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

Economist:

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.

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]

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. 

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.  

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. 

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

DETERRENCE IN MERGER REVIEW: LIKELY EFFECTS OF: RECENT U.S. POLICY CHANGES (link)

 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.

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.  

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:

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.

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

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.

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.

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. 

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.  

"Institutional Neutrality" to organize polarized people

NPR's interveiw with Chancellor Diermeier: Vanderbilt University, "...will not take policy positions unless they directly affect the operating of the university." 

Also WSJ editorial by the Chancellor.