Why didn't we hear about this when it was relevant?

Production as a by-product of government subsidies

Paper manufacturers can qualify for an "alternative fuels" subsidy by adding a little bit of diesel to black liquor soap, a by product of paper manufacturing, and then burn the mixture to make electricity. The subsidy is so valuable that paper has become a by-product of the subsidy:

“The problem for pulp producers is the tax credit encourages them to run at higher rates, which is putting pressure on already weak pulp prices,” said Mike Richmond, a paper and forest-products analyst at Salman Partners Inc., a Vancouver stock brokerage.

Should we "buy American" this holiday season?

From David Friedman via Steven Landsburg:

The Iowa Car Crop

....there are two technologies for producing automobiles in America.  One is to manufacture them in Detroit, and the other is to grow them in Iowa.  Everybody knows about the first technology; let me tell you about the second.  First, you plant seeds, which are the raw material from which automobiles are constructed.  You wait a few months until wheat appears.  Then you harvest the wheat, load it onto ships, and said the ships eastward into the Pacific Ocean.  After a few months, the ships reappear with Toyotas on them.

            International trade is nothing but a form of technology.  The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being.  To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars.

            Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa.  A tax or a ban on “imported” automobiles is a tax or a ban on Iowa-grownautomobiles.  If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.  ...

Steven E. Landsburg

The Armchair Economist:  Economics and Everyday Life

Make the rules or your rivals will: the economics of taxis in New York City

The NY taxi cartel, like a lot of other bad ideas, started during a crisis:

When the Great Depression hit New York and the city’s 30,000 taxi owners couldn’t pay their bills, the city’s impulse was not unlike that of the Roosevelt Administration in Washington: limit supply, so that demand would be adequate to support the suppliers left standing. FDR’s plans were (thankfully) declared unconstitutional, but New York City’s taxi cartel was there to stay. To operate a yellow cab and solicit passengers on the street you need a medallion. And the number of medallions is fixed at 13,237 – roughly 3,000 fewer than in the year (1937) the system was created.

A recent auction of a medallion was $1 million, which suggests the following break-even analysis:.

...let’s say the expected return on a $1 million medallion is seven percent annually (a low figure in light of the risks). To meet expectations, fare would have to be high enough to yield about $200 a day in profits. Yes, that’s right: $200 a day, after netting out the cost of drivers, fuel, maintenance and vehicle depreciation!

Is there any chance of reform? Sadly, the taxi cartel illustrates why it is so hard to undo these regulations:

If corporate medallions are worth $1 million each, the whole lot of them is worth something north of $10 billion (owner-operated medallions are presumably worth less than $1 million). And the owners are hardly likely to give up this unearned, government-defended surplus without a struggle. In any event, there’s no one around willing to give them a fight.

Who will "win" the basketball bargaining standoff?

The axiomatic or "simple" view of bargaining suggests that the alternatives to agreement determine the terms of agreement.  For the following reasons, players have a lot more to lose than owners:

First, the owners are losing net revenues, the players their gross revenues. 

Second and most important, owners are sacrificing SR (short run) net revenues for LR (long run) increases in franchise values from cost control. Players have no LR gains to motivate SR pain. 

Owners have a LR view, players SR, so it makes much less sense for players to take a SR hit without a big offsetting gain.

For these reasons, one would predict that the owners would capture a bigger share of the gains from trade.  

Does the worn-out welfare state induce "sloth?"

The chairman of China's sovereign wealth fund thinks so:

If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of the worn out welfare society. I think the labour laws are outdated. The labour laws induce sloth, indolence, rather than hardworking. The incentive system, is totally out of whack.

What does "Margin Call" teach us about the morality of markets?

Review of Margin Call, starring Kevin Spacey.

An analyst at an investment bank (think Goldman Sachs) builds a model suggesting that their portfolio of securities is essentially worthless. The firm ends up selling the assets to other sophisticated firms whose models place different valuations on them.

For some reason, however, the protagonist wrestles with his conscience before deciding to fulfill his fiduciary responsibility to shareholders.  And this takes up the bulk of the movie.

When they sell the assets, price drops by about 35% as other firms realize that their models must be wrong.

The happy ending is predictable: price adjusts to reflect the real value of the assets.  Future investors are protected from losses that would have been incurred had they purchased over-priced securities. And the firm survives because they were the first to realize that their securities were mis-priced. Other firms presumably failed.  Performance is rewarded:  the analyst who built the model makes a lot of money, while the other analysts are fired.

All my friends who voted for President Obama are raving about the movie. I suspect they see it as an expose of the inherent corruption of Wall Street and a cause for the rebels who are occupying it.

Here is a question for my economically challenged friends. Would the ethical issues raised by the movie have been any different if the firm had been buying rather than selling securities, i.e., how is searching for under-valued securities to buy any different from searching for over-valued securities to sell?

The movie is playing at the Belcourt in Nashville and On-Demand on Comcast.

REPOST: Lincoln Electric succeeds by organizing as a sweat shop

Nice example of a company that has learned to align the incentives of employees with the goals of management. My favorite quote "only 1/3 of the people out there could survive doing piecework." Think "adverse selection."

Why seat belts kill (Sam Peltzman explains).

Make the cost of a collision fall and you get more of them.

Hat tip: Mungowitz

This post has nothing to do with economics

but I like to watch my brother wipeout (red sails)

Untitled from Daniel DeLave on Vimeo.