Tuesday, August 20, 2019

The benefits of utilizing markets in the U.S.

An article I wrote for the San Antonio Express-News last March.

"I was glad to see that Beto O’Rourke recently said, “I’m a capitalist. I don’t see how we’re able to meet any of the fundamental challenges that we have as a country without, in part, harnessing the power of the market.”

It seems like our country is turning away from markets too much these days. Democrats are proposing massive government interventions like the Green New Deal, along with much higher taxes on wealth and income. President Donald Trump is for tariffs and border walls, and issued an executive order to buy and hire American.

When economists say “markets,” we mean allowing individuals to decide who they will trade (buy and sell) with, free of bureaucratic mandates. This is a very democratic process in which millions of buyers and sellers create the outcomes.

Some of these outcomes have been very beneficial. Look at the millions of people who have been lifted out of poverty in India and China in the past 40 years as those countries instituted market reforms. Countries like Venezuela that have turned away from markets have suffered poor economic outcomes.

Markets bring benefits even in unlikely cases. In their book, “The Inner Lives of Markets,” economist Ray Fisman and novelist Tim Sullivan give some good examples.

In prisoner of war camps during World War II, when the prisoners were allowed to trade (mainly the items they got from Red Cross care packages), survival rates were much higher than in camps where the highest-ranking officers forbade trade and even “doled out food and other supplies.” The top-down approach was inferior to the democratic process of letting people trade freely, even in a highly unfavorable circumstance.

Another case was when economists suggested to food bank operators that they adopt a market-based approach using a point system. Second Harvest, a clearinghouse for food banks across the country, was basically run using central planning, offering donated food to different affiliates.

Food banks were given points that could be used to bid on the available food. This greatly enhanced efficiency, with food banks getting more of the type of food they needed in their area of the country, which cut down on wasted food.

Even North Korea is starting to harness the benefits of markets, as novelist Travis Jeppesen recently explained in the New York Times. Markets have been the main driver of economic development there the past 20 years. They emerged in response to the famine of the 1990s, and they filled in the gaps due to the failure of the central planners. Now government workers can do other jobs as long as they pay something to their supervisors, and businesses are allowed to set their own prices.

Markets can also enhance morality. This is shown in a study done on small societies by Harvard anthropologist Joe Henrich and colleagues.

They found that people became more generous the more integrated they were into the world of commerce. One co-author, economist Herbert Gintis, said, “Societies that use markets extensively develop a culture of cooperation, fairness and respect for the individual.”

One important thing that all proponents of more government intervention should remember is that the more they ask government to do, the less well it will perform its tasks. This was pointed out by philosopher John Stuart Mill in the 19th century.

Mill said, “Every additional function undertaken by the government is a fresh occupation imposed upon a body already overcharged with duties. A natural consequence is that most things are ill done.”
So, if you want government to do things well, don’t ask it to do too much."

Wednesday, August 14, 2019

New Braunfels businesses fooled into taking movie money

By Bryan Kirk of The San Antonio Express-News. Funny story. It has pictures of the fake money.
"Reports that several New Braunfels businesses have been fooled into accepting money used as props in movies is being investigated by the New Braunfels Police Department.

Officials said Tuesday that a number of people in the area have accepted movie money without realizing it is fake.

According to a New Braunfels police news release, the money looks real enough at first glance, but there are several key features in plain sight that reveal the cash is indeed bogus.

Some of those features of the movie money include:
  • Asian markings may be seen on the front or back.
  • Bills may have the words: "For Motion Picture Purposes Only" or "In Props We Trust."
  • Check for bills marked with the word "Replica" in the fine print.
  • The bills may appear to be either larger or smaller than real cash.
  • Check the feel of the cash. If it doesn't feel right, then it probably isn't.
Police advise businesses not to accept the money and to call police immediately.

If the sale has already been completed, call New Braunfels police at (830) 221-4100. Police said there is a chance the person paying with the movie money may also be a victim and may not realize the money is fake.

To learn more about how to spot fake currency, click the link."

Tuesday, August 13, 2019

Can scientific thinking help entrepreneurs?

See A Scientific Approach to Entrepreneurial Decision Making: Evidence from a Randomized Control Trial by Arnaldo Camuffo, Alessandro Cordova, Alfonso Gambardella and Chiara Spina (the first three are with Bocconi University, not sure about Spina).

Maybe science can help, but entrepreneurship always takes place in the face of uncertainty. Maybe science can help but there will never be a sure thing. What if another entrepreneur is doing the same study you are doing right now and you both concluded the new business will be a good idea. You both can't succeed, or at least not as well as if only one of you went forward with your plan.

A classical approach to collecting and elaborating information to make entrepreneurial decisions combines search heuristics, such as trial and error, effectuation, and confirmatory search. This paper develops a framework for exploring the implications of a more scientific approach to entrepreneurial decision making. The panel sample of our randomized control trial includes 116 Italian startups and 16 data points over a period of about one year. Both the treatment and control groups receive 10 sessions of general training on how to obtain feedback from the market and gauge the feasibility of their idea. We teach the treated startups to develop frameworks for predicting the performance of their idea and conduct rigorous tests of their hypotheses, very much as scientists do in their research. We let the firms in the control group instead follow their intuitions about how to assess their idea, which has typically produced fairly standard search heuristics. We find that entrepreneurs who behave like scientists perform better, are more likely to pivot to a different idea, and are not more likely to drop out than the control group in the early stages of the startup. These results are consistent with the main prediction of our theory: a scientific approach improves precision—it reduces the odds of pursuing projects with false positive returns and increases the odds of pursuing projects with false negative returns.

Sunday, August 11, 2019

College Still Pays Off, but Not for Everyone

By Josh Mitchell of The WSJ. Excerpts:
"Investing in a college degree still pays off for most students with higher salaries and greater wealth, but in recent years it has become riskier, splitting graduates more widely into haves and have-nots.

“It just has not been the blanket guarantee of following the same path to prosperity that the earlier generations followed,” says economist William Emmons of the St. Louis Federal Reserve.

There are three related shifts causing economists to re-examine the returns of college. First, the wages of college graduates have remained mostly flat this century, after inflation. Second, the cost of attending college has soared. Third, even with higher salaries, significant numbers of college graduates in recent years are failing to build the kind of wealth that previous generations did."

"The share of Americans between ages 25 and 29 with a bachelor’s degree rose to 37% last year from 29% in 2000"

"College and graduate-school tuition has risen at triple the rate of inflation this century"

"Americans with a bachelor’s degree—but not a graduate degree—earned an average $77,239, nearly $32,000 more than the average earnings of workers with only a high-school diploma"

"That premium remains near an all-time high, after inflation."

"After the tech bust of the early 2000s, the economy demanded less of the type of cognitive skills that college graduates typically have"

"As a result, college graduates started taking up jobs previously held by those who went only to high school, pushing down wages for high-school graduates. College grads thus maintained an earnings advantage over nongrads, but their real wages didn’t rise."

"roughly four in 10 recent college graduates—those between ages 22 and 27—are in jobs that typically don’t require a degree."

"during the recession, as unemployment soared, employers increasingly required bachelor’s degrees for jobs that previously required only a high-school education."

"Research published in 2014 by the New York Fed shows that among college graduates, the bottom 25% of earners made roughly the same or less than the typical high-school graduate without a degree."

"according to a St. Louis Fed paper released in January . . . “Among families born in the 1980s, the college wealth premium weakens to the point of statistical insignificance with the single exception of white bachelor’s-degree holders, which remains positive but much smaller than that enjoyed by previous cohorts.”"
Here are some earlier posts on related topics:

Many college dropouts are worse off economically than if they hadn’t started college

Maybe That College Degree Is Not As Valuable As You Thought

As college costs rise, sticker shock eased by student aid

Does It Pay To Go To College?

Who Is Most Likely To Default On Their Student Loans?

Student loan delinquency is higher than for other borrowing

The Diminishing Returns of a College Degree: In the mid-1970s, far less than 1% of taxi drivers were graduates. By 2010 more than 15% were

Student-Debt Forgiveness Is a Wonderful Boon, Until the IRS Comes Calling: Education analysts, student advocates warn of impending crisis from one-time tax bills individuals may not be prepared to pay off

The Diminishing Returns of a College Degree

For Some Grads, College Isn't Worth Debt

Is It Getting Too Expensive To Go College?

Is the U.S. student loan system broken?

Is College Still A Good Investment?

Why do employers pay extra money to people who study a bunch of subjects in college that they don’t actually need you to know? Signaling

Saturday, August 10, 2019

Why Rate Cuts Don’t Help Much Anymore

By Austan Goolsbee. Excerpt:
"Take spending on consumer durables. A recent study by economists at the Federal Reserve Bank of Minneapolis and the University of California, San Diego, notes that these purchases occur in lumpy spurts. People tend to spend nothing on such items for long periods, then spend a lot all at once, when money is cheap and prices are enticing.

The problem now is that once-in-a-lifetime offers don’t generate the same excitement if they are repeated every week. And, the study suggests, after 10 years of extremely low interest rates, there probably aren’t many consumers with pent-up demand, waiting for rates to fall. Because so many people have already made their big purchases, the economic kick from a rate cut is smaller than it would be at a “normal” time.

Economists at Northwestern, Copenhagen University and the University of Chicago’s Booth School of Business have shown the same thing about mortgages. Because most mortgages have fixed rates, a Fed rate cut will affect these homeowners only if they refinance.

Typically there’s a large group of people with a pent-up demand for a cheaper mortgage, and once they get one, the benefit is roughly equivalent to receiving a big tax cut: They have a lot more money to spend on other things. But if rates have already been low for a long time, most of those people will have already refinanced along the way. A cut in rates will not deliver the same punch it usually would.
A similar dynamic probably helps explain why the 2017 corporate tax cut has had such an underwhelming impact on companies’ capital investment. Fundamentally, there wasn’t much pent-up demand for investment after years of low rates, accelerated depreciation, “temporary” investment expensing and other stimulus. That lack of pent-up demand also means that cutting interest rates now is unlikely to entice businesses to invest much more.

So it’s a twofold problem: The Fed has less room to cut rates, and the benefit from cutting them is smaller than usual. We should be wary of vesting too much importance on Fed moves."

Thursday, August 08, 2019

San Antonio, Poverty and Economic Segregation

See Another haunting reminder about economic segregation, San Antonio Express-News editorial. Important issue, but in some ways, San Antonio is similar to the rest of the nation. Excerpt:

"About 20 percent of African American and Hispanic residents live in poverty, compared with 10 percent of Anglos."

But this is very similar to the country as a whole.  The poverty rate for non-Hispanic Whites was 8.7 percent in 2017. For Blacks it was 21.2 percent. For Hispanics was 18.3 percent. So the poverty differences by race in San Antonio are close to those for the whole country. See Income and Poverty in the United States: 2017 from the Census Bureau.

The editorial also says "The median income for African American households is about $36,000, and for Hispanic households it’s about $43,000. By comparison, the median income for Anglo households is more than $64,000, and for Asian households, almost $71,000."

For the whole country, Asian households had the highest median income in 2017 ($81,331). For non-Hispanic Whites it was $68,145. Blacks had $40,258 and Hispanics had $50,486.

So in San Antonio, Whites (Anglos) are $28,000 ahead of Blacks, about the same difference as it is nationally. Whites are $21,000 ahead of Hispanics in San Antonio, while nationally it is an $18,000 difference.

In San Antonio, Asians lead Whites by about $7,000 but nationally that differential is about $13,000.

Wednesday, August 07, 2019

Texas A & M economists study cheating (and how much might not depend on being rich or poor)

Study: Richer or poorer, cheaters cheat by Lynn Brezosky of The San Antonio Express-News. If people don't cheat as much as they could possibly get away with, does it mean they are not always following their self-interest? Excerpts:
"Are people more likely to cheat when times are tough?

A team of behavioral economists from Texas A&M University and Rensselaer Polytechnic Institute on New York traveled to a remote village in Guatemala to answer that question.

What they found surprised them: while most people cheat a little, people who cheat more do so regardless of whether they're richer or poorer.

In another finding, people gave more to strangers in another village when times were bad for everyone, indicating people are more empathetic in times of scarcity."

"“Economists get really surprised when they find out either that people do not cheat or they do not cheat to the full extent, especially when the potential cost of cheating is very, very low,” RPI behavioral economist Billur Aksoy said. “Because what we say is that if the cost of doing something is less than the benefit of doing it, you should always do it.”"

The lab has technology that analyzes facial expressions, skin responses, heart and respiration rates, eye-tracking and neural signals to help researchers learn how emotional responses drive decision-making. It’s part of a field of research that’s gaining traction as a tool to help guide personnel recruitment, website design and store layout.
In one experiment, researchers used eye-tracking to redesign the menu for Messina Hof ’s wine-tasting room in Bryan. They found that tweaks such as putting prices after the wine description instead of lined up to the right prompted visitors to buy with their palate rather than their wallet. Profitability increased 18.6 percent.

In the Guatemala study, participants were told they’d be paid based on the number they rolled on a die, with a one earning them five quetzales, or about 65 cents, and a five earning them the maximum 25 quetzales, orabout $3.25, which was equivalent to a typical day’s pay. Zeros or sixes earned nothing.

Based on probability, the researchers knew that people cheated 90 percent of the time. But no one pretended to role a five all the time. And the cheating rate was the same both before the harvest and after. The same people cheated the same amount no matter when they rolled the dice."

"David Hoffeld infuses behavioral science in sales, the nation’s second-largest profession, in his book “The Science of Selling.”

“A lot of times products and services get rejected not because of the validity of the product or service but because of how they’re presented,” he said. “And the more we can align selling with buying, the more successful we’ll be and the more we can serve our customers and create deeper levels of loyalty and trust.”

The Guatemala study’s findings on scarcity’s effect on generosity is related to Hoffeld’s discussion of so-called “status quo bias” — an example of which is when organ donation increases when people are asked not to “opt in” but to “opt out.”"