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Equity Premium Puzzle

For background, this is the Wikipedia entry for Equity Premium Puzzle.

"The equity premium puzzle refers to the phenomenon that observed returns on stocks over the past century are higher, by approximately 6%, than returns on government bonds. Economists expect arbitrage opportunities would reduce the difference in returns on these two investment opportunities to reflect the risk premium investors demand to invest in relatively more risky stocks. The puzzle arises as the observed difference in returns implies an implausibly high level of risk aversion..."

While I find the entire theory dubious at best, I have neither the interest nor the expertise to address that question here.

What seems to me undeniable is that historical data must depend on historical conditions. Thus a theory that makes a prediction about, and an analysis of, the relationship between historical stock and bond returns without any qualification or description of the political, economic and demographic conditions under which the historical data being considered was obtained would seem to raise a red flag. In any case, economics is not physics or mechanics, and is not generally subject to controlled experiments.

The question is whether there is some set of historical political, economic and demographic conditions over the last century which would have likely led to a substantial premium for stock returns over those for government bonds.

I believe that the answer is probably yes, and that it involves a fundamental difference in the characteristics of stocks and bonds. Read more »


Health Insurance Inflation

According to reports, health insurance inflation has fallen below 10%.

By coincidence, I received my notification of non-group premium rates for next year in the mail this morning. Only a 13.4% increase year over year, and it still probably doesn't cover the cost of coverage.


Did I Miss This?

Can anyone provide support for the following claim by Jim Rutter at LibertyGuys?

In other news, the government just passed the 'disaster relief' tax in the form of a mandatory 10% of whatever decent people have in a bank account. You'll get hit with it when you try to withdraw your savings from the bank....


Anti-Gouging Laws Must Be Expanded in Scope.

While everyone understands that it should be illegal for gas stations to charge more than enough to realize a reasonable profit over the prior cost of filling the gas station's underground tank, that's by far not the most egregious gouging going on.

If you and your next door neighbor have identical houses and both want to sell, what prices should you both ask?

Your neighbor bought his house last year, from your previous neighbor, for $400,000, and asking $500,000 for it today seems reasonable, yielding a nominal 25% profit. Read more »


Bush and His Critics, a Race to the Bottom

If modern life has one true constant, it is that both President Bush and his critics will, at least once in every day, each convincingly disprove the theory that human intelligence has undergone an advancing process of evolution.

In today's Boston Globe -- Read more »


Credit is Economically Scarce, a Good Thing

Credit is here meant to be commercial credit, used in part for business expansion and the funding of new enterprises.

Economically scarce here means 'not supplied in excess of all possible demand.'

While credit itself is a positive thing, adding to the timely supply of goods and services available for consumption in the economy, that does not imply that more credit is a benefit, nor that less is a detriment, to the economy. As is often the case in economics, marginal analysis is required to get a true picture. Read more »


Surprising Fact, Internal Lunar Temperature

From Infoplease, Moon : Physical Characteristics

Internal Structure Read more »


Airbags, Misc.


Fractional Reserve Hat Checking

From Howard S. Katz, in The Paper Aristocracy, quoted and cited in The 100% Gold Standard: Economics of a Pure Money Commodity , by Mark Skousen -- Read more »


New Charles Stross SF Novel

Accelerando

I haven't read ten pages yet, but can't resist typing in a quote -- Read more »


Next on the EU Trade Agenda

The European Union has warned Washington that it will not sit idly by while its exporters are harmed by the unfair competition of American firms utilizing a combination of Employee Pricing Discount Plans and manufacturer mail-in rebates. The EU insists that competition be limited to the traditional forms, including special legislation, regulation, bribes and kick-backs.


Economic Fallacies All the Way Down

With friends like this, free markets have little need for enemies.

It doesn't matter how drug companies are forced by the sheer economic ignorance of their opponents, as well as probably themselves, to make absurd economic arguments that sound superficially valid. Rather, what matters is economic reality.

Why free trade won't make Atlas shrug

By Alex Singleton | 16 July 2005

In the past, I have pointed out that drug companies spend more on marketing and profits than on R&D. I am not trying to make the argument that marketing and profits are, in and of themselves, bad - both have an important social function. I state this simply in order to help people get some perspective about the cost of R&D as percentage of their turnover.

Drug company lobbyists are peddling the idea that Americans should not benefit from free trade ("parallel trading") in pharmaceuticals because R&D costs make pharma companies like Atlas, who in mythology struggled to support the sky on his shoulders. If the US allowed free trade, they suggest, Atlas would shrug. This is a myth.

The Globalization Institute appears to have missed the significance of the Marginalist Revolution of1871 completely. In the complete article, all that we see are percentages and totals and averages. This completely misses the economic incentives at the margin that the drug companies actually face and respond to.

Overall, actual free trade is a fine goal. But it is the height of folly to believe that consumers can sustainably achieve lower prices by having prescription drugs drop-shipped into Canada and then re-exported into the US. Free lunches are always scarce and often costly. What was easily predictable and has already begun is that the drug companies have started to restrict shipments into Canada. Canada has the choice of either raising its controlled prices or banning exports or doing without. The existence of a price doesn't imply a supply. The goal of lower prices through re-importation can only be achieved by forcing the drug companies to act against their own interest by shipping to Canadian pharmacies who are not compelled to obey supply contract terms that control disposition of the product received.

It was almost 40 years ago when I complained to an audio salesman that his price for an audiophile phonograph cartridge was significantly higher than the price a store across town quoted. He quickly agreed that the other store's price was also what he quoted when he didn't have any in stock.

NOTE - Comments now hopefully unjammed Read more »


An Isolated Question on the Cost of a Gold Standard

It is commonly held that a part of the cost of a gold standard, or of the holding of gold for its exchange-value in the absence of a gold standard, is the reduction in the supply of gold for non-monetary purposes that results in lower production of, and higher prices for, consumer and industrial products that utilise gold.

This seems to be a valid observation, but it raises a follow-up question. Read more »


No Price Inflation in Socialist Environs?

This is London Calling

London Mayor Increases Traffic Toll, Angers Drivers, Retailers

July 4 (Bloomberg) -- An increase in London Mayor Ken Livingstone's charge on motorists goes into effect today, angering not only drivers. Retailers say the 60 percent rise to 8 pounds ($14.52) will deter customers from traveling to the city.