70% of the value of an education is value-added; the rest is signal

HT: MarginalRevolution

High-productivity individuals (e.g., higher IQ) are more likely to invest in education, so education ``signals'' high productivity to employers.  But education also increases productivity (value-added from, e.g., reading Managerial Economics: a Problem-solving Approach, 8th ed), which is also valuable to employers.   

A new paper uses a clever natural experiment, compulsory education in Norway to separate the two.  It finds that 70% of the return to eduction is value added.

BOTTOM LINE:  read Managerial Economics (8th edition)

Why Californians keeps voting for Democrats

Babylon Bee:

 “We already sunk $126 billion into the high-speed rail project. We can’t stop now.”

~ Joe from Camino

Marshall Islands try Universal Basic Income

Economist: 

The US govt pays Marshall Islands for allowing military access. 

This year, the Marshall Islands govt began distributing the money to every citizen, in a quarterly payment of about $200/month, about 10% of the average income. 

Compared to income taxes, this kind of aid does not create an incentive to work less. 

Lots of economists and countries are watching to see what happens.

Hospitals respond to revenue caps by treating fewer higher-cost patients

 From WSJ:

Hospital care is the largest category of medical expenditure. It accounts for 41% of the cost of health insurance—more than doctor visits and prescription drugs put together.

Policy makers confront two problems when trying to reduce medical expenditures by setting "Global Budgets" or revenue caps:

• MORAL HAZARD: hospitals will treat fewer patients, and ...
• ADVERSE SELECTION: ... avoid higher-cost ones.

WHAT HAPPENED IN MARYLAND?

The Obama administration .. required Maryland to limit total revenue at each hospital—in ... in return for ...receiving higher Medicare and Medicaid reimbursements...

...the 2014 reform substantially eliminated the incentive for Maryland hospitals to attract and treat additional patients. From 2008 to 2023, the state went from treating 7% more hospital-admitted patients per capita [moral hazard] than nationwide levels to 18% fewer. The relative volume of outpatient care has also fallen.

...Community hospitals have increasingly dumped costly patients [adverse selection] on the state’s academic medical centers, which haven’t been fully compensated for the additional load and which typically are short of beds. ... Between 2012 and 2023, kidney-transplant rates statewide declined from 161% to 60% of the national average. Between 2014 and 2023, emergency department wait times in Maryland rose from 137% to 153% of nationwide levels—much longer than in any other state.

Increasing wait times is a higher ''price'' paid by patients, so it rations care to those willing to wait. But this higher price does not benefit the hospitals, so it doesn't give them an incentive to increase capacity. 

BOTTOM LINE: Better information about the effects of medical treatments can give decision makers more information which can allow them to design better incentives.

Housing prices up, affordability down, renting much cheaper than buying

FROM CALCULATEDRISK

Inflation Adjusted Housing Prices are High

Prices + mortgage rates are decreasing affordability.

(Higher Affordability means less affordable)

5-year returns (red) from buying a house are negative if you buy at wrong time

And renting is less expensive than buying.

US GDP accelerates to 3.4% growth

 WSJ: 

AI boost

Massive data-center spending has been fueling economic growth all year. Goldman Sachs recently projected that artificial-intelligence investment in the U.S. will hit a staggering 1.9% of GDP. While much of that money is spent on imported chips, the boom is also creating plenty of construction jobs in the U.S. as developers race to build server farms. The rise in construction spending has helped compensate for a decline in home-building.

Trade impact

Spending on imported goods surged by more than a quarter on an annualized basis, driven in part by semiconductor purchases from abroad. Overall net imports subtracted 3.3 percentage points from GDP growth.

GDP reflects the total of all spending. But since some of that spending is on imported products, rather than things made in the U.S., imports are considered a drag on GDP.

How much has US income inequality really grown?

It depends on whose numbers you use. Piketty, Saez and Zucman find the top 1%’s after-tax share rose from 9% to 15% since 1960. Auten and Splinter, working from the same tax data, find it barely moved, from 8% to 9%. The two series only part ways after the 1986 tax reform changed how high earners reported income, which is why critics argue much of the “surge” is a measurement artifact.

HT:  MarginalRevolution

Do state antitrust enforcers care about competition?

 Competition On the Merits examines the incentives of state antitrust enforcers.

PROBLEM:  The states bring cases against mergers whose effects fall mostly outside their borders, and ask settlement terms that have little to do with competition.

What do the states get by challenging National mergers?  Attorney fees, local jobs, donations to local firms, and DEI commitments.  And don't forget free PR.  Many state AG's are governors-in-waiting.  

SOLUTION:  What can be done to realign incentives?

• National mergers should be reviewed nationally, not by states.
• Make plaintiffs show that mergers actually harm competition (US courts do this) by repealing the Biden-era Merger Guidelines that ignore this requirement. 

Halloween Candy Trading Guide

Eleven years old but still relevant for the trick-or-treaters this week.

 

Mondelēz and Marshall's Second Law of Demand

Soaring cocoa costs prompted Mondelēz, the maker of Cadbury and Milka chocolate, to raise European chocolate prices by roughly 30%. Management anticipated a decline in sales. But consumers proved more price-sensitive than expected. Historically, the company had observed demand elasticities of approximately −0.4 to −0.5. Following the increases, elasticity rose in magnitude to roughly −0.7 to −0.8. On its October 2025 earnings call, CEO Dirk Van de Put noted that some chocolate bars had crossed important price thresholds, prompting consumers to reconsider their purchases. Competitors' decisions not to fully match Mondelēz's price increases also contributed to the disappointing sales response.

Marshall's Second Law of Demand says that demand tends to become more elastic as price rises. At a higher prices, more products are viable alternatives. Consumers may barely notice a price increase when chocolate is relatively inexpensive. But as prices climb, more consumers begin substituting. They may choose cheaper brands, purchase smaller packages, or forego chocolate altogether. Managers should be cautious about extrapolating historical elasticity estimates.  The response to a 30% price increase is likely "out-of-sample" from the historical context.