Thursday, April 23, 2015

How Does The Fed Prefer To Measure Inflation?

CPI vs. PCE: Untangling the Alphabet Soup of Inflation Gauges-Fed’s preferred measure of consumer-price growth may not be the one you think, but both have their place by Jo Craven McGinty of the WSJ. Excerpts:
"But when the Fed reviews economic conditions to decide what actions it will take to influence inflation and employment, it sets aside the century-old measure [CPI] in favor of something called the personal consumption expenditures price index [PCE].

The PCE includes a broader range of expenditures than CPI. It’s weighted according to data provided in business surveys, rather than the less reliable consumer surveys used to weight the CPI. And it uses a formula that adjusts for changes in consumer behavior that occur in the short term, something the standard CPI formula doesn’t do.

The result is a more comprehensive, if less familiar, gauge of inflation. That’s important for the Fed, which regards a small amount of inflation as a sign of a healthy, growing economy."

"Like CPI, PCE tracks changes in real prices paid by consumers for goods and services, but the two indexes differ in several important ways. For starters, the CPI, which typically is slightly higher than the PCE, captures only what urban consumers spend out-of-pocket for a common basket of goods and services.

“It represents what an average consumer buys in a typical year,” said François R. Velde, a senior economist with the Federal Reserve Bank of Chicago. “If it costs $1,000 this year and $1,200 the following year, it gives you an idea of how much the value of money has gone down.”

PCE, on the other hand, includes all goods and services consumed in the U.S. whether they are purchased by consumers or by employers or federal programs on behalf of consumers.

Medical expenses provide a good example of the differences in approach the gauges take. The CPI includes only the co-payments paid directly by consumers in its calculation, while the PCE captures co-payments as well as costs covered by employer-provided insurance and government programs."

"PCE, which is published by the U.S. Commerce Department’s Bureau of Economic Analysis, is derived from retail-sales data collected in business surveys, and in this data, medical care tends to carry the greatest weight. The CPI, on the other hand, is derived from consumer purchases reported in household surveys. Typically, consumers report spending more on shelter than anything else, giving that category more weight in the CPI."

"The CPI uses fixed weights generated from a basket of goods that is updated every two years, which doesn’t allow for the introduction of new products or price changes in the interim that might cause consumers to substitute one item for another.

The PCE accounts for this by using chained weighting. For example, if apples suddenly become very expensive, consumers may not buy as many. As a result, the apples will have one weight in one reporting period, and a different weight in the next. The chain-weight index essentially takes the average of the two."

Friday, April 17, 2015

What if companies pledge to adhere to social and environmental accountability guidelines?

See Etsy I.P.O. Tests Pledge to Balance Social Mission and Profit by HIROKO TABUCHI of the NY Times. Excerpts:
"Etsy is one of a growing number of companies, called B Corps, that pledge to adhere to social and environmental accountability guidelines set by a nonprofit organization called B Lab. And Etsy on Thursday became only the second for-profit company to go public out of more than 1,000 companies that have that certification."

“The success of our business model is based on the success of our sellers,” Mr. Dickerson said in an interview. “That means we don’t have to make a choice between people and profit.”

"It is also an experiment in corporate governance, a test of whether Wall Street will embrace a company that puts doing social and environmental good on the same pedestal with, if not ahead of, maximizing profits."

"Etsy declares in its public offering prospectus that it wants to change the decades-old conventional retail model of valuing profits over community. It states that its reputation depends on maintaining its B Corp status by continuing to offer employees stock options and paid time for volunteering, paying all part-time and temporary workers 40 percent above local living wages, teaching local women and minorities programming skills, and composting its food waste."

"If Etsy eventually reincorporates as a full-fledged benefit corporation, as required to do under B Lab rules, it could potentially become vulnerable to lawsuits from shareholders over any failure to achieve its social mission, in addition to the risk of potential litigation by shareholders over its fiduciary duties.

Still, “B Corps are reaching a tipping point in market acceptance,” said Jay Coen Gilbert, co-founder of B Lab, which assesses and certifies companies along social and environmental accountability standards. “The current shareholder model doesn’t meet the needs of entrepreneurs, business leaders and investors who want to make money and make a difference.”"

"B Lab has certified more than 1,000 companies in the United States as B Corps, including Patagonia, Warby Parker and Method. In addition, 27 states have adopted laws that can award companies status as “public benefit corporations,” letting them emphasize social or environmental concerns over profits, and more than a dozen others have introduced similar legislation."

"Under B Lab rules, companies incorporated in states with benefit corporation laws must eventually comply with their home states’ standards to maintain that benefit corporation status.

In Delaware, where Etsy is incorporated, even small shareholders of a public benefit corporation could sue the company, claiming it had failed to fulfill its social or environmental duties."

"B Corp legislation could allow companies to adopt values some would find objectionable and discriminatory, like religious beliefs, said Kent Greenfield, a professor at Boston College Law School. The Supreme Court justice Samuel A. Alito Jr., in his argument for last year’s Hobby Lobby ruling, cites B Corps as evidence that corporations can be religious.

“If you let companies opt in to their own set of obligations, there’s no constraint from them opting in to their view of ethics as something from the Old Testament,” Mr. Greenfield said."

In his book The Wealth of Nations, Adam Smith wrote about how self-interested people were led by the "invisible hand" to make society better off:
"But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestick industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the publick good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."

From the Online Library of Liberty.

The B Corps are suggesting that people start businesses to intentionally try to help society while Adam Smith thought society benefited more if people pursued their own self-interest.

Of course, Smith is more complex than this. Adam Smith's "other" book was called The Theory of Moral Sentiments. One point he made there was that we are able to sympathize with other people by trying imagine what they are going through. I wrote about that in a post once called Science Proves That Adam Smith Was Right Over 200 Years Ago (sort of)

Friday, April 10, 2015

Do Tax Rates Affect Where Tennis Players Decide To Live?

See How Tennis Stars Handle the Tax Man’s Topspin: Players like Nadal and the Williams sisters show excellent footwork when protecting their income by Allysia Finley (from the WSJ in January). Excerpts: 
"The top five French players on the men’s circuit—Jo-Wilfried Tsonga,Gael Monfils,Gilles Simon,Julien Benneteau and Richard Gasquet, as well as Germany’s Philipp Kohlschreiber, all claim residence in Switzerland, ostensibly to avoid paying their home countries’ punitive 45% top personal income-tax rates (not including surcharges or social-security contributions).

Many Swiss cantons assess taxes on the living expenses of foreign high-rollers (typically fives times the market rate for renting out their residence) rather than on their income. As a result, Switzerland has become a tax haven for thousands of wealthy Europeans. Maybe New Jersey Gov. Chris Christie should consider applying the Swiss tax model in the Garden State. Jersey City might become the Geneva for New York’s professional athletes.

Yet the most popular haven for tennis players is the principality of Monaco, which doesn’t tax foreigners’ world-wide income. (French athletes choose Switzerland because la République Française taxes its citizens who live in Monaco.) Swedish tennis legends Bjorn Borg and Mats Wilander escaped to Monte Carlo during their primes in the 1970s and ’80s to dodge their home country’s 90% top marginal rate, which has since fallen to 57%. In 2002 Germany charged six-time Grand Slam title-winner Boris Becker with tax evasion for falsely claiming Monaco as his primary residence.

Today, Monaco is the putative home of many of the world’s top-ranked men and women players.  They include Serbia’s Novak Djokovic (1), the Czech Republic’s Petra Kvitova (4), Tomas Berdych (7) and Lucie Safarova (16); Canada’s Milos Raonic (8); Denmark’s Caroline Wozniacki (8); Bulgaria’s Grigor Dimitrov (11); and Ukraine’s Alexandr Dolgopolov (23). Players who hail from former communist countries are especially keen, it seems, on keeping their hard-earned money.

The U.S. has its own Monaco: no-income-tax Florida. It’s no coincidence that America’s top-ranked players Serena (1) and Venus Williams (18) and John Isner (21), as well as Russia’s Maria Sharapova (2) and Japan’s Kei Nishikori (5) live in the Sunshine State. So do twins Mike and Bob Bryan, who have won 16 Grand Slam doubles titles. Like the Williamses, they come from California, where the 13.3% state income-tax rate is the nation’s highest."

Wednesday, April 01, 2015

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.