Sunday, April 30, 2023

100% of Subsidy Passed Through to Suppliers

 Q: What shape does this imply for the relevant supply curve?

A: The subsidy causes demand to shift upward by 3,000 euros. A resulting price increase of 3,000 euros implies that the relevant supply curve is nearly vertical.

Wednesday, April 26, 2023

Urban boundaries make housing unaffordable

By increasing the value of land inside the boundary. From REASON:
In too many metropolitan areas, housing is no longer affordable for middle-class households, especially in markets subject to "urban containment," now the world's dominant planning regime. According to planning experts Arthur C. Nelson and Casey Dawkins, urban containment draws "a line around an urban area"; it includes urban growth boundaries and greenbelts. It is "explicitly designed to limit the development of land outside a defined urban area, while encouraging" infill, to limit or block organic urban expansion.
Urban containment is intended to increase urban land costs. Shifting demand inside the contained area produces an abrupt increase in land values at the boundary, distorting the land value gradient. As Nelson and Dawkins say, "This shift should decrease the value of land outside the boundary and the value of land inside the boundary" (emphasis added), which effectively sets a higher "floor value" for urban land. This is the "urban containment effect."

Tuesday, April 25, 2023

Is NY City the canary in the recession coal mine?

 From NY Times:

Three years into the pandemic, floors of office buildings throughout Manhattan have been emptied by tenants who have shrunk their footprint and employees who work from home.
Now, there is another problem.
Rapidly rising interest rates have intensified concerns that the New York City office market, the largest in the country and a pillar of the city’s economy, could be at grave risk. That one-two punch could be worse than anything corporate landlords have experienced before, experts on the sector say, leading major banks and real estate analysts in recent weeks to warn that languishing properties along with falling property values and higher borrowing costs could increase the odds of a recession nationally and a budget crisis for the city.  ...
Office workers in the city make about 75 percent more in annual salaries than the rest of the private sector, according to the Office of the State Comptroller, and their absence from the office every day deprives a host of businesses of their spending.

Should we expect a depreciation of the yen?

 Arbitrage 101:  Borrow ¥ in Japan at 2%, sell ¥ to buy $, and invest $ in US bonds earning 5%.

And the expected change in exchange rates make makes it cheaper to pay back the loan! 

Here's why.  As more US investors take advantage of this "carry trade," the increase in demand for dollars will increase the price of a dollar (in yen) which reduces the cost of repaying the loan (when you sell $ to buy ¥ to pay back the loan).

The above graphs shows an appreciation of the dollar, or a depreciation of the yen, over the last 18 months. 

The surge in American but not Japanese interest rates over the past 18 months means that Japanese investors are paying an enormous premium to buy American assets and protect themselves from currency movements. American investors get a rather lovely premium when they do the same in the other direction. 

Monday, April 24, 2023

Adam Smith on happiness

The father of modern economics knew that economics is an analytical tool to that helps us understand what we see, not advice on how to live your life:
...“Smith wrote as eloquently as anyone ever has on the futility of pursuing money with the hope of finding happiness”, claiming that such “seductions will never satisfy”. What matters instead is “the consciousness of being beloved”, the meaning of which has weathered through the ages but approximates “authenticity”: wisdom and virtue. 
The problem in reaching this idyll is ourselves. We are brilliant at thinking we are brilliant when we are not. We are all deeply flawed, vain and selfish. And while persuading others of our greatness might be understandable, more worrying is that we are trying to convince ourselves. Smith counselled: “It’s our own praise that’s hardest to reject.” We can all relate to the fact that “flattery and falsehood too often prevail over merit and abilities”.
In other words, the gates of hell are locked from the inside.  

Thursday, April 20, 2023

Break-even analysis in Airlines

 Load factors in airlines are the % of seats that are sold on an average flight.  From Simple Flying:

A 2020 analysis by Forbes showed that big US airlines like American, Delta, Southwest, and United need a load factor between 72.5% (Southwest) and 78.9% (American) in order to not make a loss on their flights. This means when these carriers reach loads of 90% and beyond, it signals a very profitable month or year.

New penalties for responsible homebuyers

President Biden's well-intentioned plan to subsidize home buyers with low credit scores by charging more to those with good credit scores creates perverse incentives.   

The result, according to industry pros: pricier monthly mortgage payments for most homebuyers — an ugly surprise for those who worked for years to build their credit, only to face higher costs than they expected as part of a housing affordability push by the US Federal Housing Finance Agency.

Monday, April 17, 2023

Education as a Signal

From the TV series, Tulsa King









I might quibble that we really do want medicine to be practiced by physicians and bridges to be designed by engineers. And maybe even businesses to be managed by MBAs. But we also do prefer to hire people who can complete the a series of tasks reasonably well and on time for four years.

Saturday, April 15, 2023

Americans are getting richer than other developed economies...


...because they becoming more productive.  From The Economist:

America remains the world’s richest, most productive and most innovative big economy. By an impressive number of measures, it is leaving its peers ever further in the dust. ... Today it accounts for 58% of the G7's GDP, compared with 40% in 1990. 

Americans are getting richer because they are getting more productive more quickly than workers in other rich countries.

 And don't forget Management (really good management book):

...Fierce competition, the researchers believe, helps to explain America’s corporate culture. Bosses are more comfortable with firing employees (and more easily able to: America has much weaker employee-protection law than other large economies). Markets are readier to reward companies for evidence that they are well run. America’s managerial strength, their survey finds, explains as much as half of the productivity lead that it has over other developed countries.   

But like any policy there are costs to this productivity:

...America’s economy permits extreme volatility in individual livelihoods. Unemployment soars during downturns. Vast numbers end up chucked to the side: a combination of drugs, gun violence and dangerous driving has led to a shocking decline in average life expectancy in America. This suffering is concentrated among the country’s poorest, most marginalised communities. 

 But can't we have a kinder, gentler productivity?

“It would be nice if we could design policies that solve inequality and promote growth at the same time, but regrettably there are only a few policies that do both. 

Monday, April 10, 2023

Why today's students are harder to teach

 The Chronicle of Higher Education has an answer:

... for a confluence of reasons, student attitudes have shifted. For one, what’s considered appropriate for a college professor to say and do in the classroom has changed dramatically, especially around topics of race, gender, and other forms of identity. For another, student deference to their teachers is not nearly as strong as it once was.

Students can be quick to judge a pedagogical choice as harmful, offensive, or superfluous to their education, say some professors, who question if their colleges, which they describe as having adopted a “customer is always right” philosophy, will have their backs if and when the customer is wrong.

In some circumstances, the choices or behavior criticized by students would have been “regarded as benign not very long ago,” said Angus Johnston, a historian of American student-activism who teaches at Hostos Community College of the City University of New York.

While this power shift can be “discombobulating” and “scary” for faculty members, especially older ones, he said, “that does not mean it’s a bad development.”

For example, when I teach the contractual view of marriage to MBA's, it is in a gender-neutral tone. Instead of "I gave him the best years of my life and he traded me in on a younger model," I say: 

If a couple decides to take advantage of economies of specialization, one primarily on a career and one primarily on childcare, the one specializing on childcare can be held up, should the relationship end and they have to re-enter the labor force.  To encourage these kinds of specialized investments in children, the marriage contract is designed to protect victims of hold up.  As the legal penalties for breach of the marriage contract have gotten smaller, we see less of this kind of specialization.  

NOTE:  this is correlation, consistent with evidence supporting the contractual view of marriage, but it could also be that the correlation is spurious, that times have changed, and couples want a more equal division of labor at the same time that the marriage contract has been weakened. 

Thursday, April 6, 2023

Why is the Russian ruble falling?

 WSJ Reports:  

Ruble watchers attributed the currency’s latest decline to a report in Russian newspaper Kommersant that Russian President Vladimir Putin will allow gas producer Novatek to purchase Shell PLC’s stake in the Sakhalin-2 liquefied natural-gas project in Russia’s Far East for 95 billion rubles, equivalent to $1.2 billion.

Shell will likely sell 95 billion rubles in the F/X market, and buy dollars, increasing the price of a dollar, equivalently decreasing the price of a ruble, above.   

Why is the stock risk premium so low?

WSJ article:

The equity risk premium—the gap between the S&P 500’s earnings yield and that of 10-year Treasurys—sits around 1.59 percentage points, a low not seen since October 2007.

What does this mean?  Investors have a choice between investing in stocks or bonds.  Stocks are historically more volatile/risky than bonds, so risk-averse investors have to be compensated for investing in stocks, with a return that is about 3.5% higher.  As of the end of March, 2023, the risk premium had fallen to less than half of that.   

In 2006, Bill Spitz (former Vanderbilt Treasurer), saw something similar (my 2006 Blog Post).  He noticed that the risk premia between returns on stocks vs. bonds, low vs. high quality stocks (low debt, high and stable profit margins), and emerging market debt vs. US debt were at all time lows.  Either the world had gotten less risky, or investors were ignoring risk in the search for higher return.  Spitz thought it was the latter which motivated his investment advice at that time: 

  • Avoid Riskier assets 
  • Stick with quality 
  • Be skeptical of the rush to alternatives 
  • Moderate return expectations 
  • Borrow now if you are a marginal credit  
The implication was that when investors stopped ignoring risk, the prices of riskier assets would fall, which would increase the risk premia.

Monday, April 3, 2023

FDA ignores the costs of safe vaccines

Henry Hazlett, longtime editor of the WSJ, wrote a book called Economics in One Lesson in which he made a simple point:  the opportunity costs of many regulations are hidden.  MarginalRevolution applies this lesson to the Food and Drug Administration, and their blind devotion to developing safe vaccines.  

Here is the problem: if a vaccine is approved and it results in some harm to some people, the harm is visible and the FDA gets the blame.  However, if the FDA delays the vaccine until they know it is absolutely safe, the harm is invisible.  We don't see the harm to "remote work, closing schools, and canceling normal medical appointments."  In fact, the FDA never even considers it.  They do benefit-cost analysis by considering only the benefits of safe vaccines, not their costs.  

Saturday, April 1, 2023

California taxes almost eliminate he incentive to invest in education or training

MarginalRevolution reports on California's tax rates:
  • If a single parent of two in California earns $10k, the parent takes home $38k after taxes (an income subsidy or negative income tax).
  • If the same single parent were to earn $50k, the parent would take home $49k. 

Since "how much to work" is an extent decision, we use marginal analysis.  If the parent earns an extra $40K, the parent pays an extra $29K in taxes, a marginal tax rate of 73%=29/40.  In other words for every $1 earned between 10K and 50K, a single parent keeps only 27¢.  

  • ...And that's without childcare and housing subsidies!  (including them would further weaken the incentive to invest in human capital)

Bottom line: progressive taxes almost eliminate the incentive to invest in education or training.