Tag Archives: Economics

Paul Krugman Was (Probably) Right!

It pains me to admit this, but Paul Krugman was probably correct about something. (Though, modern-day Krugman might disagree.)

I’d point you to this excellent NRO item:

But what if 2014’s jobs boom is mostly thanks to the expiration of a program that the Obama administration and Democrats fervently pushed to renew?

That’s the finding of a new NBER working paper from three economists — Marcus Hagedorn, Kurt Mitman, and Iourii Manovskii — who contend that the ending of federally extended unemployment benefits across the country at the end of 2013 explains much of the labor-market boom in 2014.

About 60 percent of the job creation in 2014, 1.8 million jobs, they find, can be attributed to the end of the extended-benefits program. That’s a huge amount, and suggests that long-term unemployment benefits, while there’s a good charitable case for them, could have played a big role in the ongoing lassitude of our labor market. (Indeed, an earlier working paper from a few of the same authors argued that extended benefits raised the unemployment rate during the Great Recession by three percentage points; see a summary of that paper here.)

This brings me back down memory lane, nearly five years ago, to my days as a young and brash aide to Senator Jon Kyl (R-AZ) in 2010.

Here’s what Krugman sneered in his column back then about floor remarks made by my boss regarding the large expansion of unemployment insurance:

Here’s what Senator Jon Kyl of Arizona, the second-ranking Republican in the Senate, had to say when defending Mr. Bunning’s position (although not joining his blockade): unemployment relief “doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”

To Krugman fanatics and haters, it’s not news that Krugman will write one thing, and then, years later with a newspaper column, write something completely different.

So, we went to the Library of Congress and pulled out the text book he had written with his wife, called “Macroeconomics” and look what we found:

Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European countries.

Golly.

So, a letter to the NY Times — something they are known for not publishing if critical — was drafted. And wouldn’t you know? It got published.

Though, we never did hear back from Paul Krugman. But I hope pre-NYT Krugman is feeling somewhat vindicated.

Here’s the letter:

jk nyt unemployment

EconPop — The Economics of the Lego Movie

As usual, Heaton delivers describing the movie my Lego doppelgänger is the star of:

Imagine A World Without Price Discrimination

Price discrimination is poorly understood. Some, including me, think it gets a bad rap. I actually like it. The layman’s definition is charging people different prices for the same good or service. To economics uber nerds, you might hear it described as “taking advantage of different elasticities of demand for the same goods by charging different prices relative to marginal cost.”

Love it or hate it, price discrimination happens quite frequently — more so than most expect.

The first and most important factor in why people don’t like price discrimination is the term itself. Usually, nobody likes being on the receiving end of discrimination — unless it benefits them. Economist types prefer much less harsh terms for the practice, calling it “dynamic pricing” or “price customization.” Thomas Sowell, in his book Applied Economics, makes a very important point here:

Prejudice, bias, and discrimination are too often confused with one another. Each requires careful definition before discussing substantive issues, if those discussions are not to get hopelessly bogged down in semantics.

On the web today, many many pixels were devoted to Amazon and their new “Amazon Mom” program that gives a discount to mothers. The debate was whether people should lie to Amazon to get that discount — since they weren’t “verifying” if your baby was real.

Thought leader Touré shared this pearl of wisdom with us: “If a lie is told to a corporation, it’s not really a lie.” You can play this game at home, like former DC City Council member Kwame Brown did, by lying about his income to a bank. He went to jail, and so could you. Corporations are people, my friend. Vengeful, vengeful people.

Anyways.

If Target can find out people are pregnant through data wizardry, it’s safe to assume Amazon can probably do that even better. Heck, if you’re not buying baby items, I’m sure they’ll notice pretty quickly. I have no dog in that fight, except that I am happy to support price discrimination. Though, you probably won’t go to jail for lying about a fake baby — you’ll just be as bad as people who fake pregnancies.

There is a liquor store I go to in Washington, and because I go there with some frequency, I get special pricing. You, however, pay full price. I go to this store because I liked the pricing and selection before, and even more so now. Unlike Virginia, where my outgoing governor who promised to privatize our horrible liquor delivery system but failed to do so, these stores have decent selection. And because there is competition, you can actually get good prices on booze.

My shopkeeper seems to understand the pricing mechanism quite well. Cleveland’s finest — Great Lakes Christmas Ale — goes for $25 a six pack. Given its scarcity, he knows people will be willing to pay more for that premium product. And because he does this, it stays on the shelves. There was a six pack there this evening. A few years ago, before the secret got out in Washington, my sister and I scooped up five cases of the stuff at a reasonable price. At $25 a six pack, today, our little haul would cost $200 more.

Now, before you conclude that I like discriminatory pricing because it results in me getting cheap liquor, I’ll switch to a few more important examples.

To truly understand the usefulness and benefits of price discrimination, you should try to imagine a world without it.

At Business Insider, Josh Barro observes:

“Discrimination” has negative connotations, but there’s nothing immoral about price discrimination. In fact, it can be an economically useful mechanism. If airlines had to charge the same price to every flyer, a lot of flights would become uneconomical to operate, making both the airline and the passengers worse off.

Indeed, Barro cites but one of many examples where price discrimination serves a necessary function. Without price discrimination, would there be as many flights as there are now? As many routes? Would you be able to afford them? What about $1 Megabus rides, certain types of discounts, or coupons?

Thankfully, we probably won’t have to find out because price discrimination isn’t likely to disappear from the marketplace anytime soon.

Josh Wright writes that “discrimination is likely to result in lower prices, higher output, and increased innovation.” And he would be correct. Without price discrimination, airline output would be markedly lower.

He also concludes a fantastic blog post with this:

“one lesson of the price discrimination literature that is ignored is exactly how unusual uniform and linear pricing is in the modern economy! The ability and incentive to price discriminate, which requires only the absence of perfect substitutes, is ubiquitous. It is a power held by every restaurant, landlord, corner gas station, supermarket, and small firm in the economy. Because price discrimination is profitable, we can expect firms in our modern economy to invest substantial resources not only in product differentiation, but also in finding methods to price discriminate. These provide no reason for competitive concern. Indeed, I think one could make a plausible argument (though I won’t in this post) that the absence of price discrimination is more worthy of regulators’ attention than its presence.”

FURTHER READING: A great FindLaw article on price discrimination and the law, and a CRS report on Robinson-Patman.bsig

New Yorkers Complain About Economics

From the ever-expanding “This Isn’t Price Gouging” Department, the New York Post reports:

Passengers are blasting the Uber car-service app for its “surge’’-pricing scheme, which kicked in during the city’s first snowstorm of the season — in one case pricing a short trip across town at a whopping $132.

But in Boston, blogger Jessica Gioglio — who bills herself as “The Savvy Bostonian” — shelled out $91 for a 3.18-mile, 16-minute trip from Beantown’s Back Bay to Central Square.

Posting a screenshot of her e-mail receipt, she called the fare “price-gouging” and said, “I’m really disappointed in u guys.”

Uber, much maligned by regulatory fiends and taxi cab sympathizers, has really upset the taxi cabal in many major U.S. cities. Namely by providing better, more convenient service for a more premium price.

Unlike taxicabs, whose drivers can usually only impose a change in prices when allowed by decree from the government (i.e. during a snowstorm, or when gas prices are unusually high), Uber can raise prices to reflect market demand. And users are clearly made aware of this before they agree to take an Uber, as seen below.

The Post continues:

The app’s practice of surge pricing is actually designed to help consumers, Uber spokeswoman Nairi Hourdajian insisted Sunday. The higher rates “get more cars on the road quickly when demand outstrips supply, helping to guarantee that New Yorkers can get a ride when and where they want,” she said.

“As soon as demand falls or supply increases sufficiently, prices return to normal.”

Uber cars and their drivers, like everything else, are a scarce resource with alternate uses. Uber is right to raise prices to incentivize more drivers to work than to accept private contracts (as many Uber drivers do in Washington), hunker down with their family, or go out and get supplies for their homes. Just like laws prohibiting so-called “price gouging” during a storm serve as a disincentive for shop owners to stay open, the rules that govern taxi cabs often result in less taxis being available.

Which, in turn, might cause Uber’s demand to surge even higher than it normally would if taxis had greater flexibility to charge market rates. bsig

Why Does New Jersey Need Farms?

urban farm nj

At work today I noticed an interesting blast fax on our fax machine. “New Jerseyans Support Farming Initiatives” read the headline. It was from Farleigh Dickinson University’s Public Mind Poll and it was co-sponsored by the New Jersey Farm Bureau.

And according to this poll, 80 percent of New Jersey residents “support the continuation of public funding for the preservation of … farmland.”

Yes, you read that right. Public funding for preservation of farmland. Market forces be damned!

The reason? You guessed it. Buy Local!

According the poll, 77 percent of New Jerseyans say “they or a family member have purchased locally grown produce at a farm stand or farmer’s market in the past 3 months.”

To New Jerseyans, what does “local” mean? The poll tells us. 44 percent say anywhere grown in the state should qualify, while 17 percent think it should be within 30 miles of the store, and 13 percent think it should be within 50 miles. The remaining 24 percent were a little more liberal with their definition of what truly counts as “local.”

The poll went even further, asking whether New Jerseyans would be willing to pay extra for locally grown produce. Amazingly, 66 percent said they “would be ‘very’ or ‘somewhat’ likely to pay 10% extra” while 56 percent would be “‘very’ or ‘somewhat’ willing to pay 25 percent extra.”

New Jersey Farm Bureau President Rick Suydam closes the blast fax with this gem: “We always believed that New Jerseyans understood the importance farming has in the state and the collective results from this survey confirm that our residents fully support farmers and agriculture in the great Garden State.”

If it were true that residents “fully support” New Jersey farmers by choice, they wouldn’t need the public funding.bsig

Update: A friend writes:

New Jersey also redefined what it considers “farmland” in the last year or so to increase their tax base and to stop suburbanites from selling tomatoes to their neighbors to claim tax breaks. (Farmland is taxed at a very low rate, much lower than homes or businesses.) They’re playing both sides of the fight

If the Neo-Luddites Got Their Way

The resurgence of luddism is something that, while seemingly innocent, is frankly quite troubling. Neo-luddites take many forms these days — from the buy local crowd, the organic obsessed, make-work Keynesians to actual, straight up luddites. (I guess make-work Keynesians are sort of the same thing…)

As I’ve previously criticized the cult-like behavior of some buy local and organic folks, I’ll issue the standard mea culpa: Buying local or eating organic foods is just peachy in my book. Go for it. Go hog wild, but please don’t proselytize your lifestyle choices with clapatrap.

Go to the farmer’s market and buy “local” food from two states away. I’ll get food from Walmart that is even more local, and because they have economies of scale, it’ll be better for the planet than the F-250 that drove 500 miles with your kale (now with a free side of sanctimonious bullet points for lecturing!).

What bothers me about the neo-luddite cultists, aside from their lecturing, is that they don’t just lecture you about your choices, they often want policies to favor their choices.

Here’s a brief hypothetical look into what America would be like if some of these yahoos got cart blanche.

Garlic. Grown pretty much everywhere but Alaska. The U.S. ranks eighth in the world in garlic production.

Agriculture policies are changed, and no longer can you get garlic from Mega-Garlic, LLC. Your garlic now has to be locally grown, organic, and machine free.

This is what that would look like:

These are women peeling garlic in North Korea.

Throughout the rest of world, we have machines that do this. They’re pretty neat actually. They reduce labor costs and increase efficiency.

Even though I think that buying local for local’s sake is dumb, I realize that most people who love buying locally or people who love organic food (as opposed to that inorganic stuff we all normally eat) don’t espouse making their lifestyle choices mandatory for the rest of us. My example, North Korea, is a pretty extreme example. However, some people do think like that.

Many others propose watered down versions of this extreme, which is still pretty bad.bsig

Could Pop-Up Hotels Solve Disaster Housing Shortages?

I read with interest a recent piece in Businessweek about an innovate company that has managed to make something akin to a hotel food truck:

This year, Snoozebox Holdings is shipping 40 to 400 stackable containers to house guests at events including Le Mans, the Edinburgh Festivals of plays and concerts, and the G8 Summit. The prebooked rooms are equipped with flat-screen TVs, Wi-Fi, and running hot water.

Who would want to stay in one of those, you might ask? The company, Snoozebox, has already found some markets for its product.

snooze

The answer is, mostly, rich people. However, like with most innovations, what starts as a toy or luxury for the rich (telephones, VCRs, televisions, internet) usually becomes pretty affordable and widespread.

Take the devastating tornado that recently ravaged Oklahoma. Or the one in Joplin, Missouri. Housing is one of the most needed commodities in the wake of natural disasters. Could Snoozebox, or its competitors save the day and provide a market-based solution to help people in need?

While the obvious answer is yes, the reality is probably not. Or at least not anytime soon.

Whenever an innovation disrupts the current natural order, vested interests often use the law and politicians in an attempt to stifle competition. Economists call the former “creative destruction” (good) and the latter “rent seeking” (bad).

Creative destruction, in the form of the Uber car service or food trucks, is really great for consumers. Their competition — well established taxi cabals and brick-and-mortar restaurants — don’t see it that way. They get politicians to enforce laws that would inhibit any competitor from setting up shop, and if the laws doesn’t exist for that purpose, those interests usually push politicians to pass them.

Let’s rewind the clock to a day after the tornado hit Oklahoma. You work at Bomblebox, a fictional competitor of Snoozebox. Oklahoma would be an ideal place to offer your services to a populace coping with disaster. Hotels are overbooked, people are cramped in the houses of friends — often far away from the site of their former home. There’s a natural market for the Bomblebox.

Could Bomblebox drive a couple of trucks over and set up shop somewhere? In this hypothetical, it’s unlikely.

Each of the fifty states has their own laws and regulations governing hotels and lodging. And it’s unlikely that a company not already licensed to do business there could get all the t’s crossed and i’s dotted before the window of opportunity closes.snoozebox-exterior-sunshine

Second, local hoteliers, their trade groups, and other interest groups would probably object. There are a ton of ways they could do this:

Would Bomblebox’s products be up to snuff with Chapter 285 — the part of Oklahoma law that regulates lodging establishments?  Is the plumbing consistent with the Oklahoma Plumbing License Act? Is the electricity system consistent with the Oklahoma Electrical Licensing Act? Does each unit “maintain at least one lighting fixture suitable for reading”? Do all the bathroom floors have “impervious floor surfaces?” Is the sewage disposal system consistent with “regulations adopted by the Oklahoma State Board of Health?” I don’t know.

Remember, these laws are for your safety. Created, supposedly, to protect you — but they also often serve to protect the current natural order from competition.

You get the point.

The time and money it would take to ensure compliance would probably guarantee that such a plan wouldn’t get past the research phase. There are a lot of questions to answer just to drive a box that people would pay $400 a night to stay in while watching a race or stay at a festival like Bonnaroo. Put another way, if people are willing to pay that much to stay in a box at a race or a festival, my guess it’s probably good enough for  to stay in after the wake of a disaster.

But that’s not how regulation and the natural order operate. Mutually agreed upon and beneficial transactions, even under extenuating circumstances, are often illegal outright. You’re not necessarily free to transact with others as you see fit. While FEMA does provide disaster assistance — think FEMA trailers —  some people probably would be willing to pay more, and could afford to get something a little nicer than a crappy camper because for their well being they want the comforts of home.

Let’s pretend for a second that Bomblebox is a Missouri company, and has plans to do business all over the southland to help people recover from disasters, and provide housing during political conventions and festivals.

Could Bomblebox then, had it complied with all the varying laws regulating hotels and motels, go into business? Again, the answer is probably not.

Ill-advised price gouging laws in each of the states would likely prohibit Bomblebox from charging the market rates necessary to make it profitable. And thus, local hoteliers and the government — which also hates competition — would likely object and prohibit the “evil” Bomblebox corporation from helping people at a time when they need it most.

What about renting (or selling) house-like version of the Bomblebox? At first glance, that might appear to be a better option.

But, again, the complex web of laws and regulations would make that difficult, and in addition to hoteliers, the competitors of the natural order (RV makers, prefabricated home makers) would likely throw in a monkey wrench to complicate things.

In my lifetime, we’ve seen creative destruction move at an amazingly fast pace. The days of radio-dispatched cabs that come because of a call from your home phone or payphone are over. We’re in the Uber era now, where my smartphone will get me a black sedan in mere minutes. Instead of having to go and wait in a long line to get a Georgetown cupcake, food fad fetishists can be satisfied by a 3 minute walk to Farragut Square where multiple food trucks offer similar (and often better) products with shorter lines and often at lower prices. Or, if you really have your heart set on Georgetown cupcake, Seamless can deliver it for you.

Generally speaking, our regulatory system and laws are outdated. Uber is discovering that first hand across the country, most recently in Los Angeles. The byzantine shackles of a outdated laws and regulations that keep cities (like my hometown of Cleveland) from returning to their former status of greatness exist all across the country in various degrees.

What keeps them there is politicians who cater to the special interests, and who see themselves as wizened sherpas of the regulatory Mt. Kilimanjaro rather than people whose job it is to make their constituents’ lives easier through good policy, not political dependency.

Going forward, the cities and states that recognize the burdensome constraints of outdated regulations and laws are the ones that will prosper. They’ll have the Ubers, the food trucks, and — when times are tough — people willing to provide innovative solutions to help them in their time of need.  Their citizens will lead happier, better lives, and bounce back from adversity faster than their friends in the cities and states whose leaders who let archaic policy and outdated thinking rule the day.

Few people argue for no regulations at all, but the people who think that deregulatory advocates believe this are often the very politicians who say “everything is fine.” Odds are, it’s not. And the joke’s on you if you believe them.

 

 

 

Unintended Consequences of Price Gouging Laws

gouge

From The OK Disaster Scam Prevention Packet, as prepared by OK Attorney General E. Scott Pruitt’s “Public Protection Unit”

Most states have laws that purportedly protect people from evil “price gougers” in the wake of man-made or natural disasters. Some are toothless and silly, affording publicity seeking politicians to give themselves some good press, while others are draconian or invasive.

One point to consider is that price gouging laws do nothing to address or fix the shortage of a certain commodity due to either high demand or diminished supply. They’re not a solution.

These laws impose a “finder’s keepers” marketplace, where those conveniently situated to suppliers can hoard much needed goods at what are effectively below-market rates, rather than a market-based economy where buyers and sellers can decide what prices they’d like to charge or the price they’re willing to pay.

Oklahoma’s law seems especially pernicious because it restricts the ability of prices to rise by 10% not just for the immediate time after the disaster, but for 30 days after – and for “dwelling units, storage space and goods related to home repair and restoration”, 180 days after.

While big-box stores like Home Depot and Lowe’s have the size and scale to absorb potential losses from such a prohibition, it’s doubtful that your local mom-and-pop hardware store will escape as unharmed.

Of course, there are individuals who would try and skirt the law, and that’s not hard to understand because it is a bad law. Jim’s Hardware could mark up all items by 55% immediately before the disaster, and presumably be able to better absorb the price shocks they’d experience afterwards. However, you can bet that your local “consumer reporter” would be all over that in about a New York minute.

Lastly, even if price gouging laws do result in savings before the shortages occur, it’s worth asking whether, on net, the prosecution of violators if price gouging laws ends up costing taxpayers more than the money the few who were lucky enough to stock up on D-Batteries and bottled water saved?

Put another way, can you put a price on feeling good that you weren’t “ripped off” — even if you are living in the dark and thirsty? Will that round out the balance?

Could it be that these laws harm more than they help?

Here’s a good video on the topic:

All hail capitalism.

While I do love cooking actual meals for myself, over the years as an underpaid civil servant, I have taken a liking to frozen meals for lunch or dinner.

Nestle’s Stouffer’s meals — a Shaker Heights restaurant that became famous for pioneering the frozen meal back in the day — as well as the Lean Cuisine line of brands. In particular their lasagna and macaroni and beef are excellent.

Having left government for journalism, I often find myself at Walmart, Safeway, Giant, or Shoppers buying frozen Banquet meals — for a price between $.89 and $1.50. Even if I eat two at lunch, I am spending at most $3.

It got me thinking.

For the low, low price of  about $1, I can have five chicken nuggets, corn, and macaroni and cheese. Of course, I pay for the cooking aspect of this product, which costs me pennies. My electrical bill is usually less than $100 a month, and not much of that is used for the microwave. At work, it doesn’t actually cost me a dime, assuming of course, that the money spent on overhead doesn’t come at the expense a higher paycheck.

Are the nuggets as good as McDonald’s? No. But, even for their affordable price of 4 for $1, I get more from Banquet– even if their product isn’t as good.

The economics of the frozen dinner are, when you think about it, pretty interesting.

This is not a gourmet meal, but, it is not a bad meal, especially given the price. Inputs, marketing, distribution, storage, and sale — comes to me for less than $2 a pop.

From the chicken being birthed and raised, going to ConAgra’s plant, being slaughtered, prepared, cooked, breaded, and frozen… to the corn and wheat being grown, harvested, and transported, the cow’s milk being used for cheese and other inputs, like paper, dye, and plastic — all going into a  product with a plastic dish, covered with cellophane, inspected, boxed, and shipped from the midwest to me in Virginia — it’s a pretty amazing journey.

And it costs me, more or less, $1 a meal.

All hail capitalism.

Addendum: “But, Jim… don’t subsidies distort the price you should really be paying for that delicious frozen meal”? Yes, that they do. Without the subsidies, the meal would be more expensive, and I’d prefer that the subsidies be eliminated. Even in that universe, the marvels of capitalism would bring me this and other products at affordable prices.

Bomblecast 22: The Future of the NCAA & How We Watch It

e22

Last night, good friend of the blog Terry Neidl joined me to discuss SLU and Syracuse’s chances, the NCAA tournament, and how technology might change the way conferences organize and how we watch the game. Warning: NSFW language.

Thanks for tuning in. (You can download the file here.)