Hooray Beer

Art Carden pens an interesting article about the importance of decentralized knowledge and market feedback in the production of beer. While the article focuses on making better beer, I think his observations can be applied to the economy at large. I have included Mr. Carden’s parting shot below.

A government could, undoubtedly, make beer. But the right beer with the right flavor profiles for a world of nearly infinite variety of tastes — not all of them consistent? For that, you need a market.

Please use the comment sections to share your thoughts on the article or related content.


A break from all the Economic Mishigas

With all the economic mishigas dominating news cycle, I thought it was worth sharing a couple of articles that I have recently come across on the topic.

I found myself enjoying Donald Boudreaux’s Op-Ed in the Pittsburgh Tribune-Review. His tongue-in-cheek response to a reader’s email argues that capitalism is alive and well despite the headlines. I have included an excerpt below.

In the morning, my correspondent likely drinks coffee brewed from beans grown in Colombia or Ethiopia. For lunch, he eats a chicken sandwich or a quinoa-and-beet salad. Each of these foods is made available to him only through the efforts of countless strangers — producers such as chicken farmers, beet growers, truck drivers, insurance-company actuaries — spread across the globe and connected to him by a thick web of consensual capitalist acts of commerce.

Mike Munger’s American Institute for Economic Research article makes a rational appeal for capitalism. The entire article is worth the read, but I have included the crux of his argument below.

There are three elements to the argument for capitalism, and while they connect in crucial ways they can be separately defined. Those three elements are (a) division of labor; (b) impersonal exchange based on prices; and (3) economies of scale based on knowledge.

The Cost of Tariffs

When I wrote Make Whirlpool Great Again back in December 2016, I made the request for someone to study the full cost for each job saved by enacting the tariff. In April 2019, Aaron Flaaen, Ali Hortaçsu, and Felix Tintelnot unknowingly answered my call with their recent paper, The Production, Relocation, and Price Effects of US Trade Policy: The Case of Washing Machines . Their analysis estimates that the tariff on washing machines created 1,800 new washing machine manufacturing jobs at the price of $1.47 billion dollars or $817,000/job. This $1.47B was paid by the American consumer via a 12% price increase in both washers and dryers.

Critics of the paper will correctly point out that cost analysis includes a 12% increase in dryer prices when the tariff applied only to washing machines. My rebuttal is that washers and dryers are complimentary goods since they are often sold in pairs. I would also argue that the paper’s findings further demonstrates the pervasive impact that tariffs have on prices of other goods that are not direct targets of the tariff. I wonder if somebody will be able to measure impact of tariff on prices on laundry mats or apartment rents that provide washer and dryers to tenants.

For those of you less inclined to read the paper, Mark Perry has written an op-ed about the above paper over at American Enterprise Institute where he summarizes and opines on the paper’s finding.

While I think paper is a great start, I am left with the same thoughts from my original post which I have included below.

While it will be relatively easy to compare the average price of a washing machine before and after the tariff takes effect, it will be impossible to calculate the potential impact of those additional dollars if they had been spent on higher and better uses.  I'd like to think we would all be better off if we spent the same amount of energy and resources creating new jobs and industries as we did protecting the old ones.

Please use the comment section below to share your thoughts or any other interesting articles on the subject.

Economists Save Lives

I came across this interesting article in the WSJ. It discusses how Nobel Laureates Alvin Roth and Lloyd Shapley’s research on matching markets enabled Yogita Patel to participate in a paired donation to help her brother receive a kidney even though she wasn’t able to donate a kidney directly to her brother.

Lagniappe : Here is a link to Dr. Alvin Roth’s Nobel lecture w/slides.

Rent Control comes to Oregon

A recent WSJ Op-Ed opines on the impact that state-wide rent control will have on the Beaver State and its residents. While I do not question the intentions of state government, I do challenge their methods and expect this decision to make housing affordability worse over the long term. The article highlights Oregon’s “inclusionary” zoning policy enacted in 2017 led to a 64% drop in permit applications to build new apartments. It is my estimation that rent control will also have a negative impact and further suppress the ability to build more housing in Oregon. I think their efforts would be better spent streamlining the permitting process to help increase the housing supply. It will be interesting to see how these policies affect migration to Washington and Idaho.

Tyler Cowen wrote a blog post highlighting the unintended, but not unexpected, consequences of rent control back in 2016.

Mihir Zavery penned a more objective article in the New York Times on February 26, 2019. I share this article because it also includes statements from Gov. Kate Brown.

Taxing Peter to Pay for Paul

Several members of Congress, and individuals aspiring for higher offices, tout higher marginal tax rates on high income earners as an effective tool to address income inequality and fund additional government spending programs. Individuals of this persuasion often point out that marginal tax rates were around 90% during the 1950’s and 1960’s and GDP still grew between 4-5% per year. Joe Nocera’s recent Bloomberg article discusses the often omitted story of the great American past time, tax avoidance. He highlights how high earning entertainers like Frank Sinatra and Bing Crosby used loopholes in the tax code to shield large portions of their income and reduce their effective tax rate to about half of their 90% marginal rate.

My inner-cynic thinks that talk about raising marginal rates on high earners is more about scoring political points with a voting base and a means to usurp power by making/protecting tax loop holes for preferred special interest groups more valuable. If the goal was to actually increase the tax revenue collected from high earners and create a more equitable tax code, the focus would be on closing and/or capping the value of loopholes in the tax code.

I think the optimal tax code would be a single tax rate for all filers with an exemption on the first $X of income (i.e. 1-1.5x the poverty line). This would significantly lower the effective rate for low income earners and high earners’ effective rates will approach the actual tax rate. I would treat all entities as pass though entities so all income is taxed at the individual filer level. This would simplify things and eliminate the need for an additional tax rate for capital gains and dividends. The single tax rate also eliminates the ability to selectively (punitively) raise taxes on specific groups of individuals/corporations.

I am not a tax policy expert, but I agree with Joe Nocera’s parting shot below.

I’m not saying we couldn’t do with more taxes on the rich. But let’s be careful. When Bing Crosby won’t give a concert, it’s safe to say that the marginal tax rate is too high

Please use the comment section to criticize my tax plan or share any interesting articles or opinions on improving tax code.

Krugman, Krugman Everywhere

I had mixed feelings after enjoying Tyler Cowen’s podcast episode with Nobel Laureate Paul Krugman more than I expected. On one hand, I found Krugman’s insights to be very thoughtful and more nuanced than his opinions shared in his frequent New York Times Op-Ed column. From listening to him speak, it was clear he is very intelligent and still has the ability to think like an economist when he desires. I am also further disappointed that he uses his written platform for partisan pandering and increasing his popularity rather than stimulating intellectual discourse. Regardless of how you feel about Krugman, the episode is definitely thought provoking and worth a listen.

Bryan Caplan reacts to some of Paul Krugman’s comments in the above mentioned podcast in his recent article to discuss the idea that we, including Nobel Laureate Paul Krugman, hold markets to a much higher standard than we do our own government. He asserts that we criticize markets for imperfections but allow the government to operate as long as it avoids disaster.

I do not think comparing markets to government is entirely fair. Markets have the advantage of being able to make adjustments to real time information as changes are implemented, while government action requires voting, making decisions based on old information, and a significant time lag before implementation. Further changes require repeating the process all over again. Markets can behave more like an outfielder adjusting his course to chase down a fly ball while government action works more like an artilleryman where he has to wait and see where the projectile lands before being able to make adjustments for the next shot.

Please use the comments section to share links to any interesting podcasts/books you are currently consuming.

Maybe Capitalism ain't all that bad

Donald Boudreaux’s article takes advantage of the 2018 Nobel Prize winning economist William Nordhaus’s recent notoriety to highlight one of the Nobel Laureate’s older works that attempts to measure the economic impact of technological innovation. The most interesting finding from the paper is that from the period 1948-2001 producers only captured 2.2% of the economic benefits while consumers received the lion’s share of 97.8%. Professor Boudreaux asserts that capitalism, rather than the innovator’s benevolence, is responsible for the split.

I’d be willing to bet the next time you read an article that highlights Jeff Bezo’s $147 billion net worth, it will fail to mention the $6.5 trillion of consumer value created.

Lagniappe: For those who want to read more of Donald Boudreaux’s work, check out his blog Cafe Hayek.

David and Goliath walk into a bar

I recently came across Derek Thompson’s article on the economics of the craft beer industry. The fact that so many small companies can thrive despite operating in a de facto duopoly where the industry leaders produce 90% of the world’s beer is quite remarkable. By creating premium products, and charging premium prices, small companies are able to survive despite lacking the economies of scale that benefit the larger firms.

When thinking about other industries that behave similarly, chocolate and coffee come to mind. I am curious to see how small firms will carve out their own niches and compete in other sectors of the economy that are currently dominated by de fact monopolies like Amazon and Google.

Please use the comments section to share your favorite craft breweries and craft beers that I should try.

The Intelligent Economist: Top Econ blogs list

The Intelligent Investor's Prateek Agarwal compiles his list of top 100 Economics Blogs on his recent blog post.  There are several interesting blogs that I am looking forward to exploring their content. I have included my top 4 below. Please use the comments section to share your thoughts on other blogs on the list or to recommend any omissions.

  1. Marginal Revolution
  2. Cafe Hayek
  3. Grumpy Economist
  4. Conversable Economist

Lagniappe: Grumpy Economist post on California Solar Panel Mandate

Taxi Reform by Uber

To commemorate the 7 year anniversary of Uber's launch in New York City, Barry Ritholtz pens an op-ed claiming that the NYC Taxi and Limousine Commission created the market opportunity for Uber to enter and thrive in NYC. By using its regulatory moat, the TLC was able to restrict the number of drivers through its medallion system. 

I wonder if Uber would have had the same success if the TLC had been more focused on meeting the needs of their riders rather than its medallion holders.

I have included an excerpt from the article that shows how the entrance of Uber impacted the price of taxi medallions. 

All of these failings would be much less likely to take place in a competitive market. We know this is an artificial monopoly because of the price behavior of medallions after market competition began: prices for medallions peaked shortly after Uber came to town, but before it had much of an impact. Bloomberg Businessweek reported that medallion prices, which peaked at $1.3 million in 2013, were already sliding, falling below $900,000 in 2013. Just two years later 2015, prices had fallen another 40 percent.

And it got worse: By 2016, the lowest reported price was $250,000. Last year, medallions sold for as little as $241,000. They are still falling. Axios noted a recent transaction that went for just 8 percent of the peak value, or about $100,000. Other cities, such as Chicago, have seen similar declines in medallion prices.


More than A Bubble?

The recent declines in the US publicly equity markets in response to good US economic data support the argument that quantitative easing and near zero interest rate policy has created a bubble in the US stock prices. There seems to be a consensus that prices will continue to  decline as interest rates normalize.   While I concede that cheap money has been a major driver in the rise in US asset prices, I think there must be other factors at play. Japanese markets have not had the same run up in asset prices, despite similarly low interest rates and quantitative easing.

Tyler Cowen offers a contrarian hypothesis for high US asset prices in his recent Bloomberg article.  He suggests that at least a portion of the rise in US asset prices is due to a lack of alternative financial institutions to store wealth.  According to the Credit Suisse Research Institute's Global Wealth Report 2017, global wealth is up 27% from 2007-2017.  This approximately $60 trillion in new wealth has to be stored somewhere and the US public equity markets have received a large share of invested capital.  I have included an excerpt from Tyler's Article below.

To sum this all up in a single nerdy finance sentence, in a world where wealth creation has outraced the evolution of good institutions, the risk premium may be more important than you think

The Grumpy Economist on Recent "Stock Gyrations"

While I've been inundated with interviews, blog posts, emails and tweets from various sources wanting to share their thoughts on recent public stock market volatility, there has been a dearth of quality insight. One of the main reasons for starting this blog is to highlight good articles that I want to share with my friends.

John Cochrane's recent blog post provides a thorough analysis of the multiple factor that go into asset pricing and his hypotheses for recent changes in the public stock market.  Warning, this is a long post with lots of charts and equations. 

Please use the comment section to share your thoughts or to highlight other articles that are related to this article.

why can't this be fake news

Economist John Cochran shares his thoughts on recent tariffs on washing machines, solar panels and the regulatory hurdles of building infrastructure in the US in his recent blog post

While my sentiments closely align with those in the article, I am willing to concede that the impact of tariffs are more nuanced than purely good vs evil.  However, I think creating "optimal tariffs" that precisely balances costs and benefits is impossible and susceptible to cronyism.  I think as a whole, we are better off trying to eliminate tariffs than trying to design optimal tariffs. 

Unleash the Dragon

Timothy Taylor's recent blog post highlights the magnitude of economic growth in China over the past 40 years. I have included the most impressive excerpt below.

Although this rise has been happening right in front of our eyes for almost 40 years, it has changed the lives of more than a billion people in ways that are not fully appreciated. Here are a few measures of how life in China changed between about 1980 and the present, according to World Bank data:

  • The share of China’s population below the poverty line, modestly defined as having a consumption level of $3.10 per capita per day, has fallen from 99 percent of the population to 11 percent.
  •  Per capita GDP has risen from $200 per person to $8,200 per person.
  •  Life expectancy has risen from 66 years to 76 years.
  •  Infant mortality per 1,000 live births has fallen from 48 to 9.
  • The literacy rate for those 15 and older has risen from 66 percent to 96 percent.
  • The share of China’s total population over age 25 who have completed a secondary-level (high school) education has risen from 6 percent to 22 percent.

Such a list could be extended, of course. But the bottom line is that more than a billion people in China have risen out of a combination of grinding poverty, poor health and low levels of education to what the World Bank classifies as “upper middle income.” A Chinese person who was a young adult back in 1980 has observed the entire process in his or her own lifetime — and hasn’t yet reached retirement age.

Mismeasuring the impact of foreign trade

George Mason University economist and author of Marginal Revolution, Tyler Cowen discusses the limitations of using common macroeconomic tools like GDP and GNP to evaluate the impact of foreign investment in one of his more recent blog posts.  

If the main purpose of trade is to increase the number of goods and services available to an individual, consumption based measurements should be a part of the analysis.  I am not sure how trade that enables a consumer to purchase more goods for the same level of spending can be bad for an economy.

Lagniappe: Tyler that discusses how the GOP tax plan and Trump's objective to decrease US trade deficit are seemingly at odds in a recent Bloomberg article

Protectionism: a Euphemism for Crony Capitalism

While protectionism seems to have strong supporters within both major political parties, it often falls short when put into practice.  George Will's Washington Post editorial shows just how difficult it is to implement protectionist trade policy in the modern economy. Multinational corporations with international supply chains create an economic impact that extends well beyond the borders where their headquarters are domiciled. It is very difficult, if not impossible, to punish intended targets without causing significant collateral damage. At best, it is a futile attempt to appease a nationalist base. At worst, it is an opportunity to perform a favor for a special interest.

I wonder if the 7000 direct Bombardier employees or the thousands of indirect employees supported by $3 billion in materials Bombardier purchases from the US suppliers every year feel protected by the tariffs. Do more expensive airplanes and the resulting higher ticket prices help Delta Airlines and its customers sleep more soundly at night? 

Quadrupling the cost of an airplane seems like a high price for the American consumer to pay to protect Boeing's opportunity to create a competing plane in the future. Unfortunately, this is just one example of cronyism created by protectionism.

Like Mr. Will at the end of his article, I am left wondering,

 Who will protect Americans from the radiating mischief of protectionism?