Thursday, October 30, 2014

Bolivia legalizes child labor for ten-year olds

voluntary transactions?
In December, the Union of Boy, Girl and Adolescent Workers of Bolivia marched to the presidential palace in La Paz to press its case for legal recognition of under-14 workers. Anti-riot police fired tear gas and the TV images of gasping, red-eyed youngsters alarmed President Morales.
After meeting with the child workers, Mr. Morales declared: “The state shouldn’t outlaw child labor. It should protect them.”
The Legislative Assembly followed his advice and rewrote parts of Bolivia’s Code for Children and Adolescents. Now, children starting at age 12 who have parental consent can work under contract and those from age 10 may be self-employed, as long as both stay in school.
Luis Canaza, 15, argued that part-time jobs can improve math skills and provide money to buy school uniforms and books. Luis, who has been working since he was 7, performs weekend clown shows and moonlights as a “voceador,” the barkers who shout the destinations of minibuses to lure passengers.

Nashville's own Merle Hazard on the Federal Reserve's dual mandate

As anyone who has read chapter 21 should realize, motivating an agent to follow two conflicting goals is very difficult for any principal, much less the US government.


Thursday, October 23, 2014

For those of you who missed his Vanderbilt class, ...

Mike Aronstein spoke at Brendant Moynihan's investment class, where he spoke about inequaltity caused by the Fed:
How this works is that people in the investable class who have access to assets can liquidate them for real cash. And if these assets have been rising in value (perhaps in a bubble), the amount of cash available to borrowers can be enormous. “Anybody who has an engagement with the nominal value of investable assets right now is getting wealth at a pace that’s hundreds of times beyond that available to somebody who’s outside of that stream.”
He also thinks inflation will eventually appear.  
Are there any benefits from recent Fed policy? Possibly down the line. “Seepage of this monetary excess into the rest of the local economy, piece by piece, means you’re going to wind up with a generalized inflation later on in this process, that I don’t believe the Federal Reserve will be able to stop it, or have the will.” Could this lead to higher wages? That’s anyone’s guess at this point.

Wednesday, October 22, 2014

BEYOND IRONY: Fed Chairman causes the very inequality she bemoans


Chairman Yellen complains about inequality, yet seems oblivious to her own role in exacerbating it.  Quantititative easing makes money plentiful and cheap; and this has benefitted those who can access the money in extraordinary ways.  Let me count a few of the beneficiaries:

  • The big Wall Street banks, .. which can borrow directly from the Fed, essentially free. Because banks are in the business of making money from money, they use the Fed’s money to make more money by trading with it, investing it in government debt and pocketing the profit or by lending it out at wide spreads. ...No other business on the face of the earth gets its raw material so cheaply. No wonder bank profits have soared.
  • Wall Street’s traders and investment bankers...know – and have known for years, thanks to the Fed’s telegraphing of its quantitative easing program – that the Fed will be a continuing buyer of their risky securities at (ever-rising) market prices. Since the onset of Mr. Bernanke and Ms. Yellen’s policy, the Fed’s balance sheet has grown to $4.5 trillion, from around $800 billion before the crisis. That’s a whole lot of securities bought at high, profitable prices and paid directly to Wall Street traders. The Fed might as well have been paying the traders’ seven-figure bonuses directly.
  • The Fed’s low-interest rate policies have also been a bonanza for Wall Street’s investment bankers – and their bonuses — as companies around the world race to raise debt capital at low rates. 
  • Private equity firms ... borrow money cheaply and leverage the billions of dollars in equity – said to be $3.5 trillion these days — to buy and sell companies. The buyout firms, and of course Wall Street, also get fees from all this deal activity. 

Meanwhile the little guys on fixed income get crushed by low interest rates:
...because they can’t get a return without taking an inordinate amount of risk, by either investing in the stock market, ...,or by “reaching for yield” by investing in risky debt securities that are increasingly overpriced. Either way, Ms. Yellen’s policies are crushing these 62 million American households. 

Monday, October 20, 2014

REPOST: Über succeeds where taxis fail

Saturday, April 14, 2012


Über succeeds where taxis fail

Almost all the everyday complaints about cabs trace back to bad regulation
Drivers won’t take you to the outer reaches of your metropolitan area? The regulated fares won’t let them charge you more to recover the cost of dead-heading back without a return customer. Cabs are poorly maintained? Blame restricted competition, and the inability to charge for better quality. Cabbies drive like maniacs? With high fixed costs for cars and gas, and no way to increase their earnings except by finding another fare, is it any wonder that they try to get from place to place as fast as possible?

Über is a better way to move assets to higher valued uses

Uber makes its money at least in part by alleviating these inefficiencies. In most places, “black car” or livery services are regulated differently, and more lightly, than taxis are. Though Uber has good reason not to say so, it’s basically turning livery services into cabs. The company is one step further removed from regulation, because it doesn’t run cars itself; it funnels passengers to existing services. “We’re sort of like an efficient lead-generation system for limo companies,” says Kalanick, “but with math involved.”

Predictably, the old technology asks the government to regulate the new technology
The commission has also launched a public fight against Uber. In January, Chairman Ron Linton declared that the service was “operating illegally” and personally led a “sting” operation, impounding the car of the unlucky driver who had dropped him off at the Mayflower hotel in front of a waiting reporter. Linton followed up with an op-ed in The Washington Post, insisting that Uber was unlawfully charging for time and distance. Uber’s defenders pointed out that D.C. limo regulations define “sedans” as “for-hire” cars that charge for service “on the basis of time and mileage.” Linton now says that

HT: Brock

Friday, October 17, 2014

What happens when Apple makes it easy to switch between carriers?

Price competition should become fierce.

A preinstalled data-only SIM card has been inserted into the $499 iPad Air 2, and allows users to change carriers at the tap of a finger. It's available in the U.S. on AT&T (NYSE:T), Sprint(NYSE:S) and T Mobile (TMUS), and in the U.K. on EE. Consumers can buy short-term data plans and can switch between the carriers to find the best deal.

Wednesday, October 15, 2014

Should Tennessee fund venture capital?

Not unless they can do it better than the millions of people who already do this for a living.

Equally direct, when asked about TNInvestco 2.0, Vanderbilt University economist Luke Froeb, who is on the faculty of the Owen Graduate School of Management, said venture investment such as that discussed here should be left to the marketplace, without State involvement. He then pointed us, once again, to his earlier comments regarding what he has termed TNInvestco's "perverse incentives" for fund managers.

In fact, if they had to do it, don't you think they should have mimicked the way that investors fund VC?  Here is a REPOST on the peculiar way that they chose to do it last time.

Monday, September 10, 2012


Perverse incentives in TN state funded investment

The state is auditing the its venture capital fund, which awards $20 Million ($25 M in future tax credits are worth about $20 M today), and then asks fund managers to invest  in early stage ventures.  After the investment pays out, the state and the managers split whatever remains.

Proponents of the program say it was an innovative attempt to steer venture capital toward economic development priorities like health care, bioscience, music and other sectors. As the Business Journal reports today, some Republicans are questioning the program’s job creation so far and want to evaluate other aspects of its financial performance.


Any audit should first understand the incentives.  To do this, lets run through some scenarios.  This is what is called a "sensitivity analysis."

 Compare the (very approximate) terms of a typical Venture Capitalist (VC) to those of TNInvestco under the following scenarios:
  • Scenario A:  Good Scenario (Invest $20 million, sell investments for $50 million)
    • TNinvestco gets $25 million, State gets $25 million
    • Typical VC gets $6 million, investor gets $44 million

  • Scenario B:  Break-even Scenario (Invest $20 million, sell investments for $20 million)
    • TNInvestco gets $10 million, State gets $10 million
    • Typical VC gets zilch, investor gets $20 million

  • Scenario C:  Worse-case Scenario (Invest $20 million, sell investments for $10 million)
    •  TNInvestco gets $5 million, State gets $5 million
    • Typical VC gets zilch, investor gets $10 million
The key thing to note is that the typical VC is makes nothing (other than management fees) unless a fund makes money for investors.  This serves to align the fund manager's incentives with the profitability goals of the fund investors.

In contrast, a TNInvestco fund manager makes a substantial amount unless the fund is a total failure.  

Bottom line, TNInvestco creates incentives for the managers to not lose money, as opposed to the high level of risk taking that is typical to venture capital.  One would expect safer investments. 

Stay tuned for what the audit uncovers.


If you pay people who are unemployed, ...

... you get more unemployment.  From the St Louis Fed:

Longer benefits may reduce unemployed workers’ job search efforts, decreasing their likelihood of becoming reemployed.

BOTTOM LINE:  Every recession since 1950 has included an emergency response from Congress to increase unemployment benefits.  The good news is that the perverse incentives of the program seem small, increasing unemployment rate only a small fraction.

Friday, October 10, 2014

How can a country decrease exports?

by strengthening their currency:

Whenever the ruble moves to the weak end of the trading band, the central bank begins selling dollars and euros to cushion the currency’s decline. It automatically moves the band by 5 kopecks, or hundredths of a ruble, once an intervention allotment of $350 million is exhausted.

To combat the falling ruble, the Russia is raising interest rates, but.... 

While higher interest rates would reduce pressure on the ruble by making assets denominated in the currency more appealing, that isn’t expected to be enough to offset the impact of strong domestic demand for hard currencies. Since the West imposed sanctions against Russia, domestic banks and companies have had increasingly limited access to external borrowing, yet they still need to repay more than $47 billion in foreign debt. 
As a result, both lenders and other firms are buying dollars and euros on the Russian market.

How can a country increase exports?

Countries with strong currencies, face reduced demand for their exports:

“I would not want to be in machine tools in Germany at the moment,” said Adam Posen, president of the Peterson Institute for International Economics and a former Bank of England official. “I would not want to be in ship building in South Korea.”




The feeble recovery is tempting countries to weaken their currencies (by printing money):

European Central Bank President Mario Draghi has praised the euro’s decline, an indication to investors that a weaker currency is a key ECB policy objective. Bank of Japan governor Haruhiko Kuroda made similar remarks about the yen’s value. South Korea and China have come under fire for keeping their currencies lower than levels many economists say would reflect fair market values.

But this works only if you are the only country doing it.  If rivals also weaken their currencies, the net effect is zero, a type of prisoners' dilemma.

Top finance officials trying to talk down the value of their exchange rates have resurrected warnings of a global currency war. Such tit-for-tat devaluations tend to create short-term growth at other countries’ expense.

Monday, October 6, 2014

Saving Endangered Species by Hunting Them

While the scimitar-horned oryx was declared extinct in the wild in 2000, they have thrived in captivity in Texas.
By any measure, those gains have been impressive. In 1979, according to the Texas-based Exotic Wildlife Association, there were 32 scimitar-horned oryx in a captive breeding program in Texas; today there are more than 11,000. Only two addax were known to exist in the state in 1971; today there are more than 5,000. And the number of dama gazelle has increased from nine individuals in 1979 to more than 800 today.

This was accomplished because an exemption from the Endangered Species Act allowed reserves to offer hunting packages so that sportsmen could hunt the animals. This gave reserves a profit opportunity related to conserving the animals. But after protracted court battles, this exemption was drastically curtailed in 2012.
Without the unfettered ability to hunt, breed and trade these animals, ranchers say they will lose the economic incentive to maintain the herds, and whatever gains have been made in restoring their numbers will be lost.

The prospect of the implementation of the new rules led ranchers to escalate hunts before the market evaporated. Fortunately, clearer heads have prevailed and the exemption has been reinstated. Poachers have an incentive to kill off an entire herd because they have no claim to the offspring the herd produces next year. In contrast, no rancher kills off a herd precisely because it is even more valuable next year.

Hat tip: Richard Carroll

Beware the Cobra Effect

Does free contraception reduce pregnancy?

A natural experiment suggests that the answer is "yes"


An experiment conducted in St Louis provided 1404 girls aged between 14 and 19 with free contraceptive advice and free long-acting contraceptive devices ... The comparison group was that of similar girls in the rest of the United States who were not included in the experiment. 
The researchers found that, by giving both free advice and free contraceptives, the rates of pregnancy, live birth and induced abortion declined precipitously by comparison with national averages. ... On the face of it, the experiment was a triumphant success.

Until you look a little closer at how the experimental group was "selected":

The young girls were drawn from those who resided in St Louis or sought contraceptive services in selected community clinics, and furthermore had no desire for pregnancy for at least 12 months. These girls, then, were a self-selected group...

BOTTOM LINE:  the observed different between the groups is the sum of the "treatment" effect (the effect of the contraception) and the "selection" effect (that girls less likely to get pregnant were in the experimental group).  This is why randomized experiments are so much easier to interpret.   

Saturday, October 4, 2014

REPOST: bundling architecture and art

Sunday, June 19, 2011


Museum Bundling

Stockholm's Moderna Museet (modern art museum) and the Arkitekturmuseet (architecture museum) share a building and, therefore, share a pricing plan. The first cost 100 krona and the second cost 60 krona, but the combination cost 140 krona.



















I suspect most modern art fans are less enthusiastic about architecture and most architecture aficionados are less interested in modern art. For both groups, the profit-maximizing price for their first choice is greater than the profit-maximizing price for their second choice (adjusting for the apparent preference for modern art). That is, you would like to price discriminate between consumers' first choices and their second choices. But people rarely tell you which one they came for. With bundle pricing, they don't have to. So long as you are willing to take the same discount for both (20 krona in this case), they will self-select into the appropriate ticket purchase.

Mathematically, the increased sales from reducing the price on the second ticket has to more than make up for the lower margin. But this would be true since demand is usually more elastic for the second choice.

We can model pure bundling using a simple demand structure.  Suppose your marketing director surveyed consumers and estimated the following demand structure (values):


                                     Art Museum  Architecture museum
Art afficionados                     100                       40
Architecture afficionados          40                     100


If the cost of serving a customer is zero, the museums make more money by offering only a bundle (what price should they charge) than they do by pricing separately.  Verify this for yourself.

The reason is that you make consumers more homogeneous by bundling so you can extract their consumers surplus with a single price.  

Friday, October 3, 2014

Why doesn't insurance cover floods, earthquakes or bed bugs?

Planet Money has another episode that is making me rethink my opposition to government subsidies for public broadcasting.  In The Fine Print, a reporter reads his homeowner's insurance policy.  In it, he discovers that the policy does not pay for:

  • Floods: because floods hit all the homeowners in an area at the same time, so insurers cannot spread the risk around (called "correlated risk");
  • Earthquakes:  due to adverse selection (only the homeowner knows if she built on an active fault); and 
  • Bedbugs:  due to moral hazard (if you knew you were covered for bedbugs, you could pick up furniture off the street without any worry).  

Thursday, October 2, 2014

Why are health costs so high?

Because Medicare pays for drugs like Sipuleucel-T that extend life 4.1 months for patients with advanced cancer at a cost of $100,000

How many people would buy this drug if they had to pay for it themselves?

Wednesday, October 1, 2014

Risk Off: stock market drops 1% as investors dump risky stocks

Investors behaved as if the world had all of a sudden become more risky:

Traders said large fund managers and institutions were selling riskier investments like stocks, and fleeing into the relative safety of government bonds. Many of those investors were initially optimistic about the fourth-quarter outlook for stocks, traders said, but were changing course after weak economic data from the U.S. and Europe. Sectors seen as growth-sensitive posted sharp declines, with materials dropping 2.3% and industrials shedding 1.9%. Utilities stocks, seen as a defensive bet, climbed 0.9%.

See our past post on risk on vs. risk off trading

How does Health Spring make money?

Founder Herb Fritch explains that it is all about aligning the incentives of physicians with the goals of payers using narrow networks (to increase bargaining power), physician incentives (to reduce costs), and a disease management registry (to guide physician behavior):

On narrow networks:
We stuck with the more restrictive HMO models, even though with the higher payments, it was certainly possible to do less restrictive PPO or private fee-for-service kinds of plans. We have always taken the view that at the end of the day, the fee-for-service system costs too much and we need to be able to deliver care where the beneficiary can get an incentive to join a more structured program. But the government needs to share in some of those savings, too, and we have to be prepared ultimately to get paid at FFS Medicare rates and to share savings with the government and the beneficiary.

On physician incentives:
We organize doctors into delivery systems, typically around a hospital. They are doctors that refer to each other routinely anyway. ... We share risk on a targeted budget that is based on a percentage of the premium we collect, so there’s a shared savings based on economics and performance. 

On disease management registry:
 We also have a disease management registry tool that makes the doctor aware of which patients are due for a visit and what they need. You can actually look at the diabetics who haven’t been in for a visit and be proactive in making sure they come in and get the screenings that they should have. ...

We believe that when chronic disease is managed appropriately we can measure reductions in emergency room visits and hospitals admissions at the same time. That’s ultimately the payoff.

Why is Alibaba worth $162B?

Because it moves assets to higher valued uses, from B2B.

Planet Money has another episode that is making me rethink my opposition to subsidies for Public Radio.

One thing I like about the podcast is the description of how business used to be done in China, with drinking and karaoke, as a solution to the problem of adverse selection.