Do Investors Really Care About Data Breaches?

On Dec. 19th Target, the giant retailer, released a statement saying that their customers’ data had been breached.  The Wall Street Journal recently ran a front page story on the how the CEO was handling the breach.  The Wall Street Journal article states that Target clearly suffered since the article contains statements like “During the holiday-shopping season, Target’s sales and store traffic plummeted.”

Target’s stock closed on Dec. 18th at $63.07 a share.  The stock closed on Dec. 19th, after the announcement, at $61.68 per share.  The loss of $1.39 per share translated into a drop of almost $1 billion in the value of the company.  Investors appeared to take the data breach seriously.

Today, Target released their quarterly report that covered the holiday shopping season.  This report quantified exactly how much sales fell (3.8% during the quarter) and even contains a quote from the CEO stating that sales before the data breach were much higher than expected and after the data breach sales were much lower.

The verdict by traders was to push the stock up almost 7% as I write this post.  Target stock is now at $60.31, and Wall Street by its actions suggests the data breach doesn’t matter.  Since Dec. 19th Target is down 2.2%. For a comparison, Walmart’s stock is down 3.4% over the same time frame.

Why is all this important?  The rise in Target’s stock price today suggests there are little or no long-term financial consequences for a large company having a massive data breach.  It looks to me like Wall Street doesn’t care about the security of our data but if we want continued economic growth, we as a society should care.  If people can’t trust using their credit cards, they will buy less.

What is the optimal way to ensure companies treat data more carefully?  Should there be fines for every customer record lost, similar to EPA (Environmental Protection Agency) rules that fine companies based on the amount of oil spilled?  Should there be criminal penalties for companies that are lax in protecting their customers’ identities?  Do you have other suggestions?

Why is the Ukraine In Flames?

The news over the last few days has shown scenes of battles in Kiev between police and anti-government protestors.  On Tuesday over 25 people died in the fighting.  The news has been full of details about the battles, but short on explanations of why people are battling.  The explanation, I believe, is very simple.

The Ukraine was once part of the USSR.  When the Soviet empire broke up in the late 1980s and early 1990s many new countries were faced with a choice; continue Soviet era policies or become economically more like Western European countries.  This choice was starkly presented to Ukraine only a short time ago when their president Viktor Yanukovych needed to decide whether to sign a trade agreement with the European Union or take a large Russian loan, which meant the Ukraine would trade primarily with Russia.  President Yanukovych picked the Russian loan, which started the protests.

The anger among many Ukrainians is simple to understand by looking at the following graph.  The graph shows Gross Domestic Product (GDP) per capita after adjusting for inflation.  GDP per capita shows the amount of goods and services the economy produces annually for the average person.  There are lots of lines in the graph to look at but the key is to compare the dotted black line, which tracks the Ukraine, versus all the colored solid lines which represent the neighboring countries.

Twenty five years ago in 1990 Ukraine was in the middle of the economic pack.  Today, the average person in Poland, Romania, Latvia, Lithuania and Belarus is roughly twice as well off as they were 25 years ago.  However, people in the Ukraine are slightly worse off today than in 1990.  Everyone got better off, except for the Ukrainians.  What was the primary difference between Ukraine and the other five countries?  Ukraine’s neighbors all decided to be more integrated with the West, while Ukraine stayed economically tied with Russia.CaptureTo me the protests show that a person’s relative economic status is just as important as their absolute status.  The problem in Ukraine is not poverty for the average person.  Instead, I believe, it is the anger and resentment of seeing neighbors, friends and relatives who are just outside the country’s borders doing better and expecting to do better in the future, while the Ukrainian economy shows no hope of improvement.  That is the underlying cause of the clashes.

Will Fast Food Kill You?

I have recently been doing research into the question “Is it Really Just the Poor Who Eat Fast Food?”  when I came across an amazing article by Rudelt, French, and Hamack.  The article came out in September in the journal “Public Health Nutrition,” which is not a magazine most people read on a daily basis so I want to point it out here.

The authors look at how much sodium (Na) is in the food sold by fast food restaurants like McDonalds, Burger King, KFC and Taco Bell. Most sodium in our food comes from table salt, which is sodium chloride.  They write sodium is important because “High blood pressure is the most common risk factor for heart disease and stroke, the first and fourth leading causes of death  in the USA. High-Na diets are also associated with kidney disease and osteoporosis as well as stomach cancer.”

We all know fast food has a lot of salt.  Not only does the article point out how much, it shows the changes at 7 points in time from 1997 to 2009.  The article shows how much sodium is in the typical (median) lunch/dinner entree.  In 1997 the typical burger or chicken meal had 883 mg.  By 2009 the sodium content of the typical entree had risen to 1,015 mg, which is a 15% increase.  Fast food restaurants on average have been boosting the amount of salt by roughly 1% each year.

The CDC recommends that adults should have less than 2,300 mg of sodium per day and that people over 51 should limit themselves to 1,500 mg.  In simple terms eating two burgers at McDonalds almost puts you at your daily limit, before you start in on the fries.

The rising levels of salt bring up an interesting economic problem.  Consumers clearly like their fast food.  These same consumers clearly dislike the rapid rise in medical care costs and insurance the US has been experiencing.  When is it right for the government to control or mandate how much salt we eat in fast food restaurants to protect health?  Should the government have no control over the rising levels of fast food salt and leave us free to make our own decisions, or should the government begin to regulate hamburgers, much like it regulates cigarettes?

Has the World Changed Since Grandma and Grandpa’s Time?

How has the world changed over the last few decades?

Last week I gave two lectures on GDP, which measures the amount a country produces.  One key point of the lectures is that inflation-adjusted GDP per person was almost stagnant from the Roman Empire until the American Revolutionary War.  Then, starting around 1800, GDP per person soared.  In simple terms, rising GDP per person means the average person has far more things than the previous generation.

I first saw this GDP graph years ago when I was a graduate student.  Back then I didn’t really understand how dramatic the change in people’s lives was over the past decades.  Then  I talked to my relatives.  Many of them told me stories of how little they had growing up.  Looking around I could see how much they had now.

I asked my students during the lecture to do the same thing I had done years earlier.  Talk to a grandparent and parent and ask them how much they had growing up.  To make the matter simple I had the students ask their grandparent and parent two questions.  The first was “how many pairs of footwear (shoes, boots, sandals, etc.) they owned when they were about 20 years old.”  The second question asked “how many people shared their phone when they were about 20 years old?”  I told the students to mark down 999 if their grandparent or parent did not have a phone.

Slightly more than half did the assignment.  The graph of the footwear question, shown below, reveals tremendous growth in the average number of pairs owned.  The typical grandparent who was twenty years old in the 1920s owned just 1 pair.  Grandparents in the 1930s owned 2 pair.  By the 1970s people owned 5 pair.  My students report that they own an average (mean) of 18 pairs and a median of 15 pairs.  This is quite a remarkable change over time!

The results from the phone question were more surprising.  Asking how many people shared a phone line was not a good question, since almost half of all grandparents didn’t even have a phone!  About 15% of all parents didn’t have a phone.  The graph below shows that universal access to a phone is clearly a very modern phenomena.

We currently have far more food, clothing, housing, phones and transportation today than past generations ever had.  This leaves me pondering the harder question.  Do all these things make us happier?  What do you think?

The U.S. Labor Market Is Improving More Than The Headlines Show

Today, the Bureau of Labor Statistics released the monthly employment and unemployment numbers.  The numbers for January showed 113,000 more jobs than the previous month and an unemployment rate of 6.6%.  The business press treated this announcement as a huge disappointment.  For example the Wall Street Journal’s lead sentence was “The labor market in January registered weak gains for the second straight month, a slowdown that could heighten fears about the economic recovery.”

The actual report (if you are reading this months or years from now look for Feb. 2014 here) has many different tables and figures beyond the two headline numbers mentioned above.  One of the numbers I worry about are the number of long-term unemployed.  People who lose their job and then get another one in a few weeks are not a societal problem.  People who lose their job and then spend years looking for work are a huge problem.

The current report shows last month the number of long-term unemployed dropped by 1/4 million people.  Below is a graph since the late 1970s for the number of people unemployed for more than 1/2 a year (27 weeks), which is the formal definition of long-term.

The graph shows during a recession the number of long-term unemployed soars.  However, the most recent economic downturn broke all previous records with more than 7 million people unemployed for at least a 1/2 year! The numbers though are coming down fast.  Today’s report show there 3.7 million long-term unemployed.  This amount is still exceptionally high and we need policies to fix the problem.  Nevertheless, it represents a huge improvement over 7 million and the trend shows a rapid decline.

Compared to the slow decline in long-term unemployment that occurred during the 1990s I find the numbers released today to be very encouraging news.  While the headline numbers of jobs created and the unemployment rate failed to impress reporters, the hidden numbers shows great improvement in the labor market.  While the U.S. economy still has a way to go, the direction and speed are looking good to me right now.