Wednesday, December 26, 2007

Christmas: Never Good Enough

Another Christmas season has passed, leaving us again with various articles about how this season wasn't as good for retailers as expected. As I was reading an article about this year's retail shortcomings, I had a sense of deja-vu. Luckily, I know how to do searches on the Internet, and found that yes, I had seen stories about weak Christmas retail seasons before. Let's have a look:


Despite furious, last-minute shopping and heavy discounting, holiday retail sales largely fell short of industry expectations. Target Corp. (TGT), the No. 2 U.S. discount retailer, warned December sales might actually decline, helping to send retailers' shares down.
- CNN Money, 12/26/07


Rush at End, but Holiday Sales Fall Short, -The New York Times, 12/26/06


Retailers Find Little To Cheer -The New York Times, 1/6/06. This article says, "The nation's merchants, trotting out deep discounts before Christmas, lured enough last-minute buyers to deliver a decent, if unspectacular, sales gain of 3.2 percent in December."

A Solid but Not Spectacular Finish for Holiday Spending -The New York Times, 12/29/05. Says the article: " the International Council of Shopping Centers found that sales at 69 chain stores rose 3.9 percent from 2004. The group's chief economist called the performance 'soft.'"


Retail in Review: More Bah than Sis-Boom -The New York Times, 12/28/04. Says the gray lady: "as customers crammed stores the day after Christmas, waving their gift cards and seeking the latest markdowns, analysts were there, too - watching. They offered their latest judgment of the Christmas shopping season yesterday: good, but not great."


Results Mixed, Stores Await A Final Burst Of Shopping - The New York Times, 12/26/03. "Retailers are hoping for good news [for day after Christmas shopping] because this holiday season has been disappointing to many. Although most analysts expect sales at stores over all to be 3 percent to 6 percent higher than last year's dismal holiday numbers, in September retailers were gleefully predicting double-digit growth."


GROWTH IN SALES FOR HOLIDAY PERIOD IS LOWEST IN YEARS -The New York Times, 12/27/02. "After examining sales figures from the last frenzied hours before Christmas, experts yesterday declared this year's holiday season the worst in many years."


Late Shopping Gives Retailers A Slight Boost -The New York Times, 12/27/01. "A surge of last-minute shopping may have given the nation's retailers and the economy a small boost, according to several reports on holiday sales released yesterday. The 11th-hour sales gains will not add much to retailers' profits because most of the increases were bought with dizzying price cuts like 70 percent off gold and diamond jewelry at Kmart and 75 percent off sweaters at Neiman Marcus."

TECHNOLOGY; A Bright Spot in a Bleak Holiday Retailing Season -The New York Times, 12/19/01. "In the worst year in recent memory for most retailers, there appears to be one small bright spot: the Internet."


Sales in Holiday Season Rose, Just Barely, Over Last Year's -The New York Times, 12/27/00. "Despite widespread markdowns and a burst of last-minute buying, this year's holiday shopping season is shaping up as among the worst in a decade, industry analysts said yesterday."


Diary -The New York Times, 12/28/97. "A sparkling economy failed to deliver the snappy holiday season that retailers were counting on. Analysts and merchants estimated that sales were up a scant 2 to 3 percent from December of last year. This was the third lackluster Christmas season in a row, despite the sterling economy and the wealth-generating gains of the stock market."


Holiday Retail Refrain: Better Than '95 but Not Good Enough, -The New York times, 12/25/96. "As surprise led to surprise and the season faded to a close yesterday, sales appeared to have been stronger than in last year's dismal Christmas shopping season. But they were expected to fall short of the levels many people in the industry had hoped for, retailers and retail experts said yesterday."


Retailers Call Sales in December Worst Since '90-'91 Recession, -The New York Times. 1/5/96. "In the culmination of a dismal year for retailers that may well lead to a further industry shakeout in the next few months, the nation's merchants reported the worst December sales figures yesterday since the 1990-91 recession."

So anyway, it looks like 1998 and 1999 were good, but every other year since 1995 has had some sort of negative spin put on Christmas sales. It seems as if retailers have expectations that are just a bit high.

Tuesday, December 04, 2007

The Great Pumpkin Tax

Recently, Iowa became the brunt of many jokes when it attempted to implement a sales tax on pumpkins. In Iowa, groceries are exempt from sales tax, but the Iowa government decided that most people used pumpkins for decorations and not for food. However, some specific variety of pumpkins used for pies was exempt from the tax, and you could also fill out a form if you were going to eat a pumpkin and not carve it. Seriously.

What's the real problem here? It's that the Iowa government has arbitrarily decided to tax one class of good but not another. If it had simply decided to tax everything at the same rate, this issue would never have come up. Many states exempt certain items from sales tax: in Connecticut, all groceries and any article of clothing under $50 are exempt from sales tax.

I'd rather have everything taxed, but then have the rate lower. Right now, if one class of good is taxed but another isn't, the people buying the taxed good are in effect subsidizing those who buy the untaxed good. Sure, everyone buys groceries, but not everyone spends the same ratio on groceries and taxed items. And please don't talk about helping the poor. There are many more efficient ways of helping the poor than not having a tax on groceries but having a tax on gasoline or having a tax on furniture or having a tax on cars.

When you tax people or items differently, you create many distortions. This ncludes the creation of silly government forms that make you declare you shall eat a pumpkin and not merely carve it. I'm all for low taxes. However, they need to be low on everything. Having taxes removed from one particular good, or for one preferred group of people, isn't really a tax cut. In the end, it's just a transfer payment. If the government taxed everything equally, but then gave checks for the amount of tax you paid for one particular good, that'd be a subsidy, and no one would argue with you on this fact. But that would have the same exact effect as what the situation currently is. In finance, if two financial scenarios have the exact same cash flows under all circumstances, they are deemed equivalent and would have the same price applied, and would be considered interchangeable.

For now, however, we'll be faced with the fact that we'll have to prove were eating a pumpkin pie or pumpkin bread, and not making a jack-o-lantern that is a tax dodger.

Saturday, October 13, 2007

Diversity: Good for Us, Bad for You?

Liberals seem to have very different views of diversity in foreign and domestic policies. For our own population, diversity is wonderful, and should always be promoted. Schools, workplaces, neighborhoods, and all other facets of community life should be more diverse and integrated. However, when it comes to foreign policy, liberals often advocate countries practice no diversity, and instead separate themselves based on ethnic group.

Take Presidential candidate Joe Biden, currently a Senator from Delaware. Biden has been pushing to have Iraq partioned into three regions "divided on ethnic lines". That sounds amazingly non-diverse to me. Now, compare Biden's plan for Iraq with his June 28, 2007 Press Release, which states, "As I’ve always said, diversity in our public schools enriches our classrooms and makes America a better and stronger nation."

So I guess according to Biden, diversity in US classrooms makes the US a better and stronger nation, but in Iraq, diversity makes the country a worse and weaker nation?

It's not just Iraq that liberals seem to have this amazing double standard about diversity. Take Africa. A common reason cited for Africa's dismal economic performance is that the colonial powers -- mainly Britain and France -- drew the borders without any thought to the ethnic groups and where they lived. If countries had been separated along ethnic lines, that would have supposedly made the countries wealthier. It's strange that suggesting that Africans in Africa should be politically separated along ethnic lines is a perfectly socially acceptable position to advocate, but if you said that Alabamans should be separated along ethnic lines, with political boundaries separating them, you'd be shunned by nearly all elements of our society.

When someone advocates that we can do diversity and they can't, I wonder what their true feelings are. Why can the US do more diversity, while the Iraqis or Africnns cannot? Is it that we have a superior form of government that alows ethnic minorities a voice in the court system and political system? If so, they why not simply encourage these other countries to adopt our form of government? Or is it that there's something culturally about us that allows us to be more receptive to diversity than the peoples of Iraq or Africa? Somehow I doubt a liberal would ever make this claim overtly. So I'm left to ponder why diversity is a good thing for us, but not for them.

Friday, June 15, 2007

Let's Be Provincial!

Recently, Congressman Earl Blumenauer (D-Oregon) outlined his Food and Farm Bill of Rights. While I don't have an issue with some of the things (although probably for different reasons that the Congressman), point #6 seemed just plain odd:

Americans have a right to local supplies of fresh food: Too many Americans do not have the option of buying affordable, locally-grown fresh food. We deserve a food and farm policy that includes programs that deliver healthy food to all communities, regardless of location, class, or economic standing.

This just seems crazy, for many reasons. Having food produced in small pockets all over the country just wouldn't be efficient. The weather varies mightily from region to region, so certain crops just aren't feasible outside of certain regions (for instance, there are 5.5 million barrels of cranberries produced in the United States, of which 4.4 million barrels -- 80% of the total -- comes from just two states, Wisconsin and Massachusetts). Besides climate, there's variation in soil, variation in population densities, variations in freight rail lines, and so on. And pray tell, Congressman, but would everyone have a guarantee to local lobsters under your plan too?

A major issue, if not the major issue, is land cost. Land in Manhattan, Kansas is going to be a lot cheaper than in Manhattan, New York City. It just doesn't make sense for someone to grow bulk crops in Westchester County, NY or in Fairfield County, CT. Too many people want to live near New York City, and are therefore willing to pay significant amounts for small parcels of property. There is no way that farmers in these areas could compete with farmers in Kansas, as these NYC area farmers would have significantly higher mortgage payments.

In order to ensure that every single area of the counry, or even every major metropolitan area, had significant local food production would require a massive bureaucracy. And if not enough food were being produced according to the bureaucrats, then certain active measures would have to be taken. Bigger subsidies for the local farmers, massive zoning regulations, or something similar. This would result in massive distortions in the economy, and for little to no purpose in the end.

Right now, if enough locals really demanded that their food was local and not from far away, they could influence the market. At the grocery store, they could look for locally grown food and pay more for it. After enough people did this, more local farms may spring up. But in some cases, the extra payment would have to be considerable, since land is in very limited supply in some regions.

Back in the 1700s and 1800s, almost everything was local, because transportion costs were expensive. Now that transportation and logistics are so cheap, we can have our food come from far away. This of course means that we can eat fresh fruits and vegetables all year round, instead of just when they happen to be "in season".

This locally grown thing obviously hasn't been thought out very much. We are a dynamic country because goods can be shipped across the country with relative ease, not because we only consume locally-produced food and products. The Congressman may want to open up an economics textbook and study the chapter on Comparative Advantage.

Saturday, May 19, 2007

A Three Headed Dog of an Argument

This past week, Cerberus Capital, a private equity fund, acquired 80% of Chrysler for $7.4 billion. According to Wikipedia, Cerberus has over $24 billion under management.

This clearly shows that private equity can invest in just about any industry, and take a controlling stake.

Many people seem to imply that certain items are artificially too expensive because the existing companies in the sector somehow collaborate to keep new entrants out and the prices high, or the barriers to entry are so high that new companies cannot compete. This allows the companies to make excessive (sometimes called windfall) profits, and these industries usually earn the adjective "big" like "big oil".

However, the acquisition of Chrysler should demonstrate that if there's some industry out there in which the players are making excessive profits, private equity funds will soon show up. Private equity funds have guys that do nothing all day but look for potential markets to enter. If a certain industry is not that competitive, they'll pounce. They've got no loyalties to the existing players, and the acquisition of Chrysler should be clear evidence that there's plenty of money floating around.

A few industries have actual legal protection to keep out competition. The tobacco settlement essentially prohibits new entrants into the cigarette market. Certain utilities have a grantted monopoly. Patents and trademarks protect, for a while, companies with intellectual property (you can't start making lipitor, nor can you decide to print the latest John Grisham book). There are reasons for these protections, however: the companies had to expend particular amount of research to develop the products.

A limited number of companies can still very competitively compete: just because there are only 5 or 10 companies doesn't mean they don't compete.

If you think something is way too expensive for the cost involved, there's probably one of a few outcomes: 1) no, it really does cost a lot to produce that product or service; 2) yes, but it's intellectual property, which cost a lot; 3) the industry has somehow gotten the government to ban new entrants; 4) you're right, in which case you ought to go work for a private equity fund, and then enter that market. Your new company could undercut the others, making you millions of dollars in the process.

Monday, April 09, 2007

Are Baseball Players Paid too Much?

Well, it's Baseball season again, and even though I'm not a big sports fan, you invariably hear how crazy it is that baseball players get paid so much for merely hitting a ball (the same type of argument is made for all major sports). Often times, these salaries are then compared to teachers' salaries, with the implication that baseball players should be paid less and teachers more.

Baseball salaries are of course set by the law of supply and demand, as are teacher salaries, and most other salaries. There's two basic ways that baseball salaries would come down: 1) the entry into the baseball market of many new good players. This would be what economists might call more supply. 2) less interest on the part of the general public in baseball. This would reduce the amount of owners had to pay players (through fewer ticket sales and / or lower TV revenues), and might lead to fewer teams in the marginal cities. This would be what economists call less demand.

So why are baseball players paid so much? First, not that many people can do what they do well. Second, people are willing to pay $20, $30, or whatever to go watch a game, and large corporations are willing to buy luxury boxes to entertain clients and employees. Millions of people are willing to watch baseball on TV or listen to it on the radio, and thus advertisements can be sold. Now, if this is all news to you, then either you aren't an American and lack even the most basic understanding of how our economy works, or you are really sheltered (so how in the world did you find this article?).

In short, baseball players are paid a lot because they get a lot of people to watch what they're doing. And in the process, you can get these people either spend money to watch them, or you can sell advertising. Baseball players accomplish what marketing executives try to do: get more eyeballs on a product, or have people pay to do something (in this case, watch baseball at the stadium or on pay-tv).

However, local governments can have an impact on baseball salaries as well: it's not merely the law of supply an demand in operation. Lots of cities in the country bend over backwards to get sports teams. They build stadiums with taxpayer money, they let the team get revenues for naming the stadium or for parking, or from vendors.

This has the effect of loweing the costs for the sports team owners, which allows them to pay additional money to the players. I don't mind that sports players make a lot of money. But I do not think it is the least bit fair that my taxes have to support sports teams (and thus help contribute to higher salaries for the athletes).

If local governments built no stadiums, we'd still have sports in this country. Maybe not in the exact same cities as we do now, but there would be a broad geographical dispersal of teams, and professional athletes probably would make slightly less than they do now. Some of the more marginal teams (I mean this from an economic standpoint, not how well they do on the field) might fold up without the subsidies, but it wouldn't be the end of the world. Teams would be located where there was the most interest for that sport. We'd have slightly lower taxes, or at least the local governments could waste the money somewhere else.

Monday, January 29, 2007

No to Broadwater, but Yes to What?

Currently, Broadwater Energy is attempting to build a Liquefied Natural Gas (LNG) platform in Long Island Sound, about 10 or 11 miles from the Connecticut coast on one side and 9 to 10 miles from the New York coast on the other. This platform would be, according to Long Island Business News, 1200 feet long and eight stories high. Various distance-to-the-horizon calculators I tried on the web show that something that is 85 feet high can be seen for about 11 miles, so I guess if you were to stand on the beach, you could just see the structure.

Tanker ships would come into Long Island Sound, and the liquid natural gas would be heated into gas, where it would flow into a pipeline, and be used primarily by electricity generation facilities in New York City and on Long Island, but some gas would evidently also flow to Connecticut.

This has of course made the NIMBYites all upset. Well, they're not really NIMBYites, since this platform would be 11 miles away in the middle of the water. I don't really know if their objections are valid or not, as I'm not a maritime expert, energy expert, or anything. But one thing I've noticed is that while just about every politician seems to be against this, none of them has ever said what they might be for. However, every single one of them feels the need to say that something has to be done.

Let's take a look:

State Senator Judith Freedman (R-Westport): "No one is disputing the need for more, and more reliable, sources of energy. But in seeking better energy, we cannot lose sight of the need to protect our environment, the public's safety, and the best interests of Connecticut's citizens. The outcome of this project will affect Connecticut for years to come. FERC has a moral obligation to listen to what we have to say about it." (Source: Redding Pilot, January 29, 2007).

US Senators Dodd and Lieberman, as well as Representatives DeLauro, Larson, Murphy and Courtney (all Democrats) wrote a joint letter to FERC, and said, "While we understand and appreciate our nation's and this region's need for additional energy resources, we do not believe that the Broadwater project is the best way to meet these needs." (Source: Greenwich Post, January 23, 2007).

In a Press Release, US Rep. Rosa DeLauro (D-New Haven) said, "“Let me be clear, I do not believe that the Broadwater proposal is the right answer to addressing our region’s energy needs. Yes, there is clearly a need for additional energy infrastructure in New York , Connecticut , and the New England Region. However, it cannot come at the cost of one of our region’s and this nation's most precious natural resources." (Source: US House of Representatives, January 16, 2007).

State Rep. Tom Drew (D - Fairfield) said, "We should not even be considering something this extreme until the U.S. government has a realistic plan to reduce our dependency on fossil fuels. This isn't necessary and approving it will cause irreversible damage for generations to come." (Source: Westport News, January 19, 2007). I wonder if Rep. Drew would favor more nuclear power plants? Or if he'd be ok with a windmill farm in the sound? Or on land in his town?

Adrienne Esposito, executive director of the Citizens Campaign for the Environment, which is opposed to the platform, said, "People don't just place a high value on Long Island Sound. They place the highest value on it. We want more energy. . . . but we want an energy plan that doesn't destroy what we love." (Source: Newsday, January 11, 2007)

Lonnie Reed, a Branford RTM member, said, "We oppose Broadwater not because we are anti-energy haters but because we are convinced we can get natural gas in a cleaner, safer way." (Source: New Haven Independent, January 9, 2007). There was no mention of what this cleaner, safer way might be in the article.

One of the reasons politicians cite for the opposition to Broadwater is that the terminal is not needed, as pipelines could bring in whatever natural gas was needed. Since Broadwater Energy's parent companies, TransCanada and Shell, are probably not in the business of building unnecessary infrastructure, I'm inclined to believe that it is needed. Otherwise, Shell and Transcanada are going to have some serious explaining to do to their shareholders, since this terminal is going to cost about $1 billion to build. Some of the opposition to Broadwater says that there are other terminals under construction that could handle the distribution. Again, if that's the case, why is Broadwater prepared to spend $1 billion?

A lot of politicians said this would "industrialize" the sound. Aren't commercial fishermen industrializing the sound? What about commercial ships that bring stuff into the sound?

Some would say it would be an eyesore. Well, you'd hardly be able to see if from land, so I guess it'd be an eyesore for boaters. Are boaters that sensitive? What if they see a barge or a cargo ship with the containers not symmetrically stacked? Do they have an equally bad reaction?

The safety issue seems a bit odd. This facility would be 10 miles from anything, with water in all directions. Even if it blew up, it couldn't hurt anyone on shore. Some have said terrorists would target it. Seems like a pretty poor project to target.

Some of the opposition points seem to have some merit, like who is going to bear the costs. But to those who are opposed to the project, give some realistic proposals for how we're going to get more energy. Hoping that congress is going to wean us off fossil fuels isn't a realistic proposal. If existing pipelines or LNG platforms under construction elsewhere are going to solve the problem, why in the world is Broadwater spending $1 billion to build an LNG platform? Broadwater is only going to build the platform if they think it'll be used, because if it isn't going to be used, they'll never get their investment back.

Connecticut has the highest electric costs of any state except Hawaii. We need a realistic proposal to get more energy here.

Monday, January 01, 2007

NIMBY and Electricity Costs

Recently, Connecticut utility United Illuminating (UI) was awarded a 50% price increase. Connecticut will supposedly, after this price increase takes effect, have the highest electrical rates in the country.

I became interested in this phenomenon: why does Connecticut have such high rates? First, I am not a UI customer: UI handles the relatively small area between Bridgeport and New Haven. Connecticut Light & Power (CL&P) is my utility, and covers almost all areas of the state that UI doesn't cover, although there are a few very small municipal utilities. In Connectict, UI and CL&P don't actually generate power: they instead buy the power and then distribute it.

In the course of trying to read up on why electric rates were so expensive, I stumbled on a newspaper article (link since deleted) about UI's proposal to build a substation in Trumbull, with local NIMBY types strongly opposed to the proposed location. While this was seemingly an unrelated article that I found because I typed "United Illuminating" into Google, this story provides a good example of one reason why electrical rates are so expensive: high real estate costs.

As far as I can tell here is what's happened. There is no substation in Trumbull, and in peak periods in the summer, the substations in Bridgeport and Shelton were loaded to 107% of capacity. So a new substation needs to get built. A substation is where the voltage is stepped down so it can be distributed to the local users.

UI owns about five acres of land in a residential area, and proposed to build a substation on this property, which would cost $17.3 million. There would be some woods buffer between some houses, but not on all sides. The local residents were understandably upset that a substation was going to get built there, and a neighborhood committee formed to protest the new substation.

Another property in a more industrial area was proposed instead. UI doesn't own this property, but the owner said he'd sell it for $7.5 million. The town offered open space it owned, but after residents near that space complained, that parcel became a nature preserve.

The additional cost to locate in the industrial area is about $11.6 million: $7.5 million to buy the property, with the remainder for additional costs in construction, materials, overheads, and transmission. I guess the difference comes from the fact that the industrial property is further from the power source than the property in the residential area.

It appears to me that UI owned the land where it wants to build the substation long before most of the surrounding houses were built. (This of course makes sense: why would UI buy land in a residential area before it was clear that it could get permits to build a substation there).

UI made an operating profit of $31.6 million last quarter, and $19.7 million in net income (i.e., after interest payments on its debt). So while it certainly can afford an extra $11.6 million expense, it isn't trivial. UI is going to, somehow, pass these costs on to its users. Maybe UI could also sell off the property in the residential area it owns and get something for that, if it could be zoned for new houses. Of the extra $11.6 million that UI would have to spend, the $7.5 million price for the property would not be tax deductible, as land is usually not something you can depreciate. The other $4 million should be tax deductible, but I'm not an accountant.

I don't necessarily think that anyone is in the wrong here, although I imagine that the industrial area property owner sees an opportunity to make a killer profit. But I think this episode is useful to show one reason why electricity costs a lot in Connecticut. Real estate is very expensive, and as a result, costs for goods and services that require real estate will be higher in Connecticut than in states with lower real estate prices.

There are of course a bunch of other reasons why electricity is expensive in this state: generation capacity, demand for the electricity, reliance on natural gas over coal, taxes, a regulatory structure (often called "deregulation") that prevents distributors from owning their own generation plants, etc. But real estate, and the general high cost of doing business here, is going to help make electricity more expensive.

I've heard many Republicans, Democrats, Liberals and Conservatives all demand that the Connecticut legislature DO SOMETHING about high electric rates. While there are certain things they can do, the fact is that with Connecticut's high land prices, and the ability of local residents to stall and block infrastructure projects, there are many things that the legislature simply cannot do. In Trumbull, UI had land for future use, but then the people moved in and all of the sudden these new people didn't want UI to build the infrastructure. Now UI may have to spend an additional $11.6 million.

One thing I am curious about is if UI and CL&P were owned by the state of Connecticut, do you think that local neighborhood groups could stop infrastructure projects like they can now? Or would the siting council and zoning boards have less sympathy for local groups fighting not a for-profit corporation but the state government? Could a utility owned by the state use eminent domain more frequently to put substations and high voltage lines where it saw fit?

Anyway, I think it's an interesting episode that gives some clues about why electric rates are so expensive in Connecticut.

Updated minor grammatical and spelling errors on 1/29/07