Wednesday, September 30, 2015

Strong dollar hurts US exports

In 2010, President Obama set a goal of doubling exports in five years. Now it looks like we are not going to make it:
U.S. exports are on track to decline this year for the first time since the financial crisis, undermining a national push to boost shipments abroad. Through July, exports of goods and services were down 3.5% compared with the same period last year. New data released Tuesday by the Commerce Department showed that exports of U.S. goods sank a seasonally adjusted 3.2% in August to their lowest level in years.

But what is bad news for producers, is good news for consumers:
As unemployment has declined, American consumers have reasserted their dominant role in driving economic growth.

And with the Fed set to raise interest rates, it is likely that the dollar will get even stronger:
Fed Vice Chairman Stanley Fischer in August said it was “plausible to think that the rise in the dollar over the past year would restrain growth…through 2016 and perhaps into 2017.” If the Fed begins to raise short-term interest rates later this year, that could provide new fuel to push the dollar’s value even higher.

Tuesday, September 29, 2015

Shell Pulls Out of the Arctic

A big story this week is that Royal Dutch Shell will cease exploration in the arctic. Reportedly, they had invested in $7 billion in the effort but the prospects don't look so good now after disappointing results, a fall in the price of oil, and increased uncertainty over environmental regulations. The important lesson that Shell recognized is that a $7 billion sunk cost is still a sunk cost.

Why do inmates tattoo their faces?

The answer from our friends at, where they analyze signaling as a solution to the problem of adverse selection.

Take the quiz at the end of the video to figure out the answer to the question in the blog post.

Friday, September 18, 2015

What Exactly Does Snapshot Measure?

Here is a fuller expose of Progressive Insurance's Snapshot.We love this example of monitoring potential moral hazard through driving behavior. People are expected to drive better if they benefit from policy discounts from good driving (or is it reducing the "beep-beep" nagging by the device?). But it turns out just two practices trigger the nagging: hard braking and driving in the wee hours.

Hat tip: Isaac Labauve

Lessons from NUMMI

"This American Life" did an episode on the 1980s collaboration between GM and Toyota at the plant in Freemont, CA called NUMMI. This plant had been failing and the Japanese were the biggest threat to the American Automakers. What could GM learn from Japan? There are a number of lessons from the experience and the episode. One has to do with where to vest decision rights to shut down the production line. Another is that imitation is particularly difficult (RBV?). Perhaps another is that it takes generational change or, as my adviser repeated, "Real change comes one funeral at a time."

Hat tip: Isaac Labauve

Sunday, September 13, 2015

Shiller calls "bubble"

Robert Shiller has successfully called "bubble" twice before, in 2006 on the housing market, and in 1996 on the stock market.  Now he has called "bubble" on the stock market, based largely on his famous P/E ratio [Price/Earnings] graph, reproduced above (since June, it has come down a little).
“It looks to me a bit like a bubble again with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market,” he said.

Of course, not even Shiller can predict when the alleged bubble will pop. He was a year early on the 2007 housing bubble bursting, and 3 years early on the 2000 stock market bubble.  Unlike a lot of economists, Shiller is willing to admit he has no idea when it will pop, if indeed it it a bubble:
... [Shiller] made clear that it remained impossible to time any fall in the market, and cast doubt on whether stocks would drop should the Federal Reserve raise rates later this week.

Thursday, September 10, 2015

Supremes take on FDR's raisin cartel...

...and win:
Here's a concrete example. In 2003–04, the RAC demanded 30 percent of the crop, which amounted to more than 89,000 tons of raisins. It gave away 2,312 tons to school lunch and other government programs and it sold 86,732 tons for export. The RAC pocketed $111,242,849 from that sale, or $1,249.30 per ton. It then spent all of the proceeds on its own operations. In return, raisin growers got nothing.

From the feds' point of view, this might make sense. Raisins are kept off the domestic market, prices are tightly controlled, and a government agency makes a few bucks along the way. But there's a major problem with the government's approach. According to the Fifth Amendment to the U.S. Constitution, the government must pay just compensation when it takes private property for a public use. And as far as Marvin and Laura Horne were concerned, the raisin marketing order was nothing less than an uncompensated taking of their valuable property. "It was a theft," Marvin Horne told Reason TV in July 2013. "The reserve was nothing but highway robbery."
Justice Kagan seemed to understand this:
"Mr. Palmore," asked Justice Elena Kagan, "would anything be wrong—with a—with a disposition of this Court that went something like this: Everybody agrees that this is not a jurisdictional issue, including the government, so [the 9th Circuit] got that wrong....And now the 9th Circuit can go and try to figure out whether this marketing order is a taking or it's just the world's most outdated law."

HT:  Larry

Wednesday, September 9, 2015

Breaking the Taxi Monoply

How fast do profits erode once the entry barrier to Uber is lifted? Enough to dissipate one-third of the value of operating a cab in New York in just two years.

Hat tip: Mark J. Perry

Saturday, September 5, 2015

What's the marginal incentive to commit murder in Taiwan?

In Taiwan, "hit to kill" or "double hit" cases have been common for decades.  For example,
A 2008 television report features security camera footage of a dusty white Passat reversing at high speed and smashing into a 64-year-old grandmother. The Passat’s back wheels bounce up over her head and body. The driver, Zhao Xiao Cheng, stops the car for a moment then hits the gas, causing his front wheels to roll over the woman. Then Zhao shifts into drive, wheels grinding the woman into the pavement. Zhao is not done. Twice more he shifts back and forth between drive and reverse, each time thudding over the grandmother’s body. He then speeds away from her corpse.

This phenomenon is caused by the incentives facing a driver:
In China the compensation for killing a victim in a traffic accident is relatively small—amounts typically range from $30,000 to $50,000—and once payment is made, the matter is over. By contrast, paying for lifetime care for a disabled survivor can run into the millions.

In other words, once you hit a pedestrian, the marginal benefit of killing the pedestrian is positive.

Tuesday, September 1, 2015

Is the farm bubble about to burst?

Yes, according to Nashville's own Tom Landstreet:

We’re at the beginning of a multi year retrenchment (collapse in prices) in the agriculture sector. As my clients know, I think the entire agriculture commodity complex is in a historic bubble that was single handedly driven by the corn ethanol mandate, a policy that diverted 40% of the corn crop away from the food supply. Add in the nasty 2012 drought and you have an unprecedented bubble in the sector.

Remember that a bubble is a price movement not explainable by the ordinary forces of supply and demand.  I would explain the movement in prices in the graph above by noting that the original ethanol mandates in gasoline drove up corn prices, and then prices for farm land.  If these increasing prices cause buyers and sellers to form expectations that prices will continue to rise, these expectations can become self fulfilling if buyers accelerate purchases, and sellers delay sales, to take advantage of the expected price increases.

The so called "bubble" pops when prices deviate from their long run value, and enough market participants suspect that the prices are no longer supported by fundamentals of demand and supply.