Monday, August 31, 2015

How many Economists does it take to respond to a natural disaster?

None, the market will do it; unless the Mississippi State Attorney General gets in the way.


Auctions versus Posted Price

The Economist is reporting that auctions are no longer the main way items are sold on Ebay. Current research indicates that only a fraction of this decline can be explained by a product mix moving toward more mass-produced items or to more professional sellers. The conjecture is that the higher hassle costs, including sniping, are driving buyers to fixed price offers.

Thursday, August 27, 2015

China liquidates US treasuries to support yuan

Running a trade surplus makes your currency stronger, and in the graph below, we see the yuan appreciating relative to the dollar, from rom over 8 to the dollar, to only 6.5.  It would have appreciated faster, but the Chinese government has been buying buying treasuries to slow appreciation, which makes their exports cheaper than they would have been, which helps Chinese companies and employment (but hurts Chinese consumers).

A few weeks ago, the Chinese government's decided on a sudden depreciation the yuan (back down to 6.5 to the dollar) to stimulate their domestic economy.  You can see this in the small spike at the far right of the graph.  But now the Chinese government has decided that the currency fell too far, and has been selling treasuries to support the yuan.

The clear takeaway is that there's a substantial amount of upward pressure building for UST (US Treasury) yields and that is a decisively undesirable situation for the Fed [Federal Reserve] to find itself in going into September.

If the Chinese sell treasuries (borrowing by the US government), this puts downward pressure on treasury prices, and upward pressure on yields.  If US treasury yields rise, the cost of borrowing increases, and the government (and private borrowers) will face a higher cost of capital.  The dollar will also appreciate.  All of these effects will hurt US companies (and employment).

The interactions between markets (foreign exchange, domestic unemployment, domestic interest rates) is the hallmark of macroeconomics.  Microeconomics typically focusses on only one market at a time.

Thursday, August 20, 2015

PUZZLE: Graduate students are only 14% of total; but account for 40% of debt

WSJ has the answer:  moral hazard

Propelling the surge in grad-school debt is a welter of federal programs that make it easy for students to borrow large amounts, then to have substantial chunks of those debts eventually forgiven. Critics of the system say it makes it easier for graduate schools to raise tuition, and for some high-earning graduates such as doctors to escape debts they can afford to repay.

But why don't we see this at the undergraduate level?

Federal programs allow grad students to borrow essentially unlimited amounts—whatever their schools charge—while requiring only a scant credit check and no assessment of their ability to repay. Other government loan programs, such as those for undergraduate students and home buyers, set loan limits to prevent borrowers from getting too deep into debt. Undergraduates are capped at $57,500 total in federal loans.


Tuesday, August 18, 2015

PUZZLE: why do unions want the flexibility to opt out of minimum wage laws?

The answer comes straight out of strategy:
...unions could advise companies that if they agree to labor representation, they can avoid paying the minimum wage, spending less on wages overall. The strategy could let unions bolster their ranks at a time when union membership is falling, ...

This flexibility gives unions an advantage over non-unionized competitors, who must be hired at the minimum wage.

MAXIM:  Make the rules or your rivals will.

Tuesday, August 11, 2015

CEO of Wendy's weighs in on Nashville mayoral race...

...albeit indirectly. On last week’s call with securities analysts, Wendy’s CEO Emil Brolick was asked how he will respond to minimum wage hikes, like that proposed by Megan Barry, one of the two Nashville Mayoral Candidates in a runoff:
“our franchisees will likely look at the opportunity to reduce overall staff, look at the opportunity to certainly reduce hours and any other cost reduction opportunities, not just price. You know there are some people out there who naively say that these wages can simply be passed along in terms of price increases. I don’t think that the average franchisee believes that.”

Mr. Brolick elaborated that “we believe that some of these increases will clearly end up hurting the people that they are intended to help."

BLOGGING DISCLOSURE:  I am supporting the other candidate, David Fox, and his wife is a former student.

Opening shot fired in currency war?

China's unexpected devaluation of its currency lead to a decline in world wide stocks, global commodity prices, and and increase in US bond prices.  This could be the opening salvo in a long and expensive currency war:
One reason is that it raises fears of a more intense and destabilising currency war — the trend for countries to use a weaker exchange rate rather than supply-side efficiencies — to bolster exports. ... 
Tuesday’s PBoC move followed the release of weak trade data over the weekend that showed exports tumbled 8.3 per cent in July from a year earlier.

Sunday, August 9, 2015

Film premiere: India awakes

We have blogged about the renaissance in India, driven by the institutions of capitalism: markets, free trade, private property, and de-regulation. Now the good people at CATO have a documentary about it.

Documentary Preview and Discussion
Friday, August 14, 2015
12:00 – 1:30PM

Featuring Johan Norberg, Film host and Senior Fellow, Cato Institute. Moderated by Ian Vasquez, Director, Center for Global Liberty and Prosperity, Cato Institute.

For many centuries, only the politically connected and elite prospered in India, while the rest of the population lived in poverty. Since 1991, however, 250 million people have been lifted out of poverty and are finding new ways of unlocking their potential. India Awakes explores an inherited British bureaucracy, which created layers of rules and regulations, and it shows how globalization and economic liberalization are leading to social change. Join us to see a segment of the documentary from the Free to Choose Network. Film host Johan Norberg will discuss how individuals from different parts of India are breaking down the centuries-old caste system through new opportunities, entrepreneurship, and by obtaining property and other legal rights.

Friday, August 7, 2015

What will happen if Nashville introduces a $15 minimum wage?

Snopes reports that McDonald's is exploring the use of kiosks in its stores for the following reasons:

Fast food chains are exploring new ways for customers to order their meals without having to interact with a cashier. Labor costs are rising and consumers are demanding ever faster, more convenient service. At McDonald’s, self-service kiosks are popping up in restaurants in the U.S. after the burger chain saw some success with the machines overseas.
If an increase in minimum wage leads to "rising" labor costs, then we can expect to see more of this in cities that increase the minimum wage.  

Megan Barry, one of Nashville's mayoral candidates, has called for an increase in the Nashville minimum wage.  If fast food restaurants respond to the incentives created by the higher labor costs, we can expect to see fewer entry level jobs, as firms replace more costly labor with cheaper alternatives.  Even Democrat Warren Buffet thinks that a $15 minimum wage would crush employment.

Thursday, August 6, 2015

Repost: Avoid Bureaucratese

Repost: avoid bureaucratese

There is a temptation, especially when you have nothing substantive to say, to write in the passive voice, using big words, and ponderous prose.  If you notice these tendencies in yourself, you are probably OK.  But if you don't, you may be speaking in what Alfred Kahn calls "bureaucratese." 
Although Kahn is most remembered for deregulating the airlines industry, Vanderbilt students know him through his essay,My War Against Bureaucratese," the gobbledygook written by government bureaucrats designed to hide what they are really doing.  Here are a few of his most salient points:
  • “Every time you’re tempted to use ‘herein’ or ‘hereinabout’ or ‘hereinunder’ or, similarly, ‘therein,’ thereinabove’ or ‘thereinunder,” and the corresponding variants, try ‘here’ or ‘there’ or ‘above’ or ‘below,’ and see if it doesn’t make just as much sense.”
  • “The passive voice is wildly overused in government writing. Typically its purpose is to conceal information. One is less likely to be jailed if one says, ‘He was hit by a stone,’ than if he says, ‘I hit him with a stone.’ The active voice is far more forthright, direct, humane.”
  • The use of ‘presently’ to mean ‘now’ is another pomposity. If you mean ‘now,’ why don’t you say ‘now’?
  • “Why use ‘regarding’ or ‘concerning’ or ‘with regard to’ when the simple word ‘about’ would do just as well? Unless you’re trying to impress somebody. But are you sure you want to impress anybody who would be impressed by such circumlocutions?
  • “Outreach makes me upchuck.” Sometimes the demands of pomposity and dynamism converge—as in using “input” as a verb, “specifics” for “details” and constantly “implementing” things and “addressing issues.”
Professor Kahn began this war as part of his successful effort to deregulate the airline industry. He is the hero of Thomas McCraw's Pulitzer Prize Winning book Prophets of Regulation. Interestingly, the villain of the book is Louis Brandeis for his role in creating the FTC.

Former colleague Mike Shor's MBA Writer puts phrases from student memos together to generate sentences that sound all too familiar.
To proactively manage profit, our key initiative objective pushes the envelope toward systematized reciprocal capability.

Enabling continuity, enterprise optimization accelerates the movement towards third-generation contingencies.

Wednesday, August 5, 2015

Econ humor is not oxymoronic

"I've spent too much energy combating the sunk cost fallacy to give up now."

Gig economy aligns incentives, shifts risk, but is more rewarding

A host of applications like Uber,, and Airbnb are replacing lifetime employment on a salary with contractors who must bid for jobs and build reputations for quality service based on immediate feedback by customers:
The gig economy is only part of a shift in employment over the past three decades, unleashed by technology and global trade. It has created many winners and losers, both by outsourcing jobs from the west to Asia and Africa, and by changing the terms on which most people work. Financial and contractual risk that used to be borne by companies has been transferred to employees.

This change better aligns incentives of firms (contractors) with the goals of consumers (lower price, higher quality), but it also exposes contractors to more risk, for which they must be compensated.  However, the benefits of being self employed seem to far outweigh any risk premium:

More self-employed people in Europe and the US report enjoying their jobs than those who are employed. Many entrepreneurs, even those who run a tiny business that amounts to self-employment, like their freedom and self-reliance and the possibility that they could become wealthy.

...which is reflected in falling compensation:

...the average income from self-employment fell 22 per cent in the UK between 2009 and 2014, even as self-employment contributed 732,000 of the 1.1m rise in total employment.

Monday, August 3, 2015

Two-sided hold-up

In the investment's chapter, we talk about the problem of post-investment hold-up.  After a firm makes sunk-cost investments, it becomes vulnerable to post-investment hold up by its trading partners.  A variety of solutions are available to address the problem of hold-up, including litigation.

The antitrust laws have been moving recently to address the problem of hold-up by adopting rules that shift bargaining power from innovators (who develop intellectual property that is implemented in a standard, like 4G LTE) to implementors (who license patents necessary to use the standard).

In this paper, two economists point out that the problem is really two-sided,
Concerns expressed regarding the potential for patent hold-up are generally one-sided, focusing on the incentives of the implementers of the technology while generally ignoring the incentives of innovators to create the technology in the first place. 7 Such analysis takes the level of innovation as given, so that the only possible harm to competition is through the implementer’s decision to invest. The underlying incentive problem, however, is two-sided because an innovator’s incentives to engage in significant R&D may also be distorted by well-intentioned actions taken to correct the potential hold-up problem.
But one of the hold-up problems--the innovator's--is relatively easy to solve, via negotiations that occur prior to the implementer’s investment in the standard.  In contrast, negotiations always occur after the innovator’s investment in R&D is sunk.  Consequently, shifting bargaining power to the implementor exacerbates the risk of under-investment:

The reason is that innovators and implementers can and do bargain prior to the implementer’s adoption of and investment in a standard and courts impose such “hypothetical” bargaining when determining royalties. Therefore, the implementer’s efficient investment, which benefits both parties, is an essential part of these deliberations. However, bargaining does not occur prior to the innovator’s investment in R&D. In fact, all such “ex ante” bargaining occurs after these investments are sunk. Curtailing injunctive relief and basing royalties on the smallest salable component both pose the risk of under-rewarding innovators for their investments. This is likely to retard innovation, reduce incentives to participate in standards, and reduce economic welfare

Sunday, August 2, 2015

A populist Pope critiques capitalism

The Pope is in the news recently for his critique of capitalism.
Just as the commandment “Thou shalt not kill” sets a clear limit in order to safeguard the value of human life, today we also have to say “thou shalt not” to an economy of exclusion and inequality. Such an economy kills.
It is hard to take this criticism seriously, especially when we consider the alternative:  the Pope grew up a Peronist from his early days of Argentina, a populist movement responsible for the wreckage of millions of lives in the name of “inclusion.” Here is an historical perspective:
How did a Christian country, with a European population, a negligible racial problem, and enormous natural and agricultural wealth screw up? How did a country with a liberal constitution cycle in and out of dictatorship? How did a country that was the fourth-richest per capita on the planet in 1929 fall so hard? How is it that Argentina regularly cycles between enormous first-world wealth and third-world economic collapse? 
The answer, in a word, is government. Argentina is a frightening example to prove that bad government can destroy even a potential heaven on earth.

And here is a more recent critique:
It boils down to the basic concept of spending more money than you can make, and cutting off long-term sources of potential financing in order to make short term ends meet. Businesses have been fleeing Argentina since 2010 due to impossibly high taxes, the inability to repatriate gains, and the inability to acquire imported inputs. Agriculture exporters hoard their products rather than fork over ungodly sums to the government. Foreign investors sit on the sidelines waiting for something to break, and Argentina has to pay extremely high interest rates to lenders.

The interesting aspect of this kind of populist critique linkage it creates between politics and economics:  Argentina seems caught in a cycle between populism==>economic collapse==>dictatorship, ... .