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.

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.

HT: MarginalRevolution.com

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.

HT:  MarginalRevolution.com

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 strategy—if 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.

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.

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.

Houston Texans succeed by ignoring sunk costs

Although every econ student, and most MBA's, learn to ignore sunk costs, this learning seems not to have reached the NFL:

The propensity to stick with a quarterback too long isn’t just an anecdotal phenomenon favored by frustrated fans sick of losing with the same players. It has backing in research and hinges on the basic economic concept of sunk costs—the idea that money spent can’t be recovered. Typically, the more teams invest in a player, the more they’ll let him play.

Except for the Houston Texans, who have replaced their starter with Deshaun Watson, and now have one of the league's best offenses:

How the Texans reached this position—with an eagerness to look for a better option at quarterback at any given moment—sounds obvious. But it’s borderline radical in a league where coaches and executives attach themselves to their most prized investments with feverish devotion.

Some of the reluctance to ignore sunk costs is that management has to admit that they made an earlier mistake.

The Market for Disaster Recovery

According to this report, the cleanup from Hurricane Harvey in the Houston area may take longer than expected. Cities contract with various companies to remove debris that residents have piled up on curbsides on a price per cubic yard. These companies then contract with truckers with specialized equipment to do the actual work.

SIEGEL: After Hurricane Irma. That is Dee Sosa. He's the city manager of Groves. And here's what he told me. He says his city contracted with the DRC and agreed to pay a little under $10 per cubic yard of debris. DRC agreed to send an array of equipment. And in fact, the company sent some 10 or more of those big trucks.

SOSA: They're double trucks with a grapple in the middle. And there's about 300 of them in existence.

But then Hurricane Irma hit Florida. Demand for these trucks rose. The Florida cities were paying more per cubic yard. Owners of these big trucks  moved them to Florida.

SOSA: The best analogy I can make is like this. Let's say that you want me to Sheetrock your house, and I am the general contractor. And I hire the Sheetrock people, and I have them working for me all the time. But it's an arrangement whereby, hey, I find you work; you come in and work. I get a cut, and you get a cut.

All of a sudden, they have way more jobs available than there are Sheetrock people, and these guys can make more money someplace else. Well, I go back to you and say, hey, do you want to raise your price and try to match this so we can keep these guys here? 

This a variant of hold-up.

Should all movies have the same price?

Should a hotel charge the same price for its smallest room as the penthouse? Should a Mercedes Cabriolet cost the same as a Toyota Corolla? Of course not, but yet movie theaters in the United States charge the same price whether you're going to see the latest Oscar winner or the Emoji Movie.

But now, Regal Cinemas "plans to test demand-based pricing" by allowing prices to reflect consumer sentiment toward each specific film. Directors who see the ticket prices of their films in the discount bin might not appreciate the new pricing paradigm.

How does Google Ad Words' auction ads?

Watch the video about how Google uses a second price auction to auction ad clicks--so the auction can be run asynchronously and automatically--using quality weighted bids. 

Cutting the Cord - Again

The WSJ is reporting that AT&T is losing traditional cable TV customers.

AT&T said in a securities filing late Wednesday that its video-subscriber base declined by about 90,000 customers in the third quarter as customers abandoned its fiber-optic-video and satellite-TV services. The decline, its third quarterly drop in a row, came despite nearly 300,000 new accounts on its DirecTV Now service, which streams channels over the internet.

Other cable TV providers are also losing their higher-margin subscribers to cheaper Internet streaming services. Streaming services continue to create content bundles similar to the traditional CATV bundles that appeal to consumers.

Moreover, this increased downstream competition is forcing content providers to negotiate lower prices to content distributors.

Shares of media companies also fell. AMC Networks Inc. lost 6.8%, Viacom Inc. declined 2.5% and Walt Disney Co. slid 1.6% on Thursday after Guggenheim Securities analyst Michael Morris downgraded the stocks. "We expect pressure on subscriber trends and audience size to continue for the foreseeable future" across the entire sector, he wrote.

For those of us old enough, this has a familiar ring to it. One of the FCC's policy goals in the 1990s was to increase competition for the local telephone telephone monopolies. However, it was difficult to get anyone to invest in stringing new wires to each household. A few foresaw that the growth mobile phone industry would lead to 'cord cutting' by millions in the US (and provide service to billions worldwide).

G-Eazy on opportunity cost

There is naturally a close affinity between economists and rappers, which is why it should be no surprise that G-Eazy's chart topping debut album, These Things Happen, includes his powerhouse economics-lecture-disguised-as-rap, Opportunity Cost.

Everything costs something bro
Winning somewhere, somewhere else you just lost something though
The cost of opportunities is always good to know
But if you know that then you're good to go

I could not have put it better myself.

You may watch the video but be warned that the G-Eazy also explores his feelings on non-economic issues with language some may find objectionable.

Gaming the ACA health exchanges

A recent headline proclaims that "Pennsylvania ObamaCare to see premiums spike amid Trump pay cuts." While premiums are in fact going up nationally (and are certainly exacerbated by the recent end to certain subsidies), the important part of the story is five paragraphs down.

While the increase is steep, in Pennsylvania it will only apply to the mid-level “silver” health plans that consumers can buy on the exchange.

Plans come in three tiers, bronze, silver, and gold. Government subsidies for purchasers are based on a state's price for the silver plans. The idea was that subsidies will reflect the "average" prices of a plan. It didn't take long, though, for state regulators and insurers to realize how to game this system, raising the price of silver plans to increase the subsidies that people can then use on bronze or gold plans.

If the price of a silver plan increases, tax credits that help customers purchase insurance will also increase, so the cost of the most comprehensive “gold” plan may be much cheaper than in previous years.

Perverse incentives in soccer

Presumably, the primary goal of any sport governing body is to provide adequate incentive for competitors to do battle on the field (court, pitch, etc.), each striving for victory. Things don't always turn out that way. 

My all time favorite example of the strangest (incentive-driven) spectacle in sport is from the 1994 Shell Caribbean Cup involving a match between Barbados and Grenada. 

A very poorly-conceived (though well-intentioned) tournament rule stipulated that any goals scored in overtime (and, by virtue of a sudden-death rule, there could only be one) would count double, as if the team scored two goals. The idea was to reward teams in close matches. This simple rule led to a very strange match.

Barbados needed to win the match by two goals to advance in the tournament. If they failed, either losing the match or winning by only one goal, their opponent Grenada would advance instead. With less than ten minutes left in the match, Barbados led by exactly two goals and began to play very defensively. In the 83rd minute, Grenada finally scored, making the score 2-1. Barbados tried to answer but, with only three minutes remaining, was unable to score. Members of the Barbados team contemplated their options. To advance, they needed either to score one more goal in the last three minutes (winning by two), or force the game to extra time where a goal would count as if they won by two. Barbados scored on their own net, tying the game at 2-2.

This is not yet the odd part of the match. The Grenada players, initial shock abating, developed their own strategy. If they could score on Barbados in the waning minutes, they would win the match and advance. But, if they could score a goal on themselves, they would lose by one goal which was still enough to advance. 

For two minutes, Grenada tried to score on either goal, with Barbados players split between defending their own goal and that of their opponents!

Normal time ended in a tie and the game did go to overtime, in which Barbados scored a game winner and advanced (though was eliminated from the tournament in the next round). No penalties for the players' actions in this game were handed down by soccer's governing body since both teams were earnestly trying to win their group, and the farce was the result of silly incentives.

Pricing Political Risk - Catalunya

The recent referendum on Catalan independence injected some uncertainty into the Spanish bond market. Investors required a premium to own these bonds because they did not know how if the government was going to be able to pay them off. But prices have fallen since the vote, suggesting that investors think much of the uncertainty has been resolved.

Keeping Assets in Low Valued Uses - Jones Act Edition

If you wanted to truck oranges from Miami to New Orleans, it doesn't matter where the truck was made. If you wanted to fly them, it doesn't matter where the plane was made. But if you put them on a boat, the Jones Act says the ship must be American made or be subject to tariffs and fees. How much of a difference does this make?

Enough so that the administration temporarily waived the act so as to get shipments to Puerto Rico after hurricane Maria. Evidently, they believed this measure was restricting the free flow of emergency provisions. But, alas, the waiver will not be renewed. Some clever economist should measure how much this waiver lowered costs (and maybe saved lives). If so, we might have the ammunition needed to repeal this blatant protectionism.

Repost: Bargaining exam question

Bargaining exam question

Suppose that a grocery store knows that 50% of its customers are Coke Loyalists (they consume only Coke); 25% are Pepsi Loyalists (they consume only Pepsi); and 25% are Switchers (they will consume either Coke or Pepsi).  If the Grocery store did not carry Pepsi, they would earn $15 million on Coke sales (before payment to Coke);  and if the store did not carry Coke, it would earn $10 million on Pepsi sales (before payment to Pepsi).  Currently the store carries both Coke and Pepsi, and earns 20 million on total soft drink sales (before payment to Coke and Pepsi).

1. How is the $20 million profit split between Coke, Pepsi, and the Grocery store?
2. How would the profit be split if Coke and Pepsi merged and bargained jointly?

HINT:  the alternatives to agreement determine the terms of agreement.

NOTE:  Professors, e mail me for the answer.

REFERENCE:  Werden, Gregory and Luke Froeb, Unilateral Competitive Effects of Horizontal Mergers II: Auctions and Bargaining, Issues in Competition Law and Policy, W. Dale Collins (ed.), ABA Section of Antitrust Law, 2008, vol. 2, 1343. Available at SSRN: http://ssrn.com/abstract=956400

Capital / Labor Substittuion

At what wage rate do you no longer hire a guy to twirl your sign for you?

Rivals Horizontally - Cozy Vertically

With the latest releases of the Apple X and the Samsung Galaxy 8, we expected pretty intense rivalry. Maybe not so much seeing how Samsung is one of the major suppliers of components for the Apple X. The WSJ reports that Samsung "stands to make $110 from for each top-of-the-line, $1,000 iPhone X that Apple sells." For example, Samsung "is the only significant manufacturer of the organic light-emitting diode, or OLED, displays Apple has adopted to create the iPhone X screen." Furthermore,

An analysis conducted by Counterpoint Technology Market Research for The Wall Street Journal finds Samsung is likely to earn roughly $4 billion more in revenue from iPhone X parts than from components made for the Galaxy S8 in the 20 months after the new iPhones go on sale Nov. 3.

This suggests to me that Samsung's real comparative advantage is in the cutting edge technologies embedded in these components. Like most electronics, I suspect there are substantial scale economies  (and perhaps learning curve effects) in the production of these components. It can lower its unit costs be producing ever more units. It has vertically integrated into assembling them into phones so as to move down this cost curve. It hardly cares whether these components are in its own phones or are sold to downstream rivals to be included in the rival's phones.

Adapting to Changing Technology: Juiced Baseball Edition

NPR had a nice story about some economics of juiced baseballs. Yes NPR. 

There have been a record number of home runs this year, approaching 6,000. The evidence suggests that, due to changes in how the balls are being made, hits are going an average of seven extra feet. How do players and teams react to this?

More players now swing for the fences. Non-sluggers used to be content with just getting on base. Now they have a better shot at rounding the bases. We know this because there is also a record number of strikeouts.

SIEGEL: But given the number of strikeouts and given all the talk about the launch angle of the baseball as it leaves the bat, it seems that more baseball players are going up to the plate trying to hit a home run.

KERI: Well, that's certainly true. But it has to do with incentives. You know, if you hit a bunch of home runs and you strike out, there's nothing that's going to get you fired from your job for that. And Aaron Judge is a classic example of this. Aaron Judge has more than 50 home runs. He's going to win the AL Rookie of the Year, maybe MVP. He struck out more than 200 times this year. Only six players ever in the history of baseball, including Judge, have done that. And we don't say, Aaron Judge, tisk-tisk (ph), all those strikeouts. We say, Aaron Judge, what an exciting player.

Also, the premium teams pay for sluggers is likely to fall. Being able to hit 20 home runs a year used to be pretty rare. But the supply of pseudo-sluggers has just increased, causing the price to fall.

If you look at some other sluggers that have gone out on the open market and will this offseason, it's a supply and demand issue. If everybody's hitting home runs, why bother spending a lot for home runs?

Bundling video

What makes big tech firms so profitable?

McKinsey Report:

Increasingly the ranks of top players in TMT (technology, media, and telecommunications ) are populated by companies that have managed to create and scale successful platforms that benefit from network effects. These can be technology platforms (for example, Apple’s iOS), marketplaces (for example, Apple’s app store), or platforms of another type—but in each case these winning platforms increasingly exploit “network effects,” which means the value of the product, service, or the underlying technology increases when more people use it. The more you use Facebook, for instance, the more your friends will use it. There are also indirect network effects, which involve the creation of complementary products or services—the app markets that have grown up around smartphones and tablets, for example, or social gaming that is enabled by social networks.

Despite the network economies of size, success is short-lived:

Taking our data set as a whole, across all industries, nearly 60 percent of companies that were in the top quintile in terms of economic profit in 2000 were still in the top quintile 15 years later. In TMT industries, though, only 45 percent of top players from 2000 remained in the top quintile in 2015. The flip side is that over the same period 25 percent more companies that started at the bottom ended up in the top quintile (Exhibit 6).

Timeless words of Wisdom

I don't care who writes a nation's laws, or crafts its advanced treaties, if I can write its economics textbooks.
                            -- Paul A. Samuelson, the "father of modern economics."

HT:  MarginalRevolution.com

Which jobs don't Millenials like?

This weekend, one of my executive students told me that she is able to hire college graduates in Chicago for only $30K/year if they get to work in a downtown office. However, these same graduates turn down sales jobs that pay $50K. She ascribes it to the “cool” factor of working in a downtown office, i.e., to get a graduate to work in the relatively uncool job of sales, you have to pay them a $20K compensating differential. HT: Megan

Excavating entrenched management

In the words of Weisbach (1988): "Managerial entrenchment occurs when managers gain so much power that they are able to use the firm to further their own interests rather than the interests of shareholders."

Marc Fors told me this story of excavating entrenched management from American Business Products (ABP), a public company that was comprised of a variety of product groups; from food packaging to stationary and office products to book manufacture. BookCrafters was the book operation and was about $40M in sales and while historically profitable had now been losing money for several years. A new management group had been hired a few years before but the downward slide continued. All efforts to sell the company to other larger competitors had been fruitless. It had to be fixed or would have to be shuttered.

 I was hired as the turnaround CEO and moved to Ann Arbor with my wife and we rented a house in the community. This would be the smallest company I had attempted so far. It was the dominant company in the small town of Chelsea, and its largest employer. It had long been a family operation before being acquired by ABP and had been insulated from the changing realities of the print markets.

 Apart from the usual array of process control, a sales organization and equipment problems, there was a distinct morale issue. After a day or so at the plant HQ offices interviewing key players I began to understand the depth of the morale issue within the ranks. There was little respect or confidence in the new management team that had been hired by ABP. They had come across to the employees as aloof outsiders, more concerned with their own positions, and had not made any progress the 450 employees could see. Some key employees had been demoted or fired to make room for new managers aligned with the new management team, making matters worse as those hires brought a similar attitude and effected no positive change.

I had arrived a day earlier than planned and noticed that the entire management team was out at a “management meeting” at the local private golf club where the company maintained a membership. When they returned the next day I was struck by the lineup of leased company vehicles they all drove – all expensive luxury cars. These guys were out of touch and they had lost the respect of the hourly employees and were not likely to get it back. Morale was low and the rumor was out that I was here to reduce headcount and close the plant.

 After a series of one-on-one meetings with each department head where I was regaled with how much new capital they needed to improve operations I was scheduled to tour the plant with the three key manufacturing managers. A book printing operation is a complex operation of parts and assembly at that time. The skilled trades were on the printing presses, as large as a small house, and they were mostly men. The unskilled trades of assembling parts and operating the bindery were almost 70% women.

 Once out in the factory we walked through the Bindery with its loud clacking machines and all the handworkers gawking at the guys in suits, ostensibly to the center of the operation and to one of the newer printing presses that they wanted me to see and presumably be impressed by, they asked what I wanted to see first that day. I stopped the whole group in the aisle, by a small group packing boxes, and spoke loudly in order to be hard by all: “I want to see the women’s bathrooms.” Chuckles and odd smiles were the response all around and I said, “I’m serious. I want to see them all, one after the other – together as a group” Then I want to see any break room or employee changing area.” “After that, I will decide if we see anything else”

So that is what we did. I made them tour each bathroom and break area with me – making notes of cleanliness, broken faucets, paint problems, chipped and rusty porcelain and the like. It was intended to be obvious to the whole plant. I asked a female worker to take a break, leave her station and come with us – she entered before and made sure we were not disturbing anyone. I went in each bathroom over the course of a couple of hours (there were 12) and spent time in each and went I came out made a point of waving my arms, pointing and gesturing with the group around me.

After the tour, standing in the aisle we started in, I summed it up for the group: “So far, I am not impressed. You would not ask your own wife or daughter to spend time in those bathrooms and I am shocked you have let it go that far. I have to tell you I am not interested in touring anything else, or talking about any new capital for this plant until those bathrooms are fixed. That’s where we start. Productivity comes from people first and equipment second, not the other way around.”

The next day I fired one department head and hired back, as his replacement, a much beloved (and effective) manager that had been demoted. He began work on the refits. He had all the stalls dismantled and repainted by the local auto-body company in short order. Lighting was changed and upgraded. Paint and mirrors replaced and new seating and lockers installed in the break rooms. Fresh food options replaced broken vending machines.

 Over the next two years more progress was made and the sales organization was rebuilt. The plant never experienced the feared reduction in hourly manning – in fact the reverse. Sales grew, new product lines added, and morale and productivity recovered. I then led the sale of BookCrafters to a larger company that had two similar book plants that we merged with and integrated, led by the BookCrafters management team, bringing our management style and priorities with us. BookCrafters grew to become the Book Division of the Sheridan Group, a $500M print company, and is still in operation today in Chelsea Michigan.

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

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.

Equilibrium in the Tinder Market?

When demand shifts up we expect price to rise, ..., or quality to fall. Worst-online-dater over at Medium.com has done some analysis of activity on Tinder. The nice thing about heterosexual matching markets is that there is are almost equal numbers of males as females. With a few exceptions, matches tend to be one-to-one. But, before settling down (and perhaps after), there appears to be much more interest by men in dating women than women in dating men. Normally this would lead to side payments but that has traditionally been frowned upon. So what other mechanism allocates scarce women to the surplus of men?

Quality, or at least attractiveness, sorts these scarce women to all these men. The curve between the pink and the blue represents equal numbers of Tinder "likes" by attractiveness percentile of men and women.

Men must be quite attractive to be "liked" on Tinder while women need not be.

In reality, the bottom 80% of men are fighting over the bottom 22% of women and the top 78% of women are fighting over the top 20% of men.

An Honest Pension Manager

Zero Hedge Fund has a nice story demonstrating the power of compounding. One way to make your pension look solvent is to assume exceptionally high expected rates of return. Minnesota made more realistic assumptions and found that their unfunded obligations ballooned from $16 billion to $50 billion. But Minnesota is only noteworthy because their revised assumptions are now more honest. Most other states are in pretty bad shape too.

REPOST: Truckers are stockpiling dirty diesel engines

In 2007, new EPA regulations that mandate cleaner diesel enginestook effect. The new engines reduce particle emissions by up to 98% over the previous generation and cut Nitrogen-oxide emissions in half.

But they increase the cost of trucks by $12,000, or about 10%. In addition, truckers (consumers of the new engines) expect higher maintenance costs and worse fuel mileage.

Predictably, the new regulations caused a big increase in demand for 2006 engines and trucks,

Truckers seeking to beat the price increases made 2006 a record year for truck makers. More than 373,000 big-rig trucks were built in North America, says Ken Vieth of A.C.T. Research, which follows truck sales trends. The tally easily topped the previous record of 330,000 trucks in 1999.

But next year, Vieth predicts "a production drought," with sales falling by more than 40% to 220,000 as trucking firms hold off buying to see how the new clean-diesel trucks perform. ...

The cost to truckers goes beyond new big-rig purchases, according to Moskowitz. The new fuel costs 5 cents to 10 cents more per gallon to refine and may produce lower fuel mileage. The new engines weigh more, further cutting mileage. "Over the long run, their increased costs will be passed on to the shippers and ultimately, the consumers," Moskowitz says.

Both the 2006 boom, and the 2007 bust were predictable with simple supply-demand analysis, especially since a similar regulatory change occurred in 2002.

For policy makers, this points out yet another disadvantage of a command-and-control approach to clean air. Mandates from Washington have to be phased in, and this gives consumers an incentive to stockpile old, cheap, but dirty engines so they can use them in the future. Instead of telling producers what to produce, or consumers what to consume (by picking technologies, like ethanol, to subsidize), tax what you don't want (pollution) and let the market decide how best to reduce it.

Bottom line: How many economists does it take to screw in a light bulb? None--the market will do it.

REPOST: Uber's surge pricing is efficient, but deeply unpopular

So much so that places like Dehli has banned the practice.  In response to these political threats Uber has started trying to educate the public about the benefits of surge pricing.  Here is a "natural experiment" in Manhattan.

In the left panel, on New Year's eve 2014, there was no surge pricing (the algorithm broke down), and wait times tripled while the completion rate was cut to 25%.  The right panel shows the same area of Manhattan following a Ariana Grande concert in 2015.  After the concert let out, fares increased, but there was no change in wait times nor completion rates.

BOTTOM LINE:  surge pricing is needed to bring in supply and allocate rides to those who want them the most.  Without it, supply is too small, and rides are not allocated to their highest valued use.
(Economist article)

Heckman on Empirical Economics

Jim Heckman was awarded the Nobel Memorial Prize in Economics mainly for his contributions to the development of empirical methods. He applied these to social policy issues but they are also being applied to managerial decisions. Here he is talking about the value of empirical economics to go beyond ideology.

Markets Reveal Value

A recent article in the WSJ reports that:

Four mutual-fund companies have marked down their investments in Uber Technologies Inc. by as much as 15%, the first such price cuts that suggest these investors are souring on the ride-hailing giant following a scandal-ridden year.

A 15% swing in price in one day is huge. This happens because Uber is privately held and there isn't an organized market for the shares. They do not have to announce write downs of their shares in, say, GM or Merck. They simply check their favorite financial news site. But they likely had a team gathering information and poring over the numbers in order to come up with the new Uber price point. This is costly. One of the great virtues of markets (described beautifully by Hayek) is that they reveal value to the uninformed nearly costlessly. Yet another reason economists are so infatuated with markets.

Reduce Prices When you Acquire a Complementary Good

Minjae Song, Sean Nicholson, and Claudio Lucarelli examine the pricing of drug "cocktails" in their new paper in the RAND Journal of Economics. Sometimes the preferred treatment regimen is a combination of drugs made by competing firms. Each drugs might deal with issues not treated by the other, or that are exasperated by the other, and so are complement each other. In these cases, there would be two effects from a merger between firms:

• higher prices from increased market power when the drugs are sold stand alone and 
• lower prices from internalizing the complementarity when the drugs are sold in combination. 

In their simulations of hypothetical mergers, Song et al. find that the two effects are practically a wash and often consumers are better off.

The net impact of a merger is a modest price increase, or even a price decrease.

Germany's North-South divide

The latest evidence about the superiority of markets (over government planning) seems to come from Germany, people go to better schools, get jobs more easily, earn more and live longer to enjoy it. Crime is also lower. I say "seems to" because inferring causality from correlation is notoriously difficult.

In 1960 Bavaria was the poorest part of West Germany. Like its neighbours, it lacked natural resources and had to find work for millions of Germans who had fled central Europe from 1945 and settled in rural areas. So successive governments limited bureaucracy and offered incentives for investment not just in big cities but also in smaller-scale production in towns and villages. This suited economic traditions: the hilly south had generally been farmed in small patches by self-sufficient families, while the flatter north lent itself to larger, more class-stratified agri-businesses. ... Bruno Hildenbrand, a sociologist, even suggests that the relative autonomy of the southern farming families gave the region a more entrepreneurial and pragmatic mentality.

HT: MarginalRevolution.com

Fake Eclipse Sunglasses

Like many, I will stop my day to experience the solar eclipse on Monday. Many will regret it. As the WSJ reports, they will have stared up at the sun thinking their eyes were protected by special sunglasses that "can filter out tens of thousands of times as much light from the sun as sunglasses." Instead, they will be exposing their eyes to potential harm from counterfeits.

Mr. Jerit said some dealers on Amazon have created copycat versions of his company's Soluna brand of eclipse glasses, sold by GSM Sales LLC. He says the knockoff Solunas are replicas down to the logo, design and product information printed on the frames, and often are sold at much lower prices. A pack of 10 legitimate Soluna eclipse viewers cost $39.95 on Amazon as of Aug. 4

This is a case of a very large and very temporary expansion in demand. Supply cannot increase fast enough making price rise temporarily. But even more, the new temporary demanders are not as discerning about quality as the traditional customers. These are the characteristics that permit moral hazard. With a higher price, there is room low cost producers to enter temporarily with sub-standard products.

I am predicting that ophthalmologists will be busy over the next few months.

Sheldon Chooses a Console

I use this youtube video in class to get a discussion going of all the instances of opportunity costs. The writers did a good job making it accessible even to non-gamers and in carrying a gag as far as they could.

Game theory applied to extreme view protests

In light of events in Charlottesville over the weekend, I am reposting from a story in the WSJ. Germans pledged money to an anti-nazi group for every meter that nazis marched. You cannot help but smirk when watching the video.


I suggest that the next time an alt-right, nazi, or KKK rally is planned, a similar campaign is launched. I know many would pledge money for every hour that the speeches are made and their protest lasts if donations went to a suitable organization that peacefully counsels these folks back into the mainstream. Then hand out lozenges so they could continue as long as possible. Have a signboard with a running total so they could see how much they have raised.The media would eat it up.

The Dark Side of Incentive Pay?

The Financial Times recently published a thoughtful commentary by Jonathan Ford arguing that performance pay in the financial sector has been bad for financial market consumers. He extolls the virtues of the post-war, pre-liberalization banking system where a particularly industrious bank manager might get rewarded with a letter of commendation from the bank president. Ford notes that there were flaws.

The system was not perfect: it could entrench snooty managers and make credit hard to come by.

In contrast to these halcyon days, today's financial managers face constant competitive pressure and are constantly rewarded for increasing profits. We hope that profits are generated by delivering ever increasing value to customers. But, especially during the financial crisis, there were many examples of bankers fleecing customers. He notes that the bad acts are a result of bad incentives and suggests a remedy for these bad acts.

But there is of course a simpler way to avoid offering bad incentives. That is simply to pay employees a salary based on what the job is worth.

On net, was the move to market liberalization, and incentive pay as a consequence, worth it?

I will note that, over the past four decades, the financial sector has seen nearly as much innovation as the IT sector. Spreads between interest rates to borrowers and savers and in stock market transactions have shrunk dramatically. More consumers have access to more financial instruments than ever before in part because more financial instruments are available at cheaper rates than ever before. Ask your grandparents if they diversified their retirement fund into international equity funds when they were your age and you will probably get a blank stare. This innovation is also a result of market liberalization. Would de-liberalization and a reduction in banker incentive pay also put a halt to further financial market innovation?