Thursday, December 01, 2016

Is Christmas Gift Giving Inefficient?

In 1993, Yale economics professor Joel Waldfogel published an article titled The deadweight loss of Christmas. The idea is that gift recipients often place a lower dollar value on the item than its actual price. Maybe someone buys you a tie for $20 that you would pay no more than $5 for. So the inefficiency or deadweight loss is $15. Waldfogel estimated that in 1992, the inefficiency or deadweight loss in the United States from Christmas was anywhere between $4 billion and $13 billion.

Not everyone agrees with this. The article Christmas gift giving: a deadweight loss? from Business World mentions:

"the process of gift giving adds value to a gift over and above its retail price. Giving a gift instead of cash says the giver bothered to know what the receiver might want. There are times, in fact, when gifts that weren’t wished for turn out to be most valued. A thing one would not have thought of buying himself might end up a pleasant surprise. Or, an item the recipient might have had money to spend on but never bought for frugal reasons could also turn out to be a gift valued more than its price."

An article from the Economist magazine, "Is Santa a deadweight loss?: Are all those Christmas gifts just a waste of resources?, raised the question "So should economists advocate an end to gift-giving?" Here is the answer they provided:
"There are a number of reasons to think not. First, recipients may not know their own preferences very well. Some of the best gifts, after all, are the unexpected items that you would never have thought of buying, but which turn out to be especially well picked. And preferences can change. So by giving a jazz CD, for example, the giver may be encouraging the recipient to enjoy something that was shunned before. This, and a desire to build skills, is presumably the hope held by the many parents who ignore their children's pleas for video games and buy them books instead.

Second, the giver may have access to items—because of travel or an employee discount, for example—that the recipient does not know existed, cannot buy, or can only buy at a higher price. Finally, there are items that a recipient would like to receive but not purchase. If someone else buys them, however, they can be enjoyed guilt-free. This might explain the high volume of chocolate that changes hands over the holidays.

But there is a more powerful argument for gift-giving, deliberately ignored by most surveys. Gift-giving, some economists think, is a process that adds value to an item over and above what it would otherwise be worth to the recipient. Intuition backs this up, of course. A gift's worth is not only a function of its price, but also of the giver and the circumstances in which it is given.

Hence a wedding ring is more valuable to its owner than to a jeweller, and the imprint of a child's hand on dried clay is priceless to a loving grandparent. Moreover, not only can gift-giving add value for the recipient, but it can be fun for the giver too. It is good, in other words, to give as well as to receive."
See also

Are Homemade Gifts Better Or More Special?

What Melvin Anthropologist Konner Fails To See When He Criticizes Economists And Their Views On Gift Giving 

Here is an old Dilbert strip

 - Dilbert by Scott Adams

Friday, November 18, 2016

How much will the Thanksgiving meal cost this year?

See Thanksgiving meal to gobble up less money this year by Jeff Daniels of CNBC. Excerpts:
""The average cost of this year's feast for 10 is $49.87, a 24-cent decrease from last year's average of $50.11," the Farm Bureau said Thursday. The traditional holiday dinner's cost was down less than 1 percent this year from 2015 and it marks only the third time in a decade that the annual survey shows an overall price decline.

A 16-pound turkey — the biggest single ticket item in the meal — averaged $22.74 this year, or 1.3 percent below 2015. The survey was conducted in 40 states with price checks on roughly a dozen items.

Last month, the U.S. Department of Agriculture reduced its turkey price forecast for the current fourth quarter, saying "supplies of product are large." Overall, the retail food category has experienced flat or lower prices much of this year, according to government data.

"Consumers will pay less than $5 per person for a classic Thanksgiving dinner this year," John Newton, the Farm Bureau's director of market intelligence, said in a statement. "We have seen farm prices for many foods — including turkeys — fall from the higher levels of recent years."

The item with the biggest price decline in percentage terms this year is a 1-pound tray of carrots and celery, which the survey showed coming in at 73 cents, or 7.6 percent below last year. The meal item with the biggest percentage price increase this year was a dozen rolls, which averaged $2.46, or up 9.3 percent from 2015.

Elsewhere, the average price of pumpkin pie mix in the survey was down 2.2 percent from last year but the price of pie shells was up 4.8 percent in the same period. The Farm Bureau report said pumpkin prices fell slightly this year despite some production declines."

"Finally, the price of a 14-ounce bag of cubed stuffing was up 2.3 percent from a year ago. And a half pint of whipping cream was up by about 3 percent."
Also interesting: The percentage of income that Americans spend on food has been in a long-term decline.

Friday, November 11, 2016

The percentage of 25-54 year-olds employed increased in October

One weakness of the unemployment rate is that if people drop out of the labor force they cannot be counted as an unemployed person and the unemployment rate goes down. They are no longer actively seeking work and it might be because they are discouraged workers. The lower unemployment rate can be misleading in this case. People dropping out of the labor force might indicate a weak labor market.

We could look at the employment to population ratio instead, since that includes those not in the labor force. But that includes everyone over 16 and that means that senior citizens are in the group but many of them have retired. The more that retire, the lower this ratio would be and that might be misleading. It would not necessarily mean the labor market is weak.

But we have this ratio for people age 25-54 (which also eliminates college age people who might not be looking for work)

The percentage of 25-54 year-olds employed is 78.2% for October. It was 78.0% in September. It is still below the 79.7% in December 2007 when the recession started. . Click here to see the BLS data. The unemployment rate was 4.9% in September. Click here to go to that data.

Here is the timeline graph of the percentage of 25-54 year-olds employed since 2006. Notice how we had been rising before this year but it seems to be flattening out.

Here it is going all the way back to 1948

Friday, November 04, 2016

Wall Street Journal Reports Zombies Chasing Ghosts (and banks are friendly to these zombies)

See Bankruptcy Bust: How Zombie Companies Are Killing the Oil Rally by Timothy Puko and John W. Miller. The zombies are companies that have filed for bankruptcy but are still operating. So we see dead companies and they don't they're dead. Excerpt:
"Their owners may be bankrupt, but the sprawling mines of Wyoming’s Powder River Basin are still churning out coal. It is the same story in oil fields along the Gulf Coast and with shale-gas wells in the Rocky Mountains.

Energy investors have long hoped that falling prices would solve themselves by driving producers into bankruptcy and stanching the flood of excess supply. It turns out that while bankruptcy filings are up, they have barely impacted fossil-fuel markets.

About 70 U.S. oil and gas companies filed for bankruptcy in 2015 and 2016. They now produce the equivalent of about 1 million barrels a day, about the same as before they declared bankruptcy, according to Wood Mackenzie. That represents about 5% of U.S. oil-and-gas output."

"That resilience has kept energy inventories flush and prices capped. Oil shot to $50 a barrel this summer, but has had trouble making much progress beyond that mark. On Friday, oil futures in New York rose 0.4% to $50.85 a barrel.

The theory that bankruptcies would help balance the market “was misguided to begin with,” says Roy Martin, a research analyst at energy consultancy Wood Mackenzie. “And people are starting to come around to that now.”

This is exactly the way chapter 11 was meant to work. The process is designed to save companies that can be saved, and many energy companies are using it to lighten their heavy debt loads, adapt to lean times and keep producing."

"Bank lenders, reluctant to actually take ownership of assets that have been used as collateral by borrowers, have been friendly to troubled companies. During bankruptcy, Halcón, SandRidge, Goodrich and Penn Virginia raised a combined $1.3 billion in debt, largely reaffirmed credit lines from their banks."

"Coal magnate Robert Murray in 2014 correctly predicted that his rivals would file for bankruptcy. He pushed his Murray Energy Corp. to take advantage of the opening with a two-year buying spree fueled by $4 billion in debt. By this summer, Mr. Murray was negotiating with lenders, customers and workers on a multipoint plan he needed to avoid his own company’s bankruptcy.

His miscalculation: that his rivals’ bankruptcies would force them to cut back. If they maintain production, “that pulls everyone into what I call the bankruptcy sewer,” Mr. Murray said. “These are zombie coal companies chasing the ghosts of past markets.”"

And in further zombie news, see Do Zombies Pay the Estate Tax?:‘A zombie apocalypse will create an urgent need for significant government revenues to protect the living’ also from the WSJ:
"From the abstract of a 2012 paper by Adam Chodorow, a scholar at Arizona State University, published in the Iowa Law Review:
The U.S. stands on the precipice of a financial disaster, and Congress has done nothing but bicker. Of course, I refer to the coming day when the undead walk the earth, feasting on the living. A zombie apocalypse will create an urgent need for significant government revenues to protect the living, while at the same time rendering a large portion of the taxpaying public dead or undead. The government’s failure to anticipate or plan for this eventuality could cripple its ability to respond effectively, putting us all at risk.

This article fills a glaring gap in the academic literature by examining how the estate and income tax laws apply to the undead. Beginning with the critical question of whether the undead should be considered dead for estate tax purposes, the article continues on to address income tax issues the undead are likely to face. In addition to zombies, the article also considers how estate and income tax laws should apply to vampires and ghosts. Given the difficulties identified herein of applying existing tax law to the undead, new legislation may be warranted. However, any new legislation is certain to raise its own set of problems. The point here is not to identify the appropriate approach. Rather, it is to goad Congress and the IRS into action before it is too late."

Thursday, October 27, 2016

Odysseus Started The Industrial Revolution

Factory work may have been a commitment device to get everyone to work hard. Odysseus tying himself to the mast was also a commitment device. Dean Karlan, Yale economics professor explains how commitment devices work:
"This idea of forcing one’s own future behavior dates back in our culture at least to Odysseus, who had his crew tie him to the ship’s mast so he wouldn’t be tempted by the sirens; and Cortes, who burned his ships to show his army that there would be no going back.

Economists call this method of pushing your future self into some behavior a “commitment device.” [Related: a Freakonomics podcast on the topic is called "Save Me From Myself."] From my WSJ op-ed:
Most of us don’t have crews and soldiers at our disposal, but many people still find ways to influence their future selves. Some compulsive shoppers will freeze their credit cards in blocks of ice to make sure they can’t get at them too readily when tempted. Some who are particularly prone to the siren song of their pillows in the morning place their alarm clock far from their bed, on the other side of the room, forcing their future self out of bed to shut it off. When MIT graduate student Guri Nanda developed an alarm clock, Clocky, that rolls off a night stand and hides when it goes off, the market beat a path to her door."
 See What Can We Learn From Congress and African Farmers About Losing Weight?

Something like this came up recently in the New York Times, in reference to factory work and the Industrial Revolution. See Looking at Productivity as a State of Mind. From the NY Times, 9-27. By SENDHIL MULLAINATHAN, a professor of economics at Harvard. Excerpts:
"Greg Clark, a professor of economics at the University of California, Davis, has gone so far as to argue that the Industrial Revolution was in part a self-control revolution. Many economists, beginning with Adam Smith, have argued that factories — an important innovation of the Industrial Revolution — blossomed because they allowed workers to specialize and be more productive.

Professor Clark argues that work rules truly differentiated the factory. People working at home could start and finish when they wanted, a very appealing sort of flexibility, but it had a major drawback, he said. People ended up doing less work that way.

Factories imposed discipline. They enforced strict work hours. There were rules for when you could go home and for when you had to show up at the beginning of your shift. If you arrived late you could be locked out for the day. For workers being paid piece rates, this certainly got them up and at work on time. You can even see something similar with the assembly line. Those operations dictate a certain pace of work. Like a running partner, an assembly line enforces a certain speed.

As Professor Clark provocatively puts it: “Workers effectively hired capitalists to make them work harder. They lacked the self-control to achieve higher earnings on their own.”

The data entry workers in our study, centuries later, might have agreed with that statement. In fact, 73 percent of them did agree to this statement: “It would be good if there were rules against being absent because it would help me come to work more often.”"
The workers, like Odyssues, tied themselves to the mast to resist the temptation of slacking. This made it possible for factories to generate the large output of the Industrial Revolution.

Friday, October 21, 2016

The Prisoner's Dilemma

Click here to read about The Prisoner's Dilemma.

In my micro classes we recently played a Prisoner's Dilemma game. It relates to what might happen in an oligopoly (an industry with just a few firms). If two firms, like Ford and GM, both charge a high price, their profits will be high. But they each have a temptation to charge a lower price to make more profit (if they other firm does not lower their price).

Say they each charge $20,000 for a car. Then they each make $3 billion in profit.

But if one of them drops the price to $10,000 per car while the other stays at $20,000, that firm makes $5 billion in profit (very tempting) and the other makes zero.

What if they both charge $10,000? (we can expect the other firm to lower their price, since they do not want to make zero profit). Then they each make only $1 billion in profit.

If they could cooperate with each other, they would each charge $20,000 and make more profit than if they compete with each other on price.

Of course, cooperating on price is against the law (anti-trust laws, that is). So both Ford and GM can never really know if the other will keep charging $20,000. Then they both end up with less profit than if they charge $20,000. When they both charge $10,000, it is a "dominant strategy Nash equilibrium." (named after John Nash, the mathematician who won a Nobel Prize in economics and was portrayed by Russell Crowe in the movie "A Beautiful Mind")Click here to read how the movie presented some misleading views on Adam Smith and economics.

When Ford charges $20,000, GM's best move will be to charge $10,000 (see above discussion). When Ford charges $10,000, GM's best move will be to charge $10,000 (see above discussion). The same goes for Ford. So they both end up with lower profit. They can't really talk to each other. Not in a legal sense. Ford can't sue GM for violating a contract to raise prices since Ford knows the government will charge them with breaking ant-trust laws.

The same thing happens in the prisoner's dilemma in the link above. Two criminals are being questioned about a crime in separate rooms and they can't talk to each other. If they both deny doing the crime, they will get some jail time. But they each have a temptation to confess to get less time no matter what the other guy does. But, if they both deny they did it, they would each get less time than if they both confess.

If they could each think of the well being of their two person group (like Ford and GM), they would do better. But that is hard if you don't know for sure what the other person will do.

Wednesday, October 19, 2016

Some International Inflation Rates

I went to a site from the OECD. Click here to go to that site. I compiled the annual inflation rate for a number of countries each year from 1996-2015. Click here to see that data.

The USA and other large industrial countries that tend to make up the OECD have generally had low inflation rates in recent years. Only once since 2002 has the OECD average been above 3.0%. That was in 2008 (3.7%).

The USA has had only 4 years since 2002 above 3.0% with the high being 3.8%, also in 2008.