Markets in Everything: Trophy Wives

Recently, Larry King divorced for the 8th time. You would think after a few times he would get a hint. On April 14 Larry filed for divorce from his wife Shawn of 13 years. It should be pointed out that he is 26 years older than her. Mr. King has a net worth of around $144 million. He did not have a pre-nuptial agreement with his wife which could cost him big time. Let's examine this from an economic point of view. Larry for over a decade got the company of a much younger and attractive woman. Shawn got to be with a well known TV personality who was worth big bucks. Since they are divorced now they will get zero utility from the other person. Most likely Shawn will get at least half of Larry's estate which would be around $72 million. Remember this was for being with Larry for 13 years. Do you think more women would have done this if they had known the payout? A payout of $72 million would equal $5,538,461 per year, $106,508 per week, $15,215 per day, or around $634 per hour. Clearly, this is a large sum of money. However, it should be pointed out that in a sense Shawn is an outlier because Larry can only pick one woman out of many thousands to be his wife (okay maybe a few thousand - 7). At a rate of $634 this is clearly more than most conventional jobs and is probably more than a prostitute. However, prostitution is illegal and marrying trophy wives isn't. Both groups have incentives to engage in this type of behavior and their function is pretty similar yet one is legal while the other puts people in jail. How can we tell people it’s wrong to buy an hour of "fun" yet it’s okay to marry someone that you will have to provide "fun" for many years?

Michael Lewis

Seems like Michael Lewis is having a very good year… Some stats from Amazon.com

The Big Short- #5 in books as of 4/11/2010 has been on Top 100 for 40 days
The Blind Side (movie) - #3 in movies has been on Top 100 for 49 days
Liar’s Poker- #108 in books was at #65 last week however has first published in the 1989
The Blind Side (book)- #320 in books

I bet someone is seeing the money come on in…

Killer at Large: Obesity

Recently I watched Killer at Large the Obesity Epidemic. The documentary focused on obesity in America particularly looking at kids and their diets. When I was a kid growing up in the early 1990’s I remember we didn’t even have soda or candy machines until we got to high school. For lunch nearly everyone bought their lunch with a few people (including myself bringing their own lunch). This hasn’t seemed to change in today’s society. Kids are able to purchase candy, soda, and other baked goodies. I see no problem with this. People try to blame Coca Cola and Pepsi for being greedy and installing these machines. Don’t parents have a role in raising their children?

The documentary starts out with a 12 year old girl getting liposuction by a plastic surgeon (I really wonder if he is board certified). The girl gets liposuction after years of emotional eating. The girl gets her liposuction but the liposuction is short lived because she puts the weight back on. I see a few problems with this. First, no reputable plastic surgeon would be doing this to a 12 year old girl. Although, I am not a doctor I do know that children by that age have not reached their full potential in terms of growing and development. Also the emotional eating part was interesting. The girl claims that she used to get really stressed when her parents fought and she just began to eat. How do we know that this wasn’t part of some deeper psychological issue? Instead of eating for comfort she could have turned to some other vice such as spending too much, drinking too much, or becoming a drug addict.

Around 15 percent of children ages 6-19 are overweight during the 1999-2000 period. The percent of obese and overweight kids is much greater than this. My question would be why do we as a nation have to care so much about our children’s weight? Just because healthy weight is desired doesn’t mean we all have to achieve it. What if children and adults would like to be obese? We can’t make assumptions on what other people want. For the sake of argument let’s assume we want to solve this problem what needs to change? I would go out on a limb and say that the public school system is partly to blame for this. Since the public school system is virtually a government run monopoly parents and students have little say in what goes on at the schools. If we were able to let the schools compete with one another this would create competition between schools. For example, if the Myers family felt that Johnny was overweight and wanted a school that focused on getting their child fit. By allowing parents and students choices in the school system could to students that were not as obese. Schools could compete on what types of meals they offered students , what type of physical exercise was involved, and what type of curriculum students learned about fitness and health. Yes, school choose could reduce the number of obese and overweight kids by creating competition.
Being overweight sends signals to not only our friends, but the general public. Robin Hansen professor of George Mason University was on EconTalk and discussed signaling. In essence, signaling is economic jargon for how we want to be perceived through the eyes of others. For example Hansen argues that people that show up to the hospital to see an ill or dying relative to signal that they care about that person regardless of whether they actually do. Being overweight is no different. If a person if overweight they are signaling to others that they don’t burn as many calories as they take in. Also people can’t lie about being overweight like they can about their status, power, or money because people can obviously see how big or small they are.

If you read this far you might be wondering what solutions I might have. Since you asked I have a few. First, if the government rewards good behavior in the form of tax credits why not give people tax credits for working out. Especially with Obamacare being passed it the government will have more of a say in what people eat and how they treat their body if the government is paying for it. Next, I would break up the government run monopoly for schools and allow parents and children to choose what they fitness and workout regimen is taught in school. Lastly, I would not place a tax on soda, candy, and other assorted goodies because this would just make people fatter. You might argue, “Well if you tax anything you get less of it!” I understand this principal however a “sin” tax on these goodies would just induce people to create their own sinful goodies. If the taxes were too high it could lead to smuggling and people would just find a way around higher taxes like they do for nearly everything else. We have to remember that we ultimately control our destiny and we can’t blame it on genetics because genetics did not simply overnight make us fat. We might want that extra piece of pie or extra chocolate chip cookie but we have to remember the future might be uncertain.

Bryan Caplan on Healthcare

Bryan Caplan on the healthcare debate.

Debate: Separation of Health & State from GMU Econ Society on Vimeo.

9 Billion Problems?

Houston billionaire Dan Duncan recently passed. Mr. Duncan had a net worth of over $9 billion. His story is pretty interesting. He started his career as a roughneck in the 1950’s. By 1968, Mr. Duncan with only $10,000 and a truck he started Enterprise which is now worth over $21 billion. Truly this a great story in capitalism. Man starts with nothing then turns nothing into a lot of something. Mr. Duncan not only made a lot of money for himself, his family, and shareholders but also has donated a lot to charity. He and his wife gave $100 million (a record level donation) to Baylor College of Medicine. The family also gave $50 million to Texas Children’s Hospital (another record donation). He also gave $35 million to M.D. Anderson Cancer Center. It should be noted that Houston was noted for a world class medical center even before these donations.

Despite all this generous giving I would imagine the there are still billions of dollars in the Duncan estate. The estate tax on the Duncan estate could be enormous. The estate tax is usually 45%. For example if an estate had $10 million the estate tax that the estate would owe the government is $4.5 million. However, the estate tax in 2010 is 0%. Congress could of course make the estate tax retroactive for 2010. I have a feeling the Duncan family is quickly filing paperwork to try to make sure the estate doesn’t owe a dime to Uncle Sam. However, the I.R.S. will flag this down and I could see a Supreme Court case in the works. With an estate of over $9 billion the government would want their 45% or $4 billion. What miracles and wishes could the government grant with this money? A case like this will force Congress to do something about the estate tax.

It will be interesting to see how this case plays out. If the case goes to court it could take years to settle leaving estate planners and attorneys in the dark with regards to the estate tax law. However, one way the Duncan family could avoid paying any estate taxes is to give all the money to charity. Although, one should remember 45% of $9 billion is better than 100% of nothing.

Regulating Flying Hours

Recently, I watched the Frontline story called “Flying Cheap”. The PBS documentary details the tragic case of the Colgan Air Flight 3407 crash on February 12, 2009. Everyone on board was killed. The main point the documentary was trying to make was how regional airliners aren’t as safe as commercial airliners. The documentary also describes the atmosphere at Colgan Air when it came to safety. Regional airliners have contracts with major airliners and some like Colgan Air are paid for every flight that they complete. This arrangement can lead to some perverse incentives for pilots. I am not a pilot but I would assume flight safety would be the number one priority when it comes to flying. Former Colgan Air pilots were interviewed and described how Colgan was interested in completing flights with very little concern for what condition the pilots were in. One pilot at Colgan Air reported an incident of another pilot trying to fudge the numbers when it came to reporting how many passengers were on board (even though reporting an overweighed plane could increase the chances of disaster) In the crash of Flight 3407 the first officer Rebecca Shaw had commuted a long distance, and was sick the day before the crash. In addition to this it seemed she had little sleep and yawned during the flight. The documentary points how regional pilots have less flying experience than commercial pilots. At Colgan Air some pilots got promotions from First Officer to Captain within 9 months.

Proposed legislation wants to increase the number of hours co-pilots must have from 250 hours to 800 hours. The family members of Flight 3407 wanted co-pilots to have a minimum of 1,500 hours. The proposed legislation would not have stopped this fatal accident considering both the pilot and co-pilot each had over 2,200 hours of flying experience. This legislation will of course of unintended consequences. The legislation did not mention how many hours of flying time captains would be required to have. What if the co-pilots have their required hours but the captain isn’t experienced? Increasing the number of hours is a burdensome cost for people that want to become pilots. From what I understand pilots in training have to pay per hour for flight instruction. This legislation will triple the cost for pilots in training.

Although tragic the cause of Colgan Flight 3407 was the Colgan’s corporate culture and not the number of hours the captain or first officer had. I would imagine less people would be willing to fly Colgan Air after people learn of the company culture. No piece of regulation could ever do this because the market itself is a regulating mechanism. I often wonder why there is not more competition within the airline industry. For instance why is the TSA in charge of security? Why can’t airliners have their own line for security and different airliners could have different standards. Another thing I wonder is why airliners don’t post online which pilots are flying, how much experience the pilots have, and perhaps a customer feedback of passengers that have flown with them before. The airline industry is heavily regulated by the FAA but we must remember that flying statistically is still one of the safest forms of transportation.

Blockbusted: An Era Over?

Recently, Blockbuster announced that it lost $435 million dollars in the last quarter. Blockbuster also has close to $1 billion in debt. Competition from companies such as Netflix and RedBox have put enormous pressure on Blockbuster. Netflix and RedBox primarily rent movies through online and kiosk DVDs. Netflix has $320 million in cash with only 6% debt. Clearly, Netflix is in a better financial position than Blockbuster.

A lot of people especially those born in the 1980’s and 1990’s grew up with Blockbuster. Blockbuster has a nostalgic feel to it. Memories of Friday’s and weekends staying up late renting VHS (in the 1990’s) while eating pizza, having sleepovers, and spending time with friends is what this generation will remember. However, all we will have are these memories especially if Blockbuster goes out of business.

People should remember though that when a company goes bankrupt it doesn’t always go out of business. Sometimes other companies can purchase the bankrupt company and try to turn it around. Also bankrupt companies can try to reorganize and restructure their company and try to come back, but I doubt this would apply to Blockbuster given their dire financial situation

In understanding why Blockbuster is bankrupt it is important to realize that the company did not satisfy enough customers to cover their costs. People sometimes forget that it is the profit and loss system that markets operate under. The main reason however I believe Blockbuster went out of business is they didn’t keep up with the times. The digital media for DVD’s has changed in the past 5 years. Netflix allows people watch movies online and also transmit movies to televisions provided the user has the proper equipment. Equipment to transmit Netflix movies from the internet to the television can be purchased for only $80. Netflix also allows users to rent movies through the mail. One problem I see with Netflix is the selection of movies you are allowed to watch on the computer isn’t very wide. Hopefully, this will change in the near future. Perhaps, if Blockbuster really does go out of business it will allow Netflix to purchase content at a very cheap price.

RedBox is another service that customers to go to various kiosks usually at grocery stores, McDonalds, or various drug stores. RedBox allows people to rent movies through the kiosk but is only limited to the inventory that the kiosk provides. Also bringing back the movie to the location might get some people turned off. Maybe RedBox will allow people to watch movies online like Netflix.

At the end of the day, I think Netflix might come out as a major winner given they customers can get movies not only online but also through the mail. If Blockbuster really does go out of business this will increase Netflix’s moat and allow them to increase their profits. I don’t know what the future holds for RedBox for the reasons mentioned above but it will be interesting to see what the future holds for both companies. Although, I could be completely wrong and there could be an entirely different company that comes along and gives both Netflix and RedBox a run for its money.

Biotech Bubble

In the 1990’s the internet bubble came and left. Hundreds of technology companies were created for inventors, venture capitalists, and investors to try to cash in on the “next big idea”. The internet bubble was filled with different companies coming up with often creative and interesting ideas on how to make money through the internet. Some of the ideas were really good and some were really bad. I remember Kozmo.com in the early 1990’s that promised to deliver goods to people within an hour. This service was mostly for people that lived in New York and had busy lives. Although, in theory this sounds like a good idea in practice it was much harder to execute and ultimately led to the company’s failure in 2001 (only three years after being founded). Many of dot.com companies were like this in the early-mid 90’s. Companies had extremely high price-earnings ratios without making a penny of profit. A strategy like this leads to disaster. However, we did have some successes from the dot.com era including Amazon, EBay, and Google. These companies are still around and making profit. This type of creative destruction is good because the market rewarded the companies that did something right. The companies that weren’t prudent went out of business. This brings me to what I predict will be the next bubble…

For years the drug and biotech industry has been on the rise. One key area I see becoming changing rapidly is the genomics area. The Human Genome Project was a government project that was created to untangle the human genome. It is estimated that humans have more than 25,000 different genes. From my understanding mutations of these genes are what cause cancer, illnesses, and diseases. Since the human body is made up of millions if not billions of cells one tiny change can change these genes and cause a mutation. For instance, eating chocolate cake could “mutate” a gene. Obviously, just doing everyday activities could cause mutations in these genes. Another example is smoking. Smoking just 15 cigarettes a day mutates genes. Environmental factors also can play a role in gene mutation. What I think is really interesting is figuring out what genes cause what cancers. I think once biotech companies understand the patterns of the genes and can accurately figure out what mutations cause what cancers people will be rushing out to get tested to see if they carry certain genes. Many people talk about personalized medicine. I don’t think that personalized medicine will be taking a pill customized for a particular person, but rather having a genetic test in order to figure out how different medications and treatments could affect you. Right now the genetic testing is still in the early stages, quite expensive, and hard to tell if it is accurate. Over time the technology will improve, the quality of the results will increase, and the cost will decrease. However, this will provide and interesting situation for insurance companies. If someone were to get a genetic test and understand what they are predisposed to a certain condition would they be required to share it with their insurance company? Current law does not allow insurance companies to discriminate against people who get a genetic test performed. However, this leads to a problem because if someone gets a genetic test performed and they don’t have to share it with the insurance company it could lead the person to make certain lifestyle choices without informing the insurance company. This is also known as asymmetric information where one party has more information than the other party leading to an unfair advantage to one side.

One company Myriad Genetics sells testing equipment for doctors to test for certain things such as breast cancer, colon cancer, and most recently prostate cancer. One legal battle that Myriad has faced has been trying to get a patent on certain genes. For instance, Myriad owns the patent to the BRCA gene which a test to determine if a woman has breast cancer. If a woman wants to get tested for the BRCA gene she has to have the test done by Myriad Genetics since they own the right to the gene. This offers and interesting intellectual property battle between Myriad and other biotech companies. Could Myriad really own the right to a gene? It would seem as if they own the right to a gene it might induce other companies to enter the market and try to patent other genes for other cancers. It should be noted that the genetic tests from Myriad run in the thousands of dollars. However, I would assume insurance companies would pay for the test since it gives them a better idea about the true condition of the patient. I am excited though that we are at the infancy of this biotech process and truly believe breakthroughs will come within the industry that will help consumers and doctors. Right now tests can only show if we are predisposed to one gene. Just testing for one gene can cost hundreds to thousands of dollars. In the future, I could see testing for all genes (once scientists decode all 25,000 genes which could take a decade or more). After this is done, people can get a genetic test and see what they are predisposed to. This could maybe give the person incentives to change their lifestyle or behavior and see what clinical options are available to avoid trouble in future years. Hopefully, doctors can introduce this more preventative medical approach. Maybe in the future we could have experts on certain gene mutations. Even if drug companies stopped producing drugs tomorrow with the help of genetic testing doctors and scientists could figure out who responded better to certain medications and treatments which could greatly improve the quality of the diagnoses and deliver better results when compared to conventional processes. Time will only tell though which of companies in the biotech industry are here to say and which ones will be left in the dust.

Michael Lewis on 60 Minutes

Michael Lewis talks about the Wall-Street bailout, the culture, and executive bonuses. Update: "The Big Short" went from #11 on books on Amazon to #1 on books after the 60 Minutes interview aired.


Watch CBS News Videos Online

Nip and Tucked

More than a week ago marked the 100th and last episode for one of my favorite shows Nip/Tuck. I believe I started watching the show in high school and continued on throughout my college years. The show actually started in 2003. I was a little late in the game watching it but really didn't miss much. Although, the show was always edgy, interesting, and somewhat dark I think the thing I will miss most are the characters. I have to admit however the show did seem to get bizarre and weird after the second season. I will miss tuning in every Wednesday night to watch what Dr. Troy and McNamara are up to. What I think really drew in the viewer was looking at how two plastic surgeons and their lifestyles. I loved how Christian's has no concern for money. He always bought Ferrari's, Lamborghini’s, expensive houses, and having idea if he was broke or rich. Of course this is a fantasy world created by TV writers and does not mirror reality (or if it does to a very small degree). One of my favorite episodes was this past season where they showed Sean and Christian in their college years. I wonder however, what is ahead for both of these actors. Will they just be remembered for their appearance from one show or be known for other roles?

Nip/Tuck spawned off many reality shows such as Dr. 90210. What is really interesting is how much people spend a year on plastic surgery. According to the American Society of Plastic Surgeons 12.1 million cosmetic procedures were performed. This number does underestimate the total amount of surgeries since there is another board just for just facial plastic surgery. I have a feeling that the popularity of Nip/Tuck increased not only the awareness of plastic surgery but made it more socially acceptable. Hopefully, people realize that plastic surgery is a serious procedure and understand that there are risks with any surgery. Also finding a board certified surgeon either by the American Society of Plastic Surgeons or American Board of Facial Plastic Surgeons is important. Many doctors can take a weekend course and be an “expert” in plastic surgery. For example, Dr. Robert Rey and Dr. David Matlock (seen in Dr. 90210) are not board certified in plastic surgery. Although, they perform plastic surgery procedures they are not certified to do them which should make wonder about what kind of quality they can provide. Plus, you have to wonder about the doctors you see on television. Usually, you people that have to advertise because they “aren’t” good doctors or surgeons. Maybe their commercials should discount their quality by at least 25%. People have to remember you get what you pay for.