Taxes Destroy Wealth: Stossel on Philly's Soda Tax

5 years ago… I reported on Philadelphia’s new tax on soda. The politicians promised to spend the money on early childhood education.

5 years later… here’s what happened: pic.twitter.com/SFVNU23VEy

— John Stossel (@JohnStossel) December 26, 2023

How Biden Hobbled his own Infrastructure Push

My developer friends tell me its the difference between a developer spending his or her own money and the government spending someone else's money. 

But Eric Boehm of REASON has a more nuanced explanation: "At nearly every turn, the infrastructure package opted for policies that limited supplies, hiked prices, added paperwork, and grew government."

Rules requiring contractors to use American-made stuff in federally funded projects have been on the books for decades. That's one of the reasons why American mass transit projects are much more expensive than similar projects built in other parts of the world. The infrastructure bill doubled down on those problems by expanding those requirements to cover even basic materials like copper wiring, drywall, and lumber. 

"The quick implementation of Buy America requirements for such a broad range of materials will cause delays in project delivery while states, contractors, manufacturers, and suppliers continue working to determine how best to track and verify these materials," Washington state Secretary of Transportation Roger Millar warned federal officials in a letter last year. 

The Buy American rules are only part of the problem, however. Biden's stubborn refusal to lift tariffs imposed by former President Donald Trump means that steel (something you need for a lot of infrastructure projects) prices remain artificially high. 

The infrastructure law also created delays by adding more paperwork and a confusing patchwork of new federal oversight for projects that sought funding. "Ordinarily, Washington lets states decide how best to spend transportation money," The Wall Street Journal reported in November 2021. But the infrastructure bill gives the Biden administration a greater role in deciding which projects to fund. Those additional steps slowed everything down 

Finally, it's worth keeping in mind something the infrastructure package didn't include: permitting reform to streamline environmental reviews that routinely hamstring federal construction projects. 

Gas Stations -> Convenience Stores -> Restaurants?

Gas stations have always offered complementary services. In the 40s and 50s it was mechanic services, in the 60s, and 70s, it was wiper and oil changes, and in the 80s and 90s it was convenience store items. Pay-at-the-pump may have given drivers less of a reason make in-store purchases. Ease of substitution across gas stations makes the search for higher margin complements a profitable strategy.

However, the current trend is for more gars stations/convenience stores to offer fresh food. This may be the result of declining demand in convenience store mainstays - cigarette smoking is steadily declining and more fuel efficient cars go longer between fill ups.Perhaps the transition from selling packaged Slim Jims and Corn Nuts to preparing fresher foods is to get a leg up on the transition to EVs.

But a shift to electric vehicles should go well with the food business if it means consumers spend longer stretches of time charging their vehicles. 

I sent Nashville's Mayor a copy of Chapter 8, "Understanding [housing] Markets."

Here's why:  "Nashville voters ... are especially looking to Metro leaders to address the city's affordable housing problem."    

If the mayor and the council honestly look the cause of the crisis, they will find it is caused by zoning restrictions (see previous post) that limit supply.  With 100 people moving to Nashville each day, the only thing that can adjust is price.  

The standard feel-good response is affordable housing mandates on new construction which raises the cost of new construction and limits supply--exacerbating the very problem it is designed to alleviate.  (See What Nashville can Learn from NYC: Affordable Housing Mandates Reduce the Supply of Affordable Housing.)

...mandates reduce the profitability of new development.  This will lead to less new development, or developers will substitute towards smaller developments, not subject to the mandate.  In the former case, fewer new developments would be built; in the latter, lower-density development would take place.  Either way, this represents a decrease in supply.  A decrease in supply would increase price, exacerbating the very problem--lack of affordable housing--that it was designed to ameliorate.   (And don't forget that density is green.)

Which areas around Nashville have the tightest housing regulations?

Its Official: Forest Hills, Williamson, and Brentwood are the worst.

To be clear, zoning limits supply so when new people come to Nashville, the only things that can adjust is price--and it goes up. See previous posts on this topic.  

HT:  Davis

10 most popular posts in 2023

• Car Wash Industry Dynamics (November 27, 2023)
• Why House Prices Go Up (November 30, 2023)
• When this movie starts, Google is already popular (October 24, 2023)
• Do Looks Matter for an Academic Careers in Economic? (October 20, 2023)
• The Strategy That Saved the New York Times (Dec 16, 2023)
• Randomized Trial to Measure Facebook Ad Effectiveness (May 2, 2023)
• Where US Housing Supply Has Grown (May 4, 2023)
• Why Today's Students Are Harder to Teach (April 10, 2023)
• Declining Fertility Rates (Oct 19, 2023)
• Korea's low fertility rate (0.7) moves it toward extinction (Dec 4, 2023)

The strategy that saved the NY Times

 Economist:  

The new New York Times was the product of two shocks – sudden collapse, and then sudden success. The paper almost went bankrupt during the financial crisis, and the ensuing panic provoked a crisis of confidence among its leaders. Digital competitors like the HuffPost were gaining readers and winning plaudits within the media industry as innovative. They were the cool kids; Times folk were ink-stained wrinklies.

In its panic, the Times bought out experienced reporters and editors and began hiring journalists from publications like the HuffPost who were considered “digital natives” because they had never worked in print. ... The HuffPosts and Buzzfeeds began to decay, and the Times’s subscriptions and staff began to grow.

Illiberal journalists ... more concerned with group rights than individual rights, which they regard as a bulwark for the privileges of white men. They have seen the principle of free speech used to protect right-wing outfits like Project Veritas and Breitbart News and are uneasy with it. They had their suspicions of their fellow citizens’ judgment confirmed by Trump’s election, and do not believe readers can be trusted with potentially dangerous ideas or facts. They are not out to achieve social justice as the knock-on effect of pursuing truth; they want to pursue it head-on. The term “objectivity” to them is code for ignoring the poor and weak and cosying up to power, as journalists often have done.

Book recommendations (in no particular order)

• Anti-Fragile , by Nassim Taleb (also Fooled by Randomness, Black Swan)
• Randomistas: Fighting Poverty with Science  by Esther Duflo
• Rationality: What It Is, Why It Seems Scarce, Why It Matters  by Steven Pinker
• Enlightenment Now: The Case for Reason, Science, Humanism, and Progress by Steven Pinker 
• Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are  by Seth Stephens-Davidowitz
• Prediction Machines, Updated and Expanded: The Simple Economics of Artificial Intelligence  by Ajay Agrawal , Joshua Gans
• Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley, link
• Amazon Unbound, Why is Bezos such an Extraordinary Manager?
• Randomistas
• Algorithms to Live By
• Factfulness
• The Art of Strategy
• Shoe Dog
• An Economist Walks into a Brothel
• Sapiens
• Dataclysm
• Rising Strong (squishy, but good)

NPR: Cobalt is important for green energy. So why has America's only coablt mine closed?

https://www.npr.org/2023/12/14/1219246964/cobalt-is-important-for-green-energy-so-why-has-americas-only-coablt-mine-closed

HT:  Brie

(Lack of) Barriers to Entry in Beer Brewing

More commercial insights are forthcoming from "Grain and Beer" episode of The History of the Germans podcast. Unlike most crafts, any household could brew beer. But since not everyone could brew it well, towns set out to regulate it by limiting the number of houses where it was allowed. Fortunately, the number was set high enough for competition to thrive.

Since there were no guilds, the way the cities tried to control the production and to maintain standards for health and safety was by restricting the number of houses that were allowed to make beer. Hamburg for instance had 500 houses where the making of beer was allowed. If someone wanted to become a brewer, he did not have to marry some brewer’s widow, schmooze the guild masters and pass an examination, what he or she needed to do was buying one of the houses where brewing was allowed. That is why you often find breweries in Germany being called “Brauhaus” meaning brewer’s house, referring to the physical location where brewing was allowed. 

Hanseatic beer used hops with its distinct taste but also acted as a preservative. This allowed it to be exported even at exorbitant transport costs. 

... Einbecker Beer was famous across Northern Europe and was drunk as far north as Bergen and Stockholm, another 900km onwards by boat. Why would people pay 5X for the imported version of a daily staple? Something they drank more than 200 litres each per year.

Our pod-caster, the erudite Dirk Hoffman-Becking, claims that German brewers convinced far flung Europeans that their beer was a luxury good that signaled the status of its consumer. I conjecture, without evidence, that setting a low entry barrier and mild standards regulation generated competition that kept production costs down and product quality up. One need not be a beer snob to appreciate an objectively better product not available from locals.

The Hansa as a Brand

The History of the Germans podcast I have been enjoying has just gotten to the Hanseatic League, the trading network dominated by the Germans that came to dominate the Baltic and North Seas in the high middle ages. One the first trade routes was to the then important trade center of Novgorod. A curious question was why this network was so successful. There appear to be a number of factors but one important one has to do with developing a brand to signal quality that ameliorated asymmetric information problems.

And we get another crucial element, the commercial discipline and branding. If you came to Novgorod on your own, assuming you made it at all, it would have been very difficult for you to sell your wares at a good price. Your clients will ask: Is that cloth you sell really the high-quality material from Bruges and not the cheap stuff from Ypres? That salt, could it be mixed with something? Where do I go when I have a complaint and you have gone home?

The brand was supported by an effective governance structure for the traders visiting St. Peter’s Yard in Novgorod.

The members of the St. Peter’s Yard maintained or at least pretended to maintain strict discipline amongst their ranks and if one of their customers had found themselves cheated by one of these merchants, they knew where to go for redress. This created what we would today call a brand. Merchants who came with that fleet became seen as trustworthy. They may be a touch more expensive, but you get what you were hoping to get.

AT&T's Shift in Supplier Strategy

AT&T made a major shift from a single primary supplier of proprietary network infrastructure provided by Nokia to an open radio access network (Open RAN) to handle most of its US network traffic by late 2026.

Open RAN is expected to bring several advantages, including reduced costs, increased vendor diversity, and enhanced network agility.

Open RAN is a way to have many different vendors compete for business in the future. What precipitated this dramatic change in strategy? Two possibilities include:

• A long-term contract with single supplier is often a mechanism to overcome holdup opportunities. Perhaps newer technology has made the upstream market develop so that relationship specific investments are less important.
• A clever two-part pricing supplier contract in could have mitigated the effects of double-marginalization. Perhaps this form of contract became unworkable. Or perhaps enough competition developed that the margins are not big enough for double-marginalization to lead to large inefficiencies.
  

South Korea's low fertility rate (0.7) moves it towards extinction

 Via MarginalRevolution:

…South Korea is distinctive in that it slipped into below-replacement territory in the 1980s but lately has been falling even more — dropping below one child per woman in 2018, to 0.8 after the pandemic, and now, in provisional data for both the second and third quarters of 2023, to just 0.7 births per woman.

It’s worth unpacking what that means. A country that sustained a birthrate at that level would have, for every 200 people in one generation, 70 people in the next one, a depopulation exceeding what the Black Death delivered to Europe in the 14th century. Run the experiment through a second generational turnover, and your original 200-person population falls below 25. Run it again, and you’re nearing the kind of population crash caused by the fictional superflu in Stephen King’s “The Stand.”

Why house prices go up

Car Wash Industry Dynamics

"The Economics of Everyday Things" a recent episode on Car Washes. Lots has happened to transform this industry.

•  Growth - The industry is growing fast thanks, in part, to less "home production."

  When we started in— back in 1996, more than half of people with cars in the U.S. reported that they most frequently wash their car themselves in the driveway. Our most recent survey, we’re approaching 80 percent now use a professional car wash.

• Bundling - New technology has allowed new pricing schemes more like subscription services or gym memberships that are likely to increase consumer surplus capture.

We fix a little RFID sticker in the bottom corner of your window. And it knows exactly what wash to get, how often you’ve washed and what vehicle you’re in, any contact information. It’s kind of like a barcode, if you will, for your vehicle. And when you pull up to the pay station the gate goes up immediately.

• Input Substitution - Increasing use of technology has reduced labor costs.

A modern car wash today can be run with three or fewer employees versus having, you know, 12 to 25 at some stores back in the day. In those days, car wash owners were almost like farmers. I mean, you’re always watching the weather. You’re always trying to anticipate what demand is going to be so you can manage that labor expense.

All these changes have manager implications. Growth often allows firms to exploit sale economies. Bundling is easier with multiple establishments run under the same brand. Fewer workers could mean more decision rights to each one suggesting more incentive compensation.

Shirking at Hotels

A new paper by Matthew Freedman and Renáta Kosová titled, "Agency and Compensation: Evidence from the Hotel Industry" examines franchising as a way to motivate hotel managers to limit shirking by their employees. The money quote is actually from the travel magazine Budget Travel in which a housekeeper relates:

I cut corners everywhere I could. Instead of vacuuming, I found that just picking up the larger crumbs from the carpet would do. Rather than scrub the tub with hot water, sometimes it was just a spray-and-wipe kind of day… After several weeks on the job, I discovered that the staff leader who inspected the rooms couldn't tell the difference between a clean sink and one that was simply dry, so I would often just run a rag over the wet spots… I apologize to you now if you ever stayed in one of my rooms. You deserved better. But if housekeepers were paid more than minimum wage — and the tips were a bit better — I might have cleaned your toilet rather than just flushed it.

Since it is pretty difficult to monitor this behavior, you might want to use an incentive contract with employees. To get hotel managers to have a motive to implement such contracts, you might want to franchise the hotels. In a pretty carefully done study, Freedman and Kosová find that, relative to company owned hotels, franchise operations rely more on hiring practices characterized by low initial pay with more bonuses and more merit based pay.

Today's youngsters (under 40) will not enjoy anything like the returns their parents made

From The Economist:

... the four decades to 2021 were a golden age for investors. A broad index of global shares posted an annualised real return of 7.4%, .., global bonds posted annualised real returns of 6.3% ...

That golden age is now almost certainly over. It was brought about in the first place by globalisation, quiescent inflation and, most of all, a long decline in interest rates. Each of these trends has now kicked into reverse. As a consequence, youngsters must confront a more difficult set of investment choices

...these long-run averages are 5% and 1.7% a year for stocks and bonds respectively

Advice to the under-40 "youngsters,"

• Don't hold so much cash, ... "young investors’ preference for cash leaves them exposed to inflation and the opportunity cost of missing out on returns elsewhere." [but money market funds are yielding 5% right now]
• Hold more bonds, ... "...they have a tendency to outpace inflation that cash does not."
• Avoid “thematic investing”, ... "...Niche strategies are nothing new, and nor are their deficiencies. Investors who use them face more volatility, less liquidity and chunky fees.."

 

Why housing prices are going up, despite higher interest rates

 

From The Economist:

Three factors, however, explain why housing markets have so far brushed off higher rates. 

1. Increased Demand: The pandemic seems to have made people more hermit-like: they work from home more and spend relatively more time on home entertainment than on going out. People thus place a higher value on their living space, raising demand for housing. 
2. Fixed-rate mortgages: Between 2011 and 2021 the share of mortgages in eu countries on variable rates fell from nearly 40% to less than 15% (although some of the rest are fixed for only a few years). The effect has been to delay the impact of rate rises. Since 2021, the average mortgage rate across the rich world has only risen by half as much as the average central-bank policy rate. 
3. Richer Homeowners: Following the property crisis that began in 2007, many governments introduced tougher regulations, shutting out less creditworthy borrowers. Richer folk find it easier to weather higher interest bills. In addition, many borrowers are still sitting on large “excess savings” accumulated during the pandemic...

Nash Equilibrium Intuition from "A Beautiful Mind"

 

I could quibble but it does pretty good in under a minute.

How PBM's and Government bargain

When the US government buys drugs, they penalize drug companies with huge taxes if they don't reach agreement.  From Marginal Revolution:  

The “negotiation,” if you want to call it that, is “your money or your life” and fairness has little to do with it. The IRA also requires very costly inflation rebates, i.e. a price control/tax.

This reduces the gains to innovation, equivalent to weakening patent protections at a time when the gains to innovation in pharma are big.

In contrast, the private sector uses PBM's to create bargaining competition to reduce drug prices (Froeb and Shor, 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

These PBM's create competition between drugs within a therapeutic class by setting up formularies (lists of covered drugs) for Health Plans. Drug manufacturers compete by offering lower prices to get onto the preferred tiers of formulary, those with lower co-pays.

... Consider Lipitor and Crestor, two leading statins, or lipid-lowering cholesterol medications. The placement of one drug on a more favorable tier than the other can considerably shift sales volume in favor of the preferred drug. Economists at MIT and Wharton estimate that the statin manufacturers are willing to offer rebates of up to 54% in return for favorable placement.

2019 REPOST: Is this collusion?

We report, you decide:

If you are looking for an interesting case to discuss with your classes, I recommend to you the Commission’s complaint against Valassis.  The product at issue in the case was free-standing inserts – the booklets of coupons that come in Sunday newspapers. Historically, two companies each had about half the market – Valassis and News America Marketing, a subsidiary of NewsCorp. According to the complaint, in June 2001, Valassis raised its prices by 5%. When News America did not follow suit, it gained market share.

With News America sticking to its old prices, Valassis decided in February 2002 to abandon its attempts to raise prices and instead to try to regain its lost market share. From February 2002 until the middle of 2004, a price war ensued, with prices dropping more than 15% from those that prevailed in June 2001. At that point, the complaint alleges, Valassis decided to give up on recovering its market share and instead decided to raise prices. It did not, however, want to repeat the experience of raising prices without having News America follow suit. As a result (again, according to the complaint), Valassis decided to communicate its plans during a stock analyst conference call. In that call, the CEO announced 1) that it was raising its prices, 2) that it would not cut prices in order to attract News America’s customers, 3) that it would cut prices to whatever it had to in order to retain its existing customers, and 4) it would only stick with its strategy if News America made it clear that it was not going to try to take Valassis’s existing customers. It even provided details about specific outstanding pricing offers. The text of the conference call is available as Exhibit A to the Commission’s complaint in the case. I suggest you take a look at it and consider using it as case material in your courses.

Equity risk premium for stocks at all time low

 

WSJ:  Whatever happens to change it, there is a consensus on Wall Street that the equity-risk premium can’t stay this low forever.

ANALYSIS:  This is the Chapter 9 logic to value stocks relative to bonds, and right now it looks as if the stock market is over valued relative to bonds. 

DISCLAIMER:  if I really knew, I wouldn't be teaching school and I would charge you for the information.

House prices going up again

 

• Home prices came in exceptionally strong in August, rising a seasonally adjusted +0.68% from July; August’s non-adjusted gain (+0.24%) was more than 60% larger than the 25-year same-month average (+0.15%)

How do sales taxes deter the movement of assets to higher valued uses?

IMAGINE A SALES TAX OF 8%:

SELLERS COST IS AT 10

SELLER RECEIVES PRICE*(92%)

 

TRANSACTION TAKES PLACE IF PRICE IS ABOVE SELLER’S VALUE.  SO SELLER WILL NOT SELL UNLESS 

 

SELL IF .92*PRICE>10 OR PRICE>10/.92=10.8696

 

SO SELLER ACTS AS IF HER BOTTOM LINE PRICE RISES FROM 10 TO 10.87

BOTTOM LINE: 

TRANSACTION WILL NOT OCCUR IF BUYER VALUE IS LESS THAN 10.87

TRANSACTIONS THAT CREATE LESS THAN 8.7% OF WEALTH DO NOT OCCUR.  

            

Luke Froeb on Jon Hartley's Capitalism and Freedom in the 21st Century

Luke Froeb Nov 4, 2023 

Antitrust Policy, The Chicago School Consumer Welfare Standard and The Rise of the New Brandeisians 

A Discussion with Luke Froeb, former Chief Economist at the FTC and former DOJ Antitrust Division 

 Luke Froeb joins the podcast to talk about his career in economics, what it's like to be the chief economist at the FTC and DOJ antitrust division, how these agencies make decisions about merger cases, the history of the Chicago School consumer welfare standard and the types of analytical tools and modeling that underlies the approach, along with the rise of the New Brandeisians and their failures thus far.

Jon Hartley is an economics researcher with interests in international macroeconomics, finance, and labor economics and is currently an economics PhD student at Stanford University. He is also currently a Research Fellow at the Foundation for Research on Equal Opportunity, a Senior Fellow at the Macdonald-Laurier Institute, and a research associate at the Hoover Institution.

Trade Deficit

 

Source:  Laffer Associates

Dollar Stronger against Euro and Japanese Yen

 

Source:  Laffer Associates

A stronger $ helps US consumers, but hurts US producers.  

Speculation: It may be a consequence of fear (flight to safety?) and/or trade restrictions against China.  

Organizational Form and Enforcement Innovation

  Antitrust Law Journal, Volume 85, Issue 2, (Oct 30, 2023)

Luke Froeb, Bruce H. Kobayashi, and John M Yun

• Antitrust agency economists are uniquely situated to develop, adapt, and disseminate new methodologies to improve enforcement accuracy because of the multiple and conflicting roles that they play.
• When economists arrive at the agencies, they are often thrust into decision-making roles where they must render judgments on messy, real-world cases, often in conflict with agency attorneys, political appointees, or the economists and attorneys who appear on behalf of parties.
• We examine how the relationship between academia and the agencies can encourage what has become known as “enforcement R&D,” i.e., the development and application of new methodologies for screening and evaluating competitive effects.

BUSTED! National Association of Realtors

In the earlier post (now updated), we reported on the court decision granting $1.8B to Missouri home sellers, which may be trebled (attorney talk for "tripled"). From what I can understand, the collusion is supported by a rule mandating an "offer of compensation to a buyer’s broker."  This requirement creates an incentive for the buyer's broker to "steer" the buyer to only properties listed on the high-commission-fee multiple-listing service (MLS).

From WSJ:

Missouri home sellers challenged a Realtor rule requiring seller agents to provide a blanket offer of compensation to a buyer’s broker to list a home on the association’s affiliated MLS. These databases of homes for sale are similar to stock exchanges in that they match brokers and sellers. They are also de facto monopolies.

The plaintiffs provided compelling evidence that overall commissions have stayed at roughly 5% or 6% for decades, split evenly between the buyer and seller brokers. 

HT:  Michael H. 

[REPOST from 2011]: Economics ignorance in Tennessee

in 2008, Hurricanes Gustav and Ike reduced gasoline production in the Gulf of Mexico which reduced gasoline supply to the state of Tennessee. As would occur in any well functioning market, price went up (by about $0.85/gallon). These higher prices encouraged conservation, and ensured the availability of gasoline to those who really needed it (like someone who has to get to a hospital). In the long run, higher prices during emergencies give incentives to suppliers to alleviate future shortages.

Unfortunately, in Tennessee and 30 other states, such higher prices are also illegal: the state prosecuted 17 firms for raising price.

 It is not clear whether the suits were caused by overzealous enforcement or by the vague statute which prohibits increases “grossly in excess of a price generally charged." Any economist could build an argument that such enforcement is immoral using a consequentialist ethic, but it also seems to fail on simple deontological grounds:

It is the special claim of the virtue argument that it intends to promote a civic virtue of shared sacrifice for the common good, yet price gouging laws are destructive on both points. Because price gouging laws interfere with price signals, resources from outside of the disaster-affected area are not so readily mobilized. Rather than promoting a shared sacrifice in response to a disaster, economic damage tends to be more localized. A further result of interfering with price signals is that fewer resources get to where they are most needed, and therefore the common good is harmed rather than promoted.

The naive reaction to higher prices following an obvious supply decrease seems to represent an embarrassing failure of economics education in the state of Tennessee. Perhaps we need a "competition" day, as they have in Europe, so that we can spread the good news of markets to state legislators and those who enforce the law.

What Nashville can Learn from NYC: Affordable Housing mandates reduce the supply of affordable housing

The Nashville City Council is considering requiring that a certain percentage of units in new residential developments be priced as affordable. The mandates would apply to multi-unit developments bigger than five units.

While this may sound good, lets think clearly about its effects: mandates reduce the profitability of new development.  This will lead to less new development, or developers will substitute towards smaller developments, not subject to the mandate.  In the former case, fewer new developments would be built; in the latter, lower-density development would take place.  Either way, this represents a decrease in supply.  A decrease in supply would increase price, exacerbating the very problem--expensive housing--that it was designed to ameliorate.   (And don't forget that density is green.)

Housing markets are also subject to what is known as "filtering," apartment rents tend to go down as the apartment building ages.  So today's expensive housing is tomorrow's affordable housing.  This implies that a reduction in the supply of expensive housing today, will reduce the supply of affordable housing tomorrow.

These kinds of zoning restrictions are popular because they drive the price of existing housing above replacement cost, benefiting Nashville's homeowners. But they come at the expense of renters and new residents. As the Financial Times put it:

They are the ransom that renters and recent buyers must pay to existing homeowners – whose homes the rules protect – for use of an artificially limited stock of housing. So severe have those restrictions become that the value of the ransom runs into the trillions. 

Wealth of this kind is far more destructive than the alleged sins of the top 1 per cent. It is wealth created not by improving our living standards but by making them worse; by building too few houses in London and San Francisco, not too many. It is not earned by skill or effort. It is taken directly from the pockets of some – the young, especially those who were born poor – and transferred to others via political regulations on building. This is not wealth, this is plunder. 

The effects of affordable housing are similar to price gouging laws that in Mississippi prevented generators from reaching the Gulf Coast after Katrina. Similarly, affordable housing mandates will prevent new housing from reaching Nashville.  The market wants to help, so let it.

OK, if mandates won't do it, how do we increase the supply of affordable housing in Nashville?  Here I think Nashville could learn something from New York.  In New York, the affordable mandates are triggered only by a relaxation of zoning.  For example, a developer buys up a block of houses and asks the planning commission to re-zone it for a multi-unit apartment complex.  In exchange for the zoning change, the developer agrees to set aside some of the units for lower income tenants.

The crucial difference is that in NY, affordable mandates are triggered only by development that increases supply.  In contrast, the proposed change in Nashville would reduce supply.

[REPOST from 2015] 

[REPOST from 2017] Anti-Price Gouging Laws: Keeping Assets in Low Valued Uses

The gulf coast of Texas needs critical supplies. It is wonderful that many are contributing out of the goodness of their hearts. But the Attorney General seems to not want to marshal the power of the profit motive.

“During declared disasters, state law prohibits businesses from charging exorbitant prices for necessities such as gas, food, drinking water, clothing and lodging,” Attorney General Paxton said. “Texans affected by Hurricane Harvey should take steps to protect themselves and report any alleged price gouging or scam contractors to the Office of the Attorney General.”

Keeping prices artificially low: 1) means critical goods flow to those who 'know a guy' rather than those who have the greatest need (as expressed by their willingness-to-pay), 2) creates an inefficient black market, and, most importantly, 3) blunts incentives for entrepreneurs to supply these goods.

[REPOST from 2020] Dying from Protection from Gouging

David DiSalvo has a write up at Forbes on his experience trying to obtain N95 masks during this pandemic. Federal and state officials say they are "scouring the globe" for PPE while some medical professionals are going without. Here is his summary.

• Millions of N95 masks have been available throughout the U.S., Canada and the UK during the pandemic, according to brokers trying to sell them.
• The high price point per mask, driven by extreme demand, has contributed to an overwhelmed reaction among potential buyers, especially in the U.S.
• Scrutiny surrounding these deals is high because of ongoing scams and claims of price-gouging, both of which are triggering emotionally charged reactions and fear of making deals.
• Millions of masks are being purchased by foreign buyers and are leaving the country, according to the brokers, while the domestic need remains alarmingly high.

The entire article is fascinating. Buyers have to be on their guard against scams as there are ample opportunities for fraudsters. Prices for masks, which had been close to $4 a week before, ranged from anywhere between $6 - $7 per mask (at the time of his writing) which has raised concerns about price gouging. Sales to foreigners do not face such scrutiny.

By the end of the day, roughly 280 million masks from warehouses around the U.S. had been purchased by foreign buyers and were earmarked to leave the country, according to the broker — and that was in one day.
(emphasis in the original)

BOTTOM LINE:  Fear of price gouging laws is causing US suppliers to sell overseas.  Price gouging laws are keeping medical professionals from protection against COVID-19, and presumably killing the very people who are trying to help.  

Hat tip: Marginal Revolution

Why are US house prices rising again?

From CalculatedRiskBlog.com: Two forces are pushing house prices in opposite directions: a decrease in supply raises price and reduces quantity, whereas a decrease in demand reduces both price and quantity.  

In the graph above, we see the supply measured as months of inventory (#months it would take to sell off the #listings), plotted against the annual change in prices.  In August 2023, the black triangle indicates about 3 months of inventory (measured on an inverted vertical axis), and an annual price change of about 5%.  The graph above indicates a negative relationship between supply and price, as the months of inventory goes down, the price change goes up.  

Below we see the reason why demand is declining:  the high price of a mortgage loan (7.62%) is deterring homebuyers from borrowing money needed to buy a house.  

Amazon Ads

From Podean

Early on [2012], Amazon executives realized that they were sitting on incredibly valuable online real estate (in the form of data collection and customer accessibility) that they knew they could monetize, but they had to be careful not to negatively impact the customer experience in the process.

We can think of this ads as a complementary product to Amazon's electronic marketplace or a demand-side economy of scope: once Amazon had the online marketplace, targeted ads were a logical add-on.

[REPOST from 2017]: Reduce Prices When you Acquire a Complementary Good: Amazon/Whole Foods

The WSJ is reporting that Amazon will begin steep price cuts at its newly acquired Whole Foods affiliate. One way to think of the merger is that it couples Whole Foods's retailing niche with Amazon's logistics expertise. These are complementary assets. Lowering the margin on one increases the demand for the other. This is likely to be profitable for Amazon. Some evidence that this will benefit consumers can be gleaned from the effect of the announcement on traditional retailers.

The announcement Thursday, which sent stocks of traditional grocers into a fresh tailspin, said price changes for both staples and more high-end foods would go into effect as soon as Amazon closes the Whole Foods deal on Monday. 

EU vs. US: which will discourage innovation more?

EU: (Thibault Schrepel):

If you read the #AIAct carefully and read between the lines, you quickly realize that it greatly expands the investigative powers of antitrust agencies.

Here is an example: the EU regulates high and low risk activities similarly, but...

Only those AI systems that are used in high-risk sectors (seethe list in Article 2 and Annex III of the European Commission’s AI Act) and that are nondeterministic should be burdened to the highest compliance requirements. The systems that are used in high-risk sectors but whose output is highly predictable (e.g., AI systems that rely on expert systems) should be subject to lower compliancerequirements because they present a lower degree of actual risk.

US (Politico):

The White House is poised to make an all-hands effort to impose national rules on a fast-moving technology, according to a draft executive order.

...

At the same time, the Oct. 23 draft order calls for extensive new checks on the technology, directing agencies to set standards to ensure data privacy and cybersecurity, prevent discrimination, enforce fairness and also closely monitor the competitive landscape of a fast-growing industry. The draft order was verified by multiple people who have seen or been consulted on draft copies of the document.

Based on history (see previous blog posts here), i.e., the EU doesn't seem to care as much about mistakenly deterring innovation, though that may be changing under the Biden Administration.

Environmental Benefits of Learning curves in Fracking

... total drilling speed increases by 5%-15% for every doubling of experience.

Not only can these economies bring down the price of natural gas, but they also bring down the price of geothermal wells to to the point where they can produce electricity at comparable cost to natural gas.  Here's why:

Why Might Drilling Have a High Learning Rate?

Improvements in “fracking” have come from two primary sources - faster drilling and higher completion intensity. The pure drilling side (not including running casing and other non-drilling tasks) has a learning rate that could be as rapid as technologies like solar, wind, and batteries. It seems to keep progressing while fracturing productivity improves more slowly. Drilling speed increases see diminishing returns in shale wells as non-drilling activities dominate total construction time. Total rig productivity has increased ~50x-100x from drilling and completions since the earliest days in plays like the Marcellus Shale.

Few studies evaluate drilling speed learning curves, but they suggest that total drilling speed increases by 5%-15% for every doubling of experience. These numbers include running casing, cementing, and nippling up blow-out preventers, which are activities that improve slower than on bottom drilling. The drilling portion could have up to a 20% learning rate, though the uncertainty is high.

There are several reasons to think the learning rate is aggressive:

1. Feedback is constant, inexpensive, high signal, and instantaneous. You are making hole, or you aren’t. 
2. The supply chain is geared to rapidly iterate on bit, motor, and directional tool design

The manufacture of these items is surprisingly labor intensive, but that allows rapid iteration. Bit designs can have lot sizes as small as fifty units. Lot size can be even smaller for motors and directional tools. Bits, motors, and tools for drilling granite might improve speed and longevity several times in the most demanding applications.

3. Drilling is far away from physical limits.

HT:  MarginalRevolution.com