There’s a puzzle at the heart of our economy that has troubled economists for decades. The question is this: why do people work hard in environments where they are poorly monitored and paid a fixed wage, rather than a performance-related one. Surely any rational worker would do the bare minimum to get by.

One line of thinking focuses on the relationship between the workers and their employer, which can be influenced by contracts set out in writing and by personal relationships between workers and their managers.

That suggests that one way for an employer to improve productivity would be to perfect its employment contracts.

Another line of thinking is that peer pressure plays an important role. The people around you may affect the way you work. For example, good workers, leading by example, might raise the quality of everybody’s work. On the other hand, bad apples may make the good ones rotten.

But working out which of these effects wins out is hard. Peer pressure is hard to quantify and the various results in this area are somewhat contradictory, suggesting that they may depend on the environment too.

But a new tool is emerging that can help, according to John Horton at Harvard University who says the recent development of online marketplaces, in which people can buy and sell services over the web, provides a fascinating laboratory in which to test these ideas. (…)

Horton’s work raises many questions, not least because it contradicts other work suggesting that it is possible to improve poor workers’ output by pairing them with good workers. By contrast, Horton found that “the bad apples ruined the good apples, and the good apples did nothing for the bad.”

This kind of work fascinates psychologists, economists and managers because it raises the possibility that productivity in the workplace can be manipulated by clever management rather than by expensive financial incentives.

{ The Physics arXiv Blog | Continue reading }

photo { Cory Kennedy and friends }

I wrote a few days ago about the Intel anti-trust settlement with the Federal Trade Commission. Those words stand unchanged but some readers have asked for more so I have given the deal further thought and have what might be a better context in which to place it — Too Big to Fail. This isn’t “too big to fail” in the Bush/Obama big bank context in which failing and stupid institutions are saved at any cost to the public. Intel, in contrast, literally is too big to fail, at least right now.

Everything about the Intel/FTC settlement screams of one thing — Microsoft. Redmond’s multi-year nightmare with the FTC, DoJ, and the attorneys-general of several dozen states wasn’t lost on Intel, which is a more rational company and doesn’t want a Microsoft-like anti-trust experience. Both companies are guilty and both are paying something for that guilt, but Intel clearly wants to avoid the decade of pain and distraction suffered by Microsoft.

For the record, Intel admitted no wrong-doing in the settlement. But they also promised to specifically change their behavior.
What this settlement (and the previous one with AMD) does for Intel is clear the decks for future action. Now Intel can attack new market segments and be aggressive in existing market segments within the rules of the FTC deal.

Microsoft was paralyzed with the FTC breathing down its neck. Intel is not paralyzed.

Roughly $2 billion in payouts and Intel is a free bird — a rich free bird at that — having proved that crime does pay.

{ Robert X. Cringely | Continue reading }

Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

More than likely, that era is gone for good. (…) “People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.

If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.

The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.

{ NY Times | Continue reading | Read more: Housing: No Longer A Sure-Fire Wealth Builder | Barry Ritoltz }

photo { Helmut Newton }

{ J.D. Salinger PERSONALLY OWNED & USED Toilet Commode | eBay }

For jazz fans, nothing could be more tantalizing than the excerpts made available by the National Jazz Museum in Harlem of newly discovered recordings from the 1930s and ’40s. Nearly 1,000 discs containing performances by masters like Coleman Hawkins, Lester Young, Billie Holiday and the long-neglected Herschel Evans suddenly re-emerged when the son of the audio engineer, William Savory, sold them to the museum.

The museum is doing its best to clean up and digitize the recordings. But because of the way copyright laws work, excerpts may be all that fans can hear for some time. The museum paid for the discs, but cannot distribute the music until it has found a way to compensate the estates of the musicians, many of which may be very difficult to track down after all these decades. Hawkins’s saxophone solo on “Body and Soul” may be reason enough for Congress to revisit this issue and free historical documents from excessive legal fetters.

Copyright laws are designed to ensure that authors and performers receive compensation for their labors without fear of theft and to encourage them to continue their work. The laws are not intended to provide income for generations of an author’s heirs, particularly at the cost of keeping works of art out of the public’s reach.

The Savory collection, like other sound recordings made before 1972, is covered by a patchwork of state copyright and piracy laws that in some cases allow copyrights to remain until the year 2067.

{ NY Times | Continue reading }

Central banks usually strengthen the economy through a single, vastly powerful tool — lowering interest rates. When the Federal Reserve makes it cheaper for banks to borrow money, that stimulus generally flows through the entire economy, as the banks make loans that in turn stimulate economic activity.

But when times are so dire that banks are reluctant to lend whatever the cost, interest rate cuts lose their punch. That happened in Japan after the bursting of its real-estate bubble in 1991, and happened again in the wake of the credit crisis that upended Wall Street in the fall of 2008. In those circumstances, central banks turn to what economists call “quantitative easing” — unorthodox methods of pumping money into an economy and working to lower interest rates that central bankers do not usually control. Their effect is the same as printing money in vast quantities, but without ever turning on the printing presses.

{ NY Times | Continue reading }

Cash register and other receipts may expose consumers to substantial amounts of bisphenol A, a hormone-mimicking chemical that has been linked with a host of potential health risks, according to a trio of recent studies. Each study offers preliminary evidence that a large number of retail outlets print sales receipts on certain types of heat-sensitive, or thermal, paper that use BPA as a color developer.

Two of the new studies also showed that the BPA coating easily rubs off onto fingers. And one found evidence that BPA from receipts may penetrate skin.

{ ScienceNews | Continue reading }

The Gulf Oil Spill Disaster

First, let’s begin with the “good” news. The ecological destruction that was first feared is not going to be as bad as once thought, for a variety of reasons. It is not good, but it is not the unmitigated disaster it could have been.

Edward Overton, PhD, Professor Emeritus, Dept. of Environmental Sciences, LSU, is an expert on oil spills. He was at the Exxon Valdez. The Exxon Valdez (EV) was a big, black, thick tide of oil. The Deepwater Horizon is a much bigger spill: every ten days the amount of the EV spill spewed into the Gulf, from April 20 to July 15. Professor Overton spoke mostly for the record. He is very much a concerned environmentalist, and he is also a very serious scientist.

He reminded us that the Louisiana wetlands are a very important part of the ecological system of the Gulf of Mexico. Oversimplifying, they are the nutrient source for the small animal world which feeds the larger. Without the wetlands much of the Gulf ecosystem dies. If they were destroyed, they would not come back very easily, as without their very root system the land would erode away. Bluntly, oil kills wetlands if it gets into it.

There are only three ways to get rid of an oil spill. You can mechanically remove it, chemically remove it, or burn it. They used all three methods. But not fast enough. The Obama administration dithered while Rome burned. (This is not from Overton.) (…)

What should have been a no-brainer decision to use the Dutch ships was delayed for whatever reason. What should have been a no-brainer decision to waive the water purity rules was delayed beyond reason. My personal opinion. Whoever participated in that decision should be allowed to return to the private sector. They only made the problem of the spill worse. They should not be allowed near the decision-making process again.

Please note, this is no defense of British Petroleum. As noted below, they were extremely negligent, and deserve the costs and more. We just don’t need to compound stupid, incompetent, irresponsible (choose several more adjectives, some with color) corporate acts with dumb government ones.

There is a chemical called Corexit that is a product line of solvents primarily used as dispersants for breaking up oil slicks. It is produced by Nalco Holding Company. Corexit was the most-used dispersant in the Deepwater Horizon oil spill in the Gulf of Mexico, with COREXIT 9527 having been replaced by COREXIT 9500 after the former was deemed too toxic. Oil that would normally rise to the surface of the water is broken up by the dispersant into small globules that can then remain suspended in the water.

In hindsight, Overton thinks the use of Corexit was the correct thing to do. It probably saved the wetlands. But it is not without its own bad effects.

When you put Corexit on an oil slick, the surface oil disperses but also drops into the ocean about 15 feet. While Corexit (basically a type of soap) itself is not toxic (an admittedly controversial claim), the resulting dispersed oil is quite toxic. Fish swimming through it can be and are harmed. Marine mammals like porpoises are seriously harmed when they rise to breathe through an oil slick.

But here is the good news. It turns out that there are about the equivalent of two Exxon Valdezes a year from natural oil seepage from the floor of the oceans. The Gulf has an ecosystem of bacteria that eat that oil, which are then eaten again by plankton. To those bacteria, dispersed oil is filet mignon. They thrive and grow rapidly, turning that toxic waste into nutrients, which are absorbed by the plankton. The bacteria keep on growing until they lose their source of nutrition (the toxic oil) and then die out over time. Note: once absorbed by the bacteria, the oil is no longer toxic. There are no toxic minerals like mercury introduced into the ecosystem.

{ John Mauldin | Continue reading | PDF }

update:

[$12 a pack] It’s been six weeks since New York’s state government raised the cigarette tax to $4.35 a pack, and guess what? Cigarette sales have fallen by 35 percent. (…)

The crazy-high price of cigarettes here is sending New Yorkers over the state border to, say, Pennsylvania, where a pack of cigarettes can be obtained for around $5, or Jersey, where they’re $7ish. People are also heading to Indian reservations, where, according to a friend who does exactly this, you can get a carton for $22, and where sales have apparently gone up a whopping 300%.

{ Village Voice | Continue reading }

photo { Petra Collins }

Over the past few months, we have learned about extraordinary levels of excessively bad corporate behavior.

As bad as the Bailouts were from an economic, wealth transfer, and moral hazard perspectives, it turns out that the grim reality was an order of magnitude worse than previously believed.

We have since learned that many TARP recipients, bailed out banks and other ne’er-do-wells were actively engaged in cooking their books. I don’t mean various FASB 157 permission to lie, and other legal but nefarious activities. I am referring to the 2002-2007 era of scams, frauds, and outright theft.

The public’s righteous indignation over the lack of just desserts for the perpetrators of these frauds has morphed since September 2008 into an unresolved, unfocused anger. When this all plays out, we might very well see bonus clawbacks, fines and penalties, disgorgement of ill gotten gains, and criminal arrests for some of the major names at the biggest brokerage houses.

Why do I think that 2 years later, some justice might be done? The truth is slowly coming out, as insiders provide testimony, release papers, and even offer up recordings of conversations to various investigators and prosecutors.

{ Barry Ritholtz | Continue reading }

photo { American Standard (remix), a work based on 4 x 5 negatives Simone Bergantini bought in Brooklyn at a secondhand shop }

Mysterious and possibly nefarious trading algorithms are operating every minute of every day in the nation’s stock exchanges.

What they do doesn’t show up in Google Finance, let alone in the pages of the Wall Street Journal. No one really knows how they operate or why. But over the past few weeks, Nanex, a data services firm has dragged some of the odder algorithm specimens into the light.

The trading bots visualized in the stock charts in this story aren’t doing anything that could be construed to help the market. Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there’s no way they’d ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants.

{ The Atlantic | Continue reading }

artwork { Jean-Michel Basquiat }

related { Quants: The Alchemists of Wall Street | video | Thanks Douglas }

Although the current spill still limited to the US coasts of the Gulf, this accident is already unprecedented in history because its injury to such a large variety of ecosystems of uniquely rich biodiversity that is impossible to cleanup. As the oil asphyxiates mangrove trees, perturbs microbial communities and disrupts the ecological stability affecting animals and microbes throughout the food chain– It may be hundreds of year before these ecosystems recover, making it the worst and possibly the most far reaching of any previous oil disaster in the history of this planet.

{ Journal of Cosmology | The Gulf Oil Gusher Catastrophe: Toxic Chemicals, Undersea Oil Plumes, Currents of Death. | Tracking and Predicting the Gulf Oil Spill Plumes | Can We Learn From the Past? | Thanks Douglas }

artwork { Everett Millais, Ophelia, 1851-1852 }

One of the problems with the rise of behavioral economics is that too often behavior is defined as irrational, the result of cognitive screwups. I’ve dealt with this issue before, but James Kwak convincingly argues that the BP oil disaster is not due to a cognitive failure to assess risk. (…) this is the key point:

The problem isn’t that people have cognitive biases in assessing unlikely events. When you’re dealing with a big company like Citigroup or BP, you have many people applying lots of clever thinking to these problems. The problem is that there is a systematic bias within these companies against certain assessments and in favor of others. That is, the guy who shouts, “Danger! Danger!” will be ignored (or fired), and the guy who says, “Everything’s fine, the model says disaster can strike only happen once every hundred million years” will get the promotion — because the people in charge make more money listening to the latter guy. This is why banks don’t accidentally hold too much capital. It’s why oil companies don’t accidentally take too many safety precautions. The mistakes only go one way. You have executives assessing complex situations they don’t even begin to grasp and making the decisions that maximize their corporate and personal profits. (Is BP’s CEO going to give back years of bonuses now?)
…This isn’t inability to quantify the likelihood of unlikely events; this is willfully looking the other way.

{ ScienceBlogs | Continue reading }

ceramic { Takashi Hinoda }

{ The causes of logistics uncertainty | Full story }

{ Apple’s iPad Competition | Related: Apple, AT&T Cite Record iPhone Sales }

Over the past several months, many in the mainstream media have hailed the slight improvement in the U.S. real estate market as a “housing recovery”. But the truth is that the small improvement in the numbers was primarily due to a significant number of Americans attempting to squeeze their home purchases in before the huge home buyer tax credit expired at the end of April. Now that there is no more giant tax incentive, real estate professionals all over the United States are fearing the worst. Mortgage defaults and foreclosures are still at record levels, and a giant “second wave” of adjustable rate mortgages is scheduled to reset in 2011 and 2012. In addition, there are numerous indications that the U.S. economy as a whole is going to experience a dramatic downturn shortly, and if that happens it is going to be really bad news for the housing industry. So are we about to see “Housing Crash Part 2″? (…)

The following are 12 reasons why the U.S. housing crash is far from over:

{ Seeking Alpha | Continue reading }

{ It’s not often that a US president has cause to declare that, given the chance, he would sack the boss of one of the UK’s leading companies. | The Deepwater Horizon catastrophe uncannily mirrors the global financial meltdown that was triggered by the September, 2008 collapse of Lehman Brothers. | Thanks Douglas! }

Americans are getting increasingly anxious–and for good reason.

People are worried about the economy, and they should be. They have been told to expect a strong rebound from our deep recession. The usual pattern is that recoveries mirror the strength of the decline–the steeper the drop, the more vigorous the rebound. It isn’t happening. The latest employment report makes it clear that the economy is not adding jobs. State and local governments faced with declining revenues are being forced to cut employment, wages and services, and they are raising taxes wherever they can.

A little over a year ago the Obama administration passed a staggering $787 billion stimulus package designed to rescue the economy. More than half of that money has now been spent, and the economy is still just creaking along. But now people are realizing that there is a dark side to this spending orgy. It has to end, and then we have to pay the bill. If we need any reminders that the day of reckoning is coming we have only to look to Europe.

{ Forbes | Continue reading }

For years, almost nobody paid attention to the sky-is-falling alarms of Edward Hugh, a gregarious British blogger and self-taught economist who repeatedly predicted that the euro zone could not survive. (…)

But now that the European sovereign debt crisis is rattling world markets, driving the euro lower almost every day and raising doubts about the future of the monetary union, his voluminous musings have become a must-read for an influential and growing global audience, including policy makers in the White House.

{ CNBC | Continue reading | Thansk Douglas }

related:

Personal Bankruptcies Jump 9% In May, And The Outlook For The Year Has Been Jacked Up.

China bank adviser says property woes worse than US.

Europe’s financial woes will hit the global economy, warns the governor of the Australian central bank, Glenn Stevens.

Public Pensions Could Bankrupt California.

Venice forced to sell off dozens of historic palazzos in order to bolster fast-diminishing funds.

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened. (…)

Mr Congdon said the dominant voices in US policy-making - Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke - are all Keynesians of different stripes who “despise traditional monetary theory and have a religious aversion to any mention of the quantity of money”. The great opus by Milton Friedman and Anna Schwartz - The Monetary History of the United States - has been left to gather dust.

Mr Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use.

This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 - just as the Fed talked of raising rates - gave a second warning that the economy was about to go into a nosedive.

Mr Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called “creditism” has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure.

{ The Telegraph | Continue reading }

Europe is in crisis. Austerity measures have been announced in several countries including Greece and Spain, the euro is under pressure and stock markets across the globe have fallen sharply from their recent highs – and it is all due mainly to sovereign debt. (…)

What has caused the debt crisis?

In a word or two, over-borrowing. Sovereign debt is fine so long as the governments have no problem repaying the debt. But several countries have borrowed beyond their means – the ramifications of the financial crisis have left them struggling to repay their debt. This is why the IMF has agreed a financial package to bail them out.

Greece and other countries will struggle to pay off these debts. This has led to a dramatic spike in borrowing costs for these countries, exacerbating the problems further,” Mr Howse added. “Investors have begun to question the future of European Economic and Monetary Union and whether the crisis may spread beyond the peripheral European countries.

{ The Telegraph | Continue reading }

{ BP CEO Hayward told CNN that the sick workers, who blamed their nausea, headaches and chest pain on the oil cleanup at the beach at Grand Isle, probably got sick from food poisoning. | Court News | Full stroy | More: 30 quotes about the oil spill that reveal the horror this disaster is causing. }