Thursday, March 31, 2011

The FCC Aims for Dominant Firms - Hits Little Guy

Always clear thinking Tom Hazlett has a new piece in the Financial Times on one foreseeable result of the new Net Neutrality rules (gated but free). The FCC feared that big telecom operators would favor their own affiliates at the cost of consumer choice. The first case demonstrates the limits, indeed the counter-productivity, of regulation.
MetroPCS, hit with its first formal complaint, is an upstart wireless network offering low prices and short-term contracts. As part of their $40 a month “all you can eat” voice, text and data plan, they slipped in a bonus: free, unlimited YouTube videos, customised to run fast and clear.

But is this monopolist favoring one service over another to its own benefit?
MetroPCS possesses no market power. With 8m customers, it is the country’s fifth largest mobile operator, less than one-tenth the size of Verizon. Under no theory could it force customers to patronise certain websites. It couldn’t extract monopoly cash if it tried to.

Rules meant to foster innovative services are thwarting them.

Monday, March 28, 2011

How to win the "game of chicken"

The point of studying game theory is to understand where you are likely to end up if you play rationally, optimally, and self-interestedly. This is called the "equilibrium" of the game.

If you don't like the payoffs that you receive in the equilibrium of the game, then you had better try to do something about it. Here is a nice discussion of how to change the game of chicken to your advantage.
  • Accept, right off, that there is no way to guarantee victory. The best either player can hope for is to improve the odds of inducing the other player to swerve. Toward that end, there are many tactics, none especially appealing. Start with reputation. If you are known as a nonswerver, perhaps because you have been "undefeated" in previous encounters, your opponent is bound to take that into account.
  • Reputation can be burnished in several ways, like cultivating an image of being literally crazy, or perhaps suicidal.
  • Another tactic: Drive a large and imposing vehicle. If an armored cement truck is confronting a VW Beetle in a game of chicken, who backs down?

Friday, March 25, 2011

LA bans fast food restaurants

7 min video from REASON makes clear that the ban on fast food restaurants reduces employment, and choice.

Tuesday, March 22, 2011

Were the auto bailouts a good idea?

Former FTC colleague Todd Zywicki doesn't think so:

The Obama administration's economic policy, therefore, returns us to the thinking of the 1950s and '60s — to an economy in which big business, big labor, and big government are tied together in a relationship of mutual succor and support.

The auto bailouts exemplify this new reality. Sold as a means of revitalizing the economy, they are in fact a means of transforming the relationship between the state and the market in a way that empowers large players at the cost of economic growth. The overall effect of such state capitalism is a kind of controlled stasis, in which the preservation of old jobs takes priority over the creation of new ones. Managed decline, rather than dynamic growth, is the defining feature of the Obama economy.

Monday, March 21, 2011

California town lays off half its workforce

Arithmetic holds Costa Mesa accountable:

The cutbacks are necessary because the escalating costs of providing pensions for police, firefighters and other unionized employees are draining the city’s revenue, city leaders say.

Within three years, city projections show, more than one of every five tax dollars will be spent on employees’ retirement benefits, which were made far more generous in the years before the stock market crashed in 2008.

“Just do the math — this is unsustainable,” said Jim Righeimer, the city’s recently elected mayor pro tem. He campaigned on the pension issue, eliciting anger and a counter-campaign from the city’s police and firefighters. “Under these kinds of burdens, we can’t do everything the city needs to do.”

Why do firms fire workers instead of reducing their pay?

Because workers respond to wage cuts by shirking:
So it seems bosses are smart not to cut wages. It's bad for morale, which is bad for productivity. Sending out pink slips might seem similarly demoralizing, and thus bad for productivity, but layoffs have a more complicated effect on the lucky employees who hang on to their jobs. Layoffs can even boost productivity by giving workers a bit of extra motivation to prove their value, ...

BOTTOM LINE: Raises Don't Make Employees Work Harder, But pay cuts make them slack off.

Sunday, March 20, 2011

What is the best warfighting strategy?

It is interesting to compare the allied strategy in Libya:
But the first shots fired didn’t appear to produce an immediate collapse in the rule of Qadhafi, who has surprised his enemies with his resilience. Qadhafi’s tenacity, both in his present circumstance and as evidenced over decades of survival in a very tough neighborhood, begs the question of what happens if this self-consciously limited allied response does not succeed in chasing him from power.

Allied leaders so far haven’t provided defining answers; in fact, quite the contrary. In a series of comments and communiques over the weekend, American, British, and French officials stressed that they aren’t attacking Qadhafi’s forces to achieve “regime change” – while at the same time maintaining, as British Prime Minister David Cameron insisted, that Qadhafi “needs to go.”

...to the US Marine warfighting manual. One of my colleagues uses this to teach MBA's how to formulate succesful business strategy.  Starting out with lack of a clearly defined goal leads to what the manual calls "frictions."
The very essence of war as a clash between opposed wills creates friction. It is critical to keep in mind that the enemy is not an inanimate object but an independent and animate force. The enemy seeks to resist our will and impose his own will on us. It is the dynamic interplay between his will and ours that makes war difficult and complex. In this environment, friction abounds.

Friction may be mental, as in indecision over a course of action. Or it may be physical, as in effective enemy fire or a terrain obstacle that must be overcome. Friction may be external, imposed by enemy action, the terrain, weather, or mere chance. Or friction may be self-induced, caused by such factors as lack of a clearly defined goal, lack of coordination, unclear or complicated plans, complex task organizations or command relationships, or complicated communication systems. Whatever form it takes, because war is a human enterprise, friction will always have a psychological as well as a physical impact.

While we should attempt to minimize self-induced friction, the greater requirement is to fight effectively within the medium of friction. The means to overcome friction is the will; we prevail over friction through persistent strength of mind and spirit. While striving to overcome the effects of friction ourselves, we must attempt at the same time to raise our enemy's friction to a level that destroys his ability to fight. 

Friday, March 18, 2011

Why is the yen appreciating?


The destruction of the capital stock in Japan will reduce the marginal productivity of labor (each worker has less capital to work with), which will put downward pressure on Japanese wages, and raise the returns to Japanese capital (it is scarcer and more valuable).  The higher returns to capital in Japan should attract capital inflows, which should put upward pressure on the yen.

HT:  Laffer Associates

Wednesday, March 16, 2011

Tuesday, March 15, 2011

I know who is going to win this debate

Between economists and politicans:

Obama is being pulled in opposite directions by those whose priorities are fiscal and those whose No. 1 concern is electoral.

Treasury Secretary Timothy Geithner, National Economic Council Director Gene Sperling and Sperling’s deputy, Jason Furman — leading figures in the president’s economic team — are pressing Obama to cut Social Security benefits if necessary, say sources familiar with their positions.

But Obama’s political team, led by David Axelrod, David Plouffe and Jim Messina, are urging the president to understand that backing benefit cuts could prove disastrous to his 2012 reelection hopes, sources say.

Friday, March 11, 2011

Set-Asides and Subsidies in Auctions

A new working paper (gated version here) by Susan Athey, Dominic Coey, and Jonathan Levin examines the effects of set-asides and subsidies in auctions.

ABSTRACT
Set-asides and subsidies are used extensively in government procurement and natural resource sales. We analyze these policies in an empirical model of U.S. Forest Service timber auctions. The model fits the data well both within the sample of unrestricted sales where we estimate the model, and when we predict (out of sample) bidder entry and prices for small business set-asides. Our estimates suggest that restricting entry to small businesses substantially reduces efficiency and revenue, although it does increase small business participation. An alternative policy of subsidizing small bidders would increase revenue and small bidder profit, while eliminating almost all of the efficiency loss of set-asides, and only slightly decreasing the profit of larger firms. We explain these findings by connecting to the theory of optimal auction design.

SELF SERVING UPDATE: We find that designating a sale as a set-aside reduced e¢ ciency by 17% and cost the Forest Service about 5% in revenue. FOOTNOTE{Brannman and Froeb's paper, which looks at Forest Service timber auctions, is particularly interesting because although the approach is quite different from ours (they do not consider bidder participation, use di§erent data, and consider a logit value model of second price auctions), they reach a similar conclusion about the revenue e§ect of the Forest Service set-aside program.}

The Tsunami and the Internet

I can do little more than echo Melissa Bell and marvel:
Within hours of the earthquake, a Wikipedia page popped up with information on the event and a list of tsunami warnings. ...

Google created a people finder in Japanese and in English and deployed it shortly after the event. There are currently about 6,100 records ...

A map on Google marks possible shelters.

YouTube immediately started compiling citizen videos of the quake.

Ushahidi built a database to help those offering aid connect to those in need.

The speed of the development of "crowd-sourced" resources is pretty amazing. How many more lives would have been lost if this event had hit just five years earlier?

Thursday, March 10, 2011

When do "Greens" pollute?

When the price of pollution falls, they consume more pollution. It looks as if they respond to incentives, just like the rest of us.

According to statistics from the Swedish Transportation Agency, average emissions from new cars in the country decreased from 164 to 151 grams of CO2 per kilometer driven, Swedish drivers used their green cars to cover more territory than ever before. Thanks in part to better fuel economy and the idea that a green vehicle has a slimmer impact on the environment, the overall result is more fuel burned, more emissions spewed.

Saturday, March 5, 2011

Who has an idea to get men back to work?

The red is the median wage of all working men; the blue is the median wage of all men of working age.  By assigning a zero wage to the men who have dropped out of the work force (largely low skilled ), we see a much bigger effect of the recessions on men.



There is a $25,000 prize for the best ideas for creating jobs:
The Hamilton Project is seeking new ideas for creating jobs and enhancing productivity and will award $25,000 in prizes to the winners of its 2011 policy innovation competition. The problems facing America’s workforce are challenging and real and will not resolve themselves. Our goal is to highlight targeted, evidence-based policies that can help close both the job gap and the decline in earnings that stand in the way of a brighter future for American workers. 
HT:  the Economist

Who is going to lend us money after June 30?




Bill Gross is taking a wait and see attitude:
Investors should view June 30th, 2011 not as political historians view November 11th, 1918 (Armistice Day – a day of reconciliation and healing) but more like June 6th, 1944 (D-Day – a day fraught with hope for victory, but fueled with immediate uncertainty and fear as to what would happen in the short term). Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets. 
The fear is that demand for US debt will fall when the Fed stops buying debt, and interest rates will go way up.  (Remember that the "price" of debt is the inverse of the interest rate, so when the demand for debt declines, price of debt falls, and interest rates increase.)

UPDATE:  Just saw this cartoon in the Economist.

Thursday, March 3, 2011

Why are public sector unions better at bargaining than their private sector counterparts?

Because they can choose who gets to sit across the table from them.
 They do this by taking funds earned through collective bargaining and sending them right back to the people they bargain with in the form of political contributions.

If the politicians who bargain against them know that the public sector unions can help put them out of a job, they have less incentive to bargain hard.  The end result is that public sector unions in places like California earn 30% more than comparable private sector workers.  

Tuesday, March 1, 2011

What really matters if you are running an auction

Paul Klemperer distills wisdom from the 3G spectrum auctions:

while the European and Asian 3G spectrum auctions famously raised over 100 billion euros in total revenues, Hong Kong's, Austria's, the Netherlands', and Switzerland's auctions, among others, were catastrophically badly run yielding only a quarter or less of the per capita revenues earned elsewhere – and economic theorists deserve some of the blame

Instead of focusing on elegant mathematical theory, they should have paid more attention to parochial concerns like making sure that the auctions attracted enough entrants, and discouraged the bidders from colluding.

The primary directive for those who lead functional organizations

Make sure that the functional areas coordinate with one another, and do not work at cross purposes. The new GAO report gives us a nice example of a organization that ignores this advice:

The 345-page General Accountability Office report pinpointed 34 areas – from defense and job training to social services – where federal agencies, offices or programs have redundant objectives or are fragmented across several departments, something McConnell described as the government’s “virtual incompetence.”

For example, there are 15 agencies that deal with the nation’s food-safety system, which the GAO said has led to inconsistent oversight and an inefficient use of resources. There are 80 programs across multiple agencies that focus on economic development.

"Unions generally reduce welfare"

Some rational dispassionate economics from Gilles Saint-Paul at the Economist:
"ACCORDING to standard economics, wage bargaining by unions is similar to price agreements in cartels and in good logic should fall under antitrust laws and be prohibited."
The piece is short but full of well reasoned economics.

Hat tip to Jeff Smith