Monday, June 5, 2017

Swearing as a signal

Signals are convey information only if they are costly to use.  Otherwise, it too difficult to interpret what they mean.

To see this, consider what you learn when you hear someone use the F-word.  Some of my friends use it almost as punctuation, so it means very little.  However, when someone who abhors swearing uses it, I know to pay attention because it is costly for the sender to convey information in this manner.

Analytically, think of the sender as having two potential kinds of information:  crucial information or moderately important information.  Only the sender knows the type of information, and it can be communicated with or without swearing.  It doesn't pay for the sender to incur the costs of swearing to communicate moderately important information.  Rather, swearing is reserved for communicating crucial information.

Sunday, June 4, 2017

Why does it cost more to insure a Tesla?

The AAA is raising rates to insure Tesla's, and Tesla is angry:
The rear-wheel-drive Tesla Model S is involved in 46 percent more claims than average, and those claims cost more than twice the average, it said.

it wasn't clear whether this was due to Adverse Selection (people who buy Tesla's are worse drivers, or more prone to file claims, and the Tesla is expensive to repair) or Moral Hazard (those who buy Tesla's drive more recklessly after they buy).

Remember Adverse selection is caused by hidden information about a person's type, moral hazard is caused hidden information about actions.

Friday, June 2, 2017

Like Growing Wheat on Wall Street

The FCC recently concluded an historical auction. Spectrum licenses have been auctioned off for mobile phone service in the past and licenses to use spectrum within a specific assignment have been exchanged in the past. But this represents one of the few times (only?) that an auction was implemented to move spectrum from one assigned use (TV Broadcast) to another (Mobile Broadband). Broadcasters have a huge chunk of spectrum (most of the light blue in lines 2, 4 & 5 in the chart) but few people still receive TV signals over-the-air. Thus, it is in a low-valued use.

At the same time, users have been demanding ever more bandwidth from broadband mobile providers. Some 145 TV broadcasters (mostly fringe or duplicative channels in large markets) volunteered to go off the air for $10 billion. The mobile broadband providers will pay $19 billion with the difference going to the US Treasury. Just imagine what sort of fancy gizmos this will make available. Just imagine how many more if the US government did not impose such a hefty tax.

The whole episode reminds me of a comment Tom Hazlett made once. "Our Spectrum allocation is less efficient than using Wall Street for wheat farming."

Hat tip: Lisa George

Why are productive people leaving Puerto Rico?

The economy is contracting and productive people can earn two to three times more on the US mainland than in Puerto Rico.
“I had to choose for my family,’’ said Aledie Amariah Navas Nazario, 39, a pediatric pulmonologist who left behind young asthma patients when she, her husband and two small daughters moved to Orlando, Florida.

Puerto Rico should serve as a canary in the coal mine for US states and municipalities with unsustainable levels of spending, pensions, and debt.  

Wednesday, May 31, 2017

Portland taxes excessive CEO pay: what could go wrong?

Portland placed an extra 10% tax on excessive CEO pay:

"When I first read about the idea of applying a higher tax rate to companies with extreme ratios of CEO pay to typical worker pay, I thought it was a fascinating idea," said Commissioner Steve Novick, who championed the bill after seeing similar efforts in Arizona and California. "[It was] the closest thing I'd seen to a tax on inequality itself."

Price Discrimination in Internet Usage

Former Chief Economist at the US DOJ has estimated demand for Internet usage by looking at how much consumers cut back when they are near their monthly limits. Here are the intuitive findings:
  • We find that subscribers’ willingness-to-pay for speed is heterogeneous, which is intuitive given the different ways in which people use the internet.  
  • marginal content has relatively low value. 
  • On the other hand, the infra-marginal value of content is high.  ["inframarginal" is econ speak for other uses]
These conditions suggest that price discrimination would be a good way for providers (like Google Fiber) to make sure that low value uses do not crowd out higher valued uses, and to earn enough to build capacity where demand is high:
  • We find that usage-based pricing is effective at lowering usage without reducing subscriber welfare significantly, relative to a world with just unlimited plans. This is driven directly by our finding that marginal content is not very valuable and that subscriber welfare is mainly driven by infra-marginal usage.

Monday, May 29, 2017

Do Taxes deter innovation?

Superstar inventors, those in the top 1% of patent production (weighted by patent citations), leave higher-tax countries in favor of lower-tax countries.

For instance, if the average country decreased the top tax rates by 10 percentage points, it would be able to keep 1 percent more of its domestic superstar inventors and attract 26 percent more foreign superstar inventors.

Friday, May 26, 2017

Housing Codes Cause Homelessness - Dallas Edition

A heart-wrenching drama is being played out in West Dallas. The neighborhood is mostly full of 70+ year old homes rented to mostly poor folks. These were built before the neighborhood was even annexed by Dallas. For decades, the structures had been 'grandfathered in' from keeping up with the ever-improving building code. The area had been isolated from the city by the Trinity River until a landmark bridge opened a few years ago. That brought developers and new enforcement of housing codes. The houses are so out of code, that the owner, HMK Ltd., would rather shutter them:
“Not just impractical but it’s impossible. No matter how much money, you cannot throw enough money into these houses and make them compliant.” 

Some of the tenets have been living in these homes for three or four decades and pay a paltry $300-$400 a month in rent. HMK has offered to sell them the houses they currently rent for $65,000, their next best offer. Fine if these poor folks could find the $65,000. The idea originally was that vertical integration by the occupant into ownership would evade the housing codes. But no, the city will require the new owners to bring them up to code.

Previously, the renters and landlord had been content exchanging low rent for poor quality homes. Everyone knew these were poor quality homes and were fine with that. But nanny-state enforcement of the housing code will soon keep this value creating transaction from being consummated.

Wednesday, May 24, 2017

What caused the Great Depression?

Marginal Revolution University has another good short video, documenting its various causes, including some of the self-defeating efforts to fix it.

Monday, May 22, 2017

Of course not, sunk costs don't matter

The headline in this New York NBC affiliate news story is "Large Milk Spill Closes Roadway; No Crying Reported." The truck driver must have read our favorite textbook.

Hat tip: Alex

Advice for debating NIMBY's

Anti-development forces (Not In My Back Yard) are waking up to the evidence that zoning restrictions reduce income, increase inequality, and reduce mobility.  Here is a post from Ground Zero in the NIMBY wars (San Francisco) that offers advice on debating NIMBY's:
1. Econ 101 supply-and-demand theory is helpful in discussing these issues, but don't rely on it exclusively. Instead, use a mix of data, simple theory, thought experiments, and references to more complex theories. 
2. Always remind people that the price of an apartment is not fixed, and doesn't come built into its walls and floors. 
3. Remind NIMBYs to think about the effect of new housing on whole regions, states, and the country itself, instead of just on one city or one neighborhood. If NIMBYs say they only care about one city or neighborhood, ask them why. 
4. Ask NIMBYs what they think would be the result of destroying rich people's current residences. 
5. Acknowledge that induced demand is a real thing, and think seriously about how new housing supply within a city changes the location decisions of people not currently living in that city. 
6. NIMBYs care about the character of a city, so it's good to be able to paint a positive, enticing picture of what a city would look and feel like with more development.
I especially like suggestion #4:
...Imagine destroying a bunch of luxury apartments in SF. Just find the most expensive apartment buildings you can and demolish them.  
What would happen to rents in SF if you did this? Would rents fall? Would rich people decide that SF hates them, and head for Seattle or the East Bay or Austin? Maybe. But maybe they would stay in SF, and go bid high prices for apartments currently occupied by the beleaguered working class. The landlords of those apartments, smelling profit, would find a way around anti-eviction laws, kick out the working-class people, and rent to the recently displaced rich. Those newly-displaced working-class people, having nowhere to live in SF, would move out of the city themselves, incurring all the costs and disruptions and stress of doing so.  
If you think that demolishing luxury apartments would have this latter result, then you should also think that building more luxury apartments would do the opposite. Price should think long and hard about what would happen if SF started demolishing luxury apartments. 

HT:  Marginal Revolution

Tuesday, May 9, 2017

Missing from the advice

Motley Fool recently provided "3 Tips for Investing in Apple Inc. Supplier Stocks." Essentialy, they are:

  • Look for companies with rare, differentiated technologies
  • Look for high barriers to entry
  • Look for technologies that clearly affect the user experience
Would they same advice hold for Apple investing in these suppliers? That is, should they vertically integrate by purchasing a supplier with these characteristics? After all, these are the characteristics that tend to make a firm profitable. I see two problems.

1. EMH: An invester does not want a profitable firm; he wants a more profitable firm. That is, the purchase price already reflects the present value of the expected future profits. In order for the purchase to be profitable, the present value of the expected future profits must be made to be more than the purchase price. Your average Joe investor usually will typically not know if this can happen nor can he make it happen.
2. Synergies: Apple could possibly make it happen. It could possibly do this if it sees that the current arrangement prevents some efficiencies and that vertical integration would solve them.

But do not purchase a company merely because it is profitable.

Wednesday, May 3, 2017

Why don't restaurants give rejected food to hungry servers?

When you order a meal and what you receive isn't what you expected, you can either suffer through it or send it back. If food gets returned, many restaurants have rules to prevent the cooks and servers from eating it.  On its face, this seems inefficient, as good food is discarded.

QUESTION: Why do restaurants have these rules? (Hint:  incentives, Chapter 1)

ANSWER:  To answer the question we consider all the benefits and costs that vary with the consequence of the rule (Chapter 3).
  • The obvious benefit of giving food to hungry servers and cooks is that you increase the attractiveness of working at the restaurant, which allows you to reduce their wages (the "compensating differentials" of Chapter 9).  
  • However, the hidden cost of giving rejected food to the staff is that you create incentives for hungry staff members to deliberately mess up orders so they can get free food.  
If a restaurant has rules preventing staff from eating rejected food, one could infer that the costs are bigger than the benefits, and that the agency cost (Chapter 21) of trying to control this kind of perverse behavior are large.

HT:  Jake

Copyright 2017, Froeb (if the publishers let me, I will stick this question into the fifth edition)

Friday, April 28, 2017

Origin based vs. destination based taxes

Follow up to Greg Mankiw article on taxes:

ORIGIN-BASED VS. DESTINATION-BASED TAXATION: The corporate tax system is now origin-based. If we change to a destination based taxation (where it is consumed instead of produced), this would encourage US exports and discourage imports. But then the exchange rates would adjust:
...Americans would supply fewer dollars in foreign-exchange markets, and foreigners would demand more dollars. As a result, the dollar would appreciate, making foreign goods cheaper for Americans, and American goods more expensive for foreigners. The movement in the exchange rate would offset the initial impact on imports and exports.

If the exchange rate adjusted completely, the so called "border tax" would become equivalent to a Value-added tax, with all the attendant benefits:  low rates over a broad base (non distortionary, i.e., people would not spend lots of effort trying to avoid it), and shifts taxes to consumption rather than income (encourages production/income).

Wednesday, April 26, 2017

Should we be worried about discrimination based on party affiliation?

Via MarginalRevolution:
In the marketplace, consumers are much more likely—almost two times as likely—to engage in a transaction when their partisanship matches that of the seller. In our survey experiment, three quarters of all subjects forego a higher monetary payment to avoid helping the other party.

Original paper suggests that partisan affiliation is a strong potential source of discrimination:
To date, few social norms are in place to constrain it, as they are with respect to unequal treatment along other social divides (e.g., race and gender). Our analysis suggests that partisan-based discrimination may occur even in the most basic economic settings, and as such should be the subject of more systematic scrutiny.

Tuesday, April 25, 2017

Internet publishing jobs are on the coasts

As newspapers are being replaced by internet publishing, the new jobs are clustering, in a way that was not true of newspaper jobs, on the coasts:
As Enrico Moretti, a University of California, Berkeley, economist who has studied the geography of job creation, points out, the tech entrepreneurs who drive internet publishing could locate their companies in low-rent, low-cost-of-living places like Cleveland, but they don’t. They need the most talented workers, who tend to move to the clusters, where demand drives wages higher. And it’s the clusters that host all the subsidiary industries a tech start-up craves—lawyers specializing in intellectual property and incorporation; hardware and software vendors; angel investors; and so on. 
The online media, liberated from printing presses and local ad bases, has been free to form clusters, piggyback-style, on the industries and government that it covers. New York is home to most business coverage because of the size of the business and banking community there. Likewise, national political reporting has concentrated in Washington and grown apace with the federal government. Entertainment and cultural reporting has bunched in New York and Los Angeles, where those businesses are strong.
The result? If you look at the maps on the next page, you don’t need to be a Republican campaign strategist to grasp just how far the “media bubble” has drifted from the average American experience. Newspaper jobs are far more evenly scattered across the country, including the deep red parts. But as those vanish, it’s internet jobs that are driving whatever growth there is in media—and those fall almost entirely in places that are dense, blue and right in the bubble.
HT:  Cramer

Monday, April 24, 2017

French election results cause VIX to crash

In chapter 9, we learn that, in the long run, risky assets must return enough to compensate shareholders for bearing risk.  So when the risk suddenly declines, current stock prices increase to reduce expected return.

Colleague Bob Whaley's VIX index (previous blog posts on VIX), which measures risk in terms of the implied volatility, declined suddenly in both the US and EU as it became likely that the pro-EU candidate would win the French election.

Best selling textbook author describes principles for tax reform

In a NY Times article, Greg Mankiw demonstrates the ability that has made him a best-selling-econ-textbook author by simplifying a confusing debate down to four principles:

  • WORLDWIDE VS. TERRITORIAL: Most nations aim to impose taxes on economic activity that takes place within their borders 
  •  INCOME VS. CONSUMPTION: Many economists have argued that taxes should be levied based on consumption rather than income. 
  •  ORIGIN-BASED VS. DESTINATION-BASED TAXATION: The corporate tax system is now origin-based. 
  •  DEBT VS. EQUITY: Now, firms can deduct interest payments to bondholders, but they cannot deduct dividend payments to equity holders.
Mankiw thinks that Congress is moving in the right direction in all four dimensions.  

Friday, April 21, 2017

Sports teams do better in states without income taxes

In theory, one would expect higher after tax salaries to attract better players.  The forces behind this are the same that lead to compensating differentials in labor markets.  Evidence supports theory:
The income tax rate effect varies by league, with the largest effect in professional basketball, where teams in states without income tax win 4.5 more games each year relative to high-tax states.

Wednesday, April 19, 2017

Minimum wage hurts poor people in a new way

new working paper from HBS finds that for every $1 increase in the minimum wage, the probability of restaurant failure increases by 4-10%.  Moreoever, as zerohedge points out, the restaurants most likely to fail are those that serve lower-income workers:
... low-income workers don't just lose their jobs when minimum wages are hiked...they also lose access to cheap casual dining options as lower-rated, cheaper restaurants are much more likely to fail when their costs are artificially raised.

Friday, April 14, 2017

How to get employees to stop smoking?

Make them pay.
Employees were randomly assigned to one of three groups. The first was “usual care,” in which they received educational materials and free smoking cessation aids. The second was a reward program: Employees could receive up to $800 over six months if they quit. The third was a deposit program, in which smokers initially forked over $150 of their money, but if they quit, they got their deposit back along with a $650 bonus. 
Compared with the usual care group, employees in both incentive groups were substantially more likely to be smoke-free at six months. But the nature of the incentives mattered. Those offered the reward program were far more likely to accept the challenge than those offered the deposit program. But the deposit program was twice as effective at getting people to quit — and five times as effective as just pamphlets and Nicorette gum.

People hate losing money ("loss aversion")

Thursday, April 13, 2017

Why are business people more important than the ideas they have?

Because ideas evolve into profit only if the people are clever and motivated.  Groupon is a case in point:

Andrew Mason [Groupon's founder] had played in punk bands, and the company he started, originally called the Point, was intended to help people organize around social causes. Early on, though, its users realized they could band together to save money, so Mason reoriented the company around that purpose. Eventually he realized he could just go directly to other companies to ask for discount deals, then sell those to groups of users. “Before I knew it,” Judge recalled him saying, “I was selling coupons.” Judge sympathizes with members of the tech world, he explained, because they’re not like Wall Street guys — they actually build things people use. “They don’t seem to get into it for the purpose of pure greed and trying to make money,” he said. “They end up there.”

From NY Times profile of Mike Judge.

Whole Foods reacts to competition from grocery stores

Whole Foods practically invented the PNOS segment (Premium-Natural-Organic-Supermarket), "transforming health food from a niche market into a booming retail sector attracting millions of urbanites, soccer moms and baby boomers. Whole Foods became a Fortune 500 company, and Mr. Mackey, a wealthy, foodie celebrity."

But now, competition has caught up to Whole Foods, as Kroger pushes their own in-house organic store brand and discount rivals like ALDI and LIDL expand at the low end. In response, activist investors are pushing Whole Foods start behaving more like a normal grocery store:
Jana [activist investor] ... wants Whole Foods to more quickly adopt standard grocery-industry practices it long had eschewed: loyalty cards that would allow it to target shoppers with coupons based on their buying habits; centralizing product purchasing to improve efficiency; and advertising sales and discounts.

Whether these changes cause Whole Foods to lose its foodie cachet (where else can you buy organic tofu tikka masala from a social justice warrior with a neck tattoo?) will determine its long run viability.

BOTTOM LINE:  it is not the strongest who survive, but those willing to adapt.

Wednesday, April 12, 2017

CFA Exam Price Discrimination

An effective way of sorting high willingness-to-pay from low willingness-to-pay consumers is by using the time to the event. The CFA Institute has learned this trick comon to airlines. By registering for exams early enough, you can save about half the fee. For example, here is the schedule for the December 2017 exam.

Early registration fee US$ 650 (15 Mar 2017)
Standard registration fee US$ 930 (16 Aug 2017)
Late registration fee US$ 1,380 (13 Sep 2017)

It is likey that there are negligible costs involved with the late regestrations.

Suggested by Sameer Sathe

Monday, April 10, 2017

What can cities learn from Buffalo?

That parking minimums increase the supply of parking which drives down the price which creates traffic jams, pollution, sprawl, and segregation.  (Parking minimums are zoning requirements to add parking to buildings.)
...if you know you can park free wherever you go, why not drive? The ever-growing supply of free parking in America is one reason why investments in public transport have coaxed so few people out of cars, says David King of Arizona State University. In 1990, 73% of Americans got to work by driving alone, according to the census. In 2014, after a ballyhooed urban revival and many expensive tram and rapid-bus projects, 76% drove.

This kind of inefficiency exacts a huge toll on a city:
Free parking is not, of course, really free. The costs of building the car parks, as well as cleaning, lighting, repairing and securing them, are passed on to the people who use the buildings to which they are attached. Restaurant meals and cinema tickets are more pricey; flats are more expensive; office workers are presumably paid less. Everybody pays, whether or not they drive. And that has an unfortunate distributional effect, because young people drive a little less than the middle-aged and the poor drive less than the rich. In America, 17% of blacks and 12% of Hispanics who lived in big cities usually took public transport to work in 2013, whereas 7% of whites did. Free parking represents a subsidy for older people that is paid disproportionately by the young and a subsidy for the wealthy that is paid by the poor.

Buffalo, by the way, has realized this, and eliminated parking minimums.

Who could have predicted this?

Housing prices are climbing in Nashville, while supply dwindles.
As the supply of homes declined, the listing price climbed — especially in the trade-up and premium markets. The median listing price of trade-up homes rose 52 percent to $221,597 between early 2012 and 2017, while Trulia's data also showed the price of premium homes rose 44 percent to $437,967. Meanwhile, the median listing price for starter homes increased 36 percent to $108,783.

Supply is limited by strict zoning laws that make it difficult for supply to increase.  Since Nashville is getting about 80 new residents/day, the only thing that can adjust is price.

HT:  Campbell

FCC Chairman uses management theory to improve agency decision-making

FCC Chairman Ajit Pai wants to increase the quality of economic analysis done by the FCC staff:

...he explained that economic analysis, primarily in the form of cost-benefit analysis, is largely ignored. Actually, it is probably worse than that: Those types of analyses aren’t even done. For example, significant areas of the agency’s work in recent years ... contained nothing that would pass as economic analysis.

So how to do this?  Chairman Pai wants to change the organizational structure from an M-form (with economists mixed in with attorneys) to a functional organization, with economists in their own division.

Some middling economists had suggested exactly this in an article titled "The Economics of Organizing Economists."

... a functional organization has a couple of advantages over a divisional form. First, a functional organization is more likely to keep up with new methodologies and so be able to apply them to enforcement questions. Second, since the staff economists and attorneys produce information, not traditional goods or services, there is an advantage to the independent analyses done by attorneys and economists. Without two separate memos, the decentralization of decision making in a divisional organization is likely to result in less information reaching the ultimate decision makers.

Sunday, April 9, 2017

Post Hospital Merger Product Repositioning

An interesting presentation by Joanna Piechucka at the IIOC this weekend examined how French hospitals re-positioned the offerings of the merged firms to minimize cannibalization. Moreover, they also re-position away from third-party non-profit hospitals. This occurs even in a highly regulated environment.

Tuesday, April 4, 2017

What Nashville can learn from Seattle

How to break up a homeowner cartel that raises prices by blocking new entry:
In large and small ways, these homeowners, who tend to be white, more affluent and older than the average resident, have shaped neighborhoods in their reflection — building a city that is consistently rated as one of the nation’s most livable, as well as one of its most expensive. ...
The homeowner-dominated neighborhood councils have typically argued against land use changes that would allow more density (in the form of townhouses and apartment buildings) in and near Seattle’s traditional single-family neighborhoods, which make up nearly two-thirds of the city. Including more renters and low-income people in the mix could dilute, or even upend, those groups’ agendas.

In other words, the neighborhood councils act like cartel managers who prevent lower-priced entrants (higher density apartments) from serving lower-income, would-be homeowners and renters. The result is higher prices that benefit the cartel members (homeowners).

What would it take to break the cartel-like function of Nashville's zoning process?

Tuesday, March 28, 2017

Corruption vs. collusion (bid rigging) in Govt. Procurement.

The United States has rigid procurement rules, designed to prevent the government bureaucrats who oversee procurement from steering government contracts to well-connected patrons.  To a large extent they succeed, at least when compared to other countries.

However, the rules also prevent procurement officers from responding to collusion by, for example, raising reserve prices, or by promising one of the bidders a big share of the future procurement if she offers a better price.  

This trade-off is examined theoretically, in a recent paper by some middling economists entitled Horizontal Mergers in Optimal Auctions, where procurement agents have the flexibility to design auction rules in response to the threat of collusion:
Merger [or collusion] effects are ... much smaller than in open auctions because bidders compete more against an optimal mechanism than they do against each other. As a consequence, there is less competition for mergers [or collusion] to eliminate.

This implies that collusion would have much smaller effects, if the auctioneer had the ability to react to collusion, e.g., with a higher reserve.  But giving the auctioneer this ability could also lead to patronage (corruption).

Tuesday, March 21, 2017

Health insurance, NOT pre-paid consumption

The Republican critique of the Affordable Care Act (Obamacare) is that it is not really insurance (covering large impact, low probability events, like catastrophic illness) but rather pre-paid consumption (paying for small predictable expenses).  Singapore's Health insurance seems to validate this critique:

Singaporeans pay for much of their own care out of their own pockets, and their major insurance program is designed to cover long-term illnesses and prolonged hospitalizations, not routine care. The combination has produced genuinely extraordinary results: The island state has excellent health outcomes while spending, as of 2014, just 5 percent of G.D.P. on health care. (By comparison, a typical Western European country that year spent around 10 percent; the United States spent 17 percent.)


Thursday, March 16, 2017

Auto makers and AI

Auto makers have largely become auto assemblers who now purchase most of their components from suppliers rather than being completely vertically integrated. They are a long way from the famous River Rouge plant whose 100,000 employees were able to turn raw materials into running vehicles within this single complex.

But now automakers see the fabulous potential in driverless cars to reshape the industry. Ford just bought an AI firm for $1 billion. They seem to be vertically integrating into this technology as fast as they can by acquiring the firms that are producing these components.
In the last several months, Ford acquired Chariot, a start-up that ferries commuters around the San Francisco area, and invested in Civil Maps, which is developing 3-D mapping technology that can be used by self-driving cars. In August, Ford also acquired SAIPS, an Israeli company developing machine learning and computer-vision technology.
Other automakers are moving in the same direction. General Motors has invested $500 million in Lyft, a ride-hailing service and main rival of Uber. G.M. also acquired Cruise Automation, a maker of sensors and other gear that can enable conventional automobiles to drive themselves on highways.

Why the reversal on vertical disintegration?

Possibly for quality assurance reasons. Driverless cars rely on computers and software that comes from an industry notorious for rushing new products out the door, sometimes before all the kinks are worked out. But getting the PC’s “blue screen of death” at 80 mph might become a bit too literal. If the software in your Ford failed, you would sue Ford, not its supplier. Knowing this, its supplier might not do all the safety checks Ford might want. A solution, make them part of Ford.

Wednesday, March 15, 2017

"Coming Apart" author at Vanderbilt

Vanderbilt's Adam Smith Society (Free Markets, Open Minds), hosted Charles Murray at Vanderbilt yesterday who gave a talk on his book, Coming Apart, in which he documents the bifurcation of US white males aged 30-49, into a "cognitive elite," and an underclass that is much worse off:
Less than a third of its children grow up in households that include both biological parents. The men claim physical disability at astounding rates and are less likely to hold down jobs than in the past. Churchgoing among the white working class has declined, eroding the social capital that organized religion once provided.

Murray's thesis closely parallels that of Tyler Cowen's The Complacent Class, as evidenced in The New Segregation video.

Saturday, March 11, 2017

Is it ethical to keep frequent flyer points for yourself?

When Jimmy & Evelyn founded Taco Love, they purchased supplies on company credit cards and used the points for personal travel. As the chain grew, they brought in a second investor, and the three of them shared the points among themselves, allowing them to purchase several business-class tickets to Europe each year.

As the chain continued to grow, two more outside investors were brought in.  The new CFO who came with them insisted that the points be used only for company approved travel.  The relationship between the founders and the new shareholders began to sour and, eventually, the new shareholders bought out the founders and terminated their employment with the company.

If anyone does not immediately see that the new CFO stopped what was essentially theft, please re-read Milton Friedman's famous NY Times editorial, "The Social Responsibility of Business is to Increase Profit."

Friday, March 10, 2017

To survive, mall food brands are changing strategies

In the past, mall food brands (like Sbarro, Cinnabon, Jamba Juice, and Panda Express) were successful as impulse purchases:
"You eat Sbarro not because you want Sbarro, but because it is the food that is available at the moment you want some food," Neil Irwin wrote at the time in The New York Times. "Other fast-food chains may offer mediocre food, but their real estate strategies are less exposed to the epic decline in foot traffic in the nation's malls." 
Cinnabon's president, Joe Guith, said Cinnabon wasn't necessarily a place you'd get in the car to go to, but more of a place you'd stop at when you're walking by. 
"We're an impulse brand," Guith told Business Insider. "We work where the people are."

To survive most of these brands are re-locating to areas of high foot traffic:
While many East Coast customers may associate Panda Express with samples of orange chicken handed out in the mall food court, for the past two decades, the chain has focused on opening more stand-alone locations — today just 2% of its locations are in malls. 
In 2015, Sbarro announced it would debut a trendy fast-casual concept with made-to-order pizzas, pasta, and salads. Cinnabon and Jamba Juice are both investing in smaller, kiosk-like locations in high-traffic areas such as college campuses, amusement parks, and airports. 
"Having a flexible store format that can translate to different geographies and store formats will somewhat help mitigate" declining mall traffic, Colin Radke, an analyst at Wedbush, told Business Insider. "But those that are heavily exposed to malls, there's not much they can do."

Due to competition, the outlook is not good:
 Even in high-traffic places like college campuses, people have more options than they would if they were within a mall. And with concerns that there are simply too many restaurants open in the US, food-court chains can't depend on customers stumbling upon locations.  
 There's also the issue of food quality. Opening new locations won't help brands that people associate with rewarmed pretzels or oversized tubs of fried mystery meat.

Wednesday, March 8, 2017

Is it ethical to lay off employees in need?

Jorge Pine is a restauranteur who attributes success to three elements:  great food, great operations, and enough capital to support them.  However, after opening up a new restaurant, "Taco Love," he noticed a problem with operations.  The profit margin (net income divided by revenue) was only 5%, well below the 20% required to cover the cost of capital.

After looking at the books, Jorge noticed that labor costs were unusually high.  He spoke to his manager and discovered that she was reluctant to send workers home when demand was low, as on rainy days.  "They need the money," the manager explained, pointing out several workers who supported young families, or sent money back to struggling parents in Mexico.

Jorge sat his manager down and said, "look, if you do not hold costs down, this restaurant won't earn a profit, and my investors will not fund our next one."  Jorge had plans to open three more "boxes" under the same brand name.

Jorge continued, "Think about the families of the workers that I am not going to be able to hire, and what is going to happen to them if you don't earn a profit." The manager responded positively to Jorge's talk, and now Taco Love is so successful, that Jorge plans to expand to other cities.

The moral of this story is still one of incentive alignment--successful businesses will find ways to give workers enough information to make good decisions and the incentive to do so--but incentives include more than just money.  Great managers learn what motivates employees, and use that knowledge to get them to do the right thing.

This story also illustrates: (i) the zero-sum fallacy (when the restaurant makes more, the proverbial pie gets bigger), (ii) the consequentialist morality of earning profit, and (iii) the hidden cost fallacy--the manager should have considered the hidden cost of her decision, on the workers who were not going to be hired.

Tuesday, March 7, 2017

New era of segregation

Summary of 7 min video below: segregation caused by artificial intelligence, e.g., software that matches job applicants to firms, and potential mates, is exacerbated by housing restrictions.

this is related to our blogging about how zoning restricts housing supply which raises house prices.  

Monday, March 6, 2017

Institutionalized Moral Hazard in Health Care

Q: What happens when providers post all-inclusive prices for medical services?
A: They actually have an incentive to reduce costs.
See the video at youtube here.

Thursday, March 2, 2017

Barriers to trade within India, Canada, South Africa

Good story about trade barriers within India:
At the Walayar checkpoint in southern India, lines of idle trucks stretch as far as the eye can see in both directions along the tree-lined interstate highway, waiting for clearance from tax inspectors that can take days to complete.
Canada has the same problem:
(Canada, by the way, also has this problem. It’s often cheaper for a Canadian firm to ship to the US than to another province in Canada. You can find similar problems in Southern Africa where it is cheaper for South Africa to import produce from South America than from Zambia, as this excellent video discusses.)

Tuesday, February 28, 2017

Is the stock market over-valued?

FT has a nice summary, with graphs.

Learning Curves in F-35 Production

This CNBC report on  Lockheed-Martin plant producing the F-35 reports on the declining cost per fighter over time. The two sources are cost savings from increased automation and from learning curves. The more you buy the more you save.
Hat tip: Helen Gorman

Monday, February 27, 2017

Trump was right: China ate America's manufacturing jobs.

Freakonomics podcast featuring labor economist David Autor:
  • Between 1991 and 2013, Chinese exports grew from roughly 2 percent of the world’s total to nearly 20 percent.

  • ...There are two big differences of the last two decades relative to earlier periods. One is that a lot of our trade prior to China’s rise, a lot of it was North-North trade. You know, trading between wealthy nations. So you know, we sell aircraft engines to France and we buy cheese and wine and Renaults or maybe we buy Mercedes from Germany. And so it’s a lot of high-skill people trading high-skill goods and we’re trading on the basis of taste. Like, “I like your vehicles. You like my aircraft.” It’s not trying to see who can make the cheapest version of X, Y, or Z. We’re often focusing on a set of expensive goods in which we all are differently good at different subsets.
  • So when the United States trades with the developing world, we’re going to typically export skill-intensive products: aircraft engines, electronics, movies, and TV programs and things that use a lot of highly educated labor. And we’re going to tend to import low-skilled or what we call labor-intensive products like you know footwear and textiles, leather goods, things that require a lot of hand assembly. 
  • TRADE BENEFITS US SKILLED WORKERS AND CONSUMERS:  And so what does that do? Well, when we export those high skill-intensive goods we’re basically raising demand for skilled or educated workers in the United States. When we import those labor-intensive goods, we’re going to reduce demand for blue-collar workers, who are not doing skill-intensive production. Now we benefit because we get lower prices on the goods we consume and we sell the things that we’re good at making at a higher price to the world. So that raises GDP but simultaneously it tends to make high-skilled and highly educated labor better off, raise their wages, and it tends to make low-skilled manually intensive laborers worse off because there is less demand for their services – so there’s going to be fewer of them employed or they’re going to be employed at lower wages. So the net effect you can show analytically is going to be positive. 
  • BUT HARMS U.S. UNSKILLED LABOR: But the redistributional consequences are, many of us would view that as adverse because we would rather redistribute from rich to poor than poor to rich. And trade is kind of working in the redistributing from poor to rich direction in the United States. The scale of benefits and harms are rather incommensurate. So for individuals, you know, I have less expensive consumer items because of imports from China. But it hasn’t affected my employment or my wages. For many others – on the order of at least a million U.S. manufacturing workers – it meant the end of their jobs and in many cases the end of their industries.
BOTTOM LINE:  Trade helped U.S. skilled workers (by increasing demand for their services) and consumers (by giving consumers cheaper goods), but hurt U.S. unskilled workers (by reducing demand for their services).  In a frictionless world, they would move to their next best alternative (e.g., Texas or Tennessee), but instead they are moved out of the labor force and into the safety net (e.g., medicare, medicaid, early retirement, disability insurance, food stamps, and TANF).

Interesting closing thoughts by David Autor, which seems to echo President Trump's campaign:
I think the other thing that we have to recognize, and that economists have tended not to emphasize is that jobs aren’t purely income. They are part of identity. They structure people’s lives. They give them a purpose and a social community and a sense of relevance in the world. And I think that is a lot of the frustration that we see in manufacturing-intensive areas. We saw a lot of that actually in the recent election. People feel like their place in the universe, or at least in the economy, has really been kind of reduced, made less valuable. And I think that that’s costly even beyond the direct financial costs.

Thursday, February 23, 2017

Incentives matter: physicians perform fewer surgeries on smokers

The move towards fixed fees, and away from fee-for-service, has given physicians an incentive to get their patients as healthy as possible before surgery, so that there are fewer complications.  Under a fixed fee system, e.g., $20,000 for a joint replacement, the surgeon makes less money if there are complications.
“A year from now, I’ll probably be at a point where I would require all my patients to stop smoking,” Spector said. “Currently, I evaluate it on a case-by-case basis. Over time, we’re going to feel comfortable being a little more stringent with our patients about these modifiable risks.” 
Edwards said he finds many patients “don’t take it well at first” when he advises them to quit smoking or lose weight. But many of them thank him later.

Hotel mergers increase output

Recent article by some middling economists who show that following mergers among hotels, occupancy goes up.  They identify two theoretical mechanisms that could explain the result:
  • The first is that mergers reduce uncertainty about demand. Less uncertainty means better forecasts, which means fewer pricing errors—and higher occupancy—as the hotels are better able to match realized demand to available capacity. 
  •  A second mechanism—that the merged hotels are better able to compete for group and convention business—could also account for price and/or quantity increases. If the merged hotels are large enough to host groups, but the premerger hotels are not, then the merger could increase convention demand for the merged hotels. However, our finding that occupancy increases only in markets with high levels of uncertainty and capacity utilization leads us to prefer the former explanation, although we cannot rule out the possibility that increases in group demand, particularly during low-demand periods, could account for the results.

Thursday links: taxes, Keynesian stimulus, and the super rich

ZeroHedge has a post on the effects of Philadelphia's HUGE soda tax (50% on the receipt to the right) which has lead to layoffs within Philly, but only a small reduction in soda consumption, as residents have started buying soda outside the city limits.

Former student John Tamny has a critique of Keynesian Economics with reference to the Rio Olympics.  

The Boston Globe takes on the zero-sum fallacy by essentially praising inequality:
To begin with, all eight men earned their extraordinary wealth. Through ingenuity, talent, and immense effort, they created enterprises that provide hundreds of millions, even billions, of human beings with goods and services that make life better, healthier, safer, and more affordable. 
Moreover, the Oxfam Eight didn’t grow their fortunes by preventing other people from growing theirs. Their wealth may equal that of half the people on Earth (though Oxfam’s methodology is dubious), but the world’s poor have been climbing out of poverty at the fastest rate in human history. Byanyima rightly bewails the fact that “1 in 10 people survive on less than $2 a day” — what she omits is that over the past 30 years, the number of people living in such extreme poverty has fallen by nearly 75 percent. Johan Norberg, writing in Spiked Review, provides hard numbers: Worldwide, an average of 138,000 people climb out of extreme poverty every day. Since 1990, the world’s population has grown by more than 2 billion, yet the ranks of those in extreme poverty has shrunk by more than 1.25 billion.

Wednesday, February 22, 2017

Is Amazon's growth anticompetitive?

Amazon's focus on growing market share with low prices has benefited consumers but given it a big share of the online market.
  • In 2013, it sold more than its next twelve online competitors combined. 
  • By some estimates, Amazon now captures 46% of online shopping 
  • In addition to being a retailer, it is a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading provider of cloud server space and computing power. 
  • Although Amazon has clocked staggering growth—reporting double-digit increases in net sales yearly—it reports meager profits, choosing to invest aggressively instead. 
  • The company listed consistent losses for the first seven years it was in business, with debts of $2 billion. ...ts highest yearly net income was still less than 1% of its net sales.
Despite its low income, investors have bid up its stock price in anticipation that its size will eventually pay off:
  • Despite the company’s history of thin returns, investors have zealously backed it: Amazon’s shares trade at over 900 times diluted earnings, making it the most expensive stock in the Standard & Poor’s 500
  • ...critics often fumble to explain how a company that has so clearly delivered enormous benefits to consumers—not to mention revolutionized e-commerce in general—could, at the end of the day, threaten our markets. Trying to make sense of the contradiction, one journalist noted that the critics’ argument seems to be that “even though Amazon’s activities tend to reduce book prices, which is considered good for consumers, they ultimately hurt consumers.”
The linked article tries to make a case that the antitrust authorities should intervene now, but they it not address an obvious solution, if Amazon starts behaving anticompetitively, the antitrust authorities can act when it does.

HT:  Quinn

How to keep diplomats from defecting to the West

This appears to be a problem for North Korea. The solution to this pesky moral hazard problem is to force diplomats to "post a bond" in the form of offerring a hostage.
Thae said there was one big obstacle to his defection.

Thae Yong-ho: All North Korean diplomats are forced to leave one of their children back in Pyongyang as a hostage.

Bill Whitaker: As a hostage?

Thae Yong-ho: Yes.

His break came when that policy unexpectedly changed and Thae’s oldest son was allowed to join the family in London. They all agreed to defect. He would not give us the details about his escape and who helped. But we know he was kept in a safe house by South Korean intelligence agents and questioned for more than three months. He said it was too dangerous for us to meet his family.

But if you are going to do it, you must do it continuously.

This is not unlike an alleged criminal posting a bond while awaiting trial or a tradesman posting a bond against faulty repairs.

Suggested by Helen Gorman

Saturday, February 18, 2017

Nice summary of the affordable housing crisis

in the Stanford Law Review:

[the cause of the affordable housing crisis] is uncontroversial among urban economists but not broadly understood by low-income families, advocates for low-income families, housing activists, and their allies in academia, policy, and government—in short, the housing advocacy community. In the face of higher housing costs, the housing advocacy community tends to argue for a “kludgy” set of policies that can actually prevent new development and end up increasing housing prices— campaigns to impose building moratoria, for example, or downzonings, community benefits agreements and other exactions, lengthy approvals procedures that disadvantage developers relative to NIMBYs, various forms of rent control, and a focus on affordable housing to the exclusion of other types of development. …. 
In the suburbs, the politics of exclusionary policies are hopeless: the cartellike interests of suburban “homevoters” are well-served by current exclusionary policies, state and federal courts for the most part won’t intervene, and there is very little interest among state legislators to impose regional or state-wide solutions.11 The picture is less bleak in exclusionary cities: renters, who would directly benefit from lower housing prices, are a majority in many of these cities, and advocates for affordable housing already form a politically influential bloc—but they use their power to ends that are often counterproductive.12 While there are other serious obstacles to expanding housing supply, the housing advocacy community could and should become an important part of the fight against urban land use regimes that systematically privilege a city’s wealthiest and most powerful residents. … 
A city’s ability to remain affordable depends most crucially on its ability to expand housing supply in the face of increased demand. Among the people who care most about high housing costs there is a lack of understanding of the main causes and the policy approaches that can address them. The central message of this Article is that the housing advocacy community—from the shoeleather organizer to the academic theoretician—needs to abandon its reflexively anti-development sentiments and embrace an agenda that accepts and advocates for increased housing development of all types as a way to blunt rising housing costs in the country’s most expensive markets.
HT: Campbell

Monday, February 13, 2017

Who monitors the monitors?

In our problem solving framework we ask three simple questions to diagnose goal misalignment:
  • Q1:  Who made the bad decision?
  • Q2:  Did they have enough information to make a good decision?
  • Q3:  And the incentive to do so?
Answers to these three questions will isolate the source of the problem and suggests one of three generic solutions:
  • S1:  Let someone else make the decision, someone with better information or better incentives.
  • S2:  Give more information to the current decision-maker.
  • S3:  Change the incentives of the current decision-maker.
The first solution is always tempting, but you have to make sure that whoever makes the decision has goals aligned with those of the organization, i.e., enough formation to make a good decision, and the incentive to do so.  This is sometimes referred to as the problem of "who watches the watcher?"

The economist has an article on the history of this problem:
In business and finance, this is known as the “principal-agent” problem. Shareholders employ managers to run a company; investors use fund managers to look after their savings. That makes sense. It allows us to take advantage of the expertise of others, and of economies of scale in fund management (it costs little more to look after $10m than $1m). But it is extremely hard to align the interests of principals and agents exactly.

To spoil the ending, the solution is always "it depends."

Saturday, February 11, 2017

Cost disease in education and health

The two graphs describe the problem:

The question an economist would ask is simple:
So, imagine you’re a poor person. White, minority, whatever. Which would you prefer? 

  • a.  Sending your child to a 2016 school? 
  • b. Or sending your child to a 1975 school, and getting a check for $5,000 every year?

We ask the same question:

Do you think the average poor or middle-class person would rather:

  • a) Get modern health care
  • b) Get the same amount of health care as their parents’ generation, but with modern technology like ACE inhibitors, and also earn $8000 extra a year

Thursday, February 9, 2017

Why three point shots are the best in basketball

Basketball coach Dan D'Antoni uses expected value per attempt to explain why his team takes so many 3-point shots:
"If you can get a layup and it's clean — it's not one that's highly contested — it's [worth] 1.8 points [per attempt]. It's 1.3 from that corner, 1.27. Do you know what a post-up is, with a guy standing over top of you? It's 0.78. So you run your team down there and we'll see how long you can stay with teams that can play the other way. You've seen it in the NBA. The last two championships have been Cleveland and Golden State. What do they do? You don't see anybody post up. They just spread that thing out and go."

HT:  Jason

Thursday, February 2, 2017

Another pension fund lowers discount rate to 7%

If a pension fund has to pay out $100 in 30 years, and earns 7.5% on its investments, it must save 100/(1.075)^30=13.14 today.  If it earns only 7.0%, the amount that it much save increases by 15%.

Calstrs, the second biggest pension fund in the world, just admitted that it is reducing its target rate of return (also its discount rate) from 7.5% to 7.0%.  The increase in savings is split between the teachers and the State of California, the employer of the teachers.
Approximately 80,000 current members of Calstrs could see an increase in their yearly pension contributions of $200 or more as a result of Thursday’s move, Calstrs said. The state of California has already budgeted an extra $153 million for its pension contribution to cover the rate change, bringing the total contribution to $2.8 billion.

Saturday, January 28, 2017

Why currency devaluations are losing their punch

Typically a currency devaluation will help domestic firms and harm domestic consumers because it makes exports cheaper in the foreign country, and imports more expensive.  However, if the domestic firms also import, then the currency devaluation also drives the costs of exporters up.
We find that large exporting firms are also the most import-intensive firms, sourcing a large share of their intermediate inputs from abroad.

Further evidence comes from the effect of devaluations on large and small firm prices, called "pass-through:"
We estimate that large exporters pass-through only about 50% of exchange rate devaluations into their prices. In other words, in response to a 10% devaluation, these firms would cut their export prices only by 5%. ... By contrast, the small exporting firms, which rely on few imported inputs in production, reduce their prices by nearly the full amount of the devaluation.

In other words, the simple message of Chapter 11, that currency devaluations benefit domestic firms and harm domestic consumers, is muted by the mere fact that the biggest exporting firms are also importers.

HT:  Microeconomic Insights

Friday, January 13, 2017

RIP, Dewey

Colleague former Fed Governor Dewey Daane, died last week at 98.  Nice obit in WSJ.  He was one of the first to welcome me to Vanderbilt, invite me into his Tennis game, and introduce me to the rest of Nashville, all of whom he knew.  One of the most colorful characters I have known.  We will miss you.

Wednesday, January 4, 2017

Short-termism is inefficient

The Knicks basketball team have only a three-year contract with their best young player.  As a result, they have less incentive to worry about his long-term viability, and have increased his playing time from 28 min/game to 35 min/game.  Somewhat predictably, Kristaps Porzingis got injured.
“He’s just turned 21,’’ said the NBA scout, who has worked for multiple teams. “They’re draining Kristaps, putting more minutes on him than anyone. Physically he grew in the offseason. It’s a tremendous amount of strain on new material — ligaments, tendons, knee joints for a big guy. It’s unbelievable stress on his body.’’
There seems to be an unconsummated wealth-creating transaction here: if the parties signed a longer-term contract, the team would potntially benefit from any additional longevity (they would reap the rewards from investing in his future), which could make the team, and the player, both better off.

HT:  Marginal Revolution