Which Loans Should Be Paid Off First?

From an interview with Professor Dan Ariely of Duke:

ARIELY:Imagine you have two credit card debts, one is for $10,000, one is for $4,000. The one that is for $10,00 you're paying 10 percent interest rate, the one that is $4,000 you pay 4 percent interest rate. Which one would you pay first?

Ryssdal: I'm going to pay down the $10,000 one because it's got the higher interest rate, and it's the larger principle.

ARIELY: That's right. And it seems quite trivial that that's what people should do.

Ryssdal: All right, just for the record I think that's the first time in one of your hypothetical studies that I've actually gotten the right answer. I'm just saying. Anyway, go ahead.

ARIELY: So it sounded quite a simple problem to solve. And we assumed initially that people would just get it right, but nevertheless we did an experiment. We gave people six different loans, that's varied on how much money they owed, and how big the loan was, and what was the interest rate. And people played this game over time, with 36 periods. And what we saw was that people overemphasized closing loans. So if you had four loans, and you could put some money into closing one of them, this was too tempting for people, and they did it very often. And they did it instead of putting the money where it could work the best.

Why do you think people don't reduce their high-interest loans first?

The Lincoln Park Raid

The Harris family had lived in Lincoln Park, Chicago since 1970. Since then, it had become a wealthy neighborhood, but they had stayed put, despite offers of over a million dollars for their dilapidated home. The owner is now 77. His son Michael lived there, who had a history of burglary and shoplifting, and other relatives too, with cleaner records. Then they were raided by the police. Here are some excerpts from the news story (but read the whole thing):

No meth was found inside the Harris home. The police did arrest two family members on animal-related misdemeanors, and took away four dogs. But they found no evidence of the crimes some neighbors had suspected, the kind that typically call for 40 officers. No drugs. No guns. No dogfighting. The 40 officers on the scene — from the Chicago Police Department Animal Crimes Unit, two SWAT teams and the Cook County Sheriff's Department — left....

As the smoke cleared, a building inspector arrived. The Harrises knew that their house was rundown. In a neighborhood of new mansions, it stood out, with its bedraggled American flag, the window fan, the brown wooden steps that sloped straight to the sidewalk. But they had never been issued a building code violation. Now the inspector wrote down dozens of infractions, and made another list for an adjacent home where two of the Harris daughters live. Bad wiring, clogged gutters, torn siding, broken plaster, rotting window sashes, unsanitary living conditions. An emergency order to vacate was issued....

From the beginning, friends and relations were in and out of the Harris house on Sheffield. Mr. Harris masterminded the community garden. Friends sat out front talking, drinking and playing checkers, customs the family maintained through the decades, sometimes to the consternation of new neighbors who conducted their social lives in the privacy of back patios and decks....

After the raid, a news release about it appeared on the 18th District CAPS website. The release, noting that citizens had complained of animal cruelty and "gang/drug sales," concluded with the statement: "This is an excellent example of the police and citizens working together." What the release did not note, however, was that no one was charged with "gang/drug" sales. It did not note that Michael Harris was arrested only for the largely unknown misdemeanor of being a felon in possession of non-neutered dogs. After he got out of jail, he collected money from neighbors to have one of the dogs, Kiki, spayed and returned to the family. Meanwhile, the case against one of the Harrises' grandsons, Andrew, 21, remains in court. According to the misdemeanor charges, his two pit bulls were malnourished and maltreated. According to the family, they were fed and watered daily and never used to fight.

Building codes are a response to asymmetric information. Animal cruelty laws can be seen a a response to externalities--- that some people feel disutility if other people mistreat animals. What does the Harris story tell of the dangers of regulation?

Irradiating Food--- Scary, but Safe?

In "When Precaution Trumps Public Safety" Matt Ridley talks about the regulation of irradiating food to kill germs:

A technology that might have prevented contaminated produce from infecting thousands of Germans with E. coli was vetoed—by Germany—11 years ago for use in the European Union. Irradiating food with high-voltage electrons is a process that can kill bacteria on or in solid objects, just as pasteurization can kill them in liquid foods.

When the European Commission proposed in 2000 that irradiation be allowed for a greater range of foods and at a higher dose, the German government vetoed the measure. In the U.S., food irradiation is used for various products, including ground beef, but most retailers resist the practice, lest the word "irradiated'' on the label scare off customers....

The food-irradiation industry has argued strenuously for decades that its technology is proven to be safe, cannot leave food radioactive and does not taint the taste of food. Yet even in the U.S., legislation requires that irradiation be shown not just to have net benefits but to do no harm at all—no diminution of vitamin content, for example....

The most common means of food irradiation is to use an electron gun of the kind found, until the arrival of flat screens, in every ordinary TV set.

Politically, why do you suppose Germany would ban such an apparently safe technology? Why would U.S. regulators be wary of approving it?

Japan's Nuclear Power Plants

"Power Companies Borrow Record in Loans as Cost of Fuel Jumps" talks about the troubles of Japan's investor-owned utilities.

Tokyo Electric Power Co., Japan’s largest utility, and its peers are facing lower profit margins as the shutdown of Japan’s atomic plants after the world’s worst accident since Chernobyl has forced the utilities to burn more natural gas and coal to meet demand. ...

There were no bond sales announced by nuclear plant operators in Japan since the quake, Bloomberg data show. The extra yield investors demand to own power company debt instead of similar-maturity government notes soared to a peak of 202 basis points on June 29, from 12 basis points a day before the disaster, according to Bank of America Merrill Lynch data.

The spread narrowed to 39 basis points on Oct. 5, following Tokyo Electric’s win of state support to help compensate Fukushima victims on July 28. ...

The March 11 disaster triggered explosions at the Fukushima plant operated by Tokyo Electric, contaminating soil, waters and forests with radiation. Since then, reactors that were stopped for maintenance remain shut amid government- mandated tests to assess whether the plants can withstand strong quakes, tsunamis or a loss of power to cooling systems.

As of Oct. 6, only 10 of the country’s 54 nuclear reactors were generating power, according to Japan Nuclear Technology Institute data.

Should the utilities bear the cost of the nuclear plant shutdowns?

Duke Energy's Coal Gasification Plant

Daniels: Duke Energy Should Underwrite Edwardsport Plant says:

Utility Company Duke Energy wants customers to underwrite $920 million in over budget expenses at its Edwardsport plant.

The Indiana Utility Consumer Counselor's Office said Duke was unqualified to build the plant and should be held responsible for going over budget, 6News' Norman Cox reported.

Indiana Gov. Mitch Daniels said he supports the recommendation and said he just wants to see the plant finished.

"I just want to see it there, using Indiana coal, paying Hoosiers, as opposed to people in other states paying for the energy we need," Daniels said.

Upon completion, Edwardsport will be the largest coal gasification plant in the world.

The plant will process Indiana coal into cleaner-burning natural gas which it will burn to produce electricity.

The Consumer Counselor's Office testimony said that Duke essentially botched the construction of the plant because it refused to hire a qualified outside construction manager to build it.

As a result, the plant, which was supposed to cost $1.98 billion, ballooned to $2.9 billion.

This looks bleak for Duke Energy. Can you think of any excuses they might have that would justify putting the entire $2.9 billion in the rate base?

A No-Compete Agreement

In "Ninth Circuit Limits the Scope of In-Term Covenants Not to Compete," the Intellectual Property Blog tells how the comedy club Improv West made a contract with CCI that gave CCI exclusive use of the trademarked "Improv" name, but also prohibited CCI from opening comedy clubs under any other name:

Defendant Improv West ("Improv") is the founder and owner of the Improv Comedy Club trademark. It entered into an agreement with Comedy Club International ("CCI") providing that: 1) CCI had an exclusive right to use the "Improv" name to open comedy clubs in the United States, 2) CCI had to open four clubs a year for the first three years, and 3) CCI was prohibited from opening comedy clubs under any other name until the agreement expired in 2019.

CCI failed to open the requisite number of clubs. Improv immediately cancelled CCI's right to use the Improv name, began opening its own clubs, and sought to enforce the non-compete for the term of the agreement because CCI continued to run established Improv clubs.

The court ruled that the agreement did not violate anti-trust laws, because it didn't reduce the competitiveness of the comedy market substantially. The Court did say that it would enforce the no-compete agreement only in markets where new CCI clubs would directly hurt Improv profits, since California state law bans extreme no-compete contracts.

What the courts try to do in a case like this is to see whether the contract will end up destroying value (by reducing existing competition in the market) or increase it (by allowing two firms to help each other improve their product or reduce their costs.

California law, however, says the state will not enforce agreements not to compete that block competition in a substantial section of the market, so the Court ruled that CCI was only blocked from opening new clubs in counties where it already was operating an Improv club.

A Tax Software Merger

In "U.S. Sues to Stop H&R Block Deal for Rival,", the WSJ says:

The Department of Justice filed a civil antitrust lawsuit on Monday to stop the biggest U.S. tax preparer, H&R Block Inc. from buying the maker of a rival, do-it-yourself tax preparation product called TaxAct....
The top three companies in the field account for 90% of the sales of online tax programs and do-it-yourself tax-filing computer software.

The proposed purchase "would combine the second- and third-largest providers in that market and essentially create a duopoly," the department alleged in a complaint filed in a Washington, D.C., federal court. H&R Block had agreed to buy 2nd Story Software, or 2SS, in a transaction valued at $287.5 million in October.

TaxAct has served as "a maverick in the market," prompting its two rivals to lower prices by introducing such innovations as offering free filing of federal tax returns on the Internet in 2005, the Justice department said. The department's complaint cites internal H&R Block emails that it said show Block wanted to buy the TaxAct maker to "regain control of industry pricing and avoid further price erosion."
... The department cited an internal H&R Block email saying that "the other possible strategic consideration is that Intuit and HRB together would have 84% of the digital market and we both obviously have great incentive to keep this channel profitable."

Will blocking this merger encourage further entry into the industry?

One thing I wonder is why the US government does not itself give away or sell tax preparation software. Is there a good reason for it not to?

The Proposed Merger of ATT and T-Mobile

In "T-Mobile Antitrust Challenge Leaves AT&T With Little Recourse on Takeover," Bloomberg says

AT&T Inc. (T) wouldn’t have much luck trying to salvage its proposed $39 billion takeover of T-Mobile USA Inc. through negotiation with the U.S. Justice Department, leaving a court fight as its only recourse, lawyers said.

The combination of the country’s second- and fourth-largest wireless carriers would violate antitrust law and “substantially lessen competition,” the U.S. said in a lawsuit filed yesterday in federal court in Washington. The Justice Department asked U.S. District Judge Ellen Segal Huvelle to block the deal.

It would be strange for a merger of such large firms in a concentrated market to be permitted. What is most surprising is that ATT has agreed in its contract with T-Mobile, owned presently by Deutsche Telekom, to pay about $10 billion if the merger doesn't go through:

Rejection by regulators would leave AT&T liable to pay Deutsche Telekom $3 billion in cash, to give T-Mobile USA wireless spectrum, and to reduce charges for calls into AT&T’s network, a package valued at as much as $7 billion

FTC vs. Justice Department

"This Takeover Battle Pits Bureaucrat vs. Bureaucrat," in the WSJ says

Many antitrust lawyers believe that several deals that were approved by the Justice Department during the Bush administration—including Whirlpool Corp.'s purchase of Maytag Corp. and the merger of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc.—would have been challenged by the FTC. Whirlpool and SiriusXM declined to comment, as did the two agencies....

Some methods used to resolve agency disputes belie the stakes involved. In addition to the most recent coin toss—which several people familiar with the matter said the Justice Department won—the agencies have employed the "possession arrow" system borrowed from college basketball, in which they take turns.

How else might the agencies decide who should analyze a given merger proposal?