Energy Markets for Corporate Control

Managers differ in their ability to maintain productivity, or in their incentive to try. This can make low performing firms targets for acquisition by higher performing firms. A recent study of thousands of US power plant ownership changes by Demirer and Karaduman finds a 2% average increase in efficiency for acquired plants.

Our evidence suggests that high-productivity firms buy underperforming assets from low-productivity firms and make them as productive as their existing assets through operational improvements.

These mergers move power plant assets from low value uses into higher value uses.

[2016]: Political compromise is like collusion, ...

... in that both harm consumers.  Steven Landsburgh's famous essay from The Armchair Economist:

Driving through northwest Washington, D.C., I remarked on the opulence that is so conspicuous in that quarter of the city. My friend Jim Kahn, in the passenger seat, wondered how such great wealth could have accumulated in a city that is notorious for producing almost nothing of value. I was too quick with the obvious cynical response: Most of it is the moral equivalent of stolen, partly through direct taxation and largely through political contributions that constitute the collection arm of a vast protection racket. 

But Jim was quicker than I and saw that according to economic theory, my explanation was not cynical enough. In the presence of competition between the parties, all of those ill-gotten gains should be used to buy votes. If the Republicans are in power, pocketing $100 billion per year, then the Democrats can offer to duplicate Republican policies exactly plus give away another billion per year to key constituents. Unchallenged, this strategy would enable them to buy the next election, pocketing a net $99 billion. But the Republicans would counter by offering to give away an extra $2 billion and settle for $98 billion for themselves. Our experience with competitive markets tells us that there is no end to this bidding war until all excessive profits are competed out of existence. 

When an industry is dominated by two highly profitable firms, theory tells us that if there is no price war then there is probably collusion. In the case of the Republicans and Democrats, the requisite collusion is on display for all to see. It is called bipartisanship. 

When Republican and Democratic legislators meet to "hammer out a compromise," they are engaging in an activity that could land any of their private-sector counterparts in jail. We do not allow the presidents of United and American Airlines to hammer out compromises regarding airfares. Why do we allow the majority and minority leaders of the Congress to hammer out compromises regarding tax policy?

Adam Smith observed that "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." That truth is the basis for the antitrust legislation that attempts to prevent such conspiracies and contrivances from getting off the ground. When the president of United runs into the president of American at a picnic, he is forbidden by law to say "I will not undercut you on the Chicago-to-Los Angeles route provided that you do not undercut me on New York-to-Denver." Yet we allow Republican leaders to greet Democrats with offers like, "I will support housing aid to your urban constituents if you will support agricultural programs for the farmers in my district.”

When people get rich running airlines, I can surmise that it is because they have an extraordinary talent for delivering good air service. When people get rich in the political establishment, I am reluctant to surmise that it is because they have an extraordinary talent for delivering good government. Economics provides an alternative explanation: the absence of political antitrust [enforcement].

I propose that all political compromise—indeed, all discussion between candidates, officeholders, or officials of competing parties—be fully subject to the same provisions of the Clayton and Sherman Antitrust acts that regulate the activities of every private business in America. I predict that political antitrust legislation will confer on voters the same benefits that economic antitrust legislation confers on consumers. Once the wealth of northwest Washington is depleted by the resulting political price wars, politicians might be forced to compete by offering more efficient government. 

Correlation is not causality: income and health

MarginalRevolution:

This paper provides new evidence on the causal relationship between income and health by studying a randomized experiment in which 1,000 low-income adults in the United States received $1,000 per month for three years, with 2,000 control participants receiving $50 over that same period.

We can rule out even very small improvements in physical health and the effect that would be implied by the cross-sectional correlation between income and health lies well outside our confidence intervals.

In other words, in this randomized control trial (the gold standard in causal inference) higher income does not cause better health. The other explanation goes by the name of "selection bias" or "omitted variables bias," i.e., there is some other factor that causes both.  And this leads into the nature vs. nurture debate, covered so well in Steven Pinker's The Blank Slate.  (Earlier blog post on Pinker's book, Is Nature Stronger than Nurture.)

Book Review: The Venture Mindset

Summary by author in HBS:

"In the late 1970s, the firms on the S&P 500 had been on that list for 35 years, on average; by 2019, the average tenure was closer to 20 years. And rapid advances in technology mean that even the most stable industries risk being upended by start-ups that can reach scale on ever-faster timelines."

• Consensus decision making doesn't work because "contrarian ideas because those are the ones that deliver outsize returns....At successful VC firms, individuals are not trumped by the group." For example Reid Hoffman backed Airbnb even though his fellow investors were opposed to the idea. 
• Keep teams small: "Think of Amazon, where meetings with more than 10 participants are quite rare. Communication in smaller teams is faster and clearer, and there is greater accountability. The setup not only streamlines decision-making but also ensures that diverse perspectives—crucial for innovative outcomes—are heard and considered."
• Assign a devil’s advocate.: To ensure that opposing views are heard, many VC partnerships make it a standard practice to assign the role of contrarian to one person or to a small team. For example, a16z often designates a “red team” of people who argue against a deal. 

What interested me most was:

• discussion of "the jockey [the team] vs. the horse [the idea]."  A bad team with a good idea is doomed to failure but a good team with an OK idea can pivot to a new idea as they learn more.  
• the books hostility to "team building," "consensus," and "bureaucracy."   [professors learn this from faculty meetings]

[2019]: Do incentives imply inequality?

To engage students, I sometimes ask "who thinks income inequality is a good idea?" When no one raises their hands, I follow up with "who thinks incentive pay is a good idea?" Almost everyone raises their hands. Then I ask "who thinks incentive pay leads to inequality?" At this point, debate turns passionate, and my only role is to ensure that it stays civil.

I spent the morning searching for an old Economist article on this topic, and came up with these citations:

https://www.economist.com/special-report/2006/06/15/the-rich-the-poor-and-the-growing-gap-between-them

AMERICANS do not go in for envy. The gap between rich and poor is bigger than in any other advanced country, but most people are unconcerned. Whereas Europeans fret about the way the economic pie is divided, Americans want to join the rich, not soak them. Eight out of ten, more than anywhere else, believe that though you may start poor, if you work hard, you can make pots of money. It is a central part of the American Dream.

The political consensus, therefore, has sought to pursue economic growth rather than the redistribution of income, in keeping with John Kennedy's adage that “a rising tide lifts all boats.” The tide has been rising fast recently. Thanks to a jump in productivity growth after 1995, America's economy has outpaced other rich countries' for a decade. Its workers now produce over 30% more each hour they work than ten years ago. In the late 1990s everybody shared in this boom. Though incomes were rising fastest at the top, all workers' wages far outpaced inflation.

…

Other rich countries are watching America's experience closely. For many Europeans, America's brand of capitalism is already far too unequal. Such sceptics will be sure to make much of any sign that the broad middle-class reaps scant benefit from the current productivity boom, setting back the course of European reform even further.

https://www.economist.com/books-and-arts/2013/08/24/from-the-gut

Views of income inequality are divisive. Leftists blame uneven distribution on outside factors, such as poor education and corporate misconduct. Conservatives, meanwhile, tend to view these differences as a fair consequence of an individual’s choices and abilities. These beliefs have little to do with personal wealth: Mr Tuschman cites a California survey in which the poorest respondents were the most likely to say people get what they deserve, and were also the most religious. Yet he fails to explain properly why this might be.

https://www.economist.com/special-report/1999/05/06/the-politics-of-envy

Elsewhere, there is often great reluctance to believe that people are—or should be—motivated much by money. “Britain”, says Hermes's Mr Ross Goobey, “is a smaller, more enclosed society than America, and people still work for position, status, to be part of the great and the good.” Countries, like companies, will remain free to engineer greater or lesser degrees of equality. But there will be a price—as Sweden is discovering, and as Germany has already noticed. As the market for top talent grows more international, so it may force greater tolerance for inequality on countries that have spent half a century trying to root it out.

https://www.economist.com/democracy-in-america/2017/12/18/why-is-america-more-tolerant-of-inequality-than-many-rich-countries

A second reason Americans may differ in their view of inequality is that they seem not to trust the government to fix the problem—or to believe that this is part of its job. The researchers from Dalhousie University suggest that American respondents tend to be more sceptical about the role played by government in reducing inequality. And when Jan Zilinsky at the University of Chicago randomly exposed a sample of Americans to information about inequality in America, it made them depressed about the issue but no more likely to support cash transfers to the poor. Most Americans may dislike a tax bill that increases inequality. But that does not mean they would support one that did the opposite.

https://www.economist.com/leaders/2006/06/15/inequality-and-the-american-dream

Look around the world and the supremacy of “the American model” might seem assured. No other rich country has so successfully harnessed the modern juggernauts of technology and globalisation. The hallmarks of American capitalism—a willingness to take risks, a light regulatory touch and sharp competition—have spawned enormous wealth. “This economy is powerful, productive and prosperous,” George Bush boasted recently, and by many yardsticks he is right. Growth is fast, unemployment is low and profits are fat. It is hardly surprising that so many other governments are trying to “Americanise” their economies—whether through the European Union's Lisbon Agenda or Japan's Koizumi reforms.

Why fewer unicorns [firms worth $1B] in China?

Economist:

In 2020 Mr Xi began worrying about a “disorderly expansion of capital” as tech giants moved into businesses over which the state wanted tight control. Regulators lashed out, alarming entrepreneurs and investors. ...

The environment has become so forbidding that some firms are switching nationality [to the US]. ...

The Chinese government may now see the error of its ways. Mr Xi and the prime minister, Li Qiang, have been meeting entrepreneurs, urging them to invest and innovate. ...

US financing has fallen off, above, so the Chinese Government is stepping in. But, this investment comes with strings, and threats:

“Our job all day,” says one fund manager in Beijing, “is to figure out where the government is going to be investing and bet on it.” And investors who lose money, as VCs often do, risk graft charges when using state funds.

 

President Biden proposes nationwide rent control, then offers to help landlords who are hurt by policy

WSJ Editorial:

Higher mortgage rates and home prices are pushing Americans out of the home-buying market. This is contributing to higher demand for rental housing. Rents on average nationwide have risen 30% over the last four years and even more in Sun Belt states with fast-growing populations. Evictions are also increasing in many markets.

Enter Mr. Biden, who on Tuesday pitched conditioning “valuable federal tax breaks” on landlords capping rent increases at 5% annually. The White House says its plan would apply to “corporate” landlords with more than 50 units, covering more than 20 million units or roughly half the country’s rental stock.

If the "valuable federal tax breaks" offset the loss in profits from "capping rent increases," the only effect of the policy would be to increase the number of government employees who must oversee it.  

Sportsbooks Avoid Bets from Winners

Gamblers who manage to beat sportsbooks say they are often shut down when they succeed too much.

Dave Holmes, a sports bettor in Chicago, said that as he started to win more using a math-based wagering strategy, companies including BetMGM, ESPN Bet and Caesars began rejecting his bets.

It is not surprising that sportsbooks are limiting adverse selection. Limiting risk this way may or may not be fair, but it is profitable.

Is using data analytics for betting more like casinos banning blackjack players from counting cards or  more like day-traders developing sophisticated algorithms to arbitrage implied differences in security prices? Securities markets are positive-sum games and better analytics generate more informative price signals for many others to use. Gambling on sportsbooks, like gambling at casinos, is a zero-sum game and "the house" only earns money because the odds are in their favor. Eliminating that edge could make the whole enterprise nonviable. Or it could just mean that the house must do better at developing mechanisms that balance the odds.

Ignore the polls, prediction markets have Trump at 66% chance of winning the election

CNN Interview of Rutgers Statistics professor, Harry Crane.  Below are graphs of the prices of a Trump, Biden, and Harris futures contracts that pays out $1 if they become President.  In the last day, the Trump contract has increased by 6¢, indicating a 6% increase in President Trump's election chances.  The blue bars indicate the increase in volume in the betting market.  

Is Hermes leveraging its "monopoly" over handbags to monopolize shawls and belts?

From John Yun:

Aggrieved ... plaintiffs in California have filed a class-action suit against Hermès alleging that [customers are] “coerced” to spend $1,300 on a shawl or $820 on a belt before being “allowed” to hand over an additional $12,000 or more for a Birkin bag...

In antitrust language, the specific allegation is that Hermès is engaged in an illegal tying scheme—where the French company is leveraging its market power in handbags (i.e., the “tying product”) into ancillary goods, such as scarves, belts, jewelry, and shoes (i.e., the “tied products”).

Thus, the Birkin and Kelly bags represent what is called a “single-brand monopoly.” In support of this claim, the complaint identifies Air Jordans and the Love bracelet as other examples of iconic products that, apparently, also have no substitutes.

Of course, this theory makes no economic sense.

if Hermès really wanted to implement a plot to extract more money from its consumers—which is the end goal of a tying scheme—they could do so without tying. Both the Birkin and Kelly bags have a fixed supply because they are handmade. Given the overwhelming excess demand for these bags, it seems fairly clear that Hermès could charge significantly more for them.

Why is housing inventory for sale increasing in TX and FL?

From CalculatedRisk.com:

Q: What is causing the sharp increase in inventory in the South, especially in Florida and Texas?

Inventory is up sharply, and already above 2019 levels in many parts of Florida. I think the primary reason is the lack of affordable homeowners’ insurance because of destructive storms and rising sea levels due to climate change. A year ago I wrote: The Long-Term Housing and Population Shift. I noted that a combination of water availability and widespread use of AC drove the growth in the West and South over the last 60 years. However, climate change might make some areas further north more desirable. I think we are starting to see the start of that trend

Brainiacs drive growth, but our education system is producing fewer of them

The Economist:

 
Better educated students drive growth, and growth makes the pie larger.

"...pushing up maths and science skills in the workforce by an amount equivalent to around 25 points on pisa tests (roughly the gap that separates American teenagers’ maths scores from those of their more numerate British peers). They found that this would increase annual gdp growth in rich countries by half a percentage point. They reckon that if a country were to start pumping out these smarter youngsters in 2030, it would finish the century with an economy about 30% larger than otherwise."

Growth means that we avoid a zero-sum fight over a fixed pie.

Incentives matter: induce labor to avoid taxes

 From MarginalRevolution:

There is in fact a pronounced “baby bump” in December. ...

Why? In the US, ... an extra child brings you a $3,600 child tax credit per year.

So — speaking strictly about the tax implications, of course — a New Year’s Eve baby is better than New Year’s baby: You can claim that little bundle of joy as a dependent for the entire year, even though they were only there for a day of it. 

Ranking countries by GDP/person

 Economist:  Take America first. Its gdp has been the largest at market exchange rates for over a century. But by income per person it falls to sixth, behind Luxembourg (first) and Switzerland (second). Adjusting for America’s higher prices pushes it down to ninth; accounting for its long workdays and limited holidays, to tenth. The results for China—the world’s second-largest economy in nominal terms—are even starker: it falls to 69th by gdp per person, 75th at local prices and 97th after accounting for hours worked.

Market Power and Political Power

The last four years of antitrust policy has reversed course on 40 years of a Chicago School inspired goal of promoting a "consumer surplus" in favor neo-Brandeisian"anti-bigness." In simplest terms, the Chicago School would ignore bigness, or firm profits, and only consider whether consumers are better off, for example as could be the case with economies of scale. Neo-Brandeisians' main argument is that this static calculation does not include all of the possible harm from bigness because bigger post-merger firms are better at skewing laws and regulation in their favor to the harm of consumers, for example by erecting legal entry barriers. 

Most academic antitrust economists, on the left and on the right, embraced the Chicago School thinking as more and more carefully conducted studies provided evidence for the ideas. The evidence for the Neo-Brandeisian view has largely been speculative. But recently, Cowgill, Prat, and Valletti have provided a model and some evidence that merging firms significantly increase their post-merger lobbying expenditures. This is not conclusive but it is a start. We still do not know if this lobbying effort tips the scales or is in response to a knee-jerk anti-bigness bias. But it is a welcome contribution. The future of antitrust policy should be settled by evidence and not polemics.