Archive for the ‘Economics’ Category.

The Next Time the Media Complains About High CEO Pay.... It May be Projection

Six of the ten highest paid CEO's run media companies.

Six of the 10 highest-paid CEOs last year worked in the media industry, according to a study carried out by executive compensation data firm Equilar and The Associated Press.

The best-paid chief executive of a large American company was David Zaslav, head of Discovery Communications, the pay-TV channel operator that is home to "Shark Week." His total compensation more than quadrupled to $156.1 million in 2014 after he extended his contract.

Les Moonves, of CBS, held on to second place in the rankings, despite a drop in pay from a year earlier. His pay package totaled $54.4 million.

The remaining four CEOs, from entertainment giants Viacom, Walt Disney, Comcast and Time Warner, have ranked among the nation's highest-paid executives for at least four years, according to the Equilar/AP pay study.

More power to 'em, as long as their shareholders are happy.  But I am tired of these self-same individuals attempting to bring regulatory pressure on the rest of us in the name of high CEO pay.

A Couple Lessons We Can Learn from Disney Pricing

Bloomberg (via Zero Hedge) had this chart on Disney theme park entrance prices:


A few random thoughts:

  • This highlights how hard it is to do inflation statistics correctly.  For example, the ticket being sold in 1971 is completely different from the one being sold in 2015.  The 2015 ticket gets one access without additional charge to all the attractions.  The 1971 ticket required purchase of additional ride tickets (the famous, among Disney fans, A-E tickets).  So this is not an apples to apples comparison.  Further, Disney has huge discounts for multi-day tickets.  The first day may cost $105, but adding a fourth day to a three day ticket costs just a trivial few bucks.  Local residents who come often for a single day get special rates as well.  So the inflation rate here grossly overestimates that actual increase in per person, per trip total spending for access to park attractions
  • This is a great case in pricing strategy.  Around 1980, the Bass family bought into a large ownership percentage of Disney.  The story I am about to tell is often credited to their influence, but I am not positive.  Never-the-less, someone had a big "aha!" moment at Disney.  They realized that families were taking trips just to visit DisneyWorld.  These trips cost hundreds, even thousands of dollars.  The families were thus paying hundreds of dollars per person to enjoy Disney, of which Disney was reaping... $9.50 a day.  They had a stupendously valuable product (as far as consumers were concerned) but everyone else in the supply chain was grabbing most of the value they created.  So Disney raised prices, on the theory that if a family were paying over a thousand dollars to get and stay there, they would not object to paying an extra $50 at the gate.  And they were right.

Currency Manipulation

One of the critiques of any trade deal of late is that there should be penalties for countries guilty of "currency manipulation."  The concern is that countries will devalue their currency in an effort to make their own exports cheaper to other nations while making it harder for other countries to export back to them.  As an example, if the Chinese were to do something that cuts the value of the Yuan in half vs. the dollar, their products look very cheap to American consumers while American-produced goods suddenly look a lot more expensive to Chinese consumers.

I have two brief responses to this:

  1. I find it hilarious that anyone in the United States government, which has a Federal Reserve that has added nearly $2 trillion to its balance sheet in the service of cramming down the value of the dollar, can with a straight face accuse other nations of currency manipulation.  In practice in today's QEconomy, currency manipulation means another country is doing exactly what we are doing, but just doing it faster.
  2. As an American consumer, to such currency manipulation by other countries I say, Bring it On!  If China wants to hammer its own citizens with higher prices and lower purchasing power just to subsidize lower prices for me, I am happy to let them do it.  Yes, a few specific politically-connected export businesses lose revenues, but trying to prop them up is pure cronyism.  Which is one reason I think Elizabeth Warren is a total hypocrite.  The constituency of the poor and lower middle class she presumes to speak for are the exact folks who shop at Walmart and need very price break on everyday goods they can get.  Senator Warren's preferences for protectionist trade policies and a weak dollar will hurt these folks the most.

The Fatal Allure of the Sexy Business

The tech site Engadget directed me to this article on Visual FX and CGI as a "must-read".  What I found was one of the odder economics and business hypotheses I have encountered lately.

The article begins by relating that VFX and digital effects specialty houses all lose money, even when they are providing effects for wildly profitable movies (e.g. Avengers) and purports to explain why this should be.  The author believes that this is a result of Hollywood purposely criticizing the artistry of VFX movies as a way to keep returns in the VFX companies down (and thus increase the returns of film producers).

As the debate surrounding what visual effects are worth rages on, it is clear that the studios themselves have an interest in perpetuating the myth that VFX are the product of clinical assembly lines and the results are equally lifeless and mechanical. Blaming computers for the dumbing down of movies has become a journalistic trope that is bandied about to squeeze the one part of the Hollywood machine that has no union or organizational skill to push back. The right hand asserts they are something not worth paying top dollar for, while the left lines up an interminable roster of VFX-based box office juggernauts for the foreseeable future.

The author goes so far as to say that Avatar was denied the best picture Oscar specifically to support the anti-VFX sentiment and keep returns of VFX companies down (emphasis added).

In 2010, James Cameron’s Avatar became the highest grossing film of all time just 41 days after its release, raking in an incredible $2.7 billion by the end of its run. Weta Digital, the VFX studio that created the majority of the visual effects, along with Lightstorm Entertainment, invested years in developing the tools and talent necessary to create Cameron’s almost entirely computer generated vision, with the cost of making the film rumored to be upwards of $500 million. Cameron had promised to show the world what visual effects could do and he succeeded. The results were universally lauded as visually stunning and unparalleled.

Yet, rather famously, the film and Cameron were snubbed that year at the Academy Awards, both for Best Picture and Best Director. The blame was laid at the feet of the critical success of The Hurt Locker. However, awarding Avatar the Academy’s highest honor would have been acknowledging visual effects as not only lucrative, but high art as well, worthy of its astronomical price tag. And that was a bargaining chip Hollywood was unwilling to concede to an industry it continues to hold hostage with threats of outsourcing to unskilled laborers around the globe.

This hypothesis seems outlandish, and in fact the author never really provides any evidence whatsoever for her hypothesis.   At least equally likely is that Hollywood insiders are snobbish and conservative and reject new approaches to film-making in a way that the public does not.  Or it could be that Avatar wasn't a very good movie (go try to watch it again today, you will be surprised what a yawner it is).  So why are VFX companies really losing money on profitable films?   Let's take a step back, because there is a useful business lesson buried in here somewhere.  I think.

This discussion is a sub-set of an age-old business problem -- how do rents in a supply chain get divided up?   Think of the billion plus dollars the new Avengers movie will make.  Everyone in the supply chain for making that movie, from the actors to the caterers to the VFX houses to the distribution companies believe their contribution has immense value, and that they should be getting a solid cut of the profits.  But profits in a supply chain are not divided up based on some third party assessing value, they are divided up by negotiation.  And the results of that negotiation depend on a lot of factors -- the number of competitors, the uniqueness of the service, regulatory rules, etc.  The most visible example of this sort of negotiation we see frequently in the news is in sports, where players and team owners are explicitly negotiating the division of the end revenue pie between themselves.

If we return to the article, the author actually gives us a hint of the true dynamic that is likely bringing down VFX profits.

The international subsidies-driven business model under which VFX companies operate has been well documented. In pursuit of tax rebates offered by various governments to produce films in their jurisdiction, studios insist that VFX companies open branches in these locations or reduce their bids by the amount of the subsidy in question. Even as studios, directors, and audiences demand the latest in cutting edge technology, VFX houses must underbid one another to get the work and many have been shuttered due to operational losses in the wake of explosive blockbuster budgets. The cost of research and development, shrinking schedules, and the unlimited changes that are the building blocks of every tentpole film, are shouldered entirely by VFX houses.

This is the best clue we get to the real problem.  Here is what I infer from this paragraph:

  1. This is a high fixed cost industry.  There are enormous up-front investments in research into new techniques and large investments in the latest technology, which presumably must be constantly refreshed because it has a short half-life before it is out of date.  The situation is worsened by government policy, which provides incentives for VFX companies to build extra capacity in multiple countries, losing economy of scale benefits from large concentrated production facilities.    One would presume from this that these companies' marginal cost of output, say 15 seconds of finished effects, is way way below their total costs.
  2. There is rivalry among VFX companies that seem to have excess capacity, such that bidding for work is very aggressive.  In such situations (think American railroads in the late 19th century) competitors lower prices down to marginal cost to keep their capacity and their trained people working.  Over time, of course, this leads to numerous bankruptices

I will add a third point which the author fails to cover.  To do so I will return to one of my favorite things I learned at Harvard Business School (HBS).  At HBS, in the first two days of strategy class, we studied two very different business cases.  The first was of a water meter manufacturer, a dead boring predictable unsexy business.  The second was a semiconductor company, which was hip and cool and really sexy.  It turned out that the water meter company coined money.  The semiconductor business was in and out of bankruptcy.

Why?  Well the water meter company had limited investment (made the same meters the same way for decades) and made most of its money off the replacement market, where it had no competitors since users pretty much had to replace with the same meter.  The semiconductor business had numerous shifting competitors and was constantly trying to scrape up enough investment money to keep up with shifting technology.  But there was one more difference.  By being sexy, tons of people wanted to be in the semiconductor business. They got non-monetary benefits from being in it (ie it was cool and interesting).  When there is an industry where lots of people are getting into the business for reasons other than making money, look out!  The profits are probably going to be terrible.   This is why most restaurants fail.  The business-for-sale listings are awash in brew pubs.   The aviation industry was like this for years, and I would argue this also suppresses rents in farming.

I don't know this for a fact, but I would bet that the VFX industry attracts a lot of people because it is sexy.  Yes, like a lot of programming, the actual work is detailed and dull.  But if the coding is detailed and dull, would you rather be doing it for Exxon's new back-office system or to put Ironman on the big screen (and have your name deep into the film credits, seen by the dozen or so people who hang around waiting for the Marvel Easter egg at the end)?

This is why I think a conspiracy theory to believe Hollywood is dissing the artistry of VFX movies as a way to keep VFX company rents down is silly.  It is totally unnecessary to explain the bad rents.  Had you told me it was a high investment business with huge fixed costs and much lower marginal costs and alot of rivalry driven by participants who piled into the business because it was sexy, I would have told you to stop right there and I could have immediately predicted poor returns and bankruptcies.

So what can VFX companies do?  I have no idea.  The first idea I would offer them is branding.  If you are buried deep in the supply chain and want to increase your bargaining power, one way to do it is to develop a brand with the end consumer.   If consumers suddenly latch on to, say, the CoyoteFX brand as being innovative or better in some way, such that they might be more likely to go to a movie with CoyoteFX sequences, then CoyoteFX now has a LOT more power in negotiations with producers.  Dolby Sound is a great example -- you probably don't even know what it is but movies used to advertise they had it.  Certain camera technologies like Panavision are another, where movies actually sold themselves in part on the features of one member of their supply chain.  As a digital house, Pixar effectively did this -- so well in fact its brand actually was bigger than Disney's (its distributor) for a while, and Disney was forced to buy them.  This does not happen just in movies.  I just bought a car that advertised it had a premium Bose sound system.  The car maker doesn't advertise who made, say, the fuel tanks, so my guess is that Bose, via branding, gets a better cut of the supply chain than does the fuel tank maker.

When "Pro-Science" Environmentalists Fall For Idiotic Technologies: Solar Roads Edition

I am mostly inured to being told I am "anti-science" for thinking manmade global warming will be less than catastrophic.  In debate situations (which are increasingly rare, since most colleges where I do most of my speaking no longer want a second side in climate discussions) I usually can demonstrate I know a hell of a lot more about the science than my opponent in the first 3 minutes or so.

But the whole "pro-science" pose of environmentalists is especially funny when they get really excited about some very stupid technology.  Environmentalists' support for corn ethanol is a good case in point.  Most of them have retreated on this, and the media has pretty much allowed them to pretend they were never really vociferous supporters of this technology that most now consider (and I considered from the beginning) to be environmentally damaging.

Here is the new, latest, greatest example.  From Think Progress, where else, but the story has been reprinted all over the hip environmental Left:

The World’s First Solar Road Is Producing More Energy Than Expected


In its first six months of existence, the world’s first solar road is performing even better than developers thought.

The road, which opened in the Netherlands in November of last year, has produced more than 3,000 kilowatt-hours of energy — enough to power a single small household for one year, according to Al-Jazeera America.

“If we translate this to an annual yield, we expect more than the 70kwh per square meter per year,” Sten de Wit, a spokesman for the project — dubbed SolaRoad — told Al Jazeera America. “We predicted [this] as an upper limit in the laboratory stage. We can therefore conclude that it was a successful first half year.”

De Wit said in a statement that he didn’t “expect a yield as high as this so quickly.”

The 230-foot stretch of road, which is embedded with solar cells that are protected by two layers of safety glass, is built for bike traffic, a use that reflects the road’s environmentally-friendly message and the cycling-heavy culture of the Netherlands.

In the US, we pay about 12 cents a KwH for electricity  (the Dutch probably pay more).  But at this rate, in 6 months, the solar sidewalk has generated... $360 of electricity.  Double that for a year, and we get $720 of electricity a year.

How much did the sidewalk cost?  The article doesn't say.  You will find this typical of wind and solar articles.  If they quantify the installation cost, they will not quantify the value of power produced.  If they quantify the power produced, they will never quantify the installation cost. This article says the installation cost was $3.5 million, though I suppose one should subtract from that the cost to build a similar length concrete bike path, but that can't be more than $100,000 for 230 feet.  They say they are getting 70kwh per year per square meter, which is $8.40 worth of electricity per square meter per year.  Since regular solar panels - without all the special glass overlays and installation in the ground and inverters and wiring - cost about $150-$200 per square meter, you can see this is a horrible investment.

Part of the reason this is a bad investment is that solar panels are simply not efficient enough and cheap enough to be cost effective -- I think they will be someday, but not now.   But this project has special problems:

  • The panels are actually in the ground with people driving over them.  Honestly, could one actually choose a worse spot for a solar panel?  This installation location, vs. say a roof, adds incredible cost to toughen the panels for wear.  Also, it increases their maintenance costs and likely reduces their life.
  • Even worse, the panels have to sit flat on the ground, which is not the most efficient place for them.  Panels are most efficient if tilted at an angle and (in the case of Holland) facing south.  Further, they are more efficient up in the air where they do not get shaded by trees or buildings.

This is just stupid, stupid, stupid.  Perhaps if solar becomes more efficient and we have run out of space on every roof in the world, one might possibly maybe (but probably not) consider this.  But despite the inherent inanity of this idea, look at all the articles on Solaroad -- Think Progress, the Huffington Post, Engadget, Tree Hugger, Extreme Tech, NPR, Sustainable Business -- they all have multiple, gushing, unrelentingly positive articles about this.  Look at all the positively fawning comments on Think Progress.  I can't find a single article on the web that is even slightly skeptical.

 Update:  A reader sends me this epic video takedown of this stupid idea.  He did this in advance of the article today.  He finds it to be complete BS, despite the fact that he overestimates electrical production by a factor of 2.

Wow, It's Sure Lucky We Don't Allow All Those Dangerous Oil Pipelines to Get Built

Massive Fire Rages After Another Buffett-Owned Oiltrain Derails In North Dakota, Town Evacuated

This is CLASSIC seen and unseen.  New pipelines are discussed as if the alternative to building the pipeline is "do nothing" when in fact the alternative is moving crude by rail.  When looked at against the correct alternative, pipelines look like environmental saviors.

Update:  I do know the usage rules for its and it's.  I am just a terrible proof reader.

Celebrate the Strong Dollar

We are already seeing articles bemoaning the strong dollar as somehow a threat to the American economy.  Don't believe it.  Maintaining a weak dollar is yet another crony government program that benefits a tiny minority of admittedly vocal and politically connected Americans.

First, a bit of an aside.  It is amazing to me that the US dollar can be strong at all right now, given the actions of the Fed.  With its near infinite QE and zero-interest rate programs, one would expect the dollar to be weak (Oversimplifying, driving down the returns on financial assets reduces the overseas demand for them, thus reducing the demand for dollars, driving down the price of dollars).  But it turns out that the rest of the world (esp. Japan and the EU) are actually working twice as hard to trash their own currencies (they are actually heading into negative interest rate territory, not just zero) and thus on a relative basis, the dollar is stronger.

Companies that export or compete a lot with manufacturers in other countries hate the strong dollar.  It makes their domestically produced products more expensive vis a vis products manufactured in other countries.  Many of these companies have powerful political voices, and some have large unions with even more powerful political voices.  They lobby for a weaker dollar.  Part of that lobbying is often to portray other countries as nefariously "manipulating" their currencies to hurt the US.

What these countries that are weakening their own currencies are actually doing is trashing the prosperity of the vast majority of their citizens to protect the earnings of a few politically powerful producers.  Japan is a great example.  Japan is a country in which consumers have been stomped on from decades in order to reduce the price of the country's exports.  Japanese consumers pay far more for everything than we do, all so their exporters can lower their prices in the US.

This is the same in China.  We frequently host visiting Chinese students.  You know what every one of these kids do on their trip to the US?  They bring an empty suitcase that they fill up with electronic and fashion goods they buy here, many of which were actually manufactured in China  (I have never, ever have hosted a Chinese student that did not buy at least one Chinese-manufactured iPhone here).

So, we must oppose this currency "manipulation" that impoverishes Japanese, Chinese, and European citizens in favor of giving much lower prices to Americans -- Why?

We should celebrate the strong dollar.  It makes every one of us richer.  Not just when we buy Chinese electronics, but even when we buy American-made products that now must be less expensive to compete with foreign products and which benefit from cheaper inputs in their own manufacturing.

Years and years ago I wrote a hypothetical post about Chinese interventions to maintain a trade surplus form a Chinese consumer's perspective in a post from our sister publication Panda Blog.  I think it holds up really well.  It said in part:

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

Nestle: Private Company Getting Blamed for Government Incompetence

The story begins with a discovery that the permit under which Nestle's Arrowhead Water has been collecting water in the San Bernardino National Forest expired in 1988.  LOL, oops.  Environmental and other Leftish sites are calling for Nestle's head and somehow blaming Nestle for this.

As a permittee with the US Forest Service (USFS) in California and across the country, I can guess with pretty high confidence exactly what happened here.  For years I was head of a trade group of recreation concessionaires (think lodges and guides and such) who do business in the USFS under permit.  Most of these were located in California.  For years, the biggest problem we have had with the USFS in California is that they are years and years behind in nearly all their permit renewals.  There are literally hundreds of expired permit in the USFS in California alone.

For reasons that probably go to bureaucratic incentives, despite the Forest Service's huge budget, they are loath to allocate resources to renewing these permits -- they want to fill their organization with biologists and archaeologists and arborists, not contracts people.  Making the situation worse, Forest Service and other Federal rules have burdened the permit renewal process with so many legal requirements that each one, even if trivial in size and impact, is absurdly time-consuming to complete.

This is not a new situation -- it has obtained for years.  Almost five years ago I met personally with the Chief of the Forest Service in DC and begged for more resources to be assigned to permit renewals, but to no avail.   I did the same in a meeting barely a month ago with the head of the USFS's Region 5 (basically California).   All of us permittees have been vociferously complaining about this for years.

When you look at these situations, then, what you will see is not some evil private business trying to get over on the public, but a business that is literally screaming in frustration, year in and year out, begging the US Forest Service to address its permit renewal.   Generally, local Forest Service staff will give the company verbal assurances that they should keep operating, so they do, continuing to pay their fees and operate within the guidelines of the old, expired contract.

I would be willing to bet a fair amount of money that this is exactly what happened to Nestle.

By the way, the usual groups seem to be piling on Nestle about bottled water from the Sacramento tap water system.  A couple of comments:

  • Environmentalists seem to obsessively hate bottled water, but ignore what a trivial, trivial percentage of total water use is bottled.
  • Critics are accusing Nestle of making obscene profits on Sacramento tap water.  But if they really think the spread between tap water and bottled water is too large, isn't the real issue that Sacramento is under-pricing its tap water?  After all, Nestle is paying what everyone else in the town is paying for water.
  • Environmentalists have a misguided fetish for local foods, often ignoring that transportation costs and energy are a tiny percentage of most food production costs  (a percentage small enough to be dwarfed by differential productivity of soils and climates).  But here, all they can possibly accomplish is to chase Nestle's bottling plant out of California and then have the water trucked back into the state.  This might be a net gain depending on the differential value of California water vs. fuel, but we can't know that because California water pricing is so screwed up.

OMG, Someone Actually Mentioned Price in an Article in Our Paper About Avoiding Water Shortages

Kudos to Jeff Gibbs for finally bringing to the pages of the Arizona Republic what strikes me as the most economically obvious, but least mentioned, solution to future water shortages:  Price.

Materials I Use to Teach My 90-Minute Economic Class

I teach one 90-minute class a year in the senior economics elective at my kids' high school.  The teacher gives me a pretty free ability to cover whatever I wish.

Rather than trying to cover some school of thought, I instead focus the class on the seen and unseen (starting with quotes from Bastiat and Hazlitt).  We have about 12 economic problems, where we start with the seen, and then introduce the unseen.  We start with the classic broken window as the first one.

I teach the class with role play.  I give every student a couple of business cards with their role typed on them.  When I call on them I have them advocate for their role.  I have started to give a small food reward at the end of class to the student who best gets into character -- this has helped the role play immensely.   Let's take one example I do towards the end of the class involving price gouging after a hurricane.

We begin with the governor of Florida who has just signed an anti-price-gouging law.  We talk about how everyone hates price-gouging after a disaster.  What could be worse, right?

We then talk about a woman who spends most of her time at home, but rushes out to fill her gas tank right after the storm hits.  She has to wait in line for gas for 2 hours because everyone else has done the same as she, racing to the station, but she doesn't mind because she doesn't have anything else to do and feels better.  If asked if she would have topped off her tank if the price jumped to $6 from $3, she says no way.

Then we have an owner of a roofing company enter the fray.  His men are working 14 hours a day to put roofs on houses.  He is making a lot of money, and doing a lot of good as well.  Nothing is more important to people than fixing the roof before the next rain.  He may be the most important man in Florida at that moment.  But he can't keep up with demand, and worse, his guys are having to sit for 2 hours at a time to fill up their company trucks, when they should be repairing roofs.   He would gladly pay $10 a gallon if he could just keep his men on the job and not in gas stations.

So at this point we discuss "fairness".  It seems fair not to raise prices to "take advantage" of a disaster.  But is it fair to allocate gas away from the busiest and most productive whose time is most valuable to the people who are least productive and have the lowest value for their time?  We discuss how price caps shift rationing from price to queuing, and the people who get the product shift from those who most value it to those who assign the lowest value to their own time.

Finally, we discuss a guy in Georgia who has a tanker of gas he was going to send to a station in Atlanta.  They need the gas more in Florida, but they aren't paying more for it under the new price-gouging law, and so with his higher costs of driving all the way to Florida vs. Atlanta he is going to sell the gas in Atlanta.  If the price of gas in Florida were to rise to $6, he would send his truck of gas to Florida in a heartbeat.

This is the kind of discussion we have.   We will end up in a debate, with kids pointing out all kinds of things -- eg poor people who have a life or death need and might be shut out at $6.  We don't try to resolve things, but want them to understand there are unseen consequences to actions like price-gouging laws that must be considered along with the seen.  They may end up dismissing the unseen as less important than the seen, but it should not be ignored.

If anyone finds themselves in the same situation as me needing to teach a group (it could be adults as well) you are welcome to use my materials.  I actually print the business cards on Avery two-sided business card paper.  Attached are separate files for the front and back of cards as well as a sort of discussion key I use to guide the conversation.  We get into things, at least tangentially, like public choice theory and concentrated benefits / dispersed costs.

If you want to use the materials, you are welcome to email me with questions.  But these are all public domain so help yourself without permission.  (By the way, in trying to match the front to the back of each card in your mind, remember there is a mirroring effect, so the text on the right card on the backs in any given row goes with the front of the card on the left of the same row in the other file).

economics class discussion guide

economics class biz cards front

economics class biz cards back

Who's Subsidizing Whom? And Should We Oppose All New Anti-Poverty Programs as Crony Giveaways?

Well, the new meme on the Left in favor of higher minimum wages seems to be that since many minimum wage workers also receive government benefits, those benefits "subsidize" the employers paying minimum wage.  Example from Kevin Drum here.  This is utter madness.  A few responses:

  • The implication is that the choice is between a job at $8 an hour or a job at $15 an hour.  But this assumes the jobs still all exist at $15 an hour.  Clearly, many would disappear over time, either as companies automate or as consumers reduce purchases at now higher cost establishments.  If the alternative to offering a $8 an hour job is in fact offering no job at all, then minimum wage employers are reducing government benefits payouts.
  • The Left has pushed eligibility for many programs (e.g. the changes in Obamacare to Medicaid) into higher income bands of people making more than 100% of the poverty line.  How is this creeping up of transfer program eligibility somehow the fault of employers?
  • Does this mean that all right-thinking Americans should oppose any future expansions of transfer programs as crony giveaways?  And if you say no, that they should not be thought of crony giveaways in advance of their passage, why should they be considered such afterwards?
  • The whole point of many of these programs, like the EITC which is listed among the programs in Drum's post, is exactly this -- to provide transition assistance from not working to supporting oneself.  The Left's view on this is, as usual, entirely static.  What are the folks who are on benefits and working in food service doing 5-10 years from now?  Would they look back on that time as a stepping stone to something better?
  • If you require that all employers pay a salary such that none of its workers are on assistance of any sort, which is the logical conclusion of this meme, then you divide the world into two classes -- those 100% employed and those 100% on benefits, with most people in the latter having little or no prospect of moving to the former.
  • My company pays minimum wage to the vast majority of our 300+ campground workers.  But who is subsidizing whom?  Most of these folks are over 60 and on Social Security and find that they need or want more money than their Social Security can provide.  One reason for this is that Social Security is a horrible retirement savings program, essentially paying a negative interest rate on the money contributed to the system in the retiree's name.  If Social Security were a private retirement plan, its proprietors would be in jail by now.  Because Social Security is so lame, older people seek work, and come to me, happy to stay active and earn money to supplement their government checks.  So am I subsidizing the SSA's inability to provide a fair return?

Two Hedge Fund Managers Walk into a Bar

This one is priceless, and I have been remiss in not posting it.  Reminded most recently by the link at Maggie's Farm.  Excerpt, but the whole thing is great:

"Here's the problem. Most hedge funds are indistinguishable from mutual funds, other than the fact that they feel entitled to charge 30 times the fees."

"Two percent of assets for showing up in the morning, and 20% of any profits."

"There are probably 100 hedge funds that will consistently beat the market after fees. They won't take your money. They provide just enough hope for investors to keep the rest of us in business. We earn half the performance of index funds, charge 30 times the fees of mutual funds, pay half the income tax rates of school teachers, have triple the ego of rock stars, and fewer disclosure requirements than the NSA."

"We're basically a conduit between public pension funds and Greenwich real estate agents."


Minimum Wages as a Terrible Anti-Poverty Program, Part 2

The Unbroken Window has more along the lines I wrote about last week.  It is all good, here is an excerpt:

MaCurdy found that less than 40% of wage increases [from a minimum wage hike] went to people earning less than twice the poverty line, and among that group, about third of them are trying to raise a family on the minimum wage. In other words, something like 1 in 8 people who do receive the minimum wage (and ignoring any potential adverse effects of it), are actually in what you might call the “targeted” group. 7 out of 8 people who receive minimum wage increases fall outside the targeted group.


Generic Economics Report

Learn Microeconomics

We discuss a lot of economic issues on this site, and economics has become pretty much a staple of political discussion.  If concepts such as price elasticity, compensating differentials, or tax wedges leave you scratching your head, this is a great (free) online video series teaching the fundamentals of microeconomics.  Complete this course and you will be way ahead of 99% of politicians and journalists.  Of course, the newspaper headlines will start to drive you even crazier than they likely do today, with their total ignorance of basic economics, but there is a price to everything.

Last week, I was giving my usual introduction speech to some of my front-line employees.  One of the things I said to them is that this was a very low-margin business, which meant that wages were not very high but we try hard to compensate by making the job fun (since all of our employees essentially get to live in campgrounds).  It turns out that Cowen and Tabarrok actually have a lecture on this very topic in chapter 13 of their series.

Everything You Need to Know About California Water Pricing

California is the #2 rice grower in the nation, with 22% of US production.

There is a debate growing in California about whether crops like almonds (that use a lot of water) should be allowed.  But all that authoritarian command and control debate about "allowing" certain activities is unnecessary.  Just raise prices to some sort of supply and demand matching level (it is a bit awkward to do this because there is not a true free market in water supply but any attempts have got to be better than the current absurdly low prices).  Then the almond growers themselves, and the rice growers, and the golf courses, and everyone else will decide if they can still operate in CA or not.  No politicians' commands necessary.

Raising prices also creates a secondary benefit over government-imposed rationing -- it provides incentives for people to seek out and invest in new sources of supply.  Desalinization, any one?

That Mysterious, Unavailable "Correct" Price

This quote from a hotel owner in Venezuela that now asks its patrons to bring their own toilet paper caught my eye:

Camacho says she refuses to buy toilet paper from the black market on principle.

“In the black market you have to pay 110 bolivares [$0.50] for a roll of toilet paper that usually costs 17 bolivares [$ 0.08] in the supermarket,” Camacho told Fusion. “We don’t want to participate in the corruption of the black market, and I don’t have four hours a day to line up for toilet paper” at a supermarket….

I see this all the time, the notion there is somehow a "correct" price that no one is willing to charge.   There is nothing real about the 17 bolivares price.  It is a fiction.  There are only two real prices in the market -- 110 bolivares PLUS any risk/penalty from breaking the law or 17 bolivares PLUS 4 hours of your personal time.  My sense is that if the legal risk of buying on the black market is low, and you knew the average order size and the value people placed on their own time, you would find these two prices converging.  But in any case, it is dumb to continue to insist that 17 bolivares is the "right" price.

Why Minimum Wage Increases are a Terrible Anti-Poverty Program

The other day when I expressed my (temporary) ennui about blogging, I said I was tired of posting about things like "why the minimum wage is a terrible anti-poverty program" and getting back one line comments such as "you hate poor people."  In looking back at that post, I realize I actually haven't put in one place my reasons why minimum wage increases are a bad way to fight poverty.  So here they are:

1.  Only a tiny minority of workers make the minimum wage.  Something like 5% of hourly workers, and 3% of all workers, are paid minimum wage or less.  This number is not quite right for two reasons.  One, many states have higher minimum wages than the Federal rate and this analysis by the BLS is done at the Federal rate only.  Thus this understates the number of minimum wage workers in those higher minimum wage states.  But, these numbers also exclude tips, which about half these workers receive.  If one reasonably includes tip income, these numbers are overstated.  On balance, if one looks carefully state by state and excludes workers who get tips, the percentage of all workers who make the minimum wage holds around 3%.

Further, about half (53% by the source above) of minimum wage earners are 24 years old and under.  These are not the folks activists generally picture when they say "A family cannot live on that wage..."   Thus only about 1.5% of all workers are people 25 and older making minimum wage.  The target for this "anti-poverty" program is thus truly tiny.

2.  Most minimum wage earners are not poor.  The vast majority of minimum wage jobs are held as second jobs or held by second earners in a household or by the kids of affluent households (source)



Most of the data I have seen points to about a third of minimum wage jobs held by earners in families below the poverty line.  So 2/3 of the increased wages from a minimum wage increase go to non-poor households (it is actually probably more than this given #4 below).

3.  Most people in poverty don't make the minimum wage.  In fact, the typically hourly income of the poor appears to be around $14 an hour.  The problem is not the hourly rate, the problem is the availability of work.  The poor are poor because they don't get enough job hours.

4. Minimum wage increases kill unskilled labor hours.  You can certainly find Leftish studies that point to niche situations where a minimum wage increase maybe kindof didn't hurt employment.  But in general I think most people understand that when you raise the price of something, people will use less of it.  In this case, businesses will find ways to hire less unskilled labor as the price of such labor rises with the minimum wage.  Even if businesses hire the same number of people after a minimum wage increase, they likely will demand and get more skilled and experienced employees for this money, which likely will leave the poor out in the cold just as much as if the job were eliminated.



If one replaces the words "minimum wage" with "starting wage for new unskilled workers", the problem becomes more obvious.

5. Minimum wage laws ignore substantial non-monetary benefits of entry-level jobs.   Many young workers or poor workers with a spotty work record need to build a reliable work history to get better work in the future, just as a young couple must build their credit history with small purchases before they can take out a mortgage.  Further, many folks without much experience in the job market are missing critical skills -- by these I am not talking about sophisticated things like CNC machine tool programming.   I am referring to prosaic skills you likely take for granted (check your privilege!) such as showing up reliably each day for work,  overcoming the typical frictions of working with diverse teammates, and working to achieve management-set goals via a defined process.  I wrote a lot more about these here.  By defining acceptable compensation of jobs only as dollars of pay rather than to include softer skills and such, these wages disproportionately discriminate against unskilled and inexperienced workers.

We Still Haven't Figured Out How to Measure Prosperity

The previous chart on beer availability reminds me of an issue I have been thinking about for a while -- that we do no know how to measure prosperity.

GDP growth and unemployment reduction are terrible measures.  Just to give one example, these measures looked fabulous in WWII.  But the average person living in the US had access to almost nothing -- they couldn't buy anything under rationing, they couldn't travel for leisure, etc.   GDP looked great because we were building stuff and then blowing it up, the economic equivilent of digging a hole and filling it in (but worse, because people were dying).  And unemployment looked great because we had drafted everyone and sent them off to get shot.

But median income and net worth numbers fail to measure prosperity as well.  The reason was described in this post here way back in 2007.

The home on the left was owned by Mark Hopkins, railroad millionaire and one of the most powerful men of his age in California.  Hopkins had a mansion with zillions of rooms and servants to cook and clean for him, but he never saw a movie, never listened to music except when it was live, never crossed the country in less than a week.  And while he could afford numerous servants around the house, Hopkins (like his business associates) tended to work 6 and 7 day weeks of 70 hours or more, in part due to the total lack of business productivity tools (telephone, computer, air travel, etc.) we take for granted.  Hopkins likely never read after dark by any light other than a flame.

If Mark Hopkins or any of his family contracted cancer, TB, polio, heart disease, or even appendicitis, they would probably die.  All the rage today is to moan about people's access to health care, but Hopkins had less access to health care than the poorest resident of East St. Louis.  Hopkins died at 64, an old man in an era where the average life span was in the early forties.  He saw at least one of his children die young, as most others of his age did.  In fact, Stanford University owes its founding to the early death (at 15) of the son of Leland Stanford, Hopkin's business partner and neighbor.  The richest men of his age had more than a ten times greater chance of seeing at least one of their kids die young than the poorest person in the US does today.

How do we take into account that even if a person has the same income as someone in 1952, they are effectively wealthier in many ways due to access to medical procedures, travel, entertainment, electronic devices, etc?

Somehow we need to measure consumer capability -- not just how much raw money one has but what can one do with the money?  What is the horizon of possibilities?  Deirdre McCloskey tends to eschew the term capitalism in favor of "market-tested innovation."  I think that is a pretty powerful description of our system.  But if it is, we really are only measuring the impact of productivity and cost-reduction innovations.  How do we measure the wealth impact of consumer-empowerment innovations like iPhones?  Essentially, we don't.  Which, by the way, may be one reason our current crappy metrics say we have growing income inequality.  With our current metrics, Steve Jobs' increase in wealth is noted in the metrics, but the metrics don't show the rest of us getting any wealthier by the fact that we can now have iPhones (or the myriad of competitors the iPhone spawned).  The consumer surplus from iPhones undoubtedly dwarfs the money Jobs made, but it doesn't show up in any wealth calculations.

A few years ago I told a youth group that there were still many things left to discover in the mundane world -- by this I meant the everyday world we encounter and not just at the limits of the universe or at the scale of quarks.  The example I gave at the time is that there is a lot of room for better techniques to tease out causality in complex systems -- e.g. how much did the stimulus really affect the economy or how much does CO2 really affect temperatures.  I would add this question of measuring prosperity as a second item in this category.

Republicans Are Crazy for Wanting Dynamic Scoring at the CBO

Dynamic scoring of budget proposals has been on the Republican wish list for decades.  They have always been frustrated that tax cut proposals look like such budget losers with static scoring.  In their supply-side bones, Republicans know that tax cuts will stimulate economic activity and thus increase future tax revenues.  Taking this second order effect into account is what they mean by dynamic scoring (see: Laffer Curve).

I have some sympathy for this argument, but in making it Republicans are falling for the "this will work great when our guys are in charge" fallacy  (I need to find a name for that).  Democrats fall into this all the time, expanding government power only to be shocked at what their political enemies do with this power once in charge.

Because it is pretty clear what dynamic scoring will mean in a Democratic Congress.  Remember that stimulus bill?  Democrats all thought that expanded the economy, so its costs would, by their Keynesian assumptions, appear much lower under dynamic scoring.  The Left thinks the auto bailout was stimulative.  They even think that Obamacare was stimulative.  Do you really want some BS Keynesian fudge factor obscuring the true cost of such proposals in the future?

Related:  Greg Mankiw discusses why, if I read him right, dynamic scoring is impossible to do correctly


Wow -- Two Obama Administration Economists Write Paper Saying Obama Administration Policy Was Great

I followed a link the other day to this academic paper purporting to show that the bailout of GM and Chrysler was a success.  I was flabbergasted to see that the authors are Austan D. Goolsbee and Alan B. Krueger.  WTF?  These folks were part of the Obama Administration.  This is their own policy they are passing historical judgement on.  This is roughly equivalent to a economics journal seeking a paper on the success or failure of Obamacare and having Valerie Jarrett write it.  How does this kind of conflict of interest pass any kind of muster?

I only skimmed the paper.  I know these are two smart guys but it seems to include exactly the sort of facile analysis you would expect from a political hack, not two smart economists.  I can't believe these guys would have accepted many of the assumptions they make here had they not been directly involved.  Just to pick two things at random:

  • They seem to stick with the assumption that millions of jobs would have simply gone *poof* had the government not intervened.  Yes, this happened at Solyndra, but in most cases industries operate almost seamlessly in bankruptcy.  The odds are, for example, that you have flown on an airline in Chapter 11 and didn't even know it.  They make a specific argument that somehow it would be bad to have both in bankruptcy at the same time, but I can remember several times when there were multiple major airlines in bankruptcy.  In fact, if both went bankrupt at the same time, one could argue it would lessen their market share loss since a major competitor was in the same boat.  To the extent that the companies would have continued to operate under Chapter 11, which is 99.9% likely, then all the government did was insert itself into the bankruptcy process to overrule laws about who gets what in a bankruptcy to redirect spoils to their favored constituencies
  • Yes, GM and Chrysler are doing OK now, but they usually do OK at the top of a business cycle.  To my eye though, nothing fundamentally changed about how they are managed and operate.  The same structural and cultural problems that existed before exist today.  The same under-utilization of talented workers and valuable assets that existed before exists today.  No real reckoning occurred -- in fact the bailout looked to me at the time as an exercise to use taxpayer money to avoid a true housecleaning.  These companies have done OK, but what would they have done with a more thorough housecleaning?

Brava, Deirdre McCloskey, For Avoiding The Primary Rhetorical Failing of Our Times

Deirdre McCloskey wrote a truly massive review, and in some senses a rebuttal, of Thomas Piketty's Capital in the Twenty-First Century

I am not really going to comment on the details of her paper -- many prominent economists have already done so.  I will say that I learned a lot from it not just about Piketty's proposition but about economic history in general.  It is an interesting read.

No, what I wanted to comment on -- in this era when rebuttals usually take the form of impugning the other person's funding, integrity, honesty, and motivations rather than their actual arguments -- is that she begins her article with this:

It has been a long time (how does “never” work for you?) since a technical treatise on economics has had such a market. An economist can only applaud. And an economic historian can only wax ecstatic. Piketty’s great splash will undoubtedly bring many young economically interested scholars to devote their lives to the study of the past.....

It is an honest and massively researched book. Nothing I shall say—and I shall say some hard things, because they are true and important—is meant to impugn Piketty’s integrity or his scientific effort. The book is the fruit of a big collaborative effort of the Paris School of Economics, which he founded, associated with some of the brightest lights in the techno-left of French economics. Hélas, I will show that Piketty is gravely mistaken in his science and in his social ethics. But so are many economists and calculators, some of them my dearest friends.

Interesting Home Sales Chart

Don't have an opinion on what this means, but it is interesting.  Via Zero Hedge

new home sales vs median home price

Gender Pay Gap a Myth

At first, the link I followed told me this story was from CBS.  I found it astonishing that a major news network would challenge a previously agreed on Obama Administration narrative, and sure enough I found that this was not actually from the people at CBS who are paid to write the news (they are too busy reprinting White House talking points) and is actually from one of their financial bloggers.

Never-the-less, it is a great post that gets at why every serious academic study tends to debunk the 77% gender pay gap myth.   All of it is good but the consistently most powerful point that I tend to use if I am only given time in an argument to make one point is this one:

Despite all of the above, unmarried women who've never had a child actually earn more than unmarried men, according to Nemko and data compiled from the Census Bureau.

Women business owners make less than half of what male business owners make, which, since they have no boss, means it's independent of discrimination. The reason for the disparity, according to a Rochester Institute of Technology study, is that money is the primary motivator for 76% of men versus only 29% of women. Women place a higher premium on shorter work weeks, proximity to home, fulfillment, autonomy, and safety, according to Nemko.

It's hard to argue with Nemko's position which, simply put, is this: When women make the same career choices as men, they earn the same amount as men.

One would think that this quote from Obama's own Department of Labor would be enough to kill this meme:

"This study leads to the unambiguous conclusion that the differences in the compensation of men and women are the result of a multitude of factors and that the raw wage gap should not be used as the basis to justify corrective action. Indeed, there may be nothing to correct. The differences in raw wages may be almost entirely the result of the individual choices being made by both male and female workers."

Worst Argument for Regulation Ever

We generally use startup activity as a proxy for positive innovation and future increases in productivity and consumer value.  But it is only a proxy - based on the theory that in a free economy new startups generally add new value or die.  Startups per se are not inherently positive, especially when all they are doing is fixing the inefficiencies and mandates imposed by government regulation

I wrote about a new study suggesting that new federal regulation doesn't inhibit the creation of new startup companies in an industry. In fact, it might actually stimulate the creation of startups. This seems counterintuitive, but a reader with some experience in the education and health care sectors—which were influenced by NCLB and Obamacare, respectively—proposes an explanation for this:

Healthcare startups have absolutely exploded post-ACA....This was pretty well anticipated by venture capital; a bunch of Sand Hill firms started putting together ad-hoc health IT teams shortly after the ACA was passed, on the basic logic that anything that changed an industry as much as the ACA did would necessarily create a lot of startup opportunities.

Drum says, well this may be good or may be bad.  Look, it HAS to be bad.  All this investment and activity is going into trying to get back to even from productivity losses imposed by the government, or is being spent addressing government mandates for new services that the market did not want or value.  This is a diversion of resources from new value-creation to fixing things, and as such is just the broken windows fallacy re-written in a new form.

The language he is using, of shaking things up, is a bit like that of chemistry.  He seems to imagine that markets can reach and get stuck in local maxima, so that government action that shakes the system out of these maxima (like annealing in a metal) is positive in that it allows the system to progress to a better state over time even if the government's action initially makes things worse.  I know of absolutely no evidence for this being true, and my strong suspicion given how many industries the government has trashed is that this is rare or non-existent.  And impossible to spot, even if it did exist.  Not to mention the fact it is a total joke to talk of health care as if it was some pristine untouched-by-government industry before Obamacare.