Taxes destroy wealth: Italian Yacht edition

In Italy, a new tax on boat ownership and people leasing boats was introduced this year. Boats between 10 and 12 metres now incur an annual tax of €800, those between 20 and 24 metres one of €4,400, those over 64 metres €25,000. Predictably, it resulted in efforts by boat owners and users to evade the tax:

The summer’s blitz has brought a sharp fall in business in Italian marinas. According to Roberto Fusco, chairman of Marina di Punta Ala, 20% of the boats have not been used this year and sales of fuel have fallen by 40%.

Worse, many have moved their business offshore

Unsurprisingly, boat owners have fled to more welcoming havens. Reports talk of Italian fugitives in Corsica and Croatia. And what is true of Italians applies equally to foreigners who charter boats. Rosi Della Bruna, who runs Shaula, a yacht-services company in Rome’s marina at Ostia, says Russian visitors are not amused by Italian inquisitors. “Business is 50% down on last year, and what affects us also affects bars, restaurants, car hire, air travel and so on,” she explains. Only the year-end sums will tell if this wave of fiscal belligerence has won benefits outweighing the costs.

HT: Patti

The "Gujummer" Wars

Marketplace's story, "The economics behind the ice cream man," describes how drivers dealt with their encroachment on their territories. A driver would cultivate a neighborhood, arriving at the same time each evening, stocking the preferred items and generally getting to know his customers. Once these relationship-specific investments were sunk, another driver would start arriving just before his time slot. It is bad enough when the other driver is from a different company, but often two different "Good Humor men" would vie for the same neighborhood.

There are people going in the same areas, and if a newcomer goes into an established area, established by someone else, then they’re going to get very mad, maybe hostile.

Usually the brand owner will provide exclusive territories to different venders so they would have incentives to sink these costs. But this is a cash and carry business and it is difficult to verify territorial encroachments. Headquarters has a difficult time policing violations and it is up to individual drivers to protect their investments, sometimes resulting in broken bones. This was once explained to me by an economist friend who once sold ice cream for Good Humor in New York, which is pronounced "Gujummer" in New York.

Why do we need government?

This essay asks the question, "why do we need government?"  The economist answer is that government intervention may be justified when markets fail.  The qualification is that government may also fail.  Of the six types of government failure, the FTC (where I used to work) tries to "fix" the market failures of Monopoly (first type) and Information (fifth type).  

Book review: Keynes vs Hayek

Book Review of Nicholas Wapshott’s “Keynes Hayek: The Clash that Defined Modern Economics” by Owen MBA, Duke Useni.

Nicholas Wapshott tells the story of an economic debate that persists until today: to what extent should government have a role in the economy.  It tells the personal and professional stories of economists John Maynard Keynes and Friedrich Hayek with engaging and lucid depth. Last year’s debt ceiling debate in Washington DC is an indicator of this debate’s relevance today.

Keynes essentially invented modern macroeconomics in his “The General Theory of Employment, Interest and Money”.  He argues that government intervention is necessary to solve the problem of unemployment caused by inadequate demand. 

Hayek gained fame in his “Road to Serfdom,” in which he argues that central planning will lead to totalitarianism, and that government spending in a recession will delay the inevitable economic reckoning and will prolong the misery.

Keynes Hayek: The Clash that Defined Modern Economics is a terrific book that has the detail and references to help you find a position in this debate.

NOTE:  Russ Roberts has produced a great pair of MTV-style videos (first, second) that tell the story of Keynes vs. Hayek.  

FTC vs. Girls Gone Wild

Last week in class, one of my more energetic students asked me about this case, brought while I was at the FTC.  It involved what we call "negative option advertising," which means that after you purchase one video, more video's keep arriving until you "opt out."

The FTC charged that Girls Gone Wild made this very difficult to do which resulted in more sales than the customer really wanted.

The FTC contended that the defendants’ advertising did not tell consumers how the continuity programs operated, failed to obtain consumers’ express consent to be enrolled, and did not give consumers an effective means to cancel their memberships once they were enrolled. 

The rationale for enforcement is market failure due to not enough information--that is, if the consumer had the information, he would have never ordered the videos.

Hospital strategy results in big profits

NY Times had long piece on HCA's strategy.

Among the secrets to HCA’s success: It figured out how to get more revenue from private insurance companies, patients and Medicare by billing much more aggressively for its services than ever before; it found ways to reduce emergency room overcrowding and expenses; and it experimented with new ways to reduce the cost of its medical staff, a move that sometimes led to conflicts with doctors and nurses over concerns about patient care.

"The Value of Bosses"

That is the title by a new paper by Ed Lazear, Kathryn Shaw, and Christopher Stanton examining worker/supervisor relationships. They examine daily information from a large service company on 23,878 workers and 1,940 bosses for a total of 5.7 million worker-days: amazingly detailed data. They claim these data yield three major findings:

First, the choice of boss matters ... the average boss is about 1.75 times as productive as the average worker.  Second, boss’s primary activity is teaching skills that persist.  Third, efficient assignment allocates the better bosses to the better workers because good bosses increase the productivity of high quality workers by more than that of low quality workers.

Study Managerial Economics and become more efficient ... like a boss.

No good deed goes unpunished

The Bangladesh government is trying to seize control of the Grameen bank.  Vanderbilt alum Mohammed Yunnus won the Nobel Peace Prize (some of us wonder why he didn't win the econ prize) for coming up with what is arguably the most successful way of helping poor people improve their lot, by making small loans to women.

Ironically, the NY Times is pitching this as a war against women, despite the fact that the Bangladesh Prime Minister is female. As an aside, the discrimination that makes this microlending successful would be illegal in the US.

Beyond the damage done to the bank, the bigger issue is the perverse incentives that the government move creates:

...what it tells us is that if you try to make a difference you’ll be kicked and disgraced. I think that sends the worst possible message.

Spot the unintended consequence: Puerto Rico's Iguana solution

The Island has been overrun by the big lizards.  Their solution is to export the meat.  If this creates new demand for the reptiles, no telling how many we will have by next year.

HT:  Sam S.

Economist support for Romney

Statement of support for Governor Romney from economists:

The plan is based on proven principles: a more contained and less intrusive federal government, a greater reliance on the private sector, a broad expansion of opportunity without government favors for special interests, and respect for the rule of law including the decision-making authority of states and localities.

Intrade odds of a Romny victory, 43%.

Incentives to Commit Decision Errors

This is an oldie but a goodie. The point is not simply that the decision makers make decisions we would not like. It is that we would make the same decisions if we had the same incentives. To get good decisions, you have to be able to accept some Type II errors.

Business school stragegy

Ted Snyder, fellow Antitrust Division alum, is trying to turn around Yale's Management School.  He noted a number of past mistakes:

Specifically, Yale “lost $15 to $20 million over the last 15 years,” says Edward Snyder, the new dean of the Yale School of Management. It remained small (400 students), maintained an unusually low student-to-faculty ratio of 8 to 1 (most top schools are closer to 20 to 1) and offered only limited versions of some of its industry’s most lucrative products (like part-time and executive M.B.A.’s). Most significantly it developed a reputation as a bastion of socially minded do-gooders who were less focused on maximizing profit. According to Bloomberg Businessweek’s latest rankings of the top M.B.A. programs, Yale placed 21st, right behind Michigan State. 

 Ted has a five step plan for turning around any middling business school:

• 1. Start by focusing on the sectors where the school has strong relationships and build from there. Or, as Snyder says, ‘‘Give up the undifferentiated, multi-brass-ring strategy of best recruiters, best students, best facilities, blah, blah, blah.’’ 
• 2. Embrace a mix of faculty, particularly those with real-world experience. ‘‘You’ll still want some strong, fast-ball-discipline types in areas like economics, finance and psychology to teach how markets work and function,’’ Snyder says. ‘‘But get fewer of them.’’
• 3. Calculate the cost of things — any things! ‘‘Be very focused on and systematic about collecting data and sharing data with other schools around the country and the world,’’ he says. ‘‘Collect data on industries and on markets. It’s really valuable for students to do that, and you’ll make your school valuable for insight and information.’’ Extra credit: ‘‘It’s good for branding.’’
• 4. Offer a broader mix of programs, including part-time ones. ‘‘That’s more affordable in today’s economy and where the market at business schools is going.’’
• 5. Book your ticket to Gdansk! ‘‘If you’re going to be global, be selective and try to identify a less well served country like Vietnam or Poland instead of China. Pick places with young populations that don’t already have a lot of business schools.’’

Make the rules or your rivals will: Canadian lobster edition

A warm winter has resulted in a glut of lobster this year, bringing prices to a 40-year-low.  Predictably, the Canadian Maritime Fishermen's Union formed a blockade to prevent trucks from hauling Maine lobster into Canadian plants, and enlisted help from the New Brunswick provincial government.  

To end the impasse, processors agreed to pay $3.53 per pound for live market lobster, a 50-cent increase according to the Maritime Fishermen's Union.

Half of the 50-cent increase is being paid for by the processors, the other half by the union. The union plans to take out a loan to cover the added cost.

The Union's successful foray into politics will not be their last: 

"We'll also be immediately figuring out how this can be prevented in the future."

If you reward this kind of behavior, you get more of it.  

Is the NY Parks Department Profit Maximizing?

The WSJ reports that the NY Parks Department doubled tennis fees and it looks like season passes will fall by about 50%. That means an elasticity of about -1. It is a little more complicated than this of course. At the same time, incomes have fallen due to the recession. Also, fewer passes mean shorter waits for courts, making a pass more attractive now. They were probably expecting inelastic demand. But an elasticity of -1 means this price increase did not change revenues.

So, it looks like the NY Parks Department is not maximizing profits. I am not sure we would want them to.

HT: Mungowitz

Is Central Planing inefficient?

The question is posed by recent research:

For 40 years the Soviet Union was indeed a growth miracle, but it was a spectacularly unsustainable one based on extractive political and economic institutions. The powerful Soviet state could generate large productivity increases by moving people from rural areas and putting them into factories.

However:

 ... the reason why his thesis is ultimately unconvincing is that ... backward economies can grow rapidly and may do so using a variety of arrangements. This is made feasible because they are benefiting from catch-up and technological convergence. The fact that Soviet Russia took advantage of catch-up opportunities and transferred resources from its massively inefficient agriculture to industry implies neither that central planning was efficient in the short run nor that it could be a steppingstone for more growth-enhancing institutional structure in the long run.

 Inevitably, the collectivist system collapsed due to the universal problem of management:  

Do central planners have enough information to make good decisions, and the incentive to do so?

Anyone who has read chapters 1 and 2 knows the answer.

HT: JC

Do environmentalists cause pollution?

Carbon credits, designed as a payment to companies who reduce pollution, instead have the opposite effect.

So since 2005 the 19 plants receiving the waste gas payments have profited handsomely from an unlikely business: churning out more harmful coolant gas so they can be paid to destroy its waste byproduct. The high output keeps the prices of the coolant gas irresistibly low, discouraging air-conditioning companies from switching to less-damaging alternative gases. That means, critics say, that United Nations subsidies intended to improve the environment are instead creating their own damage.

The problem can easily be understood using marginal analysis: pollution credits increase the marginal benefit of producing the harmful coolant. This increases supply, which reduces the price, which encourages more coolant consumption.

When the developed world (UN & EU) threatened to cut off the pollution credits, China and India threatened to release the gas into the atmosphere.  This is an interesting bargaining ploy that works only if the developed world cares more about the pollution than India and China.   

How should universities respond to rising costs, declining demand, and the emergence of cheap alternatives?

The classic strategy case is one in which a firm's external competitive environment shifts, and the firm must decide what to do. This article in the economist documents the rising internal costs of education and the diminished ability of customers to pay.

Many universities' first instinct will be to batten down the hatches and wait for this storm to pass. But the storm is not going to pass. The higher-education industry faces a stark choice: either adapt to a rapidly changing world or face a future of cheeseparing. It is surely better to rethink the career structure of your employees than to see it wither (the proportion of professors at four-year universities who are on track to win tenure fell from 50% in 1997 to 39% ten years later). And it is surely better to reform yourself than to have hostile politicians take you into receivership.

Get Grandma off the dole

Social Security and Medicare were were designed to alleviate poverty among the elderly. However, now these "mandatory spending" programs take from the poor, and give to the rich:

Consider a single woman earning the average wage who turned 65 in 1980. She has paid in $8,000 but will take out $81,000 in benefits, or more than 10 times her contribution.

Unfortunately, the online article lacks the tables and figures from the print edition that managed to piss my teenager off, even without reading the article.

Ted Video on online learning

HT: Mark Perry