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 and uses data analytics to determine what is hot at other retailers. It then scours the customer reviews for areas of improvements. “Things like, where are the pockets, what zipper, quality of the hardware,” And, 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?