Sunday, July 27, 2014

How to Encourage Good Reviews

I got to go whale watching while on vacation. At the end of the cruise, the proprietor handed out these cards. It is not explicit but it implies that the discount on a second cruise is conditional upon you reviewing the first cruise. Which customers have an incentive to review the cruise? Most likely, those who want to go again. And they probably want to go again because they enjoyed the first cruise. So, those who will review the cruise are those will tend to write positive reviews. The cruise line is essentially using future discounts to screen potential reviewers.

Friday, July 25, 2014

Book review: Ethics and Public Policy by Don Welch

BOOK REVIEW:  Ethics and Public Policy by Don Welch

After students learn benefit-cost analysis, they are often eager to start policy debates with their friends and family.  But they usually come away frustrated by their inability to influence others.

QUESTION:  Why is this?

The answer reminds reminds me of some of my favorite economics jokes:

  • "An Economist is someone who knows the price of everything and the value of nothing;" and
  • "You may be an economist if human interest stories don't interest you." (from Yoram Bauman)

While economists are trained to compute the consequences of policy, we are not very good at getting others to see things from our point of view.  More often than not, the cause of the disconnect is the peculiar ethical framework we use to evaluate policy.

Economists are consequentialists (the ends justifies the means) where we measure progress using a total welfare metric (shareholders are people too).

In contrast, normal people are deontologists, who evaluate policy by how well it conforms to a set of principles, like the Ten Commandments, the Golden Rule, or "from each according to their ability, to each according to their need."

So while economists often disagree about the consequences of policy, we do not disagree about how to evaluate policy.  For example, it is likely that a dirigiste economist and a libertarian economist would agree that redistributing income penalizes success and rewards failure, but disagree about the size of the response.  The dirigiste would argue that the response is small, while a libertarian would argue that the response is large.  In essence they would reduce their disagreement to two different hypotheses, and resolve it by testing them against data.

In contrast, when and economist debates with a deontologist, they often speak past one another.  The economist argues about the effects of the policy, while the deontologist argues about how well it conforms to his guiding principles.  Unless the source of the disagreement is made clear, it will never be resolved.

It is here that I found Don Welch's book remarkably valuable.  Clearly and concisely (dare I say "efficiently"), he lays out the various ethical frameworks and illustrates their use with examples. Along the way, he proposes a framework that encompasses the various ethical approaches so that we don't end up talking past one another.

I liked the framework (goodness knows we need one so we can discuss issues cohesively, and reach better decisions), but I think it is utopian in two ways:  

First it relies on an honest accounting of the consequences of policy.  But in modern political discourse, people on both sides of the political spectrum overstate the benefits, and deny the costs associated with their preferred policies.  Fo example, would the Affordable Care Act would have passed if the President hadn't mislead us about its effects?  

Second, these kind of frameworks often get passed down to agencies who have to find ways to implement policy.  If you have an agency with any but a narrow mandate, they become difficult to oversee and manage.  Contrast the successful (and bipartisan) antitrust agencies which are concerned only with consumer welfare with agencies like the EPA, which has to follow multiple, diverse, and conflicting mandates.  As a practical matter, having any but a single mandate makes it difficult to oversee and manage an agency.  

Despite these shortcomings, I would highly recommend the book to anyone looking for a short, well-written introduction to the various ethical frameworks used to evaluate policy.  

Thursday, July 17, 2014

Question: why do expatriates receive a 15% bonus for living in China?

Its the air pollution

On some days the air pollution is 25 times worse than what’s considered safe in the U.S., deaths from lung cancer have risen 465 percent over the last three decades, and arecent study showed that Beijing residents can expect to spend significant periods of their life infirm. 

This is a compensating wage differential paid to keep employees from moving to cleaner cities.  Interestingly, companies like Coke offer the bonus only to expatriates (foreigners), not to local Chinese, as they have a lower probability of moving.

Tuesday, July 15, 2014

Forget income inequality, lets go after zoning restrictions...

The Financial Times has a nice article on the causes of housing price inflation (House prices are rising as a percent of national income (from 10% to almost 60%).  

A clever 2005 study by American economists Edward Glaeser and Joseph Gyourko compares the price of an extra square foot of land attached to a house (a slightly bigger back yard, perhaps) with the average price of a square foot of land under a house in the same city. If the problem is a natural shortage of land, the two prices should both be high because it is profitable to build on the back yards until the two prices converge. 

That is not what happens, however. In the cities of coastal California, the average price of urban land is 10 times the price of land in a back yard because zoning laws make it impossible to turn one into the other. ...  

The ratio of these two figures – as much as 10 to 1 – suggests only 10 per cent of the value of land in expensive cities is due to its natural scarcity. The rest is planning restrictions.

BOTTOM LINE:  zoning restrictions transfer income from those who own houses to those who do not.

The desire to preserve open space and familiar, low-density cities is quite natural – but it is time to wake up to the enormous cost. ... If we want to make society fairer and more equal, just let people build.

Wednesday, July 2, 2014

Promoting from Within

The typical fast food restaurant will have personnel problems. For much of the hourly staff, this is their first job for minimum wage when they become teenagers. They work part-time and for relatively short time spans. Restaurants are almost always hiring. High turnover and low motivation do not usually make for interesting jobs or career succession paths.

Chipotle revamped hiring practices in 2005 in an attempt to address these issues. They did a lot of things but chief among them was promoting from within. If you see other crew members being selected to become supervisors, managers, leaders and directors, you might try to make yourself noticed.
In 2005, the US company underwent a transformation that would make its culture as distinct as its food. As more than 1,000 stores opened across the US, the company focused on creating a system where promoting managers from within would create a feedback loop of better, more motivated employees. That year, about 20% of the company’s managers had been promoted from within. Last year, nearly 86% of salaried managers and 96% of hourly managers were the result of internal promotions.

It seems to have worked:
Since its IPO in 2006, Chipotle’s growth has been exceptional. Sales have increased from $826 million that year to $3.2 billion last year. And the company had 9.3% growth in comparable store sales last quarter, which is remarkable for a 21-year-old company that hasn’t raised prices recently.

Hat tip: EconJeff

Tuesday, July 1, 2014

How should Nestle increase profit?

By taking advantage of scale economies in purchasing.  

BOSTON—When Paul Grimwood took over Nestlé SA NESN.VX +0.29% 's struggling U.S. operations a year and a half ago, he faced an unlikely problem: Hair nets. 
Nestlé's seven independent businesses in the U.S., which run a total of 87 factories, were buying hair nets and safety shoes from more than 100 suppliers. Because the units weren't talking with each other, Nestlé, the world's biggest food company, couldn't get the best bulk discounts in its biggest national market. Now Nestlé says it uses just "a handful" of suppliers. 
The same thing happened with flavorings. By combining purchasing departments across businesses, he chopped the number of flavor suppliers in the U.S. to four from 48. 
"If you keep rolling that out across the scale and size of the whole U.S. market, it makes a phenomenal difference to the profitability," Mr. Grimwood said in a recent interview.