Intellectual Capital: Crime doesn’t pay; COVID-19 shapes migration patterns; Leveraged ETPs are risky.

By Evan Curran

CRIME DOESN’T PAY

New findings show crime cost the U.S. trillions each year

For the first time in decades, a team of researchers has calculated the financial impact of one year’s worth of crime in the U.S.—a staggering $2.6 trillion. A team that included Professor Mark A. Cohen, Justin Potter Professor of American Competitive Enterprise, conducted a comprehensive review of 120 million crimes, 24 million of them violent crimes, that occurred in 2017. The team was led by Ted R. Miller of the Pacific Institute for Research and Evaluation.

Their findings could help law enforcement agencies, judicial systems, governments, educators and advocates make efficient decisions about the billions of dollars that are spent nationwide on initiatives designed to reduce crime.

Cohen says the more accurate data will allow policymakers to address inequities and put resources toward programs that are likely to have the biggest effect.

“Our estimates of unit costs and total costs will help to inform some tough decisions,” Cohen said.

“In a resource-limited world, policy needs to weigh costs against benefits.”

Since no national database consolidates all incidences of crime, the research team put together models that drew from various public databases with the best available crime counts. Using this more complete data set, the team thoroughly analyzed the true cost of crime. Some costs are direct, out-of-pocket expenses, like police response, health care, victim services, court, and child welfare proceedings, incarceration, and other sanctions—plus the value of stolen goods or damaged property. Some of these costs are borne by victims or perpetrators; others are paid in whole or in part by insurance, by private hospitals providing uncompensated care or by taxpayers.

These direct costs, however, are only a small fraction of the overall cost of violence. Costs of violent crime are dominated by lost wages and productivity (at work and at home), quality of life losses by victims and their families, and wage losses of incarcerated perpetrators. The research team advocates that policymakers adopt this more comprehensive definition of the “cost” of crime when making decisions about programs and policies aimed at addressing the issue.

Overall, personal crime in the U.S. cost almost $2.6 trillion in 2017. Direct costs to victims and taxpayers totaled $620 billion—about $1,900 for every person in the U.S. For perspective, the U.S. spent $590 billion on the military and $450 billion on social welfare programs in 2017.

 

GOING PLACES

COVID-19 Shapes Migration Patterns in the U.S. in Surprising Ways

The choice of where to live is a major economic and social decision and includes factors such as labor markets, schools, housing costs and access to amenities. In 2020, new research shows, a new factor made a prominent appearance: the COVID-19 pandemic. But the way it showed up might not be what you’d expect.

The researchers, Peter Haslag from Vanderbilt and Daniel Weagley from Georgia Institute of Technology, examined four years of proprietary move-level data on more than 300,000 inter-state moves within the United States to determine how and why the nature of relocation decisions has changed since the onset of the pandemic.

The researchers found that a significant percentage of respondents were moving from larger cities to smaller cities with lower costs of living and less-stringent COVID regulations. The researchers also found correlation between household income and reason for migration during the pandemic. “We found higher-income households are moving much less for changes necessitated from work (such as job loss or taking a new job) and much more for non-work-related reasons,” the researchers said. In contrast, lower-income households typically moved for job-related reasons at a similar rate to pre-pandemic levels and were less likely to move for reasons such as retirement, health, or lifestyle.

The research provides insight into the impetus for inter-state moves and the ways in which the COVID-19 pandemic impacted migration decision-making. The patterns can be used by public health experts and policymakers to predict the impact of future health or environmental crises on migration decisions.

“What stood out to me was how little the infection rate in a city impacted the decision to move to or from there,” said Haslag, assistant professor of finance. “We found that it was other COVID-related factors, including regulations and the ability to work remotely, that had a greater impact on migration decisions.”

This shift in inter-state migration will have major implications for population-dependent issues such as city structures, tax bases, political biases, and real estate markets. “By analyzing movement patterns during the pandemic, we can better understand the reasons that people of different income brackets move and make stronger predictions about the futures of identified cities and states,” Haslag said.

Haslag and Weagley are particularly interested in examining the long-term impact of remote work on the labor market. “The fact that we are seeing such a large reaction across states indicates that people are buying into the notion that remote work is here to stay,” Haslag said.

Moreover, they plan to study the impact of high-income earners leaving cities with high taxes and regulations, such as New York and San Francisco, and moving to cities with less taxation and regulation, such as Austin, Texas, and Nashville. “We expect that areas with high tax rates will suffer, at least in the short term,” said Haslag, though he believes that the increase in housing prices in cities with lower taxes will ultimately create an equilibrium effect.

 

TRADE SECRETS

The Dangers of Leveraged ETPs as Long-Term Investments

“I’m 67 years old, and I’m basically bankrupt in two weeks.” That’s how an individual quoted in The Wall Street Journal last summer described the sudden collapse of a retirement portfolio comprised largely of leveraged exchange-traded products amid the market turmoil of March 2020 caused by the onset of the COVID-19 pandemic.

In a paper featured by the Financial Analysts Journal, Robert Whaley, Valere Blair Potter Chair, professor of management and director of the Financial Markets Research Center, extends his earlier empirical work—warning of the dangers of these complex products, which are marketed and sold without restrictions to retail investors. The study was co-authored by Colby Pessina, MSF’20, an investment banking analyst at Deutsche Bank in Jacksonville, Florida.

First introduced in the early 1990s, ETPs rapidly gained in popularity among individual investors because they offered a broadly diverse portfolio—such as the S&P 500 or a bond index—in a single, easily tradable asset. ETPs have since grown to become one of the most popular (and profitable) products available, accounting for global assets under management of more than $4.2 trillion.

More recently, issuers have developed leveraged and inverse ETPs that allow investors to magnify their bets on the direction of popular financial indexes such as the S&P 500 or the Volatility Index (VIX), which Whaley developed for Chicago Board Options Exchange in the 1990s. These products offer directionality—long and short—by as much as a factor of three without the complexity and expense of accessing options and futures markets.

Retail investors are picking up on the products: Leveraged and inverse ETPs currently make up 11.9 percent of all ETPs and account for assets under management of about $50.6 billion.

“Trading costs and barriers to entry are low. Bid-ask spreads on these products are trivial for active ETPs, and commission-free brokerage, with no account minimums, is now the norm,” Pessina and Whaley wrote in the paper. Moreover, because leveraged and inverse ETPs are equity securities, not derivatives, retail customers and certain institutions can now short sell and achieve leverage factors that were not possible for them beforehand.

And yet, as the authors demonstrate, these products carry significant risks, particularly for unsophisticated investors who may use them with a long-term “buy-and-hold” strategy. “The fact of the matter is that the value-destroying characteristics of these products are not well understood,” Pessina and Whaley explained.

Because of how these products are structured, prices veer from their “promised” levels through time. And hefty expense ratios erode value. Statistical models used in the paper, in fact, show that, regardless of the factor or asset class, many ETPs will die, absent corporate actions such as reverse splits. Indeed, just after their study was originally released in March 2020, two sets of directional oil ETPs were liquidated. “The problem is inherently much deeper than investor education. Why do the products exist?” Pessina and Whaley asked in the paper. “Leveraged and inverse products are not, and cannot be, effective
investment management tools.”

 

LEARNING BY DOING

How Large Firms Transfer Knowledge

How do large, multi-unit firms effectively transfer knowledge about best practices to divisions around the globe? For large companies, a top-down “template” approach—where employees observe working examples of new practices—may be good, but it works in tandem with learning the process locally, says Megan Lawrence, assistant professor of strategic management. Examining the implementation of a new restocking process from a Fortune 100 chain retailer, Lawrence found that managers balance learning from a centralized template with what they draw from their own localized experiences. Thus, superior performance of the template is paramount. When a template offers superior store performance, managers and employees are less likely to draw from their own local practices.

“Knowing and implementing a practice in one part of a firm does not necessarily mean it is easily transferred to another part of the firm. What I find time and time again is that the work of transferring and implementing practices is not nearly as simple as we think it might be. Firms need a process and multiple ways to measure performance to get this right,” Lawrence said.

Lawrence noted that understanding the components of how firms learn and share knowledge has become even more important in the era of COVID-19. This runs the gamut from training workers on new health and safety protocols to onboarding employees who may never set foot in an office or meet their supervisor face-to-face.

The data for the study came from more than 400 internal company reports and files evaluating restocking performance as a result of the implementation of a new practice. Lawrence examined 34 pilot stores, which were the first to receive the template instructions, and 280 nonpilot stories that followed the lead of their counterparts.

“Just about every business—from hotels, restaurants and retailers to white-collar offices—are having to change their practices during this pandemic,” Lawrence said. “Who will be effective at doing this, and why? What are the factors that govern this process? Those are the kinds of questions this type of research addresses.”