White House Is Taking On NIMBYs With New Zoning Proposals

Good for the President for taking this on, as this splits his coalition by pitting the “open space” and “anti-development” crowd against their “forgotten” or invisible victims, i.e., renters and would-be homeowners.  A more self interested politician would support keeping the zoning laws in place as they enrich homeowners and landlords, in addition to keeping out out new development.  

In this respect, we are much more enlightened than the Swedes, who not only have much more restrictive zoning (What happens when you allow residents to veto new building plans?) but also allow politicians to jump to the front of an 8-year queue for “affordable housing.”   

According to the Aftonbladet daily, Foreign Minister Margot Wallström was one of the left's "high-profile figures" who in deference to their positions were rented apartments in the Swedish capital, bypassing a wait of on average eight years like ordinary renters

Is talk cheap?: Prediction markets vs. Polls

LA Times Poll shows Trump in the lead

Iowa Electronic Market shows Clinton with a 72% chance of winning the election

The Marginal Oil Producer Happens to be in Kansas

The Planet Money team recently set out to see who sets the price of oil. They found out that it was not some financial speculator or an arab sheik. Instead, the price is set by the cost of production at the most expensive well still operating.

So here is what sets the price of oil. You take all the oil people are buying today. Start at the end of the spectrum, where oil is cheapest to produce, and work your way up until you've satisfied all that demand. That last barrel you need, the most expensive one someone is willing to buy, that's the one that sets the global price for oil. If you're looking for someone who is setting the price, you look for someone who is just about to turn an oil well off or on.

In their case, they had bought oil from a Kansas pastor named Jason Bruns who had just decided to shut down a well on his property.

City Financed Stadiums

The citizens of the city of Arlington will soon vote on whether to increases taxas (0.5% sales, 2% hotel, 5% car rental) to subsidize the building of a new ballpark for the MLB Texas Rangers to the tune of $500 million. The concept looks beautiful.

This event affords a nice application of the indifference principle. The new venue will spur new development, offer new entertainment opportunities, and generate general positive amenities which will lead some people to want to move to Arlington. On the other hand, each of the current 140,000 households will be on the hook for an average of ~$3,500 in new taxes over the next few decades which will encourage some out-migration. If the former outweighs the later, leading to a net migratory influx, more home buyers should bid up housing prices. If not, house prices should fall.

The experience with Jerry World might be informative. My research on Arlington taxing itself to subsidize AT&T Stadium in the amount of $350 million finds that this event led housing prices to fall in Arlington relative to neighboring cities. The cost of the tax outweighed any benefits. Moreover, the total housing stock fell in value by ... wait for it ... $350 million.

Public pensions keep two sets of books

Guess which one they disclose?

The market-based numbers are “close to the truth of the liability,” Professor Sharpe said. But most elected officials want the smaller numbers, and actuaries provide what their clients want. “Somebody just should have stopped this whole charade,” he said. For years, people have been trying to do just that. 

In 2003, the Society of Actuaries, a respected professional body, devoted most of its annual meeting to what was called “the Great Controversy” — the notion that the actuarial standards for pensions were fundamentally flawed, causing systemic underfunding and setting up a slow-moving train wreck when baby boomers retired. It drew a standing-room-only crowd.

So what is the biggest difference between the two methodologies?

The problem is, which rate should be used? An economist would say the right rate for Calpers is the one for a risk-free bond, like a Treasury bond, because public pensions in California are guaranteed by the state and therefore risk-free. And that’s what Calpers does when it calculates market values. It used 2.56 percent when it calculated the bill for the pest control district, producing a $447,000 shortfall. 

But the rest of the time, Calpers and virtually all other public pension funds use their assumed annual rate of return on assets, now generally around 7.5 percent. Presto: This makes a pension appear to have a much smaller liability — or even a surplus.

 Since I have been blogging about this for as long as I have been blogging, I am going resist saying "I told you so."

Seasonality in hotel demand

Over a typical year, hotel demand spikes in the summer, and then sharply collapses as school starts.  It picks up in the fall, and then then trails off in the winter months.  If you build capacity, you have to figure out not only how to accommodate peak occupancy (78%), but also how to make money when demand falls.  One obvious solution is to turn fixed costs (like permanent employees) into variable costs (temporary ones).

Another issue is whether seasonal demand becomes more elastic (probably), which means lower margins during seasonal peaks.

What happens when the safety net gets smaller?

It looks as if fewer people want to get in.  The graph above shows participants in the Supplemental Nutritional Assistance Program (SNAP).

"In 2009, the federal stimulus bill allowed states to waive the work requirement, which limited out-of-work adults to three months of SNAP benefits before they must find a job, in areas with high unemployment," the note said. "These waivers continue to end in many states either because 1) the federal government has not extended the waivers, or 2) state governors are opting out of them."

We are All Millionaires Now

1. Would you give up all car travel for $250,000? That is, you never get to get into a car ever again. Not to drive, not as a passenger, not to got to work, and no cross-country road trips. For the rest of your life. 
2. Would you give up all air travel for $250,000? No cross-country visits to see grandma, no spring break in Florida, and no way to backpack across Europe.
3. Would you give up all TV and movies for $250,000? No superhero movies, no sitcoms, and no soap operas ever again.
4. Finally, would you give up the Internet for $250,000? Never again during your life would you send an email, check instagram, bid on ebay, view a cat video, or use whatever yet-undreamed-of applications are developed over the next decades. (link)

Some of us would but most would not. These are modern conveniences that did not exist a little over a century ago that most of us enjoy for a cost of a tiny fraction of million dollars. The gap between value and cost has grown enormously. This is largely due to thousands of entrepreneurs profiting from the introduction of thousands of improvements. Each improvement adds value to consumers and competition eventually drives the price of each improvement down to cost. This gap is also why it is so hard to measure changes in real income over time.

Schmucks shop at outlet stores

$359 for a suit to get married in

Nordstrom Rack:  a price discrimination scheme to sell unwanted or out-of-style clothes at a discount, located far enough out of town to avoid cannibalization.  See earlier blog post on Why Outlet Stores?

Bogus Accounts at Wells Fargo

A new scandal at Wells Fargo is coming to light (here, here, and here) in which employees moved customers' funds into newly created accounts. Employees claim to have been under incredible pressure to meet sales goals or lose their jobs.

"I had managers in my face yelling at me," Sabrina Bertrand, who worked as a licensed personal banker for Wells Fargo in Houston in 2013, told CNNMoney. "They wanted you to open up dual checking accounts for people that couldn't even manage their original checking account." 

Wells Fargo is paying a $185 million fine, instituting a new $50 million program to fix this, and fired over 5,000 employees.


Incentive compensation schemes work best when there are clear metrics to be rewarded and there is little room to game the system. However, sometimes the metric is made more clear by making it a proxy for the behaviors you wish to incentivize. The more the metric is removed from the value creating behaviors, the easier it becomes to game.

Hat tip: Darshak Patel

Why are high income earners leaving blue states for red ones?

Chapter 9 tells us that a mobile asset has to be indifferent about where it is used, otherwise it will move.  An analysis of 2014 IRS data can tell us who is moving where.  The "attraction ratio" measures how many in-migrants a state receives for every 100 out-migrants.

Overall, the biggest winner — both in absolute numbers and in our ranking — is Texas. In 2014 the Lone Star State posted a remarkable 156 attraction ratio

followed by South Carolina and Florida.

One of the biggest drivers of this trend, in addition to higher income tax rates and regulatory red tape, is housing policy: Blue states enact more building restrictions, which have put family-friendly housing out of reach for broad swathes of the population.

How to decrease industry rivalry

Apparently institutional investors are applying Michael Porter's five forces to the airlines industry and trying to figure out how to develop a sustainable competitive advantage.  Porter famously gave airlines as an example of an industry that does not make profit due to easy entry, strong suppliers and customers, many substitutes, and intense rivalry.

But institutional investors who own multiple airline stocks seem to be trying to convince airlines to soften competition, by raising prices or reducing capacity.  Southwest seems to be ignoring them:

The carrier won't join rivals in trimming capacity during the rest of this year, Chief Executive Officer Gary Kelly has said. Its unwillingness to take that step, which generally enables airlines to increase prices, is a disappointment to investors like Chris Terry.

"I'd like to see them boost their fares but also cut capacity," said Terry, a portfolio manager at Hodges Capital Management Inc. "That's what the market wants. That's what the market is telling everyone. Supply growth is exceeding demand growth, and I don't think that's healthy."

Nash Equilibrium

The Economist Magazine is devoting space to explaining some fundamental economic ideas. Their third topic is Nash Equilibrium:

The Nash equilibrium helps economists understand how decisions that are good for the individual can be terrible for the group. This tragedy of the commons explains why we overfish the seas, and why we emit too much carbon into the atmosphere. Everyone would be better off if only we could agree to show some restraint. But given what everyone else is doing, fishing or gas-guzzling makes individual sense. As well as explaining doom and gloom, it also helps policymakers come up with solutions to tricky problems. Armed with the Nash equilibrium, economics geeks claim to have raised billions for the public purse. In 2000 the British government used their help to design a special auction that sold off its 3G mobile-telecoms operating licences for a cool £22.5 billion ($35.4 billion). Their trick was to treat the auction as a game, and tweak the rules so that the best strategy for bidders was to make bullish bids (the winning bidders were less than pleased with the outcome).

Adverse Selection, the ACA, and Criminal Records

The Economist Magazine is devoting space to explaining some fundamental economic ideas.  They begin with information asymmetry, which leads to adverse selection, the topic of chapter 19.

Information asymmetry remains a tricky problem for policymakers. Adverse selection is plaguing America’s Affordable Care Act, better known as “Obamacare”. Fewer healthy people than expected have signed up to the government-sponsored insurance exchanges, which limit how much premiums can vary with risk. Insurers are making losses; as a result, they are raising prices substantially (or pulling out altogether). Critics say those price rises will drive away more healthy customers, leading to a “death spiral”. Information economics should also give pause to the “ban the box” campaign, which seeks to forbid employers from asking about job-applicants’ criminal records prior to interview. Having no criminal record is a positive signal; removing that information makes information asymmetry worse. Recent research suggests that banning the box causes American firms to discriminate by race, such that employment of low-skilled black and Hispanic men falls. Adverse selection indeed.

Where has all the volatility gone?

The VIX index, (invented by Vanderbilt's Bob Whaley) measures the implied volatility of the market, from options prices.  It is at an a very low level.  So either volatility has disappeared, or investors are ignoring volatility in search of higher return:

From the WSJ:

“I still smell smoke,” he said. “The level of complacency implied by the low VIX does not correspond with all that we’re hearing about how disappointing earnings season is going to be,” he added.

From the FT:

“It’s still a high volatility-of-volatility world, and volatility can turn around quickly,” said Rocky Fishman, a strategist at Deutsche Bank.

From Market Watch :

According to contrarian investing 101, low volatility means high complacency, and high complacency is usually seen near major market tops.

Who could have seen this coming?

Even the Chicago Tribune has realized it.  Obamacare has failed because of easy-to-predict adverse selection.

•  Obamacare allowed consumers to sign up after they got sick.

• Obamacare straitjacketed insurers wasn't flexible enough so that people could buy as much coverage as they wanted and could afford — not what the government dictated.

• Too many carriers simply can't cover expenses, let alone turn a profit, in this rigidly controlled system 

• Obamacare couldn't lure them in, couldn't persuade them to buy on the chance they'd get sick.

Appropriating Your Adversary's Weapon

The Takeaway aired a story about Joe Hill to commemerate Labor Day, but one episode makes for some interesting game theory. Joe Hill was a labor leader and songwriter for IWW (the Wobblies) in the early 20th century.

1. He, and other labor leaders, would often set up a soapbox to agitate for better labor practices. 
2. Employment agencies would counter by trying to disperse the crowd, often resulting in violence. A clever, non-violent reaction was to hire the Salvation Army band to drown out these agitators. It is difficult compete with a brass band.
3. Joe Hill, and others, cleverly wrote new lyrics to the melodies the Salvation Army would play. The crowd would quickly learn the lyrics from the leaders. This way, instead of drowning out the protesters' message, they were accompanying the impromptu 'choir.'

Change the game to get your preferred outcome.

What do college textbooks, academic journals, healthcare and education have in common?

They all have big price inflation because those who consume the product don't pay the price. Instead, they are paid for using other people's money.