Friday, January 19, 2018

Can I take credit for this?

Former student Ford Scudder (NJ state treasurer) must have been paying attention in class, as he reduced the discount rates for NJ defined benefits pension system from 7.9% down to 7%.  The move is controversial as it increases the amount that NJ must set aside for its generous retirement benefits:
The decision will likely increase what the state will have to pay into the pension system next year by $234 million, according to the Treasury Department. Instead of a $3 billion pension contribution in his first budget, Murphy [the new Governor] would likely have to make a $3.2 billion contribution under that estimate.
But it is better in the long run:
“Given the current elevated level of asset values across the board, long-run expected returns have diminished, so it is appropriate to lower the assumed rate of return,” Rijksen said. “Our actuaries have suggested doing so, and it is the unmistakable trend in public pension plans across the country, with some other 20 state pension plans having adopted or being in the process of moving to an assumed rate of return at 7 percent or below.”
Readers of this blog will know that I motivate the topics of discounting and its inverse, compounding, with use our under-funded defined-benefits pensions.  Here is a recent post about another fund, from another under-funded state, doing the same thing:

Thursday, February 2, 2017


Another pension fund lowers discount rate to 7%

If a pension fund has to pay out $100 in 30 years, and earns 7.5% on its investments, it must save 100/(1.075)^30=13.14 today.  If it earns only 7.0%, the amount that it much save increases by 15%.

Calstrs, the second biggest pension fund in the world, just admitted that it is reducing its target rate of return (also its discount rate) from 7.5% to 7.0%.  The increase in savings is split between the teachers and the State of California, the employer of the teachers.
Approximately 80,000 current members of Calstrs could see an increase in their yearly pension contributions of $200 or more as a result of Thursday’s move, Calstrs said. The state of California has already budgeted an extra $153 million for its pension contribution to cover the rate change, bringing the total contribution to $2.8 billion.

Thursday, January 18, 2018

MC of a Restaurant Meal

The Washington City Paper did a nice piece on the marginal costs of different popular meals in DC. In most cases, they calculated the marginal food cost because it is difficult to figure out how much of the other inputs (e.g., labor) is marginal to a meal. Still this is an informative exercise. I wonder how often the restaurants take the next step to compare actual markups to desired markups? For example, the margin on the Baan Thai Vermicelli (left) seems way to low.

Wednesday, November 22, 2017

REPOSTS: The real meaning of Thanksgiving

What they don't tell you about Thanksgiving in school

Peter Klein gives us a more complete story of the first Thanksgiving:
Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

This year I am giving thanks for private property.

How did property rights save China, the Pilgrims, and Vietnam?

Good short video on the incentive aligning effects of private property at our friends at MarginalRevolution University

Monday, November 20, 2017

What are economists good and bad at?

Succinct summary from Claudia Sahm:
Being good at counterfactual thinking, trade offs, comparative advantage, and other non-intuitive logic, as well as a love of numbers, are useful attributes of economists BUT only as part of a larger team. For example, we, economists, tend to have blind spots from our assumptions on efficiency, credibility, rationality, markets, etc., in a way that a non-economist would not. And yet, economist are known for going it alone. Sigh.
Her take-away: Economists work best as part of a team with diverse viewpoints.
Groupthink … the lack of meaningful diversity … in economics has real consequences for real people. We give advice to Congress on how to spend hundreds of billions of dollars in stimulus. We make decisions at the Fed on interest rates. And in many capacities, we have input on financial markets, regulation, and business practices. This adds up to profound effects on many, many lives. And yet, our closed-system culture puts great emphasis on top five publications (an internal status marker) and the credibility of our economic institutions (making sure economists remain key to policy).
Excuse the dangling preposition in the title.

Saturday, November 18, 2017

REPOST: FCC Chairman uses management theory to improve agency decision-making

Monday, April 10, 2017


FCC Chairman uses management theory to improve agency decision-making

FCC Chairman Ajit Pai wants to increase the quality of economic analysis done by the FCC staff:

...he explained that economic analysis, primarily in the form of cost-benefit analysis, is largely ignored. Actually, it is probably worse than that: Those types of analyses aren’t even done. For example, significant areas of the agency’s work in recent years ... contained nothing that would pass as economic analysis.

So how to do this?  Chairman Pai wants to change the organizational structure from an M-form (with economists mixed in with attorneys) to a functional organization, with economists in their own division.

Some middling economists had suggested exactly this in an article titled "The Economics of Organizing Economists."

... a functional organization has a couple of advantages over a divisional form. First, a functional organization is more likely to keep up with new methodologies and so be able to apply them to enforcement questions. Second, since the staff economists and attorneys produce information, not traditional goods or services, there is an advantage to the independent analyses done by attorneys and economists. Without two separate memos, the decentralization of decision making in a divisional organization is likely to result in less information reaching the ultimate decision makers.

Friday, November 17, 2017

What happens if Uber raises driver wages?

ANSWER:  Nothing, because driver supply increases which reduces the time spent driving for each driver.
We find that when Uber raises the base fare in a city, ... there is no detectable difference in the average hourly earnings rate compared to before the fare increase. With a higher fare, drivers earn more when driving passengers, and so how do drivers make the same amount per hour? The main reason is that driver utilization falls; drivers spend a smaller fraction of their working hours on trips with paying passengers when fares are higher.
HT: MarginalRevolution.com

Restaurant Strategy

Must read for anyone who ever thought of opening a restaurant:
When might a restaurant be deemed to have moat? The test is always quantitative: does the restaurant generate a return on investment that is significantly above the opportunity cost of capital and does that last for a significant number of years? ...  For example, chain restaurants can create distribution networks and systems that take advantage of supply side economies of scale. Their moat is similar to a business like Costco in that way. Other factors can create moats and sometime it is the combination of factors that produces the barrier to entry. Sometimes a famous chef’s brand acquired from television appearances can help create a moat. Sometimes a location can be helpful as can longevity (the comfort food effect) and historical significance.
HT:  MarginalRevolution.com