Saturday, April 27, 2019

Did Trump's tariffs increase domestic employment?

President Trump campaigned on one issue, jobs.  His 25-50% tariffs on imported Washing Machines seemed to have induced the two biggest importers to speed up the construction of US Washing Machine plants (in SC and TN):
South Korea’s washing machine exporters to the US, Samsung Electronics and LG Electronics, on Wednesday said they will start operations of their new plants in the US as early as possible to minimize the possible impact of a likely sanction on their products.

Samsung and LG on Wednesday expressed concerns about the US International Trade Commission’s recommendation to the Donald Trump administration to impose a 50 percent tariff rate on large residential washer imports that exceeded a quota of 1.2 million units for a duration of three years in addition to the current rates of duty.
So, while the tariffs harm consumers with higher prices (for both washers and dryers), they have also increased domestic demand for labor, at least in this one industry.

Monday, April 22, 2019

Newsflash: Washers and Dryers are Strong Complements

A new NBER paper by Aaron B. Flaaen, Ali Hortaçsu, Felix Tintelnot estimates the effects of the 2018 50% tariff on washing machines. As expected, they found that domestic producers increased washer prices by about 12%. Interestingly though:
the price of dryers—a complementary good not subject to tariffs—increased by an equivalent amount.

Dryers were not directly affected by the tariffs. Indirectly though, domestic white goods producers were also able to increase the price of dryers due to their complementarity in demand. Evidently, customers are not willing to break up a set even for a 12% lower price on dryers

Thursday, April 18, 2019

Amazon fulfillment center tours

Went on a tour of an older sixth generation (no robots) Amazon fulfillment center in Chattanooga.   The infrastructure necessary to support Fulfillment by Amazon and Prime (two-day shipping, or two-hour in select areas) is impressive.  Here is what you see:

1. Where products enter the warehouse 
At the inbound dock, products get taken off trailers by forklift or manually built into pallets. Freight is separated between that coming from another Amazon facility and directly from a vendor, such as a seller using Fulfillment by Amazon (FBA). With FBA, small businesses store their products at fulfillment centers, and Amazon picks, packs, ships, and provides customer service, helping these businesses reach more customers. Half the items sold on Amazon.com are from small businesses and entrepreneurs
2. The stow process 
Instead of storing items as a retail store would—electronics on one aisle, books on another—all of the inventory at Amazon fulfillment centers is stowed randomly. Yellow, tiered "pods" stack bins full of unrelated items, all of them tracked by computers. This counterintuitive method actually makes it easier for associates to quickly pick and pack a wide variety of products. 
Robots ferry these pods to associates at stow stations based on product size, navigating 2D barcodes on the floor and yielding way to one another depending on which has more pressing business. The stower looks for suitable space for each item and stows it into the pod, making it available for purchase on Amazon.com. 
3. Picking orders 
Pickers are like personal shoppers, plucking from hundreds of items a day to fulfill customer orders. When the order comes in, a robot brings pods full of items to associates working at pick stations. The picker reads the screen, retrieves the correct item from the bin, and places it into a yellow plastic box called a tote. 
The robots are incredibly smart, but they aren't competing for jobs—they're creating them at Amazon fulfillment centers. Transporting thousands of pods per floor with millions of products stowed inside, the robots enable more inventory to pass through a fulfillment center, which means more associates are needed for handling that inventory. Since 2012, Amazon has added tens of thousands of robots to its fulfillment centers, while also adding more than 300,000 full-time jobs globally. 
4. Quality assurance 
Different teams along the way ensure the fulfillment process runs smoothly. The Inventory Control and Quality Assurance team makes sure an item's physical location actually matches what's in the computer, tracking millions of units of inventory. The robots need support too, so Amnesty Floor Monitors make sure the floors are clear and reset the units when needed. Many other checks along the way verify the right product goes to the right place. 
Touring an Amazon fulfillment center, you witness firsthand a process that is constantly being fine-tuned. While associates once needed to hand-scan a bin location after stowing each item, for example, machine learning now enables the system to know automatically the location where the associate has placed the item. It's impossible to predict today what technological innovation you might witness in six months. 
5. Packing orders 
First, items that belong to different shipments are organized and scanned for accuracy. Then they're sent to the pack station, where the computer system recommends box sizes to associates, and a machine measures out the exact amount of tape needed. Many items are shipped in their original boxes, and Amazon works with vendors to reduce packaging. At this stage, there's no shipping label—machines handle that down the line, protecting the customer's privacy and keeping the process efficient. 
6. Shipping orders out 
Packed envelopes and boxes then race underneath the SLAM (Scan, Label, Apply, Manifest) machines, which deposit shipping labels with astonishing speed and, contrary to the name, a light touch. For quality control, the package is weighed to make sure the contents match the order. A shipping sorter reads package labels to determine where and how fast customer orders should be sent, serving as a kind of traffic conductor. 
Ready to roll, the packages are nudged from the conveyor down slides into the correct trailer based on shipping method, speed of delivery, and location. Each door at the shipping dock accommodates trailers from a variety of different carriers and locations.



Tuesday, April 16, 2019

What doesn't kill you makes you stronger

New research on the benefits of early career setbacks, from evidence on scientists whose grant applications were rejected:

 On one hand, it significantly increases attrition, ... Yet, despite an early setback, individuals with near misses systematically outperformed those with near wins in the longer run, as their publications in the next ten years garnered substantially higher impact. 

HT:  MarginalRevolution.com

Thursday, April 11, 2019

Don't Panic: A Guide to Claims of Increasing Concentration

Don't Panic: A Guide to Claims of Increasing Concentration 


Vanderbilt Owen Graduate School of Management Research Paper No. 3156912

 Gregory J. Werden U.S. Department of Justice - Antitrust Division

 Luke M. Froeb Vanderbilt University - Owen Graduate School of Management

 Abstract: The Obama Administration’s Council of Economic Advisers expressed concern that competition was threatened by increasing industry concentration. Academics, commentators, and journalists have joined the chorus. But none demonstrated increasing concentration of meaningful markets, as are used in antitrust to assess the impact of mergers and trade restraints. The claims of increasing concentration are based on data that are far too aggregated. Market concentration can remain the same or decline despite increasing concentration for broad aggregates. Mergers have not increased concentration in airline and banking markets. Moreover, where market concentration has increased, that does not demonstrate a failure of antitrust law or its enforcement; market concentration naturally increases when the most innovative and efficient firms grow.

 Keywords: concentration, competition, antitrust, mergers

Inferring causality with double machine learning

Interview of Preston McAfee, former DOJ colleague, about how economists are helping Microsoft.  I particularly liked the description of the "double machine learning" they use to estimate the causal effect of price on quantity demanded, (the "price elasticity of demand").

In general, it is very hard to identify causal effects from non-experimental data because correlation is not causality.  Unless you run an experiment by randomly varying price, you cannot identify causality. 

Preston solves this problem by "creating" an experiment:
What we do is first we build a model of ourselves, of how we set our prices. So our first model is going to not predict demand; it's just going to predict what decision-makers were doing in the past. It incorporates everything we know: prices of competing products, news stories, and lots of other data. That's the first ML [machine learning]. We're not predicting what demand or sales will look like, we're just modeling how we behaved in the past. Then we look at deviations between what happened in the market and what the model says we would have done. For instance, if it predicted we would charge $1,110, but we actually charged $1,000, that $110 difference is an experiment. Those instances are like controlled experiments, and we use them in the second process of machine learning to predict the actual demand. In practice, this has worked astoundingly well.

In other words, by predicting how price was normally set in the past, the Microsoft economists create a "control group" to which they compare current prices.  The difference is the "experiment" that they use to identify causality.

BOTTOM LINE:  study econometrics!

Wednesday, April 10, 2019

New Harmony and the results of socialism

Each year, I begin teaching capitalism to our executive MBA's at the conference center in historic New Harmony, site of a failed socialist experiment.  The irony is funny (other posts on the topic seem convincing), but it is important to remember our history, lest we repeat it.
The term “socialism” was coined by followers of Robert Owen (1771-1858), whom Karl Marx would label a “utopian socialist.” In 1825 Owen founded New Harmony, an Indiana commune, to demonstrate the superiority of what was first called the “social system.” The same year, Owen explained his experiment to a joint session of Congress attended by Supreme Court justices, President James Monroe and President-elect John Quincy Adams. Although Owen poured his fortune into it, New Harmony collapsed in disarray and recrimination within two years.

Owen’s son Robert Dale Owen salvaged the community by implementing what he called “a policy the very reverse” of socialism: “giving each respectable citizen every facility and encouragement to become (what every adult ought to be) a landed proprietor.”

Undeterred, others founded some 40 to 50 similar communes during the 19th century, and all collapsed quickly. New Harmony’s two years proved to be their median lifespan.

Most telling is that the one socialist experiment which succeeded was abandoned because its people realized, collectively, that they could be much better off on on their own.
Successful socialism has been created in only one place on earth, the kibbutzim of Israel. They were democratic and egalitarian; sharing possessions, meals, even child rearing. But once the Jewish state was securely on its feet, kibbutzniks chose to switch to private enterprise. Socialism, they learned to their surprise, was not a happy way to live.

Thursday, April 4, 2019

What is organizational culture? Netflix has its answer.

https://jobs.netflix.com/culture
  1. encourage independent decision-making by employees
  2. share information openly, broadly, and deliberately
  3. are extraordinarily candid with each other
  4. keep only our highly effective people
  5. avoid rules

We can put this "culture" into the taxonomy of our textbook (decision rights, performance metrics, reward schemes):
  1. Decision rights are decentralized (employees have tremendous freedom)
    • There are virtually no spending controls or contract signing controls. Each employee is expected to seek advice and perspective as appropriate. “Use good judgment” is our core precept.
    • Our policy for travel, entertainment, gifts, and other expenses is 5 words long: “act in Netflix’s best interest.” We also avoid the compliance departments that most companies have to enforce their policies.
    • Our vacation policy is “take vacation.” We don’t have any rules or forms around how many weeks per year. Frankly, we intermix work and personal time quite a bit, doing email at odd hours, taking off weekday afternoons for kids’ games, etc. Our leaders make sure they set good examples by taking vacations, often coming back with fresh ideas, and encourage the rest of the team to do the same.
    • Our parental leave policy is: “take care of your baby and yourself.” New parents generally take 4-8 months.
    • Each employee chooses each year how much of their compensation they want in salary versus stock options. You can choose all cash, all options, or whatever combination suits you. You choose how much risk and upside you want. These 10-year stock options are fully-vested and you keep them even if you leave Netflix.

  2. Subjective performance metrics designed to identify the highest performer
    • We focus on managers’ judgment through the “keeper test” for each of their people: if one of the members of the team was thinking of leaving for another firm, would the manager try hard to keep them from leaving? Those who do not pass the keeper test (i.e. their manager would not fight to keep them) are promptly and respectfully given a generous severance package so we can find someone for that position that makes us an even better dream team.

  3. Rewards are set at the highest industry level (which includes a "risk premium" to compensate employees for the risk of getting fired
    • To help us attract and retain stunning colleagues, we pay employees at the top of their personal market. We make a good-faith estimate of the highest compensation each employee could make at peer firms, and pay them that maximum. Typically, we calibrate to market once a year. We do not think of these as “raises” and there is no raise pool to divide up. The market for talent is what it is. We avoid the model of “2% raise for adequate, 4% raise for great”. Some employees’ market value will rapidly rise (due both to their performance and to a shortage of talent in their areas) while other employees may be flat year-to-year, despite doing great work. At all times, we aim to pay all of our people at the top of their personal market.

Tuesday, April 2, 2019

How does Walmart compete with Amazon? (II)

Earlier we blogged that Walmart was acquiring firms that would speed development of:
1. an "artificial intelligence system that could someday power an automated personal-shopping service;" and 
2. autonomous cargo vans for home grocery delivery.

Now we learn that Walmart announced the first fruits of their partnership with Google:

Beginning this month, customers can say, 'Hey Google, talk to Walmart' and the Google Assistant will add items directly to their Walmart Grocery cart. Best of all, customers can be extra confident that we can quickly and accurately identify the items they are asking for with the help of information from their prior purchases with us. The more you use it, the better we’ll get.

This seems like a good example of Hal Varian's thesis (Hal is chief economist at Google) that the Tech Giants are being drawn into competition with one another:

Consider today’s leading tech companies: Google, Amazon, Facebook, Microsoft and Apple. They are not stuck in silos or hemmed in by a single business model. Instead, they compete intensely among themselves. For consumers this boils down to tangible benefits: products and services are better, faster and cheaper than ever before. 
...Entering a new market in the online world is far easier than in the offline world, since the necessary assets — hardware, software, and motivated employees — are readily available. But if companies can switch to new products quickly, so can their customers. You do not even have to walk across the street to switch between Lyft and Uber, or Google and Bing. Competition is a click away, so competitive advantage can erode quickly.

In this case, Google's search expertise allows Walmart to better compete with Amazon's in online retail and distribution.

Blogging Disclosure:  the author has done consulting for some of the tech giants.

Price discrimination Saves Lives!

Great post from Marginal Revolution on how drug companies enforce price discrimination against richer countries:

[Patient IDs] will be used to put an identifying barcode on the bottles they receive with their name and other info. Not only can the code be used to guarantee only residents of the country get the drugs…the provisions require that patients then return a bottle to get a new bottle and allows them to get only one bottle of their prescription at a time, even though allowing them to get multiple bottles could “ease the burden on patients and health providers,”

Although groups like Médecins Sans Frontières are outraged by these restrictions, what they don't realize is that the alternative is one world price, and it would be a lot closer to the $85,000 US price than to the $1,000 price in Egypt and India.  In other words, Price Discrimination Saves Lives!