Friday, September 30, 2022

Good MRU video on Prinsoners' Dilemma

Will markets thwart Xi's plans for China?

Economist lead article on President Xi's "rejuvenation," and efforts to  "maintain authority",

When Mr Xi took over in 2012, China was changing fast. The middle class was growing, private firms were booming and citizens were connecting on social media. A different leader might have seen these as opportunities. Mr Xi saw only threats.
[Xi has] reasserted state control over the economy and hobbled some of China’s most successful firms. His plan to tame the property market lies in tatters and bad loans weigh perilously on the economy.

Ironically, he is forgetting the lessons of Xiaogang village, and harming his own economy much faster than he is harming ours (see post below).

Is Chinese Capitalism an oxymoron

I begin my management course by telling students how Xiaogang villagers defied their Communist rulers in 1978 by secretly instituting a system of private property.  By the time the authorities found out, it was too late as the system had already spread to neighboring villages due to its tremendous success.

China adapted and allowed the institution of private property to spread.  At the time, many people predicted China would continue to reform and they were let into the WTO. However, "...as even the most ardent defenders of China’s WTO accession now acknowledge, that did not happen." Today we are left with an integrated world with two very different systems. To explain the effect, we can use the metaphor of A/B testing:
...imagine that the Department of Justice randomly assigns half of U.S. corporations to be A-corps and half to be B-corps. For A-corps, nothing changes. But B-corps now enjoy special privileges and rules. They are exempt from laws governing intellectual-property theft. They receive more-favorable tax incentives. They are recipients of sizable subsidies, including some to buy their A-corp rivals. They are able to enlist the DOJ to win capricious legal claims against A-corp rivals.
The result of such an experiment would be dire: The best, most innovative A-corp firms would lose market share; A-corps would be loath to invest in research and development, given that B-corp rivals would be able to purloin it; and there would be massive waste as inefficient B-corp firms expanded more than market forces required. Now extrapolate that to the global economy and you get a sense of the harms the Chinese system has imposed on capitalist economies.
I did a search on all my posts in China and I came across this one from 2007: "Market Socialism" and China's new antitrust laws  in which I argued that unless China developed "... the kinds of Democratic institutions that provide checks and balances on state power," their economy could stagnate under the what i called "regulatory miasma."  It turns out that, I needed the caveat I closed with:
But China's oxymoronic "socialist market economy" has surprised us before. In the words of Deng Xiaoping, "I don't care if the cat is black or white as long as it can catch mice."

Thursday, September 29, 2022

Is the Inflation Reduction Act, "False and Misleading Advertising?"

FROM WSJ:  

President Biden touts the Inflation Reduction Act, which lowers deficits by $240 billion over a decade, he has also signed into law increased spending on veterans benefits, infrastructure and semiconductors, while taking executive actions that vastly expand food stamp and Obamacare benefits and cancel student debt worth $400 billion to $1 trillion.

Increased Govt. spending increases Aggregate Demand for US Goods and Services, which increases price (inflation).

Someone tell the FTC.

Wednesday, September 28, 2022

How will the rise in interest rates affect Corporate Borrowers?

 


From the Economist:

...in aggregate the West’s corporate debt load looks manageable ... American public companies’ earnings before interest and tax are a healthy 6.7 times the interest due on their debts, up from 3.6 times in 2000. 


But 3 types of loans may be in for a "reckoning:"
  • The first comprises businesses that have come to rely on less orthodox sources of credit, which are often those with the diciest prospects.
  • The second area of vulnerability involves so-called zombie firms: uncompetitive enterprises, kept alive by cheap debt and, during the pandemic, government bail-outs.
  • The third and biggest area of concern involves firms that are merely unfit rather than undead.

Monday, September 26, 2022

Consult an economist before buying a wedding dress


When Stephanie (her name has been changed to avoid embarrassment) went shopping for a wedding and bridesmaid dresses, she found valuable advice from an unusual source, Chapter 23 of her favorite economics text.  And it was not about sleeve options, figure flattery, or bustles.

She was puzzled that over half of the stores that sell wedding dresses do not permit photos, and do not have tags in the dresses that would identify the manufacturer and style type.  

These retail stores want to prevent customers from "free riding" on their fitting and display services:
I just spoke with someone who had all her bridesmaids sized in the store only to go online and buy them from a discount site. I would assume many of the brides are doing this as well.
Note that this is not just a problem for the store, but also a problem for the dress manufacturer: if stores cannot prevent free-riding, they will invest less in point-of-sales fitting services, and dress sales will suffer.  See our earlier post about golf club manufacturer PING, who faced a similar problem,
The discount retailers were advising consumers to visit a full-service retailer to request a custom-fitting session, and then bring the specifications for custom-made clubs back to the discounter. PING could control this kind of opportunistic behavior only by dropping dealers, a very costly option.
PING wanted to set a minimum retail price (called "retail price maintenance") to address the problem.  The minimum price meant that discount retailers could not undercut full service retailers.  The antitrust laws prevented this until the Supreme Court changed the case law.

For the wedding dresses, the no-photos policy created a problem for Stephanie because she wanted to photograph her bridesmaids in each of the dresses to make sure that they choose the best dresses for the wedding. So she chose to purchase from a large retail chain, like J. Crew, BCBG, Ann Taylor, or Nordstrom’s because they had solved the free riding problem, using exclusives, where only one chain carries the style.

For an economic analysis of resale price maintenance, see the amicii brief of 24 antitrust economists (I am one of the 24.)

UPDATE:  Amazon just made free riding a lot easier.

What happened when Oregon decriminalized drugs?

More evidence that Demand Curves slope downward: when you reduce the "price" of taking drugs (the expected penalty), quantity will increase. From AP:
“If there is no formal or informal pressure on addicted people to seek treatment and recovery and thereby stop using drugs, we should expect continuing high rates of drug use, addiction and attendant harm,” said Keith Humphreys, an addiction researcher and professor at Stanford University and former senior adviser in the White House Office of National Drug Control Policy.
Of 16,000 people who accessed services in the first year of decriminalization, only 0.85% entered treatment, the health authority said.

HT:  MarginalRevolution.com 

Why did Martha's Vineyard homes increase from $700K to $1M in 2021?

NIMBYism restricts development (supply), so that the only thing that can adjust to an increase in demand (induced by the pandemic) is the price. From a 2021 NY Times letter to the editor
In the end, what really reads in this strange piece is that this gentleman didn’t like the Water Street apartments in Vineyard Haven for some reason, and is nervous about the Lambert’s Cove development. To this, there is of course an argument to be expressed and heard. But when it takes the form of such cynical bloat, it becomes a mockery of its own argument. It makes clear that the spirit of “not in my backyard” is as much of an obstacle to continuing to preserve the Island’s community as some self-interested folks, such as those who are pretending to oppose the housing bank out of supposed “environmental” issues. 
 ... I am also absolutely and constantly baffled when people complain about the one, sole affordable housing developer on the Island, a developer which takes great pains to protect the environment and build in accordance with what natural environment and cultural environment exists there, such as preserving and occasionally building around trees and trying to tear down as little as possible — and then conveniently miss the fact that every other building in Edgartown, for instance, has been torn down and turned into a McMansion over the past three years. If this attitude doesn’t come from self-interested hypocrisy, it comes from an extreme level of blindness.

Why is the $ appreciating against the £?

The $ will appreciate against the £ for trade or investment reasons. Either US exports to Great Britain begin to look more attractive than Great Britain's exports to the US, or investing in the US looks starts to look more attractive than investing in Great Britain. 
 

After the UK government unveiled plans to fund new tax cuts by ramping up borrowing, investing in Great Britain suddenly looks riskier.  As a result, investors sell £ and buy $ to invest in the US, increasing the demand for dollars, and driving up the price of a $ (the exchange rate).

The result of the $ appreciation is that producers in Great Britain are helped (because their exports look cheaper to Americans) but consumers in Great Britain are hurt, because prices for goods sold in Great Britain (including imports) increase.  

Is there a bubble in higher education?

The returns to education to those who finish a degree (especially in a STEM major) are huge.  The high price of college easily pays for itself several times over.

HOWEVER, if you major in a non-STEM subject it may not.  Similarly, if you drop out without a degree (a quarter to a half of all students), you will have smaller debt but also a smaller salary which makes paying off the debt much harder.  

The big increases in tuition seem to track the increases in subsidies offered by the government.  

Most of this info is taken from Marginal Revolution Blog Posts on Higher Education.

Friday, September 23, 2022

More evidence that cooperation works--but only in repeated games

In our textbook, we talk about the tradeoff between conflict and cooperation in a prisoners' dilemma. In a repeated game [play coauthor Mike Shor's online game], the best strategies exhibit the following characteristics:
  1. Be nice--no first strikes
  2. Be provokable--retailiate immediately if your rival cheats
  3. Be forgiving
  4. Be clear--make sure your rival can interpret your moves
  5. Dont be envious--focus only on your slice of the profit pie
Now we have more evidence that punishment is not a good strategy.
In Nowak's experiment, the students played more than 8,000 games of prisoner's dilemma, using dimes to reward and punish. The normal game of prisoner's dilemma gives two players two options: cooperate or defect. If both cooperate, each ends up winning a dime. If both defect, each gets nothing. If one cooperates and the other defects, the cooperative player loses 20 cents and the defector wins 30 cents. Nowak then added a "costly punishment" component. A player could choose to punish someone who didn't cooperate. That penalized the non-cooperative person 40 cents, but the other player had to pay a dime to mete out the punishment. When Nowak compared how much money people earned or lost in the long run, there was a noticeable correlation between punishment and overall money. The players who punished their opponents the least, or not at all, made the most money. Those who punished the most made the least money.

Thursday, September 22, 2022

How do insurers identify good drivers?

The previous post reminded me of the importance of Credit Scores as a screening device.  Here is a post from a couple of years ago.  And I am still curious to hear about unique uses of credit history (see question at end). 

The FTC's Bureau of Economics relased their FACTA study, which concludes that:
  1. Credit scores effectively predict ... the total cost of [auto insurance] claims.
  2. Credit scores permit insurers to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers ... . [note: this is why you can call up GEICO, let them look at your credit report, and get an auto insurance quote over the phone].
  3. ..as a group, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians.
  4. ...scores effectively predict risk of claims within racial and ethnic groups.
  5. The Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups.
So even though credit scores help insurance companies price insurance more accurately, point 3 implies that some groups pay more, on average, than others. The policy issue behind the study is whether the government ought to ban the use of credit history for anything but making loans. As point 4 implies, banning the use of credit scores would result in higher prices for good drivers, regardless of their race or ethnicity.

Theory tells us that in states which ban the use of credit scores to price insurance (California and Massassachusetts) insurance companies would find it more costly to distinguish high from low risks, so they may lump them together (called "pooling"), and price insurance at the average risk. Or they may be concerned that only high risks would be willing to buy high-priced insurance (what economists call "adverse selection") and price high or, if price controls prevent high prices, exit the market.

I would be curious if any of our readers know of novel uses of credit scores as a screening mechanism, or if they have developed better predictors (point 5) in a particular application, like pricing insurance or screening job applicants.

Tuesday, September 20, 2022

Are you odious?

The Economist opines on shortages in Egypt and Tunisia:
The government’s price-fixing exacerbates the problem. Dairy farmers, for example, must sell their milk for 25% less than it costs to produce, and the government is not making up the difference. ...Many have left the business or thinned their herds.
Relatedly, Tyler Cowen has a simple test to determine if a person is "odious," i.e., as bad as Hitler:
I’ll just ask myself, well, are their views worse than the views of someone who wants price controls on prescription drugs?

[In case you didn't understand the test, drug price controls kill thousands of people each year by reducing supply.]

Monday, September 19, 2022

Why is the CFTC trying to shut down PredictIt.org?

PredictIt.org contracts (that pay off $1 if an event occurs) are selling at prices that imply the following probabilities:
  • 55% that a Republican wins the 2024 Presidential Election 
  • 75% that Republicans win the 2022 House majority
  • 65% that Democrats win the 2022 Senate majority
So why are President Biden's appointees at the CFTC trying to shut down PredictIt.org?  A spokesperson for the CFTC said that the reason “remains confidential within the commission.”  

Washington Post and Chicago Tribune editorials suggest that it is because polls, the alternative to prediction markets, have a liberal bias, and this bias reduces Republican votes.  

PredictIt has sued the CFTC:
Unlike pundits and polls, with their quirky methodologies and unspoken partisan biases, prediction markets are much more transparent and accurate in the information they provide.
See past blog posts using prediction markets.

Saturday, September 17, 2022

What do grade non-disclosure policies do?

 From WSJ:
  • students take harder classes;
  • spend more time on extracurricular activities; but 
  • are less likely to stay at their first job out of school for longer than a year

Wednesday, September 14, 2022

What do the EU and criminals have in common?

Criminals are willing to risk future punishment for the current gains of crime.  In other words they have high discount rates.  It looks as if the EU does as well.

The WSJ reports:

The European Union outlined a sweeping plan to claw back about $140 billion in profits and revenue from companies enriched by soaring energy prices in a bid to stabilize the bloc’s energy markets in response to Russia’s punishing assault on the continent’s economy.

Short-run/immediate/direct impact: 

redistribute some energy companies’ windfall profits and revenue to cushion the blow of high prices for consumers.
Long-run/future/indirect impact: 
Reduced incentive to conserve (demand), develop alternate sources or invest in new capacity (supply).

Bottom line:  EU is fixing todays problems but creating bigger ones in the future. 

The One Lesson of Eonomics: The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

The Economics of Wine


Innovation and the F/X cycle

 

WSJ:  Why is the US Dollar so Strong?  Innovation.
...the U.S.’s leading position in academic research, and the close links of universities and business, gave the country a head start in computerization in the 1970s and early 1980s, in the internet in the 1990s and in newer internet applications and artificial intelligence more recently.  
Each innovation sparked a wave of investment to take advantage of it. This improved profitability and attracted foreign capital—pushing up the dollar. <Note, USD is the price of a dollar measured in foreign currencies>

Then... 

Inventions don’t stay in one country for long. But in each case America’s head start gave it a few years’ lead before investments elsewhere looked as profitable. 

Which lead to capital outflows and more consumption (imports), pushing down the USD, causing the cycle.  

WARNING:  This kind of after-the-fact theorizing is good for developing theories, but is not a substitute for testing them, i.e., correlation does not imply causality. 

Sunday, September 11, 2022

Stuck in Lodi (Appellation)

My winemaker brother grows and sells his cabernet grapes (Napa Appellation) for $7000/ton, but buys Zinfandel grapes (Lodi Appellation) for $900 to make his own wine.    

When I asked him why he didn't make wine from his own grapes, he said "I cannot afford them."  In other words, the extra value of drinking Napa Cabernet over Lodi Zinfandel is less than the opportunity cost ($7000-$900=$6100) of doing so.

Stuck in Lodi, by CCR

Friday, September 9, 2022

Should we trust behavioral scientists?

Not if we believe in science (cite) :
...psychologists significantly overestimated the replicability of published psychology research in the reproducibility study. In general, behavioral scientists overestimate not only the effect of nudges, but also the impact of psychological phenomena and the replicability of published behavioral science research.

Tuesday, September 6, 2022

Is ESG investing illegal?

FROM WSJ
 ...BlackRock’s environmental, social and governance investment policies appear to involve “rampant violations” of the sole interest rule, [...which] requires investment fiduciaries to act to maximize financial returns, not to promote social or political objectives. 
 See related posts:

Those with high discount rates are more likely to commit crime

From Effective Altruism Forum The paper shows that criminals discount the future much more than non criminals which combined with the delayed and uncertain future punishment, makes them more likely to commit crime
The existence of significant procedural delays in trials and sentencing may [reduce the perceived costs of crime], pushing the eventual punishment further into the discounting window.
Instead it suggests that:
  • Reduce short sentences in brutalising prisons in favour of greater use of suspended sentence or punishments akin to UK community orders,
  • Longer jail terms for repeat offenders to remove them from circulation "incapacitation," and place an emphasis on humane treatment within prison environments.
  • Visible policing and and contact with communities as a central point of practice.
  • Street lamps

Does crime cause people to move to the suburbs?

 From Effective Altruism Forum:

...back of the envelope calculation based on prior research has one murder in New York equalling 600 people moving to the suburbs

HT:  MarginalRevolution.com 

Thursday, September 1, 2022

Data-driven DEI

 From Fortune:

  • Understand disparities by controlling for differences in training and education.
  • Find the root causes of bias
    Preference bias is good old-fashioned bigotry (animus-based discrimination).  
     
    Information bias (statistical discrimination) arises when employers have imperfect information about workers’ potential productivity and use observable proxies, like gender or race, to make inferences (gender stereotypes are a classic example).  
     
    Structural bias occurs when companies institute practices, formally or informally, that have a disparate impact on particular groups, even when the underlying practices are themselves group blind. Employee referral programs can fall into this category.
  • Follow-up to find what works and what doesn't
    Solutions that yield measurable results can be substantiated into company policy, while those that don't should be discarded. In the case of the hospital network, once a small change was made to the structure of their scheduling, gender differences were reduced. Despite countless hours spent in training and seminars, their results were unchanged for years. The solution was hidden in plain data.

    Related:  Do Workplace Diversity Programs Work?

Selected price elasticities

From Wikipedia:


·        Cigarettes (US)[41]
o   −0.3 to −0.6 (General)
o   −0.6 to −0.7 (Youth)
·        Alcoholic beverages (US)[42]
o   −0.3 or −0.7 to −0.9 as of 1972 (Beer)
o   −1.0 (Wine)
o   −1.5 (Spirits)
·        Airline travel (US)[43]
o   −0.3 (First Class)
o   −0.9 (Discount)
o   −1.5 (for Pleasure Travelers)
·        Livestock
o   −0.5 to −0.6 (Broiler Chickens)[44]
·        Oil (World)
o   −0.4
·        Car fuel[45]
o   −0.25 (Short run)
o   −0.64 (Long run)
·        Medicine (US)
o   −0.31 (Medical insurance)[46]
o   −.03 to −.06 (Pediatric Visits) [47]
·        Rice[48]
o   −0.47 (Austria)
o   −0.80 (Bangladesh)
o   −0.80 (China)
o   −0.25 (Japan)
o   −0.55 (US)
·        Cinema visits (US)
o   −0.87 (General)[46]
·        Live Performing Arts (Theater, etc.)
o   −0.4 to −0.9 [49]
·        Transport
o   −0.20 (Bus travel US)[46]
o   −2.80 (Ford compact automobile)[50]
·        Soft drinks
o   −0.8 to −1.0 (general)[51]
o   −3.8 (Coca-Cola)[52]
o   −4.4 (Mountain Dew)[52]
·        Steel
o   −0.2 to −0.3[53]
·        Eggs
o   −0.1 (US: Household only),[54] −0.35 (Canada),[55] −0.55 (South Africa)[56]

We traded two years of lockdown for two weeks of added life

Conclusions 
  • Vaccines worked to prevent death. Really well, and as advertised. They held western death rates down despite elderly and obese populations. 
  • Lockdowns and restrictions were very effective only when combined with near-total travel bans, and when kept in place until full vaccination. 
  • It’s not clear that even the most effective anti-Covid restrictions pass a cost-benefit test, when it comes to freedom versus safety (10-15 days added to every life.) 

From Maximum Truth: Join me on a data-driven search for the truth!

Exporting air pollution and birth defects to Mexico

A tightening of the US air quality standard for lead in 2009 caused an increase exports of used batteries to Mexico. 
  •  In the United States, air-borne lead dropped sharply near affected plants, most of which were battery-recycling plants. 
  •  In Mexico, production increased at battery-recycling plants ... and birth outcomes deteriorated within two miles of those plants