Carpe Diem

Let a Thousand McDonald’s Bloom in Russia

Excerpts from today’s WSJ article “As Burgers Boom in Russia, McDonald’s Touts Discipline“:

Of the 118 countries where McDonald’s does business, none can boast more activity than Russia. On average, each location serves about 850,000 diners annually — more than twice the store traffic in McDonald’s other markets.

MP: That’s pretty amazing. Assuming 5 holidays, that’s almost 2,400 meals per day per McDonald’s, and 150 meals per hour if they’re open 16 hours per day, and 2.5 meals every minute, and one meal served every 24 seconds!

Opening a single McDonald’s here can require as many as 200 signatures from local officials. Real-estate prices have increased as much as tenfold over the past decade. And in Moscow and St. Petersburg, the big cities that are McDonald’s main focus, low unemployment rates make it difficult to find qualified personnel.

The Pushkin Square location (pictured above), with its 900 seats, 26 cash registers, and free wireless Internet access, has long drawn more customers than any other McDonald’s in the world.

When McDonald’s opened its first Russian drive-throughs in 1996, some people got their food from the window, parked their cars and brought the meals inside to eat. Customers bought fewer drinks because their cars often didn’t have cup holders. Now, Russians are more comfortable with drive-throughs.

As for the persistent crowds, many customers remain indifferent. “Our country’s a country of lines,” says Andrey Shatskiy, a 40-year-old soap-opera cinematographer, while eating lunch at the Pushkin Square restaurant. “We all got used to it.”

Carpe Diem

Hayek’s Influence on 2007 Nobel Economists

Yesterday Leonid Hurwicz, Eric Maskin and Roger Myerson won the Nobel Prize in Economic Science for their pioneering work in the field of “mechanism design.” Strangely, some have used this occasion to disparage free-market economics. But the truth is the deserving recipients owe a direct debt to free-market thinkers who came before them.

While we celebrate the brilliance of Messrs. Hurwicz, Maskin and Myerson, we should also remember that Hayek’s challenge provided their inspiration. Hayek concluded that the private-property rights that come with the rule of law, freedom of contract, and freedom of association is still the one mechanism design that mobilizes and utilizes the dispersed information in an economy. Furthermore, it does so in a way that tends to capture the gains from trade and innovation so that wealth is continually created and humanity is made better off.

~George Mason Economics Professor writing in today’s Wall Street Journal

Carpe Diem

Update: WTO Rules Against US Cotton Subsidies

GENEVA – The World Trade Organization has found that the United States failed to scrap a series of illegal subsidies paid to American cotton growers, a ruling that could open the door to billions of dollars’ in Brazilian trade sanctions against the U.S., trade officials said Monday.

The result is a major victory for Brazil’s cotton industry and for West African countries that have claimed to have been harmed by the American payments.

The Brazilian government claims the U.S. retained its place as the world’s second-largest cotton grower by paying out $12.5 billion in government subsidies to American farmers between August 1999 and July 2003.

Critics of U.S. cotton subsidies say they drive down prices, making it impossible for small farms to compete in international markets, and more difficult for poorer countries to develop their economies by selling their agricultural produce abroad.

Bottom Line: Not only are cotton subsidies an unjust, immoral and unfair transfer of wealth from the American taxpaying middle class to wealthy corporate agribusinesses in the U.S., they are also illegal according to WTO trade policy laws. Not to mention that they make desperately poor people in Africa even poorer.

See previous post on cotton subsidies here.

Carpe Diem

Thinking of a Foreign-Made Car? Better Buy Now

Drivers who have been thinking about buying a European luxury car (like the 2008 Jaguar XJ8 pictured above) may not want to wait too long.
As the dollar continues its long slide against the euro, prices of vehicles made by such auto companies as BMW AG, Porsche AG and Volkswagen AG’s Audi unit have steadily crept upward ahead of U.S. and Japanese vehicles over the past few years. But while car makers have largely avoided substantial price increases so far, some analysts are warning that could change as soon as next year.

They “can’t make money at the current exchange rates, so they either have to raise prices or start building them here,” says David Healy, an analyst at financial-services firm Burnham Securities.

The dollar’s weakness against the euro makes European products more expensive for consumers using dollars. If the trend continues — and many analysts expect it will — European car makers ultimately may have to raise prices on vehicles they build in Europe and sell in the U.S., shift production to the U.S. or other countries with lower costs, or simply live with lower profit margins.

So far, European car makers have been able to hedge against currency fluctuations by buying contracts that guarantee certain exchange rates. But many of these contracts are set to expire soon, analysts say. Hedging lessens the Europeans’ need to quickly change prices with every currency fluctuation, but the strategy is of limited value during long periods of weakness for a particular currency.

Read more here in the WSJ article “Euro-Trashed? Why You May Want to Buy That BMW Now.”
Carpe Diem

Static vs. Dynamic Tax Analysis: What’s Up?

As the chart above from today’s WSJ shows, the 2003 cut in the capital gains tax produced a doubling of tax receipts to $97 billion in 2005 from $47 billion in 2002. That’s twice what Congress predicted. For 2006, Congress predicted less than $60 billion in capital gains tax revenues, and the actual revenue collected was more like $105 billion, which is about a 81% forecast error, pretty large even by government standards one would think.

This result seems typical – tax revenues collected after tax cuts are usually much higher than predicted by Congress. What is going on? Here are several possibilities:

1. Congress only knows how to use static tax analysis, and doesn’t know how to account for changes in behavior in response to changes in tax rates.

2. Congress knows how to use dynamic tax analysis to account for changes in behavior, but static analysis is easier.

3. Congress understands that changes in tax rates will change behavior, but modeling or capturing or quantifying the changes in behavior is too difficult.

Which one is correct? I am not sure.

Carpe Diem

Quotes of the Day: Kennedy Was A Supply-Sider?

‘The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital . . . the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.”

~John F. Kennedy, 1963


All of the leading Democratic contenders for President have endorsed higher taxes on capital gains. Hillary Clinton is the “moderate” in that so far she’d merely raise the tax to 20% from the current 15% — a 33% increase. John Edwards and Mr. Obama want to nearly double it, to 28%.

“Every generation or so, it seems that the American political class has to re-learn these tax policy lessons the hard way. What’s especially striking about this year’s Democratic economic proposals is how little any of them mention economic growth. Their message is “fairness,” inequality and income redistribution. They seem to think taxes can be raised with ease, and no one’s behavior or investment choices will change. Jack Kennedy knew better.”

~Wall Street Journal editorial

Carpe Diem

Harvesting Cash: Cotton Farms & The Iron Triangle

What’s wrong with cotton subsidies? Let’s count the ways, using information from the WSJ editorial today “The Cotton Club“:

1. Cotton subsidies primarily benefits large corporate farms and their wealthy owners. Of the $19.1 billion that was paid out from 1995-2005, the top 10% of cotton-subsidy recipients got more than 80%, or almost $15.5 billion. The bottom 80% of recipients had to make do with $1.4 billion.

2. Cotton subsidies are a brazen wealth transfer from the tax-paying middle class to fat cats, i.e. it’s a form of corporate welfare, which creates a damaging, corporate dependency on the public’s money.

3. Because cotton subsidies eliminate risk and reward production, U.S. cotton growers produce so much cotton that we export 70-80% of our cotton, which creates a glut on world markets and depresses world cotton prices.

4. Cotton subsidies in the U.S. have devastating effects on poor cotton farmers in Africa, because U.S. cotton farmers compete with them and dump so much subsidized cotton on the world market that it depresses world prices, and thereby depresses African farm income from cotton. It is estimated that some 10 million Africans (living on less than $1 per day) could see their incomes from growing cotton increase 8% to 20% if the U.S. reformed its subsidies, and world supplies and the world price of cotton returned to market levels.

5. Another price of cotton subsidies is damage to U.S. credibility in world trade talks. For example, U.S. farm policies have guaranteed cotton exporters the artificially high domestic price of their crop, and at the same time guaranteed that U.S. mills could buy cotton at the lower world price of cotton, creating a protected U.S. market and worsening the problem of too much U.S. cotton being dumped on world markets.

And what’s good about cotton subsidies?

Not much, unless you’re a) part of the “Cotton Club” that will receive $3.3 billion of taxpayers’ money this year, b) a politician receiving “subsidies” or “kickbacks” (aka campaign contributions) from the Cotton Club, or c) a Department of Agriculture bureaucrat involved in the administration of the cotton subsidy program. In other words, if you’re part of the “Iron Triangle,” which is behind all farm subsidy programs (special interest farmers, politicians who cater to special interest farmers, and bureaucrats who administer the farmers’ subsidies).
Carpe Diem

More Grammar Nit-picking: Who vs. That

The grammar rule about the use of “who vs. that” seems pretty simple: Who refers to people. That refers to groups or things. Examples:

1. Hillary is the one who rescued the bird.
2. Bill is on the team that won first place.
3. She belongs to an organization that specializes in saving endangered species.

However, the improper use of “that” for “who” when referring to a person, seems to be increasing all the time. There are more than 700 Google News hits for the phrase “the person that,” including the following examples, mostly of quotes within a news article:

“The person that made the call…”

“I loved her for the person that she was….”

“The person that donated the money…”

“The person that is causing the problems….”

In all those cases, I think it should be “The person who…

Likewise, there are more than 1,000 Google News hits for the phrase “the man that,” such as “…the man that the left hates the most, President Bush..,” which I suggest should be “The man who…”

Finally, here’s an example of using both “that” and “who” in the same sentence! “The quarterback that lost fumbled and threw three interceptions. The quarterback who won, though, is the one who got pulled on Saturday.”

Update: When you use “grammar check” in Microsoft Word for the sentence “She is the one that found the bird,” it accepts the “incorrect” sentence as written, and of course it also accepts the correct sentence “She is the one who found the bird.”

Carpe Diem

Finance is Top Major at Boston College

After years of being close, finance has finally overtaken communication as the most popular area of study at Boston College. This marks the first time in University history that a major outside of the College of Arts and Sciences has held the top spot.

While A&S is still the most popular school in terms of student enrollment, the Carroll School of Management’s (pictured above) finance concentration boasts 855 enrolled students, a 25-year high. At this time last year, finance was the second most popular concentration, and it has been part of the top five for at least the past 10 years.