Monday, November 20, 2017

What are economists good and bad at?

Succinct summary from Claudia Sahm:
Being good at counterfactual thinking, trade offs, comparative advantage, and other non-intuitive logic, as well as a love of numbers, are useful attributes of economists BUT only as part of a larger team. For example, we, economists, tend to have blind spots from our assumptions on efficiency, credibility, rationality, markets, etc., in a way that a non-economist would not. And yet, economist are known for going it alone. Sigh.
Her take-away: Economists work best as part of a team with diverse viewpoints.
Groupthink … the lack of meaningful diversity … in economics has real consequences for real people. We give advice to Congress on how to spend hundreds of billions of dollars in stimulus. We make decisions at the Fed on interest rates. And in many capacities, we have input on financial markets, regulation, and business practices. This adds up to profound effects on many, many lives. And yet, our closed-system culture puts great emphasis on top five publications (an internal status marker) and the credibility of our economic institutions (making sure economists remain key to policy).
Excuse the dangling preposition in the title.

Friday, November 17, 2017

What happens if Uber raises driver wages?

ANSWER:  Nothing, because driver supply increases which reduces the time spent driving for each driver.
We find that when Uber raises the base fare in a city, ... there is no detectable difference in the average hourly earnings rate compared to before the fare increase. With a higher fare, drivers earn more when driving passengers, and so how do drivers make the same amount per hour? The main reason is that driver utilization falls; drivers spend a smaller fraction of their working hours on trips with paying passengers when fares are higher.

Restaurant Strategy

Must read for anyone who ever thought of opening a restaurant:
When might a restaurant be deemed to have moat? The test is always quantitative: does the restaurant generate a return on investment that is significantly above the opportunity cost of capital and does that last for a significant number of years? ...  For example, chain restaurants can create distribution networks and systems that take advantage of supply side economies of scale. Their moat is similar to a business like Costco in that way. Other factors can create moats and sometime it is the combination of factors that produces the barrier to entry. Sometimes a famous chef’s brand acquired from television appearances can help create a moat. Sometimes a location can be helpful as can longevity (the comfort food effect) and historical significance.

Tuesday, November 14, 2017

John Oliver on Economic Development

One of my favorite examples of a prisoner's dilemma is when states compete to lure companies to relocate, each state offering greater and greater development packages and tax breaks. Offering such tax breaks is a dominant strategyif other states don't offer tax breaks, you will certainly win if you do; if other states offer tax breaks, the only way to stay in the running is to offer them as well.

Earlier this year, Wisconsin offered $3 billion to lure a Foxconn factory to its state. New Jersey is offering up to $7 billion to lure Amazon to open a new headquarters. The problem is that such offers lead to an arms race in which the tax breaks actually become irrelevant. When every state offers huge tax incentives, companies decide on non-tax factors like an area's labor force, transportation, and quality of life. But that's exactly how companies would decide in the absence of state tax incentives. Thus, the incentives don't change what companies ultimately do, but they sure cost a lot.

As John Oliver observes, that's why some of the states that aggressively offer tax breaks, like Connecticut, see only a return of seven cents on every dollar given away.

Thursday, November 2, 2017

Subsidizing the American Dream

The Republican tax plan includes a provision that reduces the mortgage interest deduction. The deduction effectively subsidizes home ownership, but not other living options such as renting.

What is the effect of subsidizing the "American dream" to own a home? At least some data comes from an analysis of the experience in Denmark:
First, the mortgage deduction has a precisely estimated zero effect on homeownership. This holds even in the very long run. Second, the mortgage deduction has a sizeable impact on housing demand at the intensive margin, inducing homeowners to buy larger and more expensive houses. Third, the largest effect of the mortgage deduction is on household financial decisions, inducing them to increase indebtedness.

This continues the theme from the previous post that finds college tuition subsidies likewise don't increase the "desired" activity, but do significantly distort the market.

Wednesday, November 1, 2017

Why are you paying so much in tuition?

USA Today warns us that "College tuition is rising faster than inflation" but that headline downplays the size of the increase. Over the last fifteen years, college tuition has outpaced not only inflation but growth in housing cost and even the cost of healthcare. A number of recent economic papers have seemingly converged on the main cause: government subsidies.

Stephanie Cellini and Claudia Goldin examine for-profit schools and compare tuition at those with and without students eligible for federal financial aid. Aid-eligible colleges charge, on average, 78% higher tuition than non-aid-eligible colleges, and the differences in some cases are "roughly equal to average student grant awards and our estimate of the loan subsidy."

Another study confirms that this is not isolated to for-profit colleges:
We find that each additional Pell Grant dollar to an institution leads to a roughly 55 cent increase in sticker price tuition. For subsidized loans, we find a somewhat larger passthrough effect of about 70 percent.

Thus, most of the subsidy is translated directly into higher tuition. But do these subsidies achieve their goal of increasing college enrollment? Grey Gordon and Aaron Hedlund attempt to estimate the answer:
The tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline.

Of course, this was all famously predicted in 1987 by then Secretary of Education William J. Bennett:
Increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.