Monday, January 25, 2021

Trying to do Good does not turn out Well

At the beginning of the pandemic, the demand for N95 masks outstripped the available supply. Prices doubled overnight to near $7 per mask (and availability was exasperated by price-gouging concerns, see Dying from Protection from Gouging). Two guys from Fort Worth, Texas wanted to save lives. They understood that the solution would require an increase in supply, so they started United States Mask to fill the gap. However, as the Dallas Morning News reported, they may not have appreciated the obstacles they were up against.

First, the had to obtain certification. “There’s no guidebook, and it’s not easy. The application process alone is 100 pages long.” But that accomplished, they produced their first mask last October. But that was for federal certification. Even so, there was reluctance to purchase from the home team by the county because it had not tested the masks themselves.

Second, how to advertise?  "The two guys say they are having difficulties placing online ads because hosts don’t want to be associated with fraud that runs wild in the mask industry."

Finally, between March and October, many existing competitors could ramp up their production. Either input costs are lower in China or their are substantial scale economies. A quick search on Amazon reveals current prices of popular Chinese imported masks run from $1.50 to $2.00. United States Masks come in at $2.25.

Sunday, January 24, 2021

Are Stocks over-valued?

Earlier we noted that Shiller's CAPE (cyclically adjusted P/E ratio) is the second-highest its ever been  behind only the tech bubble of 1999.  And now Goldman is telling its clients that there are other signals that the market may be over-valued, e.g., the growth of SPAC's, and the big increase in prices of stocks with negative earnings, indicating an expectation of future growth.  

Nevertheless, Goldman seems to think those expectations are right:

"we expect modestly higher rates will be offset by a declining equity risk premium, leaving the S&P 500 P/E effectively unchanged and allowing strong EPS growth to drive the market towards our year-end target of 4300."

CAVEAT:  If I really knew, I wouldn't be teaching school.  

What do randomized control trials tell us about the minimum wage?


... almost all of the effects of the minimum wage came from substitution of higher productivity for lower productivity ones, which wouldn’t show up in headcounts, and reduction in hours worked, which is not measured in most conventional data sets.

Tuesday, January 19, 2021

Can money buy happiness?

Contrary to what I was taught in Sunday School, self-reported happiness rises with income, but at a declining rate:

each dollar (of income )starts to matter less the more a person earns. "We would expect two people earning $25,000 and $50,000, respectively, to have the same difference in well-being as two people earning $100,000 and $200,000, respectively. In other words, proportional differences in income matter the same to everyone."

Monday, January 18, 2021

Are stocks over-valued?

Stocks are historically expensive (relative to the earnings or profit they make). 

higher demand + fixed supply = higher prices


The pandemic has resulted in more people working from home which increases demand for bigger houses which has driven up the median price.  Data above are from 2020.

Friday, January 15, 2021

Bargaining with Macaques: the alternatives to agreement determine the terms of agreement

 At the Uluwatu temple in Bali, monkeys steal high value items from tourists, and then ransom the items back for food.  Higher valued items are returned only after higher payouts.  From

After spending more than 273 days filming interactions between the animals and temple visitors, researchers found that the macaques would demand better rewards – such as more food – for higher-valued items [like mobile phones, wallets and prescription glasses].

Bargaining between a monkey robber, tourist and a temple staff member quite often lasted several minutes. The longest wait before an item was returned was 25 minutes, including 17 minutes of negotiation. For lower-valued items, the monkeys were more likely to conclude successful bartering sessions by accepting a lesser reward.

The story illustrates lessons from Chapter 17:  the alternative to agreement determine the terms of agreement (more valuable items result in higher negotiated prices); and higher-value items require more bargaining time as the parties invest more time in determining the gains from trade (the difference between the parties' outside alternatives).

Friday, January 8, 2021

Good early signal from the Biden administration: First doses first!

 MarginalRevolution reports that the Biden administration will release all the available doses of COVID vaccine, essentially over ruling the bureaucrats at the FDA, to vaccinate twice as many people with a half dose!

The expected benefit of a one-dose regime is millions of lives!

This is a good harbinger of decision-making under the new administration, 

Violence, Institutions and the Rule of Law

The violence in DC undermines the institutions that support the rule of law. Without them, we descend into chaos.  

Wednesday, January 6, 2021

Are the FDA's incentives aligned with the goals of the people?

The FDA is resisting pressure from academics to vaccinate more people with single doses:
"At this time, suggesting changes to the FDA-authorized dosing or schedules of these vaccines is premature and not rooted solidly in the available evidence," Dr. Stephen Hahn, FDA commissioner, and Dr. Peter Marks, director of the FDA's Center for Biologics Evaluation and Research, said in a statement. "Without appropriate data supporting such changes in vaccine administration, we run a significant risk of placing public health at risk."

Apparently, these FDA bureaucrats want more information before making a decision. 

However, we know how to make decisions under uncertainty: minimize expected error costs or maximize expected value. The expected benefit of one-dose regime (vaccinating twice as many people with a half dose) is millions of lives.
The simplest argument for First Doses First (FDF) is that 2*0.8>.95, i.e. two vaccinated people confers more immunity than one double vaccinated person. But there is more to it than that. Perhaps more important is that with FDF we will lower R more quickly and reach herd immunity sooner. 
Here’s an extreme but telling example. Suppose you have a pop of 300 million, need 2/3 to get to herd immunity and you have 100m doses and can vaccinate 100m a month. Then with FDF you vaccinate 100m in first month and a new 100m in the second month and then you are “done.” i.e. you can then do 2nd doses more or less at leisure since you are at herd immunity (yes, I know about overshooting, this is a simple example). If instead you do second doses you vaccinate 100m in first month and the same 100m in the second month which leaves 100 million at risk for another month. Under second doses you don’t reach herd immunity until the third month. Thus, under FDF you save a 100m infection-month which is a big deal.

The FDA has a long and sorry history of delaying medical innovation because type I errors (doing something that turns out to be wrong) are visible and type II errors are not (not doing something that turns out to be right). These bureaucrats seem to be putting their own interests ahead of those of the people they are supposed to protect.

This is a well-known incentive problem:  unless we evaluate bureaucrats based on expected value, not on whether they commit Type I errors, they will respond accordingly.

Tuesday, January 5, 2021

More Notice and Minor Accolades

Woohoo, we have made Feedspot's "Top 100 Economics Blogs & Websites To Follow in 2021." We come in at number 57. This is a pretty comprehensive list of blogs on just about every field of economics.