Will Lyft and Uber drivers ever make money?

Today, they make about $15/hour, before costs of about $8/hour (NY Times).  But this $7/hour real wages won't increase, unless drivers figure out a way to stop entry into the profession.  Even if they convinced ride-share companies to raise the prices paid to drivers, the nominal ride prices would attract entry which would reduce the number of rides that each driver picked up. 

And so it is with ride-share drivers today. Another study, by a New York University professor and two Uber employees, found the same dynamic: Higher prices increased driver incomes, but only for a few weeks.
As new drivers entered the market, attracted by higher wages, the average driver had to spend more time waiting for fares. Average pay returned to the level economists refer to as “the outside option” — the pay level of whatever else the drivers could be doing if they weren’t driving for Uber or Lyft.

Similar thing happened in the California Gold Rush

In 1848, for example, at the start of the California gold rush, the first miners made about $20 per day, on average. The historical data shows that was at least 10 times more than the wage for workers doing what I would classify as similar activities — stone cutting and brick laying — in New York at that time.
Over the next eight years, so many people moved to California searching for gold that miners’ average earnings fell to $3 a day, minus expenses — barely more than they could have made if they had been cutting stones in New York.
What killed the gold rush wasn’t the lack of gold — production tripled over that time. It was the entry of so many competing miners that drove average earnings down so low that most of them barely made enough to stay in business

HT:  MarginalRevolution.com

Why are there so few unicorns in Europe?

Despite a GDP that is about the same size as the US, but with about twice the population, the EU produces relatively few unicorns (billion dollar startups) because the regulatory burden is so heavy.  A recent example is the GDPR,

Controllers of personal data must put in place appropriate technical and organisational measures to implement the data protection principles. Business processes that handle personal data must be designed and built with consideration of the principles and provide safeguards to protect data (for example, using pseudonymization or full anonymization where appropriate), and use the highest-possible privacy settings by default, so that the data is not available publicly without explicit, informed consent, and cannot be used to identify a subject without additional information stored separately.

MarginalRevolution has another great post  that documents the compliance costs, especially for would-be unicorns :

• Startups: One study estimated that venture capital invested in EU startups fell by as much as 50 percent due to GDPR implementation. (NBER)
• Mergers and acquisitions: “55% of respondents said they had worked on deals that fell apart because of concerns about a target company’s data protection policies and compliance with GDPR” (WSJ)
• Scientific research: “[B]iomedical researchers fear that the EU’s new General Data Protection Regulation (GDPR) will make it harder to share information across borders or outside their original research context.” (POLITICO)
• Microsoft had 1,600 engineers working on compliance. (Microsoft)
• During a Senate hearing, Keith Enright, Google’s chief privacy officer, estimated that the company spent “hundreds of years of human time” to comply with the new privacy rules. (Quartz)
  • However, French authorities ultimately decided Google’s compliance efforts were insufficient: “France fines Google nearly $57 million for first major violation of new European privacy regime” (The Washington Post)

Why are some prices so high?

MarginalRevolution.com has a terrific post explaining "Baumol's Cost Disease," or in more polite terms, "the Baumol Effect." It rests on two ideas:

1. Opportunity cost:  the cost of an activity is what you give up to pursue it; and
2. Differences in productivity:  some items, like cars, have gotten much easier to produce over time.

 To make this concrete, imagine two goods or services, like education and automobiles.  The first has not had much change in productivity over the past 100 years--it still takes one professor and an army of TA's to deliver a course like Managerial Economics.  But cars can be produced with one tenth the labor as 100 years ago.

This implies that the opportunity cost of producing a Managerial Econ class is now ten times as expensive as it was 100 years ago, in terms of what we give up (cars) to produce it.

This idea is useful as it explains that we can expect the cost of activities without productivity gains to increase, like education, performing arts, and health care.

HUGE Endorsement!

General Patton on decentralization (and Nike)

Don't tell people how to do things, tell them what to do and let them surprise you with their results. 
--George S. Patton

One of Nike founder CEO Phil Knight's favorite management maxims.  From his well-written and fascinating autobiography, Shoe Dog.

Reading the book makes me realize how Nike's success was driven more by belief in a higher cause or purpose than a concern for making money.

 The villains in the book were those erecting regulatory barriers to success, like Converse and Keds, domestic firms who manipulated customs laws to raise Nike's costs of importing.  Only when Nike hired people familiar with how Washington works (who filed an antitrust counter claim), were they able to resolve their claim. 

For Nike, this kind of "rent seeking" seemed like both a prisoners' dilemma (Nike's optimal response was to do something similar as Keds and Converse), and a tax on innovative activity (it would up diverting Nike's attention from their primary business of designing, producing and importing shoes).

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."

Mobile phones save lives--but not in the way that you think

Before the 1990's, gangs created markets for illegal drugs based on location, and used violence to protect their markets ("turf") from entry by outsiders.  This changed with the advent of mobile phones, as it became relatively easy for non-gang members to organize illegal drug transactions over the phone. As a consequence homicide rates fell sharply:

Studying county-level data for the years 1970-2009 we find that the expansion of cellular phone service (as proxied by antenna-structure density) lowered homicide rates in the 1990s. Furthermore, effects were concentrated in urban counties; among Black or Hispanic males; and more gang/drug-associated homicides.

Similarly, the ease of online shopping through the Internet has caused brick and mortar retailers to respond to the shrinking of their "physical" marketplace, see, e.g.,

• How does Walmart compete with Amazon? 
• How does Walmart compete with Amazon (II)? 

HT: MarginalRevolution.com

Antitrust laws are dangerous in the wrong hands

Exposé of how Huawei stole IP from Nokia, and then China used their competition authority to hold up Nokia's merger to thwart any kind of retribution:

Chinese regulators approved the sale of Motorola’s network arm in April 2011—one week after Motorola publicly agreed to make peace with Huawei. Motorola and the ministry didn’t respond to requests for comment.

Is this the reason for the trade war with China?

To protect US intellectual property?

Amid soaring U.S. concern about China’s infiltration in Western scientific research, Emory University has found that two of its researchers did not disclose money they were taking from Chinese sources, ... The two are no longer working at Emory.

The move comes one month after The Houston Chronicle reported that the M.D. Anderson Cancer Center forced out three senior researchers in connection with concerns about Chinese attempts to steal research.  

HT:  Ed

UPDATE:  WSJ EXPOSE:  Huawei "Spent All Their Resources Stealing", Stunning New Exposé Shows

Huawei had built spy-proof secure rooms that were off-limits to American employees, according to current and former U.S. officials.

Counterintelligence officials believed the discovery indicated Huawei was handling information more like a state intelligence service, with regimented tiers of secrecy, while relying on a protected communications channel with Beijing.

Who gets "affordable" housing?

When the government fixes prices of affordable housing below market rates, there is excess demand, i.e., more people demand the apartments at the low prices than are available for supply.  So how do the apartments get allocated?

"Insiders" use influence to grab the valuable apartments:

But for years, Brooklyn DA Eric Gonzalez charges, the top three execs of the Luna Park Housing Corp. conspired to “sell” units — accepting five- and even six-figure bribes in exchange for faking documents so that a new tenant could “inherit” an apartment as a supposed relative of the old one.

Prosecutors “believe that this was the norm, not the exception,” Gonzalez reports. The 14,000-strong waiting list was a joke.

Corruption this brazen surely isn’t “the norm” at all Mitchell-Lama projects, but it’s hardly cynical to suspect that insiders are pulling scams all across the city’s vast and varied affordable-housing landscape.

An apartment that by law has a rent well below market rate is a valuable commodity; gatekeepers can cash in big by quietly selling access. Not always for actual money: Political or even family connections can be enough.

Similarly, would-be tenants regularly have to pay someone (a broker, a landlord, some fixer) a hefty fee up front to score a rent-regulated apartment.

Anytime the government fixes prices below (or above) what the market price would be, it also creates incentives to circumvent the prices.  What is most damaging, however, is that these bribes are paid by those who want apartments (demand) but the rewards go to people who manage the apartments, not to those who build (supply) them.  As such they reduce supply (as they have done in Nashville), creating "shortages."

BOTTOM LINE:
Next time you hear a politician complain about a "shortages of affordable housing" ask him or her if she thinks there is a "shortage of affordable Rolls Royce automobiles."

More posts on the effects of affordable housing.