Posts tagged ‘prices’

First, and Last, Marathon

About 18 months ago I was diagnosed with osteo-arthritis in both my knees, though of course I had been experiencing some pain before that.  The condition has become increasingly irritating not just because of the knee pain, but because the pain leads to a second condition called a Bakers Cyst (also known as water on the knee) that adds new pains in the back of both my upper and lower legs.

For years my exercise of choice has been running.  I have run in many of the world's cities (except for Bangkok -- only a crazy person would run the streets there) and find the experience synergistic -- the new sights keeps me from being bored in my runs and the running helps me see details of a city I might have missed.  I am not really competitive, but I have run four or five half-marathons and a number of shorter races.

It has become clear I have to give this all up.  So I decided to go out with a bang, and run my first and last marathon, which will be January 7 at Disneyworld (I love the Disney marathons because the vibe is pretty chill, there are lots of fun things to look at as you run through the parks and past characters and bands, and the medals are really nice).  I usually run in costume for the Disney races but I think not for this race -- I will be shedding every pound;  I am considering cutting off the ends of my shoelaces to save weight 😉

The big event comes in the next few weeks when my doctor is going to shoot me up with cortisone in each knee and drain my Bakers cysts.  From past experience, this will help a ton.  Even without the cortisone I have done a couple of 16-18 mile runs in addition to my daily running of 6-ish miles so I am fairly sure I will make it.

The first question I always get is what time am I shooting for.  Timing for my distance race performances is generally by google calendar.   I did my last half in around 2:30 so extrapolating that I will likely be far behind Oprah's time of 4:29, but I think my ego can survive.

Once the race is over, I have already found my new preferred form of excercise.  The eliptical machine feels good with my knees but I hate excercising indoors.  Biking can be fun but my *ss always falls asleep.  So I bought one of these bad boys and am already having a lot of fun with it.  Super expensive, but hopefully prices will come down if they get popular.

Uber Is About To Become A Much Worse Place To Work

Here are some cool things about working for Uber:

  • You can work any time you want, for as long as you want.  You can work from 2-4 in the morning if you like, and if there are no customers, that is your risk
  • You can work in any location you choose.  You can park at your house and sit in your living room and take any jobs that come up, and then ignore new jobs until you get back home (I actually have a neighbor who is retired who does just this, he has driven me about 6 times now).
  • The company has no productivity metrics or expectations.  As long as your driver rating is good and you follow the rules, you are fine.

All of this is going to change.  Why?  Due to lawsuits in most countries that seek to redefine Uber drivers as employees rather than contractors.  One such suit just succeeded in England:

Is Uber a taxi firm or a technology company, and are its drivers self-employed or mistreated employees? These questions are being asked of Uber the world over, and last year an employment tribunal case in the UK concluded two drivers were, in fact, entitled to minimum wage, holiday pay and other benefits. The ride-hailing service contested this potentially precedent-setting decision, as you'd expect, but today Uber lost its appeal. In other words, the appeal tribunal upheld the original ruling that drivers should be classed as workers rather than self-employed.

The appeal tribunal agreed that when a driver is logged in and waiting for a job, that's still tantamount to "working time." Working time they aren't getting paid for, of course. Interestingly, the ruling also noted that Uber basically has a monopoly on private hire via an app. Therefore, drivers are beholden to them and can't reasonably engage in other work while also being at Uber's disposal.

GMB, the union for professional drivers that's behind the original case, is calling it "a landmark victory." Naturally, the law firm representing the GMB and Uber drivers feels much the same. No points for guessing who has a slightly different opinion.

Despite Engadget's usual economic ignorance that this must be all good for drivers, in fact this is going to destroy about everything that makes Uber attractive as compared to 9-5 office jobs.  That is, if rulings like this don't kill the company entirely, as I have previously prophesied.

This is going to add a new cost for Uber, forcing them to pay money to drivers for dead time when they are not actually driving a passenger.  Let's make the reasonable assumption that Uber's first response to this is to A) stay in business and B) attempt to keep prices to customers from rising.  The only way they can do this is to minimize dead time.

Want to park at your house in an unpromising neighborhood with little business?  Forget it, Uber can't allow that in the future.  Want to work at an unproductive hour of your choosing?  Forget it.  Uber is going to have to set quotas on certain regions and hours of the day that are less productive and find a way to ban drivers from working those times.   In addition, they are likely to institute some sort of productivity metric for drivers, ie something like revenue minutes as a percent of total, and then they are going to rank all the drivers and start cutting drivers from the bottom of the list.  If Uber survives, it is going to be a very different company to work for, and is going to feel much more like a regular office job with a boss hanging around your cubicle pestering you about TPS reports.

The Irony and Internal Contradiction of Passive Investment Management

My relatively snarky post on hedge fund fees and passive management got a lot of response, including a few of challenging emails from friends and acquaintances.  So I wanted to cover a few followups here.

One of the interesting features of passive investment management is that it doesn't work if everyone does it.  I vaguely remember there is some name for this in the game theory world but I can't for the life of me remember.  Anyway, passive investment is based on the theory that the market for financial products is relatively transparent and efficient.  While one stock will certainly perform better than another, it is almost impossible (or at least really expensive) in a mostly-efficient market for a regular investor, or even an average fund manager, to parse this out.  As a  result, high fees or expenses one might incur to find these opportunities generally don't pay for themselves, and it is better to just invest in a broad basket of securities and accept the average market return.

But note that this is predicated on the assumption that someone, somewhere is actively managing.  Someone must be looking for good stocks and bad stocks and buying the former and selling the latter.  Without these folks actively managing, it would not be an efficient market.  [I am reminded at this point of the old joke about a man walking down the street with an economist.  The economist steps right over a $100 bill on the sidewalk without stopping.  The man asks the economist, "why didn't you stop and pick up that money?" and the economist answers, "in an efficient market it can't really be there."]

I remember a while back reading economic research about shopping.  What percentage of customers have to be active price-shoppers to make a market efficient?  I personally don't price shop for the small stuff.  If I need a bunch of cheap bulk stuff, I just run to Wal-Mart or Costco and buy it with confidence I am getting a pretty good price.  But why can I do that?  Because I trust these large corporations to honor their promise for low prices?  Hah!  No way.  What I trust is that there are people who clip coupons and price every dang item to the penny, and it is these folks who keep Costco and Walmart honest.  Government interventionists like to talk about the free rider problem all the time, but most all of us are free riders on these hard core shoppers.

The same is true with us passive investors.   I like to get snarky about the fees certain active investors charge, but I am still dependent on their work.  And I don't particularly doubt that there are hedge funds and private equity firms that make consistently above market returns, but I do think they are a minority.  I would equate it to max-contract players in the NBA.  No one doubts Lebron James merits a max contract -- any of the teams in the NBA would sign that deal in five seconds.  But a max deal for, say, Chandler Parsons?  Joakim Noah?  The problem with hedge funds is that the few of these folks who merit the two and twenty max contract have very likely been closed to new investors for years, in the same way it is impossible to get LeBron James to play for Memphis.  It is frustrating for me to see public and private institutions chasing yield and continuing to pay 2 and 20 to folks with an unproven algorithm and a marketing plan.  If I am going to pay 2 and 20, its more likely to be to someone in private equity or an LBO fund who is doing more than stock picking.  That's because I do think that stocks are generally well-valued on the market based on their current management, investment plans, culture, etc.  But they may contain opportunities for smart people who can come in and, for example, apply different management and culture and strategy to the people and assets.  A box that is half Kale and half candy corns might not sell for a good price because no one wants the combination, so value can be created splitting it up.

A couple of other thoughts that came up in discussions since yesterday:

  • I am willing to believe that passive investing looks so good vis a vis active investing because central banks have inflated assets and compressed volatility.  If all the boats are rising with the tide of state actions that are raising the tide, then one is less likely to be fussy about which boat he is on.  What's the point of value investing when the market treats stocks as commodities?  But I can certainly see that in markets like the late 70's or pre-market-boom early 80's that stock pickers might have had more room to differentiate themselves.
  • I am also willing to concede that passive investing may turn out to be a terrible trend for corporate governance.  If all your shareholders are just holding your stock as part of a basket of 500 stocks, who is going to hold you accountable?  It is very awkward for a Vanguard agitate for changes in a company, even when they might be the largest single shareholder.  Also, ironically, passive investing may be opening the door for single lone wolf activist investors to impose their will on companies, sometimes to the other shareholders' detriment.  If one person with 5% cares a lot and the other 95% are passive, that one person might be able to raise a lot of hell.

As a final note, I am a screaming hypocrite on the whole passive investing thing, since with most of my net worth I am the ultimate in active investors.  I have most of my savings in one company, the one I run.

Are You Smarter Than A Public Pension Fund Manager

From the WSJ:

Some $333 billion moved into all U.S.-listed ETFs [exchange traded funds] in 2017 through September, a figure that eclipses last year’s $288 billion all-time high with three months yet to be tallied, according to Morningstar.

Of that amount, 73% has gone into ETFs that boast expense ratios less than or equal to 0.2%, or $20 per $10,000 invested, according to Morningstar data through September. Such low-fee funds account for just 15% of the more than 2,000 exchange-traded funds and notes on the market....

The market for low-cost funds, long dominated by BlackRock, Vanguard Group and State Street Global Advisors, is getting increasingly crowded as other players attempt to muscle in. State Street last month slashed management fees on more than a dozen of its funds. Franklin Templeton Investments, a unit of Franklin Resources, this week announced 16 ultra-low-cost foreign stock ETFs that will undercut the management fees of nearly every rival product currently on the market.

“It’s become insanely competitive,” said Ben Johnson, head of ETF research at Morningstar.” Mr. Johnson said that advisers and other intermediaries are feeling the pressure to emphasize the lowest prices available. “This has upped the ante for providers of products that have really been commoditized.”

If you are a typical investor, you too are likely investing in lower-cost funds, and for most of us that is a great choice.  But large public pension funds are still the #1 largest investors in hedge funds, whose absurd 2 and 20 (2% of the assets invested, 20% of the gains, 0% of the losses) fee schedules still exist, incredibly, despite their systematic under-performance of the market.  I have always wondered how these fees don't get competed down.  But beset by under-funding, public pension funds are so desperate for yield to try to close the gap that they will still fall for the hedge fund pitch.  Which is why your local public teacher pension fund probably helped build a number of the mansions in Greenwich.  You do have to sort of respect folks who figured out a financial model for profiting in direct proportion to government fecklessness.  Talk about hitting the mother load!

Government Regulatory Template: Subsidize Demand, Restrict Supply

The government does it in health care, education, and housing.  Usually in the name of increasing access to or usage of something, they will subsidize demand.  But then at the same time they will restrict supply, giving lie to this stated justification of increasing access, making the whole exercise a crony enrichment of a small number of incumbent producers or asset owners.  The government creates low income housing programs and subsidized mortgages but limits the ability to construct new homes, thus having the primary effect not of increasing housing access but of driving up home prices for current incumbent home owners.  In health care the government subsidizes access to care in any number of ways but then restricts supply through certificates of need, onerous licencing programs, and drug manufacturing restrictions.

Now, consider solar panels.  The government has many programs to subsidize the purchase of solar panels.  Often, one can get local, state, and federal rebates and tax breaks for buying solar panels.  But at the same time:

President Donald Trump’s pledge to offer American companies more aggressive protection from foreign competition got fresh ammunition Friday, when a government board cleared the way for him to deploy a long-dormant legal weapon to restrict solar panel imports....

In the solar panel case, filed by Georgia-based Suniva Inc. and joined by Oregon-based SolarWorld Americas Inc., the ITC commissioners will now consider specific policy recommendations and submit those to the White House by Nov. 13. Mr. Trump then has two months to decide whether to impose solar trade barriers....

“We brought this action because the U.S. solar manufacturing industry finds itself at the precipice of extinction at the hands of foreign market overcapacity,” Suniva said. The firm filed for bankruptcy protection earlier this year.

This really is utter madness, even from a domestic employment standpoint.  I would be willing to be that the solar panel installation industry, which will be hurt by rising costs of solar panels, employs way more people than the US panel manufacturing industry.  The solar industry's trade association seems to agree:

“Analysts say Suniva’s remedy proposal will double the price of solar, destroy two-thirds of demand, erode billions of dollars in investment and unnecessarily force 88,000 Americans to lose their jobs in 2018,” said the Solar Energy Industries Association, which promotes solar use.

For Progressives who are suspicious of public choice theory, this is they sort of prediction public choice theory makes and should be an area where Progressives and libertarians could make common cause.  But traditionally Progressives have always been trade restrictionists, which seems crazy to me.

 

Engadget Is My Go-To Source For Bad Economic Analysis. Today's Lesson: Apparently Items Are More Valuable If You Can't Resell Them

The following from Endadget may be clearer if you translate the British "touts" to the American "scalpers"

Touts are unnecessary middlemen, inflating ticket prices purely to create a cut for themselves. Gig-goers hate them, artists hate them, and the government isn't too keen either. The use of automated online bots to hoover up tickets (that are later listed on resale sites with a mark-up) is set to become a criminal offence thanks to the Digital Economy Act. The government has also implored venues and resale sites to address the ways they might be enabling touts. Sure, we might be lose the stub souvenir, but can we just make digital-only ticketing mandatory and kill all the birds with one stone already?

This view of scalpers as leeching middlemen with no economic value but rather as rent-seekers who merely mark up tickets and pocket the money is unfortunately common.  But they are in fact a perfectly normal functioning of markets.  They perform at least two economic functions

  1.  Events often are mispriced for a variety of reasons.  Sometimes they charge too much, as in the recent McGregor-Mayweather fight, and the arena is half-empty.  The market can't do much to fix this.  But sometimes events are under-priced, and the demand far exceeds the available supply of tickets.  When this happens, some method of rationing must occur.  Back in my day rationing was by who was lucky enough to dial in at the exact right moment or who was willing to camp out all night.  Resale markets, including scalpers, where tickets are resold well above face value are another approach.  Scalpers don't make money taking some sort of middleman fee, they make money buying tickets at face and then taking the risk that they can resell them later at a higher price.  They are not always successful.  I have sold a number of tickets I could no longer use under face to get rid of them, taking a loss.
  2. If you cannot resell a ticket to the person you want for the price you like, you lose some of your property rights in that ticket and it is less valuable to you.  Look at airline tickets, which are all electronic today and cannot be resold or transferred.  Are you better off as a consumer not having a secondary market for airline tickets?  Do you really like tickets that are use-them-or-lose-them propositions?  The contention in this article that consumers are better off if their concert tickets worked more like airline tickets is simply nonsense.  Scalpers increase our consumer sovereignty.

It should be noted that a digital ticket does not automatically mean loss of property rights in that ticket.  I bought Dallas Cowboys playoff tickets and Hamilton tickets on a secondary market and got them transferred to me electronically.  The Ticketmaster electronic app, at least currently, allows you to transfer the ticket to someone else and so digital ticketing platforms don't have to mean scalpers go away -- one could easily imagine two guys in a parking lot can still transact in tickets from their cell phones.  But the danger, of course, is that unlike with paper tickets this right of resale can be taken away any time by simply blocking the transfer function.  The article does not make this clear but I assume they are promoting a platform where once you buy the ticket you can only resell it back via the original seller (if at all), or else the entire article would be complete nonsense (always a possibility on engadget).

Artists and producers are complete hypocrites on this issue.  They are jealous because they would like to charge what the market could bear for their tickets but fear fan backlash if they do.  So they keep prices low so they can claim to be the fan's friend, but with a catch -- they hold back a ton of inventory in the hottest shows and do not offer that to the public at the published low price.  They sell this inventory at high prices to sponsors and other special groups or even sell it themselves at high market rates on the same 3rd party resale sites they publicly criticize.   What these folks really want is for there only to be secondary markets that they control. They don't want competition from third parties, and this lack of competition is only going to be worse for the consumer.  Think of it this way -- what if by law you could only resell your car to the dealer you bought it from.  Would you get as good of a price.  Hah!

 

Price Gouging Laws: Allocating Goods in An Emergency To People Who Have Nothing Much Valuable to Do

During an emergency like a hurricane, many different categories of goods and services experience supply-demand shocks.  The shock may be because of a fall in supply (e.g. oil companies can't get gasoline into the area) or a spike in demand (e.g. for generators or plywood) or a combination of both.  In a free market, prices will rise to help match supply and demand.  Higher prices cause people with less valuable or more frivolous uses of the scarce goods to defer purchase, and can cause suppliers to expend extra effort to get product into the area, even diverting supplies from other areas.

When the government institutes price gouging laws in an emergency, the supply-demand mismatch that leads to the rising prices isn't magically eliminated.   First, without higher price incentives, all the incentives to get more supply into the area are lost.  Supply and demand under these regulations can only be matched by rationing demand, and typically this is through queuing and increasing search costs (e.g. driving around all over the place looking for a station that is open and has gas).  People who gain the limited supplies in this regime are thus those with a lot of time on their hands, where the marginal cost of queuing and driving around does not impose a lot of cost.  Think about a roofer scrambling to repair roofs after the a storm -- do they have time to have their trucks and crews sitting dormant in gas lines?  Thus, price gouging laws tend to ensure that scarce goods in an emergency flow to those with the least use for them.

How Scarce Goods Are Allocated In A World Without Prices

I can think of at least two ways goods are allocated when there are no prices

  • By use of force.  In modern societies, use of force is generally limited to the government so in practice this means that goods without prices will tend to flow to those with government power or who are cronies of those in power.  A great example were the special stores in the Soviet Union for party officials, but examples great and small abound today.  Here is one small one.
  • By queuing or time spent searching.  The examples of this are all around us, though they frequently are not strictly of things without prices but of things that have been priced far below their market clearing price.  I think back to my days queuing in physical lines (long before Ticketmaster and the Internet) for concert tickets that were not free but were priced so far below market clearing prices that one had to wait in long lines to get them.  The gasoline lines of the 1970's and the time spent driving around looking for a gas station that had gas is another example.  A more recent example would be long hospital emergency room lines created by people who get care "free" at emergency rooms.

It was in this context that I read this article on finding parking in New York City.  Residential street parking in NYC is an extremely valuable resource for which there is no monetary charge.  So there is a lot more demand than supply.  So people spend scores of hours a year searching and queuing for spaces.

To some extent, this time cost is sort of like a money cost -- when the cost gets too high in relation to the value people assign to having a car, people give up their cars and bring supply and demand in balance.  But while people may vary in the amount they value having a car, one perverse aspect of any queuing system is that it will tend to allocate goods to the people with the lowest marginal value for their time.   The lower the marginal value one assigns to one's time and labor, the more hours one might be willing to queue and search.

This is a large reason why I have always thought price controls during emergencies - e.g. the "no price gouging during hurricanes" sorts of laws - are particularly destructive.  In the aftermath of a disaster like a hurricane there will be those who are mainly just sitting at home waiting things out, wondering how many days they will get off work and school; and there will be those who have a ton to do - roof repairers, tree cutters, etc.  Think about gasoline, where there is often a temporary supply shortfall after a hurricane.  Prices should rise to bring things in balance but laws do not allow this, so queuing results.  Who is most able to afford to sit in these queues - the person who is just sitting around waiting for things to reopen or the person who is totally bombarded with work and needs to be 23 places at once?  Do we really want roof repairers sitting 2 hours in line for gas behind three teenagers** who had nothing else to do so their parents sent them to top of the tank "just in case"?

** Growing up in Houston through several hurricanes, I have been this teenager and assigned exactly this task.

AP Writes Over 1300 Words on the Loss Of Summer Jobs for Teens, Never Mentions Minimum Wage

If one is curious why the public is economically illiterate, look no further than our media.  The AP's Paul Wiseman managed to write 1300 words on the loss of teenage summer jobs, and even lists a series of what he considers to be the causes, without ever once mentioning the minimum wage or the substantial restrictions on teen employment in place in many states.  I do not know Paul Wiseman and so I will not guess at his motivations - whether ignorance or intentional obfuscation - but it is impossible to believe that this trend isn't in part due to the minimum wage.  As I wrote in the comments on the AZ Republic:

How is it possible to write over 1300 words on the disapearance of teenage summer jobs without once mentioning the minimum wage?

Two of the most substantial criticisms of the minimum wage are 1. it prices low-skilled workers out of the market (and there is no one more unskilled than an inexperienced teenager) and 2. it put 100% emphasis on pay as the only reward for work, while giving no credit for things like gaining valuable experience and skills. We clearly see both at work here, and it is likely no coincidence that we are seeing this article in the same year minimum wages went up by 25% in AZ, as they have in many other states.

By the way, in addition to the minimum wage, AZ (as has many other states) has established all sorts of laws to "protect" underrage workers by adding all sorts of special work rules and tracking requirements. In our business, which is a summer recreation business, we used to hire a lot of teenagers. Now we have a policy banning the hiring of them -- they are too expensive, they create too much liability, and the rules for their employment are too restrictive.

Without evidence, he treats it entirely as a supply problem, ie that teens are busy and are not looking for work. But the data do not support this.  The teen unemployment rate, defined as employment by teens actively looking for work, is up.  The workforce participation rate for teens is down, but the author has nothing but anecdotal evidence that this is a supply rather than a demand issue.  It could be because teens are busier or buried in their cell phones or whatever or it could be because they have given up looking for work.

My Philanthropy Idea for Jeff Bezos

Jeff Bezos is apparently crowdsourcing philanthropy ideas from the public at large.  I wish him well, and hope he finds some interesting and useful outlets for his excess cash.  I would however encourage him to find something whose model can grow and still remain robust.  I have found that there are many charitable activities that work great because of the passion and vision of one person, but are not easy to grow (many examples of local successful public school reforms fall in the same category).  If Jeff Bezos gives money, a charity is likely to see a huge increase in resources, both from Bezos's money and, because his decision is going to be public and high-profile, from money from others who donate because Bezos did.

Any decision he makes will likely be more to satisfy his inner need to be involved with something new and different rather than the optimal approach to help the maximum number of people.  Because he is presumably uniquely good a creating businesses, probably the best way for him to maximize the use of his money and time in improving the lives of a maximum number of people is to go start another business.  Certainly Amazon has created value for the rest of us that dwarfs the amount he has earned from it.  Taken another way, via Amazon he has hugely improved the lives of many, many people and in turn taken just a small commission for himself on this value created. He has lowered prices for us, he has saved us time, he has brought us many more choices.  He has created a platform for small businesses to sell their product that they could never duplicate themselves.  He has nearly single-handedly created the self-publishing business and provided an outlet for a ton of new authors (myself included).  He helps keep Apple and Google honest (and vice versa) from his competition with them.

Of course, he is likely tired of doing only this kind of stuff so he wants to do something more traditionally charitable, and that is fine, but I am exhausted with the notion that charity helps people but business and commerce do not.  Learning from this, one decision criteria might be that he looks for something that not only needs his money, but needs his expertise and vision as well.  The latter is likely way more valuable than the former.

If I had a billion dollars for philanthropy, I might start a new university with a totally new approach.  I would call Brian Caplan and I'd see if we could build a curriculum and an entire educational approach out of engaging multiple perspectives on each issue.   Admissions essay question #1:  "Tell us about a time you encountered a perspective or opinion on an issue very different from you own and tell us how you responded."

 

How Governments Break Markets: 1. Restrict Supply 2. Subsidize Demand 3. Declare Market Failure When Prices Soar

Restrict supply, subsidize demand, and then declare a market failure.  That is how the government has jacked prices through the ceiling in higher education, health care, and housing:

Oregon is responding to its housing affordability crisis by doing all the wrong things. The crisis is due to a shortage in supply which in turn is due to urban-growth boundaries.

So the legislature legalized inclusionary zoning ordinances and Portland passed one. Such ordinances require developers to provide a certain percent of the homes they build to low-income people at below-market rates. In response, developers are building fewer homes, exacerbating the supply problem. City officials “hope the slowdown is temporary,” but that hasn’t proven to be the case in other cities that passed inclusionary zoning ordinances.

Now the state legislature is considering a bill to provide $5 million to help first-time home buyers make down payments on homes. This will have the effect of increasing demand, which will only drive up prices even more.

Why Monopsony Power May Be Irrelevant to the Effects of A Minimum Wage Increase

Most of us who took Econ 101 would expect that an increase in the minimum wage would increase unemployment, at least among low-skilled and younger workers.  After all, demand curves slope downards so that an increase in price of labor should result in a decrease in demand for that labor.

Supporters of the minimum wage, however, argue that employers have monopsony power when hiring low-skill workers. What they mean by this is that due to a bargaining power imbalance, employers can hire workers for less than they would be willing to pay in a truly competitive market.  As the theory goes, this in turn creates an additional consumer surplus for employers, which manifests itself as higher profits.  A minimum wage increase would thus reduce this surplus but not effect employment because companies before the new minimum wage were paying less than they were willing to pay.  Thus minimum wage supporters argue that higher wages mandated by minimum wage laws will be paid out of these excess profits, and not result in higher prices or less employment.

My understanding (and I am not an economist) is that the evidence for monopsony power in hiring low-skill workers is weak or at best limited to niche circumstances.  However, I am going to argue that it does not matter. Even if companies are able to pay workers less than they might via such monopsony power, whatever gains they reap from workers ends up in consumer hands.  As a result, minimum wage increases still must result either in employment reductions or consumer price increases or more likely both.

Why Monopsony Power May Not Matter

Why? Well, we need to back up and do a bit of business theory.  Just as macroeconomics (all the way back to Adam Smith) spends a lot of time thinking about why some countries are rich and some are poor, business theory spends a lot of time trying to figure out why some firms are profitable and some are not.  One of the seminal works in this area was Michael Porter's Five Forces model, where he outlines five characteristics of markets and firms that tend to drive profitability.  We won't go into them all, but the most important for us (and likely for Porter) is the threat of new entrants -- how easy or hard is it for new firms to enter the marketplace and begin competing against an incumbent firm.  If new companies can enter into competition easily, a profitable firm will simply attract new competitors, and keep attracting them until the returns in that market are competed down.

So let's consider a company paying minimum wage to most of its employees.  At least at current minimum wage levels, minimum wage employees will likely be in low-skill positions, ones that require little beyond a high school education.  Almost by definition, firms that depend on low-skill workers to deliver their product or service have difficulty establishing barriers to competition. One can’t be doing anything particularly tricky or hard to copy relying on workers with limited skills. As soon as one firm demonstrates there is money to be made using low-skill workers in a certain way, it is far too easy to copy that model.  As a result, most businesses that hire low-skill workers will have had their margins competed down to the lowest tolerable level.  Firms that rely mainly on low-skill workers almost all have single digit profit margins (net income divided by revenues) -- for comparison, last year Microsoft had a pre-tax net income margin of over 23%.

As a result, the least likely response to increasing labor costs due to regulation is that such costs will be offset out of profits, because for most of these firms profits have already been competed down to the minimum necessary to cover capital investment and the minimum returns to keep owners invested in the business. The much more likely responses will be

  1. Raising prices to cover the increased costs. This approach may be viable competitively, as most competitors will be facing the same legislated cost pressures, but may not be acceptable to consumers
  2. Reducing employment. This may take the form of stealth price increases (e.g. reduction in service levels for the same price) or be due to a reduction in volumes caused by price increases. It may also be due to targeted technology investments, as increases in labor costs also increase the returns to capital equipment that substitutes for labor
  3. Exiting one or more businesses and laying everyone off. This may take the form of targeted exits from low-margin lines of business, or liquidation of the entire company if the business Is no longer viable with the higher labor costs.

An Example

When I discuss this with folks, they will say that the increase could still come out of profitability -- a 5% margin could be reduced to 3% say.  When I get comments like this, it makes me realize that people don't understand the basic economics of a service firm, so a concrete example should help. Imagine a service business that relies mainly on minimum wage employees in which wages and other labor related costs (payroll taxes, workers compensation, etc) constitute about 50% of the company’s revenues. Imagine another 45% of company revenues going towards covering fixed costs, leaving 5% of revenues as profit.  This is a very typical cost breakdown, and in fact is close to that of my own business.  The 5% profit margin is likely the minimum required to support capital spending and to keep the owners of the company interested in retaining their investment in this business.

Now, imagine that the required minimum wage rises from $10 to $15 (exactly the increase we are in the middle of in California).  This will, all things equal, increase our example company's total wage bill by 50%. With the higher minimum wage, the company will be paying not 50% but 75% of its revenues to wages. Fixed costs will still be 45% of revenues, so now profits have shifted from 5% of revenues to a loss of 20% of revenues. This is why I tell folks the math of absorbing the wage increase in profits is often not even close.  Even if the company were to choose to become a non-profit charity outfit and work for no profit, barely a fifth of this minimum wage increase in this case could be absorbed.  Something else has to give -- it is simply math.

The absolute best case scenario for the business is that it can raise its prices 25% without any loss in volume. With this price increase, it will return to the same, minimum acceptable profit it was making before the regulation changed (profit in this case in absolute dollars -- the actual profit margin will be lowered to 4%). But note that this is a huge price increase. It is likely that some customers will stop buying, or buy less, at the new higher prices. If we assume the company loses 1% of unit volume for every 2% price increase, we find that the company now will have to raise prices 36% to stay even both of the minimum wage increase and lost volume. Under this scenario, the company would lose 18% of its unit sales and is assumed to reduce employee hours by the same amount.  In the short term, just for the company to survive, this minimum wage increase leads to a substantial price increase and a layoff of nearly 20% of the workers.   Of course, in real life there are other choices.  For example, rather than raise prices this much, companies may execute stealth price increases by laying off workers and reducing service levels for the same price (e.g. cleaning the bathroom less frequently in a restaurant).  In the long-term, a 50% increase in wage rates will suddenly make a lot of labor-saving capital investments more viable, and companies will likely substitute capital for labor, reducing employment even further but keeping prices more stable for consumers.

As you can see, in our example we don’t need to know anything about bargaining power and the fairness of wages. Simple math tells us that the typical low-margin service business that employs low-skill workers is going to have to respond with a combination of price increases and job reductions.

How My Company Has Responded

Just to put a bit more flesh on this, I will give a real example from my own company.  My company operates public recreation facilities, mainly campgrounds, under bid contracts.  To understand our response to rising minimum wage, you need to understand some background:

  • In bidding these, we bid both the camping fee we will charge to customers as well as the rent we will pay to the government for the concession.  Given the weights the government uses in the bid process, keeping customer price low is more important than the rent we pay, so in most cases the prices we charge customers are well below the private market rate for similar campgrounds.
  • We have limited ability to further increase productivity, in part because our ability to invest in these campgrounds in limited.
  • Because we have many contracts across the country, our reputation is important and so we seldom will entertain reductions in service, such as cleaning frequency
  • Labor and labor-related costs are about 50% of revenues, and most employees are paid minimum wage.  Profit margins hover around 5% of revenues

One of the states we operate in is California.  We are in the midst of a minimum wage increase there from $8 an hour several years ago to $15 several years hence, or an increase of 87.5%.  Basically we have had two responses:

  • In places where we are under the market price, we have been able to raise prices without a lot of drop in volume.  But this means that our camping rates in some locations have risen from $18 to a future $26 a night, an enormous increase in just a few years.
  • In places where we did not think the market would bear such a rate increase, or where our contract did not allow such a rate increase, we closed our operation.  In fact, we have exited about half our business in California (while simultaneously growing it aggressively in states like Tennessee).  In all cases this has resulted in a loss of employment -- either the location was never reopened by anyone else, or else it was reopened by a competitor with different reputational concerns who staffed the location with far fewer employees.

As a Significant Potential Beneficiary of Trump's Tax Plan, I Will Say It Makes No Sense

Trump's tax plan makes little sense to me, and much of what I have seen written about it today is so full of misunderstandings about taxes and small businesses, I thought I would try to supply a bit of context for my contention that the plan makes no sense.  As a caveat, Trump is seldom careful when he chooses words, so it could well be that I am working off of a media misinterpretation of his proposal.

I own an S-Corporation, which is the source of nearly all my personal income.  In an S-Corporation, there is no corporate income tax per se.  The corporation fills out an (extensive) set of tax forms, but the corporation does not write a check based on the corporate return.  Instead, whatever amount is on the bottom line as taxable income in the corporate return passes through to my personal income tax return, where it is added to any other income I have (e.g. I pay myself a salary from the company, I get some interest income, etc) and I am taxed on that total based on my personal income tax rate.

For an individual owner, this structure makes a lot of sense, and this can best be understood by looking at the alternative, which is a traditional C-corporation.  In a traditional C corporation, the corporation has a tax return just as in the S corp but, and this is a big difference, the corporation actually pays taxes based on this return on a corporate tax schedule.  But the income is still sitting in the corporation.  If the individual who owns the corporation wants this money, and presumably she does as why else be in business, then the corporation must dividend this money to the owner.  The dividend triggers a second taxable event -- that dividend of the after-tax profits of the C corporation is then taxed again in the individual's tax return.  I read today in the Wall Street Journal that "the appeal of becoming a pass-through business jumped after a 1986 U.S. tax overhaul set the top rate for individuals lower than the top rate for corporations."  I don't think this is at all true -- the appeal was never one of differential rates, because to get income in an owner's pocket always has required it be taxed at individual rates.  The appeal of the S corp is that the income does not need to be taxed a second time, at the corporation level.

In being the owner-operator of a C corp, one has to constantly worry about the double taxation problem.  A popular solution is for the owner to simply pay himself the entire expected income of the corporation as a salary, this effectively eliminates the corporate level tax as there is no income left to tax, and so all the income is taxed on the individual's return as salary.  Another popular dodge has been to lend rather than dividend the corporate income to the owners.   This eliminates it being taxable on the individual return at the time the income is passed over, but this merely defers individual taxes until the loan is forgiven or until the company is sold or liquidated and the loan netted out.

S-corp owners like myself don't have to worry about all this mess -- the decision as to how much I pay myself in salary vs. how much I get paid in dividends is largely irrelevant to my taxes.  If the company has income, before owner's salary, of $100,000 then my taxes are essentially the same whether I take $95,000 in salary or $5,000 in salary -- all $100,000 is going to get taxed at the individual rate on my 1040 whether I call it salary or corporate income -- this is true because on the income statement, the owner's salary is a deduction from income, so income goes up by the same amount that the owner's salary goes down.  (Note that this is not exactly correct -- there is a small difference in that a higher salary increases payroll taxes somewhat that are not incurred on dividends).

I can't totally figure out how the Trump plan is intended to work, in part because one can argue that the S-corp corporate rate is already zero, so what does it mean to "lower" it to 15%?  But my best guess is that he is saying that for pass-through entities like S-Corps, pass through income would only get taxed on the individual 1040 at a maximum of 15% while the rest would get taxed at the regular rate, whatever that is.  There is a lot that is unclear - for example, for purposes of computing tax brackets for the rest of my income, does the pass-through income count?  But assuming all this is sorted out, owners like myself would find ourselves with a strange set of new incentives.  For example, depending on my tax bracket, my incentive would likely be to pay myself nothing in salary.  Anything I pay myself in salary would be taxed at a higher rate, apparently, than anything that passes through as income.

My guess is that someone is confused here, either in communicating or putting together this plan (given Trump's haphazardness and lack of precision in communication, I would bet on the communication error).  The WSJ described the pass-through rate being dropped to 15% in parallel with the C-C0rp max rate dropping to 15%, but those two rates are not at all parallel.  The C-Corp rate is part of a double taxation chain.  For that income to be useful to anyone, it has to pass through (either as dividends or higher equity prices) to individuals who pay individual taxes on the income as well.  So in this plan as described, income in C-Corps that are then passed on to their owners as dividends are taxed at 15% + individual rate.  But the income tax for S-Corp income passed to its owners about be 15% total.

Look, I will happily take this, but if this plan is really being described well, it is stupid and senseless.  Someone doesn't really understand pass-through entities.

My alternative is still to get rid of the corporate tax code completely.  Forget all the costs spent on corporate tax lawyers and all the distortive things corporations do to manage taxes.  Tax everything once, when it reaches the 1040.  Here is my plan I have proposed on a number of occasions (pass-throughs would be kept as-is, this is for C-Corps):

So here is my simply two-point plan

  1. Eliminate the corporate income tax.  Entirely
  2. Tax dividends and capital gains as regular income on individual tax returns

Done.  All corporate profits get taxed but only when they pass through to individuals as capital gains or dividends.  I think this would actually raise more money but rates could be adjusted (or better yet deductions eliminated) if needs to keep it neutral.

Progressive Narrative Fail: Why Are Low Income Workers and the Unemployed Running from High Minimum Wage States to Low Minimum Wage States?

I think many folks are aware of how certain wealthy neighborhoods use zoning to keep out the lower-income people they don't want around  (e.g. minimum lot sizes, minimum home sizes, petty harassment over home and lawn maintenance, etc.)  If you think of California as one big rich neighborhood, many of their labor and housing laws have this same effect of keeping lower income people out.

From the Sacramento Bee

Every year from 2000 through 2015, more people left California than moved in from other states. This migration was not spread evenly across all income groups, a Sacramento Bee review of U.S. Census Bureau data found. The people leaving tend to be relatively poor, and many lack college degrees. Move higher up the income spectrum, and slightly more people are coming than going.

About 2.5 million people living close to the official poverty line left California for other states from 2005 through 2015, while 1.7 million people at that income level moved in from other states – for a net loss of 800,000.

...
The leading destination for those leaving California is Texas, with about 293,000 economically disadvantaged residents leaving and about 137,000 coming for a net loss of 156,000 from 2005 through 2015. Next up are states surrounding California; in order, Arizona, Nevada and Oregon.

Wow, I am totally lost.  The minimum wage currently in California is $10.50 an hour, going up to $15 over the next 5 years.  The minimum wage in Texas is the Federal minimum at $7.25.  If I understand it right from progressives, minimum wages are a windfall for workers that raise wages without any reduction in employment.  So why are the very people California claims it is trying to help leaving the state in droves?  For unenlightened Texas, of all places.

Of course the reason is that minimum wages do indeed have employment effects.If you think of California as one big rich neighborhood, minimum wages act as a zoning plan to keep the "unwashed" out.  Setting a minimum wage of $15 is equivalent to saying, "if your skills and education and experience are low enough that your labor is not yet worth $15 an hour or more, stay out."

Of course, there are a lot more problems for jobs in California than just minimum wages.  At every turn, California works to make operating a business difficult and hiring unskilled workers more expensive.  And then there is the cost side.  With its building restrictions and environmental rules, most California cities have artificially inflated housing costs, just another way to tell lower income  people to keep out.

Well-paid new arrivals in California enjoy a life that is far out of reach of much of the state’s population. Besides Hawaii and New York, California has the highest cost of living in America.

During the past three years in Sacramento, median rent for a one-bedroom apartment has risen from about $935 a month to $1,230 a month, according to real estate tracking firm Zillow.com. A single mother working 40 hours a week at $15 an hour would spend nearly half of her gross income to afford an apartment at that price. She would pay about 10 percent less for a one-bedroom rental in Houston or Dallas.

Sacramento remains relatively affordable compared to other California markets. Median rent for a one-bedroom apartment in Los Angeles is about $2,270 a month. In San Francisco, $3,700. Without subsidies, those prices are unreachable for a single parent making $15 an hour.

The key to attacking poverty is creating more jobs, not artificially raising the rates of entry-level jobs.

The Left Justifies New Taxes Based on Reducing (Presumed) Negative Externalities, But Actually Just Wants The Money

Here is the Wikipedia definition of  a Pigovian tax:

A Pigovian tax (also spelled Pigouvian tax) is a tax levied on any market activity that generates negative externalities (costs not internalized in the market price). The tax is intended to correct an inefficient market outcome, and does so by being set equal to the social cost of the negative externalities. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product.[1] An often-cited example of such an externality is environmental pollution.

The Left often tries to justify new taxes based on their being Pigovian taxes.  The classic example is a carbon tax -- it is claimed there is a social cost to carbon-based fuel combustion (e.g. CO2 production and resulting global warming) that is not taken into account by market prices.  By adding the tax, these other costs can be taken into account, likely raising the price of these fuels and thus both reducing their use and providing a higher price umbrella for alternatives.

For years, I accepted these arguments at face value.  I might argue with them (for example, I think that the Left has tended to spot 10 of the last 2 true negative externalities), but I accepted that they really believed in the logic of the Pigovian tax.  I am now becoming convinced that I was wrong, that the Left's support of Pigovian taxes is frequently a front, a way of putting a more palatable face on what is really a naked grab for more taxpayer money by public officials.  To support this emerging hypothesis, I cite two examples.

 1.  Proposed Carbon Tax in Washington State

This last November, a carbon tax was placed on the ballot in Washington State.  In many ways, it partially mirrored my own proposal (here) by making the tax revenue neutral, ie the new carbon tax was offset by a reduction in other regressive taxes, particularly other consumption taxes.  If the Left and environmental groups truly embraced the Pigovian logic of a carbon tax, they should have jumped at supporting this initiative.  I discuss what happened in depth here but Vox has a good summary:

The measure, called Initiative 732, isn’t just any carbon tax, either. It’s a big one. It would be the first carbon tax in the US, the biggest in North America, and one of the most ambitious in the world.

And yet the left opposes it. The Democratic Party, community-of-color groups, organized labor, big liberal donors, and even most big environmental groups have come out against it.

Why on Earth would the left oppose the first and biggest carbon tax in the country? How has the climate community in Washington ended up in what one participant calls a "train wreck"? (Others have described it in more, er, colorful terms.)....

the alliance’s core objection to I-732 is that it is revenue-neutral — it surrenders all that precious revenue, which is so hard to come by in Washington. That, more than anything else, explains why alliance groups are not supporting it.

Opponents say they wanted to use the revenue for climate-related investments, but even if true there are two things wrong with this.  First, it shows ignorance of the economic theory of the Pigovian tax -- the whole point is that by raising the price of carbon-based fuels, markets will find the most efficient way to reduce this fuel use.  The whole point is that it is way more efficient to reduce CO2 production through this simple pricing mechanism than it is through government cronyist winner-picking "investments".  The second problem is that such promises of funds dedication never last.  Supposedly the tobacco settlement was all supposed to go to health care and tobacco-related education, but there is not a single state where even a double digit percentage went to these things (the American Lung Association estimates just 2% of the funds go to the original purpose).  In New York, the entire tobacco settlement stream was securitized and used to plug a single year's general budget hole.  You can be assured the same thing would happen with carbon tax revenue.

2.  Soda Tax in Philadelphia

Last year, Philadelphia passed a large soda tax.  The justification for such a tax is that such drinks cause obesity and other health issues.  Either for people's own good or to reduce the future burden on government health care programs, the whole point of such a tax is to reduce soda consumption.  Or so it was justified.

But now, once the tax took effect, the city government that passed the tax seems to be shocked and surprised that soda consumption is way down.  You would think that they would be declaring victory, ... that is, if the point was ever to reduce soda consumption and not just to raise some extra revenue.  Via Reason:

For now, Kenney and other city officials seem unfazed—dismissive, even—of the problems caused by the new tax. A city spokesman told Philly.com that no one knows whether low sales figures and predicted job losses are anything more than "fear-mongering to prevent this from happening in other cities."

Kenney put an even finer point on it.

"I didn't think it was possible for the soda industry to be any greedier," Kenney said in an emailed statement to Philly.com reporter Julia Terruso. "They are so committed to stopping this tax from spreading to other cities, that they are not only passing the tax they should be paying onto their customer, they are actually willing to threaten working men and women's jobs rather than marginally reduce their seven figure bonuses."

It's not the first time Kenney has tried to ignore basic economics when it comes to the soda tax. A few weeks ago, he blamed grocery stores and restaurants for "price gouging" when they increased prices for sugary drinks to make consumers pay for the cost of the tax (the tax is technically applied on the transaction between distributors and retailers, but, like all other taxes, it gets passed along).

Its clear that this tax justified as a pigovian tax is really no such thing.   City officials seem to be honestly surprised that consumption is down as the result of a Pigovian tax whose purpose is to... reduce consumption.  And if they really did not expect the tax to get passed on to consumers, then how does it work?   In fact, city officials are actually worried that reductions in soda consumption is going to cause the tax to yield less money than they expected, creating a hole in their budgets.

*    *    *

Going forward, I plan to apply an order of magnitude more skepticism to any future calls for Pigovian taxes.  I think the first thing I will ask of each new suggestion is "do you still support this tax if I were to make it revenue neutral, say by offsetting it with reductions in another regressive taxes?"

Why Aren't The Chinese Ticked Off About Subsidizing American Consumers? And Why Aren't We Happy About It?

Ten years ago, we published an editorial from our Chinese sister publication Panda Blog.  Though some of the details of their government's financial actions have changed since then, the gist of it is still correct -- the Chinese government still engages in actions that they call "export promotion" and President Trump calls "currency manipulation".  So I think this editorial from the perspective of the Chinese consumer is still relevant:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

  • Limiting yuan convertibility, and keeping the yuan's value artificially low
  • Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
  • Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

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.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

Why We Need School Choice, in One Chart

In 1973, when Ford was rolling out such losers as the Pinto and the Mustang II, would the cars have been any better if the Ford designers had, say, a budget twice as large?  Or would the same people have continued to roll out the same bad cars, just more expensively, until competition from Japan and Europe forced American car makers to get their act together?

If you have not been to a Sears store lately, and you have lots of company.  If you do not shop at Sears, think about why.  Now, imagine that Sears were to double the number of employees in their local store.  Would that change your mind and suddenly send you into the store to shop?  No?

There are times when everything about an organization is broken -- its management, its culture, its strategy.  These organizations may have perfectly good people in them -- I have no doubt that the folks at Ford in the 1970's were capable people, as are the employees at my local Sears store.   I call all these factors "organizational DNA".  This is from years ago about a corporate example, but the same is true of any organization:

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  ...

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

I would argue that public schools in many parts of the country are in this situation.  Any organization can become senescent with value-killing DNA, but this process happens much more rapidly when there is no competition, as has been the case for public schools which have enjoyed a virtual monopoly enforced by the government (you can go to a competing school but you still have to pay for the government school you are not using).

If I am right, then the last thing you would expect to help is simply pouring more money into the same management, the same culture, the same organizational DNA.  But that is exactly what we have done.  That has been our lead strategy for 35 years, and still remains the preferred strategy of the Left.  Via Mark Perry:

Despite this history, President Obama's strategy was to throw even more money at the schools, and again it did not work:

One of the Obama administration’s signature efforts in education, which pumped billions of federal dollars into overhauling the nation’s worst schools, failed to produce meaningful results, according to a federal analysis.

Test scores, graduation rates and college enrollment were no different in schools that received money through the School Improvement Grants program — the largest federal investment ever targeted to failing schools — than in schools that did not.

The Education Department published the findings on the website of its research division on Wednesday, hours before President Obama’s political appointees walked out the door.

“We’re talking about millions of kids who are assigned to these failing schools, and we just spent several billion dollars promising them things were going to get better,” said Andy Smarick, a resident fellow at the American Enterprise Institute who has long been skeptical that the Obama administration’s strategy would work. “Think of what all that money could have been spent on instead.”

One will hear that criticism of public schools in unfair because they have all these great teachers in them.  Examples will be cited.   I say:  "Exactly!"  That is why change is needed.  Public schools are hiring good people and putting them in an organization and system where they deliver poor results.  Let's liberate this talent.

By the way, one of the misconceptions about school choice is that it necessarily means the end of public schools.  I find this an unlikely outcome, at least in most areas.  Competition from Japan meant that Ford lost some of its customers to Toyota, but it also meant that Ford became a lot better.

 

 

 

Trade and Consumer Advocacy, Part 2

Yesterday, I suggested we needed a new, real consumer advocacy organization to replace the economically ignorant Nader-led PIRG organizations.  The reason is that it is time that consumers banded together and resisted Trump's protectionism, since such protection generally protects a few politically favored unions and corporations while raising prices and reducing choice for all consumers.

A couple of hours after I posted that, the absolutely indispensable Mark Perry brings us a great post on academic research about how protectionist actions nearly always cost consumers more than they help producers.

The empirical evidence above helps us to understand a very important economic lesson about international trade, call it “protectionist math” — and that mathematical reality is that the costs of protectionism imposed on American consumers in the form of higher prices and a reduction in trade will always be greater than the benefits generated for the protected industries and the workers in those industries. And here’s another part of that “protectionist math” that helps us answer the question: Sure, we can save US jobs with protectionist trade policies, but how much does it cost consumers for every job saved with protectionist trade policy, and is that cost worth it? Economic analysis and the empirical evidence presented above suggest that it’s very, very expensive to save US jobs with protectionism — more than half-a-million dollars on average per year per job in 2016 dollars (see chart above). If Trump enacts protectionist policies that save $50,000 per year US factory jobs but at a cost to consumer of $500,000 annually for each job saved, that’s a surefire formula to “Make America Expensive and Poor Again,” not “great again.”

I won't reprint his chart, but he has detailed results form a number of academic studies in different industries that back this statement up.

My point about needing a new consumer advocacy group was a little tongue in cheek, but here is Perry quoting from a study at the Federal Reserve Bank of St Louis a number of years ago (back during the last wave of protectionism, which was based on Japan rather than China bashing).

The primary reason for these costly protectionist policies relies on a public choice argument. The desire to influence trade policy arises from the fact that trade policy changes benefit some groups, while harming others. Consumers are harmed by protectionist legislation; however, ignorance, small individual costs, and the high costs of organizing consumers prevent the consumers from being an effective force. On the other hand, workers and other resource owners in an industry are more likely to be effective politically because of their relative ease of organizing and their individually large and easy-to-identify benefits. Politicians interested in re-election will most likely respond to the demands for protectionist legislation of such an interest group.

Trump is Going to Destroy Economic Growth If We Don't Find Ways to Block Him -- We Need A Real Consumer Advocacy Organization

As an example, from the WSJ today:

Auto executives typically spend the end of the year prepping for product debuts and thinking up ways to spark sales.

This time around, Detroit’s chiefs devoted considerable time to trying to figure out how to deal with the nation’s new commander in chief. Union bosses are being called in to consult on how to reshuffle factory work, board members are trying to figure out who has friends in President Donald Trump ’s new administration, and task forces have been created to monitor his Twitter account.

At a dinner party during the Detroit auto show earlier this month, Ford Motor Co. Chief Executive Mark Fields said he reread Mr. Trump’s “The Art of the Deal” over the holidays. He first read it in the 1980s, but wants to better understand the new occupant of the Oval Office.

American companies, several of which have been scolded by Mr. Trump, often via Twitter, are suddenly grappling with a new, unpredictable force in their operations. Barbs have included the price the Pentagon pays for Lockheed Martin Corp. jets and whether Carrier Corp. assembles furnaces in Indiana. AT&T Inc. Chief Executive Randall Stephenson recently met with Mr. Trump, who had expressed concerns about the telecom giant’s proposed purchase of Time Warner Inc.

In other words, rather than worrying about pleasing consumers, auto companies are spending all their time figuring out how to please the occupant of the White House.  This sounds more like corporate life in Venezuela than the US.  It is absurd that Trump claims to be about reducing regulation, and then personally intervenes to micro-manage corporate division-of-labor and sourcing decision.

We need new consumer activist organizations.  The classic ones, like Nader's PIRG, are captured by progressives and economic illiterates.  Economic nationalism and tariffs and reduced immigration and border taxes and elimination of free trade treaties are all direct assaults on the American consumer.  Do all the Midwestern folks who voted for Trump ostensibly because they are struggling economically really want 20% higher prices in their Wal-Mart?

Postscript:  By the way, for a moment let's accept this awful situation.  Consider women's groups (as discussed here) and their response to Trump and Ford's response.  Which is more likely to succeed?  If abortion were my #1 issue (as it is for my wife), I would be seriously concerned that women's groups were using all the wrong tactics.  Trump is petulant.  He does not back down based on protests, he moves you up the target list.   This is a terrible, awful character flaw, but it is reality.  If women's groups had calmly sat down with Trump in a back room and worked out a deal (with a man who is a lifelong social liberal) they would probably be further ahead.

Capitalism vs. Socialism

This is a good video about various voting mechanisms for handling voting between more than 2 choices.

VotingParadoxes from Paul stepahin on Vimeo.  Via Alex Tabarrok

The video is about voting, but to make things simple it discusses voting among people for a single ice cream flavor they all have to share.   I don't think this video was meant to have any broader application beyond just highlighting basic paradoxes and strategies well-known in voting theory.   To me, though, this video highlights the strong advantages of capitalism over socialism in at least three ways

  1. Forcing one-size-fits-all socialist and authoritarian solutions sucks vs. allowing individuals to make choices based on their personal preferences regardless of other preferences in the group.  While the video discusses a variety of voting approaches for forcing everyone into a single choice, all of these result in a lot of folks who don't get their first preference.  Obamacare is a great example, where product features have been standardized, essentially through a voting process (though indirectly) and huge numbers of people are unhappy.
  2. The video fails to discuss one shortcoming of simple yes/no voting, and that is degree of preference.  In the real world, we both may prefer vanilla over chocolate, but your preference might be pretty close whereas I might be so allergic to chocolate that eating it will kill me.  Socialist and authoritarian approaches don't have a solution for this, but market capitalism does, as prices signal not only our preference but our degree of preference as well.  The real market for ice cream is a preference expression process orders of magnitude more sophisticated than voting.
  3. It is almost impossible for even an autocrat who legitimately wants to maximize well-being to do so, because the mass of individual preferences are impossible to encompass in any one mind.  Towards the end of the video, it became harder and harder for a person to synthesize a best approach from the preference data, and this was just for 10 people.  Imagine 300 million preferences.

Your Good Intentions Mean Virtually Nothing

I am exhausted with folks, particularly on the Progressive Left, judging themselves and each other based on their intentions.  Your intentions mean virtually nothing.  I suppose it is better to have good intentions than bad, but beyond that results, particularly in the public policy arena, are what should matter.  And the results of most Progressive well-intentioned legislation are generally terrible.  For example, as I wrote earlier today, poverty in this country is mainly caused by lack of work rather than low wage hours, but Progressives preen over their good intentions in introducing higher and higher minimum wages that will only serve to reduce the work hours of low-skilled poor people.

Via Mark Perry comes this great article on Progressive good intentions in Seattle collapsing into rubble.  It does not except well, so I recommend you check it out, but I will summarize it.

Begin with a libertarian goal that should be agreeable to most Progressives -- people should be able to live the way they wish.  Add a classic Progressive goal -- we need more low income housing.  Throw in a favored Progressive lifestyle -- we want to live in high density urban settings without owning a car.

From this is born the great idea of micro-housing, or one room apartments averaging less than 150 square feet.  For young folks, they are nicer versions of the dorms they just left at college, with their own bathroom and kitchenette.

Ahh, but then throw in a number of other concerns of the Progressive Left, as administered by a city government in Seattle dominated by the Progressive Left.  We don't want these poor people exploited!  So we need to set minimum standards for the size and amenities of apartments.  We need to make sure they are safe!  So they must go through extensive design reviews.  We need to respect the community!  So existing residents are given the ability to comment or even veto projects.  We can't trust these evil corporations building these things on their own!  So all new construction is subject to planning and zoning.  But we still need to keep rents low!  So maximum rents are set at a number below what can be obtained, particularly given all these other new rules.

As a result, new micro-housing development has come to a halt.  A Progressive lifestyle achieving Progressive goals is killed by Progressive regulatory concerns and fears of exploitation.  How about those good intentions, where did they get you?

The moral of this story comes back to the very first item I listed, that people should be able to live the way they wish.  Progressives feel like they believe this, but in practice they don't.  They don't trust individuals to make decisions for themselves, because their core philosophy is dominated by the concept of exploitation of the powerless by the powerful, which in a free society means that they view individuals as idiotic, weak-willed suckers who are easily led to their own doom by the first clever corporation that comes along.

Postscript:  Here is a general lesson for on housing affordability:  If you give existing homeowners and residents the right (through the political process, through zoning, through community standards) to control how other people use their property, they are always, always, always going to oppose those other people doing anything new with that property.  If you destroy property rights in favor of some sort of quasi-communal ownership, as is in the case in San Francisco, you don't get some beautiful utopia -- you get stasis.  You don't get progressive experimentation, you get absolute conservatism (little c).  You get the world frozen in stone, except for prices that continue to rise as no new housing is built.  Which interestingly, is a theme of one of my first posts over a decade ago when I wrote that Progressives Don't Like Capitalism Because They Are Too Conservative.

Postscript #2:  So, following the logic above, one can think of building restrictions and zoning as a form of cronyism.  Classic cronyism is providing subsidies to politically favored companies and restricting the ability of new competitors to arise to compete with them, granting them an effective monopoly and the ability to jack up their prices.  So what do we do with housing?  We give massive subsidies to home-owners and restrict competition from new housing that might reduce their home value, thus granting current homeowners an effective monopoly and the ability to jack up their prices.  I challenge anyone to tell me that rising home prices in Palo Alto are not driven by the exact same government actions for favored constituents as are rising prices for Epipens.

Postscript #3:  I will ask a question using Progressive terminology -- you were worried about these young renters and their power imbalance vs. development companies and landlords.  So how much more powerful are they now with a thousand fewer rental units on the market?  Consumers have power when supply is plentiful.  Anything done to reduce supply is going to reduce consumer power.

Why Are We Making It So Hard For the Chinese to Provide Us With Lower-Cost Aluminum?

This WSJ article's hook is a huge cache of raw aluminum photographed in the Mexican desert.  American aluminum manufacturers claim that this is Chinese aluminum being illegally transshipped through Mexico to get a lower tariff rate.

The U.S. Commerce Department says it is investigating the Mexican aluminum’s origin as part of a slew of trade complaints by the U.S. metals industry against China, many of which include allegations of transshipping.

China’s booming industrial production has reordered global markets, few more dramatically than aluminum. Fueled by access to inexpensive electricity and tax breaks, Chinese aluminum output doubled between 2010 and 2015. With local demand slowing,more of it was sent to the U.S., which was importing 40% of its aluminum by 2015—up from only 14% in 2010.

By the end of 2016, only five aluminum smelters will be operating in the U.S., down from 23 in 2000.

Alcoa Inc., the largest American aluminum maker, is splitting in two, isolating its profitable parts-making units from its troubled raw-aluminum operations. Alcoa Chief Executive Klaus Kleinfeld last year said illegitimate Chinese exports were “the major driver” of lower aluminum prices.

I suppose to an incumbent who has convinced himself that he has a God-given right to his historic market share, new sources of competition are always "illegitimate."  But through the whole article I kept asking myself, why are we forcing these folks in China to jump through so many hoops just to bring us lower-cost aluminum?  Given how fundamental aluminum is to almost every manufactured product today, we should be welcoming them as heroes, not forcing them to play silly games in the Mexican desert just to deliver their product at the price they want to sell it for.

It turns out that all this government effort to "protect" us from lower cost aluminum is to support an American aluminum industry that is tiny, maybe 2% of world production.

p1-by551b_china_16u_20160908113905

The industry would argue that the lower prices of Chinese imports are "illegitimate" in part because the sales price in the US is subsidized by Chinese taxpayers.  To which I answer, "so what?"  Or actually, to which I answer, "yay!"  If another country's taxpayers want to pay higher taxes so that they can provide valuable raw materials to US industry at lower prices, why in the heck would we want to stop them?

Perfect Example of Blaming the Free Market for Government Interventions

Hillary Clinton, along with many politicians and most of the media, is arguing that the recent large price increase in Epipens is some sort of market failure requiring government intervention to solve.

Democratic presidential nominee Hillary Clinton jumped into the fray over rapid price increases for the EpiPen, a life-saving injection for people who are having severe allergic reactions.

Mrs. Clinton called the recent price hikes of the EpiPen “outrageous, and just the latest example of a company taking advantage of its consumers.”

In a written statement calling for Mylan to scale back EpiPen prices, Clinton added, “It’s wrong when drug companies put profits ahead of patients, raising prices without justifying the value behind them.”

Why aren't similar government interventions required to curb greed in the pricing of paint, or tacos, or toilet paper?  Because the markets are allowed to operate and competitors know that if they raise prices too high, their existing competitors will take sales from them, and new competitors may enter the market.  The reason this is not happening with Epipens is that the Federal government blocks other companies from competing with Mylan for the Epipen business with a tortuous and expensive and pointless regulatory process (perhaps given even more teeth because Mylan's CEO has a lot of political pull).  The MSNBC article fails to even mention why Mylan has no competition, and in fact essentially assumes that Epipens are a natural monopoly and should be treated as such, despite the fact that there are 3 or 4 different companies that have tried (and failed) to clear the regulatory process over the last several years with competing products.  Perhaps these other companies would have been smarter to appoint a Senator's daughter to a senior management position.

Hillary Clinton is proposing a dumb government intervention to try to fix some of the symptoms of a previous dumb government intervention.  It would be far better to work the root cause instead.

Postscript:  Credit Vox with the stupid argument of the day:  

Other countries do this for drugs and medical care – but not other products, like phones or cars – because of something fundamentally unique about medication: If consumers can’t afford the product, they could have worse odds of living. In some cases, they face quite certain odds of dying. So most governments have decided that keeping these products affordable is a good reason to introduce more government regulation.

Hmm, let me pick a slightly different example -- food.  I will substitute that into the Vox comment.   I think it would be perfectly correct to say that there is not price regulation of food in the US, and that "If consumers can’t afford [food], they could have worse odds of living. In some cases, they face quite certain odds of dying."  In fact, the best place today to face high odds of dying due to lack of food is Venezuela, where the government heavily regulates food prices in the way Vox wished to regulate drugs prices.

China Doesn't Kill American Jobs, Politicians Do

I am simply exhausted with the notion that seems to have taken over both political parties that trade with China is somehow the source of US economic woes.

Remember that voluntary trade can't happen unless both parties are benefiting from each trade.  Remember the masses of academic evidence that the (largely hard to see) benefits of trade in terms of lower costs and more choice tend to be greater than the (easier to see) job losses in a few trade-affected industries.  But even if none of that is compelling to you, consider that our trade deficit with China is just 2% of GDP.  It's almost a rounding error.

If politicians want to know why lower-skilled laborers struggle to find employment, they need to look past imports from China and Mexican immigration and look at their own policies that are making it more and more expensive for businesses to hire people in this country.   I have written about this many times before, but some of the most prominent include:

  • minimum wage laws, rising to $15 an hour in many parts of the country, and increasingly draconian overtime rules, both of which substantially raise the cost of hiring someone.
  • minimum benefit laws, including expensive health care requirements in Obamacare and a myriad of other state-level requirements such as mandatory paid sick leave or family leave
  • payroll taxes that act as sales taxes on labor  -- we understand that cigarette taxes are supposed to reduce cigarette purchases but don't understand that payroll taxes reduce purchases of labor?
  • employment regulations, such as chair laws and break laws in California, that make employing people more expensive and risky
  • employer liability laws, that make employers financially responsible for any knuckleheaded thing their employees do, even when these actions violate company policy (e.g. making racist or sexist statements)**
  • laws that make hiring far more risk, including those that limit the ability to do due diligence on potential employees (e.g. ban the box) and those that limit the ability of employers to fire poor performing employees.

And this is just employment law -- we could go on all day with regulations that make life difficult for lower income workers, such as the numerous laws that restrict the housing stock and drive up housing prices and rents for these same folks who are struggling to find a job.

Let's say you live in California.  Who has killed more jobs in your state -- China or the California legislature?  The answer is no contest.   The California legislature wins the job destruction race in a landslide.   While California's high-tech community enjoys a symbiotic relationship with China that has created immense wealth, the California legislature works overtime to make sure low-skilled workers in the state don't benefit.

 

**Postscript:  Of all the factors here, I won't say that this is the largest but I think it is the most underrated and least discussed.  But think about it.  If you are going to be personally financially libel for ignorant, insensitive, or uncouth remarks made by your employees, even when you have explicitly banned such behavior in company rules and don't personally tolerate it, how likely are you going to be to hire a high school dropout without a good work history to interact with customers?

Another Problem With the National Minimum Wage

Beyond the basic lunacy of attempting to help the poor by mandating that they sell their labor for more than most businesses are willing to pay, I am reminded of another problem with proposals for a higher national minimum wage.

This problem is related to one that is seldom discussed in the context of most economic statistics, and that is the differences in the cost of living in different parts of the country.   The Tax Foundation looks at the cost of living by state, showing the value of $100 ($100 is worth more in states with lower prices and cost of living, since one's money will go further).  Magenta states are lower cost of living, yellow states are higher.

$100 Map-state-01

I have written before that not taking this into account messes up our view of things like poverty and income by state.  Well-being of folks in high cost states like California and New York are often exaggerated, as is poverty in states like those in the deep south.

But another issue is that this large variation in cost of living changes the effective value of a minimum wage.  Based on these numbers, a $15 minimum wage in Washington DC becomes, effectively, a $20.43 minimum wage in Mississippi.  Employment effects are likely to be much worse in these lower costs states.  Since the higher cost states all vote Democrat in Presidential elections, and the lower cost states all vote Republican, one wonders if this is a bug or a feature of Democrat-proposed $15 minimum wage plans.