Why are some countries so poor?

Planet Money is making me re-think my opposition to subsidies for NPR with this episode on Peruvian Economist Hernando de Soto, who discovered that Peru was so poor due to over-regulation--it takes over a year's worth of work just to get the permits to open up a business in Peru--and the lack of respect for private property rights.

Interestingly, they uncover what I consider a scandal at the World Bank who ranks countries on the ease of doing business:  in response to lobbying by labor organizations, the Bank stopped measuring the time it takes to fire a worker as an indicator of the ease of doing business.

As readers of this blog know, if you make it hard to fire a worker, you also make it less likely that they will be hired.  That the World Bank changed an economic indicator suggests that they are willing to trade academic integrity for political support.

Why am I so disappointed when I discover economists behaving exactly in the way our models predict?

How many economists does it take to deliver roses on Valentine's Day?

None, the market will do it.

But it takes at least two to explain how it all happens:

From:  the Microeconomics course at MRUniversity.com

Have you ever wondered how we have access to fresh roses each Valentine's Day in chilly cities where roses couldn't possibly grow?
In a new video (I, Rose) from MRUniversity’s Microeconomics course, we’ll take you around the world for a glimpse at the rose growers and distributors who bring us affordable roses every February.
The second video in this section (A Price is a Signal Wrapped up in an Incentive) shows the invisible hand at work as we discuss how the flower industry responded to the 1970s oil crisis.
We'll also address questions such as:

• How does the price of oil affect the price of candy bars?

• What is the "great economic problem" and which is better at solving it -- central planning or the price system?

• Is speculation actually useful to the market process?

• What are prediction markets? Can they be useful in predicting elections? What about predicting the popularity of Hollywood films?

Why are rents increasing while the number of renters increases?

If price and quantity both increase, it has to be an increase in demand:

But for many, slow income growth and a lack of savings are the main reasons for renting instead of buying, even as mortgage rates remain historically low. Accumulating savings has become even more difficult as rents rise in many cities. Rents outpaced inflation in all of the 11 cities except for Dallas and Houston, where they remained largely flat, according to the NYU-Capital One report. Rents rose the most in Washington, D.C., over the seven-year period, with a 21% increase in the median rent when adjusted for inflation.

Why are Tokyo Apartment prices rising?

The Financial Times has a good article on the effects of Japan's program to print money to buy bonds (increasing the supply of loans), which drives down long term interest rates (the price of a loan).

Lower interest rates increase housing demand, which drives up the price of houses, clearly illustrated in the graph above.  

Lower interest rates also depreciate the yen relative to foreign currencies due to lower demand for yen in the market for foreign exchange (because foreign investors are less likely to want yen to invest in Japanese bonds because of the lower rates).  This makes Tokyo apartments look less expensive to foreign buyers, which also increases demand for housing.  

From a macroeconomics point of view, this is supposed to start a virtuous cycle:  higher prices lead to higher wages which causes consumers to spend more:  because one consumer's spending is another worker's income, the cycle continues  This is the so-called "Keynesian multiplier."

In Tokyo, at least, it is not working because consumers are buying smaller houses, 

Until consumers get more confident, it will be hard to create a cycle of positive inflation, where rising spending provides the fuel for wage increases and thus more spending. The popularity of Abenomics will also remain under threat: smaller apartments are not what the Japanese public expected from an economic stimulus.

Is this really an arbitrage opportunity?

Kansas has an under-funded, defined-benefit pension system that is becoming more and more costly to fund, diverting expenditures from roads, schools, and the like:

Many investors in the municipal-bond market are concerned that retirement costs will eventually cripple states, particularly in Illinois and New Jersey, which also have settled SEC charges related to pension disclosures. State retirement systems have far less funds than they need to meet all their projected payouts, with the Pew study putting the combined shortfall at $915 billion as of 2012.

Instead of trying to reduce its pension obligations, Kansas wants to earn some money by borrowing at 5%, and then investing the money in its pension fund, where it thinks it can earn 8%.  This would represent an arbitrage opportunity, except for the fact the the pension investments are in higher risk securities which naturally earn a risk premium.  This means that the extra return that they generate are compensation for the additional risk that Kansas will incur.

Even under the best circumstances, pension bonds come with the risk that expected spreads won’t materialize. Since Oakland, Calif., sold the first pension-obligation bonds in 1985, cities and states have issued about $105 billion of the debt, the Center for Retirement Research said last year. Those deals have had returns averaging 1.5% annually since 1992, thanks to market gains following the financial crisis, the center said.

We have blogged about under-funded pensions before.  They arise because the median voter, and the politicians they elect, typically do not understand or care about the problem. Refreshingly, Nashville's Mayoral candidate David Fox has raised the issue in his campaign:

...The danger of debt is probably the issue he's most passionate about: He gives the sense that the city's unfunded liabilities and debt really do keep him up at night.  

"What do you think is gonna happen when our national economy, as it will do cyclically — when our national economy goes sideways for several years?" Fox asks. "We're going to see a lot of municipal bankruptcies. Because unfunded liabilities are too big, the balance sheets are way out of whack, you have way too much debt at the municipal level, and a lot of cities are going to go bankrupt. That's not gonna be an accounting adventure, that's gonna have a real bad effect on people who live in these cities."

TRUTH IN BLOGGING DISCLAIMER:  I am leaning towards Fox (and his wife is a former student).  

Et tu Uber?

Uber betrays the very principles that made it so successful by capping pricing during the blizzard.  When these price ceilings create shortages, I hope they can explain to their customers why they were left out in the cold.  

The cap comes after an agreement struck between Uber and the New York City Attorney General’s office in January 2014 that required Uber to limit prices during“abnormal disruptions of the market”, including emergencies and natural disasters. Uber also announced a national policy for its price limits during those emergencies. 

In an email to Bloomberg, Uber said the following:
Dynamic pricing will be capped and all Uber proceeds will be donated to the American Red Cross to support relief efforts. 

The company later clarified to TechCrunch that the cap will be in place in any market that has declared a State of Emergency. 

While Uber plans to limit dynamic pricing during this storm, the company has had a bad history with emergency situations and surge pricing. In late 2012, Uber received criticism for raising fares during Hurricane Sandy. (The agreement with the NY AG came in part as a result of Hurricane Sandy backlash.)

I feel like taking Uber out of my textbook; or adding them to the chapter on how to keep regulators at bay.

Declining Demand for Labor

Who needs a cameraman to do local news anymore?

Here is a reporter using a selfie pole to become her own camera operator. As the opportunity cost reporting in the field just fell, we might expect more field reports.*

*Evidence that this is a new technology adoption can be seen in her choice to use a smartphone rather than the GoPro resting on the sidewalk.

Hat tip: Chris Phelan

Bargaining for a Happy Spouse

Leora Frieberg and Steven Stern have a new paper on intra-household bargaining titled, "Marriage, Divorce, and Asymmetric Information." Survey data ask spouses two questions that essentially get at:

• "How happy are you in this marriage?"
• "How do you think your spouse answered this?"

They compared these answers to divorces rates five years later. Of course, they find that people unhappy in their marriages divorce more often. But also, people who are more wrong (i.e., information is more asymmetric) about their spouse also divorce more often. 

How much would you give up to avoid a divorce? When you allow that marriages involve myriad small bargains everyday (e.g,, doing dishes, picking up dirty clothes, letting him/her choose the restaurant or movie), you get even more interesting results:

Our results show that people forgo some utility in order to make their spouses better off and, in doing so, offset much of the inefficiency generated by their imperfect knowledge. Thus, we find evidence of asymmetric information and interdependent utility in marriage.

This last sentences is as close as economists come to saying that husbands and wives might just love each other.

Lower fuel prices help air travel industry

Falling fuel prices are idling oil exploration rigs, encouraging consumers to buy bigger cars, and helping the aviation industry:

Falling fuel prices are encouraging airlines to keep less efficient aircraft in service for longer but they are also likely to see extra growth in air travel as airlines pass on the benefit to passengers in the form of lower fares. 

The value of in-service aircraft is rising as 80% to 90% of airlines renting aircraft have extended their use, said David Power, Chief Executive of Orix Aviation, an aircraft leasing company.

Swiss banks face foreign exchange risk

Interesting article that draws the analogy between a strong member of the EU exiting the monetary union, like Finland or Germany, and the Swiss unpegging their currency from the euro.

After years of wondering whether the exit of a small, fiscally weak country like Greece could undermine the euro, policymakers will have to deal with an even bigger shock stemming from the exit of a small, fiscally strong country that is not even a member of the European Union.

Bottom line: we can learn who would benefit and who would be hurt by looking at the Swiss experience, e.g.,

Big Swiss banks fund themselves in Swiss francs, because so many people everywhere want the security of franc assets. They then acquire assets worldwide, in other currencies. When the exchange rate changes abruptly, the banks face large losses – a large-scale version of naive Hungarian homeowners’ strategy of borrowing in Swiss francs to finance their mortgages. 

Though the SNB had given many warnings that the euro peg was not permanent, and though it had imposed a higher capital ratio on banks, the uncoupling from the euro came as a huge shock. Swiss bank shares fell faster than the general Swiss index.

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