Thursday, August 29, 2019

Quinn Connelly on how to write efficiently, like an economist.

Quinn is a former student and professional blogger who writes efficiently, like an economist.  Here
 are my favorite tips:
4. Clarity: “Figure out the one central and novel contribution of your paper. Write this down in one paragraph...The first sentence is the hardest,” so “start with your central contribution.”
6. Skimming: “Your readers are busy and impatient. No reader will ever read the whole thing from start to finish. Readers skim. You have to make it easy for them to skim.”


Monday, August 26, 2019

What do physicians have in common with pilots?

They both respond to performance metrics (hand-washing or physicians; fuel consumption for pilots)--even without a reward (or penalty)!

PHYSICIANS:
METHOD:
The ICU unit coordinator was trained to observe and measure hand hygiene compliance. Data were collected on hand hygiene compliance at room entry and exit for 9 months. Percentage compliance for each medical and surgical subspecialty was reported to chiefs of service at the end of each month. Comparative rankings by service were widely distributed throughout the physician organization and the medical center.
RESULTS:
The hand hygiene compliance rate among physicians increased from 65.1 % to 91.6 % during the study period (p <0.0001). More importantly in the succeeding 24 months after study completion, physician hand hygiene compliance remained >90 % in every month.
PILOTS:  Another randomized controlled trial from Randomistas:
...Working with the pilots' union the researchers reassured pilots that they would not be ranked against each other:  "This is not, in any way, shoape or form, an attempt to set up a 'fuel league table'" the letter told them.  Despite knowing this, pilots who received monthly reports on their fueld efficiency ended up guzzling les gas than pilots who did not receive such reports.  The feedback was purely private, yet it lead pilots to tweak their behavior.  With an experiment that cost less than $1000 in postage, Virgin Airways cut its fuel consumption by about 1 million litres.  

Do tattoos signal your discount rate?

The NPV theorem (Net Present Value) says that an investment earns more than the opportunity cost of capital required to fund it if, and only if, the discounted stream of profit is positive.  It follows that individuals with higher discount rates will make fewer investments (in education, health, or reputation) than those with lower discount rates.

For many jobs, employers may prefer individuals with lower discount rates as they would invest more in becoming better employees in the hope of earning future promotion.  As a consequence, a signal, even a noisy one, about an individual's discount rate might be valuable to certain employers.

In fact, tattoos may signal high discount rates:
We show that, according to numerous measures, those with tattoos, especially visible ones, are more short-sighted and impulsive than the non-tattooed.
And this has a predictable consequence:
Survey and experimental evidence documents discrimination against tattooed individuals in the labor market and in commercial transactions

HT:  MarginalRevolution.com

Friday, August 23, 2019

Beer Industry Structure

Mark Perry at AEI keeps generating insightful graphs. This one commemorates that the number of breweries in the US has increased to its highest level ever. There is more information about one of my favorite industries here.

To me, the interesting thing is trying to understand why we observe such a stark decline in the number of breweries for 100 years and then a rapid increase over the last three or more decades. Some insights from others' research include:

  • Before 1900, the minimum efficient scale had been quite small with average cost rising sharply. Most cities supported multiple breweries and, because the product spoiled quickly, most breweries only served a single city.
  • In the late 19th century, the geographic scope of the market increased when spoilage was reduced due to increased adoption of pasteurization, refrigerated rail cars, and national marketing. This led less efficient competitors to lose out to more efficient producers in neighboring cities.
  • Throughout the early 20th century, innovations in the canning process led to even greater scale economies. This also broadened the market because patrons could purchase for home consumption rather than at a bar.
  • Until the late 1970s, home brewing was illegal at the federal level. With legalization came rapid experimentation and the development of the requisite skills among enthusiasts. This led to the founding of a few new breweries and a rapid expansion in variety - both in types of beer and in perceived quality. It was learned that yuppie beer consumers would pay a large premium for this variety.
  • Craft breweries were initially tiny compared to the national brands with 2,000 generating a collective 5% share of the market until the 21st century. Again, before the turn of the 21st century, these were predominately local operations with few shipments beyond the city that was home to the craft brewer. It appears that the quality premium more than compensated for the absence of scale economies. 
  • Currently, over 4,000 craft brewers have over 11% share and a few brands, like Sam Adams and Sierra Nevada, have become national brands.
  • The trick for these brewers is balancing any dis-economies of scope (Sam Adams brews about 50 varieties) with scale economies from national branding so as to achieve scale economies and not degrade the perceived quality.

Tuesday, August 20, 2019

Alfred Kahn on clear writing

Economist Alfred Kahn died this week at age 93. Although he is most remembered for deregulating the airlines industry, Vanderbilt students know him through his essay,My War Against Bureaucratese," the gobbledygook written by government bureaucrats designed to hide what they are really doing.  Here are a few of his most salient points:
  • “Every time you’re tempted to use ‘herein’ or ‘hereinabout’ or ‘hereinunder’ or, similarly, ‘therein,’ thereinabove’ or ‘thereinunder,” and the corresponding variants, try ‘here’ or ‘there’ or ‘above’ or ‘below,’ and see if it doesn’t make just as much sense.”
  • “The passive voice is wildly overused in government writing. Typically its purpose is to conceal information. One is less likely to be jailed if one says, ‘He was hit by a stone,’ than if he says, ‘I hit him with a stone.’ The active voice is far more forthright, direct, humane.”
  • The use of ‘presently’ to mean ‘now’ is another pomposity. If you mean ‘now,’ why don’t you say ‘now’?
  • “Why use ‘regarding’ or ‘concerning’ or ‘with regard to’ when the simple word ‘about’ would do just as well? Unless you’re trying to impress somebody. But are you sure you want to impress anybody who would be impressed by such circumlocutions?
  • “Outreach makes me upchuck.” Sometimes the demands of pomposity and dynamism converge—as in using “input” as a verb, “specifics” for “details” and constantly “implementing” things and “addressing issues.”
Professor Kahn began this war as part of his succesful effort to deregulate the airline industry. He is the hero of Thomas McCraw's Pulitzer Prize Winning book Prophets of Regulation. Interestingly, the villain of the book is Louis Brandeis for his role in creating the FTC.

Colleague Mike Shor's MBA Writer puts phrases from student memos together to generate sentences that sound all too familiar.

To proactively manage profit, our key initiative objective pushes the envelope toward systematized reciprocal capability.

Enabling continuity, enterprise optimization accelerates the movement towards third-generation contingencies.

Monday, August 19, 2019

Is Sweden Socialist?

Its not even close:
...while people like Bernie Sanders use Sweden as a talking point of socialism, “most of the world would look up at Sweden and say that they are way more capitalist than we are.”

They seemed to have been headed that way when reality set in:
“In 1960 the United States and Sweden were about the same level of income and had about the same size of government. And what happens is 1960 is both governments got bigger, but Sweden’s got really big and Sweden’s growth rate really started to suffer,” he said.

As things now stand, Lawson said Sweden has much less income than the United States, and the high cost of its social services has shown its negative impact. “Maybe it’s a price they’re willing to pay, but the vitality of the Swedish economy has slowed and not kept pace with the rest of Europe—and certainly not with the United States.”

DOJ blocks printing merger

My former employer successfully challenged a merger in the printing industry :
The U.S. Justice Department’s lawsuit opposing Quad’s acquisition of LSC focused on the “intense rivalry” between the two printers that has contributed to the multi-year trend of gradually declining prices for publication printing.

This kind of enforcement is designed to preserve competition. However, the delay and uncertainty surrounding the merger seems to have damaged one of the companies so it is not clear how much competition remains:
The aborted deal left LSC a damaged company. During the nine months when it appeared to be headed to the altar with Quad, it lost salespeople and customers, ...

HT:  Margaret

DDT is making a comeback! (book recommendation, Factfulness)


Paul Hermann Müller won the Nobel Prize in 1948 for “his discovery of the high efficiency of DDT as a contact poison against several arthropods.” For two and a half years in the early 1980's, my late wife Lisa (pictured above) rode a motorcycle around the Golden Triangle in Thailand, spraying swamps with DDT and giving out Malaria pills to villagers.  However, DDT has since been banned by what Factfulness author calls "Chemophobia."  Even the WHO seems to recognize the mistake:

... Today, the World Health Organization promotes the use of DDT to save lives in poor settings by killing malaria mosquitoes, within strict safety guidelines...

The Factfulness book (I listened to it on Audible) also dispels various myths about "us vs. them," "developing vs. developed world," or the myth that things are getting worse.  Highly recommended for anyone interested in poverty.

Thursday, August 15, 2019

Homeowners' cartel is raising prices

In past posts, we have characterized housing supply restrictions as a homeowners cartel in that they benefit homeowners by limiting what their neighbors can do with their property. MarginalRevolution.com summarizes evidence that regulations are limiting increase of housing supply.  Since supply cannot respond, price adjusts instead.

 

Monday, August 12, 2019

When prices go up, eventually demand becomes elastic

Story of a women and her US surgeon who flew to Cancún to get and perform a knee replacement:
The hospital costs of the American medical system are so high that it made financial sense for both a highly trained orthopedist from Milwaukee and a patient from Mississippi to leave the country and meet at an upscale private Mexican hospital for the surgery.

When the price gets high enough, eventually, people find substitutes. 


Ms. Ferguson gets her health coverage through her husband’s employer, Ashley Furniture Industries. The cost to Ashley was less than half of what a knee replacement in the United States would have been. That’s why its employees and dependents who use this option have no out-of-pocket co-pays or deductibles for the procedure; in fact, they receive a $5,000 payment from the company, and all their travel costs are covered.

Dr. Parisi, who spent less than 24 hours in Cancún, was paid $2,700, or three times what he would have received from Medicare, the largest single payer of hospital costs in the United States. Private insurers often base their reimbursement rates on what Medicare pays.

Why do women bid less for gigs?

They offer 4% lower prices, win jobs more frequently, and earn higher expected revenue (prob[win]*price) than men:  New working paper:

...we provide empirical evidence for a statistically significant 4% gender wage gap among workers, at the project level. We also find that female workers propose lower wage bills and are more likely to win the competition for contracts.

This raises the obvious question, whether women bid more aggressively than men because they think that the opportunity cost of their time is lower, or because they are bidding optimally, and men are not.

Effects of the trade war: Chinese selling US assets

As the trade war with China heats up, we begin to see its effects: highly leveraged Chinese firms are being forced to sell US assets so that they have enough money to service debt, especially as they earn less from trade with the US.
The government’s dramatic about-face from encouraging aggressive overseas acquisitions to cracking down on risky lending and overseas transfers underscores worries over the risk that the nation could run short of enough US dollars to make the interest and principal payments on its mounting debt at a time when the current account balance is coming under pressure.

HT:  MarginalRevolution.com

Are we on the eve of a recession?


In the graph above, we plot two time series, the percentage growth in GDP (in red) and the difference between long and short term interest rates (in blue).  The red series has a mean somewhere between 1% and 2%.  The so-called "yield curve" (in blue) is usually positive to account for the greater risk of long term bonds.  

In all of past recessions in the graph, when the blue line has dipped close to zero before the red line goes negative.  Recently the difference has approached zero, which could be a signal of a coming recession.  Here is the theory:

Under unusual circumstances, investors will settle for lower yields associated with low-risk long term debt if they think the economy will enter a recession in the near future. For example, the S&P 500 experienced a dramatic fall in mid 2007, from which it recovered completely by early 2013. Investors who had purchased 10-year Treasuries in 2006 would have received a safe and steady yield until 2015, possibly achieving better returns than those investing in equities during that volatile period.

In other words, (i) if the alternative to holding treasuries is investing in the stock market, and (ii) you expect the stock market to fall in the the short term, then get out of equities into long-term bonds.  This drives up the price of long-term bonds.  Higher bond prices imply a lower yield because yield=(bond payment)/price.  

NOTE: there is one "false positive" for this indicator, in 1967, when the dip in the yield curve did not signal an immediate recession.  

DISCLAIMER:  If I really knew that a recession were coming, I wouldn't be teaching school, and I probably wouldn't tell you.  

Argentine peso drops 25% against dollar following leftist victory

The graph above shows that the price of argentine peso in dollars went from 45 to 61 pesos/dollar, a depreciation of the peso by about 25%, following the election victory by a "leftist."

We can infer several things from the Chart. First the depreciation of the peso indicates that the markets think that demand for dollars will increase in the new regime.  Speculators' increase in demand for dollars may be due to the expectation that the leftist regime may may try to print pesos to stimulate the economy, weakening the peso.  If speculators expect the peso to be weaker in the future, they should sell pesos to buy dollars now to preserve wealth.  That looks like what is happening. 

Anticipate hold-up--China edition

From a friend who worked in China for two years:
I was working with an education consulting company, and had signed a contract prior to moving that said I would live and work in Chengdu for two years. After about 4-5 months in Chengdu, my company said they needed to relocate me to Shenzhen. I agreed under the condition that my move would financially covered.  
I arrived in Shenzhen the night before starting work. That next morning I received a message from my manager saying that I needed to sign a contract promising that if I left before my two years were up, I would have to pay back everything from my move! 
Obviously, I refused, and then had to speak with my boss back in Beijing. She expressed her "disappointment" in me, raised her voice, and said someone else had already signed and I should too. She came up with a few other solutions (one was that I would sign a contract promising not to tell my colleague that HAD signed, and if I did tell him then I would have to pay them the convenient amount of my move- haha), but ultimately realized I would not budge and dropped it.  
Needless to say, it was a strange experience! China can be a weird place. 

In this case, my friend was "held up" after she incurred the sunk moving costs.  She never received the reimbursement.  

The difficulties of anticipating hold-up and then contracting around it, make it more difficult for the Chinese economy to adapt to change, and to create wealth by moving assets to higher-valued uses. 

Wednesday, August 7, 2019

Are kids safer in a parent's lap?

...than in their own seat? The Federal Aviation Administration (FAA) says "yes." Although a child has a bigger chance of surviving a crash when belted into their own seat, doing so would cost extra.
That cost...would cause some families to revert to car travel, which is less safe. “Consequently,” states the agency in its latest response to the safety board, “entire families would be subject to far higher fatality rates, which would produce a net increase in overall transportation fatalities.”


Remember, when evaluating a policy, you want to consider all benefits and costs that vary with the consequence of a policy. If you miss some, you commit the "hidden cost" fallacy. BRAVO to the FAA for recognizing the hidden cost of mandating safety belts and for saving lives!

Socialism vs. Capitalism: funny video

Tuesday, August 6, 2019

Should you move from Connecticut to Wisconsin?

To figure out how much to save to pay off current and future retirees, public pension defined benefits plans discount future expected liabilities at 7.5-8.5%.  If they earn that much on their investments, then they will have enough to pay the retirees.  However, this year, their investments earned only 6.8%, the lowest since 2016.

On average, pension under-funding is close to 50%.  So pension fund managers have tried to earn more by investing in
... riskier, less traditional investments over the past decade. Large public pension plans had a median 11.47% of their assets in alternative investments such as private equity for the year ended June 30 and a median 4.45% of their investments in real estate.

One good solution is Wisconsin's, to turn the defined benefits plan (paying a guaranteed amount) into a defined contribution play (paying an amount that depends on how well investments do).

However, many states, like Connecticut, are leaving this problems to future generations.  The public employees union reached agreement with the governor to ignore the problem until 2046. By that time, the fund will have fewer assets generating income which makes higher taxes, reduced state services, and pension cuts more likely.

And if residents anticipate these changes, they will migrate to states like Wisconsin that don't have these problems.  If so, this may drive down the value of real estate in CT to compensate residents for living in the state.  In equilibrium a mobile asset (people) has to be indifferent about where it is used; otherwise, it will move.

Sunday, August 4, 2019

Is public philanthropy evil?

That lobotomies were not a good way to treat mental illness was known by 1941, yet lobotomies continued for thirty more years, mostly in public asylums.  Here's why:

Because superintendents [those managing publicly funded asylums] received federal funding based on the number of committed patients rather than offering effective medical care, treating patients was a secondary matter.  
[these superintendents]... sought low-cost treatment options. The lobotomy provided such an opportunity. Unlike the therapeutic or hydro and shock treatments available (all of which are still used today), the lobotomy was comparatively cheaper and did not take years to complete. It also frequently made difficult patients more docile and easier to manage.
In contrast, private asylums, which also faced overpopulation issues and treated the same patient demographics as public asylums, were funded by philanthropic donors and the patients’ legal caretakers. When patients failed to improve, were mistreated, or not offered sufficient quality of care, an asylum risked its profitability. Accordingly, using erroneous or excessively harmful treatment methods like the lobotomy would be detrimental to their bottom line.

QUESTION:  how would you better align the incentives of superintendents with the goals of patients (and their caretakers)?

HT:  MarginalRevolution.com

Saturday, August 3, 2019

AI makes marketing more powerful

There are two kinds of Artificial Intelligence (AI): symbolic logic, where automated rules replace human decision making; and machine learning, where outcomes, like sales, are related to policy, like advertising copy, to infer causality.  This from the WSJ seems to describe machine learning by Persado software:

In one test, a headline by human copywriters urged consumers to “Access cash from the equity in your home,” with the call to action “Take a look.” A variant created by Persado was headlined “It’s true—You can unlock cash from the equity in your home” and suggested “Click to apply.” 
The Persado version generated 47 weekly applications for home equity lines of credit, compared with 25 for the original version, JPMorgan Chase said.

Machine learning is designed to improve when given more data, like the A/B testing described above. In  general, following up marketing campaigns with A/B testing is a really good idea, regardless of whether you are using AI or not. 

Friday, August 2, 2019

"Smart" flashcards to learn students names and to teach vocabulary

This month, I began using anki “smart” flashcards to memorize student names  and it has been really helpful.  I also put up the glossary of my textbook on anki cards to help students learn the vocabulary of each chapter.  The anki software is free for computer (they charge if you want to put it on your phone or tablet.)

Here is how the cards work.  On the “front” is a photo of the student, and on the back where they work, job title, and name.  You look at the photo, then “turn it over” and push one of three buttons telling the program whether you got it wrong, whether you got it right, or whether you know it for sure.  Depending on your answers, and how frequently and recently you have seen the card, the built-in Artificial Intelligence of the smart cards will show the card again until you know it.  You see cards you don't know more frequently than those you do.  The program stops after it determines that I have reached my limit; apparently that is the best way to learn.   

I have never been able to learn students names, but this program changed that.  I have taught myself to invent mnemonic’s to help me learn faster.  This came naturally to me when I found myself missing the same names over and over.