Globl Value Chain Responces to Trade Wars and Pandemics

Amni Rusli has a longish piece, "Supply Chain Resilience," dissecting much of what we know about how current global value chains are being affected by the US trade wars and by the Covid-19 pandemic. It deals with relative labor costs, automation, sufficient human capital, risk, and politics. One tidbit:

Resilience is not only about reliability but also about redundancy and the ability to rebalance load away from stressed supply chains. This is too big a task on a local level but it is easier to carry out with large global networks of supply system. Consequently, this will create strong incentives for incumbents to consolidate.

These ideas are only touched on at various places in the text, but are not explicit. Diseconomies of scale and scope often lead to outsourcing some aspects of production. Sourcing it abroad implies some exchange rate risk. Quality assurance from suppliers often requires some relationship specific investments.

HT: Marginal Revolution

Low-Powered Incentives Kill Sales

Jim Halpert from "The Office" discovers that he has met his annual commission cap. Any additional sales yield zero commissions. Gabe from corporate tries to rationalize the new policy.

High-Powered Incentives Kill

In the just published article, "The Perils of  High-Powered Incentives: Evidence from Colombia’s False Positives,"Acemoglu, Fergusson, Robinson, Romero, and Vargas investigate incentivizing the military.

We investigate the use of  high-powered incentives for the Colombian military and show that this practice produced perverse side effects. Innocent civilians were killed and misrepresented as guerillas  (a phenomenon known in Colombia as “false positives”).

Policymakers (and managers) should anticipate that incentivizing an outcome enough will alter behaviors to attain the outcome both by the desired methods and by methods antithetical to the organization. Perhaps, though, for managers the perverse consequences result the deaths of innocents less often.

Without incentives, we should anticipate a principle/agent problem. In this case, that might mean more "false negatives" or more un-apprehended guerillas committing violence against innocents. Setting appropriate incentives to balance the two is a particularly delicate decision-error problem.

Private Label Products

Adam Keesling at Napkin Math has an informative write up on "How Costco Convinces Brands to Cannibalize Themselves." Costco's private label, Kirkland, will contract with a branded company to supply a product for Costco under the Kirkland brand at perhaps a 20% discount on the wholesale price. That way, consumers can choose from the branded product and, usually on the shelf beside it, the same product at a 20% lower retail price. Hypothetical P&L statements provide an explanation as to why this a supplier would agree to this. Essentially, the supplier is outsourcing the marketing of the product to Costco. These products are marketed under the Kirkland brand so the supplier's marketing expense is drastically reduced.

There are two reasons why it works out. First, most customers don’t know how Kirkland products are made.  ...

Second, it’s important to remember the sheer vastness of Costco’s revenue. In 2019, Costco brought in over $149 billion of revenue, good for 14th on the Fortune 500 list. 

This is all well and good, but, there is likely a bit more to the story. This represents an opportunity for the supplier to price discriminate. Mr Keesling relates that Costco demands that their store brand suffer no quality degradation and likely an improvement. But this is not consumers expectations with most store brands. Similar supplier/retailer relationships exist in many other situations from generic gasoline to packaged foods at supermarkets to to "branded generic" medicines to off-the-rack fashion. Usually, customers expect a quality/price trade-off. The elastic consumers sort into the store brand while the inelastic consumers sort into the producer brand.The producer can sell its brand at a premium because the elastic customers were siphoned off into the store brand.

HT: Marginal Revolution

Why are people leaving Illinois for Utah?

Wirepoints:  If the wealthy flee, ordinary Illinoisans will be left holding the progressive tax bag 

What correlates with COVID deaths rates?

From interview based on paper by Prof. Christopher Knittel:

• Race was a central factor. ... For example, if you live in a county in which African Americans make up 87% of the population (which is the highest share we found), the COVID-19 mortality rate is 10 times higher than a county with no African Americans (a 0% share).
• Commuting in any form: Our analysis found that a 20.6% increase in public transportation use was linked to a nearly tenfold increase in the mortality rate during this pandemic.
• Working from home:  We also find that a higher share of people not working, and thus not commuting either because they are elderly, children or unemployed, is correlated with higher death rates.
• Counties with higher home values, higher summer temperatures, and lower winter temperatures have higher death rates
• ...death rates in the Northeast are substantially higher compared to other states, 
• Death rates are also statistically significantly higher in Michigan, Louisiana, Iowa, Indiana, and Colorado. California's death rate is the lowest across all states.
• NO correlation between COVID deaths and: pollution, death rates, obesity rates, ICU beds, or poverty rates.

Correlation is NOT causality!

More at Spurious Correlations

Unicorns by Region

Innovation leads to growth, and growth really matters:  

In the late 1950s, Nobel Laureate Robert Solow attributed about seven-eighths of the growth in U.S. GDP to technical progress. As Solow later commented: “Adding a couple of tenths of a percentage point to the growth rate is an achievement that eventually dwarfs in welfare significance any of the standard goals of economic policy.” 

Although the number of unicorns is a noisy measure of innovation, the relative number of unicorns in the EU may be a harbinger of future low growth, and is perhaps due to the burden of the EU regulation.  In my field of antitrust, there are big differences in how similar laws are enforced, e.g., CPI article or SSRN:

• EC is run by politicians; US agencies by antitrust professionals 
• EU skepticism of markets vs. US skepticism of regulation (since 1980) 
• EU regulation vs. US law enforcement (adversarial) 
• EU weak due process: remedies w/out adversarial hearing, 3rd party discovery, or cross examination 
• EU harm to competitors vs. US harm to competition 
• EU does not screen out bad theories (not supported by evidence) vs. US Daubert rules 

Bias in damages and systemic racism

There are many reasons for significant racial disparities in policing outcomes, but one stems from a simple but macabre cost-benefit calculation. In the United States, tort damages (such as those awarded for unjustified injury or death of a suspect) are based on actuarial tables that vary by race. As Helen White writes in the Yale Law Journal:

The tables show the average member of a group defined not only by such metrics as age and income but also by race. Problematically, this results in lower damages valuations for Black lives since the tables estimate that they will live shorter lives and earn less money.

If a police chief knows that the cost of an "error" is greater when policing a White neighborhood than a Black neighborhood, simple economics suggests that we would see over-policing of minorities.

The Fourth of July

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, ...

And from MarginalRevolution.com, Thomas Jefferson's clause deleted by Northerners and Southerners involved in the the slave trade:

...He has waged cruel war against human nature itself, violating its most sacred rights of life and liberty in the persons of a distant people who never offended him, captivating & carrying them into slavery in another hemisphere or to incur miserable death in their transportation thither. This piratical warfare, the opprobrium of infidel powers, is the warfare of the Christian King of Great Britain. ...