Friday, April 24, 2015

Book Review: What Can the Rolling Stones Teach You About Economics?

Forbes editor John Tamny spoke at Vanderbilt yesterday to promote his new book "Popular Economics: What the Rolling Stones, Downton Abbey and LeBron James Can Teach You About Economics."

 "A one-man antidote to economic obfuscation and mystification." - George Will 
 "The book establishes Tamny, the editor of RealClearMarkets and the political economy editor at Forbes, as the modern and American Frederic Bastiat." - Veronique de Rugy
DISCLOSURE: the author is a former student and Vandy Alum

MY TAKE:  The book is filled with fun anecdotes illustrating what Henry Hazlitt called "The One Lesson of Economics:
The art of economics consists in looking not merely at the immediate hut at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

So for example, when you think about taxes, you should look beyond their revenue raising potential, to their negative effect on growth.  In the case of the Rolling Stones, the high marginal income tax rates (83%) and high capital gains taxes (98%) caused the Stones to move production of their "Exile on Main Street" album to the South of France.

Although the effect of the tax on the Stones was probably minimal (after all, the album was produced and turned out great), Tamny asks us to also look at the UK sound engineers, caterers, and anyone else would would have been involved in the production of the album had it been made in the UK.

This is the hardest lesson to teach students, as it asks them to step back from their natural inclination to "do something" to make the world a better place.  But with enough examples like those in the book, students will eventually realize that taxing productive activity to help the less fortunate not only reduces the gains from productivity, but it also increases the gains to becoming less fortunate.  And it is a whole lot more bureaucratic and inefficient.

 These stories also do a good job of updating Hayek's critique of Keynes that the aggregation of modern macroeconomics obscures the real (and perverse) effects of government spending:  stories about individual transactions that were distorted or deterred by government intervention make Hayek's original critique much more accessible.  In fact, in his talk, John often began his answers by reminding us that the macroeconomy is just a collection of individual transactions.

I want to close by saying that it is my second favorite economics book, behind this one.

Thursday, April 16, 2015

Miscalculation in a game of chicken

FT has a nice four minute discussion of the Greece's strategy in their prolonged game of chicken with the EU:

Tuesday, April 14, 2015

Can more regulation help European companies?

From The Wall St. Journal

BRUSSELS—The European Union should regulate Internet platforms in a way that allows a new generation of European operators to overtake the dominant U.S. players, the bloc’s digital czar said, in an unusually blunt assessment of the risks that U.S. Web giants are viewed as posing to the continent’s industrial heartland.

If you have trouble spotting the irony, read the comments:

... here go the clowns, er, the EU regulators again. if you can't compete, then regulate, subsidize and then raise all kinds of protectionist barriers. That might have worked for Airbus, but the digital world has low barriers to entry and is fast moving. Add to it worker protection regulations, limit foreign workers and wonder Herr Oettinger is sounding so frustrated.
... The EU has never stopped to seriously consider why their economic system fails to promote the innovation that leads to Google, Facebook, and Apple. Yet, their very response shows why they fail: their answer is more government regulation and market manipulation. I predict that in 10 years the EU will STILL be lagging since they're focused on today's technology and not innovating for tomorrow.
.... Step 1: Tie legs together before entering race against everyone else. 
Step 2: Insist that everyone ahead of you tie their legs together until you catch up. 
Step 3: ? 
Imagine these guys running the Olympics.

Wednesday, April 8, 2015

Compensating Wage Differentials

Alex Taborok and Tyler Cowen have some wonderful short videos to support their "Online University" initiative. This one explains why wages tend to be higher for jobs that suck - an application of what we call "The Indifference Principle."

Thursday, April 2, 2015

If firms can measure ability, why go to school?

School can serve a variety of economic goals: screening and signaling (but only if dropping out of the labor force, and paying tuition for four years is unprofitable for the bad "types"), in addition to the "added value" that supposedly raises your productivity.  

But what of software coding, where attendance at school has no relation to coding ability.

If you can measure output (coding ability), measuring inputs (grades, courses, college) is redundant.  

HT:  Merle Hazard

Tuesday, March 31, 2015

Advertising Elasticities

The US is somewhat unique in that we allow pharmaceutical ads to target consumers, albeit with plenty of FDA scrutiny. Is it doing any good? A new paper, "Ask Your Doctor? Direct-to-Consumer Advertising of Pharmaceuticals," by Sinkinson and Starc estimates how responsive consumer demand is to TV advertising.

We find that a 10% increase in the number of a firm's ads leads to a 0.76% increase in revenue, while the same increase in rival advertising leads to a 0.55% decrease in firm revenue. Results also indicate that a 10% increase in category advertising produces a 0.2% revenue increase for non-advertised drugs. 

These translate into elasticities of  0.076, -0.055 and 0.02, small but positive. Moreover, they claim that most of the effects come from new customers patients, rather than existing customers patients switching between competitors. For all of the econometricians out there, the clever identification strategy they use to get exogenous variation in the number of ads is the crowding out effect from local political advertising.

Friday, March 27, 2015

Update: zero-based budgeting in the government?

All the apparent success of zero-based budgeting in the private sector raises the obvious question, "why not use it for the government."  Apparently, it was tried before:  in 1977, Jimmy Carter ordered the executive branch to implement it.  However, without reforming the civil service protection of government employees (lifetime tenure, and very difficult to fire or reward), it was predictably unsuccessful.

A Republican, Mr. Pyhrr said one of his wishes is that more government entities would embrace zero-based budgeting to make the kind of necessary changes that companies, such as Heinz, are making. “But that is a long discussion,” he added.

Thursday, March 26, 2015

How do you create demand for your consulting tools?

Threaten to take over companies that fail to use them.

If a company is poorly run, or is not minimizing costs, it creates an opportunity for someone to take over the firm, fire incumbent management, and implement the cost-reducing schemes.

In fact, when 3G announced its intention to acquire Kraft, its stock went up by 36%, in expectation that 3G would implement their "zero-based budgeting" at the target firm.

Other food and beverage companies are embracing 3G’s financial tool, in part out of fear that they, too, could become targets of activist investors or stronger rivals. Big packaged-food companies have been particularly appealing targets for zero-based budgeting. 

So what does zero-based budgeting do?

[it] requires managers to plan each year’s budget as if no money existed the previous year, rather than using the typical method of adjusting prior-year spending. That forces them to justify the costs and benefits of each dollar every 12 months. budgeting is a symbol of the new reality for U.S. business: Activists are pressing at all sides, giving managements little room for slack or bloated budgets. This ethos has seeped into nearly every boardroom, prompting pre-emptive steps that emulate the activists themselves. 
The effects of this change are improved shareholder returns and dividends. But on the flip side, it has made the work for employees more rigorous and, some would argue, more ruthless. 
At Heinz, ... 3G quickly set out to make deeper changes, paring staff at its Pittsburgh headquarters and gutting individual offices in favor of open floor plans. It slashed Heinz’s overall head count by about 1,480, or 4% of the world-wide workforce, shut several factories and grounded corporate jets.

Sounds like a good management tool for the government.

Thursday, March 19, 2015

Make the rules or your rivals will: Germany bans Uber

When formulating a business plan, you have to pay attention to the regulatory environment.  Otherwise, your rivals can accomplish through regulation what they cannot accomplish in the market:  From Competition Policy International

A German court on Wednesday banned Uber from running services using unlicensed cab drivers and set stiff fines for any violations of local transport laws by the pioneering online taxi firm. 
Uber, worth an estimated $40 billion making it the world's most valuable venture-backed start-up, has set out to revolutionise local transport services worldwide, from taxis to carpools to fast-food delivery. 
The latest case, brought in the Frankfurt regional court by German taxi operator group Taxi Deutschland against UberPOP, is one of more than a dozen lawsuits filed in countries across Europe in recent months against the San Francisco-based company.

Wednesday, March 18, 2015

Power tool importer prevents free-riding with RPM

Resale Price Maintenance, or RPM, is a contractual arrangement between an upstream manufacturer (or importer) and a downstream retailer that specifies either a minimum or maximum retail price.  These contracts are illegal in most antitrust jurisdictions, and viewed skeptically in the others.  

So it was somewhat of a surprise that Australia's Competition and Consumer Commission (ACCC) allowed Tooltechnic, an importer of high end power tools, to specify a minimum resale price to prevent "free riding" by discount dealers on its high end Festool brand.  Consumers had been shopping at the high end retailers, and then buying the Festool products are lower-priced retailers who did not provide as much retail service.

Festool products are complex, with a high level of features and functions, and are aimed predominantly at professional users. Tooltechnic believed that provision of retail services such as pre-sales technical advice, product demonstrations, and “try-before-you-buy” arrangements, as well as post-sales services such as customer training and provision of consumables and accessories, would help to expand demand for the brand even if retail prices included a margin sufficient to fund those services. 
 However, retailers who provided these services were increasingly losing out to competitors who chose a simpler no-frills model, and the problem of free-riding was exacerbated by the increased accessibility of on-line sales. Tooltechnic chose RPM as a solution after judging that other approaches, such as imposing detailed contractual obligations on retailers, granting exclusive retailer territories, or restricting on-line sales permissions, would be unworkable or less effective as a means of boosting sales.

Congrats to the the ACCC for reaching a reasonable decision, and to the Economists at RBB for their role in educating a skeptical government agency.