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.