These questions have challenged brand managers and store owners for ages.  Sophisticated inventory tracking systems can help reduce product outages, known as stockouts, in some retail settings.  However, these systems are not available in all retail settings, and even the best systems don’t completely eliminate stockouts.

Duke University professor Andres Musalem and co-authors have developed a new model to help managers estimate the effects of stockouts and find the best ways to recapture lost sales.

“It can be difficult for managers to know how long their products have been out of stock, and thus how many sales they may have lost,” Musalem said. “Our model can help managers overcome this lack of information and identify the best ways to mitigate lost sales.”

The team tested the model using real-world data from shampoo sales of six supermarkets in Spain. Their findings, published in the July issue of Management Science, demonstrate the value of using mathematical models and simulation methods to understand consumer responses to stockouts and to design plans to protect a retailer or a manufacturer’s revenue under situations of insufficient inventory.

In the case of shampoo purchases in Spain, Musalem found customers were likely to purchase another product in the same store when fewer than five types of products were missing from the shelf.  But when more than five products were out of stock, stores sacrificed 20% of their expected normal sales.

“A store manager could use this analysis to balance product availability with staff workloads and inventory costs,” Musalem said.  “In the case of our shampoo study, we learned that you can tolerate a certain amount of empty spaces on your shelves before restocking, but you have to be careful not to let the product selection slip to the point where sales drop precipitously.”

The model also demonstrated that discounting similar products can discourage customers from heading to another store to find their preferred product. In the shampoo example, the model indicated discounting a similar item is a good way to overcome a stockout of one particular product, but it’s better to discount an already popular product if many of a store’s brands are out of stock.

“Implementing an analysis of this type can help brand managers and retailers protect their revenues and customer loyalty,” Musalem said.

More information about the model, including the researchers’ full paper, “Structural Estimation of the Effect of Out-of-Stocks” is available here.

Let’s go through the long list that paints a picture of both short-term and longer-term risk to the economy.

1. We are not creating enough jobs to cover the growth of the population.
2. The stimulus policy is not working.
3. Consumer and business confidence is down.
4. For a large number of firms, credit conditions  have not improved since the crisis.
5. The U.S. faces Europe-like debt/GDP and deficit/GDP ratios.
6. Financial reform bill seen by many as institutionalizing the cult of bailouts.
7. Discouragement about the massive Gulf spill
8. Disappointment about the progress in Afghanistan

What about the good news? Uhhh… Maybe your favorite team advanced in the World Cup?

I have some other thoughts.

The Job Outlook

I think people are finally understanding the jobs data. The fact that the unemployment rate fell to 9.5% was not good news because 652,000 dropped out of the work force. If we counted these people as unemployed, the rate would have increased to 9.9%.

However, you should not simply look at the 652,000 who dropped out in June 2010 — you need to look at all of the months when people were dropping out and not looking for jobs.

In my opinion, the effective unemployment rate is about 13%. The so-called ‘all-in’ or U-6 rate is currently 16.5%. This rate is overstated because it counts all those who are working part-time but really want to be full time as ‘unemployed’. To me, if you are working 20 hours a week, you should be counted as 50% unemployed not 100%..

There were 83,000 private sector jobs created. This is good but not enough to cover the increase in the labor force due to a growing population. We need about 100,000 new jobs each month to cover the demographics.

Hence, we are stuck. People are talking about a double dip.

Stimulus is not working

We have had at least two interesting lessons in the viability of stimulus policies.

First, the Cash For Clunkers. To me, this was an environmental policy rather than a stimulus policy. There was a surge in car buying as people traded in their clunkers and then demand dropped again as soon as the program ended. Car sales continue to be at a very low level. The stimulus just shifted demand.

Second, the new homeowner tax credit. This recently expired. The result? Permits for new housing construction dropped by 30%. Again, the program simply causes a shift in demand – from the future to present. Things look better in the short term – but worse in the longer term.

I am certainly not saying that all stimulus spending is ineffective. However, to me, it is inappropriate to push any more money into housing subsidies. The housing sector is already massively subsidized:

• Very low interest rates on mortgages (partially due to government policy)
• Mortgage interest deductibility for income taxes
• Government now owns all of the GSEs (Fannie, Freddie, etc.) and effectively sponsors (subsidizes) all the mortgage insurance
• Government is propping up many sick banks so that they can try to ride out this recession without foreclosing on too many loans
• Numerous programs such as loan modification.
• A legal system that allows people to walk away from their loans when the loan is worth more than the home – where the bank has little or no recourse in terms of the borrower’s other wealth.

Isn’t that enough support?

Confidence is down

Duke CFO Survey released earlier in the month reflected new weakness. Our diffusion index which measures views about the prospects of the CFOs’ companies, plummeted from 33.2 to 15.4. The diffusion index that looks at the CFOs view of the whole economy dropped from 35.0 to 21.5.

The CFO Survey indices have consistently provided leading information compared to traditional indicators like ISM. The logic is simple. The CFO knows about the firm’s plans before the purchasing manager.

Credit is still crunched

Again, the Duke CFO survey found an extraordinary number of firms (particularly small and medium sized) that said credit conditions had not improved for them since the worst part of the crisis.

Small and medium sized firms are the engine of job creation. If we continue to squeeze them for credit, it is no surprise that there is no job growth.

Europe’s situation is not that different from the U.S. situation

As the U.S. continues to rack up debt by deficit spending, the U.S. situation begins to resemble Europe. However, the U.S. always has the possibility of monetizing the debt. But that is an alternative that no one wants (it would mean an inflation tax on everyone).

As the government sector grows and the government share of debt in the capital markets becomes larger, government debt will be competing with corporate debt for investors. Eventually, rates will rise. This means less corporate investment and fewer jobs in the long-term.

I have already mentioned that stimulus spending can cause a shifting of demand from the longer term to the immediate term. When the program comes off, demand can drop sharply. However, there is another effect — and indirect effect. The debt that is used to finance the stimulus increases the cost of financing for corporations and reduces longer term growth of the economy. Longer term employment growth decreases.

The cult of bailout

There is no time this week to comment on all the details of the 2,000+ page financial reform bill. However, it is fair to say that the bill essentially institutionalizes the notion of bailout. Paradoxically, this could lead to more risk taking.

Aside from the reform bill, we are effectively bailing out (or keeping operational) close to 1,000 banks. This is a huge drag on the economy. Some of these banks can’t make loans. Why not just close them down and redistribute the good parts to strong banks? This could also help alleviate some of the credit crunch.

Double Dip?

That’s not my call. My best guess is that the NBER will have a hard time dating the end of the recession in August of 2009 when we still have effectively 10+% of unemployment. Even if they do date the economic trough in 2009, we will face a prolonged period of substandard economic growth and high unemployment.

If you have read my blog, I am more of a ’short-term pain for long-term gain’ person. Some bold actions are necessary – and they don’t necessarily involve spending more on fiscal stimulus. I would prefer to focus on the financial system. It is been broken for three years and needs repairs. To be clear, this is not free. Closing banks often costs the taxpayer money. However, this is money well spent for the long term economic growth opportunities.

A healthy financial system allows firms to efficiently seize growth opportunities. Right now, many firms have good opportunities (that would cause employment growth) but they can’t get the financing. Again, the Duke CFO Survey reveals key information. 34.8% of participants admitted they are limiting capital spending as a result of funding difficulties. Capital spending creates jobs today and in the future (think of the capital spending necessary to construct a new production facility).

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What single word best characterizes policy responses in this on-going financial crisis? “BAILOUT”.

It goes something like this. You take a lot of risk and reap lots of rewards (be it in pay, bonus, or social programs). You get into trouble. The government bails you out.

How often have we seen this same story repeating? It seems like we are in an infinite loop.

But we aren’t. This cannot last forever. The bailouts have many implications – some seen immediately and some will play out later.

On the positive side, bailouts buy time and short-term stability. Importantly, we see the results immediately. A good example was the big jump in world stock markets when the EU announced its 750 billion Euro bailout.

On the negative side, the list is longer. Also importantly, you do not see the results immediately. Here are a few of the implications:

1. Moral hazard. When you reward people for taking risk or going beyond their means, you will perpetuate this type of behavior in the future. That is, the cost of the bailout is not just the immediate cost but also the cost of new future bailouts that become more likely as a result of the current bailout.
2. Throwing good money at bad. We tax the productive assets to support the failed assets. Whether it is the U.S. government throwing away money on GM, Fannie or Freddy, or the German people paying for unrealistic social programs in Greece, the effect is identical. This reduces future growth opportunities in the productive economies. Think of it this way. Would you prefer to invest in a U.S. tech start up that is risky or buy some overpriced Greek assets.
3. We have to pay for it. It is naive to think that we can simply roll over debt forever. This is exactly what Greece thought. Please note that the size of the U.S. government deficit to GDP is not much different than Greece’s. [However, to be fair, the U.S. is in a much stronger starting position - but does face some similar risks.] Government debt financing competes with corporations trying to raise money. Corporations are forced to offer higher yields as more and more government debt floods the market. Increased borrowing costs means that fewer investment projects are viable. Less corporate investment leads to lower growth opportunities and lower long term growth for the economy in general. Lower growth means a smaller number of jobs.
4. Who are we really bailing out? Yes, the EU package has drastically reduced the cost to the Greek government (and other peripheral countries) of financing their debt. However, the main beneficiary are the banks and investment funds that hold the sovereign debt. They foolishly overpaid for this debt. Effectively, they thought Greek sovereign debt had the same risk as German debt. That was their mistake. However, the bailout makes them whole. That does not make any sense to me. They made a mistake and they are made whole. Remind you of AIG? Yes. It is the same thing. People that did business with AIG misestimated the “counterparty risk”. But no big deal. The government will make you whole.

I have some other thoughts.

The PIIGS Bailout

I don’t get it. I don’t understand the market reaction.

Before I forget, the IMF has pledged 250 billion Euros. The U.S. share is 17.09%. Hence, the U.S. has ponied up 42.7 billion Euro or about $55 billion. This does not include the potential costs of opening up the swap lines again. I haven’t seen much talk about this. Is this the best use of our $55 billion?

I am not going to rehash all of the arguments. Basic macro suggests that when you join currency union (or if you peg your currency) you give up your monetary policy. In the Greek crises in the 1970s and 1980s, a simple response was that the Drachma was devalued. This effectively meant the cost was shared by the people of Greece (higher inflation is like a tax) and the international investors who bought risky assets that were all of the sudden worth a lot less.

While giving up your monetary policy seems like a cost, in some situations, it is a good thing. The Greek monetary policy had no credibility. Given their track record, people did not believe their central bank when they said they would control money growth (and inflation). As a result, it was expensive for both the Greek government and Greek corporations to raise money. The currency union solves this problem and gives instant credibility – and lower interest rates which could spur growth in Greece (and other countries that benefit with lower financing costs).

All this is fine in theory. However, to get the currency union to work – there must be enforcement mechanisms. As we know now, there were no enforcement mechanisms. As a result, some countries continued to spend and got into a terrible mess. The EU was powerless and had to bring in a “bad guy” — the IMF to do a clean up job.

The lesson is not a new one. The currency union does not work without a political union (or at least enforceable actions that, by definition, infringe on sovereignty).

But now we are at the point that I do not understand. Germany had a highly credible monetary policy before the Euro. As the largest and strongest economy, it now has to pay for all the countries that go offsides.

Consider the major benefits for Germany.

It is a fact that Germany depends on trade. A common currency makes trade easier. However, in this age of electronic FX trading, it really doesn’t seem like that big of a deal. That is, yes it decreases the transaction costs of trading goods, but isn’t this saving more than offset by the bailout costs?

It is a fact that Germany is the largest and strongest economy in Europe. A common currency would mean that the Bundesbank would effectively be controlling the monetary policy in Europe. The volatility of some countries’ monetary policies was disruptive to Germany. But surely the disruption caused by these small countries are small change compared to the massive bailouts the Germans are sponsoring.

The Euro was but one step in a series of EU measures that levels the playing field in Europe for corporations. That is, the cost of trading is not just the cost of converting DMs into FFs. For example, some German goods might not be competitive in France because of French government subsidies. The level playing field would directly benefit German trade. However, and this is crucial, you don’t need to have a common currency to have a level playing field in terms of the regulatory and government environments. Indeed, a recent research piece that I am writing shows that most of the benefits to Europe came from standardizing regulations – not from the introduction of the Euro.

Consider the costs.

These are well known. I do not want to go through the list which is constantly in the press. Let me make just a few remarks.

Enough complaining. What to do?

The solutions are not easy. I am an advocate of short-term pain for long-term gain. Essentially, you drastically restructure (i.e. partially default) the debt. This means that the investors share the burden. As a result, you do not need 750 billion Euro.. Given the EU has no current mechanisms to enforce, you still have to rely on the IMF for some bridge financing. The financing carries very strict conditions (much more aggressive than the proposals on the table).

In order to survive as a common currency, the rules of the Euro Zone must change.

Greece is put on a three year probation period for the Euro. If certain conditions are not met, they go back to the Drachma.

Going back to the Drachma, would also serve to revalue the sovereign debt. The Greek government would likely change the currency of their sovereign debt to Drachma effectively (partially) defaulting.

How dramatic is this? You don’t have to go back in history that far to see that the U.S. did the same thing in 1971. In a speech on August 15, 1971 President Nixon suspended the convertibility of the dollar (at the time it was fixed so that $35 bought an ounce of gold). This immediately revalued U.S. debt because gold was trading in the $40 range.

Same for the peripheral countries – and the main countries in the Euro Zone. Any country offside automatically goes out of the EZ. Every member faces the same deadline as Greece to put their house in order. The mechanism is quantitative and not subjective. No exceptions are allowed.

Countries must stay out of the EZ for three years and then are eligible to reapply.

Yes, this will cause problems for some banks that hold the sovereign debt. The weak ones might fail. However, the economies will be benefit from the purging of weak banks and the reallocation of their productive resources to make other banks stronger.

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The study looked at average lifetime income and wealth accumulation of specialist physicians, primary care physicians, physician assistants, MBAs and college graduates.

With 32 million more Americans about to be covered for primary care by the health care reforms, the current shortage of primary care providers may become more acute. Fixing the shortage could require policy changes to reduce this income gap, say Bryan Vaughn and Steven DeVrieze, 2009 graduates of the MBA program at Duke’s Fuqua School of Business.

The pair’s research, which began as part of a class project in Fuqua’s Health Sector Management program, will be published in the May issue of the journal Health Affairs.

Using physician income data from the American Medical Group Association and the Association of American Medical Colleges, as well as publicly reported sources of salary data for physician assistants, MBAs and college graduates, the team created a model to estimate the net present value of career wealth potential for each group. The calculation accounted for years of schooling and work, student loan debt, income and investment income potential. Salary information for cardiologists was used to represent medical specialties as a whole, with the model allowing for differences in training time and residency stipends for primary care physicians and cardiologists.

According to the model, a physician who enters medical school at age 23 and practices until age 65 would have a lifetime wealth potential of $5.2 million as a cardiologist, and $2.5 million as a family medicine or internal medicine practitioner. Average wealth potential for MBAs was $1.7 million, compared to $850,000 for physician assistants and $340,000 for college graduates.

“Previous research has found that pay is an important factor in medical students’ choice of career path, especially for those with higher levels of student loan debt,” Vaughn said. “Although models can never fully represent reality, this analysis quantifies just how significant the gap between primary care and specialty pay is, especially when viewed in the context of a career that spans many decades.”

The team also tested the effects of several possible policy interventions on the wealth gap, including increasing primary care pay and decreasing cardiologists’ pay, medical school debt forgiveness programs, and eliminating pay during cardiologists’ residency training period.

Increasing primary care physician pay by 50 percent, the most extreme pay change modeled, would reduce the wealth gap between primary care and cardiology from $2.7 to $1 million. Eliminating the wealth gap entirely would require a $148,000 decrease in cardiologists’ annual income, or an annual increase of $122,000 for primary care doctors.

“There are many efforts in place to increase the supply of primary care doctors, from adding new training programs to changes in reimbursement practices, but it’s clear that successfully addressing the shortage will require a reconceptualization of primary care,” said Kevin Schulman, M.D., director of Duke’s Health Sector Management program and a co-author of the paper.

The authors note that the primary care shortage will become increasingly problematic in the wake of health care reform. “An estimated 32 million previously uninsured people will gain greater access to care, and will increasingly seek out primary care services, within the next few years,” DeVrieze said. “This increases the urgency with which we need to address the primary care shortage.”

Bryan Vaughn is currently employed by Laboratory Corporation of America, and Steven DeVrieze works for Quintiles. Shelby Reed of the Duke Clinical Research Institute was also a co-author of the study, which received no external financial support.

The full article “Can We Close the Income and Wealth Gap between Specialists and Primary Care Physicians,” including the authors’ financial disclosures, is available here.

But using TiVo actually has no effect on consumers’ buying behavior, a professor at Duke University’s Fuqua School of Business has discovered. People with TiVo don’t fast-forward nearly as many ads as you might expect.

“Companies are afraid of a ‘TiVo effect’ and are changing their media spending as a result,” says Fuqua Professor Carl L. Mela. “But we find no change in people’s shopping patterns when we compare a group that has TiVo with a group that doesn’t. The manufacturers’ fears seem to be overstated.”

In partnership with Information Resources Inc. (IRI) and TiVo, Mela and colleagues from The University of Chicago and Tilburg University conducted a multimillion-dollar, three-year field study in which some households were given a DVR and their shopping behavior was compared to those without one. The authors tracked purchases of new products, advertised products and store brands across 50 categories as well as the viewing behavior of those with the DVRs.

No matter how the researchers looked at it, DVRs did not affect what people bought. This conclusion astonished the researchers.

“Our initial goal was to simply measure how bad DVRs were for advertisers,” Mela says. “We tried a vast array of methodological approaches to find a DVR effect. And we just couldn’t.”

Mela offers these factors to account for the lack of a TiVo effect:

•    To fast-forward a commercial, users must record a show to watch later. But TiVo households still watch the huge majority (95 percent) of their TV live, meaning few commercials can be skipped.
•    Households without a TiVo can still avoid commercials. They can take a kitchen break, flip to a different channel, or find other ways to divert attention during commercials. This means the DVR might not increase ad avoidance as much as feared.
•    Even though consumers fast-forwarded through about 70 percent of commercials in shows they recorded, they don’t actually “skip” them. By concentrating on the screen to know when to press play and resume their show, those who forward are often exposed to the advertising they supposedly “skip.”
•    Because users record shows they would otherwise miss, people with a TiVo watch slightly more TV – and can therefore be exposed to ads they otherwise would not have seen.
Mela believes that sophisticated set-top boxes like TiVo will actually make television a more attractive medium for advertisers going forward.

“With set-top boxes, advertisers can now use marketing tools that previously existed only on the Internet,” Mela says. “Advertisers can use DVRs to target people who most want to see their ads. Moreover, they can make advertisements interactive, so that users can click on advertisement and get more detailed information. Finally, advertisers can customize their advertisements. One customer can see a truck driving through snow in Minnesota while another sees it under the blazing sun in Florida.”

Mela reminds marketers that consumers spend about five to six hours a day watching television while Internet usage is still far less.

“It’s back to the future,” he says. “Television used to be the darling of media. It fell out of favor with the new media. And now television may become an even more productive advertising medium than the Internet.”

The team’s work, which was funded by The Marketing Science Institute with help from Information Resources Inc. and TiVo, has been accepted for publication in the Journal of Marketing Research. The text of the article is available here.

By pairing photos of the chief executive officers of large and small companies with photos of non-executives with similar facial features, hairstyles and clothing, finance professors John Graham, Campbell Harvey and Manju Puri of Duke’s Fuqua School of Business found that CEOs are more likely than non-CEOs to be rated as competent looking, but less likely to be classified as likeable.

The trio found that CEOs who appear competent earn more money than less competent-looking CEOs, even though appearance is not associated with measurable differences in company profitability.

“Other researchers have found links between beauty and workers’ pay, and demonstrated that politicians benefit from good looks at election time,” Graham said.  “We wanted to see whether appearance also plays a role at the corporate executive level.”

John Graham, Manju Puri and Cam Harvey

The researchers staged a variety of online experiments to ask nearly 2,000 participants to assess photos of more than 100 CEOs and non-executives.

In one experiment, 765 participants were asked to rank the people in each pair of photos according to their attractiveness, competence, trustworthiness and likeability. The actual CEOs were rated as more competent-looking and more attractive. However, CEOs were more frequently rated as less trustworthy and less likable than the non-CEOs with whom their photos were paired.

Similar results were found when 762 participants were asked to rate CEOs of large firms against CEOs of small firms.  Large-firm CEOs were rated as more competent 55 percent of the time, while their small-firm counterparts were judged as looking more trustworthy, likeable and attractive.

For the purposes of the experiments, only photos of white male CEOs were used. “It would be fascinating to study the role appearance may play in the careers of women and minorities,” said Puri. “However, because there are fewer female and minority CEOs, including them in our set of photos would have increased the odds of participants recognizing a CEO, which could have inadvertently influenced their rating of the person’s characteristics.”

The team found that CEOs rated competent just by their appearance tended to have higher income.  CEOs who were rated four or above on a five-point scale for competence had an average total compensation 7.5 percent higher than CEOs who scored three out of five on competence.

Despite the relationship between appearance and CEO salary, the researchers found no evidence that a CEO’s appearance is related to company profitability.

“I thought the appearance thing was possible for politicians winning elections — but for CEOs, no way,” said Harvey.  “We are told that CEOs are very carefully vetted by boards of directors and professional consultants – as they should be for their multi-million dollar jobs. The fact that our research shows that appearance is unquestionably significant turns my stomach.”

“Given there is no relation between appearance and company performance, I hope our research changes the way we select our corporate leaders: ‘looks’ should not be a factor!”

“A Corporate Beauty Contest,” is National Bureau of Economic Research working paper number 15906, and is available for download here .  The authors received no external funding for this research.

The real issue here is what the recovery will look like. Are we stuck in a quagmire of persistently high unemployment (the plank) or are we going to see a sharp rebound (the hockey stick).

I vote for the plank.

The Jobs Numbers

Despite the snow, the unemployment rate held steady. Only 36,000 jobs were lost from non-farm payrolls. Temporary jobs increased again and temporary jobs are a good leading indicator of full time jobs. All of this is good news.

On the bad news side let me list some issues:

1. The unemployment rate did not drop. Are we stuck in the high 9% range?
2. The all-in rate which counts people that are marginally attached and working in part-time jobs (not by choice) increased to 16.8%.
3. Temporary jobs have been increasing for quite a while. Usually, they are a leading indicator – but they haven’t been (so far) in this cycle. Things might be different this time.
4. Duke-CFO Survey was released Wednesday. CFOs forecasted a lethargic 0.2% employment growth over the next 12 months. That will do nothing to the unemployment rate.

The Case for the Hockey Stick

Let me consider eight factors that have been mentioned by a leading economic consulting house.

1. Corporate profits will robustly grow, perhaps, 30% in 2010

This is definitely good news and credible. Remember that non-financial corporations (and excluding the autos) were in generally good shape before the melt down. Corporations have been reducing their leverage since 2002. There is plenty of cash on balance sheets. The recession has led to unprecedented productivity gains. CFO’s expect a further 3.2% productivity gain in 2010. They will spend. Capex will jump by 8.9%. R&D by 3.7%. Advertising by 3.4%. But, as I mentioned, not on employment. I can’t see how you can have a hockey stick recovery with 9-10% unemployment. By the way, the Duke-CFO survey puts earnings growth at 14.3% in 2010.

There is another important point but related point here. Where has the profit growth come from? Mainly cost cutting. The layoffs and restructuring costs that were taken in 2009 are now paying off in 2010. The key is sustainability. You cannot indefinitely cut costs. Growth depends not just on productivity but demand for the product. The profit numbers we are seeing are largely driven by the big bath in 2009 and the realization of cost savings in 2010.

2. Credit markets have greatly improved

Depends on who you are. Yes, credit spreads have dramatically decreased. It is a lot cheaper for large firms to go to the bond market because the spread they must pay over government bonds is a lot less. However, the problem is that corporate bond market is not accessible to small and medium sized businesses. SMB usually rely on bank lines of credit not the capital markets. The Duke-CFO survey showed that 70% of small and medium sized businesses said that credit conditions were worse than 2007. In other words, they face a continued credit crunch. Small and medium sized firms are the drivers of employment growth. It is hard to see a robust recovery if these firms are still being frozen out of the bank lending market.

3. Global short rates are low and low rates lead a recovery by one to two years

It is true rates are low. But why are they low? They are low because the economy is in recession. They are only a leading indictor of recovery in the sense that a recession is a leading indicator of a recovery. A recession is always followed by a recovery. Yes, there will be a recovery. The question is what it will look like. Low short rates are not particularly informative.

4. The yield curve is steep and has been for quite a while

I’ll write a whole blog on this one of these days. The predictive power of the yield curve was first documented in my dissertation at the University of Chicago in 1986 – so I have a bit of knowledge about this. The yield curve has accurately forecasted every recession since 1969 – without a false signal. Inverted yield curve means a recession will follow (at least so far). However, there is only so much you can ask from the yield curve. It provides very little information about the shape of a recovery. I would interpret the current reading as telling us that a double dip is unlikely (over the next year).

5. The Fed and the Administration are fully aware of the downside

Uhh, I guess so. This refers mainly to the Rogoff-Reinhart idea that once the size of government debt to GDP gets sufficiently large, it stunts future GDP growth. This is based on their careful study of 200 years of financial crises. However, I see no indication that the Administration or Congress wants to take steps to reduce this drag. The Fed has no power over fiscal policy. Indeed, most of the talk in DC is about additional spending which would make the debt to GDP situation even worse.

6. Sub-optimal growth is politically and socially unacceptable and if it occurs there will be more policy responses

But that is exactly the problem. More bailouts and more spending on short-term employment does not lay the foundations for future growth opportunities. Indeed, you can argue the reverse. When the government deploys capital, it is effectively taking it away from consumers and corporations. It is taken away via means of taxes or by their borrowing (future taxes). It comes down to who you believe has the best shot of creating growth opportunities.

7. The global economy is surging and will drag the U.S. along

Let’s be clear here. Emerging markets are surging. The bulk of the global economy is not surging. Europe is in a very low growth mode. Japan will unlikely see any meaningful growth over the next five years. Canada is in relatively good shape mainly because of their sensible financial regulation and their refusal to subsidize housing through mortgage interest deductibility. We are really talking about emerging markets. The demand for U.S. exports from these markets has moderated an already very serious recession. However, the global economy is not surging. There is a big divergence between the prospects of developed and developing countries. It is a tough case to make that the global economy will make the difference for the hockey stick.

8. Emerging markets will potentially grow at 7% in 2010.

This is really the same point as #7. Yes, the U.S. has benefited from emerging markets growth. This is a plus for the recovery but it is not enough to meaningfully reduce the unemployment rate.

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So-called “neuromarketing” takes the tools of modern brain science, like the functional MRI, and applies them to the somewhat abstract likes and dislikes of customer decision-making.

Though this raises the specter of marketers being able to read people’s minds (more than they already do), neuromarketing may prove to be an affordable way for marketers to gather information that was previously unobtainable, or that consumers themselves may not even be fully aware of, says Dan Ariely, the James B. Duke professor of psychology and behavioral economics at Duke.

In a perspective piece appearing online in the journal Nature Reviews Neuroscience , Ariely and Gregory S. Berns of Emory’s departments of psychiatry, economics and neuropolicy, offer tips on what to look for when hiring a neuromarketing firm, and what ethical considerations there might be for the new field. They also point to some words of caution in interpreting such data to form marketing decisions.

Neuromarketing may never be cheap enough to replace focus groups and other methods used to assess existing products and advertising, but it could have real promise in gauging the conscious and unconscious reactions of consumers in the design phase of such varied products as “food, entertainment, buildings and political candidates,” Ariely says.

“Neuromarketing: the hope and hype of neuroimaging in business,” Dan Ariely and Gregory S. Berns. Nature Reviews Neuroscience.

Millions of lives are lost around the world each year to accidents, terrorist attacks, wars, epidemics and natural disasters. What’s more, the prediction is that climate change will increase the number and intensity of some of these events.

Newly published research from suggests that the way people – whether members of the public or policymakers – react when faced with human fatalities is highly dependent on the distribution of death tolls they are typically exposed to.

The findings could have important implications for multi-lateral donors, national governments, aid agencies and the press in terms of planning for, fundraising for, reporting on and responding to such emergencies.

Reactions to tragic events depend largely on the size of their associated death tolls. A disaster involving millions of victims tends to produce a bigger response than one that affects tens of thousands of our fellow humans.

Previous research has shown, however, that people tend to show a diminishing sensitivity to the numbers of lives involved. As an event’s death toll increases, each additional death seems less shocking, so that, for example, we appear to care less about the last thousand people to die in a large-scale disaster than the first thousand fatalities.

Despite its grave implications, the reason for this tendency has until now not been well understood. Namika Sagara of Duke University’s Fuqua School of Business, and Christopher Olivola of UCL have published research in the Proceedings of the National Academy of Sciences explaining what may cause such diminishing sensitivity.

The study demonstrated that our motivation to act is based on our memory of similar events and a comparative, rather than absolute, evaluation of human death tolls. It suggests that reactions to fatalities are fundamentally relative and dependent on personal history.

According to the researchers, we evaluate the seriousness of a disaster by first drawing on a sample of comparable events from our memory to obtain a set of comparison death tolls. We might, for example, compare an event with other disasters that we have seen in the news or heard about from talking to family, friends, or colleagues. Then we compare the event with all those we have drawn from memory. The ‘‘shock’’ associated with a target death toll is simply its relative rank-position within the set of comparison events rather than some fundamental value on a scale of human fatalities.

This new research stresses that our responses will be shaped by the environment we live in – in particular the frequency with which we observe small or large death tolls in the news and in our day-to-day lives.

In a series of studies, the researchers show that our diminishing sensitivity to human fatalities seems to follow from the fact that death tolls are distributed in such a way that most deadly events involve very few deaths, while a few events involve very large numbers of human fatalities. As they show in one experiment, this sensitivity is malleable and can be altered by exposing people to varying distributions of death tolls.

Another implication of this research is that sensitivity to human fatalities will differ predictably across countries, as a function of the distribution of death tolls they are typically exposed to. In a country such as the UK, which is unused to mass deaths, a medium-scale disaster will seem really shocking, but the shock value will quickly start to blur as the numbers increase so that large-scale events will seem indistinguishable.

However, in a country where mass deaths are more common, a medium-scale disaster may seem less shocking but people will be more sensitive to differences in magnitude between large-scale events because they have observed many more of them.

In line with this prediction, Olivola and Sagara compared respondents in India, Indonesia, Japan, and the US, and found evidence of greater diminishing sensitivity to fatalities in the latter two countries (which tend to experience relatively fewer large-scale disasters) than in the former two.

“On a theoretical level, this research fundamentally challenges the view that the value we place on human lives is governed by stable underlying disutility functions. On a practical level, it advances our understanding of people’s reactions to humanitarian crises and other deadly events. For example, it would seem that wealthy nations which have the resources to help those countries most affected by mass deaths also have populations that are most likely to show a diminishing sensitivity to human fatalities. We hope this knowledge will ultimately help save many lives,” explains Olivola.

First, the Euro-bomb could explode anytime.

Second, the U.S. government dropped a bomb in telling us that the employment losses during the current recession are far worse than people had believed.

The Euro Bomb

The EU is in a lose-lose situation. If they rescue Greece, then other countries will have their hands out like Spain, Portugal, and Ireland. There could be others too. I doubt the main players (Germany and France) will have the stomach to bailout so many countries. The fundamental problem is that it is very difficult (near impossible) to have a currency union without a political union. While Euroland rules were established (size of deficit, government debt), they were (and are) routinely violated and there is no way to enforce – because of the lack of political union.

You create moral hazard problems. Countries will borrow and spend with the expectation that the system will bail them out. Sound familiar? If the large countries even marginally violate the rules (size of deficit, debt), then this energizes the smaller countries to brazenly violate the rules of the game.

If the EU does nothing, then the Euro will likely fall apart (or at least lose some member countries)

The real question is how deep Germany and France will want to reach into their pockets to keep the Euro going.

The Jobs Bomb

Unemployment dropped by 0.3% to 9.7%. Good news, right?

At the same time, the data were “revised”

We now know that at least 8.4 million jobs have been lost in this recession. Just last month, we thought it was 7.2 million. With the stroke of the Bureau of Labor Statistics’ pen, 1.2 million jobs vanished. Poof.

Let put this in perspective. The drawdown in people employed (non-farm payrolls) in this recession has been -6.11% (from December 2007, the month of the economic peak to today). In the 2001 recession, the drawdown was -1.21% (peak to trough). The 1990-1991 recession was only -1.13%. 1981 was more serious with a -3.08% drawdown. The recession of 1980 was only -1.07%.

Think of it this way. If we add up the employment losses over the past four recessions combined together, it sums to a -6.49% drawdown. We are dangerously close (-6.11%) to having this recession being as bad (in terms of jobs) as the previous four recessions!

Was there any good news?

Yes.

While the Establishment Survey suggested that nonfarm payrolls fell by 20,000, the unemployment rate is based on a different survey.

The Household Survey suggested fewer people were unemployed. That’s why the rate dropped. To be clear, the civilian labor force increased from 153.059 million to 153.170 million (denominator) and the unemployed decreased from 15.267 million to 14.837 million (numerator). Dividing the two numbers produces 9.687% unemployment.

There were many other small pieces of good news including: (i) greater participation rate (people re-entering labor force rose from 64.6 to 64.7); (ii) small increases in number of hours worked and average wage; and (iii) increase in temporary employment (which is usually a leading indicator of permanent employment growth).

The biggest good news is the trend. The employment situation is stabilizing.

My fears

• Usually, temp jobs are a leading indicator of growth in permanent jobs. This time might be different. Given the longer-term economic uncertainty, companies are satisfied rolling through temporary employees.
• We might see increased CAPEX without much employment growth. Companies are in the process of replacing and/or refurbishing their depleted capital equipment. Such expenditures may lead to labor savings. As such, it is unrealistic to think of hiring back all the laid off workers.
• The long duration of unemployment will lead to workers’ skills becoming stale. While companies have lots of job applicants, they might have fewer qualified applicants because of depreciated skills.
• There will not be enough growth to get us into the +300,000 monthly range for non-farm payrolls additions (we need +100,000 per month simply for population growth and 300,000 to get back all the current recession jobs lost in three years). This means that unemployment rate will be stuck at a very high level for a very long time.
• The continuing credit squeeze on small and medium sized business will defeat the recovery. Most of jobs are created by small and medium sized businesses and these firms are still severely constrained in getting credit.
• There is great economic uncertainty as a result of the extreme leverage in the U.S. economy. Corporations have reduced their leverage. Consumers have made considerable progress in increasing their savings. However, that is all offset by an exploding government debt. We are approximately at a situation where total (consumer, corporate and government) debt is 350% GDP. In the 1990s, it was about 250%. In the 1980s, 175%. In the 1950s, 60s and 70s about 150%. The previous peak was about 300% in 1933. Such a dark cloud on the horizon magnifies risk. Add to this the fear of increased taxes. Higher risk means less investment, slower employment growth, and upside prospects for the U.S. economy.

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