Wednesday, September 20, 2023

Is the opportunity cost of net-zero too high?

For Sweden it is:
It cited the tough economic climate along with a plunging krona, expecting to also fall short on other targets for protecting the environment.

Saturday, September 16, 2023

Prosecutorial Discretion: Attorney General Edition

In the late 1980's, I went with a friend to help her work the Ambassador's Ball at the French Embassy, a pay party and charity auction to support MS research.  I bought my first tuxedo and showed up early to sign people in and help set up.  After an hour or so, our job was done and we went inside to join the party.  

We grabbed a drink at the open bar, and into a big room containing the items being auctioned off: cases of rare wine, catered dinners, and vacation homes in exotic locales.  My favorite, or at least the one I might have bid on but for the money, was a week at a Chamonix chalet.  In front of each item was a lined piece of paper where people wrote down their bids.  

As the night wore on, I noticed two couples actively bidding for the chalet.  One couple would watch the other write down a bid, wait a while, and then walk over and bid again.  This went on for three or four bids, until I noticed the two couples talking to one another.  

At the time, I worked as a staff economist at the Antitrust Division of the US Dept. of Justice, challenging  anticompetitive mergers and prosecuting conspiracies to fix prices, allocate customers, or rig bids.  For these kinds of criminal conspiracies, the Sentencing Guidelines recommend prison terms up to ten years.  

I had worked on and written about a number of bid-rigging conspiracies--dealers at antique auctions, loggers at Forest Service timber auctions, and Frozen Perch sellers at Navy Procurement auctions--so I was excited to actually witness one.  [note: The Economist has reported on my articles on bid rigging albeit with a small mistake].  

The event was chaired by Ursula Meese, whose husband Ed was my big boss, the Attorney General.   I saw him standing by himself in the center of the room, so I walked over, showed him my badge--that's what I liked to call my work ID--and told him what was going on. 

"Do you want me to take 'em down?" I asked.  

He smiled and said "Book 'em Danno."  [reference for those too young]


Middle panel of my first-day class slide shows Attorney General Meese and me in the Reagan Justice Dept.  

Wednesday, September 13, 2023

How would you align the incentives of a Data Protection Officer with the goals of the organization?

 In a previous posts, we have blogged about the onerous EU privacy rules.  Just came across another, a GDPR Data Protection Officer or DPO.

According to Article 38, other employees in the organization aren’t allowed to issue any instructions to the DPO regarding the performance of their tasks. So, not only does the DPO have wide-ranging responsibilities, but the position is shielded from potential interference from the organization.
Wow. What is the performance metric, and are you prohibited by law from tying pay to performance as it could constitute "interference?"

Capital Gains Taxes destroy wealth in these EU countries

If you tax something, you get less of it.  In EU countries without capital gains taxes (Switzerland, Belgium, Luxembourg, Turkey, Slovenia, Czech Republic and Slovakia), an investment that costs $100, but returns $150 after five years has an annualized Internal Rate of Return (IRR) of 8.45%.  In other words, this investment is not profitable unless your cost of capital is less than 8.45%.

For the countries with the highest capital gains rates, Denmark (42%), Norway (35.2%), and France (34%), this investment won't get made unless capital costs are less than 5.2%, 5.7%,  and 5.9%, respectively.  

BOTTOM LINE:  the higher the capital gains rate, the smaller the investment, and the poorer is the country, compared to what it would be without a capital gains tax.

Monday, September 11, 2023

In-class question (Ch1): Wells-Fargo

QUESTION:  In 2016, Wells Fargo was fined $185 million for fraudulent sales practices. The bank's employees had opened as many as 2 million unauthorized bank and credit card accounts in customers' names. Figure out what the problem is and select the best way to fix it.   

 1. Let someone else make the decision.
 2. Change the incentives.
 3. Give the decision-maker more information. 

1. Let someone else make the decision: Replacing the CEO and firing thousands of employees was part of the response, but it doesn't address the root problem - the sales-oriented incentive system. 
 2. Change the incentives: This would be the most effective solution. After the scandal, Wells Fargo had to review and change its sales practices and incentive systems to focus on customer satisfaction rather than solely on sales volume. 
 3. Giving the decision-maker more information: This alone would not have been sufficient. The executives were aware of the aggressive sales culture. The issue was the incentive system, which encouraged employees to open unauthorized accounts. 

How Saudi Aramco, world's largest oil company, became "Green"

Irony is my favorite kind of humor!  From Bloomberg:
The unlikely tie-up between Aramco and ESG began with the creation of two subsidiaries — the Aramco Oil Pipelines Company and the Aramco Gas Pipelines Company. Aramco sold 49% of the shares in each unit to consortiums led by EIG Global Energy Partners LLC and BlackRock Inc., respectively. These investors used bridge loans from banks to fund those transactions.
In order to generate cash to repay the bank loans, the EIG and BlackRock consortiums created two special purpose vehicles: EIG Pearl Holdings and GreenSaif Pipelines Bidco, both registered at the same Luxembourg address. These SPVs then sold bonds, which, since they had no direct links to the fossil-fuel industry, ended up getting an above-average score in a widely-used JPMorgan Chase & Co. sustainability screening based on third-party ESG scores.
From there, the bonds made their way into JPMorgan’s ESG indexes, which are cumulatively tracked by about $40 billion of assets under management. Investors in the SPV bonds include funds managed by UBS Group AG, Legal & General Investment Management and the investment arm of HSBC Holdings Plc.”
BOTTOM LINE: if you cannot measure it (ESG), you cannot control it.

What is a debt coverage ratio, and how does it affect apartment rents in Nashville ($1880)?

 From investopedia:
  • The debt-service coverage ratio (DSCR) measures a business’s cash flow (Net Operating Income) divided by its debt payments, including principal and interest. 
  • Lenders use a DSCR between 1.15 and 1.5 to determine whether to make a loan to a developer.
Here is an example, involving the cheapest loan available.
  • A Nashville builder can build apartments for $167K/unit= $150K(construction) + $17K(land)
  • FHA is willing to lend at $167K at 6% for 40-years, resulting in a debt payment of $986/month.  
  • With FHA's DSCR of 1.15, the builder must make at least $1134/month in Net Operating Income (NOI) to qualify for a loan.  
  • With 7% vacancy the expected NOI increases to $1213/month
  • Add operating cost to NOI to get Rent=$667+$1213=$1880/month 
New apartment supply will enter the market when Nashville rents rise 20% to $1880.

HT:  Bill H.

Sunday, September 10, 2023

Lobster Roll Strategy

He began with the fact that he could not get a decent lobster roll in Manhattan. Everything was off, Holden said. The price was too high, 30 dollars. The lobster meat was inferior with fillers, masks and diluters “to essentially hide the fact that the lobster meat wasn’t as high quality as it could be.”
Then there was the white table cloth service – ridiculous, and as far from the quintessential Maine lobster shack as you could get.
“I’m not a big fan of mayonaisse,” Holden added. “I really struggled to find a lobster roll in the city not drowning in mayonaisse.”
Here’s the recipe for a true Maine-style lobster roll: chilled meat, somewhere in the realm of a quarter-pound of fresh knuckle claw lobster meat; a New England top-split bun, which serves purely as a vessel for the super high-quality lobster meat.
Shave a little butter onto the sides of the bun, toast it golden brown, add a little mayo for texture, some secret seasoning and celery salt to accent the lobster, a little warm lemon butter to bring it all together. That’s all you need.
“That literally is the key to the program,” Holden said. “Once you start trying to do anything other than put your star of the show facing forward, you’re playing from behind. You have to lead with your best food forward. Lobster is the star of the show.”
The first day, Luke’s sold 500 lobster rolls. They were expecting to sell 100. Holden’s dad, Jeff, drove down more lobster meat from Maine overnight for the next day.
Then geographic expansion and vertical integration:
Ten years later, Luke’s is still in the East Village in its original location, but it also has 30 more locations in Maine, Boston, New York, Philadelphia, Washington, D.C., Chicago, Las Vegas, and Miami, plus 10 locations in Japan, and two locations in Taiwan.
Luke’s also has one of the largest lobster production facilities in the United States in Maine, where it manages the lobster for Whole Foods, among others. Luke’s Lobster Seafood Co. processes about 5 million pounds of lobster annually and 2 million pounds of Jonah crab.
HT: Giselle

Tuesday, September 5, 2023

Synthetic Diamond Disruption

Prices of synthetic diamonds have fallen dramatically.

About five years ago, lab grown gems sold at about a 20% discount to natural diamonds, but that has now blown out to around 80% as the retailers push them at increasingly lower prices and the cost of making them falls.

Synthetic gems have been around for decades, but it appears that their costs have recently fallen. The resulting price decreases have increased synthetic diamond demand considerably. This is causing the longtime incumbent monopoly on natural diamonds, De Beers, no small amount of pain.

In June 2022, De Beers was charging about $1,400 a carat for the select makeable diamonds. By July this year, that had dropped to about $850 a carat.

Will DeBeers become the most recent in a string of now defunct market leaders? We are used to seeing digital disruption of traditional retailers, e.g., Blockbuster Video, Borders Bookstores, and Encyclopedia Britannica. It is harder to find recent non-Internet related examples.

HT: Marginal Revolution

Friday, September 1, 2023

Should the Justice Dept be more concerned with Google's complaining competitors or their enthusiastic customers?

Judge Mehta:
A dominant firm like Google does not violate the law, however, merely because it occupies a monopoly market position. It must act in a manner that produces anticompetitive effects in the defined markets. [e.g., that harm consumers].
Mozilla CEO testifying on behalf of Google (page 109 of MSJ transcript):
...consumers are choosing Google. We’re making search easy for them, and we added choice in a product in a way that no one else had or even thought of. We’re making it easy. ...

In response, the Justice Dept. is trying to exclude testimony about Google's quality. They seem to miss the irony that this makes them seem as if they are more concerned with Google's complaining competitors than their enthusiastic customers.

UDPATE:  the judge ruled against the DOJ, in essence telling them they should be more concerned with what Google's customers are saying.

Dollar General strategy shifting, but not too much

 From WSJ:  

  • 1000 new stores in rural areas, 
  • Target demographic <$40,000 income/year, 
  • Its workers earn about $16,000/year.
  • Experimenting with upscale brands, DGX

Thursday, August 31, 2023

Multi-family apts priced 10%-15% too high relative to bonds

 Using logic straight out of Chapter 9, the NYTimes suggests apartments are mis-priced:

Owning commercial property is a bit like owning a corporate bond, only slightly riskier: You bet on the solvency of a tenant, with more uncertainty about the value of the capital you’ll get back. For at least the past 20 years, investors in U.S. real estate have required a return premium of 1.9 percentage points over the yield on investment-grade corporate debt, according to Green Street’s director of research, Cedrik Lachance.
Right now, real estate only offers a 1.3 percentage point premium. For the relationship to return to normal and make property attractive again, U.S. real-estate prices need to fall a further 10% to 15%.


  • All real estate is local and this refers to National data.  
  • If I really knew, I wouldn't be teaching school and I probably wouldn't tell you.  

Price Discrimination saves lives: Glaxo's AIDS drugs

Link to article:
Some 28 shipments [of low-priced AIDS drugs] were diverted from African countries to Paris and Brussels, then moved to Antwerp, where the customs officers noticed something was amiss. The drugs then moved into the normal wholesale chain and were sold at European prices - up to £3.80 a tablet instead of the 50p Glaxo charges in Africa.
If Glaxo cannot prevent this kind of arbitrage, they may move to a uniform price which would price much of Africa out of the market.

Economist gets this wrong

 Dear Editor:

Though I liked your article about negotiating drug prices, the sentence, “The system is packed with opaque middlemen such as pharmacy benefit managers, many of which are making big rents” is not only wrong but it tarnishes PBMs with the “middleman” slur.    


See our recent paper on the industry, in which we survey the evidence.  This is from our conclusion,


As a final reminder, we noted in the introduction that PBMs have derogatorily been called the “middlemen” of the pharmaceutical industry. As FedEx—a “middleman” between many retailers

and consumers—has reduced the overall costs of shipping, PBMs reduce the costs of offering pharmacy benefits. Not every plan sponsor needs to (nor can) negotiate with manufacturers, keep

up with clinical developments, contract with the nation’s 66,000 pharmacies, and build systems to adjudicate and process claims.


Happy to write an article for you on what PBM’s do, and how they negotiate lower drug prices, based on the paper.  I think it would clear up a lot of misconceptions.  


Loyal reader, 


Prof. Luke Froeb

Vanderbilt University



CV  Bio  Textbook   Blog   MBA-BS'er

“In twenty years [but don't wait!], it will

be seen as the standard way to teach 

economics.”  — Robert E. Litan,

Kauffman Foundation and the Council

on Foreign Relations


Formularies, Rebates, and the Economics of PBM Bargaining

Vanderbilt Owen Graduate School of Management Research Paper

60 Pages Posted: 9 May 2023

Luke M. Froeb

Vanderbilt University - Owen Graduate School of Management

Mikhael Shor

University of Connecticut Department of Economics

Date Written: May 8, 2023


For 181 million Americans not on Medicare or Medicaid but insured through their employer, labor union, or private insurance health plan, the primary restraints on pharmaceutical prices are pharmaceutical benefit managers (PBMs) who administer health plan drug benefits. PBMs use the aggregate demand of their constituent plan sponsor clients — employers, unions, government agencies, health insurers, and others — to negotiate lower prices.

Recently, the use of formularies and PBM-negotiated rebates have come under fire. Critics allege PBMs act to maximize rebates rather than reduce prices, and that rebates lack transparency, contribute to increasing prices, and are not passed on to the benefit of patients. Yet, sophisticated plan sponsors have choices in how to administer their prescription drug benefits and almost all choose to hire PBMs to manage their drug benefit rather than internalize drug procurement, negotiation, clinical evaluations, and benefit administration.

This report examines the role of formularies and rebates in the provision of prescription drugs. We respond to the criticisms of PBMs by discussing the often misunderstood principles of formulary management and rebates and how they are essential parts of the bargaining process between PBMs and pharmaceutical manufacturers. We demonstrate that economic logic and evidence, as well as multiple investigations by independent and government groups, find that PBM bargaining reduces drug prices.

Keywords: drug pricing, pharmacy benefit managers, PBMs, rebates, formulary design, prescription drug market

JEL Classification: C70, D4, I11, I13, I18, L1, L42

Suggested Citation:

Froeb, Luke M. and Shor, Mikhael, Formularies, Rebates, and the Economics of PBM Bargaining (May 8, 2023). Vanderbilt Owen Graduate School of Management Research Paper, Available at SSRN: or




Tuesday, August 29, 2023

Regulations deter the movement of assets to higher valued uses: Germany

 Two examples from WSJ: Germany is losing its mojo:

German privacy laws made it impossible to run key studies for cancer cures, BioNTech’s co-founder Ugur Sahin said recently. German approvals processes for new treatments, which were accelerated during the pandemic, have reverted to their sluggish pace, he said.
Germany ought to be among the nations winning from advances in medical science, said Hans Georg Näder, chairman of Ottobock, a leading maker of high-tech artificial limbs. Instead, operating in Germany is getting evermore difficult thanks to new regulations, he said.
One recent law required all German manufacturers to vouch for the environment, legal and ethical credentials of every component’s supplier, requiring even smaller companies to perform due diligence on many foreign firms, often based overseas, such as in China. 
Näder said his company must now scrutinize thousands of business partners, from software developers to makers of tiny metal screws, to comply with regulation. Ottobock decided to open its latest factory in Bulgaria instead of Germany.


Sunday, August 27, 2023

Why shale-oil drilling in the US, but not in Europe?

If you give people secure property rights, they have the incentive to move the property to its highest valued use:
'Whoever owns the soil, it's theirs up to Heaven and down to Hell." So goes the ancient common-law principle. Today, however, almost no major country recognizes full subsurface private property rights, except for the United States.

Wednesday, August 23, 2023

US is getting richer faster

From the Economist:
America’s outperformance has translated into wealth for its people. Income per person in America was 24% higher than in western Europe in 1990 in ppp terms; today it is about 30% higher. It was 17% higher than in Japan in 1990; today it is 54% higher.

Monday, August 21, 2023

Saturday, August 19, 2023

On estimating elasticity from a change in price

Elasticity of demand is defined at a given Price and Quantity by taking an infinitesimal change. But in real life you cannot measure the effects of a small change, so we are presented with discrete changes. If the elasticity is not constant (most demand curves get more elastic as you raise price as consumers find more substitutes) then the elasticity after the price change may be different from the elasticity before the change. Using the percentage change from the midpoint, is a way of dealing with this: Instead of elas=((Q1-Q0)/Q0)/((P1-P0)/P0) we use elas=((Q1-Q0)/midpointQ)/((P1-P0)/midpointP); where midpointP=(P1+P2)/2, and midpointQ=(Q1+Q2)/2, and you get the formula in our favorite textbook.

Thursday, August 17, 2023

Benefit-cost analysis without the benefits or the analysis: How not to write Merger Guidelines


The wealth-creating engine of capitalism is the movement of assets to higher-valued uses. Our biggest and most valuable assets, and those with the greatest wealth-creating potential are corporations. Antitrust law and practice work to facilitate this movement, while deterring the types of mergers which substantially lessen competition. 

Previous iterations of the DOJ/FTC Merger Guidelines have articulated a clear, rigorous, and transparent methodology for doing so.   By describing agency practice, guidelines facilitate compliance, ensure consistent and reasonable enforcement, which encourages good mergers and deters bad ones.  

As long as the methodology can distinguish the good from the bad mergers, this process works pretty well.  

Beginning in 1982 (Reagan/Baxter) the methodology relied heavily on economics.  At that time, the simple "big is bad" structural models focused on changes in market concentration. But by the early 1990's, Agency economists had begun using more realistic game theoretic models to both characterize observed pre-merger competition (calibration) and to predict the loss in competition following merger (simulation).  

By providing a transparent mapping from evidence to prediction, the models showed which evidence mattered, why it mattered, and how much it mattered (Werden et al., 2004).  Economic models gave credibility to antitrust conclusions because they were falsifiable.  All one party had to do was show that the inputs were wrong, e.g., "demand is much more elastic than you think" (Werden and Froeb, 1994), or that the model was wrong, e.g., "if we ignore advertising, you will understate the loss in competition among super-premium ice cream manufacturers" (Tenn et al., 2010).  

The most common models used by Agency economists, and the consultants that appear before them, are online at  

Attorneys are critical to this process, as they have to pitch the economists' work to the Agencies in a way that is credible, but also favors their client.  When these goals conflict, attorneys earn their hourly fees.  Also, by pushing back against economists, attorneys make the presentations better so that by the time they get to the Agencies, arguments are clear and persuasive.  

But the 2023 Draft Merger Guidelines seem to be trying to go back to the days before economics played such a large role.  Not only do the Draft Guidelines put economic analysis in the appendices, they don't say how it should guide the legal analysis.  Untethered from economics, the Agency heads are now freer to claim that what they do is consistent with the Guidelines.  In other words, the Draft Guidelines don't provide as much Guidance.  

What worries us most is their potential effect on innovation. In the late 1950s, Nobel Laureate Robert Solow attributed about seven-eighths of the growth in U.S. GDP to technical progress, and stressed the importance of policies to encourage growth— “Adding a couple of tenths of a percentage point to the growth rate is an achievement that eventually dwarfs in welfare significance any of the standard goals of economic policy,” which includes antitrust.

For example, the Draft Guidelines take particular aim at acquisitions made by US Tech Firms.  However, this kind of enforcement can discourage innovation by reducing the rewards from innovating.  In particular, acquisitions of tech firms often create the incentives that induce firms to innovate in the first place:
  • acquisitions of technology companies are critical in creating the incentives to innovate—for technology ventures, exits via acquisitions are about five times more likely than IPOs. These exits create an ex-ante incentive to innovate. 
  • In addition, investors evaluate regulatory risks as part of their due diligence when considering an investment; excessive regulatory risks, like those posed by uncertain antitrust enforcement, can deter investors from investing, particularly in the early and growth stages of ventures.
BOTTOM LINE:  Without a coherent merger analysis that embraces both benefits and costs and a way to weigh one against the other, the Draft Guidelines will likely deter mergers, regardless of whether they are anticompetitive.


Cost-Benefit Analysis Without the Benefits or the Analysis: How Not to Draft Merger Guidelines

7 Pages Posted: 14 Aug 2023

Luke M. Froeb

Vanderbilt University - Owen Graduate School of Management

D. Daniel Sokol

USC Gould School of Law; USC Marshall School of Business

Liad Wagman

Illinois Institute of Technology - Stuart School of Business, IIT

Date Written: August 10, 2023


Previous iterations of the DOJ/FTC Merger Guidelines have articulated a clear, rigorous, and transparent methodology for balancing the pro-competitive benefits of mergers against their anticompetitive costs. By describing agency practice, guidelines facilitate compliance, ensure consistent and reasonable enforcement, increase public understanding and confidence, and promote international cooperation.

But the 2023 Draft Merger Guidelines do not. They go to great lengths to articulate the potential anticompetitive costs of mergers but with no way to gauge “substantiality.” Most significantly, they ignore potential benefits, which eliminates the need for balancing. In other words, the Draft Guidelines provide very little guidance about current practice which adds risk, which deters mergers, which seems to be the point. We offer specific recommendations for Horizontal, Vertical, and Tech Mergers that do a better job differentiating procompetitive mergers from anticompetitive ones.

Keywords: Antitrust, Merger Enforcement, Horizontal Mergers, Vertical Mergers, Technology Mergers

JEL Classification: L40, K21

Froeb, Luke M. and Sokol, D. Daniel and Wagman, Liad, Cost-Benefit Analysis Without the Benefits or the Analysis: How Not to Draft Merger Guidelines (August 10, 2023). Southern California Law Review, Forthcoming, Available at SSRN:

Tuesday, August 15, 2023

White House lowers US govt discount rate from 3% to 1.7%

VOX Reports:  This means that more projects with big current costs and small future benefits will pass the NPV (Net Present Value) test.  For example, the investment below returns more than its assumed cost of capital after 12 periods under the Biden Administration's 1.7%, but not under the Trump Administration's 3%. 


  • more government spending ("investment") under a Biden Administration; and
  • less government spending in a Trump one.
NOTE:  Vanderbilt uses a 12% Discount rate to evaluate potential projects.  

Monday, August 14, 2023

Why is the Russian rouble falling?

 From the Economist:  

Russia’s rouble slumped to a 16-month low of 100 against the dollar, having lost around 25% of its value this year. Deteriorating foreign trade conditions and an escalation in military spending have accelerated its fall in recent weeks. The currency was already suffering from western sanctions and European countries’ diversification away from Russian energy supplies.
The exchange rate is the "price" of the rouble which is set in a "market" where quantity demanded = quantity supplied. If the price falls it must be because 
  • Demand has fallen (Europeans who sell € (euros) to buy ₽ (roubles) to buy Russian Goods or invest in Russia).   In this case, European sanctions has reduced EU demand for Rusian Gas.  
  • Supply has increased (Russians who sell ₽ to buy € to buy EU goods or invest in EU).  The article mentions increased military spending which could represent and increase in demand for €.  More likely, though the article doesn't say this, Russians could be trying to invest in the EU or US to get their money out of Russia because they anticipate a depreciation in the ₽
Note that the Economist talks about depreciation against the $, but we are using € instead of $ because the EU is a bigger trading partner with Russia than is the US.  The depreciation against the € would track the depreciation against the $ if the exchange rate between the EU and US is stable.

UPDATE:  Russia Hikes Rates To 12% In Emergency Move To Halt Rouble's Collapse

By hiking rates, Russia hopes to make investing in Russia more profitable, so that investors will sell € to buy ₽ to invest in Russia, which makes the ₽ appreciate

Tuesday, August 8, 2023

Assumed rates of return for public pensions vs. interest rates


As a result, Public Penions are 30% under-funded. To figure out why we aren't saving enough for our public pensions, ask three questions

  • Who is making the bad decision?
    • We the People
  • Do We have enuf info to make a good decision?
    • No, We the People don't know how to compound, much less discount.
  • And the incentive to do so?
    • No, We the People over-weight the present, called "hyperbolic discounting," and act as if our discount rates are really big, which means we don't save enough.  

Is your corporate DEI program legal?

 From The WSJ:

  • Comcast settled a case accusing it of illegally favoring minority-owned small-business customers with grants and marketing advice. 
    • Comcast opened the program to all small businesses. 
  • Amazon has been sued in Texas over a program offering an extra $10,000 to Black- or Latino-owned delivery-service contractors. 
  • Starbucks directors and executives are being sued by a shareholder arguing they violated their duty to investors by supporting diversity policies. ...
“Anything a company’s doing that is treating someone differently because of their race, even if it’s a small part of the decision-making process, is going to be scrutinized,” said Dan Lennington, a former Wisconsin deputy solicitor general and deputy counsel for Wisconsin Institute for Law and Liberty, the legal group behind the Comcast lawsuit. ...
Companies have long relied on rationales similar to those buttressing affirmative action at universities—that there are benefits to diversity. By dismissing that rationale, the high court weakened the justification for other programs that promote it. 

The Hidden Costs of Property Taxes: A Tale of Two Houses

From Art Laffer:  

Since the housing bubble peak of 2006-2008: 
  •  2.8% Ohio property tax rate: owners of Dr. Art Laffer's childhood home have paid approximately $125,000 in property taxes while their home appreciated by $75,000. 
  •  0.6% Nashville property tax rate: paid $250,000 in property taxes while his current house appreciated in value by $2 million. 
The causality is hard to disentangle from the correlation: 
  • it could be that unattractive states adopt high taxes, and/or
  • that high taxes make states unattractive, and/or 
  • that high taxes are correlated with some other factor (Democratic control?) that causes states to become unattractive. 
BOTTOM LINE: before buying a house, especially one in a high tax state, look ahead and reason back.

Why is rent control failing in Scotland?

 From the Financial Times:

...levelling up secretary Michael Gove said in Edinburgh: “The history of rent controls and rent freezes is that they lead to a reduction in supply overall and they end up hurting the poorest most.”  

In other words, if you impose price ceilings below the equilibrium price, you get shortages.

HT:  Justin K.

Monday, July 31, 2023

Shopify makes visible the hidden cost of meetings

From the High Lantern Group:
When the Shopify COO grew tired of pointless, time-draining meetings, he launched a calculator embedded in everyone’s calendars. It displays the “cost” of every meeting with three or more people...A typical 30 minute endeavor with three employees can run from $700 up to $1,600. Adding an executive — like Chief Operating Officer Kaz Nejatian, who built the program during a company-wide hack day — can shoot the cost above $2,000…
“No one at Shopify would expense a $500 dinner,” Nejatian said in an interview. “But lots and lots of people spend way more than that in meetings without ever making a decision. The goal of this thing is to show you that time is money. If you have to spend it, you think about it.”

Risk premium for stocks near all time low

WSJ reports:  
The gap between the earnings yield of the S&P 500 and the yield on the 10-year U.S. government bond dropped to around 1.1 percentage point last week, its narrowest since 2002.
And here is the reason:
Bond yields haven’t risen as much, but stocks have taken flight—lifted by investors’ growing optimism about the economy.

In other words, investors are investing as if stocks are only slightly more risky than bonds.  If they change their minds, and think that stocks are more risky than bonds, stock prices will fall which will raise the expected return of investing in stocks or bond prices will rise which will decrease the bond yield, and bring the equity risk premium back up, closer to its mean.

This isn't the first time that the equity risk premium has fallen, See earlier posts to see past instances of this, like in 2008, when Vandy Treasurer Bill Spitz's advised:

  • Avoid Riskier assets 
  • Stick with quality 
  • Be skeptical of the rush to alternatives 
  • Moderate return expectations 
  • Borrow now if you are a marginal credit
But unlike 2008, the Shiller CAPE (cyclically adjusted price to earnings ratio, a measure of value) is not as high, though twice its long run mean of 16.  
DISCLAIMER:  if I really knew what was going to happen, I wouldn't be teaching school.

Sunday, July 30, 2023

Strategist Jim Bradford, RIP

Anyone attending a faculty meeting at a business school would be struck by the irony that those who teach management do it so poorly.  But Dean Jim Bradford (obituary) was different.  Not only had he successfully managed two public companies, and overseen several others as a board member, but he knew how to develop a successful strategy.

When Jim was appointed Dean, he did what he always did when he took over an organization, "first thing you do is grab the checkbook."  Then he combed through the accounting data.  What he saw was an organization with huge fixed costs and declining demand for its flagship product.  But he also noticed that other programs, like the Executive MBA, had small incremental costs.  So he bought better faculty to strengthen the brand, and then expanded the school's portfolio of degrees (Masters of Accountancy, Masters in Finance, Masters of Management in Healthcare) to take advantage of the Vanderbilt brand.  The results have been impressive: as the school moved up in the rankings, revenue and giving have increased faster than costs.

Thank you Jim, and rest in peace.  

Saturday, July 29, 2023

Nurses wages falling

DEMAND INCREASED DURING PANDEMIC:  Nurses willing to pack up and travel to a new hot spot every few months earned as much as $10,000 a week at the height of the pandemic to fill in a shortage of medical staff. The economics of nursing was further thrown out of whack by federal subsidies, which allowed hospitals to pay distorted wages, briefly creating a new class of highly paid nurses. ...
PANDEMIC ENDED AND PRICE FELL:  Brian Tanquilut, an analyst at Jefferies, sees weekly pay for temporary nurses dropping about 15% more to the low $3,000’s a week, helping to improve the bottom line at hospital groups. While a far cry from the peak, it won’t go back to how it used to be either because of what Tanquilut and other industry watchers see as a structural shift in the market.
BUT LONG RUN SUPPLY OF TRAVEL NURSES MAY INCREASE:  Some travel nurses have discovered they like the flexibility and better wages that come along with traveling. Cross Country CEO John Martins said in a recent conference that the work-from-home culture means nurses can more easily bring their remote-working spouses along with them. He estimated the market will grow from 40,000 travel nurses in 2018 to 80,000 in 2023.

PollEverywhere Ch2: the "Optimism Gap"

QUESTION: on a scale of 1 (disagree) to 7 (agree), rate your reaction to this statement, "Although things are getting better for me, for society they are getting worse."


Tuesday, July 25, 2023

Can we improve education in Nashville?

Although test scores are up, only one in four Nashville Public School third-graders is reading at or above grade level. 
Randomized controlled trials tell us that charter schools, school choice, and teacher incentives improve student outcomes (links). 
I think that Alice Rolli is the only one who has a chance of making these kinds of improvements. 

Friday, July 21, 2023

Why are DEI exec's being laid off?

Demand has Fallen:
Diversity, equity and inclusion—or DEI—jobs were put in the crosshairs after many companies started re-examining their executive ranks during the tech sector’s shake out last fall. Some chief diversity officers say their work is facing additional scrutiny since the Supreme Court struck down affirmative action in college admissions and companies brace for potential legal challenges. DEI work has also become a political target.
The number of CDO searches is down 75% in the past year, says Jason Hanold, chief executive of Hanold Associates Executive Search, which works with Fortune 100 companies to recruit HR and DEI executives, among other roles. Demand is the lowest he has seen in his 30 years of recruiting.

Tuesday, July 18, 2023

Old people will reshape the world

Good graphics [GO TO THE PAGE!] from the NYTimes shows that the EU and China will have a bunch of old people, but not enough working age adults to support them.   
  • By 2050, people age 65 and older will make up nearly 40 percent of the population in some parts of East Asia and Europe. That’s almost twice the share of older adults in Florida, America’s retirement capital.
  • Africa is where all the working age adults are, but ... "If large numbers of young adults don’t have access to jobs or education, widespread youth unemployment can even threaten stability as frustrated young people turn to criminal or armed groups for better opportunities."
  • Slightly higher fertility rates and more immigration mean the United States and Australia, for example, will be younger than most other rich countries in 2050

things many wealthier countries take for granted — like pensions, retirement ages and strict immigration policies — will need overhauls to be sustainable.

Monday, July 17, 2023

Americans have grown richer since 2008, but Europeans are becoming Poorer

...An aging population with a preference for free time and job security over earnings ushered in years of lackluster economic and productivity growth. ...

Where are housing prices headed?



Inventory is pushing up prices, and affordability (the change in monthly payments) is pushing down prices. And it appears this battle will continue … there is no relief in sight for inventory or for mortgage rates.
First, we can be very confident - barring another crisis - that we will not see a large wave of distressed sales and cascading declines in nominal house prices. Lending has been reasonably solid over the last decade, and most homeowners have substantial equity in their homes.
From Chapter 8: In the short run supply of houses ("inventory") is low, but so is demand (due to high interest rates) so we don't know which way price will go. 

From Chatpers 9, 11: Over the longer run, home owners have enough equity in their houses that they will be able to refinance without selling so supply is not going to flood the market as it did in 2009 when a big housing bubble popped. 

And over the longer run

When the baby-boom generation starts moving to retirement homes or warmer climates, inventory will likely increase. But that is mostly a 2030s story, see 

Are the Left and the Right converging on Economics?

The left-leaning Economist thinks so:

Both sides agree that the old order that prized expertise, free markets and free trade—“neoliberalism”, usually invoked as a pejorative—was a rotten deal for America. Corporations were too immoral; elites too feckless; globalisation too costly; inequality too unchecked; the invisible hand too prone to error.
  • ... Both find competition with China to be a justification for industrial policy; 
  • but the new right does not find the threat of climate change to be nearly so moving. 
  • [No desire] reform [Social Security and Medicare] before the trust funds [run out]

Saturday, July 15, 2023

Why parents of daughters are more likely to divorce than those with sons

From the Economist:
Anyone who has—or has been—a teenager knows how turbulent those years can be. Surveys confirm that teenage daughters and fathers, in particular, get on each other’s nerves. They also show that parents of teenage daughters argue more about parenting than do the parents of sons, and that mothers of teenage daughters report significantly more disagreements with their partners over money, and become more open to the idea of divorce. Earlier research has also shown that one of the most common things parents fight over is how much they should control their teenagers’ personal choices, such as how they dress, whom they date and where they work.
In light of all this, it is intriguing to note that Dr Kabatek and Dr Ribar found one type of couple who seem immune to the daughter effect: those in which the father grew up with a sister. Having seen things somewhat from a sister’s point of view may act as a sort of social inoculation. 

Monday, July 10, 2023

Judge halts NYC minimum wage law for gig drivers

CPI reports:
“Our delivery workers have consistently delivered for us — now, we are delivering for them,” New York City Mayor Eric Adams said when announcing the law. “This new minimum pay rate, up by almost $13/hour, will guarantee these workers and their families can earn a living, access greater economic stability, and help keep our city’s legendary restaurant industry thriving.”
On the day of the announcement, DoorDash responded with a blog post in which it said the policy will have unintended consequences and will undermine the workers it aims to support.

Friday, June 30, 2023

The opportunity cost of going Green: a poorer today or a hotter tomorrow?

From the Economist:
Suppose, for a minute, that you are a finance minister in the developing world. At the end of a year in which your tax take has disappointed, you are just about out of money. You could plough what little remains into your health-care system: dollars spent by clinics help control infectious diseases, and there is not much that development experts believe to be a better use of cash. But you could also spend the money constructing an electrical grid that is able to handle a switch to clean energy. In the long run this will mean less pollution, more productive farmland and fewer floods. Which is a wiser use of the marginal dollar: alleviating acute poverty straight away or doing your country’s bit to stop baking the planet?
The thought experiment is a simplified version of a dilemma currently facing global institutions and developing countries. On June 22nd politicians arrived in Paris for a summit to design “a new global financial pact”. The aim was to work out how to spread the cost of climate change. Leaders from poor countries turned up in droves; aside from Emmanuel Macron, France’s president, no Western head of state made it. Little surprise, then, that the jamboree ended without rich countries contributing a single extra dollar. Instead, attendees tinkered with the World Bank and the imf, the biggest of the multilateral agencies that seek to reduce poverty. The lack of action means painful trade-offs lie ahead.

Wednesday, June 28, 2023

Big is Green, Procompetitive, and Saves Lives: The Economics of Route Consolidation

28 Jun 2023

Luke M. Froeb

Vanderbilt University - Owen Graduate School of Management

Mark Lane


Ed Powell


Mikhael Shor

University of Connecticut Department of Economics

Steven Tschantz

Vanderbilt University - Department of Mathematics

Date Written: June 23, 2023


[When a firm like Amazon consolidates routes, e.g., by convincing groups of stores to use Amazon’s fulfillment services instead of independent alternatives], the reduction in delivery miles results in lower costs, less pollution, and fewer accidents, injuries, and deaths.

Keywords: Travelling Salesman Problem, Vehicle Routing Problem, Economic Tradeoffs, ESG, merger effects, merger efficiencies

Froeb, Luke M. and Lane, Mark and Powell, Ed and Shor, Mikhael and Tschantz, Steven T., Big is Green, Procompetitive, and Saves Lives: The Economics of Route Consolidation (June 23, 2023). Available at SSRN: or

Thursday, June 22, 2023

Professor Price Discrimination

Tourism provides ample opportunities to engage in price discrimination. This one is new to me. By virtue of being a professor, I saved 5 euros on admission to this venue. Now, I would like to think that the idea is to honor the learning and erudition of those who are academically inclined. But the economist in me knows it is because professors are cheap.

Tuesday, June 20, 2023

GREAT IDEAS: Competition in the marketplace of ideas

We are not afraid to entrust the American people with unpleasant facts, foreign ideas, alien philosophies, and competitive values. For a nation that is afraid to let its people judge the truth and falsehood in an open market is a nation that is afraid of its people.” – John F. Kennedy, February 261962. (Kenneth Josephson at the Smithsonian)

Saturday, June 17, 2023

Does investing in Green Firms help the environment?

Freakonomics: NO
Green firms tend to be services firms. So, think Spotify, Prudential, Goldman Sachs, Allstate, MetLife, American Express. Silicon Valley Bank, which recently collapsed, is one of the greenest firms in our sample, which makes sense. How can a bank pollute that much, right? ... If it gets easier for these green firms to access capital, their environmental impact barely changes.
Instead consider investing in Brown Firms:
My analysis shows that brown firms are the firms with the greatest scope to change their environmental impact. So, in addition to investing in brown firms, it might be helpful to engage with their management.
CITE: Hartzmark and Shue, "Counterproductive Sustainable Investing."

Thursday, June 15, 2023

Why are US sports leagues more profitable than European ones?


Could it be that there is less competition? The Economist thinks so:
Unlike European football, where teams can be promoted or relegated across various tiers of leagues, American sports tend to be “closed”—there is no way for new teams to accede to the top tournament.
In other words, EU teams compete to avoid relegation, while US teams' only concern is maximizing the value of their franchises.

What happens if we cannot measure ESG?

 Barrons:  Tesla (electric cars, batteries) was just added to the S&P ESG Index, albeit with a lower ESG score than Phillip Morris, a US Tobacco manufacturer. From Free Beacon:

ESG ratings are supposed to guide investors, and their money, toward ethical enterprises. But Big Tobacco has lapped Tesla in the ESG ratings race more than once: Sustainalytics, a widely used ESG ratings tool, gives Tesla a worse score than Altria, one of the largest tobacco producers in the world. And the London Stock Exchange gives British American Tobacco an ESG score of 94—the third highest of any company on the exchange's top share index—while Tesla earns a middling 65.

Here's why:

How could cigarettes, which kill over eight million people each year, be deemed a more ethical investment than electric cars? It may have something to do with the tobacco industry's embrace of corporate progressivism.
Companies like Altria have gone out of their way to emphasize the diversity of their corporate boards and the breadth of their social justice initiatives, from funding minority businesses to promoting transgender women in sports. But Tesla, whose executives are overwhelmingly white men, has resisted that bandwagon, going so far as to fire its top LGBT diversity officer last year.

If we cannot measure ESG, we cannot align the incentives of those companies that follow ESG with the investors who want to invest in them.  

Wednesday, June 14, 2023

Expect adverse selection for investments in China

From the Economist:

"[The crackdown on] Mintz, Bain and Capvision struck a nerve in foreign boardrooms because they targeted the investigators, consultants, lawyers and other advisers on whose expertise outsiders ... [depend on] order to understand whom they are doing business with, to identify any hidden risks ...
The Communist authorities have always looked askance at such work and put in place rules on data-sharing and state secrets that, if enforced, could be used to curb it. Practitioners report that this year enforcement has become much more common. In areas like Xinjiang and chipmaking corporate investigations now appear entirely out of bounds. ...
The crackdown on analysts who provide info on Chinese firms to foreign investors will result in what Chapter 20 calls "asymmetric information" (Chinese firms know what their prospects are, but US investors do not).  With less information (e.g., "A few Chinese analysts working for foreign companies have been visited by authorities and pressed to present a rosier image of China"), foreign investors should expect Adverse Selection, i.e., not invest in Chinese Firms or, if they do, anticipate adverse selection by assuming the worst.  

Monday, June 12, 2023

Why don't the rich pay more in taxes?

The graph shows that though the top marginal income tax rate has dramatically changed from 15% in 1913 to 37% today (marked by a blue line, left scale), but the share of taxes paid by the top 1% has not (red line, right scale). Here's why:
“Rich people are different than we are,” Laffer told The Epoch Times. “They can change the location of their income, they can change the volume of their income, they can change how many hours they work, they can change the composition of their income—how much of it is capital gains and how much of it is ordinary income. They can also change the timing of their income—things that normal people don’t think of, but rich people do.
UPDATE:  Loopholes are also available to the wealthy. Sec 1202 is used by wealthy to avoid tax up to $10 million. They put C Corp PE investments in multiple trust accounts to avoid $10 million multiple times. The carried interest is another unfair option. If the working class had the same tax rates as PE, they would have more money to invest in these funds. Shouldn’t everyone have the same opportunity to invest? We need lower tax rates for the working class so they have more opportunities to invest like the wealthy.
But these are pre-tax dollars.  After taxes and transfers, the share of the top 1% has not changed much, at least since 1960, plotted below (black line, from earlier post).