Wednesday, August 31, 2016

Why does women's pay fall behind after they have children?

Note the last sentence by the reporter: after she identifies a likely reason for the pay differential, she asks "is this an appropriate reflection of their lower productivity?," implying that someone else (perhaps the government) would be able to choose a better compensating differential than the market.

Tuesday, August 30, 2016

The Best Entry Barrier is a Government Entry Barrier

The whole quadrupling of the price of EpiPens episode inspired Scott Alexander at Slate Star Codex to write a wonderful little allegory.

Imagine that the government creates the Furniture and Desk Association, an agency which declares that only IKEA is allowed to sell chairs. IKEA responds by charging $300 per chair. Other companies try to sell stools or sofas, but get bogged down for years in litigation over whether these technically count as “chairs”. When a few of them win their court cases, the FDA shoots them down anyway for vague reasons it refuses to share, or because they haven’t done studies showing that their chairs will not break, or because the studies that showed their chairs will not break didn’t include a high enough number of morbidly obese people so we can’t be sure they won’t break. Finally, Target spends tens of millions of dollars on lawyers and gets the okay to compete with IKEA, but people can only get Target chairs if they have a note signed by a professional interior designer saying that their room needs a “comfort-producing seating implement” and which absolutely definitely does not mention “chairs” anywhere, because otherwise a child who was used to sitting on IKEA chairs might sit down on a Target chair the wrong way, get confused, fall off, and break her head.

(You’re going to say this is an unfair comparison because drugs are potentially dangerous and chairs aren’t – but 50 people die each year from falling off chairs in Britain alone and as far as I know nobody has ever died from an EpiPen malfunction.)

Imagine that this whole system is going on at the same time that IKEA donates millions of dollars lobbying senators about chair-related issues, and that these same senators vote down a bill preventing IKEA from paying off other companies to stay out of the chair industry. Also, suppose that a bunch of people are dying each year of exhaustion from having to stand up all the time because chairs are too expensive unless you have really good furniture insurance, which is totally a thing and which everybody is legally required to have.

And now imagine that a news site responds with an article saying the government doesn’t regulate chairs enough.
There is more detail about instances of each of the implied claims of thwarting competition in EpiPen-like products, but this part is just beautiful.

Liberals worry about the short-run; conservatives about the long-run

Tyler Cowen reviews a book written by Clinton's chief economist who wants government to take a much larger hand in paid sick leave, parental leave, and care for the elderly, among other issues.

Professor Cowen correctly points out that, at best, the policies can have only a short-run effect.  As anyone who has read chapter 9 realizes, in the long run, attractive mandated benefits means that a firms do not have to pay as much to workers to attract them:
So let’s say America’s future means better sick leave and pregnancy leave for employed women, but a narrower choice of jobs, including lower pay, for those same women. Is that better? And do we trust the legal machinery of government to be making that decision anew over decades of social and economic change? Keep in mind that there is an alternative mechanism, which for all its imperfections is far more flexible: Let companies and workers make such decisions through employment bargains.

And this cannot be good:
Boushey doesn’t estimate or indicate the expense of her proposed mandatory benefits, although she does suggest on page 1 that the cost would be “very small.”

The idea that her policies would have only a small long-run effect probably reflect a deeper philosophical belief:
Charles L. Schultze, chief economist for former President Jimmy Carter, once proposed a simple test for telling a conservative economist from a liberal one. Ask each to fill in the blanks in this sentence with the words “long” and “short”: “Take care of the ____ run and the ____ run will take care of itself.”

Liberals, Mr. Schultze suggested, tend to worry most about short run, while conservatives are more concerned with the long run.

What could possibly go wrong?

Monday, August 29, 2016

In Los Angeles, why do equivalent land parcels sell for 35% difference?

New paper compares sales of individual parcels of land to sales of plots that are immediately assembled into bigger aggregate parcels used for building higher density buildings, like high-rise apartments. Controlling for amenities like distance to a highway and access to commuter rail, the authors find that soon-to-be-assembled parcels sell for 35-40% more than similarly situated individual parcels in the same neighborhood.


The 40% price differential means that it is not possible to turn individual parcels into soon-to-be-assembled parcels for one of two reasons:

1.  Zoning, like that in Sweden where residents can veto new development plans, makes it difficult, if not impossible, to assemble bigger individual parcels into plots of land (on which higher density apartments can be built).

2.  The hold out problem, where owners of individual parcels of land hold out in expectation of a better offer.  This is a type of "free riding," that can be analyzed as a prisoners' dilemma.

Either or both of these problems could account for the premium on land that can be assembled into larger parcels.

HT:  Marginal Revolution

Sunday, August 28, 2016

Legal Markets in Kidneys

Q: What bastion of free market liberalism has virtually eliminated the waiting list for kidneys and dramatically reduced deaths due to kidney failure?
A: Iran

Thursday, August 25, 2016

Will bundled payments change health?

CMS is changing the way that Medicare and Medicaid pay providers:

The CMS announced a proposal last week to put three new episodes of care under mandatory experiments with bundled payments, potentially compelling hundreds of additional hospitals into becoming financially accountable for what happens to Medicare patients long after they leave the hospital. 

In theory this is supposed to align hospital incentives more closely to the health goals of a patient.

“All those involved in healthcare have always wanted the best for their patients. Providers now have a greater amount of skin in the game and risk in the outcome.”

What could go wrong?

Why do we spend so much on health care?

Its the incentives, stupid!  The Atlantic has a nice summary of the problem.
Ten days after my father’s death, the hospital sent my mother a copy of the bill for his five-week stay: $636,687.75. ... but why should my mother care? Her share of the bill was only $992; the balance, undoubtedly at some huge discount, was paid by Medicare.

And what about President Obama's Affordable Care Act?
Like its predecessors, the Obama administration treats additional government funding as a solution to unaffordable health care, rather than its cause. The current reform will likely expand our government’s already massive role in health-care decision-making—all just to continue the illusion that someone else is paying for our care.

A better solution would limit the government's role to catastrophic insurance:
...a threshold of $50,000 or more ... (Chronic conditions with expected annual costs above some lower threshold would also be covered.) ... But the real key would be to restrict the coverage to true catastrophes—if this approach is to work, only a minority of us should ever be beneficiaries.

But what about poor people who cannot afford catastrophic insurance?
...the government should fill the gap—in some cases, providing all the funding. ... If we abolished Medicaid, we could spend the same money to make a roughly $3,000 HSA contribution and a $2,000 catastrophic-premium payment for 60 million Americans every year. That’s a $12,000 annual HSA plus catastrophic coverage for a low-income family of four. Do we really believe most of them wouldn’t be better off?

Are we too risk averse?

Yes.  At least according to a clever natural experiment run by Freakanomics author, Steven Leavitt.
He made a website and asked listeners of his podcast, readers of the Financial Times and Forbes, and Reddit users to help him out by visiting it. They were invited to give details of a big decision they were struggling with, then witness a coin toss to help them make up their mind. Mr Levitt then followed up with them twice, after two months and after six months, to ask whether they had made the change, and how happy they were.
Those who made the change, away from the status quo, were happier.
For policymakers, the lesson is that the status quo is a powerful thing. And for those tired of hearing their friend obsess over whether to dump a disastrous boyfriend, they have a new weapon in their armoury—in their wallet.

Pension train wreck accelerating due to low yields

We will keep blogging, until the republic falls, about our under-funded pensions.  Falling investment returns are accelerating the train wreck:

Société Générale’s Andrew Lapthorne illustrates the problem a different way. If someone today invested $100,000 in a balanced portfolio of stocks and bonds, they could expect a return of $21,800 over the next two decades after costs. Ten years ago, that same investor might have expected to make $60,000, and three decades ago $150,000.

Kudos to the Financial Times for picking up on this story.  Unfortunately, if past is prologue, few will read it and nothing will change.  

There are ways to avert a true social crisis. Mass poverty in old age can be avoided. But the options are unpalatable. “We will have to save more, work longer and simply lower our expectations,” says Joachim Fels, a global economic adviser at Pimco, the bond fund manager. “That’s the sad truth.”

Sunday, August 21, 2016

When turnover is a good thing

 In 2008, Kimberly-Clark changed the way it evaluates and rewards employees:
...away from backward-looking, once-a-year reviews framed largely as compliance requirements—a paper trail for potential job cuts and salary decisions—to a process that is real-time, continuous and focused on helping people meet ambitious goals, or move out of the company faster.

Turnover increased to 10% annually, and stock price doubled.
Holding workers close through good times and bad is “not sustainable” any more, said Liz Gottung, the company’s human-resources chief. “If you look at when we started implementing the big pieces of the company’s people strategy, when you map that to our stock price and our business results, you can see the clear correlation.”

Incentive pay will encourage low performers to leave, and good performers to stay.

Saturday, August 20, 2016

"Wage segregation" is causing inequality

Interesting article that explains wage inequality
We’ve all heard that median wages are stagnating, but that’s not all that is happening. Wages are also becoming increasingly segregated by firm—meaning, high wage employees are increasingly working in high wage firms and low wage employees work in low wage firms, rather than in firms with a mix of both.

by analogy to adverse selection in insurance markets.
Once a technological or organizational innovation has made it easier to screen or observe productivity difference, inter-firm competition drives the “pooling” wage equilibrium to unravel in a way that’s very hard to reverse since the separating equilibrium is self-reinforcing.

The consequences of this are big.
If this theory is right, it means reducing wage segregation is a lot harder than it looks, and comes with extremely ambiguous welfare gains. If inequality were really only a matter of elites appropriating rents, then a few tweaks to marginal tax rates and a one-time income redistribution would have a chance at being stable. In contrast, the separating wage equilibrium theory means income redistribution is ... like trying to pour an even level of water across a convex surface that invariably draws the water to its edges. 

Thursday, August 18, 2016

Why are kidneys more likely to discarded on weekends?

New study shows that usable kidneys are discarded at 29% higher rates on Friday and at 25% higher rates on Saturday, holding kidney quality constant.  Furthermore the discarded kidneys were of higher quality than those discarded during the week.

Since 5000 people die waiting for kidneys each year, it is probably not due to lack of demand.

I will award an autographed copy of the fourth edition textbook to anyone who can solve this puzzle.  To enter, post your solution in the comment section. (I don't know the answer).

Thursday, August 11, 2016

What can Nashville learn from Palo Alto?

How not to use zoning policy.

In the past 15 years, increases in demand combined with restrictive zoning policies that prevent new supply have caused the median price of a  house in Palo Alto to increase four-fold, to $2.5 million.
At root, the failure of wealthy coastal areas like Palo Alto to address their housing shortages may be a symptom of broader cultural illness—in particular, the tendency of elites to prioritize their own enrichment at the expense of the public interest, and the decline in appreciation for the importance of community, and the young and middle-class families that are required to sustain it. Public policy can’t directly treat this disease. But it can treat the symptoms. And a modest shift in the state-local balance of power for setting land use regulations may be the best medicine for the short term.

Jerry Brown, who famously vetoed zoning mandates in the past, may have his eyes on something similar at the state level:
California Governor Jerry Brown, to his great credit, is pushing legislation that would “sidestep the endless layers of local approvals that bog down badly needed housing construction,” according to the San Francisco Chronicle.
UPDATE:  Palo Alto Planning Commission member resigns to protest no-growth zoning plans:

The people who bought their homes a long time ago lucked into a windfall and they resentfully lash out at anyone trying to cut in on that windfall. But notice how un-American these claims are. The current residents want to protect their gains by telling other people how they can use their property. When a new restaurant starts to take patrons from an old restaurant we generally don’t think that the old restaurant–the long-term resident–has the right to prevent the new restaurant from opening. The same is true, by and large, for new technologies and ways of doing business. Yet when it comes to residential land we give the old residents a veto on the new.

Wednesday, August 10, 2016

Ethanol, Cattle, and Steak

Thomas Landstreet is bearish on cattle and bullish on steak.  The reason:  government ethanol mandates are under political pressure.  In 2007, the head of the EPA announced a freeze on the ethanol mandate, and corn prices fell from $8 to $4.

The thing that makes this an interesting application of supply and demand is the notorious 12-year cattle cycle.  The only way to increase supply in the long run is to hold female cows off the market, thus decreasing supply in the short run, and driving up price.  With corn prices falling, farmers saw increasing profit in cattle, so they initially held female cattle off the market, driving up price and profit.  But eventually, prices (of cattle) follow costs (of corn) down.  As cattle become less profitable, farmers reduce the size of their herds by slaughtering more heifers.  This further decreases price.

It looks as if Landstreet's bet has paid off:
Just yesterday, expecting sharply lower beef costs (COGS) to benefit earnings, I bought stock in Carrol’s Restaurant Group (TAST) and it’s up 12% today. The same thing happened to Restaurant Brands International (QSR), owner of Burger King and Jack in the Box (JACK). Restaurant earnings continue this week with, Fogo de Chao reporting after the close today, Wendy’s (WEN) tomorrow morning and Shake Shak (SHAK) reporting Wednesday after the close.
And what can we expect in the future?
I expect cattle futures to suffer another leg down while next earnings season will be another good one for protein heavy restaurant stocks.

Ask any question; choose what kind of answer you want

Repost: avoid bureaucratese

Managerial Econ: 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 ...

Incentive Alignment and The Great Recession

Bid Rigging in Online Search Markets

The FTC recently filed a complaint against 1-800 Contacts in which it alleges the company's contracts with competitors harmed the market for online searches. The company claims it was merely protecting its trademark.

In online search markets, advertisers can bid for search terms so that their ads will be displayed when a user searches the term. Competitors of 1-800 Contacts would bid on "1-800-Contacts" in order to entice consumers to possibly better terms. 1-800 Contacts claimed this violated the use of its trademarked name and entered into agreements with most competitors to stop them from bidding on their name. This is alleged to have lowered the cost of 1-800 Contacts buying these search terms. It likely also softened competition between contact lens providers.

Monday, August 8, 2016

Do Bubbles Exist?

Eugene Fama vs. Richard Thaler:

Thaler: I have two examples. The first is house prices. For a long period, house prices were roughly 20 times rental prices. Then, starting around 2000, they went up a lot, then they went back down after the financial crisis. 
Fama: What’s the bubble? The up? The down? The subsequent up?
Thaler: We agree that it’s impossible to know for sure whether something’s a bubble. What we do know is that in markets such as Las Vegas; Scottsdale, Arizona; and south Florida, where prices were going up the most, expectations of future price appreciation were also the highest. That could be rational, but I’m skeptical about it. 

The hidden cost of living

The real value of a starting salary is how much you can buy with it.

In the graph above, if you were living in Tennessee and were offered a 25% raise to move to New York, you could use this map to see that the hidden-cost of living in New York is about 28% higher.

When making decisions consider:
  • All the costs and benefits that vary with the consequences of the decision (lest you commit the hidden-cost fallacy);
  • But only costs and benefits that vary with the consequence of the decision (lest you commit the fixed- or sunk-cost fallacy).

Sunday, August 7, 2016

Who would want to suppress an actuarial report on pensions?

Right now, public pensions discount future liabilities at 7.5%.  This means that cities and states that face a pension payout of, e.g., $100,000 in 25 years, must set aside $16,398=($100,000)/(1.075)^25.  If the pension fund invests $16,398, and earns 7.5%, then in 25 years the pension fund will have $100,000 to pay out (compounding).

HOWEVER, if the fund earns only 5% (a more realistic return), then the fund should put away $29,530=($100,000)/(1.05)^25, about 80% more than they are currently saving.

committee of actuaries who wrote a report pointing this out and suggesting a more realistic discount rate has been disbanded to prevent the report from leaking out.

Thursday, August 4, 2016

What can Nashville learn from Tokyo?

Unlike Nashville, Tokyo has no "affordable housing crisis." Like Houston, its prices have remained near replacement cost to the past 20 years.   The reason:

Tokyo has a laissez-faire approach to land use that allows lots of building subject to only a few general regulations set nationally. Robin Harding at the FT has a very important piece on the Tokyo system. 

Tokyo's liberal zoning policies increase the supply of housing which reduces prices and inequality by helping would be homebuyers and renters.

HT:  Marginal Revolution

Wednesday, August 3, 2016

Three Cheers for Pure Speculators

We often hear of all the ills that accompany mere speculators in financial markets. They are claimed to add no new production, distort prices, and cause price volatility. But these market participants can have the effect of market makers, bringing new information to industry participants. A new paper by Jha and Wolak find that California energy markets benefit from these speculators. The better price signals allow producers to better schedule generation which led to lower costs and less generation of backup supply.

Electric energy markets are complicated. Because demand is highly volatile and electricity is hard to store, these markets specify both location and time (day and hour) of delivery.  Many states require that participants be either be electricity generators or take delivery. But in California, "convergence bidding" was implemented on February 1, 2011 in which purely financial traders could arbitrage differences in the spot price and day ahead price. If they could make better forecasts of, say, end user solar production or competitively supplied wind production, they could earn profits. Also, industry producers could use this information to schedule to use a cheaper mix of capacity for generation. For example, they could run an easy-to-start gas turbine during a temporary peak rather than keep a usually more inexpensive plant running through the troughs. This leads to less energy production and lower overall prices.

"These estimates imply that the conditional mean of total hourly energy ...  is 2.8 percent lower after January 31, 2011." and "The conditional mean of total variable costs is 2.6 percent lower after January 31, 2011."

Monday, August 1, 2016

How currency devaluation affects prices

Most of the appliances that Whirlpool sells in the UK, are built in the EU.  This means that Whirlpool incurs costs in euros but is paid with pounds.  When the pound declines, as it did when the British people voted to exit the EU, their revenue, and their profit margin gets squeezed.
“A 1% change in value of the pound is the same as 1% change in cost,” Whirlpool Chief Executive Jeff Fettig said in an interview.

Whirlpool's stock price rose 2.7% after it announced that prices of their products in the UK and Russia have to rise to account for the declining buying power of the pound and the rubble.

This brings to mind the post of two days ago, The Power of P.

Get rich slowly: the power of patience

Patience makes you rich.  I tell this to my kids, my students, and anyone else who will listen.

The theory is simple.  If you have a low discount rate, it means that the future is almost as valuable as the present.  For example, a "patient" person with a discount rate of 5% is willing to invest $100 if she can earn $105 in one year, a relatively low threshold for investing.  In contrast, an "impatient" person with a discount rate of, e.g., 30% is willing to invest only in much more lucrative investments, i.e., those earning at least 30%.

The difference between the two is that the patient person will make more investments (those with a return between 5% and 30%) which will make the patient person rich.  Patient people invest more in education, smoke less, exercise, and watch their weight.  These activities all demonstrate a concern with the future, at the expense of the present.

 Here is some new evidence:
Patience boosts wealth by much more than marriage or religion. Respondents with discount rates more than one standard deviation above the average of the sample had 29% less net wealth, a loss of around $130,000. More impatient people—similarly controlling for religion, income, race, sex, optimism and education—were more likely to smoke, drink excessively, and miss out on their flu shots and medical examinations.

The title of this blog post is stolen from colleague Bill Spitz's terrific book