Wednesday, January 17, 2018

Another Semester Has Started

Welcome to any new students. The entries usually have something to do with a basic economic principle that is related to a recent news story.

Here is something I wrote for The Ranger (the school paper) back in 2011 titled "Why is college so hard?"

Students might wonder why college, and SAC in particular, is hard. This might sound trite, but I think the faculty at SAC want students to achieve success in life and that means that classes have to be hard if you are going to learn and understand the concepts which provide a foundation for that success.

I think my own experience as a community college student over 30 years ago helps me understand this. My teachers took their subjects seriously and maintained high academic standards. They got me excited because of the expertise they brought to their teaching. Now that I have been a teacher for over 20 years, I can see how important that was.

After finishing my A.S. degree at Moraine Valley Community College (MVCC) in Palos Hills, Ill., I transferred to and graduated from the University of Chicago with a degree in economics. But it was my community college teachers prepared me to handle the rigors of the U. of C.

Later, I got a Ph. D. in economics from Washington State University. But I've accomplished some other things I never could have dreamed of when I began taking classes at MVCC and I think my teachers there paved the way for me.

In 2005, I had a letter to the editor published in The Wall Street Journal (I have now had five published there, three in The New York Times and three op-eds in the Express-News). This one was several paragraphs long, nearly as long as some of their op-ed pieces. It was the first letter in the letters section that day, and I got the top headline. It dealt with NAFTA and trade agreements.

As nice as that was, I got a big shock a few days later when I got a letter in the mail, on official stationery, from Richard Fisher, the president of the Federal Reserve Bank of Dallas. He complimented me on my letter and said it was superb. I had never even met him or ever tried to contact him before.

Wow. I graduated from high school with a 2.7 GPA, and when I started at MVCC, I had no idea what I would do with my life. If you had told me then that someday I would have a letter in the WSJ and get that kind of compliment, I doubt I would have believed you.

Then an adjunct professor at the business school at the University of Chicago contacted me a few years ago and wanted to know if it was OK for her to assign a paper I wrote on entrepreneurs for a class she was teaching on innovation. (Of course, I said yes).

That professor was Nancy Tennant Snyder. She has a Ph. D. from George Washington University and is a vice president at Whirlpool. Business Week magazine has called her one of the leading innovators in the world. She also cited two of my papers in one of her books.

Then I got an email from John Joseph, a professor at the University of Edinburgh. He is an expert on language and politics. He wanted to know if he could include an essay I wrote in a four-volume work he was planning. I again said yes and it was published last year (and it is called Language and Politics).

It is a collection of essays. Mine is titled "The Intersection of Economic Signals and Mythic Symbols." Other contributors include Jeremy Bentham and George Orwell. When I was a community college student, I never imagined being included along with the likes of those great thinkers.

The co-authors of the book The Economics of Public Issues have thanked me in each of the last three editions for my helpful suggestions. Almost all of the people they thank are from big universities. One of the co-authors of this book, Douglass North, is a Nobel Prize winner. Never imagined someone like that would value my input when I started out as a community college student.

Getting such recognition in cases like this gives me a sense of achievement. I know I have made a scholarly contribution to the world. And I want all SAC students to have a chance for this same kind of success (as an academic or any in line of work). I think all SAC faculty do. That is why school is hard, and that is why I'm thankful that my community college teachers were experts who maintained high academic standards.

Monday, January 15, 2018

China Is Ahead Of The U.S. In Mobile Payments

I use a book in my class called The Economics of Macro Issues by Roger LeRoy Miller & Daniel K. Benjamin. One of the chapters is called "Revolutionizing the Way We Pay." It includes discussions of things like paying for goods with your phone, etc. So this article is related to that.

See The Cashless Society Has Arrived— Only It’s in China:Mobile payments surge to $9 trillion a year, changing how people shop, borrow—even panhandle by Alyssa Abkowitz of The WSJ. Excerpts:
"Though the U.S. saw $112 billion of mobile payments in 2016, by a Forrester Research estimate, such payments in China totaled $9 trillion"

"For Alibaba and Tencent, the payoff isn’t just the transaction fees they make from merchants, typically 0.6%. It’s also the consumer data collected"

"The payments haven’t been required to go through the central bank’s clearing system"

"Consumers also are being offered more pitches for loans, investments and other financial products via smartphone. Short-term consumer credit in China soared 160% in the first eight months of 2017"

"Chinese . . . spent about 66 trillion yuan (nearly $10 trillion[in cash]) that way in 2016, down about 10% in two years, according to a central-bank payments report."

"Alibaba, which hosts online shopping bazaars where merchants sell goods to consumers. More than a dozen years ago, Alibaba, taking a page from the U.S. company now called PayPal Holdings Inc., started a system called Alipay as an escrow service."

"passed PayPal as the largest mobile-payment platform in 2013."

"People link their bank accounts to the app, then can pay for things either by scanning a merchant’s QR code or having the merchant scan theirs. People also can transfer money by tapping on an icon in WeChat or Alipay."

"the government made it tough for Visa Inc. and Mastercard Inc. to set up shop.

The rise of tech companies as financial powers has dealt a blow to traditional banks. China’s state-owned banks lost nearly $23 billion in fees in 2015 they might have collected from card fees"

"Visa and Mastercard both have mobile apps that allow users to pay via near-field communication and are incorporating biometrics into their offerings. They also work with Apple Pay and Samsung Pay."

"Smartphones are vastly more common than Palm Pilots ever were, yet Apple Inc. has struggled to get consumers to use its Apple Pay service, now accepted at more than 50% of all U.S. retail locations.

Just 19% of iPhone users have tried Apple Pay at least once"

"In Scandinavia, Nordic and Dutch banks have cut total branch levels by about 50% from peak levels, and Sweden hasn’t had checks since the late 1980s, according to Citi Research, part of Citigroup Inc."

"WeChat Pay and Alipay are gaining attention in U.S. tourist centers after striking deals with hotels and resorts. A group of Chinese tourists recently dined at the Bacchanal Buffet at Caesars Palace in Las Vegas, where the menu includes T-bone Australian lamb, chilled crab legs and handmade dim sum. They settled their bill with a smartphone."

"Tencent and Alibaba say they have no plans to push their payment platforms to U.S. consumers. Many Americans don’t see the need for mobile payments, since their plastic cards and cash are welcomed and some merchants still accept checks.

“Any new way of paying has to prove itself to be incrementally better than any other options you have,” said James Wester of research firm IDC Financial Insights. In the U.S., “plastic is convenient, widely accepted and understood by the customer.”"

Sunday, January 14, 2018

Does collective self-deception mask selfish behavior?

Adam Smith talked about how people act on their own self-interest yet are led to help society by the invisible hand. But don't we see people sometimes behaving altruistically? Maybe. But we might be deceiving ourselves about our motives. Maybe we actually have selfish reasons for doing good.

See The Tangled Web We Weave: Collective self-deception helps mask the selfish behavior we see running rampant in art, charity, education, medicine, religion and politics. Matthew Hutson reviews ‘The Elephant in the Brain’ by Kevin Simler and Robin Hanson from the WSJ. Excerpts:
"“The Elephant in the Brain” focuses on the false narrative of hiding selfish motives. Much of what we do, including our most generous behavior, the authors say, is not meant to be helpful. We are, like many other members of the animal kingdom, competitively altruistic—helpful in large part to earn status. That may be obvious when billionaires jockey for naming rights to buildings, but it plays out in more subtle ways.

Casual conversations, for instance, often trade in random information. But the point is not to trade facts for facts; what you are actually doing, the book argues, is showing off so people can evaluate your intellectual versatility. By sharing information, you are not merely being helpful or entertaining, you are advertising yourself.

The authors take particular interest in large-scale social issues and institutions, showing how systems of collective self-deception help explain the odd behavior we see in art, charity, education, medicine, religion and politics. Why do people vote? Not to strengthen the republic, the authors say. A single vote rarely matters, and we rarely even seek objective information on the candidates. Instead, we cheer for our team and participate as a signal of loyalty, hoping for the benefits of inclusion. In education, as many economists have argued, learning is ancillary to accreditation and status. A degree signals that one has the intelligence and stamina to enter and survive a degree program.

The authors call medicine “conspicuous caring.” In many areas of medicine, they note, increased care does not improve outcomes. People offer it to broadcast helpfulness, or demand it to demonstrate how much support they have from others. The case for medicine as a hidden act of selfishness may have some truth, but it also has holes. For example, the book does not address why medical spending is so much higher in the U.S. than elsewhere—do Americans care more than others about health care as a status symbol?"

"Spread the gospel of “effective altruism” so that people gain status for practical rather than flashy charity. Retain academic credentials but teach something useful in schools, such as personal finance. Make promises to be good; you are more likely to follow through for fear of appearing hypocritical, and through such a commitment you may also gain the status of being considered trustworthy."

Saturday, January 13, 2018

Bumble Bee agrees to plead guilty in tuna price fixing scheme

By Julia Horowitz of CNN. This is from last May, but it makes for a good anti-trust case and it also mentions "limited competition in the seafood industry."

"Tuna giant Bumble Bee is on the hook for bilking customers.

The company has agreed to plead guilty for its role in a conspiracy to fix the prices of cans and pouches of tuna in the U.S., the Justice Department announced on Monday.
Bumble Bee will also pay a $25 million criminal fine. 

"[We] will continue to hold these companies and their executives accountable for conduct that targeted a staple in American households," Andrew Finch, acting assistant attorney general of the Justice Department's antitrust division, said in a statement.
 
In a felony charge filed in U.S. District Court, Justice Department prosecutors say Bumble Bee and its co-conspirators agreed to "fix, raise, and maintain prices of packaged seafood" between 2011 and 2013, after conversations and meetings with representatives of other major packaged seafood firms.

Bumble Bee said it takes the matter "very seriously" and has fully cooperated with the DOJ throughout the investigation.

"We accept full responsibility for needing to earn back any lost trust in our Company and will do so by acting with integrity and transparency in every way we operate our business," Bumble Bee General Counsel Jill Irvin said in a statement.
 
Irvin said the company hired a chief compliance officer last fall, and has since revised its internal policies.

It's not clear how much federal officials believe the company overcharged customers.
Bumble Bee's senior vice president of sales agreed to plead guilty for his role in the conspiracy in December, as did the senior vice president of trade marketing. Both remain on paid leave.

Limited competition in the seafood industry has been an ongoing issue. Thai Union Group, which owns Chicken of the Sea, dropped plans to buy Bumble Bee in 2015 after the Justice Department expressed concerns."

Friday, January 12, 2018

Do We Need Failure Stories As Much As We Need Success Stories?

See Why success stories are just propaganda by Martin Weigel. I might not agree with all of this, but it raises important issues. Looking at successful companies and realizing they did X, Y or Z, does not mean X, Y or Z caused their success. We might not know how many companies that did X, Y or Z failed. Maybe only 10% of companies that did X, Y or Z succeeded. Excerpt:

"The problem with success stories is that they are not stories about failure. And thus by their very nature, they are distortions. At this point briefly retelling a familiar story about World War II is obligatory. 

The story goes that during World War II, the statistician Abraham Wald was tasked with helping the Allies reduce  the number of bombers lost to enemy anti-aircraft fire. The Allies wanted to understand how much additional protection was needed. The challenge was not straightforward. Armour would make the bombers heavier, less manoeuvrable, and less fuel-efficient. But armouring the bombers too little would leave them vulnerable. Examining the bombers that did make it back, the Allies had noted that that the damage wasn’t uniformly distributed across the aircraft. Since there were more bullet holes in the fuselage than in the engine, the Allies concluded that this is where they should concentrate the armour. The question they had for Wald was how much armour.

Wald did not answer their question. Instead he argued that the armour shouldn’t go where the bullet holes were – it should go where the bullet holes were not, namely on the engines. This argued Wald, was where the bombers were most vulnerable and where the planes that didn’t make it back had been hit.  Returning planes with damage to the fuselage simply showed that this damage could be survived. From this insight, Wald then calculated how much damage each individual part of an airplane could take before it was destroyed and how likely it was that the average plane would get shot in those places in any given bombing run depending on the amount of resistance it faced.

Wald’s achievement lay in the fact that unlike his superiors, he did not focus exclusively on the survivors. He avoided what we call ‘survivorship bias’ and instead found a way of seeing the bombers that did not make it back and the bullet holes that were missing. The lesson of this story of course is that focusing exclusively on survivors creates a very distorted reality. As advertisers have long known, focusing exclusively on say, the successful lottery winner or the successful weight loser not only obscures quite how hard success really is to achieve, but all too easily oversimplifies or misrepresents the real reasons behind success.

Take the consultants Collins and Porras authors of the bestselling book Good To Great: Why Some Companies Make the Leap…and Others Don’t.  To get to their recipe for success, Collins and Porras identified 200 leading companies then narrowed them down to include the best and most durable and successful. This was achieved by identifying the twenty organizations most frequently mentioned in a survey of CEOs. Companies founded after 1950 were eliminated and the list culled down to eighteen “visionary” companies (alarm bells should already be ringing at this point). They then looked at the common traits of these companies and compared them with companies that were just “good”. Lo and behold their research revealed that the great companies had a strong core ideology, built a strong corporate culture, set audacious goals, developed people and promoted from within, created a spirit of experimentation and risk taking, and drove for excellence.

“Just about anyone can be a key protagonist in building an extraordinary business institution” Collins and Porras promised, “the lessons of these companies can be learned and applied by the vast majority of managers at all levels. You can learn them. You can apply them. You can build a visionary company.” But in truth their analysis tells us nothing. Other than we are suckers for good story.
After all, as Phil Rosenzweig notes in his wonderful take down of business delusions The Halo Effect, it would be remarkable if great companies were not described in these terms – and if good companies in somewhat lesser terms. And because we know absolutely nothing about all the other companies that were neither Good nor Great, we have absolutely no way of knowing if these factors are the drivers of success, or merely ways of describing a successful company.

As Rosenzweig points out, picking a handful of companies precisely because they’ve done well for many years, and then looking back in time and ‘explaining’ what happened tells us absolutely nothing about what makes for success. If they had concluded that having a blue logo was the key factor in their extraordinary performance or that the CEOs were all Virgos it would have had just as much plausibility.

There is then, nothing like a success story to obscure the real nature of success. The success story of Ryan Gosling renders us blind to every struggling or failed actor waiting on tables, just as the success story of Ryan Higer obscures the unsurfaced and unremarked content produced by a thousand YouTube creators, just as the success story of Chance the Rapper leads us to forget the legions of undiscovered performers toiling in the unknown loneliness of their bedroom. Their stories and accomplishments may well provide hope and comfort and inspiration for those who struggle. But they also misrepresent quite how hard success is to come by. And indeed how it is achieved. As David McRaney puts it:
Survivorship bias… flash-freezes your brain into a state of ignorance from which you believe success is more common than it truly is and therefore you leap to the conclusion that it also must be easier to obtain. You develop a completely inaccurate assessment of reality thanks to a prejudice that grants the tiny number of survivors the privilege of representing the much larger group to which they originally belonged.”
***
In reducing their achievements down to a single factor, those who tell their stories of success invariably claim (or believe) to  have had a monopoly of control of events and outcomes, and vastly exaggerate their agency. Yet no person, no organisation, no business functions in isolation from the environments and contexts they are located within. Any story of success is a story of a complex interaction of  factors. Reducing that complexity to a single variable or a simple aphorism might make for good storytelling, but it is usually an exercise in nonsense.

Jim Stengel in his book Grow: How Ideals Power Growth and Profit at the World’s Greatest Companies for example, wants us to believe that companies with an ideal at their heart see share price growth far in excess of those lacking such values.

This conclusion was arrived at by taking the 50 brands with the highest loyalty or bonding scores from Millward Brown’s 50,000-strong database, searching for a link between them – a ‘Brand Ideal’ – and then looking at the chosen brands’ stock value growth between 2000 and 2011. Since the these fifty brands had grown by 393% compared with a -7% loss for the S&P 500 benchmark – and ignoring the massively complex array of interrelated variables and dynamics that constitute a business – Stengel declared that having an ideal was the key to driving stratospheric business success.
One has to applaud the audacity of the argument. Yet for Stengel’s argument to have a shred of credibility, one would have had to a) have eliminated all the other factors that might have impacted growth before aligning upon Brand Ideal and b) demonstrated that successful companies have brand ideals more often than unsuccessful ones. Stengel’s analysis does neither.  

But why should the burden of rigorous analysis get in the way of seductive story? People get away this kind of sloppy half-baked stuff because we’d rather hear a story about purpose than interrogate the assumptions made in the analysis or consider that Stengel’s analysis looks at but 50 companies out of a database of 50,000. We’re so dazzled by the mere presence of numbers that we gush about about the “scientist’s rigour” of the author’s analysis. Even Chairman of WPP Sir Martin Sorrell is not immune to a good yarn, declaring that Stengel had “the hard, clean numbers to bear his teachings out”. As Professor Kahneman puts it:
The exaggerated faith in small samples is only one example of a more general illusion – we pay more attention to the content of messages than to information about their reliability, and as a result end up with a view of the world around us that is simpler and more coherent than the data justify. Jumping to conclusions is a safer sport in the world of our imagination than it is in reality.”"

Thursday, January 11, 2018

Are Low Wages Causing Texas Prison Guards To Seek Other Employment?

In economics, we think that labor supply curves slope upward. That is, when the wage in a certain occupation rises (while holding all other wages constant), more workers offer their services. For example, if the wage rises for widget makers and not for any other job, more workers will supply their labor to the widget market.

See Prison turnover leaves units understaffed: Experts attribute exits to stronger oil, gas markets by Keri Blakinger of The Houston Chronicle. Excerpts:

"Texas prisons are shedding officers with a staggering 28 percent turnover rate in the last fiscal year, a "mass exodus" that some experts say stems from a strengthening economy and recovering oil and gas sector.
"A lot of these guys don't want to work in a prison," said Lance Lowry, a spokesman for the Huntsville-based Texas Correctional Employees union. "There's other job opportunities opening up in rural Texas."

Data from the Texas State Auditor's Office show a marked increase over the previous year, when 22.8 percent of the Texas Department of Criminal Justice's roughly 26,000 officers left for other jobs. At the same time, department vacancy rates have crept up again to over 12 percent, with 3,207 jobs unfilled.

"When the economy is doing well and growing is typically when we see correctional officers leave for better paying jobs," said TDCJ spokesman Jason Clark. "The more rural areas tend to be more challenging, particularly in South Texas when we've seen an uptick in oil and gas jobs being offered."
But in 2017, with the oil and gas boom largely in the rearview mirror, that doesn't explain the whole picture.

"From 2012 to 2014, (turnover) was becoming pretty acute and especially where fracking was kind of big," said Scott Henson, policy director with the nonprofit Just Liberty. Then, "it was more than just a vague correlation.""

"Low wages, high danger

For officers on the job, high turnover can raise safety concerns when many of the employees are new.
"When you lose 20-some percent of your employees every year, it's hard," Lowry said.

One of the challenges in staffing Texas prisons is the low wages. Officer pay starts around $32,000 per year, with increases at three and nine months. After seven years, pay plateaus at $43,000.

"If you want the staff to stay - and having experienced staff is critical for effective prison operations - then the pay has to increase significantly," said Michele Deitch, a senior lecturer at the LBJ School of Public Affairs at the University of Texas at Austin.

Whitmire concurred, pointing out other potential troubles that stem from low-income offerings.
"The low pay is a problem in terms of the increase in contraband," he said. "I was told this by a warden: They've caught correctional officers making more in selling contraband cigarettes than they're making from the state.""

Wednesday, January 10, 2018

How Metrics Or Formulas That Supposedly Measure Quality Of Services Can Create Incentives To Engage In Misleading Behavior

See Metrics and Their Unintended Consequences: The best intentions combine with imprecise data for perverse effects in health care and education by Megan McArdle. Excerpts:

"In December, doctors at a VA hospital in Oregon decided to admit an 81-year-old patient. He was dehydrated, malnourished, plagued by skin ulcers and broken ribs -- in the medical professionals’ opinion, he was unable to care for himself at home. Administrators, however, overruled them.

Was there no bed for this poor man? No, the facility had plenty of beds; in fact, on an average day, more than half of the beds are empty, awaiting patients. Was there no money or medicine to care for him? No, and no. Reporting by the New York Times suggests that Walter Savage was, perversely, turned away because he was too sick. Very sick patients tend to worsen the performance measures by which VA hospitals are judged."

"in the 1990s, New York and Pennsylvania started publishing mortality data on hospitals and surgeons who did coronary bypasses. The idea was that more informed consumers would steer themselves toward the teams with the better statistics -- theoretically good for patients, bad for slacking providers. The reality was less ideal: In those states, surgeons seem to have started doing more operations on healthier patients, while turning away the sickest ones who might otherwise have benefited."

"purchasing managers who have cozy arrangements to buy a certain amount of product from their vendors in December, and ship it back in January, in order to help some sales director make quarterly targets … universities that compete to turn away as many students as possible, because doing so makes them rise in the U.S. News rankings … law schools that hired their own graduates for temporary make-work jobs in order to boost the schools’ employment statistics. All metrics will be gamed, and the games always have costs. And when the metrics involve our health, those costs can be very high indeed."