Minor Thoughts from me to you

Archives for Economics (page 1 / 8)

Asking the Wrong Question →

David Friedman uses the focus on affordable housing to illustrate how asking the right questions can lead you to different conclusions than you would otherwise get.

When someone moves into one house he moves out of another, which is then available for someone else to move into. If the development is built and the units are bought by people currently living in San Jose, the net result will be to increase the city's housing stock by almost a thousand units. Doing that will make more housing available in the city and lower its cost. The question the Mayor should be asking, assuming that what he is really interested in is the welfare of the citizens of the city and not merely his ability to control things, is whether the development will draw mostly from current residents or mostly from people who would not otherwise live in the city. Pretty clearly, that question never occurred to him.

The assumption of the Mayor–I think of city planners more generally–is that the way to get affordable housing is to build affordable housing. That is not the only way of getting it. The alternative, very common in the history of U.S. cities in the past, was for poor people to move into housing that had been occupied by, possibly built for, less poor people, vacated when the less poor people moved into newer and better houses.

The same way poor people get cars.

I thought this was very insightful.

This entry was tagged. Housing Market

The Unintended Consequences of Bike Lanes →

It won’t surprise you to learn that these lanes, like many technocratic schemes, come with unintended consequences. When it snows — and it does, from time to time, always catching the city completely by surprise — the plows can’t remove the snow from the streets because the plows can’t fit in the bike lanes. So the plows dump all the snow into the bike lanes themselves. This causes a problem for the two or three people who actually ride bicycles in the bike lanes. It also causes problems for motorists because the city, employing its micromanagerial genius, often uses the portion of the bike lanes near intersections as left-turn lanes for cars. Safety first.

Another consequence — unintended? — is that already congested streets lose an entire lane. I remember once it took me nearly thirty minutes to travel five blocks down L Street, NW. The road was down to one lane, effectively.

And today’s observation: Delivery trucks can’t fit in the bike lanes. So they load and unload not at the curb, but in the street. Safety first. Bottlenecks form. Commuters lose productive time at work or time home with their children. Welfare decreases because rage, or at least irritation, increases.

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." — F.A. Hayek, The Fatal Conceit

This entry was tagged. Incentives

Workers Get the Same Slice of the Pie as They Always Have →

I'm always fascinated by the type of analysis that Scott Winship does here. There can be a huge difference in results, depending on how you look at things. This is one reason that I don't like to trust "common sense" all that much.

A couple of posts ago, I showed that when analyzed properly, hourly pay has risen just as much as productivity since 1947. The keys to getting the analysis right are to

  • Compare mean hourly compensation (not median compensation, and not wages net of fringe benefits or household income) to productivity,
  • Compare the same workers and sectors of the economy when computing compensation and productivity,
  • Look at the nonfarm business sector to exclude the housing sector (where imputed rent to homeowners is counted as income) and the government sector (where indirect taxes are counted as income) so that income sources that do not reflect the value of what workers produce are excluded from productivity,
  • Use net GDP to compute productivity rather than GDP, so that income taking the form of depreciation–which does not go to workers or owners but will simply affect future productivity–is excluded from productivity, and
  • Use the same inflation adjustment for both compensation and GDP.

I should have added to that list that proprietors’ income (income from one’s business) should also be excluded, as it is not at all clear how to allocate that category into income from labor and income from capital. I have updated the earlier post (and chart) to take this into account. When these guidelines are followed, the results indicate that hourly compensation is almost exactly where it should be if we expect it to rise with productivity:

Average Compensation Growth vs Productivity Growth, 1947–2012

This entry was tagged. Analysis Income

Amazon Not As Unstoppable As It Might Appear →

Farhad Manjoo:

The Bay Area has become a hotbed for some of the most innovative retailing start-ups.

With Instacart, you can get groceries delivered instantly from big and small supermarkets. With Google’s Express delivery service, you can get household goods from big-box stores delivered on the same day you order. The app Curbside lets users order items from Target, and have them ready when they drive up to a store. And with Postmates, it is possible to order takeout, and pretty much anything else, and have it delivered directly very quickly.

These services all have in common speed and convenience: Because they route purchases from stores, they can often shuttle goods to buyers faster than they are available from Amazon. The prices are even competitive with Amazon, which delivers most of its products, even groceries, from warehouses that are a few hours away.

This entry was tagged. Competition

Pure Genius: How Dean Kamen's Invention Could Bring Clean Water To Millions →

Popular Science published an exciting, inspiring article about Dean Kamen's water purifier. (Kamen is the inventor of the Segway, among many other items.) The purifier requires minuscule energy to operate and works reliably in remote, undeveloped places. This makes it well suited to improve health by providing the world's poorest people with a reliable source of clean water.

As I was reading the article, this particular section jumped out at me.

“ ‘Dean,’ he says to me, ‘if we can make the water, why can’t we do other things too?’ ” Providing clean water could be the cornerstone of what’s known as a bottom-of-the-pyramid strategy for developing markets. By providing the poorest people in the world with new technologies, services, and opportunities, a company can help lift them out of poverty and transform them into viable customers. Hence, the Ekocenter concept took shape as a companion to the water purifier, at least in some markets.

Coca-Cola launched the first Ekocenter in Heidelberg, South Africa in August 2013. A slingshot attached to the faucets provides clean water. Courtesy Coca Cola “We believe Coca-Cola’s business can only be as healthy as the community it is part of, so the well-being of the community is important to our long-term strategy,” says Derk Hendriksen, the general manager of the Ekocenter program. Notably, the company won’t directly profit from the program; each “downtown in a box” will operate as a standalone business run by a local entrepreneur, typically a woman, selected and trained by Coke. (That the soda giant enjoys an image boost in the process goes without saying.)

I love Derk Hendriksen's quote. It's a direct refutation of the idea that businesses must be regulated because—absent regulation—they'll sacrifice the health and safety of their customers for short-term profit. That fallacious idea is crazy making.

Every successful business wants their customers to be as healthy and happy as possible. Repeat customers are the best customers. There's simply no long-term profit in killing off or driving away your customer base.

Selling Reservations Democratizes the Dining Experience →

Tyler Cowen, writing for the New York Times.

When restaurants don't charge for reservations, they tend to hold back tables for regular customers, celebrities, very attractive people and the politically and socially well connected. You might be dying to go to that restaurant for a special birthday or anniversary, but you'll simply be unable to get in. Money is ultimately a more egalitarian force than privilege, as everyone’s greenbacks are worth the same.

This applies to far more than just restaurant reservations, of course. All scarce goods must be rationed. That rationing can be done by connections or cash. I'd prefer that it'd be done by cash, putting everyone on an even field of play. (Those without cash can earn it, raise it, or be given it. Connections are much harder to come by.)

Minimum Wage, Maximum Outrage

This op-ed is a good example of why I dislike the New York Times editorial page.

That is why the minimum wage debate resonates so profoundly with so many: We know what it feels like to not have enough money after you’ve busted your body with too-hard work. We know the worry in parents’ eyes as they sit around a dinner table littered with more bills than dollar bills, trying to figure out whom to pay and how to save.

These scenes play themselves out in more American households than the well-dressed men and women in the marbled halls of Congress will ever care to imagine.

Raising the minimum wage won’t erase all of the problems of the poor, but it is one component, one rooted in basic dignity and fairness, of a much fairer picture of income inequality and poverty.

… But, as one would expect, Republicans in Congress are chafing.

… This week, the Republican governor of Oklahoma, Mary Fallin, signed a bill banning the state’s cities from “establishing mandatory minimum wages or vacation and sick-day requirements,” according to The Associated Press.

How callous is that?

… Now, if both sides are playing politics with the minimum wage to some degree, which side would you rather be on: that of the working people, who are struggling to make a living, or that of the politicians determined to block them?

Charles M. Blow presents a very stark view of an issue: you're either on the side of the working poor or you're a callous well-dressed Republican who's determined to stand in the way of the working poor. He assiduously ignores any evidence that opponents of the minimum wage might also care for the poor and might be concerned about their welfare. In Blow's world the facts are simple: when Congress votes to raise the minimum wage, everyone earning the minimum wage is immediately made better off and no one suffers. Only the callous and evil could stand against that.

But the issue isn't that simple. Raising the minimum wage will cause some workers to lose their jobs—their employer will not be able to employ as many people at a higher price as she did at a lower price. Raising the minimum wage will cause other would-be workers to never get a job offer—at a higher price, employers will be less willing to take a chance on iffy job candidates.

Raising the minimum wage will make some jobs less pleasant—at a higher price, employers will be less willing to provide amenities or break times. There are, in fact, a lot of ways that a minimum wage job could get worse. For instance, the employer could be come less tolerant of employees clocking in a few minutes late. She could stop providing free uniforms and begin forcing to employees to purchase their uniforms. She could reduce the amount of on-the-job training she offers and begin hiring only fully qualified employees, cutting off a source of jobs for lower skilled employees.

No. Raising the minimum wage is not a clear cut, indisputable way to improve the lives of the working poor. It will, undoubtedly, improve the lives of some of the working poor. It will also force some into unemployment, prevent others from getting a job in the first place, and make the workplace more miserable for still others.

I oppose a minimum wage increase. Not because I'm callous, well-dressed, and uncaring. I oppose it because I have a bleeding heart, I'm sloppily dressed, and I care. And I'm angered that Charles M. Blow would choose to promote his policy position by completely ignoring my arguments and ascribing only evil motives to me and those who think as I do.

This entry was tagged. Minimum Wage

An evolution of innovative, technologically advanced pizza boxes. →

I loved seeing this. I'm always excited by innovation in mundane areas. Who would have thought that the humble pizza box was such a hotbed of creativity?

Space Saver Pizza Box

In 2009, Andrew DePascale and Marcello Mandreucci invented a space-saving solution for cluttered pizza-eating situations. This box transforms into a serving stand to free up table space that would normally be eaten up by the box’s footprint. Perforated regions of the lid fold out to connect with tabs on the side and front flaps, lifting the box base 6 inches off the surface. Since the box is not losing heat by direct conduction, the pizza theoretically stays hotter longer than it would if sitting directly on a table.

There are many more examples in the article.

This entry was tagged. Innovation

How Often Can You Trust The Experts? →

Ira Stoll, writing for Reason.com, points out that the experts are often wrong.

So, of the 60 baseball “experts” in total, not a single one of them picked the Red Sox to win the American League pennant. Only one of the 60 picked the Cardinals to win the National League pennant.

You would have been better off throwing darts at a dartboard than you would have been listening to the baseball “experts.” The Wall Street Journal used to demonstrate this in a regular column in which stocks picked by throwing darts randomly often outperformed the selections of Wall Street professionals who were even more highly compensated than ESPN journalists.

Complex systems are hard to predict.

That doesn’t mean we should ignore all experts. But it does mean we should routinely treat their predictions with the skepticism they deserve. This goes for predictions from experts preferred by the political left, who warn that the sea level rise from global warming is going to leave us all under water, and for predictions from experts preferred by the political right, who warn that the future cost of entitlement programs is going to leave us all under water.

It doesn’t mean we shouldn’t plan for the future, whether on entitlements, or the threat of global warming. But what planning we do should take into account the possibility that the experts will be wrong.

Exactly. I do trust experts when they're giving advice about what to do in response to what we know is happening right now. I'm far more distrustful when they're prognosticating about what might happen later and what we should do to prepare for that potential future. In fact, given how often expert predictions are wrong, I think blindly following their advice about potential futures might be worse than blindly ignoring their advice about potential futures.

This entry was tagged. Regulation

Why Women Really Demanded Diamond Rings →

David Friedman shares an interesting tidbit.

…In the early 20th century, a common pattern was for engaged couples to have sex with the understanding that if the woman got pregnant they would get married; evidence from several late 19th century European cities suggests that about a third of brides were pregnant. One problem was the risk of that the man, having gotten the sex, would dump his fiancee instead of marrying her. One solution to that, in U.S. law, was the tort action for breach of promise to marry. In a society where marriage was the main career open to women and the fact that a woman was known not to be a virgin substantially reduced her marriage prospects, seduction could impose substantial costs and result in a substantial damage payment.

Starting in 1935 in Indiana, U.S. states started altering their laws to abolish the action for breach of promise. Women responded, by Brinig's account, by requiring a down payment from their fiancees in the form of an expensive ring—which forfeited if the fiancee terminated the engagement. Think of it as a performance bond.

Against the Living Wage/”Subsidy” Arguments →

Jason Brennan, at Bleeding Heart Libertarians, offered some thoughts about the arguments in favor of a living wage.

Isn’t it more plausible to think that if there’s some enforceable positive duty to provide Bob with enough stuff to lead a life, that all of us, together share this burdensome duty, rather than just Bob’s employer? Why should Bob’s employer, specifically, be the one that has to bear the burden and lose all this money to keep him alive (at whatever level you consider decent)? This just seems like a kind of moral outsourcing to me. Why not instead Bob’s neighbors, parents, friends, or sexual partners? Bob does McBurger a service, and McBurger pays him for that service.

I think this can apply to more than just a living wage though. Think about any employer mandate: salary, health care, paid vacation time, paid sick time, birth control, etc. Why should Bob's (or Barbara's) employer be responsible for those costs. If "we" in society think that all employees are entitled to those benefits than shouldn't "we" in society be responsible for paying for them?

If the goverment mandated cost of entry-level employees keeps going up and up and up, why wouldn't you expect employers to be a lot more picky about who gets those "entry-level" jobs? I love having these benefits at my job and I'd love for everyone to have access to them. But if we load them all onto employers, I think we'll soon find that the poorest among us are sitting home, unemployed. And that pains my bleeding heart.

The Puzzling Return of Glass-Steagall →

Alex Tabarrok, on Senator Warren's proposal to resurrect the Depression-era Glass Steagall legislation.

Separate commercial and investment banking? Please. The problem was that investment banking, in the form of shadow banking, become so separated from commercial banking that the Fed no longer had any idea where a majority of credit was being generated. Credit creation separated from banking as understood by the Fed, and moved into the shadows, hence, the term shadow banking.

...

Glass-Steagall would merely shuffle around organizational boxes in the less important regulated banking sector. Indeed, why would anyone think that 1930s policy is the solution to a 21st century problem?

Indeed. Senator Warren strikes me as the worst kind of Senator: interested in sound bites that play well on TV and in blogs but have little relevance to actual problems and solutions.

Global Warming: Causal Density is a Bear →

From Arnold Kling, at his askblog:

When there are many factors that have an impact on a system, statistical analysis yields unreliable results. Computer simulations give you exquisitely precise unreliable results. Those who run such simulations and call what they do “science” are deceiving themselves.

This is in the context of the The Economist's realization that greenhouse gases may not be quite as dangerous as previously thought.

Exquisite models are still just models. Their conclusions are only as good as the assumptions that went into making them.

This entry was tagged. Global Warming

Sorry, Folks: One Way or the Other, You'll Never Be Able to Completely Count on Retirement →

From Megan McArdle, at the Daily Beast:

But in the end, they're the same package.  There's no way to take the risk out of betting on the future; by the time you can predict the future accurately, it's already the past.  

We're just picking how we want to take our risk, not whether we want to take it.  And if there's one thing we should have learned form the financial crisis, it's this: the minute we decide that we don't have to make that choice--that we have figured out some way to get rid of the risk altogether--is generally the moment that the universe decides to give it to us, good and hard.

It doesn't matter whether you choose a defined benefit plan (pension), a defined contribution plan (IRA or 401(k)), Social Security, or something else. There is no guarantee that you'll have the retirement of your dreams.

The Revenue Deficit From Progressive Tax Rates →

Michael Solon, writing in the Wall Street Journal:

Why? A more progressive tax code now leverages the negative impact of slow economic growth. The share of all individual income taxes paid by the top 1% has risen to 41.8% in 2008 from 17.4% in 1980—but almost two-thirds of the income from the top 1% comes from nonwage income, including capital gains, dividends and proprietor's profits.

Individual income taxes as well as corporate taxes are now far more rooted in the shifting sands of volatile business income and capital profits rather than in the terra firma of wage income that stabilizes payroll taxes. From 1960 to 2000, payroll taxes were never lower than in the previous year, individual income taxes dipped only twice, and corporate taxes dropped 11 times. Since 2000, individual income and corporate tax revenues dropped five times, while payroll taxes fell twice. Not only do revenues from individual tax returns drop more often now. They fall more severely, with recent collapses of 14%-20% versus the 3%-5% range before 2000.

If "the rich" pay all of the taxes (and they pay a massive share in the U.S.) than tax revenues will be directly tied to the fates of the rich. Right now, the federal government needs high income earners to continue earning high incomes. As soon as the high incomes take a hit, tax revenue takes a massive hit.

We now have a government that has a massive incentive to ensure that "the rich" never see their incomes drop. We might have a more just government if we evened out the tax code, so that income taxes were spread more broadly and more evenly over the entire country instead of being concentrated over a very small portion of the country.

Aviation, Liability Law, and Moral Hazard →

Alex Tabarrok, of George Mason University, shares an interesting account of regulation, deregulation, and increased safety. In the mid-90's, Piper, Cessna, and Beach were no longer producing small airplanes for the general public. They were too afraid of lawsuits over planes that were decades old.

Congress eventually responded by saying that "manufacturers could not be held liable for accidents involving aircraft more than 18 years old". The result: an increase in overall safety.

a significant (on the order of 13.6 percent) reduction in the probability of an accident. The evidence suggests that modest decreases in the amount and nature of flying were largely responsible. After GARA, for example, aircraft owners and pilots retired older aircraft, took fewer night flights, and invested more in a variety of safety procedures and precautions, such as wearing seat belts and filing flight plans. Minor and major accidents not involving mechanical failure—those more likely to be under the control of the pilot—declined notably.

When it cames to safety regulation, more is not always better. Sometimes it's just more. People are more likely to be cautious if they believe that they bear risk themselves rather than believing that someone else bears all of the risk.

Krugman and Inequality of Free Time →

Krugman is correct that women spend more time in paid jobs than before. But women also spend much less time doing unpaid household work. Overall, men and women enjoy three to six hours a week more free time than in the 1960s — Americans have more leisure today than a generation ago.

In fact, lower income Americans have more free time today than upper income Americans do. It seems that people face a trade-off between higher incomes with less free time or lower incomes with more free time.

Speaking personally, I know I could probably earn more if I put in more time at work. But I'm happy to forgo that extra income in favor of spending more time at home, with my family.

Herbert Hoover: Father of the New Deal →

Steven Horwitz published a Cato Briefing Paper on Herbert Hoover, our President who was the exact opposite of a laissez faire non-interventionist.

Politicians and pundits portray Herbert Hoover as a defender of laissez faire governance whose dogmatic commitment to small government led him to stand by and do nothing while the economy collapsed in the wake of the stock market crash in 1929. In fact, Hoover had long been a critic of laissez faire. As president, he doubled federal spending in real terms in four years. He also used government to prop up wages, restricted immigration, signed the Smoot-Hawley tariff, raised taxes, and created the Reconstruction Finance Corporation—all interventionist measures and not laissez faire. Unlike many Democrats today, President Franklin D. Roosevelt's advisers knew that Hoover had started the New Deal. One of them wrote, "When we all burst into Washington ... we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself."

Quotation of the Day… →

I love this. From Don Boudreaux.

… is from page 162 of Tom Bethell’s 1998 volume, The Noblest Triumph (original emphasis):

The great blessing of private property, then, is that people can benefit from their own industry and insulate themselves from the negative effects of others’ actions. It is like a set of invisible mirrors that surround individuals, households or firms, reflecting back on them the consequences of their acts. The industrious will reap the benefits of their industry, the frugal the consequences of their frugality; the improvident and the profligate likewise. They receive their due, which is to say they experience justice as a matter of routine. Private property institutionalizes justice.

Moving Beyond Free-Market Minimalism →

The Foundation for Economic Education has an informative article out, regarding what's necessary for a "free market" to function. After I read it, I realized that it explains what I couldn't, regarding how and why markets and competition work.

In a free market, “Scrooge-like behavior” is certainly permissible as long as it doesn’t initiate violence or fraud. But where do the high quality, low price, and innovation we associate with the free market come from? Well, as most economists will tell you, much of it comes from the fear of competition. If you cut corners and charge consistently high prices, even though you may be within your rights to do so, many free-market advocates would rightly point out that free entry and hungry entrepreneurs will tend to keep you in line. That’s important, but it’s not the whole story; not by a long shot.

Honesty and fair play, trust and reciprocity, are principles that FEE has always upheld as crucial parts of the “foundation of economics.” They go far beyond the indispensable but bare minimum of private ownership of property, free trade, and individual self-seeking—or what one might call “free-market minimalism.”

... A chapter called “Murder, Reciprocity, and Trust” in Paul Seabright’s excellent book The Company of Strangers, proposes that we divide society into “calculators” and “reciprocators.” A pure calculator is the economic-man caricature who is ready to act opportunistically (with guile) at any moment. A reciprocator is someone who is going to repay what is done to her, good or bad, no matter what. If someone cheats a reciprocator, she’ll go to the ends of the earth to make him pay; if someone does her a favor, she’s going to return it, even at great inconvenience to herself. A reciprocator keeps her promises.

Seabright argues that even pure calculators would have to pretend to be reciprocators at least sometimes lest everyone, including other pure calculators, shun her. It’s people with a norm of reciprocity, an internalized rule to give tit-for-tat even when you don’t have to, who are critical to the free market.

Note also, however, that if B reciprocates and repays A, A must have first trusted that B would indeed repay her. Trust means here that A is willing to make herself vulnerable to B’s opportunistically not keeping his promise. Trust is the flip side of reciprocity.

But if A is too trusting, calculators will take advantage of her, which gives A an incentive to be a calculator at least part of the time. That’s why Seabright argues that in the real world people have an incentive to find the right balance between opportunism and trust/reciprocity.

... The free market is a great engine of discovery and development because the people in it have the opportunity and the willingness to take chances. Bringing many strangers together who have diverse knowledge, skills, and tastes—which we find markets doing around the world—presents the opportunity. Being willing to trust people we don’t know—new employers, suppliers, coworkers, customers, neighbors, and friends—enables us to take advantage of those opportunities.

Of course, sometimes trusting someone who turns out to be untrustworthy hurts us. But even those unpleasant experiences teach us something: we learn the circumstances under which people are trustworthy or not. That’s valuable knowledge we would never have learned if we were unwilling to trust in the first place.

If we are unwilling to trust when the opportunity arises, if we are mere economizing calculators, we shouldn’t expect the free market nor any other system to develop the complex division of knowledge and labor necessary to achieve real prosperity. The greatness of the free market, however, is that, more than any other system that we know, it enables us to learn and to grow, even as it allows us to flourish.