But for dumb regulation, we would have cheap Nuclear Power and Supersonic planes

From the Grumpy Economist:

In the 1960s, nuclear was supposed to bring the amazing post-scarcity Jetsons future. It could have brought the amazing post-scarcity Jetsons future. But then regulators/environmentalists/the mob destroyed its potential and condemned us to fifty more years of fossil fuels. If society hadn’t kneecapped nuclear, we could have stopped millions of unnecessary coal-pollution-related deaths, avoided the whole global warming crisis, maybe even stayed on the high-progress track that would have made everyone twice as rich today. … ...

For example, consider supersonic flight. Supersonic aircraft create “sonic booms”, minor explosions that rattle windows and disturb people underneath their path. Annoyed with these booms, Congress banned supersonic flight over land in 1973. Now we’ve invented better aircraft whose booms are barely noticeable, or not noticeable at all. But because Congress banned supersonic flight - rather than sonic booms themselves - we’re stuck with normal boring 6-hour coast-to-coast flights. If aircraft progress had continued at the same rate it was going before the supersonic ban, we’d be up to 2,500 mph now (coast-to-coast in ~2 hours). Can Congress change the regulation so it bans booms and not speed? Yes, but Congress is busy, and doing it through the FAA and other agencies would take 10-15 years of environmental impact reports. ...

Supersonic flight and nuclear power are two great economic counterfactuals. Like the Chinese emperors of the 1400s who abandoned ocean sailing, our society abandoned two great technologies. Who knows what the world would look like today with abundant power and widely developed supersonic airplanes — and all the technology that would have followed from those two?

Cost of bad regulation is 30%

 

From the Grumpy Economist:

Even 30% is a lot. That’s a decade of 3% extra growth. That’s the difference between the US and most of Europe. That’s orders of magnitude more than most conventional economists will allow as the cost of regulation. ...

This shows the correlation between the level of GDP per capita and the World Bank’s (then) ease of doing business measure. 100 is the best observed policy in each category, so is achievable. Not even the US is perfect. The regression line shows an eye-popping possibility for even the US to improve just by fixing the remaining impediments to business. I was pilloried, of course, for the suggestion.

Market Reactions to Killing the Kroger - Albertsons Deal

On 10 Dec. 2024, Kroger’s proposed $25 billion merger with Albertsons was blocked in rulings that the largest merger in US supermarket history would limit competition and harm consumers. A day later, Albertsons called off the merger. How does the change in the stock market value of competitors to Albertsons and Kroger around the collapse of this deal inform us about the foregone competitive effects of the deal? 

A merger that allows firms to enjoy greater efficiencies would lower costs, potentially resulting in lower prices to customers. A merger that increases the market power of firms would result in the ability to increase price-cost margins. Large mergers usually include a little of both efficiencies and market power. A merger where the net effect is to reduces prices is usually good for consumers and one that raises prices is usually bad for consumers. Unfortunately, it is difficult to predict the net effect on prices of lower marginal costs and higher margins on those marginal costs. Fortunately, we can use hindsight of a merger event to get an idea of what stock market participants thought the effect would be. But you can't look at the merging parties, it is assumed they will benefit. You must look at the effect on third party competitors.

Competing firms love it when competitors increase prices (if this is the only change). When a competitor raises prices, some of the competitor's customers will become more inclined to purchase from you. This should boost your profits which would be reflected in an increase in your share price. But if competitors reduce price (and this is the only change), you can expect the opposite. Competing supermarkets would love a Kroger/Albertsons merger that increased prices and hate one that decreased prices. 

When the merger that would result in lower prices is called off, competitors rejoice and enjoy higher stock market returns. Likewise, calling off a merger that would increase prices causes them to lament and suffer lower stock market returns. So were they rejoicing or lamenting on the 10 December and 11 December? Below are the closing share prices of three of the biggest supermarket chains in the US. (There is no price information for chains that are not publicly traded like Publix, H-E-B, and Meijer.)

	Price at Close on			Return
	9-Dec	10-Dec	11-Dec	1-day	2-day
Costco	987.86	993.4	994.69	0.6%	0.7%
Target	135.29	135.05	135.98	-0.2%	0.5%
Walmart	93.62	94.34	94.75	0.8%	1.2%
S&P 500	6,052.85	6,034.91	6,084.19	-0.3%	0.5%

For all three firms, the returns over both the one-day and two-day windows when this merger became dead beat or met the S&P500 return. So, no lamenting and some rejoicing in moderation. It might be better to describe these values as shareholders of competitors being relieved that the merger was called off. Still, the market capitalization of Costco, Target, and Walmart tops $1 trillion. Even a 0.1% excess return is worth $1 billion to shareholders. This amount will focus the mind of most Wall Street analysts.

The inference is that the merger was more likely to have lowered prices than raised them. Antitrust is hard.

Acquired Podcast: Nvidia 3

 Listening to the Acquired Podcast about Nvidia (part 3)

• Interesting history linking the development of machine learning, specifically image processing algorithms, to Nvidia's development of parallel processing hardware, cloud computing and AI.  
• Shows why Nvidia is now the most valuable company in the world 
• Seneca, “Luck is when preparation meets opportunity”

HT:  Charles

Acquired Podcast: Costco

Listening to the Aquired podcast about Costco.  Lots of interesting history and economics in it.  

• The start of discount retailing by figuring out how to skirt manufacturer RPM's (resale price minimums) with the "club format," Fed-co (nonprofit) to Fed-mart (
• The first US Hypermarket, idea imported from France
• How Costco evolved from retail to wholesale warehousing, where manufacturers take care of all the logistics: once a pallet is dropped off, it is immediately available for sale.  
• To Price club, which opened up to credit union members as a benefit, which had a huge word-of-mouth advertising.  
• Limiting # SKU's (#products=3800) to increase volume and get lower prices from manufacturers.
• To adding hot dogs from Hebrew National, $1.50 for hotdog and a drink, Costco's only loss leader
• Costco turns inventory 12x/year, where vendors finance Costo's inventory because it sells faster than the payment terms (pay manufacturers within 30 days).
• To two-part pricing (selling at MC and making money on the membership fees).  
• Costco clones:  Wal-mart, Home Depot, Starbucks

HT:  Charles

Advice for the new administration: Reform Social Security

 CATO:  Social Security ... operates like a Ponzi scheme: Paying benefits promised to earlier generations depends on new revenues from current and future workers. With an aging population, the worker-to-beneficiary ratio has been decreasing, making Social Security’s finances increasingly unsustainable ...

...Since 2010, the OASI program has added $1.08 trillion to the federal debt and is projected to add $4.1 trillion more by 2033, when the program runs out of borrowing authority and confronts a 21 percent shortfall.

• Slow the growth in future benefits. Under the current system, initial benefits are adjusted based on wage growth, which typically outpaces inflation. [This would eliminate] 85 percent of the program’s long-term funding shortfall.
• Modernize and reduce cost-of-living adjustments (COLAs). 
• Social Security should return to its intended mission of alleviating old-age poverty. [limit benefits to the poor]

NIMBY zoning is killing us

From The Studies Show:

How much is [restrictive zoning] costing the US economy as a whole? A famous paper (Hsieh and Moretti, 2019) estimates the US economy would be almost 3.7% larger if only San Francisco, San Jose, and New York City had zoning laws that were less restrictive1. Amazingly, 40 percent of Manhattan buildings standing today would now be illegal to build, hinting at the vast extent of our zoning problems.

So why aren’t zoning laws less restrictive? Existing homeowners have no incentive to increase housing stock. In fact, they benefit from exclusionary zoning laws that increase the value of their real estate. But while existing homeowners profit, everyone else loses.

The United States, long a country famed for internal migration, has in recent decades had the lowest rate of migration since record keeping began in 1948. Fewer people are moving—which means they aren’t following jobs to the most productive areas of the country. Staying put in dying towns or unproductive regions has big consequences. While mortality has dropped across the developed world, middle-class American whites, many of them stuck in moribund rural areas, have been dying at accelerated rates.

Russian ruble is falling, but no one is buying its exports

 From MarginalRevolution:

...I also strongly disagree with those who say that cheaper ruble is “good” for exporters and the budget. Exporters have yet to make good use of devaluing ruble – which they can’t do, because Russia is under all sorts of embargoes, and China and other Global South countries are not opening their markets to most Russian goods.

...China is only buying our most basic commodities at heavy discounts, while keeping its market closed for other Russian goods. There’s no investment or technology coming into Russia from China and other Global South countries. Everything is dependent on state subsidies – but the government’s financial reserves are running thin.

Along with their low fertility rate, 1.52 (source), and it appears that Russia's future prospects are dim.

Advice to the New FTC Leadership

Here is the most important part (link): 

 II. Promote Innovation 

Since 2010, the U.S. economy has grown at a real rate of 1.74% per capita. At this rate, per capita income doubles every 40 years.4 When our kids turn 40, they will earn twice as much as we did.

Public policy—especially antitrust policy—should recognize that innovation drives growth, much of which comes from Big Tech and startups. Big Tech has provided consumers with more everyday value than any other small group of firms in history. And most startups “exit” via acquisition, not by going public. If the FTC prevents these exits due to concerns about lost potential competition, funding becomes harder to come by, which deters startups. The FTC should recognize these innovation incentives when setting enforcement priorities.

Here is press on the new Antitrust chief on "Taking on Big Tech and Beyond"

Slater will inherit a docket packed with blockbuster cases that aim to challenge the dominance of some of the world’s largest companies. These cases, many initiated during Trump’s first term, focus on allegations of monopolistic practices that harm consumers and stifle innovation.

Trump emphasized that Slater’s leadership will prioritize fair and vigorous enforcement of competition laws. “She will ensure that our competition laws are enforced, both vigorously and FAIRLY, with clear rules that facilitate, rather than stifle, the ingenuity of our greatest companies,” he stated.

The decision to place Slater in charge signals a continuation of the administration’s efforts to curb corporate concentration and promote competition across key sectors of the economy. With both Trump and Vance championing a tough stance on monopolistic practices, Slater’s tenure is expected to mark a pivotal chapter in the U.S. government’s approach to antitrust enforcement.

More on Business Dynamism

Over at the Geek Way, Andrew McAfee has created a startling visualization related to entrepreneurship in the US and EU. The Draghi Report on EU competitiveness is generating a small buzz among economists. One startling claim is that

there is no EU company with a market capitalisation over EUR 100 billion that has been set up from scratch in the last fifty years, while all six US companies with a valuation above EUR 1 trillion have been created in this period.

But the visualization makes the contrast even more stark. US entrepreneurs have has dominated.

 

US institutions have made it the primary source for innovation. Coste and Coatanlem suggest a cause has to do with greater labor market regulation inflating the costs of failure in the EU. Other causes?

Business Dynamism

Visual Capitalist has a nice graphic that indicates the level of dynamism across industries in the US economy. An industry is not competitive if no firms ever fail.

 

Returns to Master's degrees

 Economist:

Responding to Professional Disruption

In Chapter 24 on "The Luddites," The Industrial Revolution Podcast recounts an episode when entrepreneur John Bell began producing textiles that drove out local small-scale competitors and putting many workers out of work. In 1799, Bell received a letter, reading:

“I send you this to inform you that we – the cloth workers of Trowbridge, Bradford, Chippinham, and Melkshom – are almost (or the greatest part of us) out of work and we are fully convinced that the greatest of the cause is your dressing work by machinery. And we are determined, if you follow this practice any longer, that we will keep some people to watch you about with loaded blunderbuss or pistols, and will certainly blow your brains out. It is no use to destroy the factories but put you damned villains to death.”

Contrast this with the demise of the retail video rental business in this century. The dramatic drop in employment rivals the most precipitous job loss in any industry. Where was the hue and cry? Where the death threats? Where the Luddite armies sabotaging the competition?

First, is the historical, sociological explanation. Job loss due to industrialization had never been seen before. The disruption of ancient jobs, norms, and entire ways of subsisting within a generation was new and frightening. Today, we are used to hearing of yet another radical disruption in some industry, e.g., music streaming, EVs, ebooks, big data, cloud computing, and AI. This has become regularized. Workers expect their profession to look much different at the end of their career than at the beginning.

Second though, is a not unrelated economic explanation. What were the options available to an out-of-work textile worker in 1799 versus the options of a displaced Blockbuster clerk exactly two centuries later? Textiles were among the first industries to benefit from mechanization. Textile workers had left the farm and now saw few other options in the cities. Blockbuster was able to hire clerks because clerking was so similar to clerking of other retail products. These workers took these jobs because the skills were transferable. They had outside opportunities. The supply curve for textile workers was steep meaning that a drop in worker demand would seriously lower wages. The supply curve for Blockbuster clerks was flat meaning that a drop in demand for video rental clerks would hardly affect the wages of the displaced workers.

Does inequality make us rich?

Economist:

America ranks as the most unequal big rich-world country (see chart). Combined with lower average incomes elsewhere, the pay of America’s top workers looks astonishing to European eyes. For comparison, it takes the equivalent of a mere $250,000 or so to enter the top 1% of two-person households in Britain.

It would be natural to conclude that high inequality is merely the flipside of America’s wealth. That is probably true to an extent. Yet America has grown more redistributive over the period examined by this special report, expanding the earned-income tax credit, a wage top-up for low earners, in the 1990s, and subsidies for health insurance in the 2010s. And it is not clear that tolerance for inequality is powering its economic outperformance over the past decade.

How the Trump Whale made money betting on prediction markets

WSJ:

Polymarket’s remarkable liquidity explains Théo, the Polymarket whale [who made $85 million]. Théo behaved as one would expect of a smart trader: Once he had conviction, he sized the trade aggressively. He built his positions discreetly, with a variety of wallets and with small-sized buys, to avoid causing a run-up in price. This is exactly the opposite of what one would expect if, as much of the media and BlueAnon claimed, he was throwing away dozens of millions to influence the election.

More important, Théo did his own research. Rather than rely on polls, he theorized that there was a strong “shy Trumper” effect. That is, he believed that Trump supporters were both less likely to talk to pollsters and less likely to tell pollsters that they would vote for the former president. As he told The Wall Street Journal in an email, he commissioned his own surveys in which respondents were asked who they thought their neighbors would vote for. The results “were mind blowing to the favor of Trump!”

Not only did Théo bet that Trump would win the Electoral College. He also bet that Trump would win the popular vote—an outcome that was the minority position even on Polymarket—and that Trump would sweep six of seven swing states, including the “blue wall” of Michigan, Pennsylvania and Wisconsin.

Standardization and Specialization

I am a couple dozen episodes in on Dave Broker's Industrial Revolutions Podcast and cam across this tidbit from chapter 14.

But what Whitworth was most famous for was something called British Standard Whitworth – BSW.

Up until this point, different machine tool makers used different designs for their tools. For the end users – really, anyone involved in industry by this point – it was maddening. If you had a steam engine made by Company X, for example, and one of the screws was damaged, it could only be replaced with a screw provided by Company X or the vendor for Company X. Otherwise the screw wouldn’t fit.

Along with Clement, Roberts, and other Maudslay alumni, Whitworth was a strong proponent for standardization such parts – nuts, bolts, and screws. So, in 1841, he sat down and wrote up what he thought should be the standards. Screw threads should be set at a 55 degree angle with very specific depths and radii. By the 1870s, as the railroads became increasingly frustrated with the different systems being used, they said, “yeah, Whitworth was right.” By the 1890s, everyone was using BSW.

With BSW standardization, a steam engine maker need not produce all of the screws, rivets, fasteners, and other minor parts. Outsourcing these components allowed him to focus on improving the steam engine and the component makers to improve production. Economies of scale in, say, screw manufacturing unleashed by dis-integration would drive costs down dramatically.

I recommend the podcast to fellow history buffs and I am sure I will mine it for future blog posts.

The NFL sends Mediocre Teams to Play in Europe

The NFL schedules a handful of games each season to be played in Europe, London and Munich this year. With plans to expand the program to Africa, Asia, and Australia, The Times of India asks why they disappoint their European fans by not sending "contender teams."

Since the league’s initial foray into Europe in 2007, 42 games have been held on the continent. Yet, only two of these contests featured both teams with winning records - the New York Giants and Green Bay Packers in 2022 and the Kansas City Chiefs and the Miami Dolphins in the 2023 season.

One possibility is that they don't need to - the stadiums sell out anyways. I am reminded of when I lamented to a friend that I have a fondness for the Chicago Cubs but they, at that time, had not won a World Series since before the Depression. His reply was that the fans are so loyal that they do not have to. Why pay for a better team roster when you already sellout the stadium? If you cannot adjust capacity to meet greater demand, adjust demand to meet capacity.

When will RoboTaxis become Profitable?

An interesting article in the WSJ reports on the growing acceptance of autonomous vehicles being used for ride hailing. The dominant platform, Waymo, is currently operating 300 retrofitted Jaguars in San Francisco and 400 in a few other other west coast cities.

It is doubtful that they are profitable yet but there are reasons to believe that the service will achieve economies of scale. Consumer acceptance is growing with Waymo customers being more loyal than Uber or Lyft. As it scales, the trips without paying passengers, now 40% of all trips, should fall. And, while luxurious Jaguars are a nice way to introduce the service, Waymo, plans to introduce less expensive vehicles.

Correlation is not causation: birth weight determines mortality, not the animus of white physicians

Economist: 

CORRELATION: “when Black newborns are cared for by Black physicians, the mortality penalty they suffer, as compared with White infants, is halved.” 

MISTAKENLY INFERRING CAUSALITY FROM CORRELATION:

This striking finding quickly captured national and international headlines, and generated nearly 700 Google Scholar citations. The study was widely interpreted—incorrectly, say the authors—as evidence that newborns should be matched to doctors of the same race, or that white doctors harboured racial animus against black babies. It even made it into the Supreme Court’s records as an argument in favour of affirmative action, with Justice Ketanji Brown Jackson (mis)citing the findings. A supporting brief by the Association of American Medical Colleges and 45 other organisations mentioned the study as evidence that “For high-risk black newborns, having a black physician is tantamount to a miracle drug.”

CAUSALITY:  birth weight determines mortality, not the animus of white physicians

...a disproportionately high share of underweight black babies were treated by white doctors, while a disproportionately high share of healthy-weight black babies were treated by black doctors.

IRONY:

That a flawed social-science finding which fitted neatly within the zeitgeist was widely accepted is understandable. Less understandable is that few people now seem eager to correct the record. The new study has had just one Google Scholar citation and no mainstream news coverage. 

Who regulates the regulators?

From REASON:

For decades, the California Coastal Commission has had near-unchecked authority to regulate development along the state's 860-mile coastline, and it's been unafraid of using it. 

It's now trying to expand its terrestrial authority to outer space. 

This past week, the commission voted to oppose plans by private space company SpaceX to launch more rockets from Vandenberg Space Force Base in Santa Barbara County, California. 

The commission is asserting for the first time that SpaceX must get coastal development permits to shoot more rockets into space. SpaceX and the Department of the Air Force have conversely argued that SpaceX launches are federal activity that's exempt from the commission's regulatory powers.

WORSE:  it appears that the regulators opposed the launch due to Elon Musk's political beliefs.  The case now goes to trial.  

The hidden cost of regulatory uncertainty

Innovation drives growth and at our current growth rate of 2%, US income doubles in 36 years. In contrast, EU income doubles in 108 years. There are many reasons for the US/EU difference regulation, income taxes, subsidies and "regulatory uncertainty." President Biden’s appointees have createdted huge regulatory uncertainty in antitrust (see earlier post) which deters acquisitions which are the proverbial “exits” that drive startups.

Failures ==> Learning ==> Success

Economist:

...SpaceX’s existing Falcon 9 rockets had a similar string of spectacular failures (it even released a blooper reel). But there was a method behind all the explosions. The idea is that flying lots of hardware, and failing rapidly, lets you learn from reality, which is the best teacher of all. That sort of mindset, best-known in Silicon Valley, is not how the rocket business has traditionally worked. But it is hard to argue with the results: SpaceX’s Falcon rockets have now made more than 350 successful landings. That has helped the firm cut the cost of getting a tonne of payload into space by perhaps a factor of ten. It now dominates the launch industry.

Why has US left other rich economies in the dust?

Economist:

On a per-person basis, American economic output is now about 40% higher than in western Europe and Canada, and 60% higher than in Japan—roughly twice as large as the gaps between them in 1990. Average wages in America’s poorest state, Mississippi, are higher than the averages in Britain, Canada and Germany.

WHY?

• Economies of Scale: a good idea hatched in California or product built in Michigan can, in short order, spread to 49 other states. 
• Flexible Labor Market : ...allowing people to move to better-paying jobs and drawing workers to more productive sectors. 
• Immigration: A long, porous southern border [allows] the labour force to steadily grow ... to fill the hard, dirty jobs that many native-born Americans have no interest in doing. 
• Oil & Gas:...the improvements in techniques for extracting hydrocarbons from once-unpliant shale rocks have turned America into the world’s biggest producer of oil and gas.
• Light touch Regulation:  ...has given high-tech companies room to play and grow. It also enabled the experimentation which led to the shale revolution. 
• Better regulation: After the global financial crisis of 2007-09, [regulators] clean up bank balance-sheets, and making aggressive use of monetary policy to support growth. 
• Good Macro policy: government’s willingness to step on the accelerator pedal when [the economy] has sputtered, ...[response to the] covid slowdown ... with...fiscal stimulus packages that left other countries in the dust.

What happens when you cut the supply of Northwestern football by 75%?

WSJ: Price goes up by 900%!

Ryan Field, where Northwestern played until this season, sat over 47,000 fans—nearly four times as many as the [temporary] cv lakeside stadium.

Tickets for last Saturday’s home game against Indiana started at $129 on the school’s official site, an increase of more than 900% on the $17 average secondary-market price for last season’s home opener.

The shift in capacity creates a natural experiment, a movement along the demand curve, that allows us to calculate the Price Elasticity of Demand for Northwestern football. 

(Price Elasticity of Demand) = (% change in quantity)/(% change in price) = (-75)/900 = -1/12, 

a very inelastic demand, i.e., one whose quantity does not respond much to price changes.  

But this natural experiment may make demand look less elastic than it really is because of the quality increase: its intimate feel and views of Lake Michigan, make the new stadium more attractive.  This increase (shift) in demand due to higher quality increases the price change, making demand appear less elastic than if the new stadium were the same quality as the old one.  

HT: Lamar

AI podcast on Ch1 by Notebooklm.Google (Is this better than reading text?)

Ch1 Podcast Comments solicited

Bargaining with Longshoremen

How much bargaining power did the two sides have in the recent dock workers' strike? 

For shippers, what is the cost of a one day delay in coming to terms? The port of New York handled 6.6 million Twenty-foot Equivalent Unit (TEU) containers in 2022, but the East cost and Gulf coast ports for which data are available handled ~21 million. The average value of a TEU is $54.500. Assume firms have a 20% annual discount rate for a little back-of-the-envelope calculation.

	Port of New York	All Affected Ports	Units
Volume Handled 2022	6.6	20.8	Million TEU
Value of TEU 2020	$54.5	$54.5	$Thousands
Annual Value	$359.7	$1,133.6	$Billion/Year
Daily Value	$985.5	$3,105.8	$Million/Day
Daily Carrying Cost	$540.0	$1,701.8	$Thousand/Day

The carrying cost alone is over $1.7 million per day, perhaps more in 2024 due to inflation and increases in trade volume. This is also a lower-bound since there will also be production disruptions & spoilage of goods. The cost to shippers might come to $3-5million per day.

What is labor's cost of a one day delay in coming to terms? The earnings of the 45,000 affected dock workers could be anywhere from $39/hour to $200,000/year. Suppose half of these would have worked on any day and that a typical day is eight hours of work, the 45,000*0.5*$39/hour*8hours = ~$7million per day. This is an upper-bound since opportunity cost of workers time is not $0. The cost to workers might be $3-5million per day.

You can adjust any of these assumptions as you deem appropriate, but it seems that the two parties were pretty evenly matched.

Colocating Complements

 

Providers of complementary services can increase demand by reducing the search costs of shared customers. Perhaps colocation will suffice but the next step would be vertical integration.

New interactive games to teach supply, demand, and pollution, a "negative externality"

From MarginalRevolution.com:

MRU videos are free for anyone’s use anytime, anywhere and don’t forget there are also two new econ-practice games on negative externalities and positive externalities and a fun choose your own adventure story on Unintended Consequences (most textbooks just teach when regulation works. We are more balanced.)

HIGHLY RECOMMENDED: These are GREAT exercises for teaching students about Demand, Supply, and shifts in Demand and Supply!