A tale of two bridges

It has become the best of times on Highway 520, one of two floating bridges across Lake Washington that connects Seattle to its eastern suburbs. You can "sail" across the bridge, with no traffic, even during rush hour. The secret, of course, is the $10 price:

Technologically, the system is a marvel. There are no toll booths. Indeed, there is no sign at all that this is a toll road except for actual signs that say so. The toll is collected in myriad ways. You can sign up for an account and get a little coded sticker for your windshield. Or you can wait until they bill you, using your license plate to track you down. Apparently, it works. Unless your commute is between 11 p.m. and 5 a.m., in which case it’s free, you can’t escape.

Meanwhile, it has become the worse of times on Highway 90, which is more jammed up than ever. Although the bridge is nominally "free," commuters end up "paying" in increased commuting time. Overall, the effect is exactly what any economist would have predicted:

In Seattle, since the toll was imposed, traffic on the toll bridge has dropped about 40 percent, while traffic on the free bridge has risen 10 percent. Overall traffic from the east side to and from the city has dropped about 6 percent.

The moral of the story is simple: the economy is more efficient than it was before the toll because consumers are facing the cost of their choices.

The money raised will be used to rebuild the bridge. Thus this cost will be paid by those who actually use the bridge, in direct proportion to how much they use it, rather than sticking it to the general taxpayer. The market will sort out those who value their time at more than $10 per commute from those who do not and give both drivers what they prefer. And of course, it’s good for the environment: Some people will reject both the toll and the increased congestion on the free bridge, and use public transit or work from home.

HT: Chris

Price controls destroy wealth

When will they learn?  The latest lesson comes from Venezuela where Hugo Chávez’s socialist-inspired government imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. Ironically, the controls have the opposite effect:

The shortages affect both the poor and the well-off, in surprising ways. A supermarket in the upscale La Castellana neighborhood recently had plenty of chicken and cheese — even quail eggs — but not a single roll of toilet paper. Only a few bags of coffee remained on a bottom shelf. Asked where a shopper could get milk on a day when that, too, was out of stock, a manager said with sarcasm, “At Chávez’s house.”

HT: Greg Mankiw

What Good are Economists Anyway: a slideshow

How do Economists use Evidence?

24 April 2012

NAAG Midwestern Region Meeting

Wyndham Hotel 633 N St. Clair St. Chicago, IL 60611

The market can stay irrational longer than the client can stay patient.

The quote above, attributed to Keynes, describes the conflict between investors (principals), and those who manage their money (agents). Jeremy Grantham illustrates the conflict by comparing his sister to the rest of his clients:

I have felt absolutely no career risk. ... In any case, she does not ask nor has she been told about investment changes or short-term performance for several years, and she is, after all, my sister.

For his large institutional clients, who have less patience than his sister, Grantham has to make sure that they earn enough in the short run so that don't change managers. This leads to tradeoffs:

In dealing with clients as opposed to sisters, we ... will leave the portfolio looking at least faintly normal and leave the clients’ pain just tolerable. Too big a safety margin and we are leaving too much money on the table; we are probably protecting our job rather than attempting to maximize our clients’ return.

Too narrow a safety margin and clients may fire us, as some have done in the past. ... It is, of course, a central dilemma of investing.

Grantham has done much better for his sister than he has for his institutional clients because he has the the freedom make big bets and, perhaps more importantly, the freedom to stay out of the market when everyone else is making money.

HT: Merle Hazard

Über succeeds where taxis fail

Almost all the everyday complaints about cabs trace back to bad regulation

Drivers won’t take you to the outer reaches of your metropolitan area? The regulated fares won’t let them charge you more to recover the cost of dead-heading back without a return customer. Cabs are poorly maintained? Blame restricted competition, and the inability to charge for better quality. Cabbies drive like maniacs? With high fixed costs for cars and gas, and no way to increase their earnings except by finding another fare, is it any wonder that they try to get from place to place as fast as possible?

Über is a better way to move assets to higher valued uses

Uber makes its money at least in part by alleviating these inefficiencies. In most places, “black car” or livery services are regulated differently, and more lightly, than taxis are. Though Uber has good reason not to say so, it’s basically turning livery services into cabs. The company is one step further removed from regulation, because it doesn’t run cars itself; it funnels passengers to existing services. “We’re sort of like an efficient lead-generation system for limo companies,” says Kalanick, “but with math involved.”

Predictably, the old technology asks the government to regulate the new technology

The commission has also launched a public fight against Uber. In January, Chairman Ron Linton declared that the service was “operating illegally” and personally led a “sting” operation, impounding the car of the unlucky driver who had dropped him off at the Mayflower hotel in front of a waiting reporter. Linton followed up with an op-ed in The Washington Post, insisting that Uber was unlawfully charging for time and distance. Uber’s defenders pointed out that D.C. limo regulations define “sedans” as “for-hire” cars that charge for service “on the basis of time and mileage.” Linton now says that

HT: Brock

Stalled in Detroit

Like a lot of cities, Detroit is paying pensions, entitlements and salaries far larger than it can afford. It has borrowed as much as it can, and now it is on the verge of bankruptcy, and takeover by a CFO appointed by the state with the authority to re-negotiate (sounds like a euphemism for "cut") labor contracts.

The mayor of Detroit, Dave Bing, has seemed keen to negotiate a “consent agreement” between the city and the state. But the unions and their representatives on the city council have been dragging their feet.

It is easy to see why. By delaying, the unions keep earning generous pensions, entitlements and salaries while the city goes deeper and deeper into debt.

I feel for the mayor: it is tough to bargain with an opponent that has no incentive to settle.

Will rental car mergers raise price?

New paper estimating the effects of ownership concentration, measured at 400 airports in the US, of two proposed, but never consummated rental car mergers.

Table 8.  Distribution of Markets According to the Predicted Average Price

Increases for Two Proposed Acquisitions of Dollar Thrifty

Predicted Market Average Price Increase	Acquisition by Avis-Budget	Acquisition by Hertz-Advantage
.01–.99%	0	2
1.00–1.99%	11	77
2.00–4.99%	104	38
5.00–9.99%	3	0
10.00–19.99%	2	0
>19.99%	0	0

...The predicted price increases are larger for the acquisition by Avis-Budget almost entirely because the Advantage brand was not present at many of the 117 airports, so at many airports the acquisition by Hertz-Advantage would have increased market concentration much less than the acquisition by Avis-Budget.  

Bankruptcy gives cities bargaining power

In the past we have blogged about our underfunded municipal pensions.

Today, we talk about a potential solution, bankruptcy. Remember that the alternatives to agreement determine the terms of agreement. Bankruptcy gives cities a much better alternative, and allows them to gain a more favorable split of the proverbial pie. Bankruptcies in Stockton, Detroit, Jefferson County, and Rhode Island resulted in smaller payments to city employees and pensioners.

Robert G. Flanders Jr., the state-appointed receiver for Central Falls, R.I., said his city’s declaration of bankruptcy had proved invaluable in helping it cut costs. Before the city declared bankruptcy, he said, he had found it impossible to wring meaningful concessions out of the city’s unions and retirees — who were being asked to give up roughly half of the pensions they had earned as the city ran out of cash.

“The municipality is on bended knee asking the retirees and unions to come to the table and give up their contract rights,” he recalled. “All of that leverage shifts once you have the gumption to pull the Chapter 9 trigger. And guess what? That produces agreements quicker and more effectively than otherwise.”

The article speculates that as soon as a major city, like Oakland or Los Angeles, declares bankruptcy, that the flood gates will open.

CBS Commits a Decision Cost Error

"Sunday Morning" on CBS aired a disturbing piece yesterday. In "When Medical Devices Fail," Jim Axelrod relates a gut-wrenching story of a 21 year old man with a known heart condition who died of a heart attack when his implanted cardiac defibrillator (ICD) failed to revive him. It turns out that these ICDs have a less than perfect track record. The story highlights an apparent lapse of judgement at the Food and Drug Administration (FDA) in approving the product and allowing design changes without enough oversight.

But what are the real decision costs here? That the device failed and this led to the death of a young man is tragic. This occurs "less than one percent of the time, much less," (this quote is a refrain from the story). What would have happened if the ICD was not available? People with this condition would still have had the heart attacks and, in more than 99% of cases, would not have enjoyed the benefits from the ICD. They might be revived by CPR or a "regular old defibrillator" not implanted, but I suspect not nearly as often. It seems like a no-brainer to me that 99% plus is better than nothing.

We can hope that these devices will become 99.999% effective. Even then, eventually there will be a father mourning his young son's death from a product failure when the device is designed imperfectly, or produced imperfectly by imperfect workers, or implanted imperfectly by imperfect surgeons, or implanted into patients who fit the candidate profile imperfectly. And his grief makes for good TV. There were no interviews of the 99 fathers who got to see their children grow into the fullness of adulthood because these devices did their jobs. Highlighting the one tragic case while ignoring the many who benefit is so damaging specifically because it skews the decision maker to be even more cautious. And, there is ample evidence that the FDA is already over-cautious.

Moreover, there is no conspiracy here. Holding them to a 99.999% standard instead of a "99% plus" suggests that the device maker just did not try hard enough. If Guidant, the maker of the ICD, could make the device 99.999% effective, I suspect that they work overtime to get it to the market as soon as possible. They make money by saving more lives. Incentives are aligned.

Yes, the piece was disturbing - but for all the wrong reasons.