Tuesday, June 18, 2019

Is the interest rate the Fed pays banks on reserves now more important than the Federal Funds Rate?

The Federal Funds Rate is set (maybe influenced is better) by the Fed. It is what banks pay each other when they borrow to meat their required reserves. But this market is smaller than it used to be. So maybe the Federal Funds Rate is not what matters any more. And maybe the sectors of the economy that are most affected by interest rates make up less of the GDP than they used to.

See Has the Federal Reserve Lost Its Mojo? The central bank has less control over market interest rates today than at any time in its history by Phil Gramm and Thomas R. Saving. Excerpt:
"When the Federal Open Market Committee’s meeting concluded last month, reporters focused on the federal-funds rate, announcing that it would be held constant at 2.25% to 2.5%. Unnoticed by even the financial media, and unmentioned in the lead section of the FOMC’s statement, was its decision to cut the interest rate the Federal Reserve pays on bank reserves—a rate that, unlike the fed-funds rate, still has a direct effect on the money supply. The Fed cut the rate paid on reserves because the market yield on one-year Treasurys had fallen below it, inducing banks to build up excess reserves. When banks expand reserve holdings, the money supply contracts—so the Fed was forced to act.

But it wasn’t enough. Because market rates have continued falling since the last FOMC meeting, even the lower rate that the Fed now pays on reserves is 0.35 percentage point higher than Friday’s yield on one-year Treasurys and 0.25 point above the yield on 10-year Treasurys. The return differential has caused banks to increase excess reserves by 5.5%, or $65 billion, over the past month. The size of these yield spreads and the buildup of excess reserves virtually guarantee that the Fed will again cut the interest paid on reserves at Tuesday’s FOMC meeting.

The rate paid on reserves receives too little attention. As a result of the unprecedented monetary easing of the Obama era, when the Fed bought or offset 45% of all federal debt issued—more than five times the amount it bought to support the World War II effort—commercial banks now hold massive excess reserves. By paying interest on reserves, the Fed effectively converted them into income-yielding assets, giving banks an incentive to hold excess reserves instead of expanding credit and the money supply. As banks became awash in liquidity, they all but stopped engaging in borrowing and lending in the overnight fed-funds market. The fed-funds market has contracted 80% since 2008, meaning the fed-funds rate has almost no direct effect on monetary policy."
Related article: Fed Stimulus Just Ain’t What It Used to Be: Federal Reserve may cut rates soon, but its efforts may have less oomph due to changes in the U.S. economy by Justin Lahart of The WSJ. Excerpt:
"A big reason is that the role of some of the most interest-rate sensitive industries in the labor force—the ones that hire like crazy in response to low rates—has been greatly diminished, argue economists at the Federal Reserve Bank of Kansas City. In 1980, construction and manufacturing accounted for about 25% of total U.S. employment. By the time the 1990-91 recession began, that had fallen to 21%, slipping to 18% before the 2001 recession and 15% ahead of the last recession. Now it is at 13%.

Another important difference between this last expansion and previous ones is that housing, after falling by so much in the downturn, had such a modest comeback. Home sales remain below their late 1990s levels, when the U.S. population was lower, and housing’s direct share of gross domestic product is now at levels which in other periods would have been associated with recession. The share of Americans who own the home they live in also has fallen.

Although lower rates might stimulate home sales a bit, a variety of forces are weighing on housing, including out-of-reach prices. This matters because housing is one of the ways that rate cuts have traditionally boosted the economy. Lower mortgage costs prompt people to buy not just a house but many other things—furniture and appliances—that go with it.

Mortgage refinancing—another avenue for lower rates to make their way into consumer spending—also might be lacking. Many homeowners already refinanced during the years coming out of the recession, locking in ultralow rates.

Then, there is the increased caution Americans seem to be taking with their finances since the financial crisis, leaving the saving rate substantially higher than before the recession. Even a decade later, memories of the severity of the downturn may still be too fresh for people to respond exuberantly to lower rates.

It could take more than just rate cuts to get the economy really going again."

Monday, June 17, 2019

What about all this plastic pollution?

I use the book The Economics of Public Issues as a supplemental book in my principles classes. It often chapters on trash, recycling and plastic bags.

The San Antonio Express-News ran an article by Chris Tomlinson called Solving plastics pollution takes more than just banning bags. Excerpts:
"More than half of all plastic by weight is used only once before going to a landfill or the ocean"

"Only 7 percent is recycled, but only once, before it goes to a landfill."

"Most marine plastic waste comes from Asia, and overwhelmingly from China, India and Thailand. More than 86 percent of the plastic found in the ocean was dumped first in either an Asian or African river and flowed to the sea."

"Plastics play an essential role in solving our other global problem: climate change. Plastics make things lighter, which means they require less energy. Plastics can seal buildings and coat windows to provide insulation and save on climate control.

Some plastic items should be banned, but most improve our lives. They need to be recycled."

"The root cause of plastic pollution is not what most people imagine. The solution is more complicated than they would prefer, and simple slogans will take us down the wrong path. Cleaning up the plastic pollution smothering the planet requires industry, consumers and government to compromise - not vilify one another."

Sunday, June 16, 2019

Do We Have A Zombie Economy?

See When Dead Companies Don’t Die: The policies created to pull the world out of recession are still in place, but now they are strangling the global economy by Ruchir Sharma in The NY Times. He is author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World” and is the chief global strategist at Morgan Stanley Investment Management.

This ties in to some recent posts I did on the recovery and Joseph Schumpeter (links below). Excerpts:
"Since the end of the recession, the economy has grown at about 2 percent a year in the United States and 3 percent worldwide — both nearly a point below the average for postwar recoveries.

What explains the longest, weakest recovery on record? I blame the unintended consequences of huge government rescue programs, which have continued since the recession ended."

"Once the crisis hit, however, governments erected barriers to protect domestic companies. Central banks aggressively printed money to restore high growth. Instead, growth came back in a sluggish new form, as easy money propped up inefficient companies and gave big companies favorable access to cheap credit, encouraging them to grow even bigger."

"Central bankers had hoped that low interest rates would spur investment, increasing productivity and boosting growth. But a recent paper from the National Bureau of Economic Research shows that low rates gave big companies an incentive and means to grow bigger. As their power grows, workers’ share of national income has been shrinking, fueling inequality — and anger.

Four airlines and three rental car companies account for more than 80 percent of the American travel markets."

"Start-ups represent a declining share of all companies in Britain, Italy, Spain, Sweden, the United States and many other industrialized economies. The United States is generating start-ups — and shutting down established companies — at the slowest rates since at least the 1970s."

"Zombies now account for 12 percent of the companies listed on stock exchanges in advanced economies and 16 percent in the United States, up from 2 percent in the 1980s. Companies are surviving in the “zombie state” for longer, depleting the productivity of healthy companies by competing with them for capital, materials and labor."

"The problem, however, is that government stimulus programs were conceived as a way to revive economies in recession, not to keep growth alive indefinitely. A world without recessions may sound like progress, but recessions can be like forest fires, purging the economy of dead brush so that new shoots can grow. Lately, the cycle of regeneration has been suspended, as governments douse the first flicker of a coming recession with buckets of easy money and new spending. Now experiments in permanent stimulus are sapping the process of creative destruction [see link below about Joseph Schumpeter] at the heart of any capitalist system and breeding oversize zombies faster than start-ups.

To assume that central banks can hold the next recession at bay indefinitely represents a dangerous complacency. Corporate debt levels continue to rise; government debts and deficits continue to rise. If there is a sudden break in confidence, the damage will be that much greater and governments may find themselves too broke to stem it."
Related posts:

Saturday, June 15, 2019

Over 40 years, 70% of the population made it into the top 20% of earners for at least one year

See Earnings in the U.S.: A Game of Chutes and Ladders by Jo Craven McGinty of The WSJ. Excerpts:
"Over roughly 40 years, 70% of the population made it into the top 20% of earners for at least one year, according to researchers at Cornell University and Washington University in St. Louis. But only about 21% remained there for 10 consecutive years, and even fewer clung to the top rung for a solid decade.

“A small group of people persist at the high and low levels,” said Thomas A. Hirschl, a Cornell sociologist and one of the researchers who studied the phenomenon. “But a big crowd of people move in and out.”"

"by age 60, more than half the population occupied the top 10% for at least one year, and 11% made it to the top 1% for that length of time."

"But only 0.6% remained at the highest level for 10 consecutive years, and less than 7% remained in the top 10% for that long.

On the lower rungs of the ladder, 79% of the population experienced at least one year of economic insecurity, when, for example, the head of a household was unemployed, and half the population experienced at least one year of poverty or near poverty."

"In 2016 . . . the income cutoff for the top 1% was $480,804. The top 50% earned 88.4% of total adjusted gross income. And the bottom 50% earned 11.6%."

"Earlier studies examining PSID data, from 1967 through 1976 and from 1977 through 1986, found that around 50% of earners fell out of the top quintile, while around 45% moved up from the lowest quintile."
Related posts:

The preference for partners of the same education has significantly increased for white individuals

Is The Rich-Poor Education Gap Getting Bigger?

Mean Family Income By Quintiles

The American middle class is shrinking because more people are becoming upper middle class and rich

Some Possibly Surprising Facts About Poverty

Does the top 1 percent earn 85 percent of income? Is it 52 percent? Something Else?

Study Finds Wealth Gap in Graduation Rates

Friday, June 14, 2019

Are Farmers Markets An Example Of Perfect Competition?

Perfect competition is one of the four market structures (the others being monopoly, oligopoly and monopolistic competition). It has free entry, meaning nothing stops new firms from coming in, there are many competitors and all selling an identical product. This report from Jodi Helmer of NPR seems to show this.

See Why Are So Many Farmers Markets Failing? Because The Market Is Saturated. Excerpt:
"When the Nipomo Certified Farmers' Market started in 2005, shoppers were eager to purchase fresh fruits and vegetables, as well as pastured meats and eggs, directly from farmers in central California.
But the market was small — an average of 16 vendors set up tables every Sunday — making it harder for farmers to sell enough produce to make attending worthwhile.

"The market in Santa Maria is 7 miles in one direction [from Nipomo], and the market in Arroyo Grande is 7 miles in the other direction. Both are bigger markets, so shoppers often went to those markets instead," explains market manager and farmer Glenn Johnson.

The decision to host the market on Sundays also proved detrimental. Many of the farmers participated in six or more additional markets each week and wanted Sundays to rest, says Johnson.
In 2018, with attendance down and just five vendors signed on to sell produce, organizers of the Nipomo Certified Farmers' Market decided to shut down the event at the end of last season.

Nationwide, the number of farmers markets increased from 2,000 in 1994 to more than 8,600 in 2019, which led to a major problem: There are too few farmers to populate the market stalls and too few customers filling their canvas bags with fresh produce at each market. Reports of farmers markets closing have affected communities from Norco, Calif., to Reno, Nev., to Allouez, Wis.

Markets in big cities are hurting too. The Copley Square Farmers Market in Boston reported a 50 percent drop in attendance in 2017. In Oregon, where 62 new markets opened but 32 closed, the researchers of one multiyear study concluded, "The increasing popularity of the markets is in direct contrast with their surprisingly high failure rate."

Diane Eggert, executive director of the Farmers Market Federation of NY, received numerous reports of closings; she believes the problem is one of pure mathematics.

"There are way too many markets," she says. "The markets have started cannibalizing both customers and farmers from other markets to keep going."

Eggert also points to myriad other options that consumers have for accessing fresh foods, including community-supported agriculture and home delivery options from companies such as Amazon, Instacart or Blue Apron that might be more convenient than shopping at a Saturday morning market."

Thursday, June 13, 2019

Joseph Schumpeter, Capitalism and Intellectuals

See Socialists, Knowledge of History and Agency. These are letters to the editor of The WSJ in response to an article about socialism by Joseph Epstein. The one below reminded me of a 1992 article by Robert Samuelson in Newsweek.
"Joseph Epstein’s “Socialists Don’t Know History” (op-ed, May 30) on the abysmal historical knowledge of young people brings to mind the prophesy of the keenest of economists, Joseph Schumpeter, in 1942 when he said that capitalism would destroy itself by breeding a “new class: bureaucrats, intellectuals, professors, lawyers, journalists, all of them beneficiaries and, in fact, parasitical on them and yet, all of them opposed to the ethos of wealth production, of saving and of allocating resources to economic productivity.” The 77 years since then has proven Schumpeter a major prophet.

Larry W. White
Dallas"
See also Schumpeter: The Prophet by Robert Samuelson. Excerpts:
"He is best known for his evocative phrase "creative destruction." Schumpeter saw capitalism as a system that produces material progress-rising living standards, more creature comforts-through the turmoil of new technologies and business methods. The "entrepreneur," a man of great vision and energy (in his day, there were few women in business), was the driving force of change. Sam Walton and Wal-Mart fit his theory perfectly."

"It is precisely because the "gale" (his term) of creative destruction seems so ferocious that Schumpeter has enjoyed a revival. But he had a second stunning insight that also is relevant. He argued that capitalism's vast economic success generates popular dissatisfaction with capitalism. As prosperity increases, progress is taken for granted. Capitalism's remaining shortcomings-including the disruption caused by creative destruction-become increasingly intolerable. Finally,, prosperity expands the class of intellectuals who are contemptuous of capitalism."

""[C]apitalism ... creates, educates and subsidizes a vested interest in social unrest," Schumpeter wrote. Popular discontent and intellectual hostility would, he thought, doom capitalism and lead to socialism."

"capitalist economic success, because it is incomplete and interrupted, breeds its own backlash. The sour public reaction to the present slow economic recovery only highlights a longstanding trend. The growth of Big Government-here, in Europe and in most advanced market societies-has aimed to placate popular discontent without undermining capitalism's ability to raise living standards."

"Its [his book Capitalism, Socialism and Democracy] genius is to explain why capitalism succeeds as Adam Smith imagined, even though modern economies lack Smith's perfect competition with hordes of tiny companies. In today's industries, big firms often dominate and enjoy monopoly profits. But most monopolies are temporary, Schumpeter argued. Their high profits, far from stifling competition, inspire more innovation from entrepreneurs and big companies alike. Cable TV assaults the networks; fax machines replace mail; McDonald's invents fast food.

But the drawn-out nature of this process makes capitalism hard to defend politically, Schumpeter said. The argument for it "must rest on long-run considerations." The "unemployed [worker] of today [has] to forget his personal fate and the politician of today his personal ambition." This was not likely."

Wednesday, June 12, 2019

Is there really a shortage of construction workers?

See Behind Deadline: Home Projects In Colorado Suffer From Worker Shortage by KAREN SCHWARTZ of the Associated Press.

A shortage means that the price is below the intersection of supply and demand and that the quantity demanded is greater than than the quantity supplied. It does not mean we simply have less of something than we used to. If price were too low, we would expect to see it rise until quantity demanded equals quantity supplied again.

This article talks about a shortage of construction workers. If there really is a shortage, we would see wages starting to rise. But that is not discussed.

Lowe’s offering employees tuition and other incentives might be the equivalent of rising wages since if a worker does not have to pay to learn to be a carpenter, that field becomes more lucrative. But again, the article does not discuss that.

Some of this is driven by retirements, which means a decrease in supply which leads to higher prices (or, in this case, wages). Excerpts from the article:
"Current estimates indicate there are about 300,000 unfilled jobs in the construction industry, and the industry is expected to need an additional 747,000 workers by 2026, according to the U.S. Bureau of Labor Statistics.

An August survey of nearly 375 members of the National Kitchen and Bath Association found that almost two-thirds of the respondents said they had difficulties hiring skilled workers in the previous year, and nearly 70% felt the problem had gotten worse since 2016.

“Labor shortages have impacted start dates and completion dates on construction and renovation projects, with NKBA members citing delays on 30% of jobs,” said Bill Darcy, chief executive officer of the trade association.

A look at 15 different trades found shortages in them all"

"The seeds of the current labor shortage were planted during the Great Recession, when a lack of construction jobs prompted many workers to leave the industry.

“Not enough of them have returned to help us close the gap,” Darcy said.

Compounding the problem is the graying of the remaining workforce, with the median age for a construction worker at 42.5 years, according to January figures from the Labor Bureau. It’s estimated that for every five workers retiring from the industry, only one is entering it"

"Players in the industry are ramping up efforts to address the impending crisis, launching incentives to try to recruit new workers, especially young people, to the trades."

"Lowe’s last year started offering employees tuition and other incentives to train for jobs such as carpentry, plumbing, and appliance repair."

Tuesday, June 11, 2019

U.S. Job Openings Outnumber Unemployed by Widest Gap Ever

By Sarah Chaney of The WSJ. I've done alot of posts on the relationship between inflation and unemployment. So this article shows the job market is doing well and inflation is low. The inflation rate in 2018 was 1.9%. Over the last 12 months it is 2.0%. See Consumer Price Index Data from 1913 to 2019.

Excerpts from the article:
"The number of job openings exceeded the number of unemployed Americans by the largest margin on record in April, signaling difficulty for employers to find workers in a historically tight market.

There were a seasonally adjusted 7.449 million unfilled jobs at the end of the month, barely budging from March, the Labor Department said Monday. Meanwhile, the number of Americans seeking work in April dropped to 5.824 million from 6.211 million a month earlier."

"The number of openings . . .  outnumbered the unemployed by 1.625 million in April, the largest gap on records back to 2000."

"At the same time, though, growth in job openings is stalling, pointing to a slowdown in labor-market momentum"

"There were 4.8% more job openings in April than a year earlier, pulling back from the double-digit gains in openings posted through January."

"Some of the slowdown in job growth could reflect a shrinking supply of available workers. The share of adults ages 25 to 54 in the labor force—which filters out many people who are still in school or who have retired—fell to 82.1% in May. That shows that even the 3.6% unemployment rate in April and May, a 50-year low, doesn’t appear to be attracting additional Americans off the sidelines and into the job market."

"The rate at which workers quit their jobs, a proxy for worker’s confidence in the job market, is already the highest since the recession."

"The so-called quits rate held steady at 2.3% in April for the 11th straight month"

Monday, June 10, 2019

Social media, insurance and asymmetric information

Can a Facebook Post Make Your Insurance Cost More? With insurers likely to add social media to the data they review before issuing policies, it might be wise to post pictures from the gym—but not happy hour by Ellen Byron and Leslie Scism of The WSJ.

This reminds me of what economists call "asymmetric information." This is a situation in which the seller knows more about a product than the buyer (sometimes the buyer knows more about something important like how healthy or risky they are as it relates to insurance). These markets do not operate optimally. If insurance companies don't know how healthy or risky you are, they can't be sure of how much your premiums should be. But with fitness tracking, they learn more about you. My students might recall I discussed this after we played the supply and demand game in class. A good example is the used car market. Sellers usually know alot more about the product than the buyers.

I play a game in class that touches on insurance. Click here to see the Lessons From the Supply and Demand Game.

Excerpts from the article, which explains how insurance companies are trying to get more information about you:
"Did you document your hair-raising rock-climbing trip on Instagram? Post happy-hour photos on Facebook ? Or chime in on Twitter about riding a motorcycle with no helmet? One day, such sharing could push up your life insurance premiums.

In January, New York became the first state to provide guidance for how life insurers may use algorithms to comb through social media posts—as well as data such as credit scores and home-ownership records—to size up an applicant’s risk. The guidance comes amid expectations that within years, social media may be among the data reviewed before issuing life insurance as well as policies for cars and property.

New York set a high bar, requiring insurers to prove that any social-media data used in underwriting is actuarially justified, logical for use and doesn’t unfairly discriminate against certain customers.

“We’re going through a period now where most life insurers are exploring using all types of data, not just data they get directly from the customer proactively, but other external sources of data—social media being a big one,” said Ari Libarikian, a senior partner at McKinsey & Co. in New York.

He anticipates that some day, underwriters will assess potential customers with automated reports based in part on their social media use. “It’s here to some degree and it’s coming in the next couple of years,” Mr. Libarikian said."

"The time and effort to monitor an applicant’s online presence can be costly, so few if any insurers are doing it yet in detail or at scale, says Jacques van Niekerk, chief executive of Wunderman Data, a unit of WPP Group ."

"Some insurers are using social media in handling claims. Insurers can check explanations of auto claims against Facebook testimonials about an accident. And they could challenge disability claims if posted photos from a ski trip, for example, contradict an impairment or illness."  
 Related posts:
Lose the Fat to Lower Your Insurance Rates
How Did Astronauts Of The 60s "Purchase" Life Insurance?
Should Overweight People Pay More For Health Insurance?
Should We Pay People To Adopt A Healthy Lifestyle? 

'Spy car' worries raised by new Allstate patent
Should your company or insurer reward you for meeting exercise goals?
How insurance companies are using technology to better assess how risky customers might be
The EU Says Insurers Can No Longer Discriminate On The Basis Of Gender
Some History of Insurance
Companies and governments are paying people to get healthy, and it works

Sunday, June 09, 2019

Are business cylcles imbedded in longer cycles called financial cycles?

See Investors, Buy the Dips: The Economic Cycle Isn’t What It Used to Be by Jon Sindreu of The WSJ. Excerpts:
"Business cycles have historically happened at intervals of between five and eight years, so the current expansion is indeed an abnormally long one."

"these business cycles are themselves contained within longer ones, which economists call “financial cycles.”"

"Economists have long struggled to separate the two types of cycles. Back in 2003, University of Chicago professor Robert Lucas infamously said in a speech that the “central problem of depression-prevention” had been “solved for many decades.” The worst crisis since the Great Depression struck a few years after those comments.

Yet Mr. Lucas wasn’t totally off the mark. The nature of the business cycle has indeed changed since the 1980s.

Back then, trade and finance were liberalized around the world while policy makers sought to quash inflation by sidelining labor unions, which had a strong hand in pushing wages up in response to other costs—like oil prices—going up. Central banks were given more independent power to fight downturns as the public sector kept getting bigger.

In the present era, central banks go to extremes to stimulate the economy and reassure markets at the first sign of trouble. They can do so without concern because weak unions and globalized supply chains keep inflation subdued. If growth does falter, governments automatically cushion the blow through the sheer size of the public-sector wage bill as well as unemployment and social benefits."

"However, longer expansions also encourage people to take on more debt and they give financial firms time to get around regulations. As another economist, Hyman Minsky, put it: Economic stability breeds instability. The result is that business cycles have become mellower but financial cycles more violent since 1985, according to data by the Bank for International Settlements."
Related posts:

What ends expansions? (or what causes recessions according to Alan Blinder and Austan Goolsbee).

The current expansion is close to a record, so what might be the potential risks of it ending? 

Saturday, June 08, 2019

Is the U.S. student loan system broken?

See The Long Road to the Student Debt Crisis: A series of well-intentioned government decisions since the 1960s has left us with today’s out-of-control higher education market by Josh Mitchell of The WSJ.

The program was set up in the 1960s and 1970s to get more people into college, with the aim of increasing productivity and incomes. At first, the federal government guaranteed the loans before eventually lending the money.

Excerpts:
"four in 10 recent college graduates are in jobs that don’t require a degree"

"At more than a third of them [colleges], less than half of the students who enroll earn a credential within eight years, according to the think tank Third Way."

"College tuition has soared 1,375% since 1978, more than four times the rate of overall inflation"

"The U.S. now spends more on higher education than any other developed country (except Luxembourg)—about $30,000 a student"

"college presidents are being handsomely rewarded for the success of their enterprises: Seventy of them, including a dozen at public colleges, earned over $1 million in 2016-17"

"Sallie Mae borrowed from the Treasury at low rates and used the money to buy student loans from banks, thus freeing up banks to make even more loans to students."

"the system gave colleges an incentive to maximize the tuition they extracted from students and the federal taxpayer by boosting fees and enrollment, which meant relaxing admissions standards.

The federal government didn’t want to put in place any academic criteria to prevent someone from getting aid."

"They didn’t consider the possibility that a large number of students would end up in debt without earning a degree or the higher wages that come with it."

"Colleges could raise money quickly by admitting academically suspect students while suffering little or no consequences if their students dropped out and defaulted on loans.

The market was suddenly flooded with cheap money, which led to a surge in the ranks of college-going students. Colleges responded to higher demand by raising prices, leading Congress to increase loan limits and grants."

"Only last month did the federal government release, for the first time, data showing the average debt burden of students leaving particular programs within a school."

"The Obama administration also heavily promoted income-based repayment programs, which set borrowers’ monthly payments at 10% of their discretionary income and then forgave a portion of their debt after 20 to 25 years of payments."

"The number of full-time workers with bachelor’s degrees has risen from 7.6 million in 1980 to 19.5 million today. The share of Americans age 25 and older with a bachelor’s degree reached 34.2% in 2017, double what it was in 1980"

"About 40% of all student debt goes to finance graduate degrees, including law and medical degrees, which typically lead to high salaries."

"In particular, the financial benefits one can expect from a college degree appear to be lower among people born in the 1980s, and they remain unequal across racial and ethnic groups"

"Companies including Google, Apple and IBM have dropped the requirement that job applicants have college degrees"

"In February, I asked [economist Alice Rivlin] what she thought about the system she helped to create 50 years ago. Her response: “We unleashed a monster.”"
Related posts:

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

Friday, June 07, 2019

What Chocolate Shortage? Cocoa Prices Steady as Record Output Projected

Supply concerns made cocoa the best-performing commodity of 2018

By Kirk Maltais of The WSJ. This is what we predict in economics, that if sellers anticipate higher prices in the future, they will begin taking steps to increase supply when the higher prices are supposed to arrive. If this is a competitive market, supply will keep increasing until price falls enough so that we move back to an average rate of profit. The article indicates that this happened.

Excerpts:
"The world appears to have averted a chocolate shortage, upending the rally that made cocoa the best-performing commodity in 2018.

Last year, prices of cocoa futures soared by 28% on repeated warnings by analysts that chocolate would be in limited supply in 2020 because of a scarcity of cocoa beans.

But cocoa prices are relatively unchanged since the start of 2019. As of Tuesday, they were trading on the Intercontinental Exchange in New York at $2,360 a metric ton, down 2.3% this year.

Prices have steadied as weather in major cocoa-growing regions has been conducive to production. Supply is outpacing demand for a third year in a row, according to the latest projections from the International Cocoa Organization."

"The predictions of a cocoa shortage weren’t based on sound science, said Jeff Rasinski, director of commodities and corporate procurement at Blommer Chocolate Co."

"Higher production partly came about as corporations made changes to their cocoa supply chains.

Reacting to the reports of a looming shortage, Mondelez International Inc. began a program in 2012 that helped farmers in six cocoa-growing nations learn to grow more efficiently."

Thursday, June 06, 2019

Companies and governments are paying people to get healthy, and it works

By Marc Mitchell. He is an Assistant Professor at Western University. Excerpt: 
"In the past, the prevailing opinion was that health rewards, like paying people to lose weight, simply do not work. They may stimulate health behaviours in the short term but once removed, people will go back to doing what they were doing before, or worse.

By introducing extrinsic rewards you can actually damage (or shift focus from) the important intrinsic motivators that drive long-term change — for example, walking simply because you like to.
This line of thinking was grounded primarily in research that paid people to do enjoyable tasks, like completing puzzles. If you pay someone to do something they like doing, the research went, they are less likely to continue to do it once the payments stop.

Our new British Journal of Sports Medicine study, led by scientists from Western University and the New York University School of Medicine, challenges the assumption that these findings can be extended to the use of incentives for health behaviour change.

In fact, it appears that incentives tied to the achievement of realistic physical activity goals — like 500 additional steps per day — can actually stimulate physically active lifestyles that persist for several months after rewards are withdrawn.

From corporate benefits to Medicaid

Despite some mixed evidence, big companies have embraced this so-called “behaviour change technique,” with 75 per cent of larger U.S. firms offering health incentives to their employees. Governments around the world have been piloting incentive-based health programs as well.

In the U.S., for example, at least 19 states have implemented Medicaid health behaviour beneficiary incentive programs with some evidence of success.

The Carrot Rewards app in Canada (for which I am an advisor) is a great example too, as the app rewards Canadians with very small incentives ($0.03 U.S. per day) to hit individualized daily step count targets.

As promising as these health incentives may be, though, too often they fail to stimulate and sustain health behaviours, and they can be expensive to deliver on a mass scale. Most of the time weak reward designs are to blame — for example, incentives are delayed or goals are too hard.

Small but immediate rewards work better

Our study explains how leveraging the latest in mobile technology and behavioural science can boost the effectiveness and efficiency of these programs.

Primarily, real-time physical activity data collected by built-in smartphone accelerometers (motion sensors) can now be used to set and adjust goals, track progress, link to friends and family, and so on, on a population scale.

The new ability to provide immediate feedback to thousands of people in an instant, in the form of rewards, is a theoretically sound innovation too.

According to behavioural economics, the Nobel-prize winning offshoot of traditional economics, people respond most to the immediate costs and benefits of their actions. In the case of physical activity, the “costs” are experienced in the present (for example uncomfortable feelings and time) whereas the “benefits” (for example good health and attractive appearance) are delayed, resulting in notorious resolutions to “exercise more tomorrow.”

According to behavioural economics, increasing the immediately rewarding aspects of physical activity (with tiny rewards) may increase peoples’ likelihood to choose activity today."
Related posts:

Lose the Fat to Lower Your Insurance Rates
How Did Astronauts Of The 60s "Purchase" Life Insurance?
Should Overweight People Pay More For Health Insurance?
Should We Pay People To Adopt A Healthy Lifestyle? 

'Spy car' worries raised by new Allstate patent
Should your company or insurer reward you for meeting exercise goals?
How insurance companies are using technology to better assess how risky customers might be
The EU Says Insurers Can No Longer Discriminate On The Basis Of Gender
Some History of Insurance

Wednesday, June 05, 2019

The current expansion is close to a record, so what might be the potential risks of it ending?

See After Record-Long Expansion, Here’s What Could Knock the Economy Off Course: Experts see the U.S. continuing to grow, but looming risks include trade wars, interest-rate mistakes and the ballooning budget deficit by Jon Hilsenrath of The WSJ.

This article is similar to a couple of others that I have posted about before. See What ends expansions? (or what causes recessions according to Alan Blinder and Austan Goolsbee).

Excerpts from Hilsenrath's article:
"Economies aren’t like cars. They don’t just wear down and peter out after running for several years. Something needs to happen to knock them off course.

That’s potentially good news as the U.S. expansion reaches its 10-year mark this month. By July, it will become the nation’s longest on record—eclipsing the decadelong expansion of the 1990s—and there’s no economic rule that says it must end.

While many economists say this one is in position to keep going, risks are looming, most notably threats of tariff-driven trade wars with China, Mexico and others that damage business, household and investor confidence. A central bank mistake with interest rates is also a threat, and—because of the country’s ballooning budget deficit—fiscal policy is in a weaker position to help through spending or big tax cuts if the economy becomes stressed. Moreover, structural issues that develop as expansions age make them somewhat vulnerable to mishap."

"Though the U.S. expansion has been a long one, it has lacked vigor. The growth rate has been the most anemic on record, and the jobless rate took years to recede, with lower-skill workers seeing their main gains in just the past couple of years.
Wage growth also has been slow, though when adjusted for very low inflation real wages have grown more robustly than in other expansions. For many households, meanwhile, growing student debt loads have been a burden, and many of the gains from a strong market and recovering home prices went to the highest-income households.
Since World War II, the average U.S. expansion has lasted just 58 months, less than half as long as the current one, but periods of extended growth have been common in many other nations.
Australia is enjoying its 28th straight year of growth. Canada, the U.K., Spain and Sweden had expansions that reached 15 years and beyond between the early 1990s and 2008. Without the Sept. 11, 2001, terrorist attacks the U.S. might have, too.

France, Germany, the Netherlands, Norway, South Korea, Ireland, China and others have likewise experienced sustained periods of economic growth that lasted 15 years or more at different points since World War II, according to the Economic Cycle Research Institute and a Wall Street Journal analysis of global growth data."

"As long as the labor force is growing and workers are becoming more productive, economies, in theory, should keep growing."

"Three factors tend to trip them up: Shocks, excesses and central banks.

In 1990, an oil price shock related to Iraq’s invasion of Kuwait helped to sideswipe U.S. economic growth. It drove up gasoline prices and squeezed consumers and business profits. In 2001, the reversal of technology investment excesses derailed a strong U.S. economy. A stock price collapse destroyed investor wealth and crimped household spending plans, while businesses reined in investment. The Sept. 11 terrorist attacks were an added shock to an economy already on edge. In 2007, a housing bust and budding banking system crisis combined excess and shock to send the U.S. deep into recession.

Each of those cases was preceded by Fed interest-rate increases, which were meant to stop excesses from building. Higher rates hurt interest-sensitive sectors like housing and car buying and make it more costly for businesses to invest. In the most glaring example of the central bank’s key role in the U.S. business cycle, the Fed in the early 1980s pushed short-term interest rates sharply higher to tame double-digit inflation, driving the U.S. into a double-dip recession. In 1997, MIT economist Rudi Dornbusch wrote, “None of the U.S. expansions of the past 40 years died in bed of old age; every one was murdered by the Federal Reserve.”"

"An expansion in its eighth year was no more likely to end than one in its fifth."

"the hangover from the 2007-09 recession may have restrained the kinds of excesses in the current expansion that led to downturns in the past.

In the past five years, for example, U.S. financial sector debt has increased 9%, compared with a 64% increase in the five years before the last recession. Household debt is up 14%, compared with a 65% increase in the five years before the recession."

"Former central bank officials in Australia and Canada say financial regulatory scrutiny was an important factor in the long upturns their economies experienced"

"Big recessions also sometimes prompt policy changes that help sustain growth."

"Australia’s pre-expansion period in the 1980s and early 1990s was marked by economic malaise, including high inflation and budget deficits that officials set out to reverse with a central bank inflation target and fiscal belt tightening. It also helped that the country became a major exporter of commodities to fast-growing China."

"The current U.S. expansion has some trends going in its favor. Unlike the 1970s and early 1980s, inflation is low, taking pressure off the Fed to raise interest rates. The U.S. has become a large exporter of oil, making it far less susceptible to another oil price shock. Productivity growth is accelerating after a long period of dormancy, and a strong economy is drawing workers into the labor force."

"older expansions can become vulnerable. One reason is that excesses tend to build late in the cycle—when unemployment is low, confidence is high and risk aversion among businesses, investors and individuals is forgotten."

"This is also the stage in an expansion when the central bank has shifted its stance, from nurturing growth with low interest rates to preventing excesses with higher rates, raising the chances of a policy mistake."

"A recent Wall Street Journal survey shows most economists don’t expect a recession until 2021 or later."

Tuesday, June 04, 2019

Is Walmart adding robots to replace workers or because it is hard to find workers?

See Walmart Is Rolling Out the Robots: Retailer to expand use of machines to scan shelves and scrub floors as it seeks to keep labor costs down by Sarah Nassauer and Chip Cutter of The WSJ.

In my macroeconomics class, we talk about the types of unemployment. Here is one of them:

Structural-unemployment caused by a mismatch between the skills of job seekers and the requirements of available jobs. One example of this is when you are replaced by a machine.

It is not clear if this is the case with Walmart. Here are excerpts from the article:
"Walmart Inc. WMT +0.21% is expanding its use of robots in stores to help monitor inventory, clean floors and unload trucks, part of the retail giant’s efforts to control labor costs as it spends more to raise wages and offer new services like online grocery delivery.

The country’s largest private employer said at least 300 stores this year will add machines that scan shelves for out-of-stock products. Autonomous floor scrubbers will be deployed in 1,500 stores to help speed up cleaning, after a test in hundreds of stores last year. And the number of conveyor belts that automatically scan and sort products as they come off trucks will more than double, to 1,200.

The company said the addition of a single machine can cut a few hours a day of work previously done by a human, or allow Walmart to allocate fewer people to complete a task, a large saving when spread around 4,600 U.S. stores. Executives said they are focused on giving workers more time to do other tasks, and on hiring in growing areas like e-commerce."

"The automatic conveyor belts cut the number of workers needed to unload trucks by half, from around eight to four workers, said executives at a company presentation last June."

"“It’s very hard for employers to get the workforce they need,” Mr. Duffy said. “None of the customers we’re working with are using our machines to reduce their labor costs; they’re using them to allow their teams, their janitorial teams, to perform higher-value tasks.”

Retailers and other companies that hire large numbers of low-skilled hourly workers are increasingly looking to automation as they face higher labor costs and aim to improve retention amid the lowest unemployment in decades."
Related posts:

Robot Journalists-A Case Of Structural Unemployment?

Structural Unemployment In The News-Computers Can Now Tell Jokes 

WHAT do you get when you cross a fragrance with an actor?

Answer: a smell Gibson.

Robot jockeys in camel races

Are Computer Programs Replacing Journalists?

Automation Can Actually Create More Jobs 

The Robots Are Coming And It Might Not Be A Case of Structural Unemployment 

Broncos to debut beer-pouring robot at upcoming game

Robots Are Ready to Shake (and Stir) Up Bars

Monday, June 03, 2019

Unemployment Isn’t What It Used to Be

The low rate doesn’t take account of low labor-force participation. Wages are a better indication of slack

By Neel Kashkari. He is president of the Federal Reserve Bank of Minneapolis. This gets at the relationship between inflation and unemployment. How low can unemployment go before inflation gets too high? Maybe we should look at some other statistic instead of the unemployment rate. Excerpts:
"In 2015 Federal Open Market Committee participants estimated that unemployment couldn’t go below 5.1% without triggering inflation. The rate is now 3.6%, which means 2.4 million more Americans have found work, yet inflation remains low."

"the number of Americans of prime working age—25 to 54—who consider themselves in the labor force is 2.3 million lower than it would be if participation was as high as in 2000."

"more than 70% of people who got jobs in April indicated the previous month that they weren’t looking for work."

"in recent years people who previously had considered themselves disabled have been entering jobs."

" the rate of compensation growth is the best way to determine how near the labor market is to maximum employment. The price of labor—wages and other compensation—should rise at a rate roughly equal to productivity growth plus inflation. With productivity growth climbing to 1.5%, maximum employment and stable inflation will likely occur when wages are rising at a sustained rate of about 3.5%. Today wage growth is only around 3%, meaning there is likely still slack in the labor market: The economy hasn’t yet reached its capacity."

Related posts:

The Phillips curve is alive and well (unless it's dead)


 
Fed officials disagree on how much inflation the current low unemployment rate might cause 

Fed Looks for Goldilocks Path as Jobless Rate Drops  

Sunday, June 02, 2019

How elasticities affect Uber passengers and drivers

See Passengers May Pay a Lot More. Drivers Won’t Accept Much Less. by Austan Goolsbee. Excerpts:
"Yes, surge pricing — the practice of raising prices when demand is high — makes many people feel irate. But what people actually do is what is important. The most comprehensive study of rider behavior in the marketplace found that riders didn’t change their behavior much when prices surged. (Like most major quantitative studies about Uber, it relied on the company’s data and included the participation of an Uber employee.)

Passengers were what economists call “inelastic,” meaning demand for rides fell by less than prices rose. For every 10 percent increase in price, demand fell by only about 5 percent.

Drivers, on the other hand, are quite sensitive to prices — that is, their wages — largely because there are so many people who are ready to start driving at any time. If prices change, people enter or exit the market, pushing the average wage to what is known as the “market rate.”

That’s what always happens when there are no barriers to entry in a market. In 1848, for example, at the start of the California gold rush, the first miners made about $20 per day, on average. The historical data shows that was at least 10 times more than the wage for workers doing what I would classify as similar activities — stone cutting and brick laying — in New York at that time.

Over the next eight years, so many people moved to California searching for gold that miners’ average earnings fell to $3 a day, minus expenses — barely more than they could have made if they had been cutting stones in New York.

What killed the gold rush wasn’t the lack of gold — production tripled over that time. It was the entry of so many competing miners that drove average earnings down so low that most of them barely made enough to stay in business.

And so it is with ride-share drivers today. Another study, by a New York University professor and two Uber employees, found the same dynamic: Higher prices increased driver incomes, but only for a few weeks.

As new drivers entered the market, attracted by higher wages, the average driver had to spend more time waiting for fares. Average pay returned to the level economists refer to as “the outside option” — the pay level of whatever else the drivers could be doing if they weren’t driving for Uber or Lyft.

If for many ride-share drivers the next best option is delivering for an outfit like Domino’s Pizza, or working at a fast-food restaurant, then average pay for the drivers will likely to end up around minimum wage, too."

"average raw earnings for UberX drivers of about $15 per hour, before projected deductions of about $8 per hour."

Saturday, June 01, 2019

Supply, Demand and the High Price of Vanilla

See Vanilla fever by Wendell Steavenson in "The Economist." Excerpts:
"in 2014 the price of vanilla began to rise. Over the next three years it went from less than $40 per kilogram to more than $600 per kilogram."

"It can be difficult to grow vanilla in plantations, where it becomes susceptible to disease. But the humid heights of Madagascar offer the right climate for the plant to thrive. And the large pool of poor smallholders on the island provides abundant workers to grow this labour-intensive plant."

"Few Malagasys have much confidence in the state. A coup in 2009 scared away foreign investors and tourists. The soaring price of vanilla has been accompanied by an opportunistic crime wave: raiders rip out whole vines to transplant them elsewhere and armed robbers hold up warehouses. Estimates vary but upwards of 15% of the crop is stolen each year."

"Like vanilla farmers all over Madagascar, Raminisoa’s father and brothers now patrol their fields at night. They band together with neighbours and hired guards, and brandish machetes."

"Though Madagascar now produces 80% of the world’s vanilla, the vine is native to Mexico. The Maya were the first to cultivate it in the jungles of the Yucatan peninsular. They flavoured their chocolate drink with the spice. When the Spanish conquistadores arrived early in the 16th century, they took both cacao and vanilla back to Europe. By the end of the 18th century, Mexico was exporting a million vanilla beans a year to Europe."

"It took a young slave boy called Edmond Albius, working on a plantation in the French colony of Réunion, to discover a method for hand-pollinating vanilla flowers in the 1840s. His technique quickly spread to nearby Madagascar, where French administrators encouraged its cultivation."

"Häagen-Dazs shook things up. In the 1990s the company started selling its ice cream as a premium, indulgent treat. Their advertising campaign was sexy and risqué – beautiful people tempering their lust with a ball of the frozen stuff. It was a triumph of branding. The name Häagen-Dazs was confected to suggest European sophistication (the firm is American). The picture of a vanilla bloom on the carton drew attention to the vanilla extract that gave the ice cream its rich flavour. The Häagen-Dazs moment was one cause of the vanilla rush."

"Another one was broader and more recent. Over the past 15 years, food companies have faced increasing pressure from consumers to use natural, ethically sourced ingredients. Flavour companies began to trace beans back to their original villages and farms in order to earn certifications of fair trade and sustainability that commanded top prices. In 2015 Nestlé announced that it would eliminate artificial flavouring from its chocolates sold in America, citing consumer interest in more natural ingredients. Other multi­nationals followed. It didn’t hurt that the price of natural vanilla was low. Among artisanal and mass-market producers alike, flecks of vanilla became a proxy for quality."

"For many years Madagascar's government set the price of vanilla at around $80 a kilogram. Harvests were variable and sometimes ravaged by cyclones. A portion of the crop was stockpiled as insurance against years when yields were low. This forestalled shortages and prevented price fluctuations. Between 80,000 and 100,000 smallholders sold their green pods to middlemen known as “collectors”. These, in turn, sold them to preparers, who owned curing warehouses, or exporters (often Chinese-Malagasy families who had been in the business for generations). The beans were then bought by international traders or large foreign flavour companies such as Symrise and Firmenich in Europe, and Virginia Dare in America. These rendered the vanilla into high-quality extract to supply the big multinationals: Nestlé, Unilever, Mars."

"It was a stable if swampy system, but not all buyers felt they had fair access to Madagascar’s vanilla. In the early 1990s, as part of a wider privatisation policy, the World Bank insisted that vanilla prices be allowed to float. Yet no market institutions or regulations were put in place. In the ensuing free-for-all, the price of vanilla plummeted to below $40 a kilogram and farmers neglected the crop.
The path from pod to pot of ice cream is a long one and could not be hurried in the face of rising demand. Many vanilla vines grow on forested slopes and often lie several days walk from paved road. A newly planted vine takes three years to bear pods. Even once it does, says Henry Todd of Virginia Dare, it can take another two years for the fruit to reach a tub of ice cream."

"“The supply chain is long and complex and a little bit opaque because of the lack of infrastructure,” he says. For many years, collectors acted as the hinge in the market, linking farmers with exporters, the bush with the road. They brokered deals and financed loans.

After the market was liberalised – but before the current boom – exporters generally set the price of vanilla. They weighed the expected global demand against the size and quality of a harvest. But as demand rose, many collectors – the middle men in the system – tried to pay low prices to growers while selling to exporters for much more. By 2017, some exporters were paying exorbitant sums for poor quality beans. As the price mounted, speculation and stock-piling became rife. Several hundred collectors multiplied into thousands of middlemen frantically buying and selling, often to each other. Farmers played the market too, half curing their vanilla and then preserving it in vacuum packs until the price rose again. This created more fluctuations in the market and damaged the all-important vanillin content of the beans."

"I spent almost two weeks in Sava observing the vanilla market. Every time I thought I had worked out the relationship between supply and demand, quality and processing, the hierarchy of middlemen and the relative price of green and black vanilla, I found that a new factor – currency fluctuations, corruption, cyclones – confounded me anew.

"But why did the price rise so high? Though demand had risen, it hadn’t grown tenfold in three years. And although the Enawo cyclone blew through Sava in March 2017, it didn't destroy 90% of the vanilla vines.
In 2018, the price fell back a little to around $400, from a peak of over $600. Foreign buyers like Todd believe that the industry is still in “crisis” and publically rue the deterioration of quality caused by speculation. But privately, Todd and almost everyone else I speak to agree that money from the illegal rosewood trade fuelled the vanilla boom.

Rosewood is a beautiful hardwood that grows abundantly in the forests of Madagascar’s national parks in the Sava region. It is prized for its deep-red hue, particularly by furniture-makers in China. Logging from national parks is illegal but has always been carried out on a small scale. But after storms toppled many trees in 2007, Madagascar’s president granted export licences to several traders to buy wood felled by “acts of god”. Some interpreted this as permission to start cutting down trees again. The brokers of illegal rosewood sales often operated in vanilla regions and had connections to vanilla collectors."

"In 2017 the quality of beans plummeted: so much green vanilla was being stolen from the vine that many farmers were picking their pods early and unripe. Even so, prices were higher than they had ever been. Todd and other buyers realised, with increased urgency, that the only way forward was to strengthen direct relationships with farmers and cut out the middlemen who were manipulating the market."

"I visited the Virginia Dare warehouse, where members of the Malagasy army were guarding $5m-worth of vanilla. Workers – mostly women – are frisked by hand every time they leave. An alliance of local vanilla networks, exporters and the military have tamped down the violence. But the benefits of the boom have been unevenly distributed. A small tax is supposed to be levied on each vanilla transaction, but most sellers sidestep this. Export taxes are imposed according to volume rather than value. The Malagasy government has made little effort to cash in."

"High prices have driven down demand [he should have said quantity demanded] by 30% from its peak, as food companies have started to incorporate artificial vanilla again. Some artisanal ice-cream makers no longer offer the most basic flavour. Gilles Marchal, a Parisian pâtissière, says that many of his colleagues have stopped using vanilla altogether. “When the price got to €500 ($560) a kilo they just said, ‘that’s enough’.”"
Related posts:

Vanilla is so valuable now that it needs to be guarded

Vanilla Is In The News Again

Friday, May 31, 2019

How Technology Has Changed The Distribution Of Income Among Musicians

See Music Superstars Are the New One Percenters: Huge stars like Beyoncé and Taylor Swift are dominating the concert-tour business like never before, as music’s top 1% takes home an increasingly large share of the pie by Neil Shah of The WSJ. Excerpts:
"A small number of superstars like Beyoncé and Taylor Swift is gobbling up an increasingly outsize share of concert-tour revenues, as music’s biggest acts dominate the business like never before.

Sixty percent of all concert-ticket revenue world-wide went to the top 1% of performers ranked by revenue in 2017, according to an analysis by Alan Krueger, a Princeton University economist. That’s more than double the 26% that the top acts took home in 1982.

Just 5% of artists took home nearly the entire pie: 85% of all live-music revenue, up from 62% about three decades earlier, according to Mr. Krueger’s research. “The middle has dropped out of music, as more consumers gravitate to a smaller number of superstars,” he writes in a new book, “Rockonomics,” set to come out in June. (Mr. Krueger died in March.)"

"Performers’ royalties—for acts big and small—are generally much smaller on streaming than on records, CDs or download sales, so artists have to turn to concert revenue for more of their income. And it’s only the superstars who have the ability to charge significantly more for tickets than their predecessors did a generation ago. That leaves non-superstar performers competing for a shrinking share of the concert pie.

The average ticket price in the U.S. jumped from $12 in 1981 to $69 in 2017, far outstripping inflation and driven by superstars, Mr. Krueger’s research indicates. Three tours alone—Ed Sheeran, Taylor Swift, and Beyoncé with Jay-Z—hauled in around $1 billion in concert-ticket revenue in 2018, up from the $600 million that 2008’s three highest-grossing tours brought in, according to Billboard Boxscore. Beyoncé and Jay-Z charged $117 a ticket on average, according to Pollstar, the concert publication. Taylor Swift? $119. (Ed Sheeran, by contrast, charged a relatively more modest $89.) 

Meanwhile, at the bottom of the industry, the lowest 2,500 acts ranked by revenue grossed an average of about $2,500 in 2017 from concert tickets, out of the 10,808 touring acts that year that Mr. Krueger studied. There were 109 acts in the top 1%."

"Performers today generally generate about three-fourths of their income from concert tours, compared with around 30% in the 1980s and 1990s. While many artists have tried to increase ticket prices to compensate for smaller recorded-music revenues, the biggest stars have the most leverage.

Concerts generated a record-setting $10.4 billion in revenue last year"

"While the share of concert tickets sold by superstars has stayed relatively constant, “the actual ticket prices themselves have risen quite dramatically compared to everyone else,”"

"streaming-music services and social-media marketing have helped small acts, making it easier for emerging artists to find fans. But for performers in the middle market, particularly in genres like rock—which isn’t as popular on streaming as hip-hop—the reduced earnings from recordings and increased need to tour can be tough."

"Music venues often take a cut of 20% or higher of the merchandise, he says. By the end of a tour, merchandise sales can determine whether it was financially successful or not."

"The concert circuit is so jammed with artists competing for tour dollars that there’s even been a shortage of tour buses."

Thursday, May 30, 2019

How the U.S. justifies & enforces sanctions on countries like Iran and how other countries try to get around the sanctions

See The Dollar Underpins American Power. Rivals Are Building Workarounds. Iran sanctions spur Europe and India to devise systems to trade with Tehran without using the U.S. currency by Justin Scheck and Bradley Hope of The WSJ. Excerpts:

"In congressional testimony in March, Treasury Department undersecretary Sigal Mandelker said that “those who engage in activities that run afoul of U.S. sanctions risk severe consequences, including losing access to the U.S. financial system and the ability to do business with the United States.”"

The dollar’s status dates back to the end of World War II, when the U.S. economy was the world’s most robust and dollars were plentiful. The currency’s liquidity, and the efficient U.S. banking system anchored by the Federal Reserve, mean trading in dollars is much less expensive and more convenient than using other currencies, says Craig Pirrong, a University of Houston professor who studies payment systems.

Here’s how it works: A Canadian lumber company sells boards to a French buyer. The buyer’s bank in France and the seller’s bank in Canada settle the payment, in dollars, via “correspondent banks” that have accounts at the Fed. The money is transferred seamlessly between the banks’ Fed accounts because their status as correspondent banks means they are seen as safe counterparties.

The use of these accounts, the U.S. says, means every transaction technically touches U.S. soil, giving it legal jurisdiction. Because using most other currencies is relatively inconvenient and expensive, many countries and companies will do whatever the U.S. requires to maintain access to dollars."

"It is needed because U.S. sanctions bar dollar transactions with Iranian banks, even on deals for unsanctioned goods. Once operational, Instex’s [Europe's workaround] members could expand it to cover any trade with Iran."

"The system aims to bypass the dollar by using the same mechanism underlying the age-old hawala money-transfer system popular in the Middle East and Asia, under which people pay cash in one office and a recipient draws the equivalent funds at a distant locale without money actually moving.

This is how the Instex system would handle the sale of medicine by a German company to an Iranian buyer: The German exporter wouldn’t get paid by the buyer, but by another European company that is separately importing goods from Iran. Similarly, in Iran, the buyer of the medicine would pay the exporter of the other goods. No dollars at all would be involved, which means the U.S. would have no jurisdiction."

"In 2013, less than 7% of trade between China and Russia was in yuan and rubles, the bank ING Groep reported last year. In 2017, it was more than 18%."

"Even if such alternative systems catch on, the dollar is likely to dominate international trade for years to come. In 2016, the most recent year for which data are available, the dollar was involved in 88% of the daily trades in the $5 trillion-per-day foreign-currency market"

"The euro is handicapped by political uncertainty in Europe, and the yuan by Chinese restrictions on currency flows and unease about that nation’s economy. Further bolstering the dollar’s standing is its role as the world’s main reserve currency, held by central banks globally. That creates a strong incentive to keep the currency stable and liquid.

“The rest of the world can’t do without the U.S. dollar,” says Daniel Drezner, a Tufts University professor who used to advise the U.S. Treasury."

Wednesday, May 29, 2019

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

See It is all about the money when discussing ‘planet, people and profits’ by Prasad Padmanabhan. He is a professor of finance at St. Mary’s University.

Adam Smith's "invisible hand" suggests that if you follow your own self interest, you will promote the interests of society. I have had some posts on this issue of being selfish vs. being altruistic and if they can actually be separated before. So those links are at the end.

Adam Smith talked about the invisible hand and how profit seeking firms would provide what the public wanted. But what about trying to make the world a better place?

Here is an excerpt from The Wealth of Nations found at The Library of Economics and Liberty.
"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 domestic 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 public interest, nor knows how much he is promoting it. By preferring the support of domestic 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 public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."
Now excerpts from Professor Padmanabhan's article, which says if companies want to make a profit, they have to do good.
"Rightly or wrongly, firms now believe that they should routinely report their performance along financial and nonfinancial lines to outside stakeholders. It seems important for them to prominently display their social and environmental performance in addition to their financial performance to stakeholders. Arguably, each generation of stakeholders believes it is more conscious about social and environmental issues than the previous generation. Hence, firms may seem to be pandering to the needs of these generational stakeholders by showcasing their nonfinancial performance as well.

Blue Apron and Plated are two firms offering meals that target young adults and provide information on their websites to appeal to these stakeholders. Plated, for instance, indicates that its produce is grown organically and its poultry and fish originate from sustainable sources. “Look,” it seems to say. “We are good custodians of the planet and take care of our stakeholders!”

Additionally, in today’s social media world, good and bad news about anything or anyone is instantly disseminated globally. Firms and individuals must increasingly manage information flow very carefully. Together, increased stakeholder focus on environmental and social issues, and the relative ease of information dissemination, can be a deadly combination for firms.

One faux pas on either of these counts can prove disastrous to a firm’s image. Witness the response to the United Airlines CEO’s apology blaming the victim in reaction to a video circulating on social media of a man dragged off a plane. And how about tweets from Adidas congratulating Boston Marathon survivors? It was forced to take down that ad after furor from Twitter followers who suggested this ad reminded individuals of the tragedy.

The cost to erase these errors in judgment proved extremely expensive to the firms involved. To avoid costly missteps like these, firms are more proactively inclined to expend valuable resources to hire people to manage their corporate social responsibility, or CSR, profiles and their advertising campaigns."

"But in today’s globalized, social-media-filled world, a firm cannot be profitable unless it takes care of the people and the planet. The most profitable firms of today are successful because they are good stewards of the planet and take good care of the people."

Research by my colleagues and me also indicates a direct link between a firm’s CSR activities and its future financial performance. We found evidence that current CSR activities for a group of service firms are strongly positively correlated with how much future profits the firms can generate from its assets, after controlling for other factors.

In another study, we found that global manufacturing and service firms use CSR dollars as strategic dollars to be spent carefully for maximum financial benefits.

Another related analysis found that banks offer lower interest rates on bonds to firms that follow good CSR principles relative to firms that do not. Bankers may feel good about firms that implement good CSR practices, but they still follow the money. They offer lower interest rates to such firms since they may recognize that such firms are likely to attract higher revenues in the future — lowering their business risks, which translates into more money — capital.

Ultimately, firms cannot make money unless they take care of their stakeholders. The harsh limelight of social media punishes irresponsible firms because potential, and even loyal, customers will avoid its products. Decreased revenues, in turn, lead to lower profits. Lower profits can negatively affect the stakeholders of the firm. It is essentially unimaginable for any firm today to earn sustained profits while being irresponsible custodians of the planet and/or not taking care of its employees and customers."
Related posts:

Why Doing Good Makes It Easier to Be Bad

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

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

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 

Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ