Preparedness 101: Zombie Apocalypse

The Centers for Disease Control offers emergency preparedness tips with a sense of humor:

So what do you need to do before zombies…or hurricanes or pandemics for example, actually happen? First of all, you should have an emergency kit in your house. This includes things like water, food, and other supplies to get you through the first couple of days before you can locate a zombie-free refugee camp (or in the event of a natural disaster, it will buy you some time until you are able to make your way to an evacuation shelter or utility lines are restored). Below are a few items you should include in your kit, for a full list visit the CDC Emergency page.

     

  • Water (1 gallon per person per day)
  • Food (stock up on non-perishable items that you eat regularly)
  • Medications (this includes prescription and non-prescription meds)
  • Tools and Supplies (utility knife, duct tape, battery powered radio, etc.)
  • Sanitation and Hygiene (household bleach, soap, towels, etc.)
  • Clothing and Bedding (a change of clothes for each family member and blankets)
  • Important documents (copies of your driver’s license, passport, and birth certificate to name a few)
  • First Aid supplies (although you’re a goner if a zombie bites you, you can use these supplies to treat basic cuts and lacerations that you might get during a tornado or hurricane)

Once you’ve made your emergency kit, you should sit down with your family and come up with an emergency plan. This includes where you would go and who you would call if zombies started appearing outside your door step. You can also implement this plan if there is a flood, earthquake, or other emergency.

ht: Alex Tabarrok

Developing the Competitiveness Agenda

On Friday I will be speaking at an event sponsored by Hamilton Place Strategies. It came together on short notice, so let me give it a plug:

Developing the Competitiveness Agenda

This week’s first meeting of the President’s Council on Jobs and Competitiveness kicked off a national debate on the economic policies encouraging greater job creation and economic growth in the United States. The Council’s mission is to focus on finding new ways to promote growth by investing in American business to encourage hiring, to educate and train our workers to compete globally, and to attract the best jobs and businesses to the United States.

To contribute to the ongoing debate, we are bringing together noted policy experts and economists to discuss the key policies that will be most effective in achieving America’s economic goals.

Featuring

Byron Auguste, Director, McKinsey & Company
Donald Marron, Director of the Urban-Brookings Tax Policy Center
Michael E. Porter, Professor, Harvard Business School

Moderated by Matt McDonald, Partner, Hamilton Place Strategies

WHEN: 10:00 am – 11:00 am, Friday, February 25th, 2011

WHERE:
The National Press Club: Holeman Lounge
529 14th Street, NW
Washington, DC 20045

RSVP here

My basic approach will be to emphasize the three key drivers of economic activity: a skilled workforce, capital, and ideas. I generally align myself with Paul Krugman on the idea of “competitiveness“, so if you hear me use the term, I probably mean it as shorthand for productivity. (Well, not shorthand exactly — “competitiveness” has more letters than “productivity” — but you know what I mean.)

The Yield Spread and the Odds of Recession

Worries about a double-dip recession have spawned much economic commentary … and a humorous country and western song. So how likely is a return to recession?

Researchers at the San Francisco Fed took a crack at this question a few weeks ago. Their answer? It depends.

When they used a traditional model based on the leading economic indicators, the probability of a second dip turned out to be about 25% over the next two years (the blue line). When they dropped one indicator from their model, that probability doubled to about 50% (the red line).

That important indicator is the yield spread–the difference between the 10-year Treasury interest rate and federal funds rate. In recent decades, the yield spread has done a terrific job at anticipating recessions. When the federal funds rate has risen above the 10-year rate, the economy has invariably fallen into recession.

As I noted briefly the other day, the relative steepness of today’s yield curve (10-year rate about 2.5 percentage points above the fed funds rate) thus suggests, by itself, that renewed recession is unlikely, despite recent weak economic data. On the other hand, there are reasons to believe that this time things are different (usually a scary phrase). After all, fed funds rate has been pushed down almost to zero and yet the economy no longer appears to be responding. That’s exactly the logic that inspired the SF Fed researchers to try their model without the yield spread.

The Vuvuzela Externality

Thus far, the top three stories of the World Cup are (3) Germany looks strong, (2) the U.S. got lucky, and (1) the vuvuzela is remarkably annoying.

For those who haven’t tuned in yet, the vuvuzela is a meter-long plastic horn whose name translates roughly as “making a vuvu noise.” And make a noise it does. When thousands of fans start blowing, you’d think a swarm of bees was taking over the soccer stadium … and your living room. Highly annoying.

And that’s not all. According to Wikipedia, the vuvuzelas raise other concerns:

They have been associated with permanent noise-induced hearing loss, cited as a possible safety risk when spectators can’t hear evacuation announcements, and potentially spread colds and flu viruses on a greater scale than coughing or shouting.

In short, the vuvuzela creates a host of externalities. So it’s not surprising that FIFA is under growing pressure to ban them.

I’ve been unable to come up with a market-based approach for dealing with the vuvuzela — there won’t ever be a Pigou club to limit the vuvu noise — and I would personally benefit from such a ban. So I’m all for it.

It is worth pondering, however, whether there are less drastic actions that might address some of the vuvuzela nuisance. Here’s one idea: ESPN and ABC should figure out a way to cancel out most of the vuvuzela noise. I still want to hear the cheers of the crowd and the screams of players who pretend to be hurt, but those are on different frequencies than the dreaded vuvu noise.

I don’t know how technically challenging that would be, but the marketplace is already providing similar solutions for consumers. According to Pocket Lint, you can change the sound settings on your TV, purchase an anti-vuvuzela sound filter, or even build your own filter at home.

Or you can go really low tech and use your mute button.

Single-Family Home Construction is Still Flat

Today’s housing data are again driving some optimistic headlines. Most notably, new starts of single-family homes in April were up more than 10% from March.

As I’ve noted in previous posts (here, for example), I think it’s useful to look not only at the number of housing starts, but also at the number of houses under construction (which reflects the pace of both starts and completions). Why? Because that gives us a sense of how much construction activity is actually taking place. As shown in the following chart, those figures suggest that the housing market is still moving sideways:

307,000 single-family homes were under construction at the end of April, essentially unchanged from March. The sudden spurt in housing starts in April was offset by a burst of completions.

In short, little has changed in construction of single-family homes over the past month or, as the chart demonstrates, over the past year. The number of houses under construction has remained remarkably constant over the past 12 months–ranging between 298,000 and 318,000–despite home buyer credits and the upturn of the overall economy.

Advice to Nasdaq and the NYSE: Cancel Only 90% of the “Erroneous” Trades

Nasdaq and the New York Stock Exchange have both announced that they will cancel many trades made during the temporary market meltdown between 2:40 and 3:00 last Thursday afternoon (see, for example, this story from Reuters). These “erroneous” trades include any that were executed at a price more than 60% away from their last trade as of 2:40.

The motivation for these cancellations is clear: a sudden absence of liquidity meant that many stocks (and exchange-traded funds) temporarily traded at anomalous prices that no rational investor would have accepted.

As several analysts have noted, however, canceling these trades creates perverse incentives. It rewards the careless and stupid, while penalizing the careful and smart. It protects market participants who naively expected that deep liquidity would always be there for them, while eliminating any benefits for the market participants who actually were willing to provide that liquidity in the midst of the turmoil.

Kid Dynamite has helpfully linked to several comments along these lines, as well as providing his own view:

Paul Kedrosky asks aloud: “why are we wiping out all the errant trades by runaway algorithms and market battle bots?”

David Merkel points out, emphasis mine: “NASDAQ should not have canceled the trades.  It ruins the incentives of market actors during a panic.  Set your programs so that they don’t so stupid things.  Don’t give them the idea that if they do something really stupid, there will be a do-over.”

And the Law of Unintended Consequences rears its ugly head again.  Merkel’s point is simple and accurate:  if buyers who step in later see their trades canceled, it removes all incentive for them to step in – and then you don’t get the bounce back that we saw!  Think about how much havoc it causes a trader who astutely bought cheap stock, then sold it out at a profit.  He’s now short!  Or, he spent the entire day wondering if his order would be canceled, in a state of limbo.  What’s the alternative – that traders should just assume that the orders will get canceled, and NOT buy stock?  Guess what – if no one buys, the stock stays cheap! SOMEONE has to buy, and that someone shouldn’t be penalized in favor of remedying the ignorance of the seller who screwed up.

I see merit in both sides of this argument. My economist side thinks people should be responsible for their actions and bear the costs and benefits accordingly. But my, er, human side sees merit in protecting people from trades that seem obviously erroneous.

What’s needed is a compromise–one that maintains good incentives for stock buyers and sellers, but provides protection against truly perverse outcomes.

Happily, the world of insurance has already taught us how to design such compromises: what we need is coinsurance. People have to have some skin in the game, otherwise they become too cavalier about costs and risks. That’s why your health insurance has co-pays and coinsurance. Those payments undermine the risk reduction that insurance provides, but for a very good reason; 100% insurance would make medical care free, and people act really weird when things are free. Even a little skin in the game gets people to pay attention to what they are doing.

So here is my proposal:  NYSE and Nasdaq should cancel only 90% of each erroneous trade. The other 10% should still stand.

If Jack the Algorithmic Trader sold 100,000 shares of Accenture for $1.00 last Thursday, he should be allowed to cancel 90,000 shares of that order. But the other 10,000 shares should stand–as a reminder to Jack (and his boss) of his error and as a reward to Jill the Better Algorithmic Trader who was willing to buy stocks in the midst of the confusion.

Greece, the Other PIIGS, and “The Chastening”

Several colleagues recently suggested that now is a propitious time to read (or re-read) Paul Blustein’s “The Chastening.” The book recounts how the International Monetary Fund (IMF) and the G-7 nations struggled to combat the Asian, Russian, and Latin American economic crises of the late 1990s.

Having read the book while flying back and forth across the nation, I heartily agree. The Chastening is a great read if you want to get up to speed on many of the issues now posed by the “PIIGS” (Portugal, Ireland, Italy, Greece, and Spain).

I particularly enjoyed (if that’s the right word) the number of characters, familiar from today’s Greece debacle, that appear in the book. For example:

* The government that used derivatives to hide its perilous financial situation (Thailand)

* The German leaders who denounced the moral hazard created by sovereign bailouts (most notably Hans Tietmeyer)

* The policymakers facing doubts (often well-founded) about whether assistance packages could really help or were just postponing the inevitable (and, in the meantime, bailing out some unsympathetic creditors).

With the benefit of ten years more hindsight, readers can also enjoy a certain “you ain’t seen nothing yet” thrill from passages about how scary the financial world looked during the crises of the late 1990s.

[Alan Greenspan the] Fed chief told the G-7 that in almost 50 years of watching the U.S. economy, he had never witnessed anything like the drying up of markets in the previous days and weeks. (p. 334)

Unfortunately, we were all in for even worse in less than a decade. And now Greece is following in many of the steps of Korea, Thailand, Indonesia, Russia, and Brazil.