Taxes and Light Rail vs. Uber and Express Lanes

Colleague Malcolm Getz posts a critique of Nashville's transit plan, up for a vote on May 1, 2018.  He uses the "indifference principle" from chapter 9 to conclude that neither bigger roads, nor mass transit, will reduce congestion

With wider roads, traffic expands to congest them. This well-established fact is the "iron law of traffic." ...

Similarly, ... when some people shift from cars to transit, other people take their place on the roads. Visit cities with vast transit services—Chicago and Atlanta, for example. Notice that roadways are as congested as those in Nashville, if not more so. Transit may attract riders but does not reduce traffic congestion. The average time to travel to work by car is 24.2 minutes in Davidson County, TN, 27.6 minutes in Fulton County, GA, and 32.6 in Cook County, IL.

So what does Professor Getz recommend?  Car-hailing Services and Express Lanes.

The new services will reduce congestion with the confluence of three factors. A) The car services, including Lyft, are more convenient than owning a car or using conventional transit for many trips. B) The car-service companies are offering increasingly sophisticated shared-ride services. C) Digital systems are managing the flow of traffic in real-time on express lanes to forestall congestion. Taken together, these developments improve mobility, increase the capacity of the road network, and reduce congestion. They are also less expensive than trains.

Perhaps the most intriguing part of the report to students is that Prof. Getz uses the indifference principle to evaluate the fairness of using a broad-based sales tax to finance transportation improvements.  Provided that the transit plans work as intended,

Where better transit improves access to a location, the value of real estate increases. Market rents on housing and commercial space increase. The benefits of the transit improvement, then, go to the landlords, the owners of the real estate with better access, not to the transit riders. 

If readers disagree with Professor Getz's analysis, please comment!

Wither the Price Tag?

Planet Money ran a story about the price tag a few years ago. The premise of the story is that the price tag emerged in just the 1870s and may be on its way out. So how did you know what to pay previously?

You know, for almost all of the history of human commerce - for thousands of years - you walk into a store, and you point to something. And you say, how much does that cost? The guy at the store is going to say, how much you got? You know, everything was a negotiation.

Price tags saved transactions costs but removed the ability to price discriminate. There is a nice discussion of how price tags lowered the skill level required by clerks, and hence labor costs. But now we are in the era of online 'personalized pricing,' a constant price on a tag seems to be on the way out. But we are still working out the rules.

And there is this broader sense, I think, that right now, you know, we're still trying to figure out the rules of this new pricing universe we're in. There is one thing the people clearly don't like, that clearly at least so far is against the rules. And that is when a company charges different customers different prices at the same moment. 

Perhaps this is a quibble, but the point of price tags was to minimize the costs of haggling. The new pricing mechanisms typically do not invite haggling back.

18th Century Pretzel Standardization

Pretzels, or bretzels, were an important part of the cuisine in southern Germany at least since the 12th century. Apparently, shirking on the size of pretzels could be a problem. The photo here is from Heidelberg and represents a solution adopted nearly three centuries ago. The size and shape of a 'standard' pretzel, about 10" in diameter, was engraved onto the stones at the base of the central cathedral. If anyone suspected they were being cheated, they could place their pretzel on top of the engraving to verify if it was, in fact, large enough. This is an early example of the regulation of minimum quality standards.

BTW, pretzels in southern Germany (with a little butter) are delicious and Heidelberg is a lovely town to visit.

China's yuan up 11% since President Trump took office

Marginal Revolution reports:

“China’s yuan has appreciated vs. US dollar by +3.7% so far this year, and has risen +10.7% since Trump took office. – US dollar has fallen by about -1% so far this year, on a broad trade-weighted basis.” Link here.

Two ways of explaining this:

1. China is exporting fewer goods and services [to buy Chinese goods and services, US consumers or the importers that bring the goods to the country need to sell dollars to buy yuan==>demand for yuan increases]
2. China is investing less in the US, i.e., holding fewer Treasury Bills [to invest in the US, Chinese investors need to sell yuan to buy dollars==> supply of yuan falls]

I suspect both may be going on.

Scaling up Auto Dealership Size

The WSJ reports that the efficient size of an auto dealership in the US is getting larger. They have become 20% larger over the past four years:

The top 50 dealer groups are poised to book more than $175 billion in revenue this year, compared to $144 billion 

There is an consolidation wave going on:

Erin Kerrigan, founder of the Kerrigan advisory, said about 200 dealerships changed hands in 2017, near an all-time high with a similar level of transactions to take place this year.

An economist observer naturally asks why?

1. One explanation suggests that inefficient small firms had been able to survive only because of weak competition. They cannot stay afloat on the smaller margins:

... dealer margins are shrinking amid tough competition and the increased pricing transparency enabled by the Internet. Dealers took home about 2.5% of the selling price of the average new car in 2017, down from about 4.7% in 2009, according to data from the National Automobile Dealers Association; used-car margins slipped to 6.9% from 10.7% in 2009 during that period.

and

 Dealers say they need to as much as triple revenue in the next half-decade to offset shrinking margins and increasing competition from companies that didn't exist a decade ago.

2. Another explanation is that the cost conditions changed so that unit costs are lowest at a larger scale.

"In order to survive and thrive you need scale and scope and access to capital," he [Mr. Rosenberg, chief executive of GPB Capital] said.

DON'T PANIC: a guide to claims of increasing concentration

New paper by some middling economists:

The Obama Administration’s Council of Economic Advisers (CEA) sounded an alarm in 2016 with an “issue brief” pointing to indications of “a decline of competition.” Principal among them was “increasing industry concentration,” and the key evidence was data from the U.S. Census Bureau. Commentators relied on these data in advocating antitrust reform. But these data do not demonstrate increasing concentration of markets, i.e., ranges of economic activity in which competitive processes determine price and quality, and in which the impact of mergers and trade restraints are evaluated in antitrust law.  

Market concentration is a useful indicator of competition, but Census data relate to aggregations of economic activity much broader than markets. We show that even the least aggregated Census data can be over a hundred times too aggregated, yet the CEA used the most aggregated Census data. It principally cited the change in the 50-firm concentration ratio for 13 broad sectors of the U.S. economy, such as retail trade. We agree with Carl Shapiro, a member of the CEA during the Obama Administration (2011– 12), that these data are “not informative regarding the state of competition.”

These claims have spread rapidly into policy debates without careful review of the claims or the underlying data on which they are based.

Hope for would-be home owners and renters from California!

The State of California is consider a measure that would loosen zoning restrictions near "transit rich" areas, like subway stops.

The impact could be huge. A Times analysis found that about 190,000 parcels in L.A. neighborhoods zoned for single-family homes are located in the “transit rich” areas identified in SB 827. Residences in those neighborhoods could eventually be replaced with buildings ranging from 45 to 85 feet, city officials say.

Increasing housing supply would not only reduce price and help would-be home-owners and renters, but it would also reduce our collective carbon footprint because California, with its mild climate, is one of the "greenest" places to live. 

Bundled Ride Shares

Lyft is experimenting with monthly subscriptions for rides. There is a $15 limit on how much each ride is worth, but for high volume users, this is a deal. This might convince some people to forego owning a car.

Even better, Lyft is trying out different plans: 60 rides for $399 per month versus 30 rides for $199 per month. I suspect their data analysts will pore over the data to see how to taylor offerings.

Cheaper Booze

This is the likely result from allowing more efficient retailers into Texas. A Texas law has prohibited publicly traded firms from selling liquor.

Walmart sued to challenge that rule, and on Wednesday a federal district judge sided with the retail giant. 

The law was specifically written as a barrier to entry to protect mom & pop stores.

The law was created in the early 1990s when the Texas Alcoholic Beverage Commission, or TABC, lost a lawsuit from an out-of-state package store liquor license applicant. The rule forbids publicly traded businesses from selling alcohol to protect family-owned companies.

So, since the legislature could not prohibit only out-of-staters, they simply prohibited all publicly held firms. Naked protectionism.

Half Million Dollar Steel Jobs?

The steel and aluminum tariffs just announced represent a barrier to entry for foreign firms. On the up-side, they are claimed to generate 19,000 steel worker jobs.* On the down-side, steel costs will go up. By how much? A naïve estimate would multiply the 25% tariff by $70.6 billion in US steel sales to yield $17.6 billion in additional annual costs. This yields just short of $1 million per steel industry job generated. But steel workers earn about $52,000 per year, not bad but no where near $1 million. A more precise price estimate would take into account the types of steel affected, stimulation of US production, and the reduction in quantity demanded. A more precise estimate could cut this estimate in half or perhaps more, but is still likely to be many multiples of a steel worker's salary. The tariff will move assets from a high valued use to a lower valued use.

*Among the job losses caused by this tariff, it is claimed that there would be 45,000 lost auto jobs and 30,000 lost construction jobs. The costs of these losses should be added to the half million.

When Does a Show Turn a Profit?

Slate recently reported that Amazon Prime's streaming numbers do not look so good ("Amazon Prime’s Streaming Numbers Are Out, and They’re Surprisingly Underwhelming"). But, as they point out, this is not so easy to figure out. One of the goals, perhaps the primary goal, of Amazon's foray into producing TV shows is "customer acquisition" for Amazon Prime's online shopping offerings.

A source informed Reuters that Amazon evaluates shows based on the number of times that show was the first thing viewed by a Prime subscriber after signing up. “The company then calculates how expensive the viewer was to acquire by dividing the show’s costs by the number of first streams it had,” the report explains. “The lower that figure, the better.” Unfortunately, a number of beloved Amazon shows sport high costs per first stream.

This is just one metric because shows now can generate ad revenue too ("Amazon Prime Video free with ads? Not quite"). But it highlights what is most important to Amazon. And it seems to be driving production decisions.

While The Man in the High Castle, for instance, had one of the lowest costs per first stream after its first season, $63, that number jumped up to a whopping $829 following the production of Season Two. Mozart in the Jungle season two, despite having one of the studio’s lowest budgets at $37 million, cost $581 per first stream. Feminist cult favorite Good Girls Revolt was singled out as the highest cost per stream: $1,560 against its $81 million season one budget. The show got the axe after one season and just 1.6 million viewers.

Another inference is that Amazon considers the online shopping to have higher margins. It was willing to set low margins for TV streaming so as to shift out the demand for the complementary product, online shopping. Not too different from bars offering free peanuts to patrons in order to sell more beer.

Why mansions are artificially cheap

That is the title of an excellent blog post by Jaap Weel. In a nutshell, because zoning regulations prevent them from being converted into a a higher valued uses. He compares to this home on a one acre lot that sold for $6 million in Atherton

to 350 unit mixed use condo on a 1.6 acre lot 2 miles further up the peninsula in Redwood City that would fetch hundreds of millions.

If one could convert the mansion into condos, the value of the property could easily increase tenfold.

But the zoning code mandates single-unit buildings with a floor area ratio below 18% on lots of at least 1 acre, so $6m it is. Quite the bargain.

Zoning - keeping assets in low valued uses.

Trucking Costs

One little tidbit in this WSJ story on Tyson's earnings has to do with them passing on to customers the rising MC of trucking transport:

Short-term prices to secure some big rigs have jumped 20% as a result, and long-term shipping contract rates are projected to climb between 5% and 8% this year.

This provides an opportunity to test the relative competitiveness of various downstream industries. We know that the simple pricing rule is (P-MC)/P = 1/|e|. In a more competitive industry, firm's demand curves are more elastic. At one extreme 1/|e| = 1 for a monopolist and at the other, 1/|e| is zero for a perfectly competitive industry. For the former, P should rise with 0.5*MC and for the latter P should rise with 1.0*MC (the math is left as an exercise for the reader). So, for different industries and firms, is the "pass through rate" closer to 0.5 or 1.0?

Management matters

in exactly the way that economists would predict, both across countries:

Income differences between rich and poor countries remain staggering, and these inequalities are in good part due to unexplained productivity gaps , ..., US productivity is more than 30 times larger than some sub-Saharan African countries. In practical terms, this means it would take a Liberian worker a month to produce what an American worker makes in a day, even if they had access to the same capital equipment and materials.

and across firms within a country:

This huge productivity spread between countries is mirrored by large productivity differences within countries. Output per worker is four times as great, and TFP twice as large, for the top 10% of US establishments compared to the bottom 10%, even within a narrowly defined industry like cement or cardboard box production (Syverson 2011). And such cross-firm differences appear even greater for developing countries (Hsieh and Klenow 2009).

A new survey relates these differences to management practices:

we rated companies on their use of 18 practices, ranging from poor to non-existent at the low end (for example, “performance measures tracked do not indicate directly if overall business objectives are being met”) to very sophisticated at the high end (“performance is continuously tracked and communicated, both formally and informally, to all staff using a range of visual management tools”)...

The large, persistent gaps in basic managerial practices that we document are associated with large, persistent differences in firm performance. Better-managed firms are more productive, grow at a faster pace, and are less likely to die. 

HT: marginalrevolution.com

7% gender pay gap for Uber drivers

The flexibility of the gig economy was supposed to eliminate the gender pay gap.  At Uber it didn't:

 ...the entire gender gap is caused by three factors: experience on the platform (learning-by-doing), preferences over where/when to work, and preferences for driving speed. This suggests that, as the gig economy grows and brings more flexibility in employment, women’s relatively high opportunity cost of non-paid-work time and gender-based preference differences can perpetuate a gender earnings gap even in the absence of discrimination.

HT:  Peter Klein

Dilbert on sunk costs

dilbert.com

100 Top Econ/Finance Blogs

Is food demand at football games elastic?

"Yes" is the answer from the Atlanta Falcons:

Steve Cannon, CEO of the AMB Group, Blank's holding company, told ESPN that although food and beverage prices were 50 percent lower in its new Mercedes-Benz Stadium than the prices in the Georgia Dome the previous year, fans spent 16 percent more.

As a first approximation,

(% Change in Revenue) = (% Change in Price) + (Change in Quantity)

In this case, 16% = -(50%) + X, or X = 66%.  In words, revenue increased because the 50% drop in price was more than offset by the increase in quantity because food demand was much more elastic than the Falcons previously thought--otherwise they would have lowered prices last year. 

To maximize profit on food sales, set MR=MC which implies (Price-MC)/P=1/|elasticity|.  In this case, with an estimated elasticity of -1.32=66/50, the optimal margin on food is 76%. 

HT:  Justin

Good story of the 2008 housing recession

From a reporter who bought at the height of the housing bubble, then held onto an underwater property for a decade, and then finally sold at a $50,000 loss.  Love the last paragraph:

At a wedding I attended recently, I met a real-estate broker who touted the riches to be made by buying units in the glassy residential towers popping up along the waterfront in Brooklyn, where I live. No matter how slapdash the construction, she said, prices have only one direction to go.  

I had sunglasses on. She didn’t see me rolling my eyes.

Video Game Arcade Bundling

"Geek Mania" in Madison ,WI does not price arcade games per game played. Instead, it sets an admission price and allows patrons to play as much as they desire. This is similar to Walter Oi's "Disneyland Dilemma" when Disneyland went from per ride tickets to a single price of admission.

Entry Barriers for Opticians

A new paper by Timmons and Mills,"Bringing the Effects of Occupational Licensing into Focus: Optician Licensing in the United States," examines the effects of labor market entry barriers. The argument for occupational licensing is that it can serve to assure the quality of practitioners. The argument against is that it restricts supply and drives up prices. Timmons and Mills find no evidence of the former but:

Our results suggest that optician licensing is associated with opticians receiving as much as 16.9 percent more in annual earnings. 

I don't think I have yet seen an example in which occupational licensing was found to improve quality and/or does not raise costs. This is why most economists who study the matter prefer to allow market mechanisms (e.g., warranties, reputation, third party reviews) assure quality rather than government regulation.

Can I take credit for this?

Former student Ford Scudder (NJ state treasurer) must have been paying attention in class, as he reduced the discount rates for NJ defined benefits pension system from 7.9% down to 7%.  The move is controversial as it increases the amount that NJ must set aside for its generous retirement benefits:

The decision will likely increase what the state will have to pay into the pension system next year by $234 million, according to the Treasury Department. Instead of a $3 billion pension contribution in his first budget, Murphy [the new Governor] would likely have to make a $3.2 billion contribution under that estimate.

But it is better in the long run:

“Given the current elevated level of asset values across the board, long-run expected returns have diminished, so it is appropriate to lower the assumed rate of return,” Rijksen said. “Our actuaries have suggested doing so, and it is the unmistakable trend in public pension plans across the country, with some other 20 state pension plans having adopted or being in the process of moving to an assumed rate of return at 7 percent or below.”

Readers of this blog will know that I motivate the topics of discounting and its inverse, compounding, with use our under-funded defined-benefits pensions.  Here is a recent post about another fund, from another under-funded state, doing the same thing:

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.

MC of a Restaurant Meal

The Washington City Paper did a nice piece on the marginal costs of different popular meals in DC. In most cases, they calculated the marginal food cost because it is difficult to figure out how much of the other inputs (e.g., labor) is marginal to a meal. Still this is an informative exercise. I wonder how often the restaurants take the next step to compare actual markups to desired markups? For example, the margin on the Baan Thai Vermicelli (left) seems way to low.

101 Top Econ and Finance Blogs of 2017

LINK

What makes countries rich or poor?

Great lecture on how to use data to make policy

Raj Chetty's class at Stanford
HT:  MarginalRevolution.com