Michael Sykuta

The "Laws" of Economics

Economics has few “laws”. The most notable is the Law of Demand, which simply states that there is an inverse relationship between the price of a thing and how many units people are willing to buy (i.e., when the price goes down (up), people buy more (less)). The Law of Demand is basically just the culmination of the most basic observations of human behavior; specifically, The Basics with which I started this blog.

There are a few other things that sometimes get labelled as “laws” in economics textbooks. The “law of supply” only applies to things still actively produced, for which the necessary inputs are available; but in general, the more people are willing to pay for something, the more of it producers will try to produce. The “law of diminishing returns”–typically applied in the context of production–assumes there is at least one fixed input that constrains the marginal productivity of the rest. It’s more a rule of thumb than a “law.” But it is also analogous to Rule #3 in The Basics: More more is less better.

Whether we consider them “laws” or not, one thing is for certain: when we ignore these basic principles, we do so at our own peril. And that brings me to the motivation for this post; namely a recent blog post by “The Edgy Optimist” (aka Zachary Karabell) at Reuters.com titled “The ‘laws of economics’ don’t exist.” Continue reading “The "Laws" of Economics”

"Dish"ing It Out To Softbank

A student in my contracts course asked today about Dish’s hostile bid for Sprint and the implication for Sprint’s existing deal with Softbank. Great question! If only Dish had held off on their bid another couple weeks until when we are scheduled to talk about termination fees in M&A deals.

Turns out the Softbank-Sprint deal does have a break-up fee, to the tune of $600 million (as reported in the WSJ Online and confirmed in the actual deal). But Softbank went one step further than just including a termination fee. Concurrent with the original M&A agreement, Softbank also purchased a $3.1 billion convertible bond from Sprint. The conversion rate implies a price of $5.25 per share. That’s close to 600 million shares that Softbank can convert and sell back to any hostile bidder, capturing the additional value of the hostile tender offer. In the case of Dish’s $7/share bid, that’s roughly a $1 billion pay-off for losing the bidding war…in addition to the $600 million termination fee.

That’s a pretty sweet deal for sour grapes. It also illustrates that there are multiple ways bidders can protect their interests in an M&A deal.

Side note: the WSJ headlines report a potential $4 billion benefit to Softbank if Sprint bolts to Dish, but most of that is a windfall resulting from devaluation of the yen and it’s effect on the cash Softbank had set aside to effect the deal. It’s a nice windfall, but it’s not directly related to the terms of the deal itself.

Losing The Death Bet (aka Paying For Life Insurance)

It’s that time of year. No, not tax time (though it is that, too). It’s birthday season in my family. And with birthday season comes the annual renewal of life insurance policies–specifically, for two of my kids. When I opened the bill yesterday I realized I once again had lost the bet, and was now faced with ante-ing up for another round of the game.

Sounds crass, doesn’t it? But that’s the reality of life insurance (any insurance for that matter). Insurance is intended to cover the cost associated with a particular (bad) event–like your home burning down or your car being damaged. In the case of life insurance, the insurance purpose is to replace the economic value (i.e., present and future earning capacity) to the beneficiary of the person who dies. Taking out life insurance is effectively putting money down on a bet that the insured person is going to die in the next year (assuming annual premiums). If the insurance company loses the bet (the insured person dies), they pay the contracted benefits. If the person who owns the policy loses the bet (the insured person doesn’t die), then they are faced with re-upping the bet for the next round.

Now think about life insurance for your child. Continue reading “Losing The Death Bet (aka Paying For Life Insurance)”

Paid To Be 'Stuck'?

Words matter. So when a recent article in the Wall Street Journal Online proclaims “Workers Stuck in Disability Stunt Economic Recovery,” it sets off the incentive alarms. What do you mean by “stuck in disability” and what role do incentives play in that “stuck”-ness? I mean, if you choose to stay in a sticky situation, are you really stuck?

The quick background:
A very large number of people were disabled by the recent recession (i.e., the number of people who were placed on federal disability jumped dramatically, even by historical standards). The preponderance of this increase in “disability” came from people who were no more disabled than they had been previously. Rather, they are people who lost jobs that they were previously able to endure but jobs they were not able to replace. In short, the new “disability” was really the inability to find new jobs given whatever physical limitations individuals claimed to have, not the physical limitations themselves. This was compounded by States that were able to reduce their welfare and Medicaid costs by shifting people to Social Security disability (SSDI) and Medicare.

Now people are not getting off of disability as rapidly as they have after recessions past. While the official unemployment has been falling of late, it has more reflected a decrease in the labor participation rate than an increase in the number of jobs. The percentage of working-age adults who are in the labor market has decreased, and almost half of that decrease is a result of people moving into “disability” status. Fewer people in the labor market not only makes unemployment look better than it really is, but it also puts a drag on the economy as fewer workers are available to take jobs (supply of labor decreases) and make “stuff”. And “stuff” is what makes the market economy go ’round. If that wasn’t bad enough news, the high disability rate is now predicted to bankrupt the current SSDI system in the next three years.

So, are people really “stuck in disability”? Continue reading “Paid To Be 'Stuck'?”

New POLCON Data Set Released

Witold Henisz (Wharton) has just released the latest update to his POLCON (political constraint) index, which includes data up through 2012. The previous (2010) release included data only up through 2007. The POLCON data uses a spatial modeling technique to synthesize a number of variable characterizing the structures and ideological alignments of countries’ political system, including the number and types of veto points and the party control (and fractionalization) of different government bodies.

The data are made available for no fee except the promise of an appropriate citation. The 2013 release is available for download in both STAT and Microsoft Excel formats and a code book is provided.

This index is an excellent resource for scholars interested in cross-country comparisons that take into account political uncertainty, and Henisz has been doing the academic community a great public service in maintaining and updating this resources since its inception.

Conducting Empirical Legal Scholarship

The 12th Annual Conducting Empirical Legal Scholarship Workshop will take place at the USC Gould School of Law May 22-24, 2013. The workshop is for law school faculty, political science faculty, and graduate students interested in learning about empirical research and how to evaluate empirical work. Leading empirical scholars Lee Epstein and Andrew Martin will teach the workshop, which provides the formal training necessary to design, conduct, and assess empirical studies, and to use statistical software (Stata) to analyze and manage data. Participants need no background or knowledge of statistics to enroll in the workshop. For more information, see the conference website.

Most economics grad students get a lot of exposure to econometric and statistical concepts, but not necessarily to an understanding of how to actually apply that knowledge to conduct empirical research. I suspect the organizers may be willing to let even economics grad students participate.

Wrinkles In The US Raisin Cartel

Cartel sounds much sexier than “marketing order”, doesn’t it? But that’s basically what it is…and some of the cartel members are not happy.

It didn’t receive the attention some other recent US Supreme Court cases did, but a couple weeks ago in Horne v. Department of Agriculture the SCOTUS heard arguments about whether mandatory marketing order set-asides amount to federal takings and should be compensated. This case has tremendous potential impact for upward of 30 agricultural products governed by marketing orders run under the auspices of the USDA. These marketing orders date back to the 1930s and were an attempt by agricultural producers to increase the prices they received for the products by disposing of “excess production”. In other words, farmers of the 1930s got the federal government to institute a national cartel for the purposes of raising the price of food…and those cartels continue to operate today.

So how does that work?

Continue reading “Wrinkles In The US Raisin Cartel”