A tale of two cities and rent control

WSJ: What the Twin Cities Tell Us About Fixing the Housing Crisis

The Natural Experiment:

• In 2022, St. Paul enacted one of the strictest rent-control regimes in the country. The ordinance capped annual rent increases at 3% for most apartments, even empty ones. It didn’t adjust for inflation. ... 
• Across the Mississippi River, Minneapolis steered clear of rent control. Instead, city officials strictly focused on creating new housing.

Results:

• [In St Paul]:  Real-estate investment activity nearly froze. Developers halted new projects as lenders pulled back....Property values declined as investment cooled. 
• In Minneapolis:  ...developers kept building. Housing permits surged nearly fourfold in early 2022 from the year before. Downtown hubs blossomed as new apartments hit the market and attracted young professionals.

BOTTOM LINE:  In the short run, a rent ceiling create excess demand for, or shortage of available apartments.  In the long-run, it reduces supply, thereby exacerbating the shortage.   

President Trump vs. Economists on Tariff Predictions

WSJ: Why Everyone Got Trump’s Tariffs Wrong 

Economists were right that Tariffs would push up inflation (it went up slightly) and have little effect on the trade deficit (it didn't move much).  President Trump was right when he predicted they would raise a lot of money.

European Pensions are in bad shape

Economist:  

Europe’s fastest-ageing countries also already offer some of the most generous pensions and lowest retirement ages. The average French retiree now spends 23 years drawing a pension, longer than in any other OECD country (see chart below). In Denmark, by contrast, pensioners draw one for 19 years on average. Its government plans to raise the retirement age from 67 to 70 by 2040, which would be the highest in Europe.

Arbitrage Fueled by Data Analytics

Reuters reports that Williams-Sonoma recently sued "dupe" producer, Quince, for an unfair comparison. Dupe producers include online retailers who make copies of popular high-end items that often include high margins. 

"By brand-washing its ads, Quince creates the false impression that consumers will receive comparable quality and design, when in reality they may be purchasing unrelated items of often inferior quality," Williams-Sonoma said.

Quince seems to have struck a nerve. It mostly sells apparel targeted to women aged 25 to 55 and women’s business accounts for about 80% of its sales. Quince uses data analytics to determine what is hot at other retailers and then scours the customer reviews for areas of improvements. “Things like, where are the pockets, what zipper, quality of the hardware,” Of course, it is implementing AI to speed up production of its dupes. Fashion is especially vulnerable to this sort of arbitrage because the IP protections generally do not apply.

Streaming Merger Market Definition

 

One aspect of the antitrust review of the Warner Brothers Discovery (WBD) merger with Netflix (or Paramount) will be what constitutes the relevant market. Eric Fruits provides a nice explanation of the issues over on "Truth on the Market." It essentially boils down to whether a narrow "streaming services" definition is used versus a broader "screen time" definition that includes recreational Internet scrolling and maybe video gaming. The market would be quite concentrated under the former definition and quite a bit less so under the latter. This is an empirical question over the extent to which consumers substitute their time between various screen content. 

I happen to have some experience with time use data from the ATUS from some of my past research. These data are amazing with a quarter million "diary days" covering every day since 2003. Other nice things about these data are that they are publicly available and have consistent definitions over almost a quarter century. Among other activities, these data include time spent watching TV, playing games (mostly video games), and "recreational computer" usage. A major problem with ATUS for screen time measurement is that, because it was setup before smartphones were a thing, there no good way of measuring time spent looking at your smartphone while you are doing something else. The amount of computer time in ATUS is a fraction of time on smartphones reported elsewhere. So I spent the morning seeing how time spent on these three activities related to each other. My quick and dirty analysis indicates that each minute playing games decreases TV time by 4 seconds [P<0.01] while each minute "recreating" with a computer decreases TV time by 8 seconds [P<0.01].* If you confine the sample to just the past 10 years, you get slightly more time diversion. This is evidence suggesting that consumers do substitute between television and other screen time.

Surely the parties, whoever they end up being, will have more granular proprietary data yielding better analyses. 

 

*This analysis includes fixed effects for age category by sex and year by sex and uses ATUS's weights. Interpreting these correlations as causal is problematic. Most of the variation is likely to come from ever better video games and ever more Internet activities (e.g., YouTube, Facebook, TikTok, etc) which would suggest a causal interpretation. But this analysis is merely conditional correlations.

Econ makes you right -eaning, clear-thinking, and wealthier

 From Marginal Revolution:

• studying social sciences and humanities makes students more left-leaning, whereas studying economics and business makes them more right-leaning. 
•  the rightward effects of economics and business are driven by positions on economic issues, whereas the leftward effects of humanities and social sciences are driven by cultural ones. 
• humanities and social sciences increase activism, while economics and business increase the emphasis on financial success.

Will AI get rid of billable hours?

• WSJ: Say Goodbye to the Billable Hour, Thanks to AI

Ironically, what began as an effort to promote transparency and efficiency for legal work has since become a tyrannical arrangement with both senior people and junior associates motivated to rack up hours to maximize profits. It spread from law firms to accounting firms, consultants and most other professional services firms as the dominant mechanism for value exchange. ...

...as AI handles routine cognitive work, the remaining human contribution shifts toward judgment, creativity and relationship management—the value of which bears little relationship to time expended.

• Value-based pricing represents the most obvious alternative, where fees are tied directly to outcomes achieved or value delivered rather than time spent. 
• Subscription and retainer models offer another path forward, providing clients with ongoing access to expertise and capabilities for a fixed periodic fee. 

 The end of the billable hour also could bring change to the organizational structure of professional-services firms. Instead of maintaining a pyramid structure in which authority flows down from a small group of leaders at the top to a large group of employees at the bottom, these firms might become flatter and more flexible, consisting of a small core of senior experts who assemble teams and technology on an as-needed basis, depending on the client or project.

Transfer Pricing when Demand Increases

A recent news item seems to suggest that Samsung has a vertical relationship problem with its own subsidiaries. Part of Samsung's highly diversified product offerings is that it produces both memory chips and the mobile phones that use them. Samsung's mobile phone division had hoped to nail down pricing and supply for another year, but

... according to a report from SE Daily spotted by SamMobile, is that Samsung Semiconductor rejected the original order for smartphone DRAM chips from Samsung Electronics’ Mobile Experience division.

It appears that demand for memory chips for AI applications is so high that prices have skyrocketed and most chip makers are diverting production to these customers. As a profit center, the internal transfer price just isn't worth it for Samsung Semiconductor. Since the optimal transfer price should be the opportunity cost of its chips, the rejection of this order could be appropriate. This situation may be temporary until either the AI demand subsides or chip production capacity can be increased.

 

What you never learned about Thanksgiving in school

Peter Klein gives us the real story behind the first Thanksgiving:

In 1620 Plymouth Plantation was founded with a system of communal property rights. Food and supplies were held in common and then distributed based on “equality” and “need” as determined by Plantation officials. People received the same rations whether or not they contributed to producing the food, ... Because of the poor incentives, little food was produced.

Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

 This year I am giving thanks for private property. 

Related:  Good short video on the how private property saved the Pilgrims, China and Vietnam from our friends at MarginalRevolution University

Argentine Rental Market Natural Experiment

One of Argentine President Milei's radical reforms was to "take a chainsaw" to rent control laws. Argentina had had some of the most restrictive rent control regimes ever. All of that was abandoned almost over night. Many media outlets noted with glee that rents fell dramatically. Even most economists were surprised by how much supply had been withheld from the market.

Now a more systematic analysis by Elfert and Thomsen that compares trends just before and after the repealing laws confirms the initial impressions. Supply of rental units skyrocketed.

 When the supply curve shifts out, we move down the demand curve resulting in prices falling. 

Could this be a lesson for New York's new mayor?

A friend reads the Meta Opinion so I don't have to

Background:  The FTC’s case against Meta rested on a familiar monopolization narrative: Meta supposedly dominates “personal social networking” and preserved that dominance by buying Instagram and WhatsApp before they could blossom into competitive threats. For the theory to hold, users must be trapped on Meta’s platforms despite wanting something different, and Meta must be quietly degrading quality because—secure in its monopoly—it can.

After a full trial, the court found none of this matched the evidence. A friend of mine, who celebrated the opinion’s release with a glass of single malt, sent along a set of remarks that form the basis of this post.  

The European regulators required Meta to offer an ad-free Facebook and Instagram for €5.99 per month. Fewer than 0.01% of users subscribed. If consumers were truly desperate to flee the “oppressive” ad-supported model, one might have expected more than statistical noise. As my friend put it, this was not exactly the behavioral evidence one hopes for when arguing that users are crying out for an alternative.

Europe contributed another natural experiment when regulators mandated a choice screen for search engines on Android. Under the FTC’s theory, Google’s dominance stems largely from being the default—the search engine pre-selected for users who supposedly never bother to change it. So regulators removed the default entirely and required every user to make an active choice. Yet when presented with a perfectly neutral menu, over 98% still selected Google. It was a useful reminder that consumer preferences sometimes favor the incumbent for reasons unrelated to default settings.

The profits evidence fared no better. The FTC treated Meta’s high profits as proof of monopoly power, but did not rule out the more mundane explanations—efficiency, innovation, or providing products people actually like. Since Meta’s returns do not look unusual relative to other successful tech firms, the court concluded that “monopoly” was doing more work in the FTC’s theory than in the real world.

Then there was the “quality degradation” argument. The FTC suggested Meta raised its “quality-adjusted price” by making its apps worse over time. The record instead showed steady feature additions and billions in R&D investment. If Meta is secretly degrading its products, it is doing so in a very expensive and user-pleasing way.

Finally, the court noted that one FTC expert had previously urged the agency to bring this exact case. As my friend observed, this made the testimony feel less like neutral analysis and more like a very committed book report.

In the end, the court’s conclusion rested on the distance between the FTC’s theory and the evidence. The agency described a world in which consumers were effectively captive and Meta behaved like a textbook monopolist; the record pointed to something far less dramatic. Confronted with the gap, the court went with the evidence.

HT:  My friend supplied the irony. 

Tax Avoidance in Norway

The Laffer Curve, made famous by supply-side economic policy in the 1980s, is alive and well. It shows that higher taxes can reduce tax receipts if enough people stop engaging in the activity that is being taxed. In this case, that activity is owning wealth in Norway. Like all tax implementations, it's complicated, but it seems that various increases in tax rates on the wealth of the super rich has led to their exodus.

The recent wealth tax increase in Norway was expected to bring in an additional $146M in yearly tax revenue.

Instead, individuals worth $54B left the country, leading to a lost $594M in yearly wealth tax revenue. 

 Switzerland looks to gain from this wealth flight.

 

Europe at a crossroad

The Constitution of Innovation

The continent faces two options. By the middle of this century, it could follow the path of Argentina: its enormous prosperity a distant memory; its welfare states bankrupt and its pensions unpayable; its politics stuck between extremes that mortgage the future to save themselves in the present; and its brightest gone for opportunities elsewhere. In fact, it would have an even worse hand than Argentina, as it has enemies keen to carve it up by force and a population that would be older than Argentina’s is today.

Or it could return to the dynamics of the trente glorieuses. Rather than aspire to be a museum-cum-retirement home, happy to leave the technological frontier to other countries, Europe could be the engine of a new industrial revolution. Europe was at the cutting edge of innovation in the lifetime of most Europeans alive today. It could again be a continent of builders, traders and inventors who seek opportunity in the world’s second largest market.

HT: Mike

How not to grow: lessons from India's poorest and youngest state

Economist:

Lately Bihar’s leading parties have been talking about expanding the system of “reservations”, which provides preferential access to jobs to members of castes that are deemed to need a leg-up. ...

Only about one-third of 15-to-29-year-olds are in the labour force, among the lowest rates in the country. ... Growth would transform lives in Bihar, more than anywhere else in India. If only politicians would spend more time debating how to make the pie bigger—and less time fighting over how to slice it up.

Irony: quitters are making tobacco companies rich

   ANALYSIS from the Economist:

When lots of people smoked, there were many “price-elastic” consumers. In plain English, they were sensitive to increases in the cost of a cigarette. As more people have quit, however, only the most committed smokers are still puffing. Companies have responded by raising prices at an ever-quicker pace.

MY COMMENT:  In chapter Chapter 6, the simple linear demand curves get more price elastic as price increases. But for cigarettes, higher prices make the more-price-elastic consumers stop smoking. The remaining smokers have less elastic demand, so demand becomes less elastic as price increases. This allows tobacco firms to raise price more--and earn higher profit--than they other otherwise would.

You can also understand this using the language of Chapter 14 (indirect price discrimination), with two groups of consumers with different elasticities of demand. At lower prices, both groups consume, but at higher prices, only the less-price-elastic group consumes. Firms optimally raise price and earn higher profit by serving only the less price-elastic group.

An obvious question raised by this interpretation is why didn't firms simply raise price so that the less elastic consumers quit and then reap higher profit from the higher prices. One possible answer is that the tobacco companies didn't know. It was only when so many snokers quit that they realized the remaining ones had much less elastic demands.

Condos vs. Houses: months of supply

WSJ:   In Chapter 8, we teach that prices are set when the number of buyers (demand) equals the number of sellers (supply).  When there are too many sellers (buyers), prices fall (rise).  However, it may take a while for prices to "clear" the market.  

For condos and single family homes, one measure of whether there are more buyers or sellers is the "months of supply," calculated as the number of units on the market divided by the selling rate.  For example, if there are 1 million units on the market, selling at 20,000/month, it would take 5 months to sell the current inventory.  

in the second graph, you see the annual price change:  prices of condos began falling when supply hit 4 months.  

Polymarket odds of a 2025 US Recession

Are we in a stock market bubble?

NYTimes:

Preview of 7th edition: As of late 2025, the U.S. stock market’s cyclically adjusted price-to-earnings (CAPE) ratio has climbed above 40—its highest level since 2000. The CAPE compares stock prices to a decade of inflation-adjusted earnings. In principle, valuations should mirror the present value of expected future profits. High CAPEs can be justified if productivity and earnings growth from artificial intelligence and other innovations materialize—but if those expectations falter, prices tend to revert toward long-run earnings. As of October 2025, the CAPE stands near 39.5, more than double its historical average of 17.

Gamification of Hiring

A primary role of HR is to screen job applicants to address adverse selection in hiring. Now they can automate much of this with apps like HireVue. This platform performs virtual video interviews that include various tasks to assess skills. Candidates perform 'gamified' tasks that are linked to various applicant traits. Not surprisingly, influencers have developed content helping applicants prepare for these games.

 

Nobel Prize: How to Grow

From MarginalRevolution:

Economic growth is not just about new ideas but about how well an economy can reallocate production to the firms using the new ideas

...growth requires that some firms fail and that labor be displaced so resources can flow to new, more productive uses. ... Business dynamism has declined in Europe relative to the United States, a worrying fact given that business dynamism has also declined in the United States. Nevertheless, the US has a more flexible labor market and appears more open to both the birth of new firms (venture capital) and the deaths of older firms.

...Yet, in both the United States and around the the world the differences between high productivity and low productivity firms appears to be growing, ... which means that the good ideas are not spreading as quickly as they once did.

Previous posts on Dynamism

HT:  Mike

Winners' curse in real estate auctions

Fortune:

The real-estate 'winner's curse': Study of nearly 14 million home sales over 20 years shows you don't want to win that bidding war

In today’s hot housing market, winning a bidding war can feel like a triumph. But my research shows it often comes with a catch: Homebuyers who win bidding wars tend to experience a “winner’s curse,” systematically overpaying for their new homes.

Note: the winners' curse is a form of adverse seleccton (ch19) HT: Justin

EU Labor Laws crush innovation.

Economist:

...the sheer difficulty of shedding staff en masse—a reality of corporate life—steers Europe’s biggest companies away from making risky bets in innovative fields.

BOTTOM LINE: Look ahead and reason back: if you cannot fire workers, no company wants to hire.

Are CA and NY acupuncturists evil or stupid?

CHATGPT:

Dry needling by Physical Therapists (PTs) is designed to “reset” knotted or overactive muscle tissue by causing it to spasm, bleed a little, and then relax. This usually decreases pain and improves mobility — at least temporarily — and can help jumpstart rehab when combined with other therapies.

EVIL: By preventing PT's from dry needling, acupuncturists in CA, NY, HI, OR, WA prevent residents from accessing a proven therapy: 

STUPID: From a patient's perspective, they don’t compete, so how can acupuncturists profit from eliminating a non-competitor?

• Dry needling is invasive, uncomfortable, and deliberately traumatic to the muscle — the goal is to provoke a twitch, bleeding, and ultimately a release of the knot. 
• Acupuncture is usually gentle, often painless, and oriented toward restoring balance, calming the nervous system, or addressing systemic issues. 
• So functionally, they look different to consumers — one is painful but targeted to fix a muscle problem, the other is soothing and holistic.

Getting rid of subidies creates wealth

REASON:

Starting Today, Electric Vehicle Buyers No Longer Get a Federal Tax Credit. It's bad news for upper-income motorists wanting a deal, but good news for taxpayers.

In 2022, then-President Joe Biden signed the Inflation Reduction Act (IRA) into law...,[awarding] up to $7,500 for purchasing an electric vehicle. ...Donald Trump [terminated the subsidy] on September 30, 2025.

...each credit cost U.S. taxpayers around $32,000 [for each extra vehicle purchased], because around 75 percent of them went to people who would have bought an E.V. anyway.

...Tax credits can also artificially inflate prices, since sellers can charge more if the government will shoulder a portion of the bill. Under the previous version of the program, when Tesla and General Motors hit the sales cap and their E.V.s were no longer eligible for the credits, each company lowered prices.

Govt. Shutdown Showdown

In bargaining, it’s not the arguments that matter most. It’s the alternatives. Whoever can live more comfortably without a deal usually wins. 

That’s the lesson from Chapter 16—and from Washington’s latest budget standoff. The President has a blunt alternative: let the government shut down. Painful for some, sure. But it also means he gets to lay off more federal employees—something he’s willing to tolerate, maybe even welcome. That makes his threat credible. 

On the other side of the table, Democrats face a dilemma: If they hold firm, they risk being blamed for dysfunction. If they cave, they risk losing the progressive wing of their party. Either way, their “no deal” alternative looks costly. 

And that’s the bargaining imbalance: the President’s fallback is uncomfortable but tolerable; the Democrats’ fallback is politically toxic. Guess who that favors at the negotiating table? 

Lesson: Don’t just listen to what’s said across the table. Always ask: what happens if there’s no deal? That’s where real bargaining power comes from. 

DISCLOSURE: This post written with help of ChatGPT. 

DISCLAIMER:  "Guess whom that favors at the negotiating table?" is gramatically correct, albeit awkward.  ChatGPT made the correct choice to go with the more colloquial and natural, "Guess who..."

Link to Economist Article

McDonald's is Repricing Combo Meals

The WSJ recently reported that McDonald's is working with franchisees to keep combo meals, e.g., Big Mac, fries, and a drink, 15% lower than the sum of the individual item prices. They have been losing low-end customers who may be more receptive to a cheaper value menu. Bundling the different items entices me to buy fries when my waistline, and wife, say I really shouldn't. I just came for the sandwich and drink, but the price of the fries could be maybe 40% cheaper now.

 

Trust and Scale

I am enjoying the History of the Germans Podcast by Dirk Hoffnan-Becking. Along with endless "Game of Thrones" style dynastic struggles among countless counts, dukes, princes, and emperors, there is a fair amount of business economics. A recent episode described the emergence of an early joint stock corporation to solve a thorny asymmetric information problem. The episode compared trade within the Baltic based Hanseatic League, which came to prominence in the 13th-14th century, with Great Ravensburg Trading Society dominant in Southern Germany in the 15th century. Long distance trade requires trust since your trading partner has many ways of cheating you. As Dirk notes:

In the Hanse system, this problem was solved through an elaborate surveillance operation. Each merchant would have several correspondent agents in each city that he or she would trade with. These correspondent agents would not only keep an eye on the market, but also on the behaviour of the other correspondents. That way a merchant would know fairly quickly if say the creditworthiness or honesty of one of his agents was placed in doubt. And the higher a merchant rose within their city, the more access he would gain to information. As a member of the city council, he would hear about the state of negotiations with kings and princes, where pirate activity was most intense and what would be done about it etc. And finally, long standing relationships, intermarriage and the fact that Hanse traders all spoke Low German created trust between the participants in that network.

The Hanse system limited the size of each trader's operations since its hallmark was engaging multiple traders in each location keeping an eye on each other. In contrast, the Great Ravensburg Trading Society, employed agents throughout its network, each with a stake in the company's fortunes.

The main constraints to this model were the number of family members and trustworthy business partners one could recruit. That is likely one of the reasons the three firms of Humpis, Mötteli and Muntprat joined forces in Ravensburg in the early 15^th century. They all had been extremely successful merchants, but growth has hit a wall as they had run out of individuals they could send out as their representatives. By pooling their resources, they could establish a much larger network of agents than they could set up individually. Another key benefit was that the combination reduced competition, increased pricing power with suppliers and customers and reduced risk.

Every three years a full account of the books was made to determine the dividend payments and bonuses. The company expanded to as many as 90 smaller partners and grew into a truly pan-European network. The founders' wealth eventually became many multiples even of nearby Kings. 

Imperfect Entry Barriers

Occupational licensing is often used to exclude potential competition. However, it is only as effective as it is enforceable. 

Unfair and Inefficient: Britain's Property and Stamp taxes

 Economist:

Britain levies the highest property taxes of any OECD country, relative to GDP...Unfortunately, British property taxes are not well-designed. Rather, they distort the housing market and undertax the most valuable homes. ...The owner of a two-bed flat in Hartlepool today pays more council tax per year (£2,218) than someone with a ten-bed mansion in Westminster (£2,034).

... stamp duty—paid whenever a house changes hands—is growth-sapping. Although it raised £15bn in 2024-25, at over £40,000 on a £1m home it makes moving house very expensive, resulting in fewer transactions. Because people often move to take higher-paying jobs, inhibiting such moves means less-productive workers, undermining growth.

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. 

 

Nursing Home Quality Improvements through Merger

A successful merger creates wealth by moving an under-performing asset into a more valuable use. But does this wealth derive from the ability to extract more consumer surplus through higher prices for the same product? Or is it from the better management of poorly performing assets that generates more total surplus that need not decrease consumer surplus? Determining where on this spectrum a specific deal lies is the crux of economic antitrust policy. 

Chatterji, Ho and Li, have a new paper, "Mergers and Quality Provision in Healthcare: Evidence from Nursing Homes," that finds evidence of increased total surplus. Specifically, purchases of "independents" by "chain-owned" Skilled Nursing Facilities (SNFs) reduce health deficiency citations by 5% two years post-merger. New management improves quality. Looking deeper, this result is larger for acquiring chains that are smaller, chains with a higher-quality track record, and chains that make more acquisitions. Notably, the wealth creation appears to be from increased quality, and not from reduced costs, or increased market power.

My experience with this industry is that smaller, independent facilities may have begun with the best of intentions, and performance, but the founders were not able to keep this up indefinitely. Larger chains have processes, and especially succession plans, in place that allow facilities to maintain quality. 

CA min wage goes up ==> CA employment declines

The classic book, Economics in One Lesson reduces all of economics to a similar lesson:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

The lesson of Chapter 3 is similar:

• Consider all costs and benefits that vary with the consequences of a decision:
• If you miss some, that is the "hidden cost fallacy"
• If you take account of irrelevant ones, that is the "sunk-cost fallacy"

 This hidden-cost fallacy comes from California, via Instapundit.com:

California raised the minimum wage statewide for “fast food restaurant employees” to $20 per hour last April following the passage of a ballot proposition in September the year before.

Analysis of unadjusted data from the Quarterly Census of Employment and Wages, the NBER found “that employment in California’s fast food sector declined by 2.7 percent relative to employment in the fast food sector elsewhere in the United States from September 2023 through September 2024 … Our median estimate translates into a loss of 18,000 jobs in California’s fast food sector relative to the counterfactual.”

The fast food sector has also cut workers’ hour and increased automation to avoid paying rising employment costs.

Any econ student could have predicted this using a shift in the supply curve, but someone at UC Berkeley predicted the opposite:

A new study published by UC Berkeley’s Institute for Research and Labor Employment confirmed that California’s $20 minimum wage for fast-food workers has led to significant benefits for workers, without the devastating consequences that critics predicted.  

Fortunately for us, we have an adversarial system, so that mistakes by one side are usually brought to light by the other.  

FOOTNOTE: a middling economists' take on weighing the benefits of our adversarial system. (link)

Monetizing Attractiveness

Many people like to be around attractive people. They will patronize a business more often if they know they might "rub elbows" with people way out of there league. Business might want to pay attractive people to patronize their establishments so as to attract these "normies." But how? Well, there is an app for that. Neon Coat vets models and influencers so that businesses can barter free goods and services to these bonafide pretty people. As the WSJ reports, content creator Lauren Karwoski 

... grabbed a green juice from gourmet eatery Mangia (normally $9) in the morning, then took a workout class at Barry’s (about $40 in New York City). Afterward, she got her eyebrows laminated at Nampa by Himalayan Salon (“I do this monthly anyways, so [I saved] myself 100 bucks right here”). That evening, she met another Neon Coat user for a glass of wine at Paros, a Greek restaurant in Tribeca. She estimated she saved $200 that day. “My favorite thing is that it’s stuff that I would do normally,” she said of the app. 

 Alas, neither my friends nor I are suppliers or demanders of this form of attractiveness.

“𝗜 𝘄𝗮𝗻𝘁 𝘆𝗼𝘂 𝘁𝗼 𝗰𝗹𝗼𝘀𝗲 𝘆𝗼𝘂𝗿 𝗰𝗼𝗺𝗽𝘂𝘁𝗲𝗿, 𝗰𝗼𝗺𝗲 𝘀𝗶𝘁 𝗯𝘆 𝗺𝗲, 𝗮𝗻𝗱 𝘁𝗲𝗹𝗹 𝗺𝗲 𝘄𝗵𝘆 𝗜 𝘀𝗵𝗼𝘂𝗹𝗱 𝗶𝗻𝘃𝗲𝘀𝘁 𝗶𝗻 𝘆𝗼𝘂.”

It was the most terrifying moment of my entrepreneurial journey. 

I was 31 - a farm kid from Mississippi, sweating through my suit jacket at Rockefeller Center in New York. I’d already been rejected by Nashville investors: “Too young, too risky, too small to compete.” This felt like my last shot.

Ten minutes into my polished pitch, Ted McCourtney, Senior Partner at Venrock, asked his team to leave. Then he told me, “I'm already an investor in your biggest competitor. Why should I bet on you?”

I knew the deck wouldn’t save me. So I just told the truth.

I shared how I grew up on a rural farm. Joined the Army to pay for college. And then I said:

“Mr. McCourtney, I’ve mortgaged my home and my family farm to start this. If I fail, I lose everything. If I fail, you lose a fraction of a percent of your holdings. I’m all in. This cannot fail.”

He listened quietly. Then he brought his assistant back in and said, “We’re going to back Michael.”

Years later, after we’d successfully sold the company, I asked him why.

He said “Michael, I rarely see such naive honesty in New York. Given your story and what you had on the line, I knew you were a good bet.”

LESSON: Venture Capital investing is inherently uncertain. Investors like Ted McCourtney have to guard against moral hazard (will the entrepreneur act in the best interests of the investor) and adverse selection (if other investors turned him down, am I missing something). But the entrepreneur's revelation that if he failed, he would lose everything, assured the investor that his goals were aligned with those of the investor.

CREDIT: Professor Michael Burcham

Mowing Your Own Lawn

Roland Fryer has a nice opinion piece in the WSJ about "The Economics of DIY." He points out that even wealthy people tend to do household chores that they could affordably outsource. He relates an incident:

When a friend invited me to play golf and I declined because the yard needed mowing, he didn’t hide his disbelief. “You can pay someone to cut your lawn,” he said, “but you can’t pay someone to have fun for you.”

At first blush, it seems as though the tenured Harvard economics professor mowing his own grass needs a refresher in cost-benefit analysis. But he points out that many of the benefits of DIY are often hidden and ill-defined while the costs are fixed and precise. Three economic concepts help to better understand some hidden benefits.

Diminishing Marginal Utility - The value of an activity falls as you do more. In his example, when time with his kids is short, he frees up time by outsourcing more - cooking, cleaning, ride-sharing, etc. The cost of the meal, the maid, or the ride is fully observable. The value of the time shared is less amenable to an accounting ledger.

Experiential Utility - There is often pride in doing. We value our ability to do things and we recognize these talents in others.We admire the craftsmanship in DIY car restoration, woodworking, quilting, or calligraphy.  Hobbies can be fun. Moreover, there can be joy in seeing yourself improve. And the nostalgia of learning from an elder can bring back fond memories. 

Signaling - Cutting the lawn sends a signal to your neighbors and yourself. You are the kind of person who takes care of things, who others can look on with admiration for the care you take. You provide positive externalities.

The zero-sum fallacy: trade, immigration

 MarginalRevolution explains much of our current political conflict as a mistaken belief in the zero-sum fallacy:

Zero sum thinking fuels support for trade protection: if other countries gain, we must be losing. It drives opposition to immigration: if immigrants benefit, natives must suffer. And it even helps explain hostility toward universities and the desire to cut science funding. For the zero-sum thinker, there’s no such thing as a public good or even a shared national interest—only “us” versus “them.” In this framework, funding top universities isn’t investing in cancer research; it’s enriching elites at everyone else’s expense. ...

Technologies that Drastically Alter Costs Could also Drastically Alter Processes

Austin Vernon has posted an amazing analysis of how AI is transforming logistics. Even before he gets to the implications of AI, there is lots of information about current cost structures. 

Autonomous trucks and last mile delivery by drone don't need drivers, which reduces costs. They also don't need systems to sustain drivers, e.g., climate control, rest periods, meals, etc. which reduces costs further. To fully appreciate the savings, the way that things get from manufacturer to consumer may drastically change.

• Truck drivers are a fixed cost meaning you want defray these costs with big shipments often with agglomerations of items. Without the fixed costs of drivers, the efficient vehicle size could be smaller and agglomerating packages into shipments is no longer necessary. This means there may be much less need for warehousing as smaller robot vehicles can ship directly from producer to retailer.
• Likewise, last mile delivery is currently drone by trucks with many packages to many customers, a logistical challenge. Smaller drones are quickly becoming cost effective alternatives that deliver to a single location and return, representing simpler logistical processes.

Vernon claims that both the direct costs reductions and the indirect cost savings from re-engineering the delivery process could eventually reduce logistics costs as much as 90%. 

Middling professor opines on deregulation, wealth creation, benefit-cost analysis

 https://www.youtube.com/watch?v=wOFPggYsKfc

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.

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