Anchor Shock Pricing: How Vail makes most of its money

In 2008, 65% of skiers at Vail Resorts bought single-day lift tickets. Today, 75% of their customers purchase season passes, committing thousands of dollars months before the first snowfall.

People are shocked by the $329 daily ticket price and then realize that “If I ski just 3-4 days this season, the annual pass pays for itself!” 

In other words, Vail "anchors" price expectations at $329, and then offers consumers dramatically lower average daily prices with the annual pass, and they switch. This is akin to bundling as a form of indirect price discrimination but includes a bit of psychology. 

CITE:  DemandCurve.com 

HT: Justin

PolyMarket.com predicts outcomes of Israel-Iran conflict

Probability      Event

66%                US Military action against Iran by July?

59%                Khameni out as Supreme Leader of Iran by 2025?

59%                Fordow nuclear facility destroyed before July?

--------UPDATED Jun 18, 2025 (link)---------

Weaker incentives in unionized plants make them more likely to close

Unionized plants have worse incentive alignment:

• 26% less likely to offer performance-based bonuses. 
• 11% less likely to promote based on performance 
• 13% less likely to dismiss workers for poor performance. 

Consequently, unionized plants have: 

•  Higher rates of business closures, 
•  lower investment 
•  slower employment growth 

BOTTOM LINE:  right-to-work states (no unions) have higher employment and better outcomes. 

CITE:Maksimovic, Vojislav and Yang, Liu A., What do Unions do? Incentives and Investments (June 16, 2023). Available at SSRN:  https://ssrn.com/abstract=4565288 or http://dx.doi.org/10.2139/ssrn.4565288

HT: MarginalRevolution.com

Effects of Zoning: when we restrict supply, prices go up.

President Trump's deregulation

President Trump must have read Chapter Two: 

• Voluntary Transactions create wealth by moving assets to higher-valued uses; 
• Taxes, price controls, subsidies, and regualtion destroy wealth by preventing assets from moving to higher-valued uses.

Or Kimberly Strassel of the WSJ suggests as much:

[The deregulatory] plank of the Trump agenda has been eclipsed by drama over tariffs and the Republican tax bill, though it is economically as important and moving far faster. ...

Alaska has become the symbol of the effort, in part because, as ... Mr. Biden infamously directed more than 70 orders and actions at killing development in the state ...

Whereas it normally takes an agency years to repeal a few rules, the Energy Department had taken 47 deregulatory actions by mid-May, axing rules governing appliances, motors and heating and power equipment—saving consumers and business $11 billion. ...

Mr. Biden is estimated to have added more than $2 trillion in regulatory burdens to the economy over his four years. ... the Trump deregulation effort is going to be as central to any economic revival. Inside Alaska, and out.

I hope that Ms. Strassel writes about the President's deregulatory moves in other areas:

• Making it easier to develop nuclear power (link)
• Deregulating supersonic flight (we should be flying to London in two hours) (link)
• Deregulating Financial Technology (Fin Tech) that will increase innovation in banking services. (link)

BOTTOM LINE:  Deregulation increases innovation which drives growth: real per capita income has doubled in the last 40 years.  

Why there is a housing shortage in California

The Free Press:

...I spent two and a half years obtaining permits, navigating a labyrinthine zoning department and paying for not only architectural plans but geological surveys, sewer permits, street improvement clearances, an inventory of “California protected trees” performed by a state-licensed arborist and, most of all, fighting an unhinged neighbor who mobilized the entire block against me on the pretense that I had to build a sidewalk in front of my house even though the entire neighborhood is composed of craggy hillsides and there are no sidewalks anywhere.

In California, there are a hundred people who can say "no," and no one who can say "yes."

BOTTOM LINE:  when you restrict supply, prices go up. 

Punishment increases → murder decreases

 From the FreePress:

...Five years ago, ...police activity and staffing fell in big cities (where most of the crime is), as demoralized cops left the force. ...new policies—from chokehold bans to “no-chase” policies—further constrained police activity. ...

Unsurprisingly, murder soared.

But now, following a political backlash, policing is back:

In those cities where activity has recovered—New York and Washington, D.C., for example—murder has fallen. In cities where activity remains low, like Seattle, murder is still high. 

However, police "have focused on bringing murder down, while sidelining other, less significant crimes. This helps explain surging public disorder, which has remained high even as homicide has dropped." 

BOTTOM LINE:  When criminals substitute away from high-punishment crimes, we say those crimes are "deterred," one of four justifications for punishment (Google):

1. Retribution: This philosophy centers on the idea of "just deserts," meaning that offenders should be punished because they deserve it, and the punishment should be proportionate to the severity of the crime committed. It aims to achieve justice by making the offender suffer for the harm they've caused.
2. Deterrence: Punishment can aim to prevent future crime by discouraging both the individual offender and others in society from committing similar acts.
   • Specific deterrence: Intends to discourage the individual offender from repeating the crime due to the fear of further punishment.
   • General deterrence: Seeks to make an example of the offender to dissuade others from engaging in criminal behavior.
3. Incapacitation: This approach focuses on preventing future crime by removing the offender from society or limiting their ability to commit crimes. Examples include incarceration, house arrest, or even capital punishment.
4. Rehabilitation: This goal aims to prevent future crime by altering the offender's behavior and addressing the underlying causes of their criminal conduct. Rehabilitation programs can include counseling, educational and vocational training, or treatment for substance use disorders.  

What happens to natural gas prices when weather is mild?

WSJ:

U.S. natural gas futures were down for a third straight session as low weather-driven demand looks set to last into the first days of June while LNG feedgas flows eased and production edged up.

When demand decreases, prices fall.   

Trade with China created US jobs

WSJ: The Real Story of the ‘China Shock’

The jobs harm was largely local and temporary, while overall jobs and consumer welfare increased. ...

There is growing evidence that, while Chinese imports did hammer certain regions, they didn’t cause large net job losses across the entire U.S. Recent research from the National Bureau of Economic Research finds that job losses locally were mostly balanced by job gains in other regions. Manufacturing-heavy areas in the Midwest and South saw employment declines, but services jobs sprouted in coastal and high-tech hubs like the West Coast and Northeast. Import competition shifted jobs rather than eliminated them. ...

While tariffs on Chinese goods might bring back a few factory jobs, they will raise prices for everyone and hurt U.S. businesses that rely on imports. Current attempts to turn back the clock by introducing tariffs are a costly remedy for a poorly understood ailment.

Why central economic planning worked so well for America in WWII but so badly almost everywhere else—most notably in the Soviet Union

From Bastiat's Window: The answer is right out of Chapter 1, "incentive alignment."

...the key to that success (versus the Soviets’ 75-year failure) was that in WWII, America had a single, clear, time-limited, objectively verifiable goal—survival. Everything else was secondary. There was essentially universal agreement among Americans of all political groupings with that urgent and temporary goal. Given the extreme threat posed by the Axis Powers, Americans were willing to endure great sacrifices they would not ordinarily tolerate. And they were willing to put aside much of the self-interested behavior that characterizes more normal times.

In normal times, if a producer tries to take advantage of consumers by reducing quality or raising price, consumers can turn to substitutes, or choose not to purchase. In other words, competition aligns producers' incentives with the goals of consumers. 

But in WWII, there was no need for such markets and competition to play its usual role because everyone's incentives were already aligned by the existential threat posed by the Axis powers.

WSJ: Why EU lags US in tech.

Someone at the WSJ read Why the U.S. Produces More Unicorns than the EU

• Limited Presence of Major Tech Firms: 
• Apple's market cap > entire German stock market, 
• Structural Barriers to Innovation: 
• risk-averse business culture, 
• stringent labor laws, 
• heavy regulation
• smaller venture capital pool
• Talent and Incentive Challenges: 
• lack of stock options makes it harder to align incentives--and retain--innovators.  
• Underinvestment in Emerging Technologies: no quantum computing and artificial intelligence. 
• Dominance of Legacy Industries/lack of dynamism:  EU firms founded in 1911, US in 1985

Why the U.S. Produces More Unicorns than the EU

The United States has produced about twice as many unicorns (private startups valued at $1B+) as China and more than four times as many as the European Union. These numbers reflect institutional and cultural advantages in the U.S. startup ecosystem.

Table: Number of Unicorns Created Since ~1990

Region	Cumulative Unicorns
United States	~1,950
China	~970
European Union	~450

Source: Estimates based on Hurun Global Unicorn Index 2024 and Strebulaev & Gornall, Stanford Venture Capital Initiative. Includes both active and exited unicorns created since ~1990.

Why the Disparity?

• Tolerance for Inequality:  The US gap between rich and poor is bigger than in any other advanced country, but most Americans want to join the rich, not soak them. The EU taxes inquality.
• Bankruptcy Laws Forgive Failure: U.S. founders can declare bankruptcy and get a clean slate in ~7 years. EU bankruptcy regimes are often punitive, with long-term credit restrictions. That discourages risky ventures. The U.S. treats failure as a résumé item, not a moral failing.
• Unified market: A U.S. startup can scale across 330 million consumers under one legal system. EU startups must navigate 27. It's harder to grow when your “domestic market” includes multiple languages, tax codes, and regulations.
• University spinouts: U.S. research universities are world leaders in tech transfer. Stanford alone has spun out over 200 unicorns. The Bayh-Dole Act helps universities commercialize IP. Europe is catching up, but still lags.
• Easier exits (acquisitions) lead to more entry:  investors require an exit.  
• Immigration to the US Nearly half of U.S. unicorn founders were born outside the U.S. If you have a good idea, you can more easily act on it in the US.
• Lighter regulation: U.S. startups face less red tape. European data/privacy rules (e.g., GDPR), strict labor laws increase fixed costs and reduce flexibility.

---

Acknowlements:  This post based on research begun by Annie Cox, and Avi Goldberg, and Jack Underwood and finished by ChatGPT.  

Should professors--but not their students--use chatbots?

NYTimes:

Ella Stapleton said she was surprised to find that a professor had used ChatGPT to assemble course materials. “He’s telling us not to use it, and then he’s using it himself,” she said.Credit...

..professors said they used A.I. chatbots as a tool to provide a better education. ...chatbots saved time, helped them ... [grade papers] and served as automated teaching assistants.

Dr. Malan, a computer science professor, has integrated a custom A.I. chatbot ... hundreds of students can turn to it for help with their coding assignments. Dr. Malan has had to tinker with the chatbot ... so that it offers only guidance and not the full answers.

How to raise kids in the age of AI

FreePress: AI Will Change What It Is to Be Human. Are We Ready?

...If you raise your children with the uncritical expectation that if they work hard they can be a top person in their field, they will be disappointed. The skill of getting good grades maps pretty closely to what the AIs are best at. You would do better to instill in your kids the quality of taking the initiative and the right kinds of intellectual humility. You should also, to the extent you can, teach them the value of charisma, making friends, and building out their networks.

... 

• Don’t set up being the smartest person in the room as the goal. Encourage them to develop to their fullest, challenge themselves, and to be virtuous. 
• Encourage them to find many sources of meaning and social connection. They should develop hobbies and learn how to do self-directed projects, and actively seek out friends. 
• Make it clear that meaningful endeavors don’t necessarily have to be compensated. Work is one way to contribute, but volunteering, making art, and building a family are some of the many others. 
• Familiarize them with AI. Teach them how to learn from it and how to let it augment them. 
• But choose their AI carefully! Don’t let them fall prey to the attentional black holes that will be built and offered to them. 
• Don’t teach them to expect stability. Make it clear the world will likely change a lot, but that this change brings opportunities for them.

Too many Superheros?

How much content should a franchise produce? A recent WSJ story indicates that the expanding Marvel Cinematic Universe (MCU) is approaching a deluge. The graph they created certainly indicates a huge increase in content, mostly on TV. How much to produce is an extent decision.

On the one hand, the huge success of the Avengers related films created valuable brand awareness. The studio sunk the fixed costs into characterization, story lines, and production values that will pay off in terms of future audience engagement. That is, the marginal cost of attracting additional audiences is now lower because of these past investments. The strategic decision implied by lower MC is to increase content production.

On the other hand, the audience is experiencing diminishing marginal utility in consuming more content. It may not be worth it for fans to keep up with every thread in the franchise. Endgame culminated a consistent story arc that kept engagement high. Additional content necessarily means splintering story lines that fans need not keep up with. Perhaps the studio did not appreciate how the resulting lower MR would optimally lead to a reduction in content production.

There may be lessons here for the Star Wars universe.

The best tariff threat is one you do not have to use

Following up on an earlier post, Reciprocal tariffs as a tit-for-tat strategy in a repeated prisoners' dilemma 

From NY Times:

Trump imposed, quickly withdrew and then threatened to bring back huge tariffs on dozens of countries. Immediately, they began calling and asking what they could do to stop him. “More than 100 countries have already come to the table looking to offer more favorable terms for America and our people,” Karoline Leavitt, the White House press secretary, said at a briefing with Treasury Secretary Scott Bessent on Tuesday. “There has never been a president who has created his own leverage like this president.”

What can Trump get? For starters, some countries are offering to lower their own tariffs on American exports and cut red tape that keeps U.S. businesses out. India said it might lower its tariffs on U.S. farm goods, while Europeans may drop them on cars and machinery if Washington agrees to do the same.

BOTTOM LINE: It looks as though President Trump's Tariff threats are working.

The price of "free" healthcare is the wait

 

While healthcare in Canada's single-payer health care system is technically free, its real price is measured in wait times.  In 2023, the median wait time from a general practitioner's referral to treatment reached 27.7 weeks—the longest ever and nearly triple the 9.3 weeks reported in 1993. (MuskegonPundit)

To see this, think of "free" as a price ceiling of zero.  

• In the short run (Chapter 8), quantity demanded exceeds quantity supplied.  So who gets this care?  Those willing to wait.  In other words, wait times act as prices to ration available supply (AIER). 
•  Even patients whose mortality depends on prompt care--and don't want to pay for care in the US--wait before receiving essential treatments . (Fraser Institute).
• This inefficiency could be lessened by allowing patients to sell their place in line to others.

• In the long run (Chapter 9), fewer providers (physicians, nurses, hospitals, clinics) are drawn into the industry, leading to decreases in supply and even longer wait times, or "prices."  

HT, ZeroHedge: The Wait Is The Price: Quiet Rationing Plagues Canadian Health Care (AIER).

In California, running an auction can land you in jail

Mansion Global: 

Before the palisades fires, a nearbySanta Monica property was listed at $15,000 per month. But afterwards, the landlord held an auction, and there were 10 to 15 offers on the property, and it rented for nearly $30,000 per month.

But,

During an emergency, California law prohibits raising the price of a rental property by more than 10% of what its price was before the state or local emergency was declared.

And so the problem gets worse,

Fears of penalties have worsened housing woes in the city as many agents refuse to deal with rentals altogether. “Because they’re afraid they’re going to be fined, they’re going to lose their license. That’s creating even further a shortage of housing,” Ravitz said.

Earth Day Question: Will the world run out of resources?

Only if you ask an ecologist.

"We are using 50% more resources than the Earth can sustainably produce, and unless we change course, that number will grow fast—by 2030, even two planets will not be enough," says Jim Leape, director general of the World Wide Fund for Nature International (formerly the World Wildlife Fund).

To get the right answer, ask an economist.  They will point out that when a good gets scarce, its price increases, which gives consumers an incentive to conserve or find substitutes, and producers an incentive to find more of it.

But thanks to fracking and the shale revolution, ... [we will find] cheap substitutes for fossil fuels long before they run out.

BOTTOM LINE:  Ecologists could have improved their predictions by studying a little economics.  As a resource becomes scarce due to a decrease in supply, its price goes up which causes two longer run adjustments:  (i) consumers substitute away from the higher priced resource; and (ii) producers find more of it.  

Incentive conflict between the President and the Fed serves a purpose.

WSJ:

On Monday Mr. Trump demanded again that [the Federal Reserve] make “pre-emptive” interest rate cuts to avoid a slowdown.

The Federal Reserve's ("Fed") performance metrics are inflation and unemployment. Presumably, these incentives make the Fed more cautious than the President about cutting rates, as doing so may worsen inflation. The threat to put The Fed under the control of a President who has different incentives would dramatically change their role by changing their incentives. The resulting "...meltdown in stocks, bonds and the dollar, a trifecta of declining confidence," suggests that the incentive conflict between the President and the Fed serves a useful purpose. BOTTOM LINE: In Chapter one, we talked about how to diagnose incentive conflict when it creates problems within an organization. However, organizations may choose incentive conflicts to serve a useful purpose. For another example, many workers and bosses dislike their HR and Legal departments as they seem to pursue different goals than firm profit maximization. However, the resulting incentive conflict can serve a useful purpose by constraining potentially illegal or unethical behavior. EXTRA CREDIT: Think of an incentive conflict within your organization that serves a purpose.

Scale Determines Technology

The robotaxi business is getting another entrant, but also a different kind of entrant. Zoox, a decade old startup purchased by Amazon in 2020, is expected to launch this year. It has developed a vehicle specifically aimed at the autonomous ride share market without a driver seat or controls, sliding doors in the middle, a seats facing each other. No one will mistake the Zoox car pictured below for a sports car, but its features are specific to the purpose.

Most entrants, like GM's Cruise pictured below, have modified "off-the-shelf" cars that will have inefficient vestigial elements from when they had human drivers. 

Retrofitted cars that make sense at small scale, may imply relatively higher marginal costs at large scale.They represent a low fixed cost/high marginal cost technology. Zoox's design represents a higher fixed cost/lower marginal cost technology. Its features are more efficient for short-haul, dense traffic, intracity rides but require more substantial upfront investment. Zoox is banking on realizing economies of scale once the service takes off. 

GM canceling plans for its Cruise suggest that at least they expect a greater scale.

The Egg Market Rebounds

To prevent the spread of bird flu, 166 million birds were culled, most toward the end of 2024. Since the US typically has about 400 million egg-laying hens at any time, this was significant. With fewer hens, the supply of eggs also fell causing egg prices to more than double. Thankfully, this market disruption already appears to be behind us. A recent USDA report shows that production and egg prices have mostly recovered to where they were a year ago. 

 

Damn that's fast. And just in time for Easter egg hunts. Not even the Ag sector expected the recovery of the egg industry so quickly. Just last month, Farm Progress forecasted, "The U.S. poultry industry could take a year or so to recover from the recent HPAI outbreak." They were only off by 11 months.

The speed of this adjustment is a testament to market forces. With prices doubled, egg producers saw a huge opportunity for short-run profits. Hens that might have been "retired" a year ago would be kept in service a bit longer. Chicks that might otherwise have been deemed unacceptable would be allowed to mature. Had the policy response instead been to impose egg price ceilings to prevent price gouging, the blunted profit motive would have weakened the supply response. Allowing the market to operate alleviated the shortage in short order. 

S&P 500 Largest Ten Firm Transitions

The Visual Capitalist produces many wonderful visualizations. This one displays how fast firms rise into and fall out of the the top US 10 firms. 

 

Re-shoring as a response to tariffs?

Google on the re-shoring response to 2018 Appliance Tariffs:

In response to the 2018 U.S. tariffs on washing machines and other appliances, both LG Electronics and Samsung shifted manufacturing operations to the United States, effectively reshoring some production. The tariffs incentivized these companies to establish or expand manufacturing facilities in the U.S. to avoid the tariffs on imported appliances.

...The tariffs were credited with creating 1,800 new jobs in the U.S., but also raised consumer prices by an estimated $1.5 billion, according to one study. The study also concluded that the tariffs resulted in a high cost per job created.

Re-shoring of Nvidia Chips in response to 2025 Tariff threats:

Contract chipmaker Taiwan Semiconductor Manufacturing (TSM) has started production of Nvidia Blackwell chips at its plants in Phoenix.

Contract assemblers Foxconn and Wistron are building supercomputer manufacturing plants in Houston and Dallas, respectively. Mass production at both plants is expected to ramp up in the next 12 to 15 months, Nvidia said.

Reciprocal tariffs as a tit-for-tat strategy in a repeated prisoners' dilemma

Trade policy can resemble a Prisoners' Dilemma game: free trade is the best outcome (no tariffs), but that is not a Nash Equilibrium because any country can do better by imposing tariffs on imports as it helps domestic producers.  The Nash equilibrium is for all countries to impose tariffs on imports.

One way out of this prisoners' dilemma is to play tit-for-tat (do whatever your rival did last period) because it gives foreign countries an incentive to keep their own tariffs low:  if foreign countries put a tariff on imports from the US, their exports to the US will be treated similarly.  

However, President Trump is computing reciprocal tariffs as (Trade Deficit with US)/(Exports to the US).  This measure is determined largely by foreign investment in the US, not foreign tariffs on US goods.  For example, China sells ￥to buy $ to invest in the US to buy US Treasuries.  Such an increase in demand for $ raises the price of a $ relative to the ￥.  The stronger $ makes Chinese exports look cheap to US consumers.  This is both a US Trade Deficit (the US buys more Chinese goods than China buys US goods), and a Chinese Investment Surplus (China invests more in the US than the US invests in China).

As a result of the policy, US tariffs on foreign goods are set to dramatically increase, which will likely lead to tit-for-tat responses from foreign countries which will result in less trade.  From Chapter One, we know that voluntary transactions create wealth, and with fewer of them, we are all poorer.  

It might make some sense to set reciprocal tariffs equal to actual tariffs on a country-by-country basis, i.e.,(reciprocal US tariffs on foreign goods) = (foreign tariffs on US goods). 

BOTTOM LINE: Reciprocal Tariffs, as calculated, would harm the US.  

CAVEAT:  The above analysis ignores: (i) the international nature of supply chains--domestic producers are also importers of foreign goods; and (ii) their harmful effect on consumers. 

HT:  Mike, Donna

Remove barriers to progress!

Open Philanthropy's Progress and Growth Fund

• ...scientific and technological progress that creates ideas is the main driver of long-run growth...But ideas don’t automatically raise living standards; economic growth requires turning them into technologies that can disseminate throughout society. 
• Burdensome government regulations and institutional constraints are increasingly slowing the pace of this progress and creating artificial scarcity. 
• Restrictive zoning and land use regulations have created housing shortages in many major cities, driving up rents and preventing people from [moving to] to centers of economic growth and innovation. 
• Similar constraints hinder scientific and technological innovation — key institutional funders ...burden researchers with excessive paperwork and overly lengthy grant review processes, [leading to] low-risk, incremental research over higher-risk but potentially transformative ideas. 
• ...environmental review laws slow a wide variety of infrastructure projects, including green energy. [Irony is my favorite kind of humor.]

HT:  MarginalRevolution

Revealed Preference: people like inequality

 From Bryan Caplan's Bet On It:

“In their recent article,‘Why People Prefer Unequal Societies,’the psychologists Christina Starmans, Mark Sheskin, and Paul Bloom found that people prefer unequal distributions, both among fellow participants in the lab and among citizens in their country, as long as they sense that the allocation is fair: that the bonuses go to harder workers, more generous helpers, or even the lucky winners of an impartial lottery (Pinker 2019).“

And they move into neighborhoods with more inequality. From research by Prof Douglas Coate (Rutgers):

...I find that two-bedroom home sale prices are not adversely impacted by income inequality in favor of the well off in the community. In fact, the results show these prices may be slightly higher in communities where high quintile households receive a greater share of community income

Historical conservationists are the bad guys

 Economist:

[Cambridge, MA] is “becoming a barbell society,” ...The poor got help and the wealthy lived well, but ... young families leave for cheaper places. “One of the biggest signs that something was going wrong,” says Mr Azeem, is “when you can’t create space for the next generation.” 

But now, they are relaxing zoning to allow " six-storey residential buildings citywide ... People are waking up to the fact that land use regulation has something to do with housing costs”. 

But: “The minute someone tries to put a six-storey building in a residential zone that has historically been no higher than 35 feet, there’s going to be immediate negative pushback,” from "powerful historic conservationists"

Can income buy happiness?

 

Economist: 

The magazine article focuses on explaining "residual" happiness, the vertical distance between the line and the observation), i.e., how happy is a country controlling for its GDP. 

But elephant in the graph is the HUGE positive correlation between GDP and Happiness, likely caused by innovation, free markets, and less regulation, topics the left-leaning magazine doesn't want to talk about.

Compensating differentials: wind turbines

From MarginalRevolution:  Danish houses near wind turbines have 12% lower prices.

Foreign aid: "send a person a fish every day, and he forgets how to fish."

John Cochrane recommends the Economist article Aid cannot make poor countries rich.

From 2004 to 2014, foreign aid increased by 75%, but it didn't help:

• 2004, William Easterly: aid was just as likely to shrink the world’s poorest economies as to help them grow. 
• 2005, World Bank: grants and loans did not move the needle on growth. 
• 2019, IMF reached a similar conclusion. 
• 2025, Centre for Global Development, “There is no country that has really grown from aid.”

In what seems like evidence-based decision-making by the donors:

• President Trump has stopped much of US foreign aid.
• Sir Keir Starmer chopped Britain’s aid budget from 0.5% to 0.3% of GDP.
• France, the most generous Western donor after America, will this year reduce aid by 35%.
• Germany is considering cuts, too.

Effects of Tariff increases

Article by Joshua Hendrickson

The U.S. dollar is the world’s reserve currency, and the U.S. Treasury security is the global reserve asset. This means, respectively, that the dollar is the primary currency used in international trade, and that foreign central banks and other institutions store wealth in terms of dollars with Treasury securities.

...the dollar, because of its reserve status, tends to be overvalued. This makes foreign goods cheaper for U.S. consumers, but it also makes foreign labor and production cheaper ... a dynamic that has hollowed out America’s industrial base.

...

While imposing duties on imports will raise prices for American consumers, it will also appreciate the value of the dollar, ...

Tariffs might generate some revenue in the short run, but their larger effect—bringing countries to the negotiating table—could help the Trump administration achieve its [other] long-term objectives.

Software Deveopers and AI

I ran across this image that seems to support the idea capital/labor substitution in software development (see earlier post). Stack overflow is the preeminent site for software developers to get coding questions answered and/or find bits of code that will solve a current problem. But, being human intermediated, it could be slow and sometimes trolls will lead you astray. Its site volume seems to have started to decline with the advent of ChatGPT, the first, and most widely used LLM. Chat GPT can provide answers instantly, though some it may take some "prompt engineering" to get the specific answer you need.

Interestingly, much of the relevant training data come from stack overflow. Which means that asking ChatGPT is asking stack overflow but with computer intermediation. If ChatGPT allowing coders to get answers faster is leading to a decline in the demand for software developers, this suggest that AI is making software developers so much more productive that there is less demand for them. (edited)

Tariffs May Not Boost Domestic Investment

Alcoa would seem to benefit from an increase in demand for domestically produced aluminum from the imposition of 25% tariffs on steel and aluminum. All they have to do is ramp up existing US capacity. This quote from Alcoa CEO William Oplinger.in the WSJ suggests maybe not.

“We make decisions around aluminum production that have a horizon of 20 to 40 years,” he said. “We would not be making an investment in the United States based on a tariff structure that could be in place for a much shorter period of time.”

Who knows what tariffs would be under the next administration. Instead, he is bracing for a loss in 100,000 U.S. aluminum industry jobs due to tariffs targeting the metal. He is not explicit, but this would be the case if customers plan to cut back purchases due to their reduce operations or their ability to find cheaper substitutes. 

Innovative Strategic Levers

Is narc'ing on your competition the prisoners' dilemma equilibrium?

Egg Market Makers

The WSJ reports on the Egg Clearinghouse, or ECI while we are in the midst of the recent dramatic egg shortage and increase in egg prices.

While the article mentions that some have suggested price gouging, it seem more likely that supply has shifted in because temporarily, there just are not enough egg laying hens to supply the market.

The deadliest outbreak of avian flu in history has resulted in the death of more than 100 million U.S. chickens, turkeys and egg-laying hens since 2022, according to the Agriculture Department. Once infections are identified in a single bird on a farm, whole flocks are often eliminated to prevent further spread, creating supply shortages in some regions and grocery stores.

As a consequence, the number bids to buy eggs is now more than double the offers to sell. 

 

 

 

Wither the Software Developer?

The employment market for software developers sucks right now. ADP released a study from their payroll data in June, 2024 that included this graph.

It hasn't got better since. But why the severe and persistent decline?

• The decline begins in Spring 2020 so responding to the COVID-19 pandemic could be a cause. But this does not explain why the decline continues.
• The growth of AI is making them so much more efficient that you need fewer of them. But this may only explain maybe the last two years or so.
• The growth of cloud computing means that much of what software engineers do is outsourced to a supplier that can eke out economies of scale in software development. With Software as a Service (SaaS), code can span multiple enterprises instead of being used solely in-house. 

Evidence for this last explanation comes from the timing of cloud computing adoption.

Whichever the cause, I think a takeaway is that all explanations will persist and the market may not rebound very soon.

What do Ferrari and Hermes have in common?

 WSJ:

With a list price of $3.7 million, Ferrari’s new “hypercar” was revealed to the public in October with a twist: It wasn’t available for sale....

Money isn’t enough to buy a top-of-the-range Ferrari. You need to be in a long-term relationship with the company.

By leveraging the rabid fandom of its customers through a business model based on uber-scarcity, the storied Italian company is enjoying a new golden age. Following an almost tenfold increase in the stock since its initial public offering almost a decade ago, Ferrari is now worth $90 billion, making it the most valuable car company in Europe—despite delivering just 13,752 vehicles last year.

 John Yun on Hermes:

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”).

How long before someone sues Ferrari for "tying" sales of new cars to past purchases?

Should you buy IVF insurance?

Baby or Your Money Back 

It’s that simple. If your IVF is not successful after 2 cycles, you make an insurance claim. You get] your money back.

BUT, only if you qualify.  So the insurance company insures only those with a high chance of success.  

HT: MH

How Europe must respond (or not)

 Economist:

Let us spell out the reality Europe faces. It is an indebted, ageing continent that is barely growing and cannot defend itself or project hard power. ...

Paying for this rearmament will take a fiscal revolution. ...In order to bear that, Europe will have to cut welfare: Angela Merkel, Germany’s former chancellor, used to say that Europe accounted for 7% of the world’s population, 25% of its GDP but 50% of its social spending. To raise growth, Europe must press ahead with obvious but endlessly delayed reforms, from unifying capital markets to deregulation.

Arbitraging Influencers

The WSJ recent;y reported on lawsuits by Internet influencrs against the makers of browser extensions that seek out discounts. These extensions, such as  as PayPal Honey, Capital One Shopping and Microsoft Shopping, automatically seek out discounts that might exist elsewhere and apply them at checkout. Influencers no longer get credit for directing their followers to the retailer. 

“If the customer clicks on…the Plaintiff’s [influencer's] affiliate link and then at checkout clicks on the Honey pop-up, then the business tracks the sale as originated from Defendant [browser extension], and Plaintiff [the influencer] will receive no credit for the purchase,” one suit against PayPal said. “Honey erases Plaintiffs’ affiliate links and replaces it.” 

The problem stems from a standard industry practice. Influencer affiliates include a link into their content for interested followers to make purchases of a brand. The industry has settled on the practice of "last-click attribution." When the extension replaces the influencer attribution with its own, the influencer does not receive credit for the sale. This is kind of like paying someone to stand outside of a high-end boutique informing eager customers that they can save at a discount store. The brand wants to price discriminate by selling through both the boutique and the discounter, but it doesn't want the discounter to interrupt too many of the high-end sales. Actually, it more like a billboard company advertising discounters just outside the boutique. The boutique is suing the billboard company.

Is your master's degree worthless?

Economist:

In America returns are especially large in computer science and in engineering. They are slightly smaller in other science subjects, in part because an undergraduate degree in these already bumps up salaries by quite a lot. Teachers who bag graduate degrees in education tend to earn more, even if wages for the profession as a whole are fairly low, because many American school districts automatically raise the pay of those who have them.

Would Thomas Jefferson approve of DOGE?

From ChatGPT:

Thomas Jefferson would likely have mixed feelings about a Department of Government Efficiency, depending on its scope and function.

• Why He Might Approve: 
•  Limited Government & Fiscal Responsibility – Jefferson was a strong advocate for minimizing government waste and ensuring efficient use of public funds. If such a department worked to reduce bureaucracy and streamline operations, he might have supported it. 
•  Republican Virtues – He believed in a government that served the people effectively without unnecessary complexity, so an effort to improve government efficiency could align with his ideals. 
• Why He Might Disapprove: 
• Bureaucratic Expansion – Jefferson was skeptical of centralized power and large government institutions. The very creation of a new department could be seen as adding more layers to the bureaucracy he often opposed. 
•  State vs. Federal Power – He strongly favored states’ rights and decentralized governance. If the department operated at the federal level, he might argue that efficiency efforts should be handled at the state or local level instead. 
• Final Thought: If structured as a temporary commission to identify inefficiencies and reduce waste, Jefferson might have supported it. But if it became a permanent federal agency with expanding influence, he would likely have opposed it as a contradiction to his vision of a small, decentralized government.

All he wants is "good pricing"

Fron WKRN:

“There are too many liquor stores in Lebanon, just at the rate that more stores are opening. I never really felt that way before,” Andrea Ross, the owner of Cheers Wine and Liquor, said. “We know multiple liquor store owners in Lebanon [TN] that are great people, great business owners, but in order for us to continue to be able to provide good pricing and all the things that we offer, we have to be able to sustain the business.”

For anyone who has not read Chapter 6, what the incumbent liquor store owner means by "good pricing" is high pricing. To the residents of Lebanon, good pricing is low pricing. 

• By limiting competition from entrants, the city council create incentives for incumbents to support their reelection campaigns.
• Does the city council have enough information to make good decisions about the number of liquor stores, and the incentive [see above] to do so?

HT:  MH

Adverse Selection in Genetic Insurance Markets

A new paper by Azevedo, Beauchamp, and Linnér (ABL) finds that some predictions are coming true and that may be a problem. Economists predicted that the Human Genome Project would uncover many markers for diseases that may not present themselves until much later. For two decades, these predictions were hard to come mainly because single-gene mutations are not as informative. ABL show that more recent improvements developed from data on nearly half a million people in the UK Biobank has become much more predictive. This affects insurance markets.

In many countries, but not the US, a market for Critical Illness Insurance (CII) is growing. 

Critical illness insurance (CII) pays out a lump sum in the event that the insured person gets diagnosed with any of the medical conditions listed on the policy (Brackenridge et al., 2006). The lump sum can be used as the policyholder wishes. The policy pays out once and is thereafter terminated.

Consumers with bad test results should gobble up insurance. CII providers will have to adjust rates for this adverse election. Consumers with good test results will not find the insurance worth it. Will CII providers require genetic tests? Will they be allowed to risk rate their policies? As the predictive power of genetic testing improves, as it surely will, these issues will become more acute.

Hat tip: Marginal Revolution

Can President Trump break the International Corporate Tax Cartel?

 From the Economist:

The international tax system has long suffered from two related problems: firms go to great lengths to book profits in low-tax jurisdictions, and governments thus have strong incentives to compete with each other in cutting levies so as to attract investment [only a dirigiste would consider this a problem]. Hoping to forestall a [competitive] race to the bottom, 136 countries reached a [collusive] compromise in 2021 to overhaul tax rules—the outcome of talks held under the auspices of the OECD, a group of mainly rich countries. The crucial element was that governments would impose a minimum tax rate of 15% on the profits of multinational companies.

...Unlike America’s withdrawal from the World Health Organisation and the Paris climate agreement, the OECD framework is not a formal treaty that America can leave. Rather, it is a common approach that depends on governments each passing legislation to impose top-up taxes on companies that pay less than the 15% minimum. This means that, if some countries choose to tax a multinational firm at a lower rate, others can claim the difference.

In other words, if the US doesn't tax its corporations at 15%, foreign countries can claim the difference.

...Mr Trump hopes to break this logic by promising brutal retaliation. Any country that imposes a top-up tax on an American company would, in his administration’s view, be guilty of extraterritorial overreach. In executive orders issued on January 20th, the day of Mr Trump’s inauguration, it said that it could respond by doubling taxes on citizens and firms from any offending countries. These orders displayed his advisers’ talent for unearthing obscure statutes that serve their goals: the law that allows the doubling of taxes on foreigners has been in place for nine decades without being used. Even if Mr Trump’s objection to the OECD deal was expected, his threat’s ferocity surprised observers.

Airline Yield Management

 It had been hard to manage an airline in the Covid-19 and early post-Covid-19 era. As Alison Sider
 at the WSJ reports:

Airfares plunged in the early months of the Covid-19 pandemic, only to soar in 2022, when airlines couldn’t add flights quickly enough to keep up with the frenzied urge to travel. Then prices tumbled when airlines expanded service and flooded into popular routes. Now airlines are constraining supply and lifting prices. 

Now it looks like things have settled back into a yield management problem. The quantity demanded has been  rising for the past three years, but the seems to have plateaued.

Airline price increases have begun to outpace inflation.

This suggests that demand has shifted out enough that it is constrained by airline capacity. Airline load factors have rebounded to pre-Covid-19 levels. At these higher prices, Airlines would like to sell more seats, but there are no more seats, at least in the short-run.

Is $5,000 enough to screen out bad dates?

That is how much it costs to join Tawkify.  A friend said he found his dates interesting (so it was)  but complained about the distance he had to travel to meet them.  

Would eliminating DEI improve government procurement?

Yes, by 15%.  From a paper by some middling economists,

Mergers, Cartels, Set-Asides, and Bidding Preferences in Asymmetric Oral Auctions, The Review of Economics and Statistics, 2000, vol. 82, issue 2, 283-290.  

The SBA [Small Business Administration] set-aside program limits auction participation to "small" firms... The set-aside program has numerous analogies in other areas of government contracting in which, for example, bidding is restricted to minority-owned firms (Froeb and McAfee (1988)).

The costs of the SBA program can be simulated by assuming that small, high-cost firms evolve into large, more efficient firms. The expected price change under this hypothetical scenario is computed over all 51 [Forest Service] auctions... . On average, [timber] price [revenue to the govt] would increase by 14.8%. 

Gig Work as Entrprenerial Training

There can be many hurdles to becoming an entrepreneur, particularly for those without a background in business startups. New findings from Denes, Lagaras, and Tsoutsoura indicate that Gig work can help budding entrepreneurs overcome these hurdles. Using data from U.S. Tax Returns, they can track individual's sources of income.

We find that gig workers are more likely to become entrepreneurs, particularly those who are lower income, younger, and benefit from flexibility. We track all newly created firms and show that gig workers start firms in similar industries as their gig experience, which are less likely to survive and demonstrate higher performance. Overall, our findings suggest on-the-job learning promotes entrepreneurial entry and shifts the types of firms started by entrepreneurs.

Of course the obvious benefit from Gig work is that we consumers have more choices to acquire goods and services. This is a static benefit. But a dynamic benefit is that Gig work becomes a stepping stone for workers to realize their potential. They will create new goods and services or they provide competitive pressure on existing suppliers. Policies that limit Gig work could undermine an economy's growth potential.
 

 

Do Environmentalists and NIMBYs share blame for LA fires?

The Economist thinks so:

Strict regulations in LA require new homes to be fire-resistant, but most homes are not new. NIMBYism and convoluted environmental rules make it extraordinarily difficult to build, so much of the housing stock pre-dates the modern building code and is packed with flammable wood.

CA gov prevents voluntary wealth-creating transactions

From REASON:

On January 7, Newsom issued a state of emergency as fires spread in Los Angeles County. On Tuesday, Newsom signed Executive Order N-7-25, prohibiting buyers for three months from "making any unsolicited offer to an owner of real property" in fire-affected areas "for an amount less than the fair market value of the property or interest in the property on January 6, 2025."

I sent Newsom a copy of Chapter Two.

High US interest rates strengthen dollar, weaken Asian equities

Economist: Jan 13, 2025

The dollar reached a two-year high against a basket of major currencies, bolstered by a strong jobs report, released on Friday. The data dampened expectations that the Federal Reserve will cut interest rates aggressively in 2025. Share prices in Asia fell, as investors fear that prolonged high interest rates in America will draw capital to the dollar, draining funds from weaker currencies and emerging markets.

Is ESG investing illegal? In TX it is.

Breaking:

...US District Judge Reed O’Connor found that the airline breached its fiduciary duty ... by prioritizing ESG considerations over the financial interests of participants.  ... The court criticized American Airlines for allowing its asset manager, BlackRock, to advance goals unrelated to maximizing returns for plan participants.

“ERISA does not permit a fiduciary to pursue a non-pecuniary interest no matter how noble it might view the aim,” O’Connor said, according to separate reporting by Bloomberg Law. He went on to maintain that ESG investments “often underperform traditional investments by approximately 10%

See related posts:

• The paradox of ESG investing.
• Can ESG investing stop climate change without sacrificing returns?
• Is ESG investing illegal?

Price controls destroy wealth: California Fire Insurance

Noah Smith via Marginal Revolution, and Kim Mai Cutler.

•  The CA insurance regulator is elected, and is reluctant to allow higher rates for fire insurance, despite the big risks, lest she be voted out of office. 
• As a consequence, expected profits are low, so a majority of top insurers have stopped issuing fire insurance in CA. In 2024, State Farm decided not to renew tens of thousands of policies in the state, including about 1,600 in Pacific Palisades.
•  Instead, CA becomes the insurer of last resort through it FAIR program.
• FAIR insures risks of about $458B but has less than $700M in cash. The Jan 9, 2025 fires may cost FAIR about $24B. As a result, CA residents may face big surcharges to shore up FAIR's finances.
• Expect more insurance companies to exit the state because insurers in the state are on the hook to pay into the plan when FAIR can’t cover its claims.

BOTTOM LINE: insurance rates are too low and dont cover expected losses. Furthermore, they are not risk adjusted, so low risk homeowners subsidize higher risk ones. And the risks are getting worse, due to regulation that delays and deters fire prevention efforts, like controlled burns.

UPDATED WSJ:  

FAIR now covers about half a million homeowners who can’t obtain private coverage. Its exposure has ballooned to $458 billion as of last September from $153 billion four years earlier, with $5.9 billion in exposure in the Palisades. Yet it has only about $700 million cash on hand to pay claims.

The capitalist revolution Africa needs

Economist:

In the coming years Africa will become more important than at any time in the modern era. Over the next decade its share of the world’s population is expected to reach 21%, up from 13% in 2000, 9% in 1950 and 11% in 1800. As the rest of the world ages, Africa will become a crucial source of labour: more than half the young people entering the global workforce in 2030 will be African.

This is a great opportunity for the poorest continent. But if its 54 countries are to seize it, they will have to do something exceptional: break with their own past and with the dismal statist orthodoxy that now grips much of the world. Africa’s leaders will have to embrace business, growth and free markets. They will need to unleash a capitalist revolution. ...

In the past decade, as America, Europe and Asia have been transformed by technology and politics, Africa has, largely unnoticed, slipped further behind. Income per person has fallen from a third of that in the rest of the world in 2000 to a quarter.

Mortgage debt is rising, but lending standards are strong

From CalculatedRisk:

The bottom line is there will not be a huge wave of distressed sales as happened following the housing bubble. Most homeowners have significant equity, were well qualified, and have a mortgage with low rates that they can afford.

Leftys get screwed again