Let me start off by saying that something like the shooting which occurred at Sandy Hook should have never happened in the first place and my heart goes out to the family and friends of all those impacted by such a heinous act of violence. Before you get too far along, I also want to make you as a reader acutely aware that I am a gun owner, that I have an active NRA membership, and own two similar guns, I'll go into more detail later, to those used in this recent attack.
I wasn't the least bit surprised by the knee-jerk reaction of the media(it's what they are good at after all) nor was I least bit surprised to hear rumblings that the president was considering some sort of reform in the firearms space. After the string of shootings that have occurred, Sandy Hook, Aurora, Virginia Tech, Columbine, something must be broken with Second Amendment rights, how could there not be? There must be some blame to be laid somewhere, some change that will make gun violence a thing of the past. This can never happen again, not in America anyway.
When the Second Amendment was drafted and ratified, guns were significantly different than they are today. Rifles then were single shot and really only accurate out to 50 meters/yards or so. One shot and then you spend the next 30 seconds reloading the thing contrasted with today's assault rifles that can hit within a 5 inch circle at 500 meters/yards and fire 30 or more rounds in less than a minute (assumes an AR-15 with a decent shooter). I would make the argument that while the guns and destructive power have changed, that gun violence has remained relatively constant.
Back in the day, duels among gentlemen was a perfectly reasonable and legal occurrence. If you had a problem with some one tainting your honor, you went in the street with them and shot at each other - loser more than likely died but you got your point across. Modern America has a significantly different legal landscape where nearly any violence with any sort of weapon is considered a felony situation, do not pass go, do not collect $200. Within the modern legal landscape, the worst that you can really do is sue someone to prove that you're right, ouch that really hurt my wallet but my dog is still going to poop on your lawn every day.
As barbaric as it may sound, I feel that violence is an intricate part of humanity. Wars and power struggles have fueled entire economies as far back as Spartan times. Disagreements happen, struggles for resources across artificial lines in the sand, even something as simple as "you stole me wife" (the story of Troy) have been the subject of epic war tales and poems. As technology has evolved, the physical stature and stamina of an individual has played less and less a role on the field of war.
Technology, specifically guns, have leveled the playing field in the sense that no longer must you be an expert in multiple martial arts, expert swords man, and top physical condition to be influential in winning a fight. Do those things help? Certainly. But when you put a gun into the hands of a person, their lack physical stature, their lack of martial arts training, becomes irrelevant. The only thing relevant turns into the technology that they are grasping in their palms and between their fingers. Guns equalize otherwise disparate parties when it comes to violence and intimidation.
In almost every modern occurrence, except for maybe Aurora where the motive is not totally clear, the school shooters have shared two apparent themes: bullied by classmates for some childish reason (too smart, different, etc), lacking of physical stature compared to those stereotypically doing the bulling (athletes). I'm not going to attempt to understand the motives these people had in their execution of their specific attacks nor attempt to rationalize what happened. There are too many "what if" scenarios for that and we'll never know exactly what caused these people to act. What we do know is that guns enabled these individuals to lash out against their targets in a way where their physical stature and social status were no longer relevant, making them significantly more powerful than their targets - a power trip.
As an extreme example, let's remove guns from our equation all together. The pain and suffering and experiences the perpetrators of these mass school shootings would have been exactly the same. The only difference would be their ability to inflict what they see as an appropriate amount of pain/suffering or death on their intended targets. I have no doubt that these people would have resorted to violence and lashing out in some way even by removing guns from the equation. Bombs can be made from over the counter components, inflicting significantly more damage than any gun could ever do. Knives and swords are easily bought and sold. Heck even a baseball bat is no match for even the largest of individuals. Poison the food supply? The list goes on and on the more you think about it.
An easy argument that can be made is that the death counts in these shootings would have been very different if firearms were removed. Is that totally true? It's hard to say. A properly motivated individual, which all these people I would say can be classified as, would do anything to extract their revenge if not with guns by some other means. Think a pipe bomb in the cafeteria or hallway during class change would be any less devastating?
What I can say without any hesitation is that stricter gun controls would not prevent violence like this. In effect they are already criminals, just by planning out something like this, and should have no expectation of following the laws. Do you think that drug dealers honestly care that they are not legally carrying a concealed weapons permit for the pistol they have in their waist band? Or that fully automatic weapons are illegal to poses without a class 3 firearm license? Criminals and terrorists ignore the laws already, that sort of goes with the territory, and the individuals that are impacted the most are the ones that follow the laws, your average citizen. Just to highlight another little known fact, these shootings have always occurred in places where it is illegal to even posses a firearm, that law seems to have worked out well for the victims.
The one thing that has stuck in my head from the time I was a boy, is something my dad said when I first was around guns. He basically said "Without you, your gun can do nothing wrong. You are responsible for where the barrel is pointed and only you are responsible for pulling the trigger. Make sure you know what your intentions are and what you are shooting at before you even think about removing the safety." That first part is what people forget about when talking about these shootings, that without the person pulling the trigger no one would have been injured. Without that person aiming the barrel and consciously pointing it at the victims no one would have been killed. I personally own two similar guns to those used in the Sandy Hook shooting, an AR-15 and a Glock 27 pistol - does me owning these two weapons mean that I'm more likely to incite violence? Heck, I've got more than 3,000 rounds for my AR-15, does that make me a menace to society? I'd say no, that's like saying every person who buys pseudoephedrine is using it to cook meth in their basements.
Maybe the problem with gun violence in America has nothing to do with the guns or the laws that regulate their ability to the general public? I get it, people are looking for a place to take out their fear. They see guns as the reason that events like these occur but I've never once heard of a person being shot or killed when there was not another person grasping the trigger. Maybe, just maybe, there was some event in one of these shooter's lives that you could have impacted, that you could have helped change their view on society, have them feel welcomed or not as different as they thought they were. One incident where you didn't step in to a stop a bully or as simple as asking someone how their day had went. Maybe a parent somewhere in one of their classes never had the "bully" talk with their own kid. Bullying has been in the news a lot lately, specifically related to suicides. These kids have no way to break out of their molds, they are the outcasts, the geeks, the people that are just a little different from everyone else that get the full attention of bullies. Maybe the attention should be put back onto the bullies themselves. Maybe, then things would change.
Wednesday, December 19, 2012
Thursday, July 12, 2012
Lyoness: Are they a Scam?
Before you think about commenting, please please please read the entire article, especially if you are or are thinking of becoming a Lyoness Premium Member. While my writing is slanted, even jaded at times, against Lyoness the arguments presented are my personal analysis of the matter and how I approach any and all business/money making proposals. I would hope that anyone looking to pursue any business endeavor to apply the same level of rigor before taking any of your own money and putting it in the pockets of someone else.
The Lyoness program is broken into two tracks, the first being in the form of a discount card where between 1% and 6% of your purchase (depends on the vendor) is returned to you in the form of cash where this percentage goes up depending on the number of people that join your direct network. The second track is more extreme in that rather than racking up cash back through purchases, a one time gift card purchase (cough cough fee) of roughly $3,000 will allow you up to $25,000 in future payments granting you the title of "Premium Member" assuming you are able to recruit the required number of additional "Premium Members" yourself. There are additional tiers that scale at a similar rate depending on how active you are.
Fast forward to a few months ago, I was providing advice to a younger member of a online car forum that I am an active member for a career advice in what direction to head in. Nothing too crazy, just some background on what worked for me and advice I had been provided/learned along the way. Almost instantly one of the European members sent me this private message:
I read the message in disbelief - shaking my head and feeling bad for the rest of the general population. How is it in this day and age would anyone be 'convinced' by any of these statements, that boiler plate pyramid scheme lingo could still gather the attention of the masses and swoon them into submission without questioning the facts or doing any sort of research on their own. I'll have to man up and do the investigation myself and present the evidence in a holistic and unbiased manner to get anyone to listen to me. As our conversation ensued, he reviled that he was talking about Lyoness.
BAM! Instant results but nothing conclusive. Few blogs saying Lyoness is a scam. Few news articles out of the EU claiming that Lyoness is nothing more than a Ponzi scheme (with a bunch of "Premium Members" posting and stating otherwise).
Maybe Google isn't the best way to base a decision since results can be manipulated and adding the "scam" search term focuses in on only the negative aspect of anything. What Google is amazing for however is understanding the landscape of what you're researching or investigating. A quick analysis of the results will surface three types of people writing about Lyoness (more on this later): those that are already in the program, those claiming it to be a scam, and finally "review" websites with nothing but glowing reviews of how awesome the program is.
Ok it's not all that weird for a company to be owned by another company, United Trade Mark Limited, especially for taxation purposes. What is a bit curious is that the companies, both Lyoness and United Trade Mark Limited, is registered in Malta, a country which has a history of not extraditing nationals to other countries even under mountains of evidence and an extradition policy in place. As of 2009, there has been an explicit extradition policy in place with the US but this policy has never been tested. Something to note but maybe nothing more than that - although it is a bit curious when Malta has a 35% income tax rate. Granted there are some benefits to being an international holding company which I was unable to fully confirm which may lower the tax burden.
The address provided in Valletta, Malta seems to be much more residential than that of a bustling, multi-million dollar holding company based on Google Maps and pictures uploaded in that area. Maybe they are just going for the homely look and feel? You be the judge there.
The single most curious bit about the website's registration record is that it's in the name of the CEO and owner of Lyoness, Hubert Freidl. Kind of weird that his name would be put on the registration information rather than the legal entity which owns the domain (which is common practice to protect the owner). What's even more curious is that the company was founded in Austria but has its holding company in Malta? I'm sure there is a good tax reason that is escaping me here.
Another oddity which I came across is that the Lyoness servers are based in Liechtenstein. Little weird that the servers would be hosted in another country in the EU but not unheard of, especially since historically Liechtenstein has had such strong data protection laws and is centrally located. The curious bit that I found is the domains that are hosted on the same server:
cashback.net
Pretty even split between the money making sites and the supposed non-profit which is the foundation - something to keep in mind for the section talking about the foundation.
Wait a second there almost forgot to point out that there is a reference to an .ag domain for the name servers? Yup that's right, the name servers are setup in Antigua and Barbuda. Odd choice to go that road when your primary business is in Europe. Antigua and Barbuda has been known for it's shell companies and is the head quarters for a number of hedge funds and other large value financial firms.
In the IT world, typically you try and consolidate your infrastructure to a single location to make it easier to manage. If I were to play the devil's advocate I would argue that having computer systems across multiple legal entities (read countries with strong data privacy and security laws that historically don't cooperate with other countries) I would say they are trying to hide something, or at least make the truth more difficult to obtain. But since that's all speculation, I'm sure there is a perfectly reasonable explanation for it as well. (Oh, I forgot to mention that the founder of Lyoness, Hurbert Feridl, made his money in the technology space - maybe he just prefers all the extra paper work?).
On the surface it sounds like a great thing for consumers - money back on every purchase made is money in the bank literally but is it sustainable?
In addition to fixed setup and monthly fees, "a customary 6% commission" (it's not clear just how high this can actually go) is assessed on purchases which are made by Lyoness Loyalty Members meaning that the price of the good was effectively discounted by 6% to sell more of the product. Small price to pay for a vendor or merchant for closing the deal on potential fringe customers (those which might have not bought the product without the discount).
I've always been fascinated by the economic concept which is price elasticity of demand, being the tendency to sell more of a given product the cheaper it is (over generalization but gets the point across) which is the foundation Lyoness discount cards are based on. An aspect which is often overlooked however is that the price benefit (read, lower price) is only "available" to Lyoness loyalty members and the MSRP or base price remains constant - in layman's terms, a $100 pie is still a $100 pie regardless if purchased through a Lyoness vendor or not.
Continuing the pie example, let's say a given store sells 10 of these pies to Lyoness members, resulting in $60 in commission for Lyoness (remember the 6% commission?). The $60 in commission and additional $26 in fees go towards the cash back which the members receive each month. Sweet! (pun intended) Ok so now we know where the "cash" in the cash back card actually comes from - right from the pockets of the vendor. Interesting.
You could argue that a vendor who participates in the Lyoness Loyalty Program will receive more sales than that of a non-member due to the "2 million user" base plastered all over their website which is attributed to a simple concept in economics called the fungibility of goods, that is the ability for one good to be swapped out for another. How many different tablet pc's are on the market right now? As a consumer you have a choice in what you buy and if there are two identical items but one is priced cheaper, economics and common sense would dictate that you would choose the cheaper vendor (Lyoness' Merchant Network).
Pricing of a product in economics is a hot subject and well outside the scope of this discussion but what is a universal fact of business is that no legitimate business will ever sell an item at or below the cost of the item plus their operating margin (how much they paid for the product plus how much running the business costs). Maybe it's common sense but it's something that needs to be pointed out. Using my pie example, it would not be good business for it to cost me $101 to make the pie only to sell it for $100, effectively loosing 1% or more on the sale (remember there are credit card transaction fees etc).
Of course there is a profit margin, the difference between how much the product is sold for and the cost of making the product, which is exists for every product. Depending on the product being sold, you can expect a markup of anywhere between 15% and 50% or in the case of some electronic goods in the hundreds of percents before you as a consumer even see the pricing for a product. If you think that your local retail store is losing money when they have a 50% off sale you are out of your mind - they are still making quite a bit of money off of you even at the discounted rate.
As a business, I'm looking to maximize my profits. If I have to discount my products in order to sell them so be it, especially if that discount is only 6% compared to my 40% profit margin that I'm sitting on right now. That's the allure of Lyoness for all businesses, that 6% commission is worth the 'extra' sales only if my profit margins are greater than 6% (anything less and I'd lose money). Even with the fixed costs, as long as I can offset those with a minimal number of transactions through Lyoness' network it's a worthwhile endeavor for me as a business owner.
In every single internet post I have seen supporting Lyoness, big names like Walmart, Porsche, and others are paraded around as some badge of acceptance, that "why would big names like these join Lyoness if it were a scam?" The answer: there is no negative reason for a merchant to not sign up as a Lyoness vendor because as outlined above, the only risk to them is the initial setup fee. These organizations don't care where the sales come from as long as there is a sufficient profit to be made. Heck if I had any sort of consumer product and lacked a soul, I'd sign up to sell my products through them as well - well maybe if I didn't have such a good understanding of where their money comes from.
Wait, I thought that this was a post about why Lyoness is bad - you just worked through why a company would join the network - now I'm all confused? I wish it were that simple and I'm getting to that - just remember, they money has to come from somewhere - where specifically? The 6% commission on the sale.
Yes, as a Lyoness member you are encouraged to recruit other people to use Lyoness and in return you get a .5% additional cashback amount for your direct recruits and their immediate recruits. Why? So you can make money off of their purchases. Here is an example take directly from the recruiting brochure:
50 people getting $12 = $600
10 people getting $27 = $270
1 person getting $197 = $197
-------------------------------------
Grand total payouts result in $1,067 potentially paid out to people each month. So really at the end of the day, excluding the 'loyalty commission', Lyoness just made ~$1,129 for doing nothing but moving money around. At this point in time I'd like to direct you to this wonderful Wikipedia article swapping out the phrase "one time payment" for "purchase from a Lyoness Loyalty Vendor" and you can see what I'm getting at.
Let me first start out by stating that neither Lyoness nor its holding company own ANY patents outside of a handful of trade marks. Patents in the US and the EU are public record meaning you can go and read the detailed documents of how it works in order to prevent derivative works from coming onto the market.
The term accounting unit is nothing more than a representation for the amount of money you have spent/generated through Lyoness. Every $75 in cash back received generates an accounting unit or another way of putting it is that you need to directly spend atleast $3,750 ($75 / 2%) at 2% cash back vendors to generate a single unit or your direct/second level friends need to spend $15,000 ($75 / .5%) in network. The real gotcha is that the money needs to be spent in the right way for the accounting unit to 'complete' itself and the pay outs on an accounting unit show just how much money needs to be pumped into the system to get anything out of it(taken directly from the brochure again):
The over/under number represents how may completed accounting units are required to receive that tier's payout. So 3/3 means a total of 6 accounting units generated, three direct and three indirect, or in real cost terms Lyoness pays you $12 once an additional $90,000 has been pumped through your network - how kind of them. Looking for turning your $75 into $675? That's only going to cost you and your network a cool $1,050,000. Talk about life long income...just not for you.
A natural reaction for an organization to cope with the reduced revenue would be to increase the cost of the product by exactly the same amount to offset the reduced earnings - that way their margins stay the same - so now your product costs 2% more than it originally did and you're in exactly the same situation you were before, just now you're spending more money and breaking even after it's all done.
In the case of Lyoness the price change would eventually be more drastic, after all 6% is a hefty amount in some consumer good markets. You are probably sitting there thinking "yea, but if I hustle I can get ahead and get an even bigger discount at the end of the day by recruiting more and more people." I totally agree with you but at the same time you are heading to the situation described above quicker.
Another thing which should be pointed out is that the cash back is exactly that, cash given back to you after the transaction has occurred. Basically you are providing a free loan to the company pushing the paper for that dollar amount until it is deposited in your bank account. Sure it may feel nice to spend money and then get money directly deposited into your account in the form of cash, but a more effective use of your money would be in the form of a direct discount at checkout. Oh right, that wouldn't make Lyoness any money and that's why it doesn't happen!
Sometimes I get too "big pictured..."
A Swiss article that I read had the same concerns that I have which have been left unanswered. Maybe I shouldn't be so skeptical of an organization which "helps" people, but given that their parent company makes money through people spending money I wouldn't be surprised if an audit by an outside organization found some 'accounting irregularities'.
One more thing to note goes back to the server configuration being hosted on the same server. In the US there would be a questionable conflict of interest in running non-profit servers on the same hardware as a for-profit business specifically in how the expenses are recorded. Maybe the EU is a little more relaxed?
Of course they received the TUV certification...because the TUV certification means that as an organization they do not represent a health hazard. I would hope that an organization which doesn't actually have a product and does nothing more but artificially moves money around is not a hazard to anyone health. Seems to be a weird certification for a company to go an get unless they have a hard time gaining credibility.
Before using certifications as an argument for "this is a legit company" you should look into what those certifications mean and the requirements to get said certification.
I'm not saying you can't make money off of using the system but what I am saying is that through using Lyoness, an organization which provides nothing more than a minimal discount on a product/service, you are taking money directly out of the pockets of merchants - you know, the ones contributing to society through offering the product or service...
Who/What is Lyoness
Lyoness advertizes itself as a shopping community, providing cash back on purchases at participating vendors. They claim to have over 2 million members across the world who can receive rebates at a claimed 20,000 vendors. In addition to the shopping network, a claimed non-profit Lyoness Child & Family Foundation receives a portion of the income to help children around the world fight hunger and abuse.The Lyoness program is broken into two tracks, the first being in the form of a discount card where between 1% and 6% of your purchase (depends on the vendor) is returned to you in the form of cash where this percentage goes up depending on the number of people that join your direct network. The second track is more extreme in that rather than racking up cash back through purchases, a one time gift card purchase (cough cough fee) of roughly $3,000 will allow you up to $25,000 in future payments granting you the title of "Premium Member" assuming you are able to recruit the required number of additional "Premium Members" yourself. There are additional tiers that scale at a similar rate depending on how active you are.
Why I care about Lyoness, MLM scams, and Ponzi schemes
Not all that long ago (2 years ago) I had received a call from a childhood friend who had gotten my number somehow. He cut the small talk to 2 or 3 life updates and went right into sales pitch mode talking about this "awesome program that allows you to make tons of cash...you just need to recruit people to sell the products in addition to selling it yourself." After talking to him a bit and explaining the business model to him, my friend saw the light and stopped participating the "program" for more legitimate business opportunities. Hence, started my crusade against all bottom feeding organizations with shady, unsustainable business models.Fast forward to a few months ago, I was providing advice to a younger member of a online car forum that I am an active member for a career advice in what direction to head in. Nothing too crazy, just some background on what worked for me and advice I had been provided/learned along the way. Almost instantly one of the European members sent me this private message:
I read the message in disbelief - shaking my head and feeling bad for the rest of the general population. How is it in this day and age would anyone be 'convinced' by any of these statements, that boiler plate pyramid scheme lingo could still gather the attention of the masses and swoon them into submission without questioning the facts or doing any sort of research on their own. I'll have to man up and do the investigation myself and present the evidence in a holistic and unbiased manner to get anyone to listen to me. As our conversation ensued, he reviled that he was talking about Lyoness.
Scam litmus test - Google?
If you need to actually ask the question "is such and such a scam," that should be your first red flag, one easily ignored which for our purposes we will do as well. The easiest thing you can do to see if something is legitimate or not is to take the company or product name, type that into Google, and append "scam" to the end of your search term. Sounds simple right?BAM! Instant results but nothing conclusive. Few blogs saying Lyoness is a scam. Few news articles out of the EU claiming that Lyoness is nothing more than a Ponzi scheme (with a bunch of "Premium Members" posting and stating otherwise).
Maybe Google isn't the best way to base a decision since results can be manipulated and adding the "scam" search term focuses in on only the negative aspect of anything. What Google is amazing for however is understanding the landscape of what you're researching or investigating. A quick analysis of the results will surface three types of people writing about Lyoness (more on this later): those that are already in the program, those claiming it to be a scam, and finally "review" websites with nothing but glowing reviews of how awesome the program is.
Maybe WHOIS results can help?
Ok, ok, I'm a technology freak and know a decent amount about the web. Every domain name (company.com) has to maintain a set of information called the registrant information - basic info about how to contact the owner of the web site and where the site is based out of. Here is the results for Lyoness.net:The address provided in Valletta, Malta seems to be much more residential than that of a bustling, multi-million dollar holding company based on Google Maps and pictures uploaded in that area. Maybe they are just going for the homely look and feel? You be the judge there.
The single most curious bit about the website's registration record is that it's in the name of the CEO and owner of Lyoness, Hubert Freidl. Kind of weird that his name would be put on the registration information rather than the legal entity which owns the domain (which is common practice to protect the owner). What's even more curious is that the company was founded in Austria but has its holding company in Malta? I'm sure there is a good tax reason that is escaping me here.
Another oddity which I came across is that the Lyoness servers are based in Liechtenstein. Little weird that the servers would be hosted in another country in the EU but not unheard of, especially since historically Liechtenstein has had such strong data protection laws and is centrally located. The curious bit that I found is the domains that are hosted on the same server:
cashback.net
lyoness-child-and-family-foundation.com
lyoness-child-and-family-foundation.org
lyoness-foundation.com
lyoness-foundation.org
lyoness.com
lyoness.info
lyoness.us
lyonesschildandfamilyfoundation.com
lyonesschildandfamilyfoundation.org
lyonessfoundation.org
Pretty even split between the money making sites and the supposed non-profit which is the foundation - something to keep in mind for the section talking about the foundation.Wait a second there almost forgot to point out that there is a reference to an .ag domain for the name servers? Yup that's right, the name servers are setup in Antigua and Barbuda. Odd choice to go that road when your primary business is in Europe. Antigua and Barbuda has been known for it's shell companies and is the head quarters for a number of hedge funds and other large value financial firms.
In the IT world, typically you try and consolidate your infrastructure to a single location to make it easier to manage. If I were to play the devil's advocate I would argue that having computer systems across multiple legal entities (read countries with strong data privacy and security laws that historically don't cooperate with other countries) I would say they are trying to hide something, or at least make the truth more difficult to obtain. But since that's all speculation, I'm sure there is a perfectly reasonable explanation for it as well. (Oh, I forgot to mention that the founder of Lyoness, Hurbert Feridl, made his money in the technology space - maybe he just prefers all the extra paper work?).
Can we talk about the business model?
So my use of the internet to poke holes in Lyoness was far from conclusive maybe a detailed analysis of the operating model will draw some attention to how the company makes its money and 'pays' its members - maybe that will turn some heads?Discount Cards (Warning numbers and Economics content)
Lyoness touts itself as a grassroots, social shopping network granting you cash back on purchases made in network. The argument made by Lyoness is that you need to purchase goods to live, so why not purchase the good(s) through their network and receive some money back - you were going to buy it anyway?On the surface it sounds like a great thing for consumers - money back on every purchase made is money in the bank literally but is it sustainable?
Merchants and why they join
Before we can talk about if it's 'good' for consumers or sustainable we need to look at the fixed costs in joining the Lyoness network as a vendor and what it might represent. (Note that these are for online vendors only since that's all that is available through the website to outsiders) On average there is a $1,068 one time setup fee and an $26 a month network fee (only applicable if your storefront makes 10 transactions through Lyoness a month).In addition to fixed setup and monthly fees, "a customary 6% commission" (it's not clear just how high this can actually go) is assessed on purchases which are made by Lyoness Loyalty Members meaning that the price of the good was effectively discounted by 6% to sell more of the product. Small price to pay for a vendor or merchant for closing the deal on potential fringe customers (those which might have not bought the product without the discount).
I've always been fascinated by the economic concept which is price elasticity of demand, being the tendency to sell more of a given product the cheaper it is (over generalization but gets the point across) which is the foundation Lyoness discount cards are based on. An aspect which is often overlooked however is that the price benefit (read, lower price) is only "available" to Lyoness loyalty members and the MSRP or base price remains constant - in layman's terms, a $100 pie is still a $100 pie regardless if purchased through a Lyoness vendor or not.
Continuing the pie example, let's say a given store sells 10 of these pies to Lyoness members, resulting in $60 in commission for Lyoness (remember the 6% commission?). The $60 in commission and additional $26 in fees go towards the cash back which the members receive each month. Sweet! (pun intended) Ok so now we know where the "cash" in the cash back card actually comes from - right from the pockets of the vendor. Interesting.
You could argue that a vendor who participates in the Lyoness Loyalty Program will receive more sales than that of a non-member due to the "2 million user" base plastered all over their website which is attributed to a simple concept in economics called the fungibility of goods, that is the ability for one good to be swapped out for another. How many different tablet pc's are on the market right now? As a consumer you have a choice in what you buy and if there are two identical items but one is priced cheaper, economics and common sense would dictate that you would choose the cheaper vendor (Lyoness' Merchant Network).
Pricing of a product in economics is a hot subject and well outside the scope of this discussion but what is a universal fact of business is that no legitimate business will ever sell an item at or below the cost of the item plus their operating margin (how much they paid for the product plus how much running the business costs). Maybe it's common sense but it's something that needs to be pointed out. Using my pie example, it would not be good business for it to cost me $101 to make the pie only to sell it for $100, effectively loosing 1% or more on the sale (remember there are credit card transaction fees etc).
Of course there is a profit margin, the difference between how much the product is sold for and the cost of making the product, which is exists for every product. Depending on the product being sold, you can expect a markup of anywhere between 15% and 50% or in the case of some electronic goods in the hundreds of percents before you as a consumer even see the pricing for a product. If you think that your local retail store is losing money when they have a 50% off sale you are out of your mind - they are still making quite a bit of money off of you even at the discounted rate.
As a business, I'm looking to maximize my profits. If I have to discount my products in order to sell them so be it, especially if that discount is only 6% compared to my 40% profit margin that I'm sitting on right now. That's the allure of Lyoness for all businesses, that 6% commission is worth the 'extra' sales only if my profit margins are greater than 6% (anything less and I'd lose money). Even with the fixed costs, as long as I can offset those with a minimal number of transactions through Lyoness' network it's a worthwhile endeavor for me as a business owner.
In every single internet post I have seen supporting Lyoness, big names like Walmart, Porsche, and others are paraded around as some badge of acceptance, that "why would big names like these join Lyoness if it were a scam?" The answer: there is no negative reason for a merchant to not sign up as a Lyoness vendor because as outlined above, the only risk to them is the initial setup fee. These organizations don't care where the sales come from as long as there is a sufficient profit to be made. Heck if I had any sort of consumer product and lacked a soul, I'd sign up to sell my products through them as well - well maybe if I didn't have such a good understanding of where their money comes from.
Wait, I thought that this was a post about why Lyoness is bad - you just worked through why a company would join the network - now I'm all confused? I wish it were that simple and I'm getting to that - just remember, they money has to come from somewhere - where specifically? The 6% commission on the sale.
So where is the money made exactly?
Through recruiting people to use the network of course. Oh, I thought I could just use Lyoness to get a discount a certain vendors. Well you can, but then you're not "enjoying the full benefit of Lyoness" and they are taking anywhere between 4-5% of the purchase from you - remember they get 6% commission regardless.Yes, as a Lyoness member you are encouraged to recruit other people to use Lyoness and in return you get a .5% additional cashback amount for your direct recruits and their immediate recruits. Why? So you can make money off of their purchases. Here is an example take directly from the recruiting brochure:
- You recruit 10 people
- Each of those recruit 5 additional people
- Assume each spends $600 a month at Lyoness vendors
50 people getting $12 = $600
10 people getting $27 = $270
1 person getting $197 = $197
-------------------------------------
Grand total payouts result in $1,067 potentially paid out to people each month. So really at the end of the day, excluding the 'loyalty commission', Lyoness just made ~$1,129 for doing nothing but moving money around. At this point in time I'd like to direct you to this wonderful Wikipedia article swapping out the phrase "one time payment" for "purchase from a Lyoness Loyalty Vendor" and you can see what I'm getting at.
Patented Accounting System
Patented Accounting System? Residual Income? Accounting Units? These are all terms which Lyoness places around the payout system to entice users to spend money in the network rather than outside it. These terms may sound official or related in some way to real accounting terms but reality and fact show differently.Let me first start out by stating that neither Lyoness nor its holding company own ANY patents outside of a handful of trade marks. Patents in the US and the EU are public record meaning you can go and read the detailed documents of how it works in order to prevent derivative works from coming onto the market.
The term accounting unit is nothing more than a representation for the amount of money you have spent/generated through Lyoness. Every $75 in cash back received generates an accounting unit or another way of putting it is that you need to directly spend atleast $3,750 ($75 / 2%) at 2% cash back vendors to generate a single unit or your direct/second level friends need to spend $15,000 ($75 / .5%) in network. The real gotcha is that the money needs to be spent in the right way for the accounting unit to 'complete' itself and the pay outs on an accounting unit show just how much money needs to be pumped into the system to get anything out of it(taken directly from the brochure again):
Why are discount/loyalty programs bad for you as a consumer?
The greater the benefit the membership provides in the form of a discount the greater the tax on non-participants (people pay more for not being part of the club). As more and more people join the 'club' the total operating margins of the organization offering the discount will decrease by approximately the same amount - if you offer everyone in a club a discount of 2% but everyone already belongs to the club, your new MSRP is effectively 2% lower than it was.A natural reaction for an organization to cope with the reduced revenue would be to increase the cost of the product by exactly the same amount to offset the reduced earnings - that way their margins stay the same - so now your product costs 2% more than it originally did and you're in exactly the same situation you were before, just now you're spending more money and breaking even after it's all done.
In the case of Lyoness the price change would eventually be more drastic, after all 6% is a hefty amount in some consumer good markets. You are probably sitting there thinking "yea, but if I hustle I can get ahead and get an even bigger discount at the end of the day by recruiting more and more people." I totally agree with you but at the same time you are heading to the situation described above quicker.
Another thing which should be pointed out is that the cash back is exactly that, cash given back to you after the transaction has occurred. Basically you are providing a free loan to the company pushing the paper for that dollar amount until it is deposited in your bank account. Sure it may feel nice to spend money and then get money directly deposited into your account in the form of cash, but a more effective use of your money would be in the form of a direct discount at checkout. Oh right, that wouldn't make Lyoness any money and that's why it doesn't happen!
Sometimes I get too "big pictured..."
A non-profit?
I told you I'd get back to the non-profit issue eventually. I have had a hard time confirming if the Lyoness Child and Family Fund even does anything related to helping people. Not to be skeptical but there are no independent audits of the organization in how the funds are spent or allocated or really anything more than artificial press releases that they have done anything more than fund raising events. Not a single financial statement, or spending document is available anywhere - a bit suspect in my book!A Swiss article that I read had the same concerns that I have which have been left unanswered. Maybe I shouldn't be so skeptical of an organization which "helps" people, but given that their parent company makes money through people spending money I wouldn't be surprised if an audit by an outside organization found some 'accounting irregularities'.
One more thing to note goes back to the server configuration being hosted on the same server. In the US there would be a questionable conflict of interest in running non-profit servers on the same hardware as a for-profit business specifically in how the expenses are recorded. Maybe the EU is a little more relaxed?
Rant reviews galore! Let me in!
It's actually pretty hard to find a negative review of Lyoness on the internet. I find that a bit discerning since every Fortune 500 organization has a slew of hate talk on the internet. Could a company which rips off consumers so blatantly (see above) have such a great system that next to no one has anything bad to say? Actually that's a lie, there are plenty of people explaining how it's a form of Ponzi scheme - maybe that's how you got to this page?Oh but Lyoness has certifications!
And they all are a joke. Lyoness made a huge deal out of it getting ISO 9001:2008 certification. Any one which has gone through any ISO certification knows that the business is not the one being certified but the underlying business process. This means that as long as you have extensive documentation on what to do when xyz occurs you can be certified regardless of the process itself. I can write up documentation on how to go number 2 in the bathroom everyday but just because the process can be ISO certified does not mean it does not stink from here until tomorrow.Of course they received the TUV certification...because the TUV certification means that as an organization they do not represent a health hazard. I would hope that an organization which doesn't actually have a product and does nothing more but artificially moves money around is not a hazard to anyone health. Seems to be a weird certification for a company to go an get unless they have a hard time gaining credibility.
Before using certifications as an argument for "this is a legit company" you should look into what those certifications mean and the requirements to get said certification.
Anything too good to be true, actually is
I've heard time and time again that Lyoness is a viable business model utilizing existing global consumption as a viable business model to live off of, something which is too good to be true. The numbers speak a lot louder than any testimonial or sales pitch ever could. Sure you can make some money and game the system, but you just made someone else 10X that much money. When times are tough, as is the situation in the global economy right now after all, people will look to cut corners where ever they can. If that means looking at the micro picture and taking a small discount now and screwing themselves over down the line by all means.I'm not saying you can't make money off of using the system but what I am saying is that through using Lyoness, an organization which provides nothing more than a minimal discount on a product/service, you are taking money directly out of the pockets of merchants - you know, the ones contributing to society through offering the product or service...
Sunday, March 25, 2012
Cross Shopping an e92 M3 and a R35 GT-R
I'm privileged in the sense that I've owned both an e92 M3 and R35 GT-R, one after another. Maybe I can provide an objective review of both vehicles and help calm the waters that seem to be bubbling in the forums these days on people cross shopping the two.
I stepped into the world of BMW after a stint in the Audi scene (2005 S4 to be exact), an extremely costly maintenance stint. Being a little short-sighted, fueled by Audi frustrations, I honed in on the M3 without doing much cross shopping. I didn't bother looking at anything resembling an automatic which threw out Mercedes (c63 AMG) and Lexus (IS-F), both extremely sexy cars, which were really the only competitors in that price range. The BMW 335is had just come out, which I was allowed to test drive but the fact that regular 3-series cars are everywhere in the north east, swayed my decision to go with a loaded M3. Well, that and the price difference between the 335is and a loaded M3 was on the order of $10,000 - something I was very willing to spend knowing the ///M racing heritage and aggressive, yet sleek styling on the M3. That's not the whole truth, a guy I worked with just picked up a 335i and I wasn't about to get the same car as him!
.JPG)
The M3 was my first new car buying experience and boy was it informative. Hours spent searching online, gathering details on how I could squeeze every cent out of that dealer and get the best price. When I showed up at the dealer, I came prepared with invoice pricing sheets, offers from internet dealers, even my fancy pad folio and $50 pen to seal the deal. I was a little turned off by this specific dealer because it was obvious that I knew more of the technical details concerning the car than he did, often misquoting product details or flaunting their dealership's "Gold Sales Status" or some other fake sounding award. It's a little weird, only because every BMW dealership I have ever been to brags about how they are the best one around in sales and service - give me a break, not everyone can be the best. One demerit
Flip the tides and start talking about the Nissan dealership that I bought my GT-R from. The salesman claimed to be one of three people at the dealer that were allowed to move GT-R's around on the lot - the other two were the owner of the dealership and the tech, which is apparently pretty standard. Knew everything there was to know about the car. Extreme low-pressure sale and limited negotiating required to close the deal. I followed a similar approach with other available cars in the area, pricing, etc. Other than the difficulty in finding a mint GT-R, the entire process was painless.
With BMW came an extremely personalized run through of all the cool gadgets, gizmos, pressure switches, and buttons found through out the cabin. Details that would all require a run through of the user manual to get back to the same screens.
Just by glancing at the interior you see two different pictures, that of a refined German sports car with extensive attention paid to detail, the fit-and-finish contrasted against a raw, clunky feeling interior littered with cheap buttons and knobs found in the Nissan, even the abnormally large 'Bose' emblem plastered directly below the CD area wreaks of cheap style. I have to give the leg up in terms of electronics to the GT-R, real-time customizable sensor readings (really just a cool factor), and lets not forget the time saving touchscreen which is eons ahead of iDrive's knob twisting. The fatty ///M steering wheel is something that I found missing after heading to the dark side. Forget about trying to use the backseats of the GT-R for any adult - I'm 6'3'' and there is literally 2inches of leg room directly behind me when I'm all setup, good thing it's my car and I'm always the one driving it! Cabin noise seems to be a common complaint for GT-R passengers but when you're going for speed you need to skimp on sound proofing and go for big tires to keep sending power to the pavement consistently.
The s65 motor in the M3 is an awesome, high revving V8 that sounded like pure sex at the 8,300 redline but lacked any real killing power on the streets, especially in a younger area riddled with STI's, Evo's, and bad ass modded 335i's making more power than you. Hell, I got beat up on by a turbo Integra one night. The 0-60 of 3.9 is what is published everywhere but can't confirm as I had the 6 speed and those numbers where for the DCT version. In terms of modifications, there isn't much room to play in the engine bay limiting your options. Sure you could do a full exhaust, tune, and a few other little things but you'd be hard pressed to make more than 400rwhp (stock cars will dyno at around 300-340rwhp). Yea, there is always the blower option which would put you into the 550ish range and lots of people have had great success going that route. It's a fight to get any sort of real power out of the car without heading down the supercharger road. It was the fastest car I had ever been in - that is until I took the GT-R for a spin
What the GT-R lacks in luxury items it makes up for in raw performance, even in porker status (3,800 curb weight - so figure 4,200 after fuel and a passenger). In stock form, you'll find most R35 GT-R's making 400-430awhp for the 2010 model year (that's the year that I have). Certainly nothing to sneeze at, especially with the quoted 0-60 time of 3.5 which I have found to be extremely consistent (it's an 'automatic' remember). Pump a little bit of money into her, figure $4,000 if you do your own labor and this beast is quickly at the 550awhp mark (93oct, y-pipe, downpipes, tune, intake, 1000cc injectors) which turns the car into a high 10 second beast (just like in 'fast and the furious') - fast enough to embarrass almost anything on the road. Of course you can get really crazy and go with different turbos and supporting mods and beat up on 'busas on the highways but I'm not going to go there because of costs (figure another 15-30k depending on how crazy you want to get).
Purist seem to hate the GT-R because of the gear box, claiming "the car has no soul" as you effortlessly fly through a corner with instant shifts and practically point-and-shoot mentality. These fan boys associate the difficulty in driving a vehicle to how 'pure' a car is which to me is stupid. If technology progression is a bad thing, we wouldn't have cars with turbos or limited slip differentials or air conditioning while running down a track at 120mph on a 100 degree day. What a lot of these fan boys don't understand is that the GT-R's transmission *is* essentially a manual transmission that is computer controlled. Gear selection is a breeze and while there are some disconcerting noises when stopped or in slow traffic from the rear located tranny, it functions better than any human could control.
Ok, ok I know every car magazine and review out there talks about how fast of a car the GT-R is, I certainly agree. What they never talk about is the attention the thing gets by the general public. I rocked the M3 for just over a year, getting a few thumbs up by car guys on the road and general 'nice car' comments at local car meets. What the M3 lacked was any sort of recognition for the race heritage behind the ///M brand. Sure, car nuts knew the difference and what it was, but at the end of the day the general public is just ignorant to an M3 being any different than a 3-series. It has the stigma of being an executive hauler, an 'old man car' as one of my less informed friends put it (being as only older males are typically seen driving them).
The GT-R was a completely different beast. Driving around town you get the stares and the attention of an uber-exotic. On the highway, in parking lots, basically anywhere you can find people, there will be people taking pictures of it. Car meets are even better with comments like "this is my dream car" or my personal favorite "why didn't you get a lambo or a ferrari instead". Ok, I know the second comment came from a guy that had no understanding to the cost of cars but the image was still there - that the GT-R possesses the same image as high end exotics on the road. Even people that know nothing about the car will approach and ask questions about it. It's always a new adventure being in public with the GT-R.
All in all, your decision to cross shop an M3 and a GT-R is purely an artificial one. The M3 is highly refined, overall luxury car with a little bit of pep when you need it while the GT-R is an attention grabbing performance beast. If I had to choose one car for a daily driver, it would be hands down the M3. But being that I'm young and reckless (owning a second vehicle helps too), I'll keep the GT-R in my stable for a long time.
I stepped into the world of BMW after a stint in the Audi scene (2005 S4 to be exact), an extremely costly maintenance stint. Being a little short-sighted, fueled by Audi frustrations, I honed in on the M3 without doing much cross shopping. I didn't bother looking at anything resembling an automatic which threw out Mercedes (c63 AMG) and Lexus (IS-F), both extremely sexy cars, which were really the only competitors in that price range. The BMW 335is had just come out, which I was allowed to test drive but the fact that regular 3-series cars are everywhere in the north east, swayed my decision to go with a loaded M3. Well, that and the price difference between the 335is and a loaded M3 was on the order of $10,000 - something I was very willing to spend knowing the ///M racing heritage and aggressive, yet sleek styling on the M3. That's not the whole truth, a guy I worked with just picked up a 335i and I wasn't about to get the same car as him!.JPG)
The M3 was my first new car buying experience and boy was it informative. Hours spent searching online, gathering details on how I could squeeze every cent out of that dealer and get the best price. When I showed up at the dealer, I came prepared with invoice pricing sheets, offers from internet dealers, even my fancy pad folio and $50 pen to seal the deal. I was a little turned off by this specific dealer because it was obvious that I knew more of the technical details concerning the car than he did, often misquoting product details or flaunting their dealership's "Gold Sales Status" or some other fake sounding award. It's a little weird, only because every BMW dealership I have ever been to brags about how they are the best one around in sales and service - give me a break, not everyone can be the best. One demerit
With BMW came an extremely personalized run through of all the cool gadgets, gizmos, pressure switches, and buttons found through out the cabin. Details that would all require a run through of the user manual to get back to the same screens.
The s65 motor in the M3 is an awesome, high revving V8 that sounded like pure sex at the 8,300 redline but lacked any real killing power on the streets, especially in a younger area riddled with STI's, Evo's, and bad ass modded 335i's making more power than you. Hell, I got beat up on by a turbo Integra one night. The 0-60 of 3.9 is what is published everywhere but can't confirm as I had the 6 speed and those numbers where for the DCT version. In terms of modifications, there isn't much room to play in the engine bay limiting your options. Sure you could do a full exhaust, tune, and a few other little things but you'd be hard pressed to make more than 400rwhp (stock cars will dyno at around 300-340rwhp). Yea, there is always the blower option which would put you into the 550ish range and lots of people have had great success going that route. It's a fight to get any sort of real power out of the car without heading down the supercharger road. It was the fastest car I had ever been in - that is until I took the GT-R for a spin
What the GT-R lacks in luxury items it makes up for in raw performance, even in porker status (3,800 curb weight - so figure 4,200 after fuel and a passenger). In stock form, you'll find most R35 GT-R's making 400-430awhp for the 2010 model year (that's the year that I have). Certainly nothing to sneeze at, especially with the quoted 0-60 time of 3.5 which I have found to be extremely consistent (it's an 'automatic' remember). Pump a little bit of money into her, figure $4,000 if you do your own labor and this beast is quickly at the 550awhp mark (93oct, y-pipe, downpipes, tune, intake, 1000cc injectors) which turns the car into a high 10 second beast (just like in 'fast and the furious') - fast enough to embarrass almost anything on the road. Of course you can get really crazy and go with different turbos and supporting mods and beat up on 'busas on the highways but I'm not going to go there because of costs (figure another 15-30k depending on how crazy you want to get).
Purist seem to hate the GT-R because of the gear box, claiming "the car has no soul" as you effortlessly fly through a corner with instant shifts and practically point-and-shoot mentality. These fan boys associate the difficulty in driving a vehicle to how 'pure' a car is which to me is stupid. If technology progression is a bad thing, we wouldn't have cars with turbos or limited slip differentials or air conditioning while running down a track at 120mph on a 100 degree day. What a lot of these fan boys don't understand is that the GT-R's transmission *is* essentially a manual transmission that is computer controlled. Gear selection is a breeze and while there are some disconcerting noises when stopped or in slow traffic from the rear located tranny, it functions better than any human could control.
The GT-R was a completely different beast. Driving around town you get the stares and the attention of an uber-exotic. On the highway, in parking lots, basically anywhere you can find people, there will be people taking pictures of it. Car meets are even better with comments like "this is my dream car" or my personal favorite "why didn't you get a lambo or a ferrari instead". Ok, I know the second comment came from a guy that had no understanding to the cost of cars but the image was still there - that the GT-R possesses the same image as high end exotics on the road. Even people that know nothing about the car will approach and ask questions about it. It's always a new adventure being in public with the GT-R.
All in all, your decision to cross shop an M3 and a GT-R is purely an artificial one. The M3 is highly refined, overall luxury car with a little bit of pep when you need it while the GT-R is an attention grabbing performance beast. If I had to choose one car for a daily driver, it would be hands down the M3. But being that I'm young and reckless (owning a second vehicle helps too), I'll keep the GT-R in my stable for a long time.
Sunday, March 11, 2012
Diablo 3: Magic Find Debate
I was a huge fan of Diablo2:LoD back in my high school days. Some friends from school got me hooked and I couldn't stop playing, even while I was at school. Having gotten rushed to hell by friends and countless hours in the Secret Cow Level, I had nearly an ultimate account:
MF cannot appear on weapons, something already data mined by various other sites.You will notice that MF can appear on everything else, meaning that one of the attributes will be consumed by magic find, in each slot on a true magic find character. While, in the early game, characters will need to choose between items that increase DPS versus increase MF, late game this will become moot. Think about how many items that you have found or heard about in the beta that are things like + health from globes or +Gold pickup radius that could easily be swapped out from an MF attribute (assuming you put in the time locating items to replace it).
Ok, so we've proven that MF gear is the same as non-MF gear atleast in the end game. What about the shared aspect of it? What will happen is, that characters looking to perform MF runs will start their own games together and go on their merry way. Bottom line is, MF sharing won't matter if you find friends with similar interests to play with (MF) since it will be beneficial in the form of more/better item drops by having more people in a game together.
- Lvl 99 Whirlwind Barb with enough life leech to heal almost instantly
- Lvl 99 Breath of the Dying Hydra bow Amazon with crazy IAS to mow down them cows
- Lvl 99 Breath of the Dying Hammerdin that was doing 5k 1 hand damage
- Lvl 99 MF Sorc with over 1000mf+
- Joined a game where someone was using his friend to transfer items to another character. Waited for the one guy to leave. Went up to his friend and said "ok, im ready" to have his friend give me all the other guy's stuff. Social engineering at its finest
- .08 Unidentified vamp gaze (not really one, had found with 28 durability and sold it as one) Buyer not happy!
- Botted nearly all day while I was at school.
- Even got in on the dupe'ing bandwagon while it was working
MF cannot appear on weapons, something already data mined by various other sites.You will notice that MF can appear on everything else, meaning that one of the attributes will be consumed by magic find, in each slot on a true magic find character. While, in the early game, characters will need to choose between items that increase DPS versus increase MF, late game this will become moot. Think about how many items that you have found or heard about in the beta that are things like + health from globes or +Gold pickup radius that could easily be swapped out from an MF attribute (assuming you put in the time locating items to replace it).
Ok, so we've proven that MF gear is the same as non-MF gear atleast in the end game. What about the shared aspect of it? What will happen is, that characters looking to perform MF runs will start their own games together and go on their merry way. Bottom line is, MF sharing won't matter if you find friends with similar interests to play with (MF) since it will be beneficial in the form of more/better item drops by having more people in a game together.
Tuesday, March 6, 2012
The results
Compare with my predictions...
Washington--Romney, Paul, Santorum, Gingrich (67% correct)
Alaska--TBD
Georgia--Gingrich, Romney, Santorum, Paul (100% correct)
Idaho--Romney, Paul, Santorum, Gingrich (100% correct)
Massachusetts--Romney, Santorum, Paul, Gingrich (100% correct)
North Dakota--Santorum, Paul, Romney, Gingrich (83% correct)
Ohio--Romney, Santorum, Gingrich, Paul (100% correct)
Oklahoma--Santorum, Romney, Gingrich, Paul (83% correct)
Tennessee--Santorum, Romney, Gingrich, Paul (100% correct)
Vermont--Romney, Paul, Santorum, Gingrich (83% correct)
Virginia--Romney, Paul (100% correct)
That's 92% correct overall. If you just count Super Tuesday states, I was 94% correct. A/A- seems fair.
Note also that these contests could've played out in one of over 2.6 trillion different ways. Come on...fives.
Washington--Romney, Paul, Santorum, Gingrich (67% correct)
Alaska--TBD
Georgia--Gingrich, Romney, Santorum, Paul (100% correct)
Idaho--Romney, Paul, Santorum, Gingrich (100% correct)
Massachusetts--Romney, Santorum, Paul, Gingrich (100% correct)
North Dakota--Santorum, Paul, Romney, Gingrich (83% correct)
Ohio--Romney, Santorum, Gingrich, Paul (100% correct)
Oklahoma--Santorum, Romney, Gingrich, Paul (83% correct)
Tennessee--Santorum, Romney, Gingrich, Paul (100% correct)
Vermont--Romney, Paul, Santorum, Gingrich (83% correct)
Virginia--Romney, Paul (100% correct)
That's 92% correct overall. If you just count Super Tuesday states, I was 94% correct. A/A- seems fair.
Note also that these contests could've played out in one of over 2.6 trillion different ways. Come on...fives.
Wednesday, February 29, 2012
Super Tuesday Forecast
I issued private forecasts for Arizona and Michigan, but forgot to post them on the blog. Needless to say, I nailed both. Now, onto Super Tuesday...but first, Washington (on March 3rd): Santorum, Romney, Paul, Gingrich
Super Tuesday contests (on March 6th)
----------------------------------------------------------------
Alaska: Romney, Paul, Santorum, Gingrich
Georgia: Gingrich, Romney, Santorum, Paul
Idaho: Romney, Paul, Santorum, Gingrich
Massachusetts: Romney, Santorum, Paul, Gingrich
North Dakota: Santorum, Romney, Paul, Gingrich
Ohio: Romney, Santorum, Gingrich, Paul
Oklahoma: Santorum, Gingrich, Romney, Paul
Tennessee: Santorum, Romney, Gingrich, Paul
Vermont: Romney, Santorum, Paul, Gingrich
Virginia: Romney, Paul
Enjoy.
Super Tuesday contests (on March 6th)
----------------------------------------------------------------
Alaska: Romney, Paul, Santorum, Gingrich
Georgia: Gingrich, Romney, Santorum, Paul
Idaho: Romney, Paul, Santorum, Gingrich
Massachusetts: Romney, Santorum, Paul, Gingrich
North Dakota: Santorum, Romney, Paul, Gingrich
Ohio: Romney, Santorum, Gingrich, Paul
Oklahoma: Santorum, Gingrich, Romney, Paul
Tennessee: Santorum, Romney, Gingrich, Paul
Vermont: Romney, Santorum, Paul, Gingrich
Virginia: Romney, Paul
Enjoy.
Friday, February 24, 2012
The contraception mandate and you: the religious debate
President Obama has gotten more than he bargained for with the fire fight he is facing with religious groups over a mandate that even religious organizations include birth control as part of their insurance coverage. What was originally framed as a step in the right direction for woman's rights and universal healthcare quickly turned into a constitutional debate over the president's ability to force specific coverage onto everyone, including religious groups.
The Texas Attorney General's argument is weak at best and I call into question his understanding of the First Amendment:
The mandate is not directed at religious groups, but rather the insurance companies themselves. Are religious groups affected? Sure they are but then again they are also part of the greater population so any decision that applies to the United States as a whole affects them. Greg Abbott, as are religious groups, are linking the idea that insurance companies offering contraception methods as part of insurance plans somehow "authorize(s) conduct that conflicts with their religious principles" but I beg to differ. Something like 42% of women use contraception methods for something other than preventing pregnancies (the real reason religious groups are up in arms) - let's just ignore that for the time being since the religious groups are.
Let's take a tangent real quick before we continue and look at my experiences with sex and religion. I was raised a Catholic. Went to Catholic school for 10 years of my life and have a pretty good understanding of the mindset utilized by similar groups. Since sex education was a required thing growing up, we were taught three basic ideas:
Pretty grim stuff if you ask me, but the reality was that it was only part of the truth. If you read into these ideas a little, you sense a fear factor rather than that of love and compassion. Why is that? Why was the church pushing a harsher reality onto students in their early years? Plain and simple - they have always done it. My interpretation of the church is that if the general public were left to their own devices, morality would not exist and the integrity of people would be that of Sodom and Gomorrah. Since the church has little physical influence over the personal lives of their employees (free will), another avenue of control is required - making birth control somewhat fiscally out of reach through not providing it in insurance plans. You won't find any studies published on the cold, hard number of people who classify themselves as religious and their use of contraceptives but I'll go out on a limb and say that more than 80% of married couples practice it in some form.
I'm going to pull the religious card here. I was always taught that people are tested while here on earth but every decision was yours, including the decision to sin or not follow the church. How is the abstinence from contraceptives offered by an insurance company any different? The answer is it's not.
Enough tangent, back to the argument. Religious groups can harp all day on moral issues of offering birth control as part of their insurance plans but the reality that they do not want to face is that, regardless of it being available in the insurance plan, their congregation would still practice contraception methods in some form. The other side of the argument, that some how they are subsidizing the use of contraceptives is totally crazy. The mandate specifically says that rates will not go up as a result of this. Let's look at the insurance company for a minute because this is the best thing that could have happened for them. The insurance costs of raising a child are enormous compared to providing birth control so it's a win-win for them.
Obama is not shoving contraception down the throats of everyone but merely making it financially available to everyone. That's it. It's the person's decision to take it or not. Because it is a free will decision, arguing that this mandate violates the First Amendment is absurd. Now if it was "crazy religious fanatics are required to take birth control every day" then you have something, but merely making something available to the greater public and arguing it violates your rights? Give me a break.
The president's so called 'accommodation' was nothing but a shell game: the mandate still requires religious organizations to subsidize and authorize conduct that conflicts with their religious principles. The very first amendment to our Constitution was intended to protect against this sort of government intrusion into our religious convictions. (Texas Attorney General)
The Texas Attorney General's argument is weak at best and I call into question his understanding of the First Amendment:
Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.
The mandate is not directed at religious groups, but rather the insurance companies themselves. Are religious groups affected? Sure they are but then again they are also part of the greater population so any decision that applies to the United States as a whole affects them. Greg Abbott, as are religious groups, are linking the idea that insurance companies offering contraception methods as part of insurance plans somehow "authorize(s) conduct that conflicts with their religious principles" but I beg to differ. Something like 42% of women use contraception methods for something other than preventing pregnancies (the real reason religious groups are up in arms) - let's just ignore that for the time being since the religious groups are.
Let's take a tangent real quick before we continue and look at my experiences with sex and religion. I was raised a Catholic. Went to Catholic school for 10 years of my life and have a pretty good understanding of the mindset utilized by similar groups. Since sex education was a required thing growing up, we were taught three basic ideas:
- Only way to not get pregnant is to not have sex. Actually was told numerous time: "the use of any contraceptive is a sin"
- You need to wait until you're married to have sex
- If you have sex with more than one person, you will get a STD for life
Pretty grim stuff if you ask me, but the reality was that it was only part of the truth. If you read into these ideas a little, you sense a fear factor rather than that of love and compassion. Why is that? Why was the church pushing a harsher reality onto students in their early years? Plain and simple - they have always done it. My interpretation of the church is that if the general public were left to their own devices, morality would not exist and the integrity of people would be that of Sodom and Gomorrah. Since the church has little physical influence over the personal lives of their employees (free will), another avenue of control is required - making birth control somewhat fiscally out of reach through not providing it in insurance plans. You won't find any studies published on the cold, hard number of people who classify themselves as religious and their use of contraceptives but I'll go out on a limb and say that more than 80% of married couples practice it in some form.
I'm going to pull the religious card here. I was always taught that people are tested while here on earth but every decision was yours, including the decision to sin or not follow the church. How is the abstinence from contraceptives offered by an insurance company any different? The answer is it's not.
Enough tangent, back to the argument. Religious groups can harp all day on moral issues of offering birth control as part of their insurance plans but the reality that they do not want to face is that, regardless of it being available in the insurance plan, their congregation would still practice contraception methods in some form. The other side of the argument, that some how they are subsidizing the use of contraceptives is totally crazy. The mandate specifically says that rates will not go up as a result of this. Let's look at the insurance company for a minute because this is the best thing that could have happened for them. The insurance costs of raising a child are enormous compared to providing birth control so it's a win-win for them.
Obama is not shoving contraception down the throats of everyone but merely making it financially available to everyone. That's it. It's the person's decision to take it or not. Because it is a free will decision, arguing that this mandate violates the First Amendment is absurd. Now if it was "crazy religious fanatics are required to take birth control every day" then you have something, but merely making something available to the greater public and arguing it violates your rights? Give me a break.
The contraception mandate and you: the religious debate
President Obama has gotten more than he bargained for with the fire fight he is facing with religious groups over a mandate that even religious organizations include birth control as part of their insurance coverage. What was originally framed as a step in the right direction for woman's rights and universal healthcare quickly turned into a constitutional debate over the president's ability to force specific coverage onto everyone, including religious groups.
The Texas Attorney General's argument is weak at best and I call into question his understanding of the First Amendment:
The mandate is not directed at religious groups, but rather the insurance companies themselves. Are religious groups affected? Sure they are but then again they are also part of the greater population so any decision that applies to the United States as a whole affects them. Greg Abbott, as are religious groups, are linking the idea that insurance companies offering contraception methods as part of insurance plans somehow "authorize(s) conduct that conflicts with their religious principles" but I beg to differ. Something like 42% of women use contraception methods for something other than preventing pregnancies (the real reason religious groups are up in arms) - let's just ignore that for the time being since the religious groups are.
Let's take a tangent real quick before we continue and look at my experiences with sex and religion. I was raised a Catholic. Went to Catholic school for 10 years of my life and have a pretty good understanding of the mindset utilized by similar groups. Since sex education was a required thing growing up, we were taught three basic ideas:
Pretty grim stuff if you ask me, but the reality was that it was only part of the truth. If you read into these ideas a little, you sense a fear factor rather than that of love and compassion. Why is that? Why was the church pushing a harsher reality onto students in their early years? Plain and simple - they have always done it. My interpretation of the church is that if the general public were left to their own devices, morality would not exist and the integrity of people would be that of Sodom and Gomorrah. Since the church has little physical influence over the personal lives of their employees (free will), another avenue of control is required - making birth control somewhat fiscally out of reach through not providing it in insurance plans. You won't find any studies published on the cold, hard number of people who classify themselves as religious and their use of contraceptives but I'll go out on a limb and say that more than 80% of married couples practice it in some form.
I'm going to pull the religious card here. I was always taught that people are tested while here on earth but every decision was yours, including the decision to sin or not follow the church. How is the abstinence from contraceptives offered by an insurance company any different? The answer is it's not.
Enough tangent, back to the argument. Religious groups can harp all day on moral issues of offering birth control as part of their insurance plans but the reality that they do not want to face is that, regardless of it being available in the insurance plan, their congregation would still practice contraception methods in some form. The other side of the argument, that some how they are subsidizing the use of contraceptives is totally crazy. The mandate specifically says that rates will not go up as a result of this. Let's look at the insurance company for a minute because this is the best thing that could have happened for them. The insurance costs of raising a child are enormous compared to providing birth control so it's a win-win for them.
Obama is not shoving contraception down the throats of everyone but merely making it financially available to everyone. That's it. It's the person's decision to take it or not. Because it is a free will decision, arguing that this mandate violates the First Amendment is absurd. Now if it was "crazy religious fanatics are required to take birth control every day" then you have something, but merely making something available to the greater public and arguing it violates your rights? Give me a break.
The president's so called 'accommodation' was nothing but a shell game: the mandate still requires religious organizations to subsidize and authorize conduct that conflicts with their religious principles. The very first amendment to our Constitution was intended to protect against this sort of government intrusion into our religious convictions. (Texas Attorney General)
The Texas Attorney General's argument is weak at best and I call into question his understanding of the First Amendment:
Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.
The mandate is not directed at religious groups, but rather the insurance companies themselves. Are religious groups affected? Sure they are but then again they are also part of the greater population so any decision that applies to the United States as a whole affects them. Greg Abbott, as are religious groups, are linking the idea that insurance companies offering contraception methods as part of insurance plans somehow "authorize(s) conduct that conflicts with their religious principles" but I beg to differ. Something like 42% of women use contraception methods for something other than preventing pregnancies (the real reason religious groups are up in arms) - let's just ignore that for the time being since the religious groups are.
Let's take a tangent real quick before we continue and look at my experiences with sex and religion. I was raised a Catholic. Went to Catholic school for 10 years of my life and have a pretty good understanding of the mindset utilized by similar groups. Since sex education was a required thing growing up, we were taught three basic ideas:
- Only way to not get pregnant is to not have sex. Actually was told numerous time: "the use of any contraceptive is a sin"
- You need to wait until you're married to have sex
- If you have sex with more than one person, you will get a STD for life
Pretty grim stuff if you ask me, but the reality was that it was only part of the truth. If you read into these ideas a little, you sense a fear factor rather than that of love and compassion. Why is that? Why was the church pushing a harsher reality onto students in their early years? Plain and simple - they have always done it. My interpretation of the church is that if the general public were left to their own devices, morality would not exist and the integrity of people would be that of Sodom and Gomorrah. Since the church has little physical influence over the personal lives of their employees (free will), another avenue of control is required - making birth control somewhat fiscally out of reach through not providing it in insurance plans. You won't find any studies published on the cold, hard number of people who classify themselves as religious and their use of contraceptives but I'll go out on a limb and say that more than 80% of married couples practice it in some form.
I'm going to pull the religious card here. I was always taught that people are tested while here on earth but every decision was yours, including the decision to sin or not follow the church. How is the abstinence from contraceptives offered by an insurance company any different? The answer is it's not.
Enough tangent, back to the argument. Religious groups can harp all day on moral issues of offering birth control as part of their insurance plans but the reality that they do not want to face is that, regardless of it being available in the insurance plan, their congregation would still practice contraception methods in some form. The other side of the argument, that some how they are subsidizing the use of contraceptives is totally crazy. The mandate specifically says that rates will not go up as a result of this. Let's look at the insurance company for a minute because this is the best thing that could have happened for them. The insurance costs of raising a child are enormous compared to providing birth control so it's a win-win for them.
Obama is not shoving contraception down the throats of everyone but merely making it financially available to everyone. That's it. It's the person's decision to take it or not. Because it is a free will decision, arguing that this mandate violates the First Amendment is absurd. Now if it was "crazy religious fanatics are required to take birth control every day" then you have something, but merely making something available to the greater public and arguing it violates your rights? Give me a break.
Thursday, February 23, 2012
Banking, in a nutshell
What do banks do? Two things. First, they maintain their customers' deposits, paying interest on them for the privilege. Second, they lend some of their customers' funds to creditworthy borrowers, charging them interest for the privilege. Banks make money, in brief, by taking a bit off of the top when transferring interest payments from their debtors to their depositors.
What is the economic value of what banks do? Banks perform the important tasks of liquidity & maturity transformation. In so doing, they play the role of financial intermediaries--institutions that match savers with borrowers, facilitating investment. Investment, in turn, is a critical driver of economic growth.
A depositor, in general, wants to invest in a short-term, highly liquid vehicle. That is, she wants to be able to, on a moment's notice (short maturity), convert her investment into cash (high liquidity). A bank deposit offers her just that. As long as her savings reside in the bank they yield her interest. Whenever she wishes, however, she may make a withdrawal, converting her investment into cash without warning.
A borrower, in general, wants to provide a long-term, illiquid vehicle. That is, he wants to be able to spend his borrowed funds over a long period of time (long maturity), without necessarily being able to convert his purchases into cash in the interim (illiquidity). For example, if he borrows from the bank to buy a house, he may not be able to fully pay off his mortgage until it matures (say, thirty years from now), because his stream of income prevents this. A bank loan offer him exactly what he wants. As long as he makes his payments on time, he need not fully pay for his purchases until his loan matures, which may be well into the future.
How do banks manage to match depositors with borrowers, then, given their divergent wants? They manage to do this thanks to the law of large numbers. The withdrawal behavior of each depositor is very unpredictable. Because the behavior of one depositor is independent of the behavior of others, however, the law of large numbers entails that the withdrawal behavior of many depositors is very predictable. A bank that enjoys a large number of customers may confidently predict aggregate withdrawals on a given day, even if it cannot predict how much each customer withdraws. As a consequence, banks keep just enough cash in their vaults (their reserves) to honor these predictable withdrawals, freeing up the remaining funds to be invested with long-term, illiquid borrowers. Banks, therefore, make possible productive investments that would otherwise not be possible, thereby contributing to economic growth.
Sounds too good to be true, doesn't it? There is, indeed a catch: Exploiting the law of large numbers is only possible because, most of the time, the behavior of one depositor is independent of the behavior of others. If withdrawals become correlated, the business model of banking breaks down. Suppose, for illustration, that a bank invests heavily in one sector of the economy (e.g., housing), believing that this promises the highest risk-adjusted returns for its depositors. Suppose further that many of these investments go belly up, with large numbers of borrowers defaulting on their loans. A depositor, observing this, worries about the ability of her bank to make good on her future withdrawals. Moreover, she knows that if she is worried about this, other depositors must be similarly worried. Even if the bank is in fact solvent, it is never in a position to make good on every deposit simultaneously, for some of the funds have been invested. Knowing that others will make larger-than-usual withdrawals, fearing that the bank is insolvent, it is in her best interest to beat them to it. If she isn't one of the first to get her money out of the bank, the bank may not be able to honor her deposits, even if it was solvent in the first place.
A banking panic (or bank run) is a self-fulfilling prophecy. Fears concerning a bank's solvency trigger correlated withdrawals, rendering the bank insolvent regardless of its prior condition. Systemic banking panics occur for similar reasons. If many banks turn out to have exposure to lots of bad loans, uninformed depositors may play it safe, running on their bank regardless of its individual exposure. This pushes the entire banking system into insolvency, causing a complete breakdown of financial intermediation in the economy, severely undermining economic growth.
Most economists, therefore, believe it is part of the role of government to stem banking panics, but not to make every failing financial institution whole. It is also important to regulate banking, because if banks can count on the government to bail them out in a panic, that limits their downside, encouraging them to take excessive risks with their depositors' funds. The best way to do these things, however, is a matter of considerable debate. With the introduction of deposit insurance, depositors no longer monitor commercial bank's investments, which is why the government tightly regulates them (for better or for worse). In the recent financial crisis, there were runs on so-called 'shadow banks', which work similarly to commercial banks, but operate outside of ordinary bank regulations.
The most important lessons, going forward: (1) preserve the banking system, not individual banks; (2) preserve institutions--preserve neither the management, nor the shareholders; (3) the purpose of regulation is to force bankers to put their own money on the line, not just the taxpayer's--otherwise, keep it simple. The US definitely erred too much on the side of caution in '08-'09, for which it may be rightly criticized, but it is safe to say swinging too far in the other direction may have done even more damage to the economy. Pick your poison.
What is the economic value of what banks do? Banks perform the important tasks of liquidity & maturity transformation. In so doing, they play the role of financial intermediaries--institutions that match savers with borrowers, facilitating investment. Investment, in turn, is a critical driver of economic growth.
A depositor, in general, wants to invest in a short-term, highly liquid vehicle. That is, she wants to be able to, on a moment's notice (short maturity), convert her investment into cash (high liquidity). A bank deposit offers her just that. As long as her savings reside in the bank they yield her interest. Whenever she wishes, however, she may make a withdrawal, converting her investment into cash without warning.
A borrower, in general, wants to provide a long-term, illiquid vehicle. That is, he wants to be able to spend his borrowed funds over a long period of time (long maturity), without necessarily being able to convert his purchases into cash in the interim (illiquidity). For example, if he borrows from the bank to buy a house, he may not be able to fully pay off his mortgage until it matures (say, thirty years from now), because his stream of income prevents this. A bank loan offer him exactly what he wants. As long as he makes his payments on time, he need not fully pay for his purchases until his loan matures, which may be well into the future.
How do banks manage to match depositors with borrowers, then, given their divergent wants? They manage to do this thanks to the law of large numbers. The withdrawal behavior of each depositor is very unpredictable. Because the behavior of one depositor is independent of the behavior of others, however, the law of large numbers entails that the withdrawal behavior of many depositors is very predictable. A bank that enjoys a large number of customers may confidently predict aggregate withdrawals on a given day, even if it cannot predict how much each customer withdraws. As a consequence, banks keep just enough cash in their vaults (their reserves) to honor these predictable withdrawals, freeing up the remaining funds to be invested with long-term, illiquid borrowers. Banks, therefore, make possible productive investments that would otherwise not be possible, thereby contributing to economic growth.
Sounds too good to be true, doesn't it? There is, indeed a catch: Exploiting the law of large numbers is only possible because, most of the time, the behavior of one depositor is independent of the behavior of others. If withdrawals become correlated, the business model of banking breaks down. Suppose, for illustration, that a bank invests heavily in one sector of the economy (e.g., housing), believing that this promises the highest risk-adjusted returns for its depositors. Suppose further that many of these investments go belly up, with large numbers of borrowers defaulting on their loans. A depositor, observing this, worries about the ability of her bank to make good on her future withdrawals. Moreover, she knows that if she is worried about this, other depositors must be similarly worried. Even if the bank is in fact solvent, it is never in a position to make good on every deposit simultaneously, for some of the funds have been invested. Knowing that others will make larger-than-usual withdrawals, fearing that the bank is insolvent, it is in her best interest to beat them to it. If she isn't one of the first to get her money out of the bank, the bank may not be able to honor her deposits, even if it was solvent in the first place.
A banking panic (or bank run) is a self-fulfilling prophecy. Fears concerning a bank's solvency trigger correlated withdrawals, rendering the bank insolvent regardless of its prior condition. Systemic banking panics occur for similar reasons. If many banks turn out to have exposure to lots of bad loans, uninformed depositors may play it safe, running on their bank regardless of its individual exposure. This pushes the entire banking system into insolvency, causing a complete breakdown of financial intermediation in the economy, severely undermining economic growth.
Most economists, therefore, believe it is part of the role of government to stem banking panics, but not to make every failing financial institution whole. It is also important to regulate banking, because if banks can count on the government to bail them out in a panic, that limits their downside, encouraging them to take excessive risks with their depositors' funds. The best way to do these things, however, is a matter of considerable debate. With the introduction of deposit insurance, depositors no longer monitor commercial bank's investments, which is why the government tightly regulates them (for better or for worse). In the recent financial crisis, there were runs on so-called 'shadow banks', which work similarly to commercial banks, but operate outside of ordinary bank regulations.
The most important lessons, going forward: (1) preserve the banking system, not individual banks; (2) preserve institutions--preserve neither the management, nor the shareholders; (3) the purpose of regulation is to force bankers to put their own money on the line, not just the taxpayer's--otherwise, keep it simple. The US definitely erred too much on the side of caution in '08-'09, for which it may be rightly criticized, but it is safe to say swinging too far in the other direction may have done even more damage to the economy. Pick your poison.
Wednesday, February 22, 2012
Fixing the corporate income tax
First, businesses only ought to report their revenue from sales. Second, they should deduct purchases from other businesses. Third, they must also deduct labor expenses (wages & benefits). On the difference, they ought to be taxed at a flat rate. No further deductions, credits, etc. Simple.
'Closing loopholes' sounds good, but the devil is in the details. If it is code for taxing purchases from other businesses, for example, then these may not be loopholes worth closing. Also remember that means-testing raises marginal tax rates. If you want to close loopholes, close them for everyone, not just big businesses.
Finally, note that corporate income tax reform has little or nothing to do with stimulating the economy in the short run. By contrast, it has everything to do with long-run economic growth, the state of the government's finances, and the distribution of wealth in society. So judge proposals on those terms.
'Closing loopholes' sounds good, but the devil is in the details. If it is code for taxing purchases from other businesses, for example, then these may not be loopholes worth closing. Also remember that means-testing raises marginal tax rates. If you want to close loopholes, close them for everyone, not just big businesses.
Finally, note that corporate income tax reform has little or nothing to do with stimulating the economy in the short run. By contrast, it has everything to do with long-run economic growth, the state of the government's finances, and the distribution of wealth in society. So judge proposals on those terms.
Drugs to make you sick
Here is a gem I came across while reading an article on the FDA reviewing caffeine:
I appreciate alternative views on society but this comment is second to none, well except maybe people that think the gold standard is a good idea, and really show the lack of education on the matter. Being sort of an expert on all things pharma, I can only laugh at what this person has to say and want to educate others which may fall into this same mindset. Queue National Geographic intro music...
First off, of the costs associated with bringing a drug to market only a small percentage ever hits the books of the FDA. Your average drug development costs are on the order of $1 billion once you factor in four rounds of clinical trials compared to the ~$1.2 million associated with a full drug application (roughly .001% of the costs). If you've ever seen a drug application (I'll just assume you haven't), you'd know that they basically cut down a small forest to print out a hard copy with all the clinical data. The FDA needs a small army of people to review all the data and ensure that the drug company followed industry standards - all people that are paid. Let's also not forget that just because the company pays the application fee, that the drug is approved. Use your favorite search engine and look for "fda rejections" for a little bit of fun. The FDA is meant to provide reasonable oversight to drugs and devices marketed to the greater public - without them, we'd literally have snake oil being sold as the cure for cancer...
What about a cure for cancer and diabetes? Between these two classes of diseases, billions of dollars are spent in basic research at universities and an unimaginable amount at both big and small pharma. Any time a viable treatment option is found or new potentially viable compound is discovered/created, money is thrown at it. Venture capital goons love throwing their money at these wonder compounds because their few million dollar gamble now could be worth billions in drug sales in the future - sort of like hitting the lottery. Heck, even universities will spin off commercial entities to bring a drug to market just for a cut of the licensing fees. I have a hard time believing that there are scientist sitting out there with viable compounds or revolutionary treatment having a hard time finding funding - there is just too much money to be made to risk not looking into it further.
It's the perfect business model: drug companies create drugs that keep you sick so they are able to turn a greater profit off of your warm body, eventually killing you in the long run. If people were not sick in the first place, drug companies would not exist. Ok, so you got sick and now you're taking a drug - if you stayed sick or got sicker while taking a drug, wouldn't you stop taking it? I know if I took a drug for my acne and required Chipotle Away in response to a nasty side effect I'd stop taking it. How bout those fun-loving side effects caused by chemo therapy? No one said drug development or treatments were perfect - far from it actually. Drugs and treatments are rated and compared by their statistical likely hood of being effective at treating your symptoms while at the same time weighing the risks of the side effects. Except for twins or the like, the effect a given drug or treatment has on an individual can vary greatly so the expectation of a wonder drug with no side effects, curing your ailment is absurd unless you talk about custom tailored drugs, currently cost prohibitive. Sick people can't work - people that can't work can't pay for prescription drugs, even with Obamacare.
Drug companies are around not because they are money hoarding, evil entities looking to steal your money, soul, and wife but because they improve the quality of life in a statistical sense. Sure some guy might die from a heart attack that might have been caused by a drug or you might be covered in teal polka dots for the rest of your life but if it improves the quality of life for a statistically significant population what's the big deal? The person knew the risks of taking the drug in the first place (except in cases of shoddy clinical trials but that's a topic for another day) and valued the potential life without the ailment more than the statistical likelihood of any of the side effects.Case closed, no conspiracy, no cover up.
To the person that wrote the quotation above, next time you get sick don't take any drugs or antibiotics and see how well you feel and how fast you recover.
This is so ridiculous. I suppose the manufacturers of this product greased the palms of the FDA but good. How about a cure for Diabetes and Cancer? There are thousands of young scientists doing just that but they can't get into clinical trials because they don't have the funding-- but some quack produces THIS and it gets considered and will only be recalled when a few hundred die from it. The FDA has one thing in mind -- Money, and if you have it, they will allow it, hence all the bogus pharmaceuticals designed to keep you or make you sick. What a world. (CNN.com)
I appreciate alternative views on society but this comment is second to none, well except maybe people that think the gold standard is a good idea, and really show the lack of education on the matter. Being sort of an expert on all things pharma, I can only laugh at what this person has to say and want to educate others which may fall into this same mindset. Queue National Geographic intro music...
First off, of the costs associated with bringing a drug to market only a small percentage ever hits the books of the FDA. Your average drug development costs are on the order of $1 billion once you factor in four rounds of clinical trials compared to the ~$1.2 million associated with a full drug application (roughly .001% of the costs). If you've ever seen a drug application (I'll just assume you haven't), you'd know that they basically cut down a small forest to print out a hard copy with all the clinical data. The FDA needs a small army of people to review all the data and ensure that the drug company followed industry standards - all people that are paid. Let's also not forget that just because the company pays the application fee, that the drug is approved. Use your favorite search engine and look for "fda rejections" for a little bit of fun. The FDA is meant to provide reasonable oversight to drugs and devices marketed to the greater public - without them, we'd literally have snake oil being sold as the cure for cancer...
What about a cure for cancer and diabetes? Between these two classes of diseases, billions of dollars are spent in basic research at universities and an unimaginable amount at both big and small pharma. Any time a viable treatment option is found or new potentially viable compound is discovered/created, money is thrown at it. Venture capital goons love throwing their money at these wonder compounds because their few million dollar gamble now could be worth billions in drug sales in the future - sort of like hitting the lottery. Heck, even universities will spin off commercial entities to bring a drug to market just for a cut of the licensing fees. I have a hard time believing that there are scientist sitting out there with viable compounds or revolutionary treatment having a hard time finding funding - there is just too much money to be made to risk not looking into it further.
It's the perfect business model: drug companies create drugs that keep you sick so they are able to turn a greater profit off of your warm body, eventually killing you in the long run. If people were not sick in the first place, drug companies would not exist. Ok, so you got sick and now you're taking a drug - if you stayed sick or got sicker while taking a drug, wouldn't you stop taking it? I know if I took a drug for my acne and required Chipotle Away in response to a nasty side effect I'd stop taking it. How bout those fun-loving side effects caused by chemo therapy? No one said drug development or treatments were perfect - far from it actually. Drugs and treatments are rated and compared by their statistical likely hood of being effective at treating your symptoms while at the same time weighing the risks of the side effects. Except for twins or the like, the effect a given drug or treatment has on an individual can vary greatly so the expectation of a wonder drug with no side effects, curing your ailment is absurd unless you talk about custom tailored drugs, currently cost prohibitive. Sick people can't work - people that can't work can't pay for prescription drugs, even with Obamacare.
Drug companies are around not because they are money hoarding, evil entities looking to steal your money, soul, and wife but because they improve the quality of life in a statistical sense. Sure some guy might die from a heart attack that might have been caused by a drug or you might be covered in teal polka dots for the rest of your life but if it improves the quality of life for a statistically significant population what's the big deal? The person knew the risks of taking the drug in the first place (except in cases of shoddy clinical trials but that's a topic for another day) and valued the potential life without the ailment more than the statistical likelihood of any of the side effects.Case closed, no conspiracy, no cover up.
To the person that wrote the quotation above, next time you get sick don't take any drugs or antibiotics and see how well you feel and how fast you recover.
Supply-side economics, for babies
Suppose you're deciding how much gas to purchase. The gas station charges $x per gallon, but you also have to pay a gas tax of $y per gallon. The effective price of gas for you, then, is $(x+y) per gallon.
Suppose first that y = 0.25. In that case, let's say you want to buy 10 gallons. Now suppose that y = 0.75. Do you still want to buy 10 gallons? Those same 10 gallons would cost you $5 extra. Even if that isn't enough to make you want to buy a little less gas, it's plausible that someone out there is going to buy fewer gallons than they otherwise would, right?
How will the change in y impact the government's income? On the one hand, y goes up, which means every gallon purchased adds $0.50 more to the government's income. On the other hand, the gallons of gas purchased probably go down, which means every gallon not purchased deducts $0.25 from the government's income. If the former effect dominates, then the government's income rises with the tax hike. If the latter effect dominates, then the government's income falls with the tax hike.
Suppose you're deciding how many hours to work. Your employer pays you $x per hour, but you also have to pay a tax of y% on your wages. Your effective wage, therefore, is $x(1 - y/100) per hour.
Suppose first that y = 0.25. In that case, let's say you want to work 40 hours. Now suppose that y = 0.75. Do you still want to work 40 hours? Those same 40 hours would earn you only half as much. Even if that isn't enough to make you work less, it's plausible that someone out there is going to work fewer hours than they otherwise would, right?
How will the change in y impact the government's income? On the one hand, y goes up, which means every hour worked secures the government more income. On the other hand, hours worked probably go down, which means every hour not worked loses the government more income. If the former effect dominates, then the government's income rises with the tax hike. If the latter effect dominates, then the government's income falls with the tax hike.
What's the difference? Well, if the price of gas goes up, you become poorer, which makes you buy fewer things in general (and gas in particular). If the price of work goes up, you still become poorer, but that makes you work more hours to make up the difference. Thus, there is a third effect, which reinforces the revenue-reducing aspect of the gas tax, but reinforces the revenue-raising aspect of the wage tax. Common sense suggests, therefore, wage tax hikes are likely to be more successful in raising revenues than gas tax hikes.
What do the data tell us? Higher income taxes unambiguously raise more revenue, but some expected revenue is lost because some people do not generate (or report) as much income. In other words, the supply-siders had a point, but one that was way overblown. So when peeps tell you cutting taxes raises revenue, understand that there are multiple things going on, and that we have pretty solid evidence that other, more intuitive effects, tend to dominate in the end. Doesn't mean higher tax rates are desirable, but they would raise more revenue--possibly a lot more.
Suppose first that y = 0.25. In that case, let's say you want to buy 10 gallons. Now suppose that y = 0.75. Do you still want to buy 10 gallons? Those same 10 gallons would cost you $5 extra. Even if that isn't enough to make you want to buy a little less gas, it's plausible that someone out there is going to buy fewer gallons than they otherwise would, right?
How will the change in y impact the government's income? On the one hand, y goes up, which means every gallon purchased adds $0.50 more to the government's income. On the other hand, the gallons of gas purchased probably go down, which means every gallon not purchased deducts $0.25 from the government's income. If the former effect dominates, then the government's income rises with the tax hike. If the latter effect dominates, then the government's income falls with the tax hike.
Suppose you're deciding how many hours to work. Your employer pays you $x per hour, but you also have to pay a tax of y% on your wages. Your effective wage, therefore, is $x(1 - y/100) per hour.
Suppose first that y = 0.25. In that case, let's say you want to work 40 hours. Now suppose that y = 0.75. Do you still want to work 40 hours? Those same 40 hours would earn you only half as much. Even if that isn't enough to make you work less, it's plausible that someone out there is going to work fewer hours than they otherwise would, right?
How will the change in y impact the government's income? On the one hand, y goes up, which means every hour worked secures the government more income. On the other hand, hours worked probably go down, which means every hour not worked loses the government more income. If the former effect dominates, then the government's income rises with the tax hike. If the latter effect dominates, then the government's income falls with the tax hike.
What's the difference? Well, if the price of gas goes up, you become poorer, which makes you buy fewer things in general (and gas in particular). If the price of work goes up, you still become poorer, but that makes you work more hours to make up the difference. Thus, there is a third effect, which reinforces the revenue-reducing aspect of the gas tax, but reinforces the revenue-raising aspect of the wage tax. Common sense suggests, therefore, wage tax hikes are likely to be more successful in raising revenues than gas tax hikes.
What do the data tell us? Higher income taxes unambiguously raise more revenue, but some expected revenue is lost because some people do not generate (or report) as much income. In other words, the supply-siders had a point, but one that was way overblown. So when peeps tell you cutting taxes raises revenue, understand that there are multiple things going on, and that we have pretty solid evidence that other, more intuitive effects, tend to dominate in the end. Doesn't mean higher tax rates are desirable, but they would raise more revenue--possibly a lot more.
Wednesday, February 15, 2012
NGDP targeting, for beginners
What is nominal gross domestic product (NGDP)? It is, in principle, the level of money expenditures on the economy's output. If you buy a good produced by the economy for the price of $x, then you raise NGDP by exactly $x. Of course, the government does not track every money expenditure, but it estimates NGDP based upon various inputs.
What determines NGDP? In a word (really three words): the central bank. Why? The central bank is the monopoly producer of money (defined here to be paper notes and coins). It is legally permitted to produce however much money it sees fit to produce. Moreover, money's cost of production is nearly zero. Consequently, the central bank is in complete control of the money supply.
At any point in time, the public only wants to hold onto so much money (its money demand). The rest it wants to spend or invest (free up for others to spend). If the central bank provides more money than the public wants to hold onto, putting it in the public's hands by purchasing assets from them, then the public will spend the excess money, raising NGDP. If the central bank provides less money than the public wants to hold onto, removing it from the public's hands by selling assets back to them, then the public will cut back spending, lowering NGDP. Because the central bank determines the money supply, it by extension determines the level of money expenditures, or NGDP.
There is one exception to this relationship. Consider a case in which the quantity of money the public wants to hold onto becomes entangled with the quantity of money the central bank provides. To be more specific, suppose that every time the central bank expands the money supply by $x, the public's demand for money expands by $x, too. This situation is called a 'liquidity trap'. If the central bank tries to raise NGDP by expanding the money supply, it will fail to do so no matter how much money it creates.
The only way to raise NGDP in a liquidity trap is to contract the public's demand for money. The way to do this is to make holding onto money less appealing. How is the central bank supposed to do that? Liquidity traps do not last forever. Once the economy exits a liquidity trap, money demand becomes disentangled from the money supply. At that point, if the central bank expands the money supply, then the value of money will fall (the value of money equilibrates money demand with money supply). If the central bank credibly promises to do just that when the time comes, the public will expect the money they hold onto to decline in value. This makes holding onto money less appealing. The less money the public holds onto, the more it spends, raising NGDP.
Thus, by managing not only the contemporary money supply, but also expectations concerning the future money supply, the central bank is always the determinant of NGDP. Why, though, does NGDP matter?
Everyone's expenditure is someone else's sale. NGDP, therefore, also measures the economy's money-denominated output. Let P be the price level, the price of a typical good or service. Let Y be real output, the quantity of typical goods and services the economy produces. It follows from the preceding observations that NGDP = P*Y. Many economists posit sticky prices--that is, they believe that many prices adjust only sluggishly to various kinds of shocks. Price stickiness implies that P moves slowly in response to NGDP shocks. As a consequence, shocks to NGDP induce shocks to Y, or real gross domestic product (RGDP):
Monetary (NGDP) shocks have real (RGDP) effects. RGDP, or Y, is the economy's real output. Producing lower levels of real output does not require employing so many inputs--e.g., labor:
Monetary (NGDP) shocks drive the business cycle. Stable NGDP growth minimizes shocks to RGDP, smoothing the business cycle. In contrast, sudden, deep contractions in NGDP cause severe recessions:
At any point in time, there is only so much real output the economy can produce. Too fast NGDP growth maxes out Y, necessitating rapid growth in P--that is, inflation:
Stable, moderate NGDP growth maximizes employment while keeping prices stable, fulfilling the dual mandate of monetary policy. Targeting stable, moderate NGDP growth, therefore, is usually the best course for monetary policy. What, then, is the prescription for lowering the unemployment rate in the US, which has been experiencing slow NGDP growth? More money => more NGDP => more employment?
Looks like more money isn't doing the trick. Looks, therefore, like we're in a liquidity trap--the solution to which is the management of expectations concerning the future money supply. Suppose that, instead of targeting stable, moderate NGDP growth, the central bank targets a stable, moderately rising trajectory (or path) for NGDP. Under normal circumstances, the two policies work more or less similarly. The difference is that the former policy is forgiving of past failures, while the latter never forgets.
If, because of a liquidity trap, the central bank fails to keep NGDP growing at the usual rate, the former policy will continue to strive for NGDP growth at the usual rate once the liquidity trap is behind us. The latter policy, by contrast, will strive for faster than usual NGDP growth in order to catch up to the targeted path. Faster NGDP growth will require a bigger than expected money supply, post-liquidity trap. Thus, if the central bank targets a stable, moderately rising trajectory for NGDP, then encountering a liquidity trap automatically commits it to a bigger than expected future money supply (the longer the trap lasts, the bigger the commitment), which is precisely what our earlier discussion of liquidity traps called for.
Suppose that the Federal Reserve, the central bank of the United States, promises to do everything in its power to restore NGDP to its pre-crisis trend line (see the third figure above). Since we're in a liquidity trap, this commits it to expanding the future money supply until NGDP makes a full, speedy recovery, but to do no more than that. Doing so would cause the public to expect the value of their money to decline over time, discouraging them from holding onto so much of it, thereby stimulating NGDP right now. And more NGDP, given sticky prices, would increase employment right now. The way to reduce the unemployment rate in the US, therefore, is for the Federal Reserve to target a stable, moderately rising trajectory for NGDP--in particular, to promise to continue NGDP's pre-crisis trajectory in a timely manner. Welcome, friends, to NGDP targeting.
What determines NGDP? In a word (really three words): the central bank. Why? The central bank is the monopoly producer of money (defined here to be paper notes and coins). It is legally permitted to produce however much money it sees fit to produce. Moreover, money's cost of production is nearly zero. Consequently, the central bank is in complete control of the money supply.
At any point in time, the public only wants to hold onto so much money (its money demand). The rest it wants to spend or invest (free up for others to spend). If the central bank provides more money than the public wants to hold onto, putting it in the public's hands by purchasing assets from them, then the public will spend the excess money, raising NGDP. If the central bank provides less money than the public wants to hold onto, removing it from the public's hands by selling assets back to them, then the public will cut back spending, lowering NGDP. Because the central bank determines the money supply, it by extension determines the level of money expenditures, or NGDP.
There is one exception to this relationship. Consider a case in which the quantity of money the public wants to hold onto becomes entangled with the quantity of money the central bank provides. To be more specific, suppose that every time the central bank expands the money supply by $x, the public's demand for money expands by $x, too. This situation is called a 'liquidity trap'. If the central bank tries to raise NGDP by expanding the money supply, it will fail to do so no matter how much money it creates.
The only way to raise NGDP in a liquidity trap is to contract the public's demand for money. The way to do this is to make holding onto money less appealing. How is the central bank supposed to do that? Liquidity traps do not last forever. Once the economy exits a liquidity trap, money demand becomes disentangled from the money supply. At that point, if the central bank expands the money supply, then the value of money will fall (the value of money equilibrates money demand with money supply). If the central bank credibly promises to do just that when the time comes, the public will expect the money they hold onto to decline in value. This makes holding onto money less appealing. The less money the public holds onto, the more it spends, raising NGDP.
Thus, by managing not only the contemporary money supply, but also expectations concerning the future money supply, the central bank is always the determinant of NGDP. Why, though, does NGDP matter?
Everyone's expenditure is someone else's sale. NGDP, therefore, also measures the economy's money-denominated output. Let P be the price level, the price of a typical good or service. Let Y be real output, the quantity of typical goods and services the economy produces. It follows from the preceding observations that NGDP = P*Y. Many economists posit sticky prices--that is, they believe that many prices adjust only sluggishly to various kinds of shocks. Price stickiness implies that P moves slowly in response to NGDP shocks. As a consequence, shocks to NGDP induce shocks to Y, or real gross domestic product (RGDP):
Monetary (NGDP) shocks have real (RGDP) effects. RGDP, or Y, is the economy's real output. Producing lower levels of real output does not require employing so many inputs--e.g., labor:
Monetary (NGDP) shocks drive the business cycle. Stable NGDP growth minimizes shocks to RGDP, smoothing the business cycle. In contrast, sudden, deep contractions in NGDP cause severe recessions:
At any point in time, there is only so much real output the economy can produce. Too fast NGDP growth maxes out Y, necessitating rapid growth in P--that is, inflation:
Stable, moderate NGDP growth maximizes employment while keeping prices stable, fulfilling the dual mandate of monetary policy. Targeting stable, moderate NGDP growth, therefore, is usually the best course for monetary policy. What, then, is the prescription for lowering the unemployment rate in the US, which has been experiencing slow NGDP growth? More money => more NGDP => more employment?
Looks like more money isn't doing the trick. Looks, therefore, like we're in a liquidity trap--the solution to which is the management of expectations concerning the future money supply. Suppose that, instead of targeting stable, moderate NGDP growth, the central bank targets a stable, moderately rising trajectory (or path) for NGDP. Under normal circumstances, the two policies work more or less similarly. The difference is that the former policy is forgiving of past failures, while the latter never forgets.
If, because of a liquidity trap, the central bank fails to keep NGDP growing at the usual rate, the former policy will continue to strive for NGDP growth at the usual rate once the liquidity trap is behind us. The latter policy, by contrast, will strive for faster than usual NGDP growth in order to catch up to the targeted path. Faster NGDP growth will require a bigger than expected money supply, post-liquidity trap. Thus, if the central bank targets a stable, moderately rising trajectory for NGDP, then encountering a liquidity trap automatically commits it to a bigger than expected future money supply (the longer the trap lasts, the bigger the commitment), which is precisely what our earlier discussion of liquidity traps called for.
Suppose that the Federal Reserve, the central bank of the United States, promises to do everything in its power to restore NGDP to its pre-crisis trend line (see the third figure above). Since we're in a liquidity trap, this commits it to expanding the future money supply until NGDP makes a full, speedy recovery, but to do no more than that. Doing so would cause the public to expect the value of their money to decline over time, discouraging them from holding onto so much of it, thereby stimulating NGDP right now. And more NGDP, given sticky prices, would increase employment right now. The way to reduce the unemployment rate in the US, therefore, is for the Federal Reserve to target a stable, moderately rising trajectory for NGDP--in particular, to promise to continue NGDP's pre-crisis trajectory in a timely manner. Welcome, friends, to NGDP targeting.
Tuesday, February 14, 2012
What's up with bubbles?
Suppose you believe (unjustifiably) that real estate prices will keep rising for the foreseeable future. You thus believe you can buy real estate now, only to sell it later at a profit. You proceed, consequently, to buy lots of real estate.
Sold on the merits of your new investment strategy, you try to persuade your friends to do the same. On the one hand, if you're right, they too would profit. On the other hand, their added demand for real estate would boost prices further, increasing the value of your investments.
Your friends, understanding this plan to be a win-win, try to persuade their friends. And so on. Eventually, enough people with enough savings sign onto the plan that they seem to be having a measurable (positive) impact on real estate prices. Their impact, in turn, supports your belief that real estate prices will keep rising for the foreseeable future. Selling the masses on your plan becomes easier, as the theory underpinning it proves increasingly accurate. As more amateurs come on board, prices start rising even faster.
Sophisticated investors begin to take notice. They conduct extensive research into the causes of the run-up in real estate prices. To their surprise, the real estate boom seems to have nothing to do with people's desire to own real estate--instead, it seems to have everything to do with your success in promulgating your theory! They predict, therefore, that when your theory finally runs into a rough patch (real estate prices decline, for whatever reason), investors will sour on your plan, causing some to move their money elsewhere. This, in turn, will depress prices further, causing still more investors to call it quits. And so on. Anticipation of such a downward spiral will only serve to accelerate it, as investors compete to get out of the market while prices remain high. There will, in short, be a sudden collapse in real estate prices once reality sets in.
Initially, their inclination is to short real estate, which is sensible enough given their expectation of a bust. They then, however, recall the wise words of a famous speculator: "markets can remain irrational a lot longer than you and I can remain solvent." Once reality sets in, prices will surely come crashing down, but reality may take a very long time to rear its ugly head. In the meantime, playing the contrarian is a loser's game.
Despite the arbitrariness of your original forecast, then, you manage to bring the major players in the real estate market over to your side. With real estate prices skyrocketing, you become very wealthy indeed. But suddenly, to your dismay, the political discourse turns to the subject of illegal immigration. Some politicians want to make it easier for would-be immigrants to come to the United States, but many others demand that the problem of illegal immigration be forcefully dealt with first. With only the best of intentions, therefore, the government sharply escalates its efforts to identify and penalize the illegal immigrants in our midst.
The crackdown not only encourages many illegals to leave the US, but also discourages many would-be illegals from coming to the US in the first place. These incentives depress the demand for real estate, causing the price of real estate to stagnate, before gradually declining. Investors find themselves reading headlines like "Has the Real Estate Market Finally Peaked?", making them fear a rush for the exits. As the market begins its rapid descent, you wonder whether you're really the genius others believed you to be.
Cheer up, dude--it's not the end of the world. If I were you, though, I'd buy US bonds. My sources tell me Treasury prices will keep rising for the foreseeable future...
Sold on the merits of your new investment strategy, you try to persuade your friends to do the same. On the one hand, if you're right, they too would profit. On the other hand, their added demand for real estate would boost prices further, increasing the value of your investments.
Your friends, understanding this plan to be a win-win, try to persuade their friends. And so on. Eventually, enough people with enough savings sign onto the plan that they seem to be having a measurable (positive) impact on real estate prices. Their impact, in turn, supports your belief that real estate prices will keep rising for the foreseeable future. Selling the masses on your plan becomes easier, as the theory underpinning it proves increasingly accurate. As more amateurs come on board, prices start rising even faster.
Sophisticated investors begin to take notice. They conduct extensive research into the causes of the run-up in real estate prices. To their surprise, the real estate boom seems to have nothing to do with people's desire to own real estate--instead, it seems to have everything to do with your success in promulgating your theory! They predict, therefore, that when your theory finally runs into a rough patch (real estate prices decline, for whatever reason), investors will sour on your plan, causing some to move their money elsewhere. This, in turn, will depress prices further, causing still more investors to call it quits. And so on. Anticipation of such a downward spiral will only serve to accelerate it, as investors compete to get out of the market while prices remain high. There will, in short, be a sudden collapse in real estate prices once reality sets in.
Initially, their inclination is to short real estate, which is sensible enough given their expectation of a bust. They then, however, recall the wise words of a famous speculator: "markets can remain irrational a lot longer than you and I can remain solvent." Once reality sets in, prices will surely come crashing down, but reality may take a very long time to rear its ugly head. In the meantime, playing the contrarian is a loser's game.
Despite the arbitrariness of your original forecast, then, you manage to bring the major players in the real estate market over to your side. With real estate prices skyrocketing, you become very wealthy indeed. But suddenly, to your dismay, the political discourse turns to the subject of illegal immigration. Some politicians want to make it easier for would-be immigrants to come to the United States, but many others demand that the problem of illegal immigration be forcefully dealt with first. With only the best of intentions, therefore, the government sharply escalates its efforts to identify and penalize the illegal immigrants in our midst.
The crackdown not only encourages many illegals to leave the US, but also discourages many would-be illegals from coming to the US in the first place. These incentives depress the demand for real estate, causing the price of real estate to stagnate, before gradually declining. Investors find themselves reading headlines like "Has the Real Estate Market Finally Peaked?", making them fear a rush for the exits. As the market begins its rapid descent, you wonder whether you're really the genius others believed you to be.
Cheer up, dude--it's not the end of the world. If I were you, though, I'd buy US bonds. My sources tell me Treasury prices will keep rising for the foreseeable future...
Sunday, February 12, 2012
What is unemployment?
An individual is unemployed if she does not have a job, but she is actively searching for one. The unemployment rate is, therefore, the percentage of the labor force (those who either have a job, or are actively searching for one) who do not have a job; it is determined by means of a survey.
Why does unemployment matter? Consider the textbook model of the labor market. The labor demand schedule (D) relates the quantity of work would-be employers want to buy to the level of wages. The labor supply schedule (S) relates the quantity of work would-be employees want to sell to the level of wages. In equilibrium, the level of wages (P) is determined by the intersection of the labor demand and labor supply schedules. Because employers want to buy more work when the level of wages is lower, the labor demand schedule slopes down. Because employees want to sell more work when the level of wages is higher, the labor supply schedule slopes up:
Suppose that, for whatever reason, the level of wages is too high (in the diagram, higher than P). The quantity of work employees want to sell (the labor force) exceeds the quantity of work employers want to buy (employment). Unemployment, in this model, is the excess supply of labor due to wages being too high. Lower wages increase employer surplus more than they decrease employee surplus--that is, lower wages (provided compensating transfers) can make everyone in the labor market better off. Unemployment thus signals labor market inefficiency.
For the sake of efficiency, then, we want zero unemployment, right? Not quite. In order for dynamic economies to efficiently allocate labor, it is necessary for workers to change jobs from time to time. At every point in time, therefore, some "natural" fraction of the labor force is in between jobs, resulting in a non-zero unemployment rate. Moreover, because the unemployment rate is determined by survey, some individuals outside of the labor force may pretend to be actively searching for a job (for various reasons), further elevating the unemployment rate. The "natural rate of unemployment" is, consequently, thought to be significantly greater than zero.
What causes high unemployment? Demand-side stories cite contracting labor demand in the face of sticky wages. Supply-side stories cite contracting labor supply masquerading as contracting labor demand. Demand deficiencies cause unemployment rates in excess of the natural rate, while supply deficiencies cause the natural rate itself to rise. The mark of demand deficiency is slowing or static wage growth, while the mark of supply deficiency is rising wages.
It is important to correctly identify the cause. To see this, note that if the problem is demand deficiency, a fix for supply deficiency (encouraging workers to seek employment) raises, not lowers, the unemployment rate. If the problem is supply deficiency, a fix for demand deficiency (encouraging firms to hire more workers) does little or nothing to the unemployment rate, but creates other problems (e.g., excess inflation).
So, why is the unemployment rate in the US so high?
Looks to me like slowing or static wage growth since the onset of the recent crisis. Looks to me, therefore, like demand deficiency is the problem. The prescription for lower unemployment rates, then, is more work, not more workers. And the prescription for more work, recall, is greater aggregate demand for US economic output.
Why does unemployment matter? Consider the textbook model of the labor market. The labor demand schedule (D) relates the quantity of work would-be employers want to buy to the level of wages. The labor supply schedule (S) relates the quantity of work would-be employees want to sell to the level of wages. In equilibrium, the level of wages (P) is determined by the intersection of the labor demand and labor supply schedules. Because employers want to buy more work when the level of wages is lower, the labor demand schedule slopes down. Because employees want to sell more work when the level of wages is higher, the labor supply schedule slopes up:
Suppose that, for whatever reason, the level of wages is too high (in the diagram, higher than P). The quantity of work employees want to sell (the labor force) exceeds the quantity of work employers want to buy (employment). Unemployment, in this model, is the excess supply of labor due to wages being too high. Lower wages increase employer surplus more than they decrease employee surplus--that is, lower wages (provided compensating transfers) can make everyone in the labor market better off. Unemployment thus signals labor market inefficiency.
For the sake of efficiency, then, we want zero unemployment, right? Not quite. In order for dynamic economies to efficiently allocate labor, it is necessary for workers to change jobs from time to time. At every point in time, therefore, some "natural" fraction of the labor force is in between jobs, resulting in a non-zero unemployment rate. Moreover, because the unemployment rate is determined by survey, some individuals outside of the labor force may pretend to be actively searching for a job (for various reasons), further elevating the unemployment rate. The "natural rate of unemployment" is, consequently, thought to be significantly greater than zero.
What causes high unemployment? Demand-side stories cite contracting labor demand in the face of sticky wages. Supply-side stories cite contracting labor supply masquerading as contracting labor demand. Demand deficiencies cause unemployment rates in excess of the natural rate, while supply deficiencies cause the natural rate itself to rise. The mark of demand deficiency is slowing or static wage growth, while the mark of supply deficiency is rising wages.
It is important to correctly identify the cause. To see this, note that if the problem is demand deficiency, a fix for supply deficiency (encouraging workers to seek employment) raises, not lowers, the unemployment rate. If the problem is supply deficiency, a fix for demand deficiency (encouraging firms to hire more workers) does little or nothing to the unemployment rate, but creates other problems (e.g., excess inflation).
So, why is the unemployment rate in the US so high?
Looks to me like slowing or static wage growth since the onset of the recent crisis. Looks to me, therefore, like demand deficiency is the problem. The prescription for lower unemployment rates, then, is more work, not more workers. And the prescription for more work, recall, is greater aggregate demand for US economic output.
Who's threatened by Iran?
Let me ask you a question: How many countries in possession of nuclear weapons have been attacked by a country not in possession of nuclear weapons? Take your time. In case you're still scratching your head, the correct answer is zero.
Let me ask you a second question: Does the United States possess nukes? Does Israel? (Yes, they both have lots of them, the US especially so).
Projecting past experience forward, then (the new riddle of induction notwithstanding), will the US or Israel be attacked by a non-nuclear Iran?
Okay, if you're still with me, let me ask you a third question: How many countries in possession of nuclear weapons have been attacked by a country also in possession of nuclear weapons? Again, take your time. In case you wanna cut to the chase, the correct answer (once more) is zero.
Projecting past experience forward, then, will the US or Israel be attacked by a nuclear Iran?
"Don't be silly," you say. "Just because something never happened in the past, doesn't mean it won't happen in the future. This time, my friend, really is different." Maybe so. But when there is a strikingly consistent pattern in the historical record, it's worth getting to the bottom of it. So let's.
Why have countries with nuclear weapons never been attacked by other countries? Here's a first stab at a solution. Political leaders, above all else, crave power. If they didn't, they wouldn't be willing to sacrifice as much as they do to acquire it, and to maintain it. In 1945, when the US demonstrated the destructive potential of nuclear weapons (essentially telling Japan, "if you give us so much as a papercut, we will set you on fire"), every political leader in the world was watching. What they learned is that, for small countries, getting nuked is a recipe for not having a country over which to rule anymore. For big countries, getting nuked is a recipe for losing power very, very quickly.
So, caring first and foremost about power, world leaders silently affirmed the 11th commandment: Thou shalt not fuck with nuclear states. Don't forget that, prior to 1945, war between great powers was the norm, not the exception. Since 1945, it's only been cold wars between nuclear states, which is to say, often tense but essentially non-violent relations.
"Don't be silly," you say again. "Iran isn't a cold, calculating government--it's a fanatical theocracy committed to the destruction of Israel. Nukes in its hands cannot be trusted." Maybe so. But consider this: How have the ayatollahs managed to (with relative stability) control Iran for 33 years? This is not a country whose government is protected from its people by outside governments. This is a country who has been the victim of CIA-led coups, internal uprisings egged on by outsiders, and social and economic volatility the likes of which Americans cannot even imagine. And yet these supposed loons have managed to maintain their grip. Something tells me that while they may be fanatical this-or-thats, they care a lot about political power, too. And something tells me that their cold, realistic calculations have a lot to do with why they still hold the reigns in what would otherwise be a tremendously unstable political environment. And recognition of the 11th commandment does not require a genius. So, why do you seem so sure that this time is different?
"Why, then, do they seem so hellbent on the development of a nuke?" you ask. Simple--when the most militarily powerful countries on Earth speak openly on a daily basis about their eagerness to destroy you, and when you know of the 11th commandment (refresher: Thou shalt not fuck with nuclear states), it would seem that getting hold of a nuke would help a lot with maintaining your grip on a country that is on the brink of revolution. Self-preservation is the name of the game in international relations.
Do I want Iran to have a nuke? Of course not. For one thing, lots of Iran's neighbors would be more or less defenseless against a nuclear Iran. The effect on the balance of power in the Middle East would almost certainly be unfavorable. And yes, the probability of Iran violating the 11th commandment is marginally higher than the probability of, say, Israel doing likewise. Nobody wants Iran to go nuclear. But that's not because Iran is a serious threat to US or Israeli security. It's simply for classic balance of power considerations.
What's in everyone's best interest is for a ratcheting down of tensions. If Iran is less concerned about the international community planning its destruction, it will be more willing to slow or halt its development of the bomb. And if we offer that, in exchange for healthier diplomatic relations, we may be able to create a more stable political situation in the Middle East than would otherwise obtain.
So, why aren't we doing that? Well, recall the 11th commandment. Once Iran has the bomb, we will no longer have the option of shaping their internal political situation (witness nuclear Pakistan, a fanatical government if there ever was one, who almost certainly hid bin Laden, but whom we don't give orders to). If we don't take out the ayatollahs while we have the chance, Iran is, for the foreseeable future, beyond our sphere of significant influence. But why do we care so much about influencing Iran? We obviously don't care much about influencing Syria at the moment (actions speak louder than words). The answer, not obvious to only the most deliberately obtuse, is that Iran has lots of oil. Our goal is not to steal their oil, or to secure it at a discount. Our goal--indeed, the Western world's goal, is to stabilize oil production and flows in international markets so as to minimize oil shocks to Western economies (the oil shocks of the late 2000s drove up headline inflation, triggering tighter monetary policy, triggering the worst recession since the Great Depression). Sure, we care about human rights, etc., too. But the reason we seem really eager to bomb some countries (Libya, Iran), and not others (Syria), is because access to a very important commodity is at stake. No conspiracy, no hegemony, just good old fashioned pursuit of strategic interests.
Let's, then, not sign off on another war without our eyes open to what's really at stake, and what our government's true motivations are.
Let me ask you a second question: Does the United States possess nukes? Does Israel? (Yes, they both have lots of them, the US especially so).
Projecting past experience forward, then (the new riddle of induction notwithstanding), will the US or Israel be attacked by a non-nuclear Iran?
Okay, if you're still with me, let me ask you a third question: How many countries in possession of nuclear weapons have been attacked by a country also in possession of nuclear weapons? Again, take your time. In case you wanna cut to the chase, the correct answer (once more) is zero.
Projecting past experience forward, then, will the US or Israel be attacked by a nuclear Iran?
"Don't be silly," you say. "Just because something never happened in the past, doesn't mean it won't happen in the future. This time, my friend, really is different." Maybe so. But when there is a strikingly consistent pattern in the historical record, it's worth getting to the bottom of it. So let's.
Why have countries with nuclear weapons never been attacked by other countries? Here's a first stab at a solution. Political leaders, above all else, crave power. If they didn't, they wouldn't be willing to sacrifice as much as they do to acquire it, and to maintain it. In 1945, when the US demonstrated the destructive potential of nuclear weapons (essentially telling Japan, "if you give us so much as a papercut, we will set you on fire"), every political leader in the world was watching. What they learned is that, for small countries, getting nuked is a recipe for not having a country over which to rule anymore. For big countries, getting nuked is a recipe for losing power very, very quickly.
So, caring first and foremost about power, world leaders silently affirmed the 11th commandment: Thou shalt not fuck with nuclear states. Don't forget that, prior to 1945, war between great powers was the norm, not the exception. Since 1945, it's only been cold wars between nuclear states, which is to say, often tense but essentially non-violent relations.
"Don't be silly," you say again. "Iran isn't a cold, calculating government--it's a fanatical theocracy committed to the destruction of Israel. Nukes in its hands cannot be trusted." Maybe so. But consider this: How have the ayatollahs managed to (with relative stability) control Iran for 33 years? This is not a country whose government is protected from its people by outside governments. This is a country who has been the victim of CIA-led coups, internal uprisings egged on by outsiders, and social and economic volatility the likes of which Americans cannot even imagine. And yet these supposed loons have managed to maintain their grip. Something tells me that while they may be fanatical this-or-thats, they care a lot about political power, too. And something tells me that their cold, realistic calculations have a lot to do with why they still hold the reigns in what would otherwise be a tremendously unstable political environment. And recognition of the 11th commandment does not require a genius. So, why do you seem so sure that this time is different?
"Why, then, do they seem so hellbent on the development of a nuke?" you ask. Simple--when the most militarily powerful countries on Earth speak openly on a daily basis about their eagerness to destroy you, and when you know of the 11th commandment (refresher: Thou shalt not fuck with nuclear states), it would seem that getting hold of a nuke would help a lot with maintaining your grip on a country that is on the brink of revolution. Self-preservation is the name of the game in international relations.
Do I want Iran to have a nuke? Of course not. For one thing, lots of Iran's neighbors would be more or less defenseless against a nuclear Iran. The effect on the balance of power in the Middle East would almost certainly be unfavorable. And yes, the probability of Iran violating the 11th commandment is marginally higher than the probability of, say, Israel doing likewise. Nobody wants Iran to go nuclear. But that's not because Iran is a serious threat to US or Israeli security. It's simply for classic balance of power considerations.
What's in everyone's best interest is for a ratcheting down of tensions. If Iran is less concerned about the international community planning its destruction, it will be more willing to slow or halt its development of the bomb. And if we offer that, in exchange for healthier diplomatic relations, we may be able to create a more stable political situation in the Middle East than would otherwise obtain.
So, why aren't we doing that? Well, recall the 11th commandment. Once Iran has the bomb, we will no longer have the option of shaping their internal political situation (witness nuclear Pakistan, a fanatical government if there ever was one, who almost certainly hid bin Laden, but whom we don't give orders to). If we don't take out the ayatollahs while we have the chance, Iran is, for the foreseeable future, beyond our sphere of significant influence. But why do we care so much about influencing Iran? We obviously don't care much about influencing Syria at the moment (actions speak louder than words). The answer, not obvious to only the most deliberately obtuse, is that Iran has lots of oil. Our goal is not to steal their oil, or to secure it at a discount. Our goal--indeed, the Western world's goal, is to stabilize oil production and flows in international markets so as to minimize oil shocks to Western economies (the oil shocks of the late 2000s drove up headline inflation, triggering tighter monetary policy, triggering the worst recession since the Great Depression). Sure, we care about human rights, etc., too. But the reason we seem really eager to bomb some countries (Libya, Iran), and not others (Syria), is because access to a very important commodity is at stake. No conspiracy, no hegemony, just good old fashioned pursuit of strategic interests.
Let's, then, not sign off on another war without our eyes open to what's really at stake, and what our government's true motivations are.
Subscribe to:
Posts (Atom)