Tuesday, June 11, 2024

China's anti-growth policy

...China’s stockmarkets began falling in the second half of 2023, then plunged in early 2024 (see chart).

This led to regulatory scrutiny of new IPO's 

...On top of on-site inspections, regulators now review companies’ past business deals and trawl through executives’ bank accounts, according to Reuters, a news agency. Faced with this, at least 80 companies withdrew their ipo applications in the first quarter of 2024.

When IPO exits are harder, fewer VC's want to invest:

...Just five Chinese companies listed on domestic bourses in April, down from 35 in April 2023. The ipo market raised 80% less capital in the first four months of 2024 than in the same period the previous year.

RIP James Lawson

James Lawson taught nonviolent resistance to a generation of civil rights leaders that ended government-imposed, mandatory discrimination.  
  •  The protests forced a reckoning, and Nashville became the first Southern city to desegregate its downtown lunch counters in 1960. 
  • Vanderbilt expelled Lawson in 1960 due to his leadership role in the sit-ins. Lawson later reconciled with Vanderbilt, and the university created an institute in his honor.
Obituary:  Axios Nashville

Sunday, June 9, 2024

Price controls deter voluntary, wealth-creating transactions: CA minimum wages increase to $20/hour

 When staking out a position, it is rare for a politician to acknowledge any tradeoffs.  For example, a politician in favor of a minimum wage increase will praise the increased wages for workers, but won't acknowledge that businesses will shut down or fire workers.  That job is left to those on the other wide of the issue:

Nearly 10,000 California fast food workers have been firedthanks to the state's new $20 minimum wage, according to the California Business and Industrial Alliance (CABIA), which slammed Governor Gavin Newsom for the law which went into effect April 1.
Source: ZeroHedge

Saturday, June 8, 2024

Why organizations commit less visible errors or why Anthony Fauci didn't test

When one type of error (e.g., doing something you ought not to do) is less visible than the other type of error (e.g., not doing something that you ought to do), employees are more likely to commit less visible errors, as they are less likely to be punished for doing so.  

In addition, employees have an incentive to conceal errors, which may explain the lack of follow up, e.g., to test whether action or inaction was the right thing to do.  For example, Anthony Fauci conducted ZERO tests of non pharmacological interventions (lockdown, social distancing, wearing masks, border closure), despite claiming that doing so would help prevent spread of the virus.  

Testing would have made visible the costs of Fauci's errors which could explain why he didn't test.

Wednesday, June 5, 2024

When life imitates comedy: FTC's Amazon Flip Flop

Nobel Laureate Ronald Coase once quipped that he left antitrust because "When prices go up, its monopolization, when prices fall it's predation, and when they stay the same it's collusion." As if to illustrate this idea, the FTC's Chair is reversing herself to bring a case against Amazon.
On one hand, booksellers argue that Amazon uses its clout to obtain and sell books at lower prices, forcing them to cut their own prices [Chair Khan's former position]. On the other, the FTC says Amazon uses its market power to block other businesses from selling at lower prices [Basis of FTC's current position]. (WSJ)

When an Agency with enormous prosecutorial discretion abandons principle, it loses credibility:

The progressive antitrust movement that Khan leads is ideologically incoherent. Progressives believe that the government should break up Amazon simply because it is a big company and will say or do anything to reach their desired goal. The FTC’s and ABA’s arguments, while contradictory, both amount to the legal equivalent of flinging spaghetti at the wall and seeing what sticks. (Nat'l Rev)
There is also a rumor that the FTC might be offering VERA-VSIP (early retirement with an incentive payment), perhaps to rid themselves of the remaining staffers who still care about principle, i.e., protecting competition.  

DISCLAIMER: I have worked at the FTC and done consulting work for Amazon.

Monday, June 3, 2024

Costco's Price Discrimination

There is a great episode of the Acquired podcast about the Costco business model. It is three hours long and full of history, anecdotes, and, importantly, lots of business insights. One is just how important two-part pricing is to their business model. Customer/members pay an annual membership fees to pay much lower prices. Costco limits product markups to 14% when the standard for traditional retailers is 100%. This means that 70% of the net income is from memberships and only 30% is from retailing. Another is how scale economies feature throughout their operations, from pallets on the floor to the Kirkland Signature brand. Their low margins and scale economies are meant to deliver huge consumer surpluses that they then extract with the membership fee.

Sunday, June 2, 2024

Migrants Bear Costs of Biden's Changing Immigration Policy

PHOTO May 23, 2024: Migrants in Salina Cruz, MX, 
heading to US 

NY Times: Migrants from all over Central and South America's are exhausting their savings to come to the US, 
But instead of landing closer to the U.S. border, they are being hauled roughly 1,000 miles in the opposite direction — deep into southern Mexico in a shadowy program meant to appease the Biden administration and ship migrants far from the United States.
Mexican authorities rarely publicly acknowledge the busing program, making it much less contentious than the efforts by Republican governors to transport migrants to blue states that have become political theater in the United States.
In the first four months of 2024, U.S. border apprehensions plunged in one of the steepest declines in decades, giving the Biden administration some relief as immigration persists as a top voter concern in this year’s election.
HT: Chris

Wednesday, May 29, 2024

Why the shift from owning to renting, and why are rents going up? (and rent controls don't help)


A sagging jobs market, high house prices, rising rents and tighter mortgage rules left many youngsters less able to afford a first property.

Owning is too expensive, so there is an increase in demand for renting, and rents have increased from 30% (for boomers) of income to 40% for todays homeowners.

And zoning controls prevent new supply from reaching the market

Rent controls first became popular in the aftermath of two world wars—a time when tenants were a large voting block. Milton Friedman attacked controls in an essay in 1946, warning that they would result in the “haphazard and arbitrary allocation of space, inefficient use of space, [and] retardation of new construction”. Liberal economists regard controls as a zombie policy.
No city today better demonstrates the distortions Friedman warned of than Stockholm. On paper Sweden’s system of rent controls, the hyresreglering is the strictest in the world. A powerful tenants’ union negotiates with landlords, holding rents as much as 50% below the market. In practice lots of people lose out. Swedes must join waiting lists for a rent-controlled apartment: in central Stockholm the average wait is 20 years; across the city it is about half that. Many who reach the front of the queue are in their 50s and own a home. Young Swedes often have to put up with expensive sublets agreed to under the table, laments Mr Persson.

Is there anything competition cannot do?

Politico: School choice programs have been wildly successful under DeSantis. Now public schools might close.
Gov. Ron DeSantis and Florida Republicans have spent years aggressively turning the state into a haven for school choice. They have been wildly successful, with tens of thousands more children enrolling in private or charter schools or homeschooling.
And, competition from private schools is putting the market pressure on underperforming public schools.
“If your product is better, you’ll be fine. The problem is, they are a relic of the past — a monopolized system where you have one option,” Chris Moya, a Florida lobbyist representing charter schools and the state’s top voucher administering organization, said of traditional public schools. “And when parents have options, they vote with their feet.” 

Booksellers are Straying from the Script

The parties that the FTC's case against Amazon is intended to protect are contradicting key elements of the FTC's case. A WSJ opinion claims that the FTC would like to prevent the American Booksellers Association (ABA) from permission to intervene in the case. “We believe the facts we bring to the table will significantly bolster key arguments made by the FTC in their already strong and compelling case,” says ABA CEO Allison Hill. The FTC wrote a brief opposing this "help" from the ABA because the ABA contradicts some FTC claims about the case.

What is the market definition?

The FTC narrowly defines the market in which Amazon competes as “online super stores”—namely, Walmart, Target and eBay—to argue that it has monopoly power. But small booksellers rightly argue that they also compete with Amazon.

Higher prices or lower prices?

On one hand, booksellers argue that Amazon uses its clout to obtain and sell books at lower prices, forcing them to cut their own prices. On the other, the FTC says Amazon uses its market power to block other businesses from selling at lower prices.

Tuesday, May 28, 2024

When do short term interest rates above long term ones signal a recession?

An inverted curve indicates that investors expect rate cuts, but it doesn’t explain why they are making those wagers. 
Bets on cuts:
  • could reflect some chance of a recession, but also 
  • some probability of a benign scenario, with the Fed trimming rates as a precautionary measure even as growth remains stable.
WSJ: [slightly re-formatted]

Monday, May 27, 2024

Portfolio Diversification in action

 MarginalRevolution has a great story about Lucas and Spielberg reducing risk by swapping 2.5% net points on Star Wars and Close Encounters. 

Friday, May 24, 2024

Why do closed-end funds trade at a 10% discount to their underlying assets?

 Economist:  No one knows, but they are becoming less popular.  

Persistent discounts violate one of the fundamental assumptions of efficient financial markets: the law of one price. This holds that two identical assets should converge in price, and that long-term differences must reflect intervention or friction. ... As far back as 1949, Benjamin Graham, an author and investor, called the discount “an expensive monument erected to the inertia and stupidity of stockholders”.
In the early 1950s, just after Graham penned his attack, closed-end funds held assets worth almost 70% of those in mutual funds. ... Now closed-end funds are outgunned not just by mutual funds but by exchange-traded ones, too. Among the three categories, [closed-end funds] hold just 1% of total assets.
OK, but if the few remaining closed-end funds represent an arbitrage opportunity, why can't we buy them, sell the underlying assets, and earn 10%?  

Turns out that someone else thought of it first: activists are targeting a range of closed-end funds, including ten run by BlackRock.  

Wednesday, May 22, 2024

On how to encourage college-educated women to have more kids

Economist  on how declining birth rates will lead to demographic catastrophe, a world populated by old retired people, and not enough young workers to support them.
More than half the drop in America’s total fertility rate is explained by women under the age of 19 now having next to no children. Around a third of the missing births would have been unplanned, and most of these would have been to women on low incomes.
However, instead of encouraging teenage pregnancies, the Economist tells us to encourage college pregnancies.
Only 8% of the children of American-born non-college-educated parents are themselves expected to obtain a bachelor’s degree, and during their adult life the average high-school graduate boosts the public finances by less than a tenth of the net contribution of a college graduate. 

Tuesday, May 21, 2024

New article by some middling economists on President Biden's merger enforcement


 By Luke M. Froeb, Steven T. Tschantz & Gregory J. Werden 

We model likely effects of Biden Administration changes in merger enforcement on five discrete decisions in the review process. We find that the policy changes can be expected to stop many bad mergers but only at the cost of stopping even more good mergers, largely as a consequence of the increased cost of the regulatory gauntlet.

Sunday, May 19, 2024

Competition to design AI Chips

 From The Economist, Can Nvidia be dethroned? Meet the startups vying for its crown

Nvidia’s market value is more than $2trn, with year-on-year revenue growth of more than 200%. Here is wny it succeeded:

...GPU's do the computational heavy-lifting needed to train and operate large ai models. Yet, oddly, this is not what they were designed for. The acronym stands for “graphics processing unit”, because such chips were originally designed to process video-game graphics. It turned out that, fortuitously for Nvidia, they could be repurposed for AI workloads.
But now several startups are designing chips specifically designed for AI:
Cerebras’s response is to put 900,000 cores, plus lots of memory, onto a single, enormous chip, t...On-chip connections between cores operate hundreds of times faster than connections between separate GPUs, ... [and] reduces energy consumption by more than half...
Groq's [chips] contain their own memory, [and] act as routers, passing data among the interconnected LPUs (language processing units). Clever routing software ... greatly boosts efficiency, and thus speed: Groq says its LPU can run big LLMs (large language models) ten times faster than existing systems.
MatX, also based in California. GPUs contain features and circuitry that provide flexibility for graphics, but are not needed for LLMs, ...[their] gpu-like chip gets rid of such unnecessary cruft [badly designed, unnecessarily complicated, or unwanted code], boosting performance by doing fewer things better.

Bottom line:  How many economists does it take to change a lightbulb?   None, the market will do it.  

Saturday, May 18, 2024

Why is this joke wrong, [yet still funny]?


The implied joke is ironic, albeit wrong, as it implies there is a correlation between confusion and dying.  Rather the correlation is zero.  Everyone dies, so death is a constant, and correlation with a constant is zero.  

Here is a technically correct joke with the same theme:

Tuesday, May 14, 2024

Corporate Social Responsibility: Whole Foods vs. Cypress Semiconducter

Colleague Mark Cohen pointed me to an interesting debate on Corporate Social Responsibility in REASON Magazine ("Free minds and Free Markets") between three libertarians: Whole Foods CEO John Mackay, Milton Friedman, and Cypress Seminconductor's TJ Rogers, who makes an appearance in John Stossel's intriguing "Greed" video.

Professor Friedman's classic argument is that since shareholders can contribute to charity if they want, the corporation should return as much money as possible to shareholders to let them pursue their own goals. Indeed, Mr. Rogers' employees can afford to be altruistic, partly because they have jobs at Cypress:

My company, Cypress Semiconductor, has won the trophy for the Second Harvest Food Bank competition for the most food donated per employee in Silicon Valley for the last 13 consecutive years (1 million pounds of food in 2004).

Mr. Rodgers goes on to criticize Whole Foods for donating 5% of its profit to charity by arguuing that corporations add far more to society by maximizing "long-term shareholder value" than they do by donating time and money to charity. Mr. Mackay responds by turning the usual principal-agent relationship between shareholders and managers on its head:

I believe the entrepreneurs, not the current investors in a company's stock, have the right and responsibility to define the purpose of the company. ... At Whole Foods we "hired" our original investors. They didn't hire us. .... We first announced that we would donate 5 percent of the company's net profits to philanthropy when we drafted our mission statement, back in 1985.

The most interesting, and paradoxical, argument comes from Mr. Mackay who says that one cannot maximize profit by trying to maximize profit:

...we have not achieved our tremendous increase in shareholder value by making shareholder value the primary purpose of our business. ... In the profit-centered business, customer happiness is merely a means to an end: maximizing profits. In the customer-centered business, customer happiness is an end in itself, and will be pursued with greater interest, passion, and empathy than the profit-centered business is capable of.

Sunday, May 12, 2024

Why the US leads China, EU in economic dynamism

QUESTION TO CLAUDE 3:  The EU and China lag behind the US in economic dynamism, measured by start-up activity, number of unicorns, age of unicorns (younger indicates more rapid innovation), and in productivity growth. Can you document this and tell me why?

ANSWER:  Here is the data to document the economic dynamism gap between the US, EU, and China, along with some key reasons behind it:

Start-up Activity:

  • The US had over 63,000 startups in 2020, compared to around 37,000 in the EU and 25,000 in China. The US accounted for over 50% of global venture capital investment.

Unicorns (private companies valued at $1B+):

  • As of 2023, the US has 704 unicorns, China has 258, and the EU has 139. The total value of US unicorns is $2.4 trillion vs. $862 billion for China and $449 billion for the EU.
  • The US represents 51% of the world's unicorns by number and 65% by valuation. China and the EU lag significantly behind.

Age of Unicorns:

  • The median age of US unicorns is 7 years vs. 9 years for Chinese unicorns, indicating more recent startup success in the US. [Claude 3 unable to find data on EU unicorns]

Productivity Growth (average annual labor productivity growth 2010-2019):

  • US: 1.0%
  • EU: 0.7%
  • China: 7.1% (but from a much lower base)

Key Reasons for the US Lead:

  1. Larger, more developed venture capital and private equity industry in the US fueling more startup investment. US VC deal value was 5-7X higher than China and the EU in recent years.
  2. US equity markets provide better exit opportunities for startups via IPOs. US represented over 60% of global IPO proceeds in 2021.
  3. Huge US domestic market enables startups to scale quickly. EU is fragmented across countries and China's market is difficult for foreign firms.
  4. Top US universities and companies attract global talent. Over 50% of US unicorn founders are immigrants.
  5. Historically strong intellectual property protections, rule of law, and business-friendly regulations in the US encourage innovation and risk-taking.
  6. Deeply rooted culture of entrepreneurship and risk-taking in the US compared to more risk-averse cultures in the EU and China's state-led system.

While China leads on productivity growth, this is largely due to catch-up growth from a low base. On most measures of economic dynamism, especially in the innovation economy, the US maintains a substantial lead over the EU and China as of 2023. But the gap has been narrowing over time.

Economist: America is in the midst of an extraordinary startup boom

Thursday, May 9, 2024

Is globalization over?

The Economist on what we might lose:
It is fashionable to criticise untrammelled globalisation as the cause of inequality, the global financial crisis and neglect of the climate. But the achievements of the 1990s and 2000s—the high point of liberal capitalism—are unmatched in history. Hundreds of millions escaped poverty in China as it integrated into the global economy. The infant-mortality rate worldwide is less than half what it was in 1990. The percentage of the global population killed by state-based conflicts hit a post-war low of 0.0002% in 2005; in 1972 it was nearly 40 times as high. The latest research shows that the era of the “Washington consensus”, which today’s leaders hope to replace, was one in which poor countries began to enjoy catch-up growth, closing the gap with the rich world.
But the political consensus behind globalization is breaking.
As we report, the disintegration of the old order is visible everywhere. Sanctions are used four times as much as they were during the 1990s; America has recently imposed “secondary” penalties on entities that support Russia’s armies. A subsidy war is under way, as countries seek to copy China’s and America’s vast state backing for green manufacturing. Although the dollar remains dominant and emerging economies are more resilient, global capital flows are starting to fragment, as our special report explains.

Wednesday, May 8, 2024

What's wrong with the Episcopal Church?

As a result of declining attendance and giving, driven partly its emphasis on politics instead of ministry, administration costs have risen to 60% of revenue, way above the recommended 40%.
Throughout the church, parishes and dioceses are being asked to do more with less, except at the top levels, where [the Episcopal Church] now spends more on church chancellors than evangelism.

And when the General Convention directed that Church HQ relocate from New York City to a cheaper location, the NY-based administrators simply ignored the directive.

Lets run this through our problem-solving algorithm:
  1. Who made the bad decision?  Church administrators decided to stay in NYC.  
  2. Did they have enough information to make a good decision?  Yes.
  3. Did they have the incentive to do so?  No.  They put their own lifestyle preferences ahead of the Epicopal Church's.  We can infer that church administrators have decision rights over the costs they incur, but not the incentives to make good decisions for the church.  
OK, now that we have identified the problem, lets try two obvious solutions:
  1. Give decision rights to someone else;  One suggestion from Rev. Everett Lees, almost as if he had read Managerial Economics: A Problem Solving Approach, is to decentralize decision making to individual parishes and reduce the 15% Episcopal franchise fee down to 10%.  When you decentralize decision making, strengthen incentives, i.e., by letting parishes keep more of what they make.  
  2. Better align Church Administrator incentives with those of the individual parishes.  However, because church administrators are so far removed from the concerns of individual parishes, it is hard to imagine a good performance metric.

Friday, May 3, 2024

The Peltzman Effect at Sea

Deiana, Maheshr,and Mastrobuoniand have recently published an analysis of the effects of Search and Rescue operations on migration from Africa to Europe.Nearly half a century ago, Sam Peltzman showed that, because mandatory seat-belts made driving safer, drivers tended to drive more recklessly, partially offsetting the increased safety. Similar effects occurred in the search and rescue context. From the abstract:

Many countries are facing and resisting strong migratory pressure, fueling irregular migration. In response to mounting deaths in the Central Mediterranean, European nations intensified rescue operations in 2013. We develop a model of irregular migration to identify the effects of these operations. We find that smugglers responded by sending boats in adverse weather and utilizing flimsy rafts, thus inducing more crossings in dangerous conditions and ultimately offsetting intended safety benefits due to moral hazard. Despite the increased risk, these operations likely increased aggregate migrant welfare; nevertheless, a more successful policy should instead restrict supply of rafts and expand legal alternatives. 

Thursday, May 2, 2024

Higher interest rates in the US make the dollar stronger

The Economist: The yen has been falling against the dollar because US interest rates are 5% points higher in the US than in Japan.  This increases the demand for dollars, as Japanese investors sell ¥to buy $ so the price of a dollar appreciates.

In the chart above, we see the price of a dollar (inverted scale) has risen to about ¥160.  

Tuesday, April 30, 2024

Meritocracy and Productivity

A new paper by Bandiera et al. focuses on how matching worker skills to job characteristics affects productivity. They use detailed data for 120,000 workers across 28 countries in an attempt to identify the productivity effects of i) worker skill endowments, ii) technology, and iii) job markets frictions. They formalize meritocracy as as the degree to which worker skills match with the skill requirements of jobs. Miss-allocation, due to, say, inflexible labor laws or nepotism, would imply a reduced the role for meritocracy.

Not surprisingly, they find that most of the difference in income between developed and developing countries is from differences in skills and technology.  However:

... a large share (36 percent) of the gains from adopting frontier endowments and technology are realized through enhanced sorting. Improvements in worker-job matching thus constitute an important amplification channel for economic development ...
Without the ability to hire he right person, technology is less productive. Without the likelihood of using advanced skills on the job, workers forgo acquiring these skills. More generally, meritocracy improves incomes because it increases the return to investing in the technology and skills. This is further documentation of the importance of getting the incentives right.

Wednesday, April 24, 2024

Why are quarterbacks taken so early in the draft?


Since 2011, the NFL has had a rookie wage scale, which allocates relatively affordable salaries to each draft pick regardless of position. That means taking a rookie at one of the more valuable positions has the chance to generate enormous surplus value. It’s why, for instance, quarterbacks on rookie deals are so advantageous—teams can get the most from them before they re-sign on contracts that could cost upward of $50 million a year.
In other words, quarterbacks salaries are fixed further below expected value than other positions, so they generate more expected profit for the team.

Note how NFL owners negotiated with current players and came up an agreement that screwed the only people not at the table, future players (college kids).  Nice metaphor for the human condition. 

 Ironically, I am still disappointed by this kind of self-interested behavior. 

HT: Lamar

Monday, April 22, 2024

US v. Google: do complaints have to be internally consistent?

From former DOJ Economist Greg Werden
The governments case suggests that its exclusive deals with Apple and Mozilla to be the default search engine on their browsers “allowed Google to maintain its monopoly power [in "general search"] in violation of Section 2 of the Sherman Act.”  
However, the government's brief also suggests that Google's scale is very important, which implies that its scale economies--not its exclusive deals--that maintain Google’s dominant share. 

What does Earth Day teach us about supply?

Around the time of the first Earth Day (1970), Environmentalists were making dire predictions (via Mark Perry): 

  • ...world famines of unbelievable proportions.
  • some 4 billion people, including 65 million Americans, would perish in the “Great Die-Off.”
  • By the year 2000, … there won’t be any more crude oil.
  • Lead, zinc, tin, gold, and silver would be gone before 1990.
Why were these predictions so spectacularly wrong? 

ANSWER: If prices increase, producers find more supply or develop alternatives. For example, oil reserves are much bigger now due to technological innovations like directional drilling and shale oil extraction. 
  • In 1980, Paul Ehrlich, a Stanford biologist (author of "The Population Bomb,") bet Julian Simon, a Maryland Economist, that prices of five metals (chromium, copper, nickel, tin, and tungsten) would rise due to increased demand from population growth. 
  • In 1990, the prices of all five metals had fallen, and Ehrlich lost $1,000.
BOTTOM LINE:  Don't underestimate supply.  

Friday, April 19, 2024

Places like Illinois "are screwed"

The Economist: Declining fertility and declining immigration lead to:
  • DEATH SPIRALS: ... the biggest problem is that, once a place starts shrinking, ... there is far more housing available than people to fill it, ... landlords and even homeowners stop maintaining their properties, ... blight spreads .. 
  • TAXES PAID BY FEWER PEOPLE: as cities lose population, the cost of providing public services [mostly public pensions] tends to stay about the same. ... the result is that the remaining taxpayers must pay more simply to support the same services. 
  • STATE CANNOT PAY ITS PENSIONS: Across Illinois the total burden of unfunded state and local pension liabilities is estimated to be around $210bn, or roughly four times the state’s entire annual budget.
  • IL, NJ, WV, have been shrinking for awhile
  • In 2021, 14 more states shrank.

Thursday, April 18, 2024

McKinsey was wrong: diversity does not improve performance

Econ Journal Watch:
Combined with the erroneous reverse-causality nature of McKinsey’s tests, our inability to quasi-replicate their results suggests that ... they should not be relied on to support the view that US publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives.

Why growth matters

Making the pie bigger ("the growth agenda") means we are not fighting over a fixed pie ("zero sum fallacy"), and it guides decision making, "does this policy increase the size of the pie?"

MarginalRevolution points to a Jason Furman graph showing that a 0.5% growth rate difference between the US and Argentina over the last 120 years has lead to a per capita income in the US that is over three times as large as Argentina's [note exponential scale]

"The last refuge of a vacant liberal mind:" thinking that antitrust can cure inflation

 NYT (12/23):  

As rising inflation threatens his presidency, President Biden is turning to the federal government’s antitrust authorities to try to tame red-hot price increases that his administration believes are partly driven by a lack of corporate competition.
On Christmas 2021, the headline in the NY Times business section was "As Prices Rise, Biden Turns to Antitrust Enforcers."  Larry Summers immediately bashed the idea:
“The emerging claim that antitrust can combat inflation reflects ‘science denial,’ ” tweeted Harvard economist Lawrence Summers, a senior official in the Obama and Clinton administrations. “There are many areas like transitory inflation where serious economists differ. Antitrust as an anti-inflation strategy is not one of them.”
In the late 1970's, at Stanford, I heard John Kenneth Galbraith, the economist in charge of price controls during WWII, call the idea "the last refuge of a vacant liberal mind."  The turn of phrase was so elegant and shocking--at the time, I was a liberal--that it has stayed with me.

Monday, April 15, 2024

Online Marketplace Competiton

Amazon had been concerned with Walmart's and Target's growing presence as online marketplaces. Now Sebastian Herrera at the WSJ reports that their focus has shifted to Temu and Shein. So far, Amazon's US market share is larger than the other four combined. But these newcomers (to the US) believe that this could change. Temu's number of active users is approaching Amazon's, but Temu's revenue per user is much lower.

It is interesting how all of these firms are staking out differentiated products strategies. Walmart and Target leverage their brick & mortar stores, Shein focuses on fast fashion, Temu on deep discounts, while Amazon's logistics muscle allows it a delivery speed advantage.

Friday, April 12, 2024

Flying over Troubled Red Sea Shipping Lanes


Since November 2023, there have been 133 reported incidents of shipping attacks by Houthi militia in Yemen, including 14 vessels struck by missiles or drones and 18 vessels hijacked by Somali pirates. This has caused some ships to bypass the Suez Canal in favor of the Cape of Good Hope. But Paul Berger at the WSJ reports on another alternative for some shippers. Some cargo has been diverted to air freight leading to huge increases in rates.

On lanes linking the Middle East and South Asia to Europe, average spot rates rose 46% from February to March to $2.82 per kilogram, a 71% increase from last year. The average global spot rate to ship cargo by air in March rose 7% from a month earlier to $2.43 per kilogram, according to Xeneta. 

Tuesday, April 9, 2024

Diverse MBA teams perform worse

From "Diversity and Performance in Entrepreneurial Teams" (SSRN): 
  • Among the randomly-assigned teams [of MBA students], greater diversity along the intersection of gender and race/ethnicity significantly reduced performance. 
  • However, the negative effect of this diversity is alleviated ... [when teams can choose their teammates]
  • ...teams with more female members perform substantially better when their faculty section leader was also female. 

Monday, April 8, 2024

Pricing the Atlantic

A WSJ article by Alexandra Bruell reports that three years ago the Atlantic magazine ran a $20 million deficit which led to layoffs. A new boss, Nick Thompson, was tasked with turning this around. Along with editorial changes toward longer investigative pieces rather than breaking news, the Atlantic raised subscription prices 50%. How did he know to do this?

Thompson’s team ran experiments to determine the best way to charge more without alienating new readers. It is offering fewer stories free and no longer discounting subscriptions. Last year, it raised prices for annual subscriptions to $80 from $60 for digital and to $90 from $70 for both print and digital.

Revenue was up 10% last year to close to $100 million and the magazine is now profitable.

Friday, April 5, 2024

What makes people happy?

Economist: Four main factors, explain happiness: 
    • Age: Things go downhill from youth to middle age until they reach a nadir commonly known as the mid-life crisis. ... . [Then as people lose] ... vitality, mental sharpness and looks, they also gain what people spend their lives pursuing: happiness.
    • Gender: Women, by and large, are slightly happier than men. But they are also more susceptible to depression: a fifth to a quarter of women experience depression at some point in their lives, compared with around a tenth of men. 
    • Personality: Neurotic people—those who are prone to guilt, anger and anxiety—tend to be unhappy. ... Whereas neuroticism tends to make for gloomy types, extroversion does the opposite.
    • Circumstances: Married, employed, childless, and richer people are happier

    Wednesday, April 3, 2024

    Spotify's Complements?


    Anne Steele at the WSJ reports that Spotify is the leading audio-streaming platform with 600 million users and a 30% market share. Even so, it seems to be struggling. After a couple of rounds of layoffs, some false starts from expansion into podcasting, concert promotion, and audio books, it earned its first quarterly profits since 2022 in the last quarter of 2023. Competition with tech giants Apple, Amazon, and Google have kept margins low - for every dollar it earns on music streaming, it pays $0.70 in royalties.

    But its tech giant competitors do not have to earn profits on streaming music. Their other services can be complementary to audio-streaming. For example, Apple would be happy if Apple Music operated at a loss so long as it helped to sell more high-margin iPhones. This is exactly what Netscape complained about in the late 1990s when Microsoft gave the Internet Explorer away for free. Netscape's revenue model was based on the sales of the browser. Microsoft's was based on sales of operating systems. So long as a free browser sold more computers with Windows already preinstalled, Microsoft was happy. How could Netscape compete with free? How can Spotify compete with subsidized competitors?

    Steele hints at this problem by suggesting that Spotify could be a takeover target for companies like Microsoft, Netflix, or Tencent. These companies all have services that could be complements for music streaming. They might be willing to subsidize Spotify if doing so sells more operating systems, movies, or video games.

    Tuesday, April 2, 2024

    Keeping you from Cutting your Finger Off

    The Consumer Product Safety Commission (CPSC) is considering mandating SawStop technology on future table saws. Ben Blatt at The Age does a good job of laying out the issues and providing some numbers. The technology to drop the blade out of harm's way within a few milliseconds is amazing (see video). My table saw is the scariest piece of equipment in this woodworker's shop. 

    Let's see if this mandate might be worth it. The article in The Age reports that table saws cause 4,300 amputations every year, more than thousands of other products combined. Almost all of these will be fingers. Maximum workers compensation values for a lost finger range from 20 weeks of pay (a pinky) to 45 weeks (an index finger). The average carpenter's compensation is $63,149 per year or $1,214 per week. This means that if all amputations were prevented a maximum value of the savings would be $24,288-$54,648 per accident, or about $104-$234 million in aggregate. 

    The Age also reports that 675,000 table saws are purchased in the US and that the CPSC estimates that the technology would add $338 to $1,210 in costs per table saw. This implies total cost increases of $228-$817 million. So the costs of the mandate are two to three times the maximum benefit.

    But it is worse than this. A mandate eliminates choice. SawStop is already available on the market but only has a 2% market share. Those who value this technology can purchase it. Those who place a lower value on it can choose not to. The mandate implies that the government knows better than the 98% of practicing woodworkers and carpenters who have opted out. This little back-of-the-envelope calculation confirms my own decision not to purchase a SawStop. This may be a case for more information disclosure rather than a product mandate.

    Saturday, March 30, 2024

    Do the Rich Pay their Fair Share of Income Taxes?

    WSJ :
    •  The top 1% of earners in 2021 provided 45.8% of tax revenue;  
    •  the top 10% provided 75.8%; 
    •  the bottom 50% provided 2.3%. 
     The obvious justification for this kind of inequality is incentives.  If we pay people who create more wealth more, we get more wealth. 

    •  Denmark: The top 10% of income earners in Denmark pay around 28% of all Danish income tax revenue collected. However, Denmark has very high income tax rates across the board compared to the US, with even average earners paying around 36-37% in income taxes. 
    •  China: vIncome inequality is high in China, with the top 10% earning around 41% of total national income as of 2015. However, taxes on high incomes in China are relatively low compared to Western nations. The top marginal income tax rate is only 45%. 
    • France: the top 10% of income earners pay around 70% of all income tax revenue. 
    • Germany: the top 10% pay about 55% of all income tax. 
    • UK: the top 10% contribute around 60% of income tax revenue. 
    • Sweden, despite high taxes overall, only around 27% of income taxes come from the top 10% of earners due to a more even income distribution. 
    So while the exact percentages vary, it is common across developed nations for a relatively small percentage of top earners to contribute a disproportionately large share of total income tax revenues due to progressive tax rate structures. Denmark's flatter overall tax system leads to more evenly distributed tax contributions across incomes.

    Tuesday, March 26, 2024

    Music Backed Securities


    Due to music streaming, many musicians can expect steady royalty streaming. The WSJ has a video that explains how this future income is increasingly being capitalized and securitized. This way, the artist has access to the cash now instead of waiting for the streams to materialize.

    Thursday, March 14, 2024

    FTC vs. Amazon: If there is no solution (remedy), there is no problem (liability)

    The FTC asked a Washington court to split its monopolization case against Amazon (earlier blog post) in two: 1. to determine whether Amazon has a monopoly (liability), and then 2. what to do about it (remedy). 

    Their argument (not yet posted) likely would be that bifurcation is more efficient because if FTC loses on liability, there would be no need for a remedy trial.  But if the FTC has to litigate both at once, it would change the trial.  The FTC would have to answer the questions "what should they have done differently?"  and "why is the choice they made bad for competition?"  The burden of answering it would fall on the FTC, and its economic expert. 

    For example, suppose that the FTC thinks that the source of Amazon's market power is the integration of its fulfillment network with its electronic marketplace, and proposes a remedy to force divestiture of the two.  An economic witness would be forced to admit that divested companies may not perform as well as the integrated one (See Chapters 22, 23), e.g., by creating a double markup problem, or by foregoing some other economy of integration. 

    The Dept of Justice brought (I was Chief Economist then), and then lost, the ATT/TimeWarner vertical merger challenge, in part because it could not overcome this burden of proof.

    • Willem H. Boshoff, Luke M. Froeb, Wihan Marais, Roan J. Minnie, Steven Tschantz. Bargaining Competition and Vertical Mergers: The Problem of Model Selection, Review of Industrial Organization (SSRN). 
    • Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Antitrust Policy as a Problem of Inference, International Journal of Industrial Organization, 23 (2005) 639–664. (SSRN)
    TRUTH IN BLOGGING: I have done consulting work for Amazon.

    Post will be updated as information becomes available.  

    Would that the EU were as fast at innovating as they are at regulating

     LinkThe European Parliament approved the AI Act, which raises the cost of European innovation.

    ➵ High-risk AI systems will be assessed before being put on the market and also throughout their lifecycle. People will have the right to file complaints about AI systems to designated national authorities. ➵ Generative AI, like ChatGPT, will not be classified as high-risk but will have to comply with transparency requirements and EU copyright law.

    ➵ Fines for non-compliance can be up to 35 million Euros or 7% of worldwide annual turnover.

    Americans favor SUV's over the environment, ...

    ...because they are exempt from fuel economy standards:
    Because making light trucks held to lower environmental standards was more profitable than building small clean cars, automakers marketed big models, including suvs, enthusiastically. They portrayed them as quintessentially American, embodying freedom, strength and adventurousness. By 2002 light trucks made up a bigger share of light-duty vehicle sales than cars. After the price shock of the 1970s, by the 1990s petrol had become cheaper in America than in other rich countries—so the cost of running a big car did not deter buyers. Such models are convenient for suburban living, and consumers see them as safe. (The Economist)

    This is an example of what economists call "revealed preference."  You don't have to ask people whether they care about the environment; instead you infer their preferences from how they behave.   

    It is also an example of "incentive misalignment" from Chapter 1.  If we want people to drive more fuel efficient cars, we have to stop penalizing them for doing so.  

    Wednesday, March 13, 2024

    Why did Chocolate become so expensive?


    From The Economist:
    Carla Subirana Artus explains that severe drought and diseases, driven by extreme weather, together with regulatory pressures have created the perfect storm for the cocoa industry.
    In other words, supply declined.

    Tuesday, March 12, 2024

    Like Snapshot for Your Home

    Progressive Insurance pioneered telematic monitoring devices to offer Pay-How-You-Drive (PHYD) insurance policies over a decade ago. Now State Farm, along with other insurance companies, is partnering with Whisker Labs to offer the Ting home monitoring system. These are WiFi-enabled sensors that plug into an outlet to detect potential electrical fires. Whisker Labs monitors these sensors in what they claim is the largest Internet of Things (IoT) network to monitor the grid. State Farm is offering these for free to its customers presumably because, once insured, customers provide too little of their own monitoring.

    The Effect of M&A on Workers

    New research by Arnold, Milligan, Moon and Tavakoli investigates worker outcomes from mergers in Canada. They identify three possible mechanisms: 1) workers may gain bargaining power if the firm's products have increased market power, 2) workers may lose bargaining power if the reduced number of firms confer onto them monopsony power, 3) workers who are not retained after the merger may face worse job prospects. The first two do not seem to be important.

    First, we don’t find that increasing corporate competition driven by M&A is important for workers either through concentrating the market for the products the workers produce, which would in theory increase worker wages, or through concentrating the labor market, which would in theory decrease their wages. 

    However, job displacements usually lead to worse worker outcomes. Which begs the question as to why they were displaced. Earnings fall most for workers with more time at the old firm and workers with higher pay. Their firm-specific human capital may not carry over. Or these are entrenched, overpaid workers that represent the inefficiency the merger was meant to eliminate.

    But the efficiency impact of these M&A-driven job transitions depends on whether the higher pay at the old firm reflected higher productivity or was itself a source of inefficiency that the M&A was able to eliminate.

    Hat tip: Marginal Revolution

    Sunday, March 10, 2024

    Should restaurants let menu prices "surge?"

     When demand increases, shouldn't price be allowed to rise? (WSJ)

    Dynamic pricing—charging higher rates at peak times and dropping them at slower ones—has become commonplace in industries such as e-commerce, and mobile apps have made it easier for companies to study consumers’ buying and browsing and quickly adapt. Rising costs in recent years have led more retailers to implement it.
    Restaurants are experimenting with the technology as the industry looks for ways to boost sales and increase profits. Many restaurants increased menu prices as labor, food and other costs have soared since 2021. Prices for food eaten away from home in January were 30% higher than in the same month in 2019, according to Labor Department data.

    If prices cannot rise shortages will develop, and profits will fall, which will reduce the number of sellers (supply), further exacerbating the shortage. 

    Friday, March 8, 2024

    Using procurement for political ends gives you worse prices.

    Over 20 years ago, some middling economists (cite) estimated that the Small Business Set-Aside program reduced Forest Service Timber prices by 15%.  By limiting the potential pool of available bidders to only smaller lumber mills, you get less competition and worse prices.

    Now San Francisco is re-learning that lesson.  In 2016, it refused to do business with companies headquartered in states that don't share San Francisco's values. As a result, project costs increased 20 percent. 

    Two forces are at work:  
    • Short-run reduction in competition:  just as mergers which eliminate competition raise price, so too does limiting the number of bidders.  
    NOTE:  a reduction in competition in a selling auction (high bid wins, e.g., timber), price goes down; in a procurement auction (low bid wins, e.g., city services) price goes up.  
    • Long-run decline in bidder quality:  winning bidders must outbid the losers, so if losing bidders from states that share San Francisco's values--like unionization--have higher costs, they are easier to outbid, so price goes up.
    REASON, "Great Moments in Unintended Consequences"

    Sunday, March 3, 2024

    The Economics of Skiing

    Vail's two-part pricing (Fixed Fee + Low Daily Price) from The Economist:  

    With the Epic Pass, Vail has changed the offer. Skiers can now get unlimited skiing at a whole pack of resorts cheaply, but only by committing before the season starts. The result, says Stuart Winchester, who runs the Storm Skiing Journal, an industry blog and podcast, is that for the first time in decades skiing in America is reliably profitable. But it has come at a cost to competition. “Everyone else is swimming around. Vail is buying everything,” he says.
    Vail now owns 41 resorts, including more than two dozen tiny hills on the East Coast and in the Midwest, which they consider “feeder” resorts that nurture new skiers who eventually may come west. In 2018 a competing pass, the Ikon, was launched by the Alterra Mountain Company, owned by the billionaire Crown family of Chicago, which shares revenue with independent resorts. Nowadays, most of America’s biggest ski areas are on one or the other pass.

    Guide to Online Econ Videos

    From Marginal Revolution 
    • On day one, I show video on how secure Property Rights lead to growth.  The basic idea is simple, if you give owners secure title to their property, they have an incentive to take care of it, invest in it, and move it to its highest-valued use. 
    • Others I like but do not assign.  

    Gaelic Price Control

     Here is a nice video on the experience with price control in Ireland and Scotland.

    Hat tip: Marginal Revolution

    Friday, March 1, 2024

    Compensating Differentials in the Marriage Market

    Potential mates differ in what they bring to the relationship. In online dating, youth, especially for women, appears to be sought after. In a forthcoming Journal of Labor Economics article, Corine Low applies the Indifference Principle to estimate how much more income a woman must earn each year she ages to remain equally attractive. Here is the abstract.

    This paper quantifies the causal negative impact of age on women’s marriage market appeal using an experiment where real online daters rate hypothetical profiles with randomly assigned ages. Truthfulness is incentivized through the experiment’s compensation: participants receive professional dating advice customized according to their ratings. The experiment shows that for every year a woman ages, she must earn $7,000 more annually to remain equally attractive to potential partners. This preference appears driven by women’s asymmetric fertility decline with age, as it is present only for men without children and who have accurate knowledge of the age-fertility trade-off.

    Thursday, February 29, 2024

    Do Bike Vigilantes Substitute for Bike Insurance?


    Organized bike vigilantes are emerging to recover stolen bikes. A pedagogical tool I stole from Luke (who I believe also stole it) is to explain how bicycle insurance might work, or not, in the face of adverse selection or moral hazard. Bike's are a nice example because if they are stolen, they are usually gone. Until now.

    Pavlik is part of an unusual army: amateur sleuths who find stolen bikes and return them to their owners. As bike theft becomes more profitable, grassroot efforts to thwart thieves are springing up nationwide. Part wannabe detective, part vigilantes, the volunteers say recovering bikes can be strangely fun and addictive. 

    Bikes becoming more expensive make them better targets for thieves but also make retrieving them more worthwhile. I suspect the coordinated vigilante effort arose because the specific insurance market did not.

    Hat tip: Chris Meyer

    Wednesday, February 28, 2024

    Vitual Assistants in Retailing

     Swedish online retailer, Klarna, partnered with OpenAI to create a chat bot powered by the latest AI. The claimed results seem impressive:

    • It handled two-thirds of Klarna’s customer service chats
    • This is the equivalent work of 700 full-time agents
    • Customer satisfaction was on par with human agents
    • Repeat inquiries fell by 25%
    • Customers' errands were resolved in less than 2 mins compared to 11 mins previously

    However, this may be embellished boasting as the company may be stirring up good press over an expected IPO.

    Hat tip: Marginal Revolution

    Friday, February 23, 2024

    The Life Cycle of Products

    Most product's life cycle is much shorter than I had imagined. In "The Life Cycle of Products: Evidence and Implications," Argente, Lee, and Moreira analyze 100 billion unique observations at the UPC by store by week level. Among other findings, they can trace product life cycles by type of product.

    Brands can span individual UPCs (A) and last longer. Novel product introductions (B) last longer. Products sell well at introduction (C) fade faster. And more durable products (D) fade faster.

    Thursday, February 22, 2024

    The Market for Private-Label Products

    There is a nice podcast on "Store-Brand Products" over at the "Economics of Everyday Things." It touches on many managerial economic concepts. There are multiple factors going into the store brands on the shelves.

    1. Brand names may have excess capacity.

    ...some store brand products are actually made by the same companies that produce the name brand versions of those products. Take, for instance, Costco. Some of the Kirkland brand of coffee blends are made by Starbucks. Kirkland batteries? Duracell. And Kirkland diapers? Those come from Kimberly-Clark, the company that makes Huggies.

    2. Brand names may be too expensive.

    Bringing a store brand product to market usually starts like this: a national retailer like Albertsons has category managers who are in charge of specific kinds of goods. They might see that a certain name-brand tomato sauce is selling in big numbers, but it’s a little expensive — which means there’s an opportunity for a more affordably priced store-brand version.

    3.  Private label manufacturers often explicitly reverse engineer the existing product.

    Retailers ask Winland Foods to reverse engineer name-brand products and create a new version.

    BERINGAUSE: We have a large R&D facility in Chicago with a large group of food scientists. And we may have customers bring us something that they want us to develop. They may say we’d like an emulation or something better than a certain pasta sauce that is out there.

    4. Private label manufacturers have little bargaining power

    Marketing professor Kusum Ailawadi says that private label manufacturers don’t have much bargaining power when it comes to negotiating with retailers.

    AILAWADI: Because nobody knows who the supplier is — the consumer doesn’t. So the supplier doesn’t have much leverage. 

    Which undergrad majors lead to under-employement?

    WSJ: under-employment (lower is better)--and getting an internship helps.

    Will China Generative AI catch up to US?

     NY Times thinks China's regulations make it unlikely:

    When OpenAI released ChatGPT in November 2022, many Chinese firms were being hamstrung by a regulatory crackdown from Beijing that discouraged experimentation without government approval. Chinese tech companies were also burdened by censorship rules designed to manage public opinion and mute major opposition to the Chinese Communist Party.
    Chinese companies with the resources to build a generative A.I. model faced a dilemma. If they created a chatbot that said the wrong thing, its makers would pay the price. And no one could be sure what might tumble out of a chatbot’s digital mouth.
    Chinese tech giants were also grappling with new regulations that dictate how A.I. models could be trained. The rules limit the data sets that could be used to train A.I. models and the applications that were acceptable, and also set requirements for registering A.I. models with the government.