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).

Saturday, June 10, 2023

Did the PGA just admit their merger eliminates competition?

 From the WSJ:

When LIV launched a year ago, it brought unprecedented money into professional golf. The $25 million of prize money it offered at its regular-season tournaments was a record high. And to further induce top talent such as Phil Mickelson and Dustin Johnson to sign on, LIV offered enormous appearance fees, some of which reportedly exceeded $100 million.
Monahan bluntly stated last year that “if this is an arms race, and if the only weapons here are dollar bills, the PGA Tour can’t compete.” But as LIV continued to pick off top golfers—it announced Brooks Koepka as an addition during the same press conference last June when Monahan uttered those words—the Tour participated in that financial arms race anyway.

UPDATE from Truth on the Market

Some regulators will have a knee-jerk response that the merger of PGA and LIV would create a monopoly that will make many worse off than if the two organizations competed against each other.
But, this is the wrong way to look at it. Before LIV entered less than two years ago, the PGA was a monopoly with which few people (mostly just Phil Mickelson) had a problem. Would rolling back the clock a couple of years really impose irreparable harm? I doubt it.
Instead, it seems just as likely that the merged organization will incorporate the lessons it learned from their “LIVed” experience. Payout pools may drop relative to last year, but there is no evidence that those high payout pools were sustainable.

In other words, the bidding war for top golfers caused by LIV's entry may be unsustainable.  If so, the apparent high prices are temporary.  If profitable entry is unsustainable, then the merger would have no long run effect.  

Reminds me of an old joke:

  • QUESTION: How many economists does it take to screw in a lightbulb?
  • PUNCHLINE: None, the Market will do it.  

Thursday, June 8, 2023

Is private school worth it?

Economist:  "Should you send your kids to private school?
The benefits are probably bigger in America than they are in Britain, at least for pupils sitting in the swankiest private classrooms. That is because their alumni continue to enjoy access to the best universities at rates which would cause a furore in the old country. That might surprise anyone who assumes that American society is less ridden by class than British society. ...
By the time they turn 25 Britons with private education earn 17% more than other workers from similar homes, according to a study from 2015. The pay premium widens by the age of 42, according to earlier research, to around 21% for women and 35% for men. In part this is because privately schooled people are more likely to enter high-earning professions, such as finance. Alumni networks may help in this, but peer pressure and parental expectations probably play a big role, too.
[In US]...on average about 34% of their new undergraduates were educated in private high schools (see chart). That is astonishing given that the private sector educates just 8.5% of American high-schoolers. Pupils from “independent” schools do brilliantly. The most recently published data suggest they made up about one-third of new undergraduates at Dartmouth and more than a quarter at Princeton. “Legacy” preference, whereby the relatives of alumni get a leg-up in admissions, may explain some of this. Nothing so brazenly unfair happens at British universities.
EXERCISE:  Give two causal explanations for the correlation between private schooling and success in the US.  

Is the China Real Estate Bubble popping?

Barron's via Instapundit:

So much for the Chinese economic boom. Last year China ended a disastrous zero-Covid policy that had crippled its economy. A rush of growth was widely expected to follow. Instead of booming, five months after the ending of its Covid restrictions, the Chinese economic recovery is sputtering. That is due in no small measure to the bursting of its outsized housing and credit market bubbles.   ...
A bundle of recent disappointing Chinese economic data, including retail sales, factory orders, and imports, all suggest that the Chinese government will have trouble meeting its 5% economic growth target. So too do indications that a number of major Chinese local governments are struggling to meet their debt obligations and that Chinese youth unemployment has risen to a worrying record 20.4%.

Tuesday, June 6, 2023

Will bad real estate loans cause more problems for banks?

 Two potential problems:

Interest-only loans:  Nearly $1.5 trillion in commercial mortgages are coming due over the next three years, according to data provider Trepp. Many of the commercial landlords on the hook for the loans are vulnerable to default in part because of the way their loans are structured.

Reduced demand for office space:  After the spate of bank closures that included Silvergate, Signature NY, Silicon Valley Bank (SVB) and Credit Suisse, there is now talk of a major crisis—not just in the banking sector, but in other sectors, especially in commercial real estate.

There is an oversupply of office space in big cities like Los Angeles, San Francisco and New York that has been complicated by the work-from-home and quiet quitting trends.