Thursday, July 28, 2016

Why are interest rates negative?

The simple explanation is that the supply of loans (savings) is so big, and the demand for loans (investment) is so small, that the price that equates supply and demand (the interest rate), is negative.  
Japan was the first to reach negative rates, and has three distinctive characteristics:
1. A high saving East Asian culture.
2. A mature, fully developed economy.
3. A population that leveled off, and is now falling. 
Only one of the three applies to China, but in the future all three may apply. If 1.4 billion Chinese become rich, and keep saving a large share of their incomes. I'm not certain there are enough productive investment opportunities to absorb all that saving, at least at the sort of rates of return that we are used to. In my view, the growing Asia-fication of the global economy may put further downward pressure on interest rates over time.
For an alternate explanation see Tyler Cowen's article in Bloomberg.

Friday, July 22, 2016

Bad news from California

We have blogged before about the problems of public defined-benefit pension plans:
the use of higher-than-appropriate discount rates (e.g., 7.5%) reduces the value of the pension obligations that is reported to the public, and thus likely reduces the contributions that sponsors feel they must make to pre-fund their pension obligations.

 If the pension fun earns 7.5%, then it will have enough to pay out to retirees when they retire.  However, if they earn less, then there will not be enough money to go around.

Calpers, one of the biggest defined-benefit pension funds in the world has reported that it is earning much less than than the discount rate they use to compute the present value of pension obligations:
California’s pension fund for most public employees—reported abysmal annual earnings of 0.61 percent, a tiny fraction of the seven-and-a-half percent annual returns needed to keep it solvent over the long run.

Monday, July 18, 2016

Friday, July 15, 2016

Are online travel sites arbitraging away gains from hotel price discrimination?

I glean from this Marketplace story that this may be the case. Hotels tend to charge many different rates for the same room to take advantage of huge variation in the demand elasticity across different groups of consumers. Moreover, you can book a room directly with a big chain hotel or you can book the same room through arrangements they make with online travel sites. But by outsourcing the booking to an online travel site, the hotel loses some of its ability to charge different prices. It would be poor public relations to come out and say, "these guys keep us from charging high prices to some of our preferred customers." But these quotes suggest that the online sites are allowing inelastic customers to get prices aimed at more elastic customers.
“They've just shifted business that might have come in direct to the hotel or to some other channel,” she [Estes Green from Kalibri Labs] said."
Hilton’s chief marketing officer, Geraldine Calpin, said skirting commissions to travel sites “was not the intent of the strategy,” which she said was more focused on better anticipating and serving guests’ needs. That's easier to do when they book directly through Hilton. 
“If you're booking through a third-party site we know less about you,” she said. 

Usually, a price discriminator must vertically integrate into the low-priced, elastic portion of the market to prevent arbitrage. Instead, hotels tend to serve the more loyal, high-priced, inelastic portion through their own website. It will be interesting to see how this is resolved.

Verizon's demand became less elastic

Verizon is raising prices for most services. About three years ago, the smaller carriers, led by T-Mobile, started removing contract restrictions and introduced discounts. The bigger carriers, Verizon and at&t, followed them to some extent. But things seem to be settling down to where customers switch less often.
"Wireless phone buyers have gone into their typical hibernation mode, while they wait for the new iPhone release," Mr. Moffett said. "Switching activity has slowed to a crawl. It's the ideal time to raise rates." 

With less elastic demand, the desired markup rises.

Tuesday, July 12, 2016

Is this due to the minimum wage?

A Forbes Columnist opines on the spike in teenage black unemployment:
Today black teen unemployment is more than 40 percent; nearly double that for white teens. In 2007, prior to the Great Recession, the black teen unemployment rate was about 29 percent. There is no doubt the increase in the federal minimum wage from $5.15 to $7.25 per hour contributed to the higher unemployment rate. If Congress passes a new minimum wage law that makes it illegal for employers to pay less than $9 per hour, and for workers to accept less than that amount, we can expect further erosion of the market for unskilled workers, especially black teens.

 Sure, we can look to other pieces of research that say that the effects are modest, or that they’re worth it, but even that research still tells us that the negative effects are going to be concentrated down onto teens and more especially black teens. There’s more in two NBER papers for those who want more detail.

My basic objection to a minimum wage at any level (yes, I do think it should be $0 an hour) is that whatever the bad effects upon employment those effects are inevitably going to be visited upon those already being shafted by the current set up of society: those black teens. As they are being and is this really the time to be making them even worse off?

Monday, July 11, 2016

What happens when you allow residents to veto new building plans?

To answer this question, look at Sweden, with a constitutional law that allows municipalities to veto building plans. We have blogged about the politics of restrictive zoning that reduces supply and drives up housing prices, transferring profit from renters and would-be homeowners to existing homeowners.

 While average price of a house in the European Union increased 3.8 percent during 2015, in Sweden the figure was a huge 14.2 percent, putting the country top of a new table looking at property price hikes. Hungary (10.3 percent) and the United Kingdom (7.1 percent) were in second and third place.

Transfer pricing to avoid taxes

Facebook moves its intellectual property (IP) to Ireland in 2010:
That year, Facebook shifted the global rights for many of its intangible assets -- outside the U.S. and Canada -- to a subsidiary in low-tax Ireland. The IRS claims that, for tax purposes, the company understated the value of those assets by billions of dollars.
If a company transfers IP to a low tax jurisdiction, then it can charge subsidiaries in high-tax jurisdictions, like the US, a fee for using the IP, and thus shift profits to the lower-tax jurisdiction.