCF formula needs to be



The greek letter Ï„ is the marginal income tax rate.  If we examine this formula, we see that for small t, value does in fact decline with an increase in taxes.  But now let us approximate a long term investment by looking at the perpetual annuity formula--one that has a constant cash flow for infinite t.

Now the formula for before tax valuation becomes:




Analogously, the formula for after tax valuation becomes:


Of course, the (1-Ï„) divides through, so the after tax and before tax values are the same.

But here is where I will add a kicker of my own: if it is really true that fiscal issues as creating uncertainty, resolving those issues should reduce the discount rate, and thus encourage investment.  People such as Mr. Asness should welcome greater certainty, and the investment opportunities it will doubtless induce.

Jumat, 30 November 2012

Hannah Green in Thinkprogress on Renewable Energy in India

She writes:


This August, power shortages in India that left 300 million in the dark made it very clear that one of the world’s fastest growing economies was facing an energy crisis. Less clear is how realistically to solve it. Many firms are looking for new sources of oil to fulfill India’s growing energy demands, but this could prove to be painfully expensive.  On the brighter side, solar energy and other renewable resources are already being rapidly harnessed in the non-Western world, and they are becoming cheaper and cheaper.
As of June 2012, 31 percent of India’s energy came from renewable resources, including hydroelectric power, while only 9 percent of the United States’ did as of the end of 2011. In a 2009 McKinsey & Company survey, India was rated the top producer of solar energy in the world, just above the United States, with an annual yield of 1,700 to 1,900 kilowatt hours per kilowatt peak (kWh/KWp). However, demand for energy in India will only continue to grow, and the question is whether energy will continue to come mainly from fossil fuels or from renewable energy sources...

Minggu, 25 November 2012

The housing cycle is the business cycle--again

Ed Leamer said so.  I said so.  And I continue to think it so.

Run a simple bi-directional Granger Causality model of change in residential investment and GDP.  It turns out a model with one and three lags best fits the data going back to 1969.  That model's four quarter forecast for GDP growth is 2.6, 2.5, 2.1 and 2.5 percent; for residential investment growth is 6.2, 5.0, 4.9 and 4.9 percent.  (BTW, the model passes the stationarity test).

But residential investment has grown by between 8.5 and 20 percent over the past four quarters.  Let's say that an exogenous shock (kids moving out of their parents' houses) leads residential investment to grow by 10 percent.  The forecast for GDP growth now increases to 2.6, 2.9, 2.6 and 2.9, or about .4 percentage points higher than the baseline case.  This increase in GDP reflects more than the direct impact of residential investment on GDP.

What is Apple's objective function?

Walter Isaacson's biography of Steve Jobs is a lot of fun--at least in part because it is not a hagiography.

One of the most striking things about the book is that Jobs never pushed profit maximization per se--he pushed "great products."  When John Scully pushed out Jobs and ran the company, he did push profit maximization--and Apple nearly went out of business.  Re-enter Jobs with his products-first philosophy, and Apple eventually becomes the most valuable company in history.

When economists model firms, we inevitably assume profit maximization, and then allow firms to compete either through price or quality.  The exception to this is a principal-agent set-up, where managers are seeking to maximize their own compensation.  But this doesn't really work for Apple, where Jobs was both a principal and an agent.

Maybe none of this matters--that making great products is a sufficiently strong proxy for profit maximization.  But Job's desire to make great products led him to care a lot less about cost minimization than, say, Dell--the chapter on how fanatical Jobs was about the plastic case molding for the original Macintosh underscores how Jobs tended not to think about marginal revenue and marginal cost when making decisions.

Rabu, 21 November 2012

It turns out Harry Hopkins didn't say it

After Mitt Romney's "gifts" comments, I couldn't help but remember that I thought FDR advisor and WPA director Harry Hopkins said "we shall tax and tax, and spend and spend, and elect and elect."  But it turns out this is likely apocryphal--indeed, Hopkins denied having said any such thing.

Here is a nice chronology from Bartleby:

AUTHOR:Harry Lloyd Hopkins (1890–1946)
QUOTATION:We shall tax and tax, and spend and spend, and elect and elect.
ATTRIBUTION:Attributed to HARRY L. HOPKINS, administrator of the Works Progress Administration.

  Although Frank R. Kent mentioned the subject of “spending, taxes, and election” in reference to Hopkins in his column, “The Great Game of Politics” (Baltimore, Maryland, Sun, September 25, 1938, pp. 1, 16) he first attributed “we are going to spend and spend and spend, and tax and tax and tax, and elect and elect and elect” to Hopkins in the Sun, October 14, 1938, p. 15.

  Joseph Alsop and Robert Kintner in their column, “The Capital Parade” (Washington, D.C., Evening Star, November 9, 1938, p. A–11), elaborated Hopkins’s “probably apocryphal” words to: “Now, get this through your head. We’re going to spend and spend and spend, and tax and tax and tax, and re-elect and re-elect and re-elect, until you’re dead or forgotten.”

  Arthur Krock, in his column, “In the Nation” (The New York Times,November 10, 1938, p. 26), reported the wording as “we will spend and spend, and tax and tax, and elect and elect.” He also repeated this wording in an article in The New York Times, November 13, 1938, sec. 4, p. E–3. A letter by Hopkins denying this attributed quotation and a response by Krock were published in The New York Times, November 24, 1938, p. 26.

  Over the years the quotation attributed to Hopkins has evolved into the wording above.

Selasa, 13 November 2012

The myth that taxes are too complicated for the typical American

I was listening to David Walker on the radio this morning, and he was going on about how tax preparation is too complicated for the vast majority of Americans.  This didn't seem right to me, so I went to the IRS SOI data Table 1.2 to see how many American's qualified for the 1040A return (a two-page form) or the 1040EZ return (a one page form).

The answer: of the 140 million tax returns filed in 2009, 90 million were filed by taxpayers that had adjusted gross income of less than $100,000 and that used the standard deduction.  These taxpayers qualify for using the 1040A or1040EZ.  So for more than 3/5 of US taxpayers, filing is not complicated at all.

Is the tax code too complicated for the other 50 million and for corporations?  Almost certainly.  But it is not a problem that afflicts the "vast majority" of Americans.

[update: according to this source, 32 percent of filers use 1040A or 1040EZ]



Minggu, 11 November 2012

Coastlines and votes

President Obama did better on the coasts and the Great Lakes states than elsewhere.  I thought it would be fun to plot coastline/shoreline miles by state against Obama vote percentage in 2012.  Here is what I got:


The data on coastline/shoreline come from http://www.michigan.gov/deq/0,4561,7-135-3313_3677-15959--,00.html and The Statistical Abstract of the United States, Table 364.  Vote totals come from Dave Leip's Atlas of Presidential Elections.  The correlation is .22, so not huge, but not nothing either.

If one adds Alaska, with its 6000+ miles of coastline and support of Romney, the correlation goes to zero.


Who is doing the shopping?

I was listening to a retailer last week discuss the interaction between housewives and grocery stores.  The tone of his remarks suggested that he thought housewives were grocery stores' principal customers.

This didn't seem right to me, so I tabulated the Family Type and Employment variable in the 2006-2010 sample of the American Community Sample (having a laptop with flash memory is pretty awesome--it allowed me to do it in about five minutes).

Here are the results:


Household Type                                           # of Households         % 0f Households

Married Couple, both in labor force|           22,309,285                           41.16      
Married Couple, only man in labor force      8,792,744                           16.22      
Married Couple, only woman in labor force 2,933,758                            5.41      
Married Couple, neither in labor force          6,473,742                          11.94      
Male only, in labor force                               2,848,830                            5.26      
Male only, not in labor force                            720,066                            1.33      
Female only, in labor force                            7,230,003                          13.34      
Female only, not in labor force                       2,890,776                           5.33    

I am guessing that most retailers know and understand the implications of a country where only 16 percent of households have housewives (in the traditional sense of the word), but perhaps they are not.

Sabtu, 10 November 2012

I am not thrilled...

..that President Obama has made Tim Geithner the point person for budget negotiations. I very much hope he doesn't negotiate away the President's strong position.