Notice...

Dear Readers:

Thanks for stopping by the site. As always, we appreciate you taking the time to visit. Apologies for the lack of new content and sporadic posting recently; this will be the state of affairs for the next month or so. Although it may be some time before we post new content, please don't hesitate to use our search tool to find old articles that may be of interest in the meantime. In addition, please feel free to send us a message or comment on a post; we will do our best to reply, even if we aren't posting frequently.

Best,
Josh

P.S. - Despite the slow down, we have been relatively active on the Twitter feed if anyone is interested in general updates.

Resources for Readers: Political Prediction Markets

As primary season rumbles along unfailingly toward convention season on the way to Election 2012, pundits and wonks are working around the clock to find sources of information to help them determine where the chips might fall. Increasingly, it appears that the trendy tool of choice for those who cover the political scene is also an excellent example of the wisdom of crowds: prediction markets.

While prediction markets, the topic of this post, are being featured more heavily in national newspapers and nightly telecasts, this is not to say that we are going to start mindlessly plugging the trendy tool du jour going forward. For example, if  the folks at CNN once again decide that hologram technology will assist viewers in understanding election night better, we can promise you won't see anything about it on this page.

Prediction markets, on the other hand, are right in the BlawgConomics wheelhouse. For those who are unfamiliar with the concept, prediction markets allow people to make bets on the outcomes of events. Online platforms of this sort serve as an intermediary between buyers and sellers for everything from weather events to Supreme Court retirement dates and the most pertinent category for this post, political outcomes.

Essentially the more money people place on an outcome (reflecting a belief that it will occur), the more the price increases. As the price rises, owners can then sell their shares and make a profit, or wait until settlement to gain the maximum potential profit. Alternatively, if one were to bet against an outcome that comes to fruition, they would lose money when the bet settles (more on the basics, as well as other strategies, can be found here). The opposite is true as well, meaning that outcomes are always a zero-sum game for participants. In some ways, it can be seen as the ultimate in putting one's money where their mouth (or in this case, clicker finger) is.

All the while, the prices themselves reflect the odds the market is placing on certain outcomes. For example, at Intrade, the most popular prediction market site, an outcome trading at $5.00 per share has, in the minds of the participants, a 50% chance of occurring. At settlement, an outcome that does happen is assigned a value of $10.00 (100%), while an outcome that doesn't occur is given a value of $0.00, which represents its 0% chance of happening. The winners and losers are paid out accordingly. This pricing cum odds determination mechanism is what is getting the political junkies so excited as those prices (up until settlement) presumably factor in all of the best information individuals have about a potential outcome.

While it is true that certain extraneous factors could impact prices of political outcomes more than some other types of outcomes (for example, especially excitable supporters of a candidate betting them up), prediction market pricing does nonetheless provide a snapshot of the best information about races in real time at least as well as the average poll does.

Some of our more imaginative readers might be wondering what safeguards prediction markets might have in place for someone (or their supporters) trying to reverse-engineer a victory by bidding up shares, causing pundits to talk up the candidate's chances in a self-fulfilling bit of hysteria. However, let's all agree to cross that potentially odd bridge when we come to it.

In the meantime, we can all just enjoy the insights that can be had when political junkies and bad gambling problems meet face to face. You can find Intrade's, political prediction page here. We will also post a link to that page in the sidebar, and will leave it there at least through Election 2012.

Those familiar with the site know that this semi-regular segment typically features an academic journal or a web page with free information that one might have to pay for elsewhere. However, today's post feels a little bit different; while the information gleaned from looking at prices there is of course free, there is always a risk that those visiting the site for the 'free' part will end up being enticed into participating in ventures of a more costly nature. Therefore, we just didn't feel right posting this edition of Resources for Readers without including a minor caveat...

The SOPA Blackout: Did You Feel the Pain Today?

I was already against SOPA before the internet blackout today, so Wikipedia et al. shutting down didn't necessarily impact my thoughts on the legislation. However, it did make me realize how much I have grown accustomed to using Wikipedia in everyday life. I know it isn't always perfect, but for the quick refresher or primer on most topics, it is an invaluable resource.

It also made me wonder whether any of our readers were impacted by the action. Did you change your mind on SOPA one way or another? If not, did you at least become more aware of the issue? If so, do you think this was an effective protest? Were you just mad that you couldn't easily look up information of questionable provenance? Any thoughts would be appreciated in the comments section.

Is Albert Pujols Worth $254 Million? Part II

This post is the second in a two-part series on Albert Pujols' record contract. Part I can be found here. There, we discussed the difficulty of asking the question of whether something is 'worth it.' Here, we do so anyway...

Now we can shift to whether the contract was 'worth' it. Certainly many contracts are signed that don't end up being economically efficient for one, or even both, parties. This is true both in the sports world and in the world most of our readers inhabit. However, despite the fact that we have to look ahead a bit, there is some analysis which can be done to determine if the supply and demand equation came out correctly. To do so, we will look at the contract from both Pujols' and and Angel owner Arte Moreno's perspectives.

Let's start first with the player. Wherever the rest of this analysis ends up, I think it is fair to say that $254 million is a lot of money. Pujols, his children, their children and any conceivable relation to Pujols (no pun intended) should be okay. However, we can't just look at dollar figures, as we are trying to determine worth. After all, $1,000 wouldn't be much to spend on a car these days, while it would be quite a bit to spend on an average children's bike.

Therefore, in addition to the pure dollars, we need to take a look at what Pujols' alternatives could have been. First, let's take it outside the realm of baseball and consider career alternatives. I think it is safe to say that Pujols is very unlikely to be able to make that much money doing anything else in life. This isn't necessarily a knock on Pujols, his intelligence, skills or drive. It is simply a recognition that jobs paying $25 million a year are hard to come by. This is especially true in his native Dominican Republic where over 40% of the population lives below the poverty line. While Pujols did move to the US as a 16 year old, we will just repeat as granted the idea that it is tough to make $25 million a year, even in the wealthiest nations on earth.

Shifting to the universe of baseball, the analysis becomes a bit different. People make a lot of money to play baseball, so some people might think that $254 million is not so big of a deal in that such an otherworldly economic environment. However, even in baseball terms, Pujols signed a large contract.

As noted in Part I, Pujols is only the game's second $200 million contract man behind Alex Rodriquez. However, A-Rod plays third base. For direct comparison, we can look at Pujols' positional peers. The top-paid first basemen in 2011 made the following amounts: $23,125,000 (Mark Texiera), $20,275,000 (Todd Helton), $20,000,000 (Ryan Howard and Miggy Cabrera), $15,500,000 (Prince Fielder) and $15,000,000 (Justin Morneau).

Spending on Gadgets to Break $1 Trillion in 2012

During the holiday season, camcorder sales plummeted 43 percent and sales of GPS units fell 33 percent in the US. Best Buy Co., the largest US-based electronics retailer, recently disclosed that sales at stores open longer than a year fell 1.2 percent in December.

However, analysts predict that sales of electronic gadgets will break the $1 trillion barrier for the first time in 2012. Why? The rise of middle classes in developing nations across the world. The AP has details here.

The List: English Football's Richest Men (And One Woman...Sort of)

Football, or soccer in the US, is the world's favorite sport. It is also big business, nowhere more so than in England. The magazine Four Four Two recently came out with its annual rich list detailing just who has the biggest wallets in the English game. Not surprisingly, a number of owners (including some Yanks) top the list, but there are some other individuals of note. For example, David Beckham, who came in at #42, is the top-ranked player with an estimated net worth of $206 million. He is also notable for ensuring the inclusion of least one woman, his wife Victoria, onto the list as Four Four Two included earnings from their joint company in his net worth.

And people say that football is sexist...

Detroit Makes a Comeback: Was I Wrong?

I have been critical of government intervention in markets in the past. Among other things (like saying that bank bailouts were wrong, a call which has since been taken up by everyone from the Tea Party to Occupy Wall St.), I have written that bailouts of the auto industry were inefficient and against the principles of free market capitalism. At the time, I was just one voice in a majority of 67%. However, in a recent Reuters article, it was noted that:

"Executives arriving this week for the Detroit auto show find a U.S. car market that has morphed from meltdown three years ago to a safe haven as concerns grow about the stability of other big economies, from Europe to China...Analysts and executives expect 2012 U.S. auto sales to grow 4 percent to 9 percent, the third consecutive annual gain. The only reason automakers are not more bullish is the risk that the sovereign debt crisis in Europe may trigger a broader slowdown...All three U.S. automakers took market share in the United States for the first time in 23 years..."

And from the Behind the Wheel blog:

"Walk around the Detroit Auto Show and one thing stands out: America's automakers are coming on strong when it comes to cars...Gone are the days when Detroit's cars lagged the sedans you saw from overseas...Bottom line: Detroit has closed the gap (on most levels) with its foreign competitors when it comes to cars."

So was I, and also the majority, wrong about the auto bailouts? An industry, and many jobs, were saved. What was long a point of American prestige was protected and has even been revitalized. Even if the American taxpayer was a big loser on the deal, the bailouts still cost less than the stimulus packages, with an arguably bigger positive impact. By almost all measures, it would appear that the auto bailouts were one of President Obama's best conceived and best executed moves, and they are certain to be noted as 'decisive and pragmatic efforts to save American jobs' when the Team Obama campaign bus makes its way to Michigan and Ohio later this year.

Tebow-nomics

As the countdown clock for Tebow v. Brady, or Jesus v. The Prophet (or The Denver Broncos v. The New England Patriots as some in the 'mainstream media' have taken to calling it) ticks closer to zero, we thought that it might be a fun Friday activity to look at the business stories surrounding Tim Tebow's rise from third string bench warmer to the leader of the zeitgeist. After all, pundits aren't expecting this game to break ratings records just because of the skill on display.

No, there is more to it than that. Tim Tebow is a phenomenon. Tebow represents different things to different people. Some applaud his faith, some find it offensive. Some think he is the quarterback of the future, others think his team should seek out a replacement this offseason. Broncos and Gators fans love him, Pittsburgh Steelers fans, not so much. He even set a social media record recently after he engineered a one-play-and-done overtime victory over those Steelers, leading to over 9,400 tweets per second with the hashtag #tebow. No word from Twitter on whether he will still hold the record if #tebow falls to #tebowie...

Of course Tebow's economic impact is inextricably linked to his status as a phenomenon. However, as noted above, and in keeping with the goals of our site, we wanted to take a look at Tebow purely as a business, delinking the myth in the making from the dollars he is impacting. The stories below all play into this theme. Special thanks to Darren Rovell's SportsBiz blog, which we link to several times.

Is a Plus One on the Horizon?

Last night, the University of Alabama football team rectified its only loss of the season, beating LSU, and as a result was crowned the national champion of college football. While The Tide are certainly a worthy champion, there were many other one-loss teams in the nation, a few of which could claim that they were, in some way, cheated by the system. For one, Oklahoma State has a legitimate gripe; unlike Alabama, it at least won its conference. Another one-loss team from a less glamorous conference than either 'Bama or OK State is Boise State, a program which can say 'been there, done that' three or four times over when it comes to big game snubs.

While it seems highly unlikely that the top division of college football will move to a full-blown playoff system in the forseeable future (despite the fact that lower division have made it work), it is possible that a plus-one format will soon be adopted. Essentially, the winner of the top two bowl matchups would go head to head to settle the question of who the best team is. Though some teams might still be left on the outside in such a format (five teams had one loss this year), it would, in most years, go some way toward alleviating some of the problems which have arisen under the current format.

While the BCS system is encumbered by contractual obligations, and many structural issues would need to be ironed out, the appetite for change, both among fans and administrators, is at an all-time high. Add to this some recent antitrust attention from the US government, and the time is ripe for a new format to be adopted. While there is no doubt that this will open a new box of troubles, it is also clear that the system as constructed has run its course.

Resources for Readers: The OECD Financial Market Trends Journal

Yesterday we continued our ongoing effort to highlight free resources that could be of interest to our readers. In what is perhaps a record turnaround time for this semi-regular feature, we return with another tip today.

In this post we would like to highlight a journal which is produced by the Organisation for Economic Co-operation and Development (OECD). Though some might be interested in a paid subscription to an actual paper version, the online versions of articles in the bi-annual Financial Market Trends, including those in the archive, all appear to be free.

Topics ranging sovereign bank debt to financing green growth are presented in a manner that rivals much more expensive (and not just relative to 'free') alternatives. In addition to this post, we have included a permanent link to the homepage of the journal in the 'Other Resources' section of BlawgConomics.

Resources for Readers: Explaining The Fed

Regular readers will be familiar with our semi-regular efforts at bringing interesting, free resources to our visitors' attention. Today, we would like to highlight a resource which aims to demystify some of the inner workings of the Federal Reserve Banking system.

While the Classroom Economist video series from the Atlanta branch of the Fed might not necessarily allow one to form an opinion on whether or not another round of quantitative easing would have a beneficial or malignant impact on the economy, topics such as monetary policy and inflation are covered.

Visitors should note that this resource is geared toward educators, and the 'Lesson Demonstration' links will probably not hold much value to the general public. However, the general 'Chat with an Economist' videos, cut into digestible bits, should do the job for those who would value quick primers on the subjects highlighted.

An Open Letter to SCOTUSblog

Dear SCOTUSblog,

For months, I have been unable to access SCOTUSblog on my smart phone. Every time I do, it redirects to the mobile site, which has been down since Fall of 2011.

I assume that you enjoy making your blog difficult to access, but why the half measure? I can still read it from my desktop PC. If you really want to make it inaccessible, remove it from the Internet entirely, and hide all posts inside a steel vault concealed inside Lincoln's head at Mount Rushmore. Include clever clues to the cache's location in an inscription on the underside of the Titanic wreckage. I'll send in the mini-submarine immediately.

Best regards,
Jeremiah Newhall


And to the readers of BlawgConomics: My suggestions are a start, but I'm not sure they're enough. Please add your suggestions in the comments for how to make SCOTUSblog content truly inaccessible to all but the most intrepid readers. Bonus points for commenting via BlawgConomics' mobile site.

Fed Forecasting: Transparency or Risky Monetary Tool

Any observer of the financial markets around the turn of the century will remember a bewildering assortment of obfuscations by then Federal Reserve Bank Chairman Alan Greenspan. In what amounted to a cat and mouse game between the interest rate-setting body of the world's largest economy and the credit and equity markets dependent on its edicts, Greenspan seemed to delight in delivering a turn of phrase which kept investors on their toes.

When Ben Bernanke took over in 2006, he vowed to diverge from this strategy and promised to usher in a new era of transparency. He has succeeded in this endeavor in increments, first employing clarity in Fed meeting minutes, then mimicking this approach in everything from congressional hearings to informal dinner speeches. In a recent announcement which seemed to be missed by many in the media, he laid the foundation for a continuation of this long-term strategy of transparency when he announced that the Fed will begin publishing its own forecasts of interest rates up to a few calendar years in the future.

While this is certainly in keeping with his trend of pulling back the Fed's traditional veil of mystery, it also begs a number of questions. For example, is the plan intended to increase transparency, or is it n reality intended to serve as a tool to reduce long-term interest rates? Perhaps both? Is the latter merely a corollary of the former? If it is actually intended more as a subtle rate reduction tool, does this mean that the Fed is feeling for the last few bullets in its belt?

If it is indeed a ploy to increase clarity behind Fed strategy and decisions, it could help those involved in credits markets in long-term planning. This, in turn, could have the effect of reducing long-term rates. While these could both potentially be positives, it is also true that it is in the Fed's interest to maintain some level of secrecy as well.

For example, it is a near certainty that markets will price in the information which will be in the published forecasts. This includes long-term debt instruments, which, as anticipated above, will have a reduced risk premium owing to the increased visibility into Fed strategy. However, the Fed will reserve the right to change its forecasts on a dime. If such a change occurs (particularly the first time or so that it does) it could create more volatility in the markets than there would have been if they didn't have the information in the first place. Shame on the market participants one might say; but then it would be even more foolish if they didn't take Fed-provided forecasts under advisement, particularly when their peers are.

It also seems as if this type of strategy could invite currency manipulation by foreign banks and governments. For example, if a nation with a non-floating currency, large treasury holdings and strong trade ties to the US had a very strong indication that interest rates would not move for, say, three years, it would be even easier for it to ensure that it kept its goods flowing solidly in one direction. Whether or not this is ultimately bad is a matter for debate, but it should nonetheless be part of the conversation.

Longer-term implications exist as well. Some Fed officials indicated fears that markets could interpret the forecasts as strategy goals, an issue noted above. What if a future Fed chair shares this concern? Will he or she have the flexibility to revert to a less transparent strategic approach if they feel it is necessary? Or will this precedent leave them helpless to shape policy suited to their styles and the times they are operating in.

Time will tell if Chairman Bernanke's approach is the right one. There are certainly benefits to transparency, and there is no doubt he had all of the above concerns in mind, or at least brought to his attention, before he finalized this dramatic policy change. However, if this was merely a means to reduce long-term rates, it seems as if far too much flexibility was taken off the table for what could be a fleeting benefit fraught with risks.

Supply and Demand Don't ALWAYS Explain Things...

Regular readers will know that supply and demand forces are leaned on heavily by BlawgConomics as the explanation for many a phenomenon in life. However, supply and demand can't explain everything, and in some situations a normal person with an ounce of common sense can explain the real world better than a pseudo-academic with a pound of Econ 101 knowledge.

So is the case with a recent article from Derek Thompson in The Atlantic. In the article 'Why Do All Movie Tickets Cost the Same?' Thompson takes a look at the fact that movies like Spiderman and Mission Impossible are no more pricey to see than your average flop and suggests some interesting reasons why. This will be an interesting read for anyone who appreciates the Freakonomics approach to economics, particularly passages such as the following:

Cheaper tickets lead to higher policing costs. I'm a cheapskate, so I might buy a ticket to see cheap, cheap Iron Lady and sneak into Sherlock Holmes. This would create a fascinating incentive for art-house studios to release smaller, cheaper films the same weekend as blockbusters, knowing that thousands of canny consumers might buy fake tickets to their show to sneak into the more expensive blockbuster.

Tip of the cap to S.W.

The SCOTUS Year End Report and the Independence of the Judiciary

The Supreme Court often comes under fire due to the partisan influences many note in its members' voting records. Indeed, it often seems that more time is spent in the media discussing the political affiliations of Justices than actual decisions, a phenomenon that is doubly true during any potential Justice's confirmation process. However, it is not clear that the Justices themselves spend much time worrying about political considerations, and they actually tend to come out 9-0 or 8-1 far more often than they split 5-4. Indeed, if Justice Roberts' year-end address is any indication, the Nine are currently far more concerned with old Marbury v. Madison-esque independence issues than political considerations.

It is no secret that the 2010 healthcare reform legislation is heading to the Supreme Court. What was assumed by many as a number of cases related to Obamacare led to massive circuit splits became a surety as the Court set dates to hear arguments related to the bill for late March.

Many on the right have called for Elena Kagan to recuse herself from the consolidated appeals due to her unclear involvement in the legislation in her role as solicitor general. However, using the Black Sox scandal as a backdrop, Roberts takes advantage of the opportunity afforded him in the Chief Justice's annual address to address recusals (and indirectly defend his benchmate) as part of a broader discussion on judicial ethics. Though he states that he cannot discuss specific cases or circumstances, it is clear what he had in mind with the following statement:

I have complete confidence in the capability of my colleagues to determine when recusal is warranted. They are jurists of exceptional integrity and experience whose character and fitness have been examined through a rigorous appointment and confirmation process. I know that they each give careful consideration to any recusal questions that arise in the course of their judicial duties. We are all deeply committed to the common interest in preserving the Court’s vital role as an impartial tribunal governed by the rule of law.

Of course many other issues of a pragmatic nature may be at play. Many believe that Clarence Thomas has grounds for recusal as well with his wife's involvement in the healthcare industry. Recusal by both Thomas and Kagan would, most likely, lead to one vote being taken from each side in a wash. Or, there may already be a sense among the justices that, particularly in an election year, it would be easier to decide the case on slightly less charged grounds than the ability of the government to mandate coverage. Similarly, or maybe as a corollary, they could duck the issue by declaring that the political process is better able to solve any problems pertaining to reform than the judiciary. Or, perhaps believing he already has a majority with him on this particular issue, maybe Roberts is simply taking the opportunity to reaffirm the independence of the judiciary in a situation where it doesn't lose him any points for his side.

However, while it may be a bit naive, it is nice to think that these types of factors weren't the sole driving force behind Roberts' statement; that he was actually affirming the integrity and independence of his judicial brothers and sisters. If so, this would be a strong signal of intent and should provide a measure of comfort to those who have perhaps become overwhelmed by political sniping and alarmist reporting with regards to The Supreme Court. This is particularly true as the nation embarks upon an election year which is certain to be among the most divisive to date.

Exploring a Potential Solar Rooftop Bubble

In a recent Freakonomics post, Steve Sexton explores the market for rooftop solar panels and concludes that there may be a bubble in the industry that could soon burst. The basis for his theory is that hidden incentives in the current metering scheme which have been favorable (and, he argues, essential) to the growth of the residential solar industry could potentially be phased out en masse soon, a process which could start in otherwise solar-friendly California if utilities have their way.

The net-metering schemes in question are in place in one form or another in 43 states currently, and have been used to entice owners of residential properties to go solar. Utilities dislike these schemes as they are forced to purchase energy produced by residences at the same rate which they sell electricity, a price which includes infrastructure and other costs. Because of the way the laws work, residential producers are receiving retail prices for what is already subsidized generation. Sexton also notes a perverse incentive by which those who might produce energy storage mechanisms are dissuaded from doing so, an interesting point.

As more and more people take advantage of various tax credits to place solar panels on their homes, this type of scheme is becoming more damaging to utilities' bottom lines (Sexton also notes that it is a case of the poor subsidizing the wealthy, but we will leave this valid point for another day). Because of this, utilities have increased lobbying efforts. At this point, the situation has progressed to the point that regulators in California are considering a scheme whereby solar energy producers would pay the utilities back for some of the difference in production and sale costs via a use charge. Sexton argues that this will cause many to abandon solar panels, thus bursting a bubble he has suggested exists.

While I agree that such a usage fee could alter the dynamics in California, I do see some holes in Sexton's analysis. For one thing, the proposed scheme still includes a subsidy. Additionally, it is not yet even a certainty that such a scheme will be adopted in California, never mind anywhere else. States have shown a predisposition toward stimulating residential solar generation, even if it has to be subsidized. This is particularly true when it isn't the state, but rather other consumers, that are doing the subsidizing.

Further, I believe that he underestimates the power of the solar lobby to counter the weight of the utilities. Finally, I think that many people will continue to buy solar panels (albeit not at the same rate) even without subsidies. Therefore, even in a changing regulatory environment, I think that the industry could be a bit more buoyant than Sexton believes, especially as the technology becomes more efficient.

As an aside, assuming arguendo that a bubble does exist, and further that it is on the verge of bursting, it is not clear who would be hurt. Certainly environmentalists wouldn't be happy, but their displeasure would have more to do with less solar energy being produced than any misfortune for manufacturers. And to the extent that manufacturers are hurt, it is not clear what might happen to what is a very fragmented market. A large amount of panel production has moved offshore, with China one notable hotbed for activity. As far as domestic producers, maybe the bursting of a bubble could act as a Schumpeterian evolutionary moment leaving the best technologies and producers to take control of the market. But I digress...

Despite various differences of opinion with Sexton, I respect his analysis and agree that the situation in California is worth watching as change there could well impact the policies of other jurisdictions. After all, California is often cited as the leader in the area of rooftop solar. Just because that maxim is typically uttered in reference to the state's progressivity doesn't mean that Cali couldn't play the Pied Piper in backtracking as well. More broadly, energy policy in the US is a very difficult beast to analyze, and the competing interests are varied and determined. Nothing at all would surprise me as far as statutory and regulatory schemes go, and a lack of certainty is just about the only sure thing when it comes to this very interesting intersection of law and economics.

Tip of the cap to J.N.

Sports-Related Promotions and the Incentive Effect

Anyone with even a passing interest in how incentives impact consumer behavior will appreciate this quick read from Darren Rovell's SportsBiz blog. In the post, Rovell discusses a number of sports-related promotions, past and present, and how they have impacted sales for the various auto dealerships, electronics stores and furniture retailers involved. In an example that hit close to home for BlawgConomics, Rovell highlighted Boston furniture superstore Jordan's Furniture. The chain received a mention due to the Red Sox and Bruins championship-linked promotions that have helped the company boost its numbers.

Meanwhile, Rovell missed a golden opportunity to explore how running ads featuring

aging founders in full uniform might impact sales...