Does venture capital still contribute to growth?

The New Yorker has a harsh critique of some Venture Capital firms, like the ones that funded WeWork: 

 A widely read summary by a Harvard Business School professor, Nori Gerardo Lietz ... exposed WeWork’s “byzantine corporate structure, the continuing projected losses, the plethora of conflicts, the complete absence of any substantive corporate governance, and the uncommon ‘New Age’ parlance.” At the same time, she wrote, the S-1 (Disclosures to the regulators about the company's financial health ) failed to provide many conventional financial details. ...S-1 laid bare a basic truth: WeWork’s dominant position in the co-working industry wasn’t a result of operational prowess or a superior product. Instead, WeWork had beaten its rivals because it had access to a near-limitless supply of funds, much of which it had squandered on expensive furniture, flamboyant perks, and promotions luring customers with below-market rents.

Anyone who reads this blog knows three things:

1.  Innovation drives growth, and growth is almost everything.  

As Novel laureate Robert Solow said, “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.

2.  Total Factor Productivity (the output measured relative to the inputs required to produce it) has grown much faster in the US than elsewhere.  This is one of the best aggregate measures of innovation.  

3.  The US has birthed more Unicorns (startups with a $1B valuation) than any other country else:

BOTTOM LINE:  Innovation is hard to measure, but it looks like the US has it, so the Venture Capitalists who fund it must be doing something right.  One cannot condemn an entire industry using a few anecdotes about how some startups fail--no matter how spectacularly.

President Joe Biden vs. Joe Biden

 NY Times has a good article on the Biden administration's contempt for economics.  

“The next generation of the economics profession is rebelling against its predecessors by being all about inequality in the same way that my generation rebelled against its predecessors by being all about incentives, and this is a good thing,” said Larry Summers, who served as Treasury secretary under Bill Clinton and N.E.C. director under Barack Obama. 

Biden has less trust in economists, and so does everyone else. Obama’s constant frustration was that politicians didn’t understand economics. Biden’s constant frustration is that economists don’t understand politics.

... 

 The backdrop for this administration is the failures of the past generation of economic advice. Fifteen years of financial crises, yawning inequality and repeated debt panics that never showed up in interest rates have taken the shine off economic expertise. But the core of this story is climate. “Many mainstream economists, even in the 1980s, recognized that the market wouldn’t cover everyone’s needs so you’d need some modest amount of public support to correct for that moderate market failure,” Felicia Wong, the president of the Roosevelt Institute, said. “But they never envisioned the climate crisis. This is not a failure of the market at the margins. This is the market incentivizing destruction.”

Gig Workers of the World Unite!

Door Dash drivers are trying to beat the algorithm. When a specific meal needs to be delivered, Door Dash's algorithm will post the gig to available drivers with payment information. If no one accepts, the algorithm raises the compensation level. This is how markets are supposed to clear. 

What if drivers organize to withhold their services until the rate rises enough? In labor markets, this is the main goal of employee unionization. In business markets, we call it collusion. (It is an open question if these gig workers are employees or independent contractors.) But there are a lot of drivers. It is not clear if you can get enough of them them to commit to this strategy. It is useful to employ moral suasion. The Facebook group #DeclineNow, was formed to share information and encourage compliance.

#DeclineNow has little patience for such naysayers. Users who question the $7 minimum rule are punished with suspension from the group or, as the group’s moderators like to put it, “a trip to the dungeon.” One former moderator, Josie Lindström, claims to have personally suspended hundreds of people, saying the intolerance for dissent was necessary to keep the group moving in the right direction. “It has to be all of us, or it doesn’t work,” she says. But Lindström eventually quit, citing what she described as a toxic atmosphere.

Restrictive zoning causes segregatation in Connecticut

Restrictive zoning--90% of Conneticut allows only (expensive) single-family homes--limits supply, especially of lower priced housing like apartments, and drives up the price.  

From Vox:

According to one measure by researchers at the University of Pennsylvania’s Wharton School, Connecticut has the 15th-most regulated residential building environment. In doing so, it has confined poorer people to small parts of the state and likely discouraged countless more from ever moving to the state.

The results are pernicious:

By artificially restricting the supply of housing through onerous regulations, Connecticut has in effect driven up the cost of living for everyone and priced out lower- and middle-income Americans from living in most of its towns and cities. Simply put: fewer homes and growing demand mean higher prices for everyone.

As part of her “Segregated By Design” series, the Connecticut Mirror’s Jacqui Thomas reported that “more than three dozen towns in the state have blocked construction of any privately developed duplexes and apartments within their borders for the last two decades, often through exclusionary zoning requirements. In 18 of those towns, it’s been at least 28 years.” By creating these metaphorically walled enclaves, in addition to driving up the cost of housing for low-income people, localities have blocked lower-income families from finding housing in a place where their kids could attend good schools.

Other posts on housing

The Economics of Vending Machines

Zachary Crockett at the Hustle has a nice description of the economics of owning and operating vending machines. It is a fascinating look at an industry I would never have known about otherwise. 

There are about 2 million in operation in the US generating $7.4 billion in annual revenue for nearly 18,000 businesses that own them. Most owners run small operations as sole proprietors but Coke and Pepsi have vertically integrated into owning their own machines. The business scales well which allows for a gig workers type of entrepreneurship.

 

Owners rent space for their machines mostly in manufacturing plants, offices, hotels, and hospitals and typically pay a percentage of gross revenue. The biggest decisions are what to stock and where to locate them.

Which cities have the cheapest house prices?

From chapter 9, we know that in the long run a mobile asset has to be indifferent to where it is used, otherwise it will move.  This long-run indifference principle means that in the long run, you should be indifferent about where to live and whether to own or rent.  In particular, the price-to-rent ratios should reflect this "indifference," and be  similar across cities.  However, this is is certainly not the case.  Here are the most expensive cities:

City	Price-to-Rent Ratio	Home Price (for a $1,000 Rental)
San Francisco, California	50.11	$601,362
Oakland, California	41.05	$492,611
Honolulu, Hawaii	39.50	$474,014
Los Angeles, California	38.59	$463,135
New York, New York	36.83	$441,987
Long Beach, California	36.37	$436,385
Seattle, Washington	36.07	$432,862
San Jose, California	33.77	$405,263
Washington, D.C.	33.76	$405,070

and the cheapest ones:

Indianapolis, Indiana	13.18	$158,161
El Paso, Texas	12.79	$153,486
Lubbock, Texas	12.78	$153,333
Baltimore, Maryland	12.43	$149,179
Milwaukee, Wisconsin	12.43	$149,146
Corpus Christi, Texas	12.14	$145,670
Pittsburgh, Pennsylvania	11.14	$133,622
Buffalo, New York	10.66	$127,862
Toledo, Ohio	9.68	$116,148
Memphis, Tennessee	9.53	$114,368
Cleveland, Ohio	8.31	$99,716
Detroit, Michigan	5.35	$64,194

NOTE:  this is not the "owner equivalent rent" which includes the opportunity cost of owning, it is a much simpler calculation than that,

median home value ÷ median annual rent = price-to-rent ratio

South Lake Tahoe: when housing inventory is low, price increases

 

More evidence of adjustment in the housing market to changes in demand and supply.  The Pandemic has increased demand for housing, taking the available supply of houses to buy (blue line) to historic lows.  Price increases (red line) generally follow.  The seasonal spikes are due to increases in seasonal demand for vacation houses (higher in summer).  South Lake Tahoe has a large percentage of second (vacation) homes. 

CalculatedRisk is a good blog to follow if you are interested in real estate.  

Housing Bubble-ology: is this time different?

 The WSJ is apparently reading our blog: (earlier blog post)

The Pandemic Ignited a Housing Boom—but It’s Different From the Last One

Residential home sales are hitting peaks last seen in 2006, just before the bubble burst, but this time mortgages are stricter, down payments are higher, and a tight supply is supporting prices

Mask moral hazard?

According to an AP article, "Virus Tolls [are] Similar Despite Governors' Contrasting Actions." The article suggests moral hazard is the cause:

Some people voluntarily were “being more vigilant in states where the guidelines are more relaxed,” said Thomas Tsai, an assistant professor at the Harvard T.H. Chan School of Public Health.

In other words, in states where it is safer, people take more risks.   

Is the recent 10% house price increase going to stick?

Last year, house prices in my zip code increased by about 10%; and they are forecast to increase another 10% this year.  This "tightness" or "seller's market" is indicated by the small available supply relative to demand, as indicated by the 2.1 months of inventory.  [NOTE:  months of inventory=(# houses for sale)/(selling rate per month)].  

In the scatter plot below, we see that an inventory of 2.1 months (vertical axis) is normally associated with about a 1.5% monthly price increase (horizontal axis).  The increase in housing demand caused by the lockdowns, as working from home increases demand for bigger living spaces, or for owning a bigger home instead of renting a smaller apartment, is probably behind the price appreciation.  And if you can explain a price change with demand and supply it is likely due to "fundamentals," rather than a "bubble," prices not tied to fundamentals.  

If this is a permanent increase in housing demand then the 10% price increase will likely "stick."  But if this is a temporary increase in demand, which reverses when the pandemic and lockdown ends, we may see a drop in price.  

BOTTOM LINE:  housing price changes are explained by demand and supply changes, but adjustment is relatively slow in this market.  

See earlier post about high price-to-rent ratios leading to lower housing price appreciation.