Tuesday, June 28, 2016

Maybe ‘regime uncertainty’ slowing the recovery

This was my response to an article by columnist Catherine Rampell. It was printed in the San Antonio Express-News. Click here to read it. Or read it below.

Catherine Rampell says the assessment of our economy having the worst recovery after a deep recession since World War II is highly misleading ("Economic recovery better than you think," June 14). But her column itself may also be misleading.

She does acknowledge the slow growth rates in real GDP since the recession ended. Obama may be the first president not to have at least one year with a real GDP increase of at least 3%.

But in one sense, even though the GDP has grown (however slowly), the economy has not recovered. Right now, only 77.8% of 25-54 year olds have a job, still below the 79.7% in December of 2007, when the recession started.

If we give Rampell the benefit of the doubt, and agree that there has been some recovery, we can focus on why she says it has been so slow. It is because the recession was caused by a financial crisis and such recessions usually result in recoveries with less growth than other recessions.

She gets that from a paper by two respected economists, Carmen M. Reinhart and Kenneth S. Rogoff. They "examined the aftermath of 100 financial crises spanning the past century-and-a-half."

But other economists have looked at this issue and are at least somewhat skeptical that recoveries after financially caused recessions are different from others. Christina and David Romer wrote a paper on this in 2015.

They said, of financially caused recessions, "we find that output declines following financial crises in modern advanced countries are highly variable, on average only moderate, and often temporary."

Christina Romer was Obama’s first chief economic advisor and is now back teaching at the University of California (Berkeley). She is also an acknowledged expert on the Great Depression. David, her husband, is a recognized expert on economic growth.

Ms. Rampell has probably heard of them yet she failed to mention their research on this subject. And the Romers are not the only skeptics of this thesis.

Michael Bordo (of Rutgers University) and Joseph Haubrich (of the Federal Reserve) wrote a paper last year on the topic and concluded that "recessions associated with  financial crises are generally followed by rapid  recoveries." Again, this is not mentioned by Rampell.

If it was not the financial crisis, then what might make our current recovery so weak? It could be a result of economic historian Robert Higgs' concept of "regime uncertainty," the idea that with so many new regulations being enacted, businesses may be afraid to invest, not knowing what initiatives they will be allowed to continue with in the future or what their profit rate might be.

Back in 2011, Scott Baker and Nicholas Bloom at Stanford University and Steven Davis at the University of Chicago analyzed "regime uncertainty" and found it to be a valid thesis. They created an index to quantify uncertainty and concluded "When businesses are uncertain about taxes, health-care costs and regulatory initiatives, they adopt a cautious stance."

If business becomes cautious, that means less investment spending. Which, in turn, can reduce the growth of GDP.

None of this conclusively proves that Rampell is wrong. Showing cause and effect in economics is difficult since there are so many uncontrolled variables and each recession can have its own peculiarities.

But I think that Rampell was wrong to base her opinion only on the research of two economists (Reinhart & Rogoff), even though they are well respected. We need to be open to other valid causes of the slow recovery.

Saturday, June 18, 2016

Domino's & T-Mobile discover there is no such thing as free pizza. Too many took advantage of offer. They ran out

See T-Mobile Ends Free Pizza Promotion as Domino’s Runs Out of Dough by Saad Chandna of Bidness Etc. Why the give away in the first place? Competition: "With AT&T having launched a similar thank you service for its customers, T-Mobile needs to keep the ante up as rival carriers initiate methods to keep their own customers hooked."

Here is the definition of a scarce good I use in my classes:

Scarce-A good or resource is scarce when the amount available is less than the amount people would want if it were given away free of charge.

So pizza is scarce!!

Excerpt from article:

"T-Mobile Tuesdays has provided the un-carrier’s customers with a lot of free goods, but free Domino’s Pizza will not be one of those promotional items anymore

Domino's Pizza, Inc. (NYSE:DPZ) has had to back out of a T-Mobile promotion owing to a demand-supply discrepancy. The un-carrier recently launched its T-Mobile Tuesdays app on iOS and Android in a bid to say thank you to its customers for their loyalty. Among other freebies, T-Mobile offered coupons entitling customers to a free Domino’s medium pizza with toppings. The restaurant chain, however, has been unable to handle the surge in demand every Tuesday, and has now discontinued the service.

T-Mobile US Inc. (NYSE:TMUS) promotions tend to create quite a bit of a brouhaha, and T-Mobile Tuesdays was no exception. The app crashed soon after it launched, as customers rushed to get their hands on free goods. Demand has been so high that it put a strain on Domino’s stores, as they tried to cater to the orders. T-Mobile CEO John Legere acknowledged this in an internal Domino’s memo, saying that the promotion would not be renewed unless a viable solution was found.

The T-Mobile CEO noted in his tweet that the promotion will not be valid on the next Tuesday, June 21. Mr. Legere was appreciative of Domino’s efforts to facilitate the extra orders. According to his tweet, Domino’s sales went up by around three to four times the sales accrued on any given Tuesday, as a direct result of the T-Mobile promotion.

According to TechCrunch, Domino’s appreciated the number of T-Mobile customers who are fans of the pizza chain. However, the restaurant giant had already started capping the number of free pizzas per store, while some T-Mobile Tuesdays coupons were not accepted altogether. This understandably left a lot of customers unhappy."

Thursday, June 09, 2016

Criticizing the selling of Ali's memorial service tickets ignores economic reality

I submitted this to the San Antonio Express-News

At first glance, it might seem awful that some people were selling free tickets they had gotten to Muhammad Ali's memorial service Friday (June 10) in Louisville ("Some trying to profit off funeral," sports, June 9).

An Ali family spokesman said he was "personally disgusted" by this and that Ali "wanted this to be a free event, an event that was open to all."

Another person, who wanted to attend the service, said "The Greatest wanted his funeral to be accessible to everyone." Another fan, who was lucky enough to be given a ticket by someone else who had waited in line said "I'm glad that somebody has a heart out there" (as opposed to those who sold their tickets).

But the arena holding the service only seats 15,000. People started lining up the night before tickets were given out and thousands left empty handed.

That also seems heartless, to have people wait so long and come up empty handed. If tickets were sold for money, that would have been avoided.

Luckily the high temperature in Louisville was only 77 that day. But the next day it was supposed to be 85 and the day after 92. Just imagine what might have happened if people had waited hours in the heat and gotten nothing.

Anytime we don't allow a product to be sold (or sold for its market price)  some other mechanism will allocate goods and services. It could be on a first come, first serve basis, like in this case. That is, who waits the longest gets it.

Or, as happened in Rhode Island in 2006, two police officers used their badges to cut in line to buy the Playstation3 video game. The selling price was not high enough on the first day, so, like in the case of Ali's memorial service, people waited in line all night.

We should not be surprised when people sell "free" tickets. This happened in 2009 when comedian Jay Leno gave away free tickets to unemployed workers in Detroit. Some sold them.

Leno was not happy about this. But he required no proof from recipients that they were actually unemployed. And if a truly unemployed worker sold a ticket, maybe they needed the money more than Leno's jokes.

Free items can end in tragedy. This happened in India in 2004 when a stampede occurred while free saris were being given away. Twenty-one women and children (mostly poor) were killed.

Mr. Ali may have had a noble sentiment by insisting that tickets to his memorial service be free. But "free" items cause problems.

Some people were paid to stand in line. Although tickets might not be sold in those cases, it violates the spirit of what Mr. Ali wanted. But detecting such activity might be difficult.

Paying people to stand in line is common. Lobbyists have paid people to wait in line for them to get a good seat at Congressional hearings. Kathleen Elkins of Business Insider reported last year that there are companies that employ professional line sitters.

This happened up in Austin. People got paid to wait in line at Franklin Barbecue.

Calling the profiteering (selling free tickets) despicable, deplorable and heartless just ignores reality. Supply and demand set a price and when that is ignored, strange things happen.

Right now price controls are causing a human tragedy in Venezuela. The government mandates low prices and businesses can't make a profit. So they have shortages of food and medicine and other essentials. If they only allowed some "disgusting" profiteering, things might be better. 

Here are some related links:

People are paying up to $1,500 for someone else to take their place in line
Franklin Barbecue bans professional line-sitters
Cops in Trouble for PS3 Line-Cutting
Stampede for free saris kills 21 in India
Some looking to profit from free tickets to Ali services