Politicians learn that criminals respond to incentives

NYTimes:

In the late 2010s, calls began growing for a more relaxed approach to law enforcement. Crime had fallen so low that it didn’t always seem like a threat. And more people had understandably grown concerned about mass incarceration, given that the U.S. was a global outlier and disproportionately locked up people of color.

These concerns helped lead to several policy changes. In Oregon, citizens voted to decriminalize all drugs. In Washington D.C., Democratic politicians questioned the importance of immigration enforcement. In New York, the Manhattan district attorney in 2017 stopped pursuing most fare evasion cases, and Brooklyn took similar steps.

These policies haven’t aged very well. Fare evasion in New York has surged. Oregon, faced with neighborhoods coping with sick addicts and public defecation, recently restored some penalties for drug use. On immigration, the Biden administration’s loosening of border policy has frustrated even many Democratic voters, mayors and governors — and the administration has since reversed itself.

The subway systems in New York and other cities have also made changes. Washington and Philadelphia have installed taller barriers to stop people from jumping over fare gates. New York and Chicago have placed more police officers inside the transit system.

Algorimthic Rental Collusion

Today, the DOJ accused RealPage of facilitating collusion. Among its services, RealPage has developed an algorithm that culls through rental information on 3 million units to make rental rate recommendations.The government alleges this stifles competition because, through its illegal monopoly over rent-setting software, RealPage allows landlords to illegally coordinate price increases. This is the latest in allegations that IT allowing sellers to see each others' prices in a market will reduce competition in that market. Earlier this Summer, I saw a presentation about a similar information sharing platform alleged to facilitate gasoline collusion in Australia.

What has changed with IT is better communication of the market conditions. What has not changed is the underlying market conditions in these industries. The apartment rental business is extremely unconcentrated. For example, there are close to a million units for rent in the DFW metroplex owned by perhaps 10,000 separate entities. As many as 30% could be using RealPage's service and, for the sake of argument, are in lockstep trying to elevate prices above competitive levels. But that means there may be as many as 7,000 apartment owners who could undercut these prices. We know OPEC has trouble maintaining prices with a dozen members, because there are two dozen other oil exporters that can potentially undercut them. When the number of sellers gets much past double digits, there is a huge temptation for any one of them to undercut the others.

Technology that improves information sharing can make markets more efficient. Until about six years ago, even I owned rental property. I wasn't very good at it. One reason was that I did not know how much to charge. Had I been aware of RealPage, I might have been able to increase occupancy rates. In fact, in financial markets, research often finds that quick and transparent information through advances in IT improves market efficiency by making prices better reflect the underlying values of assets.

Incentivizing Data Analytic Teams

The effectiveness of incentivizing routine or manual tasks has often been been studied. The effectiveness of incentives for non-routine, analytical tasks, such as data analytics, is much more difficult to determine. As well as the usual free-riding in teams, performance metrics are noisier and these tasks tend to have higher levels of intrinsic motivation. Englmaier et al (2024) find a clever setting to test the efficacy of external incentives - escape rooms. A 10 euro incentive to escape with 45 minutes, doubles the likelihood of meeting the target. The usual time allotted is 60 minutes. This provides some evidence that bonus incentives can be a viable instrument to increase performance in these tasks.

Why Hilton Doesn't Franchise Luxury Hotels

The WSJ has posted a nice eight minute video about the hotel business as part of their "Economics of" series. One trends has been a decades long shift toward franchising properties to the owner / operators. However, Hilton, as well as other chains, own and operate their luxury hotels themselves. In this segment, their are just too many non-quantifiable dimensions of amenities on which a hotel can falter. It is too difficult to set metrics for a franchisee.

The last refuge of a vacant liberal mind: blaming inflation on anti-competitive behavior

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.  

Here are some modern takes on this old canard.

NYT (8/16/24) "Price Gouging"

In detailing her presidential campaign’s economic agenda, Vice President Kamala Harris will highlight an argument that blames corporate price gouging for high grocery prices.

...

The Harris campaign announcement cited meat industry consolidation as a driver of excessive grocery prices, but officials did not immediately respond on Thursday to questions about the evidence Ms. Harris would cite or how her proposal would work.

 NYT (12/23):  "Greedflation"

During the debate, President Biden once again blames inflation on corporate greed. This follows an old, albeit-debunked, strategy that I first heard about as undergrad in the 1970's. Here are some modern takes on it

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.”

VP Harris advocates price controls, so I am sending her a copy of my textbook.

TRUTH IN BLOGGING: I was political appointee in the Trump administration (Chief Economist of the Antitrust Division).

VOX on regulating rents:

Harris’s remarks to cap rents echoed a recent proposal from the Biden administration just two weeks earlier to limit rent hikes to 5 percent nationwide over the next two years for all landlords who own more than 50 units. (They estimate this would cover over 20 million units across the country.) The Biden plan — which would require congressional approval — would exempt not-yet-built units, so as to not discourage much-needed new housing. The two-year rent cap, Biden officials said, would serve as a way to drive down costs while new housing was under construction.

Harris’s seeming embrace of the Biden plan isn’t the first time she’s expressed support for rent control. In 2019, after Oregon adopted a then first-of-its-kind statewide rent control measure, she tweeted in praise of the bill signing. “No one should ever have to choose between paying their rent each month or feeding their children,” Harris wrote. As a senator, she also introduced legislation to offer tax relief to renters who earned less than $100,000 if they spent more than 30 percent of their income on rent and utilities.

ANALYSIS: 

• Chapter 2: Voluntary transactions create wealth by moving assets to higher valued uses. Price controls deter some transactions by limiting the range of agreements between sellers and buyers. 
• Chapter 8: With a price ceiling below the market clearing price, there will be more buyers than sellers. Who gets to buy?  In Sweden, politically connected buyers are more likely to be chosen.
• Chapter 9: In the long run, assets will exit the industry, or new supply will not enter, exacerbating the very problem (high prices) the price controls were designed to solve.  Although VP Harris seems to be aware of this problem, she thinks she can solve it by creating an exception for new supply. However, would-be builders will wonder how long before their new supply becomes old and subject to the controls?  
• And don't forget the increase in the number of government bureaucrats to enforce the new rules.

RELATED:  This is the third time I have had to send out an unsolicited copy of my textbook:  President Maduro (Venezuela, below), The Pope, and now VP Harris.

UPDATE (MarginalRevolution):

Here is the Washington Post’s Catherine Rampell on Harris’s price control policy:

It’s hard to exaggerate how bad this policy is. It is, in all but name, a sweeping set of government-enforced price controls across every industry, not only food. Supply and demand would no longer determine prices or profit levels. Some far-off Washington bureaucrats would. The FTC would be able to tell, say, a Kroger in Ohio the acceptable price it can charge for milk.

Echo versus Kindle

 

Amazon's strategy for devices is to generate "Downstream Impact"or DSI. That is, if you buy a Kindle Ebook reader, you are probably going to buy high margin Ebooks from Amazon. The hope was that if you had an Echo in your home, you would impulsively order products from the Amazon store. Subsidize the device in order to generate profit from high margin complementary DSI purchases. Turns out, not so much for the Echo.

Echo and other devices are generally sold at or below the cost to make them. The devices team, in internal pitch meetings to senior management, would claim the top end of a range of estimated revenue from downstream impact, some of the people said. The team relied heavily on the metric to justify costs related to Echo and other devices and the growing size of staff devoted to the business, which at one point swelled to more than 15,000 employees across all its products.

Sufficient DSI has not materialized for other Amazon devices such as game streaming on Luna, an in-home robot Astro, a video-calling gadget Glow and the Halo fitness tracker. The last three are discontinued or will soon be. With 500 million Echos in use, it might be hard to discontinue.

How should Apple and Mozilla be paid by Google?

WSJ on the antitrust ruling against Google.:

“Google has not achieved market dominance by happenstance. It has hired thousands of highly skilled engineers, innovated consistently, and made shrewd business decisions,” Judge Mehta writes. “The result is the industry’s highest quality search engine, which has earned Google the trust of hundreds of millions of daily users.”

So what’s the antitrust problem? The judge says Google’s advertising revenue-sharing payments to Apple, Mozilla and others for default placement have made it harder for potential startups and Microsoft to compete.

Greg Werden on the economics behind the payments:

Apple and Mozilla, which developed Safari and Firefox, did not develop search engines. Instead, they rented out default status in their browsers for a share of the advertising revenue consequently earned by the tenant search engine.

Google pays Apple 36 percent of its gross revenue from Safari search queries ... approximately $20 billion in 2022. Google paid Mozilla ... more than $150 million in 2020, ...approximately 80 percent of Mozilla’s revenue. 

BOTTOM LINE: Apple and Mozilla developed and own valuable "property" (browsers). Google rents space on their property to display ads. Now that the court has outlawed Google's payments for default placement, Apple and Google and Mozilla and Google will have to find another way to transact.

All my rich friends sold too early...

Bubble-ologist Robert Schiller developed the CAPE [Cyclically Adjusted PE Ratio] as a measure of the long-term value of a stock:. The idea is that a stock's price will eventually return to its CAPE average.

Financial Times on the usefulness of the CAPE:

Cape ticks many boxes you’d want from a rule-of-thumb: simplicity, comprehensibility, and clarity. Its relationship to long-term returns is statistically significant but for short-term forecasting it is next to useless. And even longer-term forecasting accuracy depends on the future looking like the past. We should celebrate it as a superb starting point for market analysis — one that furnishes market outsiders with probing questions to put to their fund managers. But let’s not overburden it with unrealistic expectations of precision.

Hidden costs of the Chernobyl accident: US deaths from air pollution

From MarginalRevolution.com:

Namely, Chernobyl caused many more deaths by reducing nuclear power plant construction and increasing air pollution...