Business Dynamism

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

 

Returns to Master's degrees

 Economist:

Responding to Professional Disruption

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

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

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

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

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

Does inequality make us rich?

Economist:

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

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

How the Trump Whale made money betting on prediction markets

WSJ:

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

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

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

Standardization and Specialization

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

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

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

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

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

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

The NFL sends Mediocre Teams to Play in Europe

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

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

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

When will RoboTaxis become Profitable?

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

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

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

Economist: 

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

MISTAKENLY INFERRING CAUSALITY FROM CORRELATION:

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

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

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

IRONY:

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

Who regulates the regulators?

From REASON:

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

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

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

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

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

The hidden cost of regulatory uncertainty

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

Failures ==> Learning ==> Success

Economist:

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

Why has US left other rich economies in the dust?

Economist:

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

WHY?

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

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

WSJ: Price goes up by 900%!

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

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

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

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

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

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

HT: Lamar

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

Ch1 Podcast Comments solicited

Bargaining with Longshoremen

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

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

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

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

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

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

Colocating Complements

 

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

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

From MarginalRevolution.com:

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

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

Frank Zappa on Project Selection

 

Why vertical merger challenges are hard to win

In 2016, the Antitrust Division of the US Dept of Justice (DOJ) challenged the vertical merger of Time Warner (movies) and ATT which owned DirectTV, a cable provider.  It was the first litigated vertical merger case in 40 years.

The DOJ used a "foreclosure" theory, arguing that the vertically integrated firm (movies + distribution) would give ATT the incentive and ability, via increased bargaining leverage, to raise the price of Time Warner movies to rival distributors, like Comcast. As a result, Comcast would raise its subscription price and some Comcast customer would shift from Comcast to ATT's DirectTV. 

The government argued that these anticompetitive costs outweighed the well-documented procompetitive benefits of vertical integration (Cooper et al., 2005), namely the better incentive alignment of Time Warner and ATT, e.g., that post-merger markups on TimeWarner movies shown by ATT, would fall. 

The Antitrust Division lost its case in court because they couldn't prove all the assertions of the theory, that: (i) ATT would raise the price of Time Warner content to rival distributors, (ii) Comcast would raise its subscription price, (iii) that Comcast customers would switch to ATT, and (iv) these anticompetitive costs outweighed the merger's procompetive benefits. 

After DOJ lost the case, the merger was consummated.  But ATT just sold its remaining stake in DirecTV, undoing the merger the DOJ fought so hard to challenge. 

The expert witness for the parties, Dennis Carlton et. al. (2022), weighed in on the failure of the merger:

That the previous integration did not work out as AT&T hoped represents a firm's decision regarding what risks to take in the market, not an indication that the government's alleged harms came to pass. Indeed, the disintegration is evidence that the alleged harms, such as supracompetitive pricing or other exercises of market power, did not occur. The reasoning is straightforward: if the mergers had created significant market power as the government alleged, AT&T would have been incentivized to retain ownership, which would make the subsequent spinoffs less likely (see, for example, Hazlett 2021).

ChatGPT on why Vertical merger cases are hard to win:

• Pro-competitive Justifications: Companies often argue that vertical mergers can create efficiencies, such as reducing costs, improving supply chain coordination, and enhancing product quality. These claims can be compelling in court, making it harder for the government to prove that the merger would harm competition. 
• Better incentive alignment between ATT and TimeWarner, e.g., on price, called "the elimination of double marginalization."
•  Lack of Established Precedent: There is less legal precedent and fewer clear guidelines regarding vertical mergers compared to horizontal mergers (where firms in the same market merge). Courts and regulators may have less confidence in assessing potential competitive harms in vertical mergers. 
• Market Definition Difficulties: Defining the relevant markets can be complex in vertical mergers. Regulators must consider not only the direct competitors in the market but also how the merger affects suppliers and distributors, which often involves nuanced economic analysis. 
• Is the market defined at the upstream content level or the downstream distribution level or at both?
• Indirect Effects: The potential anti-competitive effects of vertical mergers are often indirect, making it harder to demonstrate harm. For instance, a merger may not lead directly to higher prices but might reduce competition over time or create barriers for new entrants, which can be more difficult to quantify.
• Dynamic Nature of Markets: Many industries are dynamic, and the competitive landscape can change rapidly. Regulators and courts must consider not only the current state of competition but also future market developments, which adds uncertainty. 
• The advent of streaming. 
• Economic Theories: There are differing economic theories about how vertical mergers can affect competition.  Some economists argue that these mergers are typically beneficial, while others highlight potential risks. This divergence in expert opinion can complicate litigation. These factors contribute to the difficulty in successfully challenging vertical mergers in legal and regulatory contexts.
•  For example, see Boshoff et al (2021), who show that how and over what parties bargain, namely one- or two-part prices, determine whether a merger will raise price. 

REFERENCES

• Boshoff, Willem H. and Froeb, Luke M. and Minnie, Roan and Tschantz, Steven T., Bargaining Competition and Vertical Mergers (March 31, 2021). SSRN
• Dennis W. Carlton , Georgi V. Giozov, Mark A. Israel and Allan L. Shampine, 'A Retrospective Analysis of the AT&T/Time Warner Merger' (2022) 65 JLE S461
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Antitrust Policy as Problem of Inference, International Journal of Industrial Organization, 23 (2005) 639–664. SSRN 
• i) Comment by John Comanor, Frederick Scherer, and Robert Steiner 
• ii) Reply by John Comanor, Frederick Scherer, and Robert Steiner 
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, A Comparative Study of United States and European Union Approaches to Vertical Policy, George Mason Law Review, 13:2 (Winter, 2005) 289-308. SSRN 
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Restraints and Antitrust Policy: What about the Evidence? Competition Policy International, 1:2 (Autumn, 2005) 45-64. SSRN 
• i) Comment by Frederick Scherer (2005) 
• ii) Comment by Ralph Winter (2005) 
• iii) Reply by authors (2006) 
• iv) Rejoinder by Ralph Winter (2006)
• Thomas Hazlett, “Antitrust Activists Want to Go Full Throttle. Here's a Lesson. They Should Consider First.” Barron's, July 29, 2021,.

 

Who Works From Home?

Work From Home (WFH) opportunities were dramatically broadened during, and after, the COVID-19 pandemic, but they existed pre-pandemic. Emanuel and Harrington (and ungated here) take advantage of when WFH went to voluntary to mandatory due to the pandemic to investigate which call center workers had selected WFH. Workers switching to WFH due to office closures during the pandemic were not as productive as before but those switching to remote work pre-pandemic were even less productive. The authors infer that those choosing WFH were adversely selected. Not only did they complete fewer calls, but they had higher customer hold times and more customer call-backs indicating that call quality suffered.

Interestingly, the voluntary nature of both pre- and post-pandemic WFH choices may limit its appeal.

Our model suggests that call-center firms were trapped in a prisoner’s dilemma with a low provision of remote work before the pandemic. All call-center firms would have been better off offering remote work jobs at similar wages as on-site ones — since the costs of remote work’s negative treatment effect would be offset by savings in office real-estate costs. Yet an individual firm hesitates to offer remote and on-site jobs at similar wages, due to concerns about attracting less productive workers into remote jobs.

Finally, the reduced worker productivity could be worth it due to offsetting reduced real estate costs. However,once you factor in the adverse selection, it may no longer make economic sense.

Fabulous essay on the history of trying to regulate technology

Grumpy Economist via MarginalRevolution: AI, Society, and Democracy

Highly recommended, but loved the spread of "misinformation" by Gutenberg

...Gutenberg’s moveable type arguably led to the Protestant Reformation. Luther was the social influencer of his age, writing pamphlet after pamphlet of what the Catholic Church certainly regarded as “misinformation.” The church “regulated” with widespread censorship where it could. Would more censorship, or “regulating” the development of printing, have been good? The political and social consequences of the Reformation were profound, not least a century of disastrous warfare. But nobody at the time saw what they would be. They were more concerned with salvation. And moveable type also made the scientific journal and the Enlightenment possible, spreading a lot of good information along with “misinformation.” The printing press arguably was a crucial ingredient for democracy, by allowing the spread of those then-heretical ideas. The founding generation of the U.S. had libraries full of classical and enlightenment books that they would not have had without printing.

What would be the effects of VP Harris' housing plan?

Here is the plan:

•  expand rental assistance for veterans and other low-income renters, 
•  increase housing supply for people experiencing homelessness, 
•  enforce fair housing laws, 
•  hold corporate landlords accountable [for charging high prices?]. 
•  provide up to $25,000 in down payment assistance for first-time homebuyers 
•  First-generation homeowners – those whose parents did not own homes – would receive more generous assistance.

WSJ Analysis:

• The law of supply and demand dictates that an increase in demand without a commensurate increase in supply will result in higher prices.
• As of August, the overall supply of homes for sale was 3.7 months’ worth. For houses in lower price tiers, that number drops to 2.4 months. Sellers’ markets create upward price pressure on home prices, which grows more powerful when demand is further stimulated. Ms. Harris’s policy would do just that, boosting demand by giving buyers more spending money.

My take is that the real barrier to increasing housing supply is not money but rather the restrictive zoning (see Nice Summary of the Affordable Housing Crisis) but, politically, restrictive zoning is very popular.  

The WSJ is right to point out that increasing demand will exacerbate the very problem VP Harris says she wants to address.  She can begin by listening to her economists, if she has any.  

Removing rent control ==> more supply ==> lower rents!

WSJ:

The Argentine capital is undergoing a rental-market boom. Landlords are rushing to put their properties back on the market, with Buenos Aires rental supplies increasing by over 170%. While rents are still up in nominal terms, many renters are getting better deals than ever, with a 40% decline in the real price of rental properties when adjusted for inflation

Milei’s move to undo rent-control regulations has resulted in one of the clearest-cut victories for what he calls “economic shock therapy.” He is methodically taking apart a system of price controls, closing government agencies and lifting trade restrictions built up over eight decades of socialist and military rule in an effort that has upended the lives of many Argentines.

Nepotism makes it hard for China's middle class to get ahead

 Economist:

...people in China once accepted glaring inequality, remaining optimistic that with hard work and ability they could still succeed. But now they are more likely to say that connections and growing up in a rich family are the keys to success, ...

IRONY: the "peoples' republic" has less income/social/class mobility than the US.

Why does China win at individual but not team sports?

Spectator:

...China uses an intensive and disciplined bureaucratic system modelled on the Soviet Union, scouting for children at an early age and plucking them out for full-time training at elite government-run sports schools. It’s a method which relies on rigid routine and repetition, meaning it excels in individual, not team-based, sport. In essence it is a machine with the single purpose of turning out other machines to win medals.

But, 

Football doesn’t work like that. As a team sport, it requires creativity and innovation; authoritarianism seems almost guaranteed to destroy it. Football is an open and free-flowing game of countless permutations, relying on the brain as much as, if not more than, physique.  

BOTTOM LINE:  interesting link between a top-down, authoritarian regime and creativity/innovation.  

Arbitraging Luxury Brands

The WSJ reports that China is the world’s most expensive major market for the purchase of luxury goods, commanding the highest markups.

When price differentials become really large, not only will arbitrageurs enter, but a whole arbitrageur industry will emerge.

China’s daigou trade, which roughly translates as “buying on behalf of,” is an $81 billion business that specializes in parallel imports of everything from European luxury goods to Korean cosmetics, and even high-tech Japanese toilet seats. Regional price and tax differences make it cheaper to buy some goods outside China, which creates an arbitrage opportunity.

This is probably not sustainable. While stock prices are skyrocketing elsewhere, "Europe's luxury stocks are down 24% on average this year." Unless this arbitrage leakage can be stemmed, cross-country price differences will likely converge.

Betting Markets show President Trump's probability of winning fell by 3% after debate

Are heavy trucks a Nash Equilibrium?

Economist: America's love affair with big cars is killing them.

In America the average new car weighs more than 4,400lb (2,000kg) compared with 3,300lb in the European Union and 2,600lb in Japan. In 2023 vehicles weighing more than 5,000lb accounted for a whopping 31% of new cars, up from 22% five years earlier. As a London cyclist I find these numbers staggering—and scary. Our analysis shows that—aside from posing a risk to pedestrians and cyclists such as myself—the inflated weight is becoming a growing risk to the drivers of other, smaller cars. The fatality rate is roughly seven times higher when colliding with a heavy pickup truck than with a compact car.

Conservation of momentum also suggests that if you are driving a heavy pickup truck, your fatality rate is much lower. By analogy to a prisoners' dilemma, it appears that the equilibrium is to drive as heavy a vehicle as likely. 

 BOTTOM LINE: if you drive a heavy truck, I do better by driving a heavy truck, and vice-versa. In other words, we are in a Nash Equilibrium.

UPDATE: Why American Cars are so Big

Today the law mandates 40mpg. To increase efficiency, manufacturers had to use more complex engines, which made their cars costlier. To ease the burden on small businesses that relied on big vehicles, the government exempted “light trucks”, any vehicle that could be used off road and weighed less than 8,500lb (3855kg). That meant SUVs—typically among the biggest and least-efficient cars—were swept into the category and avoided the new fuel 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.

Rent control, really?

 WSJ:  

By limiting supply, rent control leads to "housing shortages, underinvestment, tenant discrimination or falling property values." The most recent evidence comes from Argentina.

Since the law’s repeal, supply has reportedly rebounded and prices have fallen by double digits.

As Swedish economist Assar Lindbeck observed, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” No matter how many times we try, we can’t outsmart economic first principles.

BUT,

Rent control is in vogue among Democrats. President Biden in July proposed capping landlords’ annual increases at 5%, and Kamala Harris vowed to “take on corporate landlords and cap unfair rent increases.”

Marin residents say they care about affordable housing but don't act like it

Housing prices are prohibitively expensive because we enact strict zoning that prevents other people from building more of it. These restrictions on new supply drive up the price of housing. No where is this more evident than in Tiburon, just north of San Francisco, with its own temperate micro climate and beautiful views of all three bridges across the Bay. When owners tried to develop a property to create 43 single family homes, the project was stalled for decades by lawsuits filed by neighbors.  Recently the county purchased the property under the pretext that it would "preserve open space."

Jenny Silva of Sausalito, a volunteer pro-housing watchdog who's been monitoring the creation of housing elements in Marin, said ... "there’s a housing crisis, not an open-space crisis." She noted that 31% of respondents to the county’s 2023 Community Survey said housing should be the No. 1 priority, ... Silva called it “frustrating” that Marin’s latest budget then dedicated more than twice as much to open-space expenditures than to its affordable-housing trust: $11.23 million versus $5 million.

BOTTOM LINE:  Marin residents say they care about housing but don't act like it. Instead, they have "revealed a preference" for open space which increases their own property values. But they are not the only ones (see previous blog posts on housing).  

NFL Teams as Franchisees

The NFL had been the only large US sports league to prohibit private equity firms from owning teams. Beaton and Gottfried at the WSJ report that this prohibition is slowly being removed.

The National Football League, the most lucrative league around, has long barred firms from owning a piece of its teams. Its policy was simple: team owners should be actual people, not corporate entities. That meant eschewing the free-flowing cash infusions from institutions that now line the pockets of owners in the National Basketball Association, the English Premier League and Major League Baseball, among others.

Now, after years of discussions, that’s finally changing.

At a meeting Tuesday afternoon, NFL owners passed a new policy that will allow them to sell up to 10% of their teams to a select group of preapproved firms. It removes the last major hurdle to the flood of private capital sweeping through the sports landscape, which now has firms circling the college game and others amassing portfolios of pro franchises.  

Why such severe restrictions on private equity ownership? Possibly, this is a way to keep franchisees interested in maximizing league profitability and not just club profitability. It has long been suspected that club owners are willing to sacrifice some of their profits to generate more wins and, perhaps, a championship. (An exception that still chaffs me is the McCaskey's dismantling of the 1985 Bears immediately following their Superbowl victory, but I digress.) This seeming "over-investment" in team quality improves quality of play throughout the league enhancing fan engagement across the board and so makes all the teams more profitable. It is feared that private equity firms would be too interested in the club's bottom line to keep up these investments.

 

America innovates while Europe regulates

NYTimes reluctantly admits that "overregulation and weak governance in Europe may undermine the continent’s future."

Europe softened the harshest edges of capitalism, provided safety nets and in important ways has exceeded the United States in well-being. European infants are less likely to die than those in America, childbirth is less dangerous in Europe than in the United States, and Europeans live longer.

But

...Europe is struggling today. The U.S. economy last year grew six times as fast as in the European Union, 2.5 percent to 0.4 percent.

[NOTE: Using rule of 72: US income will double in 29 years; EU income will double in 180.]

...The United States abounds with tech successes like Apple, Google and Meta, but there isn’t a single European company on one recent list of the world’s top 10 tech companies by market capitalization.

Related: Why are there so few unicorns in the EU?

Rents fall ==> new supply falling ==> rents will increase

 WSJ:

Apartment Construction Is Slowing, and Investors Are Betting on Higher Rents 

For more than a year, apartment renters in many cities have been getting some relief from price increases because of the enormous amount of new supply being delivered by developers.

Now, big investors are betting that downward pressure on rents from new supply is coming to an end and the market is shifting back in landlords’ favor. At the heart of their reasoning: the critical metric of new construction starts, which began slowing last year and now are falling even further.

Apartment developers are stepping on the brakes, especially compared with the building frenzy in the early years of the pandemic. Across the country some rental-construction projects are getting stalled, as developers struggle to obtain the financing needed to complete them. Other investors are pivoting to more lucrative alternatives.

...

Most apartment developers today build high-end units for middle- and upper-income households, which have little impact on the affordable-housing shortage. Lower-cost rentals—the kind most in need by low- and moderate-income households—remain scarce and are rarely built without a government subsidy.

Social Security and Medicare are screwing our grandkids

NYTimes:

Under almost every president since 1980, 80 percent of the real growth in domestic spending has gone to Social Security and ... Medicare.

For Example: 

...A 65-year-old couple with average life expectancy and average household income (about $90,000 in 2023) who retires in 2025 would require $1.34 million to finance their benefits, even though they had paid only $720,000.

Younger workers are paying taxes to support generous benefits to retired ones.

So ..., younger generations are more likely to fall into lower-income classes than their parents or grandparents. Nearly a half century ago, it was the reverse. ...

As a result, "...older folks parading in golf carts [while] twentysomethings [are] paying onerous student loans and living with their parents This is F***ed up. 

[Note: this blog limits profanity to this topic.]

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...

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]