Economics & Finance

1940’s
With wages frozen by government edict, employers begin offering non-taxable health insurance to attract and retain scarce employees. The next sixty-odd years will feature numerous proposed government solutions to this unintended secondary effect of the original government solution.

1950’s
President Eisenhower successfully resists Democratic pressure to reduce the income tax rates originally put in place to finance WWII and the Korean War. The top tax rate on individuals was 90%. The modern tax shelter industry is born.

1960’s
The Interest Equalization Tax of 1963 and the Foreign Credit and Exchange Act of 1965 result in the birth and rapid growth of the Eurodollar trading system in London. With the currency market permanently placed outside of government control, the US was soon forced to abandon the gold standard (1971) and the Bretton Woods system.

1970’s
Following the collapse of the Bretton Woods arrangement, the Nixon administration tries to control inflation by imposing wage and price controls, while Arthur Burns at the Federal Reserve simultaneously cuts interest rates. The Federal funds rate went from 3.2% to over 10% within two years, and stagflation was invented.

1980’s
Automobile companies improve the anti-theft features of their products. As cars become more difficult to hot-wire, thieves increasingly turn to carjacking. The US Department of Justice begins keeping survey statistics for this crime in 1987.

1990’s
CAFE fuel economy requirements cause carmakers to build smaller, lighter vehicles. Consumers react to the space shortage and crash dangers by buying SUV’s.

2000’s
It ain’t over ’til it’s over.

The Laotian immigrants that I work with were streaming hip-hop songs from their native country today. Every so often a few recognizable syllables would sometimes rush past my ear in the torrent of Lao. It was a slang word popular with American rappers that begins with the letter “N”.

The significance of this story is that people will find unexpected uses for technology if there is some sort of reward. The Internet was originally intended for the fast transfer of data between scientists and engineers, yesterday it was used by my coworkers to stream crappy popular music from a dirt poor Communist state. If they decide to buy the CD, then both a Laotian rap group and the country’s economy will benefit from the influx of hard American dollars.

There is an anecdote about the beginnings of photography in the 1830’s. The story goes that the assistant of Louis Daguerre was caught by the police on a Paris street when he offered to sell naughty pictures to men passing by. The picture, so it is said, was of a woman making love to a horse.

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Via Chris Masse comes a link to this Commodity Futures Trading Commission consent agreement with Tradesports, parent company of the Intrade betting exchange (of which this blog is an affiliate). This is a worrisome development for those of us who are enthusiastic about prediction markets. However, Chris also pointed out this analysis by Chris Hibbert, who thinks the CFTC action may apply only to Intrade’s markets on commodities, and not to its markets on political and other events.

Note that Tradesports has been trying to set up a CFTC-regulated online subsidiary based in the USA, so what we are seeing here may be mainly a case of the CFTC marking its territory. Clearly, Tradesports/Intrade are going to have to pay a significant regulatory and legal tax to do business here, which is no surprise given that Tradesports’ business overlaps that of domestic commodity exchanges who have captured the regulatory process to some extent. We shall see how this ultimately plays out. IMO Tradesports was wise to go the US-subsidiary route. They will eventually gain a foothold here, and once they do they should be able to get more of their products approved. That will be good for everyone other than the competing exchanges.

A&L links to Johan Norberg who analyzes “The Scientist’s Pursuit of Happiness.” He criticizes Richard Layard’s study:

To stop this ‘hedonic treadmill’ we should increase taxes, discourage hard work, and slow down mobility and restructuring, to give us more time to the things that really make us happier—family, friends and reading Layard’s books.

Norberg, on the other hand, argues:

Apparently, a sense of competence and efficacy gives us happiness—a sense of being in control in complex situations. This is not surprising since it is difficult to imagine a trait that has helped mankind to survive and procreate better than this, but the implications are interesting.

U[date: This study might have been helpful at the Clinton Global Initiative..

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Like most people, I find it easier to spend money than to save it. Pulling out a charge card is so convenient; filling out a deposit slip and a check just seems too difficult. If you know you need to get a savings plan going, and at the same time you doubt your willpower, one answer would be an automatic investment plan. With one of these plans, you set up an automatic withdrawal from your checking account. The money is invested in a mutual fund as you go. A side benefit to automatic investment is that you are also automatically using dollar cost averaging, a popular risk-reduction strategy.

Most fund management companies make their money by imposing fees based on a percentage of the net value of each account. Small accounts may be less profitable for the management company, since some costs (printing and mailing account statements and a fund prospectus, for example) are the same regardless of the size of the account. For this reason, many fund management companies have rather high initial investment requirement ($3,000 for most Vanguard funds and $2,500 for most Fidelity funds, for example). Some also impose a fee for accounts that fall below a certain level.

The initial investment requirement is often waived for accounts with automatic investment plans in place. Without too much digging, I was able to find two no-load fund families that permit you to open new accounts with as little as $50 per month automatic investment: TIAA-CREF and T. Rowe Price. (Full disclosure: I or a member of my family hold shares in T. Rowe Price Small-Cap Value and Equity Index 500.) Both feature low expenses, so you get to keep more of your investment.

There are a couple of other things to bear in mind. First, IRA accounts usually carry lower initial or automatic investment minimums, so you can pretty much take your pick from a wider number of funds. Second, there are expenses such as account maintenance fees that do not figure into the expense ratio, since they are imposed on a per-account basis.

For more ideas, here is a screener for mutual funds by the Mutual Fund Education Alliance. You can search by Morningstar ratings, initial investment requirements, asset class, and expenses. For a guide to fund expenses and why I place so much emphasis on them try this article in The Motley Fool. For general information on mutual funds, here is the Wikipedia article, originally written by yours truly.