Total Wages Have Increased

Despite what people say it looks as if productivity and wages have been increasing together and wages have not declined if you include worker's benefits. Productivity rose 110% since 1968-2008 while total compensation (wages + benefits) increased 103%.

Koch Giving

Charles Koch has been in the news recently for trying to fund two professorships for Florida State’s economics department. $1.5 million was pledged from the Charles B. Koch Charitable Foundation to the school. Koch wanted to be involved in the process however. In reviewing potential candidates for the professorships Koch rejected nearly 60% of the faculty’s recommendations. One thing people really don’t realize is that deans and any department chair’s real job is fundraising. Often times a dean of any school has to figure out how to get donations from individual donors, alumni, and corporations. Clearly, this is no easy task and requires connections, charisma, and knowing how to work parties.

What I don’t quite understand is why people are upset about how people to choose to use their money. People don’t seem to realize that even people that donate money are to some degree self interested. These people want to see the money go for a good cause, something that can benefit society, or whatever reason they can rationalize. This Koch case would make a great ethics case for business school. One thing to keep in mind is that these schools never have to accept the money. There are cases were schools do reject money even when billionaire Alfred Mann wanted to try to give $162 million to fund a bioengineering institute to UCLA they declined because he wanted too much control. The point is colleges never have to accept the money if they choose not to. Colleges also have reputations to maintain. If a college is known for accepting money to let students in, allow wealthy donors to cherry pick professors, or to have control of athletic teams it will be known.

Koch’s net worth in 2010 was $22 billion. He and his brother have given away more than $196 million already. The man should be free to choose what he does with his money or what organizations, charities, or schools he gives it to. One large benefactor of Koch’s charitable giving has been George Mason University. Over the past 20 years Koch has given $30 million to George Mason University. The school established the Mercatus Center which is a free market think tank. George Mason now has a top rate economics department.

I think even if someone wants to donate money to liberal causes they should be allowed to do so. I think it’s interesting that people believe they should decide how other people use and spend their money. Donation is voluntary and is a two way street.

Speculative Nonsense

With high recent oil prices there has been a lot of talk about what is causing high oil prices. Oil companies are being called into Congress to explain their record profits and an investigation is underway to investigate speculators for “fixing” prices. I wonder Congress never seems to investigate oil companies when prices are low. Federal taxes on gasoline are above 18 cents per gallon. This does not include state taxes on gas which can range from 8 cents to 32 cents per gallon. Of course state and federal governments are never greedy.

First, we have to understand that prices are never set they are signals of information to suppliers and buyers. High prices induce consumers to cut back while inducing producers to try to create more. OPEC has a large role in determining how much oil can be produced which in a way acts like a cartel. OPEC looks at proven reserves in order to see how much a country can produce which doesn’t seem to make any sense. Countries should be free to produce as much oil as they want and sell it on the open market.

Congress also has a large say in the supply of oil. What is ironic however is if Congress allowed companies to drill within the United States futures prices would start falling since the future price reflects current and future conditions. In 2008, it was estimated in ANWR (Alaska National Wildlife Refuge) had over 4 billion barrels of oil. Even the United States interior department estimated there was around 134 billion barrels of undiscovered but recoverable oil.

Allowing companies to also build refineries wouldn’t hurt either. Even if Congress allowed companies to build refineries it would take at least 10 years to build in the United States considering all the permits required. In an odd way oil companies could not be in favor of drilling or allowing refineries since it acts as a barrier to entry for anyone that wants to get into the industry. If you could keep competitors out and restrict the supply it would be easy for a company to maintain not only their competitive advantage but their profits as well.

Despite what people think speculators are providing a valuable function by informing people what futures prices are going to do. If this were true why aren’t people quitting their day jobs in order to become oil speculators? By definition, this is a zero sum game. In a futures contract someone who thinks oil is going up and someone who thinks oil is going down. People make it seem as if anyone could speculate and make money. People complain about people speculating up the price of oil, however they should blame the people that believe the price is going down because otherwise a futures contract could never exist! Speculators put their own capital at risk and can lose a lot of money (especially if they are leveraged). These speculators are reducing the price volatility of oil not increasing it as some would speculate.

I tend to think people often look at outcomes instead of the inputs that lead to those outcomes. If people went a step beyond and thought about the actual causes of why prices are high it could do wonders for critical thinking skills.

Richard Epstein: Let The Rich Get Richer

Richard Epstein has the rare ability from a lawyer's perspective to understand and explain economics to others.


http://ricochet.com/main-feed/Let-the-Rich-Get-Richer

$5,000 In An Hour

Apparently Nobel winner Gary Becker is charging for his time now. For $5,000 you can get you one hour with one of the best economists. All you get for this money is a video chat and not even an actual meeting. Although, I think $5,000 is somewhat high time will tell if people are really willing to pay this kind of price. Other people like economists Steven Levitt and Harvard professor Jeffrey Miron are also joining (charging $3,000 and $400 an hour respectively). Jeffrey Miron also ended his blog this week which poses some interesting timing. The company Expert Insight takes a 30% commission so the people get to keep 70% which still isn’t bad. I wonder what people get for this kind of money. Can someone really get a couple hundred or a couple thousand dollars of value in one hour? Celebrities, authors, sports stars often charge money for speaking fees. These fees can be anywhere from a couple thousand dollars to over $10,000. Economist Milton Friedman use to charge $30,000 but he would actually show up! In 2008, the top lawyers were charging over $1,200 per hour. One could argue lawyers are more valuable since they could save a company millions or billions in liability and damage. I am skeptical of whether or not people will actually use this service but as a free market guy I am all for new ideas.

Ignorant Yet Richer?

Recently, Newsweek ran a story entitled “How Ignorant Are Americans”. The article discusses how Newsweek gave over 1,000 people a quiz and found that 38% failed (or 62% passed). So what questions were asked? Questions like reasons why the Cold War was fought, defining the Bill of Rights, and other civics questions. I am all for educated people but is this really the right kind of education?

My larger point comes from Dr. Bryan Caplan making the case against education. Do employers value civic knowledge? The only people that would really need this knowledge are perhaps people that teach civics, historians, and maybe people in government. Other than that what job would require this knowledge? Also given that that brain is only so large and if we could store skills that were useful storing this type of knowledge may be harmful since hardly anyone values it. I think people have the following thought process… “If you don’t know history, you don’t have knowledge, which means you won’t be able to add value”. Again technical knowledge is much more important than general knowledge since that is what employers are paying for. Someone could have make the argument even 20 years ago that knowing storing information was important but that argument today is very weak with the internet.

My main point however is that we really can’t be that dumb since GDP per capita has been growing since 1969 (in 2005 dollars). GDP per capita in 2010 is double what it was 1969! This means individuals in America are becoming more valuable. The bigger issue is that general education isn’t important what is important is the right kind of education that employers and the market values.

Source: ERS International Macroeconomic Data Set (Dr. Matthew Shane)

CEO vs. Hollywood

So lately I have been thinking about the difference why people complain about how much corporate executives make but rarely if ever complain about how much actors, actresses, or athletes. Let’s examine the data before making any conclusions. Below are what some people earned last year.

Highest Paid CEO’s
Larry Ellison (Oracle) $84.5 million
Ray Elliott (Boston Scientific) $33.4 million
Ray Irani (Occidental Petroleum) $31.4 million
Mark Hurd (Hewlett-Packard) $24.2 million

And now Hollywood…
Oprah $275 million
George Lucas $170 million
Steven Spielberg $150 million
Madonna $110 million

In 2009, the average pay of a CEO that worked one of the 500 largest companies (S&P 500) was only $9.25 million. I would be interested in a survey that asked average people what they believed the average pay of a CEO was. According to Hollywood Economics 78% of movies lose money and only 22% are profitable. I am curious as to why movie studios or financers would keep giving people money to make movies if the odds are slim. This is interesting considering every year all companies in the S&P 500 report a profit.

Another interesting point is that people in Hollywood are not paid on how many people come to see their movies. If actors and actresses were given movie rights and their pay was based off the performance of a movie I have a feeling Hollywood would be turning from blue to red. Actors and actresses would have an incentive to make sure the movie made money. Actors and actresses make their movies over a short period of time and then move on to the next project. Movie stars don’t have to worry about the movie making a profit and loss but just making sure their check clears.

Corporate CEO’s on the other hand are paid with stock options. Employees usually have to work years before they are even illegible for stock options and when stock options are awarded employees can’t usually cash them in until years after they are awarded to make sure employees take a long term approach and not take short cuts.

If a CEO is paid even $9 million and saves or makes the company $1 billion in additional revenue the cost of the CEO would still be less than 1%. This is a bargain considering the CEO is in charge of managing hundreds of not thousands of employees. I think it’s important to remember that businesses do have value.

John Allison on Financial Crisis

BB&T CEO John Allison on the Financial Crisis from BBT Economics on Vimeo.

Epstein Wants to Fire FDA

Great article from the great Richard Epstein.

Link:

http://www.heartland.org/healthpolicy-news.org/article/29379/The_Case_for_Firing_the_FDA.html

Todd Kendall

So lately I have been reading the work of Todd Kendall. Kendall is an economist who now works at Compass Lexecon (economic consulting firm) in Chicago. He earned his all his degrees including his PhD in economics from the University of Chicago. Some of Kendall’s research is very interesting. I think the general public would find Kendall’s research quite controversial but he does offer some interesting insights into a variety of different topics. The topics Kendall covers range from NBA players who misbehave, to prostitution, to how the internet has affected divorce rates. If I had to pick a theme for Kendall’s work I would say it is very Becker like. This of course comes from the work of Nobel Laureate Gary Becker who pioneered human capital and analyzed crime and punishment using an economics framework. I really wish all of Becker’s studies were published in some book. So what would be in this book? Well here in some of the things you might find.

On prostitution
When looking at prostitutes 53% have private insurance, 41% are college graduates, and 13% are married with an average yearly income over $92,000 per year. Although the amount of time women are in the industry is a little more than 5 years.

On children married to un-married parents
An increase of 10 non-married births/1,000 live births is associated with future increase in murder and property crime rates between 2.5% and 5%

On internet and divorce
No evidence that the internet has increased divorces and may have even reduced the number of divorces

I hope Todd Kendall continues to keep writing because I know I will continue to be reading his work.