Good MRU video on Prinsoners' Dilemma

Will markets thwart Xi's plans for China?

Economist lead article on President Xi's "rejuvenation," and efforts to  "maintain authority",

When Mr Xi took over in 2012, China was changing fast. The middle class was growing, private firms were booming and citizens were connecting on social media. A different leader might have seen these as opportunities. Mr Xi saw only threats.

[Xi has] reasserted state control over the economy and hobbled some of China’s most successful firms. His plan to tame the property market lies in tatters and bad loans weigh perilously on the economy.

Ironically, he is forgetting the lessons of Xiaogang village, and harming his own economy much faster than he is harming ours (see post below).

Is Chinese Capitalism an oxymoron

I begin my management course by telling students how Xiaogang villagers defied their Communist rulers in 1978 by secretly instituting a system of private property.  By the time the authorities found out, it was too late as the system had already spread to neighboring villages due to its tremendous success.

China adapted and allowed the institution of private property to spread.  At the time, many people predicted China would continue to reform and they were let into the WTO. However, "...as even the most ardent defenders of China’s WTO accession now acknowledge, that did not happen." Today we are left with an integrated world with two very different systems. To explain the effect, we can use the metaphor of A/B testing:

...imagine that the Department of Justice randomly assigns half of U.S. corporations to be A-corps and half to be B-corps. For A-corps, nothing changes. But B-corps now enjoy special privileges and rules. They are exempt from laws governing intellectual-property theft. They receive more-favorable tax incentives. They are recipients of sizable subsidies, including some to buy their A-corp rivals. They are able to enlist the DOJ to win capricious legal claims against A-corp rivals.

The result of such an experiment would be dire: The best, most innovative A-corp firms would lose market share; A-corps would be loath to invest in research and development, given that B-corp rivals would be able to purloin it; and there would be massive waste as inefficient B-corp firms expanded more than market forces required. Now extrapolate that to the global economy and you get a sense of the harms the Chinese system has imposed on capitalist economies.

I did a search on all my posts in China and I came across this one from 2007: "Market Socialism" and China's new antitrust laws  in which I argued that unless China developed "... the kinds of Democratic institutions that provide checks and balances on state power," their economy could stagnate under the what i called "regulatory miasma."  It turns out that, I needed the caveat I closed with:

But China's oxymoronic "socialist market economy" has surprised us before. In the words of Deng Xiaoping, "I don't care if the cat is black or white as long as it can catch mice."

Is the Inflation Reduction Act, "False and Misleading Advertising?"

FROM WSJ:  

President Biden touts the Inflation Reduction Act, which lowers deficits by $240 billion over a decade, he has also signed into law increased spending on veterans benefits, infrastructure and semiconductors, while taking executive actions that vastly expand food stamp and Obamacare benefits and cancel student debt worth $400 billion to $1 trillion.

Increased Govt. spending increases Aggregate Demand for US Goods and Services, which increases price (inflation).

Someone tell the FTC.

How will the rise in interest rates affect Corporate Borrowers?

 

From the Economist:

...in aggregate the West’s corporate debt load looks manageable ... American public companies’ earnings before interest and tax are a healthy 6.7 times the interest due on their debts, up from 3.6 times in 2000. 

But 3 types of loans may be in for a "reckoning:"

• The first comprises businesses that have come to rely on less orthodox sources of credit, which are often those with the diciest prospects.
• The second area of vulnerability involves so-called zombie firms: uncompetitive enterprises, kept alive by cheap debt and, during the pandemic, government bail-outs.
• The third and biggest area of concern involves firms that are merely unfit rather than undead.

What happened when Oregon decriminalized drugs?

More evidence that Demand Curves slope downward: when you reduce the "price" of taking drugs (the expected penalty), quantity will increase. From AP:

“If there is no formal or informal pressure on addicted people to seek treatment and recovery and thereby stop using drugs, we should expect continuing high rates of drug use, addiction and attendant harm,” said Keith Humphreys, an addiction researcher and professor at Stanford University and former senior adviser in the White House Office of National Drug Control Policy.

Of 16,000 people who accessed services in the first year of decriminalization, only 0.85% entered treatment, the health authority said.

HT:  MarginalRevolution.com 

Why did Martha's Vineyard homes increase from $700K to $1M in 2021?

NIMBYism restricts development (supply), so that the only thing that can adjust to an increase in demand (induced by the pandemic) is the price. From a 2021 NY Times letter to the editor: 

In the end, what really reads in this strange piece is that this gentleman didn’t like the Water Street apartments in Vineyard Haven for some reason, and is nervous about the Lambert’s Cove development. To this, there is of course an argument to be expressed and heard. But when it takes the form of such cynical bloat, it becomes a mockery of its own argument. It makes clear that the spirit of “not in my backyard” is as much of an obstacle to continuing to preserve the Island’s community as some self-interested folks, such as those who are pretending to oppose the housing bank out of supposed “environmental” issues. 

 ... I am also absolutely and constantly baffled when people complain about the one, sole affordable housing developer on the Island, a developer which takes great pains to protect the environment and build in accordance with what natural environment and cultural environment exists there, such as preserving and occasionally building around trees and trying to tear down as little as possible — and then conveniently miss the fact that every other building in Edgartown, for instance, has been torn down and turned into a McMansion over the past three years. If this attitude doesn’t come from self-interested hypocrisy, it comes from an extreme level of blindness.

Why is the $ appreciating against the £?

The $ will appreciate against the £ for trade or investment reasons. Either US exports to Great Britain begin to look more attractive than Great Britain's exports to the US, or investing in the US looks starts to look more attractive than investing in Great Britain. 

 

After the UK government unveiled plans to fund new tax cuts by ramping up borrowing, investing in Great Britain suddenly looks riskier.  As a result, investors sell £ and buy $ to invest in the US, increasing the demand for dollars, and driving up the price of a $ (the exchange rate).

The result of the $ appreciation is that producers in Great Britain are helped (because their exports look cheaper to Americans) but consumers in Great Britain are hurt, because prices for goods sold in Great Britain (including imports) increase.  

Is there a bubble in higher education?

The returns to education to those who finish a degree (especially in a STEM major) are huge.  The high price of college easily pays for itself several times over.

HOWEVER, if you major in a non-STEM subject it may not.  Similarly, if you drop out without a degree (a quarter to a half of all students), you will have smaller debt but also a smaller salary which makes paying off the debt much harder.  

The big increases in tuition seem to track the increases in subsidies offered by the government.  

Most of this info is taken from Marginal Revolution Blog Posts on Higher Education.

More evidence that cooperation works--but only in repeated games

In our textbook, we talk about the tradeoff between conflict and cooperation in a prisoners' dilemma. In a repeated game [play coauthor Mike Shor's online game], the best strategies exhibit the following characteristics:

1. Be nice--no first strikes
2. Be provokable--retailiate immediately if your rival cheats
3. Be forgiving
4. Be clear--make sure your rival can interpret your moves
5. Dont be envious--focus only on your slice of the profit pie

Now we have more evidence that punishment is not a good strategy.

In Nowak's experiment, the students played more than 8,000 games of prisoner's dilemma, using dimes to reward and punish. The normal game of prisoner's dilemma gives two players two options: cooperate or defect. If both cooperate, each ends up winning a dime. If both defect, each gets nothing. If one cooperates and the other defects, the cooperative player loses 20 cents and the defector wins 30 cents. Nowak then added a "costly punishment" component. A player could choose to punish someone who didn't cooperate. That penalized the non-cooperative person 40 cents, but the other player had to pay a dime to mete out the punishment. When Nowak compared how much money people earned or lost in the long run, there was a noticeable correlation between punishment and overall money. The players who punished their opponents the least, or not at all, made the most money. Those who punished the most made the least money.