Why is Europe Falling Behind?

 WSJ: Europe is Losing

Europeans live longer, have more leisure time and less income inequality, and often live in stunning cities and towns built over the centuries. But increasingly, Americans enjoy a higher standard of living. They have over 50% more living space on average per person. More than four in five Americans have air conditioners and clothes dryers at home, compared with between one-fifth and one-third of Europeans. Executive assistants in New York City earn around the same as specialist doctors in London.

The reason: no innovation 

But Europe’s lack of economic dynamism has deeper roots, too. Taxes and regulations have risen inexorably; the volume of EU regulations has doubled since 2010. Sprawling rules protect old buildings, incumbent firms and aging consumers, limiting the creation of new infrastructure and industries. As Italy’s prime minister Giorgia Meloni puts it, “America innovates, China imitates, Europe regulates.”

Sweden is the exception: 

Sweden has quietly spurred economic growth by cutting back its welfare state—tightening government spending, revamping the pension system and slashing corporate and personal tax rates. Per capita incomes are now climbing, and the country has seen a burst of entrepreneurship. Sweden even moved ahead of the U.S. in the number of billionaires per capita, thanks to a thriving tech startup scene and a video-game industry that has produced hits such as Minecraft and Candy Crush.

Europeans dont want change: 

One reason change is difficult is that most Europeans will continue to enjoy a comfortable lifestyle for decades to come. “In global terms, relative decline is inevitable, but it may still be a very nice place, right?” says Sander Tordoir, an economist at the Center for European Reform.

Many European voters might consider the relative decline in economic power to be a price worth paying for spending less time at work than Americans and living with less inequality, a more generous social safety net and higher environmental standards.

Best Teaching Video ever! (comparative advantage)

 From MRU via  Alex Tabarrok 

The excellent Don Boudreaux on comparative advantage, one of the deepest and most important ideas in economics.

As a new semester begins this is a good reminder that MRU has great videos for learning and teaching economics, all entirely free and open. (Of course, these videos pair delightfully with Modern Principles of Economics).

Timely topic.  

Franchise Recontracting and Hold up

With 76 stores and 1600 employees over four states, Paradigm Investment Group is a large franchisee of Hardee's restaurants. It is currently suing Hardee's to block them from terminating franchise agreements due to Paradigm's failure to comply with new contract terms. At issue are a nonpayment of monthly technology fee, limited hours of operation, non-use of third-party delivery services, but primarily Paradigm's non-participation in an in-app loyalty program.

The market conditions when the terms of a franchises contract are agreed upon will almost certainly change over time so that it will be efficient to alter the terms. When Paradigm first became a franchisee 25 year ago, smartphone apps to order food and Door Dash did not exist. An efficient contract would now address these new aspects of an evolving market. However, over the decades, Paradigm has made large investments in the Hardee's brand and business practices. Hardee's could seek to impose conditions on the implementation of these practices that are disadvantageous to the franchisee. If Paradigm does not agree, it could have to abandon these investments. That is, the franchisor can use these relationship-specific sunk costs to holdup the franchisee.

Value Extraction by Bargaining over Wholesale Price

A new paper by Alvarez-Blaser et al analyzes how wholesale and retail prices respond to changes in costs for 2,000 household products from a global manufacturer. There are lots of interesting results on pricing dynamics, responses to idiosyncratic versus aggregate cost shocks, cost pass-through rates, and more. The result I was drawn to was how the value that is created is allocated between the manufacturer and retailers. The retailer markup is the retail price minus the wholesale price while manufacturer markup is the wholesale price minus cost. 

Rather than passing on changes in the wholesale price, the above graph from the paper indicates that retailers respond with lower markups on their end. The two parties determine how much value they can each extract by bargaining over the wholesale price. This suggests that the final price to consumers is a hard limit on the value to be extracted.

Managing Remote Workers

As we all know, Work From Home (WFH) arrangements became important with the COVID-19 pandemic. However, five years on, about a quarter of the US workforce still works from home. WFH appears to be here to stay, but it represents an employee management challenge. Since monitoring offsite effort is more difficult, the professions that tended to take advantage of WFH, at least initially, have been those in which constant monitoring has been less important.

Increasingly, firms are taking advantage of newly developed monitoring tools for remote workers. VPN Express reports that three types of remote monitoring have become common.: Online tracking tools (74%), Physical surveillance (75%), and AI-driven metrics (61%). These tools can mitigate moral hazard problems and make WFH available to larger classes of workers, but they may also undermine trust and, therefore, incentive pay schemes. 

Sunk Costs while Playing Tennis

Roger Federer's 2024 commencement address at Dartmouth has received some attention on social media partly because of his admirable humility. In one part, he notes that, while he won almost 80% of his matches, he lost 46% of his points. Why relate this statistic?

Here’s why I am telling you this.

When you’re playing a point, it is the most important thing in the world.

But when it’s behind you, it’s behind you... This mindset is really crucial, because it frees you to fully commit to the next point… and the next one after that… with intensity, clarity and focus. 

Sunk costs don't matter.

Data Driven Decision-making ... or visa versa

The furor over the president's recent firing the BLS director over unfavorable revisions to the jobs numbers highlights an issue with all data driven decision making. Firms are increasingly turning to data to inform strategic decision making. However, often managers consider the new requirement of empirical support for a decision to be a nuisance. Instead, they seek to find analyses that support their prior beliefs. A useful check against this "cherry-picking" of the data is to vest the data analysis team with some autonomy from the decision maker.

Reproduced below is a graph from Vincent Geleso (who credits Gary Wagner) that tracks BLS jobs revisions over the last quarter-century. It appears that data revisions are common, are both positive and negative, are not biased up or down, are often large, and most importantly are non-partisan. This suggests that the recent revisions were not out of the ordinary. Non-independence of future BLS data reporting from partisan priorities will likely render their future reports to be more suspect. 

Hat tip: Marginal Revolution

Fixed - Mobile Substitution ... for Internet Service

A generation ago, a middling economist started a series of projects that found that mobile phone service would substitute for landline telephone service (here, here, and here). In talks, I would caution that this trend of "cutting the cord" would not bode well for traditional telephony. Incredible as it seems now, at the time, many critics thought I was nuts. I think I may be vindicated by the fact that globally there now are about ten times as many mobile subscribers as fixed line subscribers. Connecting almost all of humanity through mobile phones, and usually smartphones, is one of the under appreciated triumphs of modern technology.

But how about for Internet service? More than 99.9% of bandwidth is used for data and not voice telephony. Indeed, calling them mobile "phones" seems nearly archaic. Most US residential Internet access has been through home WiFi modems connected to high-speed fixed lines to homes. Most homes are passed by only two wires, usually from the CATV and phone companies. With only two competitors, US prices for Internet service have remained significantly higher than in most comparable countries. However, the increased speed of 5G technology makes Internet access from your mobile carrier a viable alternative. The WSJ reports that these carriers' fixed-wireless services have been gaining ground against traditional Internet providers. Competition from 5G entry has increasingly enabled Internet consumers to cut the cord. And wire based services are responding with significant price cuts.