Zombies might return and fighting them is art as well as science

See Zombies Could Stunt the Bank Recovery: Europe’s lockdown-support programs risk creating the kind of festering bad-debt problems that damaged its economy after the financial crisis by Rochelle Toplensky of The WSJ. Excerpts:

"The region’s generous lockdown-support programs and patchwork of insolvency laws could create so-called zombie firms—inefficient companies kept alive by cheap debt. Last month, the European Central Bank said this remains a risk."

"Following both the global financial crisis and the eurozone crisis, nonviable companies in Europe were kept alive by politicians worried about job losses and lenders hesitant to acknowledge bad debts. The zombies lowered markups, net investment and productivity in their markets as well as inflation in the wider economy, according to a recent report from the Federal Bank of New York—problems that have come back to bite their lenders too."

"Pandemic support programs, such as loans and bankruptcy moratoria, aspire to give businesses the time needed to secure their finances and pivot operations to better serve pandemic and post-pandemic customers. Sometimes, though, the support simply provides cheap funds that help unsustainable companies limp on. It is very hard for policy makers to get the timing right on these programs: Rolling back too early could hurt viable businesses, but too late can create zombies."

"New accounting rules aim to recognize loan losses earlier, but these estimates are art as well as science. Payment holidays make it particularly difficult to know who might be in genuine trouble"

I use the book The Economics of Public Issues in my micro classes. Chapter 1 is called "Death by Bureaucrat." It discusses how the Food and Drug Administration can make either a Type I error or a Type II error.

Type I error: The FDA approves a drug before enough testing is done and when people take it, there are harmful side effects.

Type II error: The FDA tests a drug longer than necessary to stay on the safe side. But people might suffer because the drug is not yet available. 80,000 people died waiting for Septra to be approved.

The FDA would usually rather make a Type II error because the public can blame the FDA if a Type I error occurs.

What if we think about government aid to business like a new drug. The passage in red in the article above indicates that the government cannot be sure which way to go: give assistance for too long and create Zombies (which seems like a Type I error because harm is caused by a policy that is too easy) or not long enough and lose good firms (which seems like a Type II error because good firms are not helped because a policy is too strict, like people not getting a drug in time).

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?

Joseph Schumpeter, Capitalism and Intellectuals

Are business cylcles imbedded in longer cycles called financial cycles?

Wall Street Journal Reports Zombies Chasing Ghosts (and banks are friendly to these zombies)  

  

Do We Have A Zombie Economy?

Another Semester Has Started

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

Here is something I wrote for The Ranger (the school paper of San Antonio College where I used to teach) back in 2011 titled "Why is college so hard?"

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Rewards for College Students Could Help Curb the Pandemic

A new study suggests ways of structuring payments to persuade even impulsive students to behave more cautiously

By Seema Jayachandran She is an economics professor at Northwestern University. Excerpts:

"There are several ways such programs might work:

• A university might announce that each week that students test negative, they will be paid $50. Once they tested positive, they would no longer be eligible for rewards.

• The rewards could be structured as a one-time payment of $700 at the end of a 14-week semester if students test negative every week.

• In a blend of these two options, students could receive $350 if they stayed negative for the first half of the term, then another $350 for staying negative for the second half.

Higher or lower sums might be preferred. The important thing is to find incentives that motivate as many students as possible in order to protect the broader population.

Rewards programs that pay people to be diligent about their health are already common. Many companies offer employees money if they exercise regularly, and addiction clinics pay people who stay drug-free."

In their study, the economists Shilpa Aggarwal of the Indian School of Business, Rebecca Dizon-Ross of the University of Chicago and Ariel Zucker at Berkeley experimented with an incentive program in India that encouraged diabetic adults to walk at least 10,000 steps a day. They found that several methods were successful in boosting exercise and improving health.

The economists found that an all-or-nothing contract — for example, paying students only if they stayed Covid-negative the whole term — worked especially well for people who hate to sacrifice short-term pleasure. Those are exactly the type of people who might be reckless in their social life and whose risky behavior a college would want to curtail.

The study measured how much each person was willing to sacrifice in the future to avoid a sacrifice today. Some people put a steep discount on whatever happened in the future, whether good or bad. These so-called impatient people want to have fun today and to push off unpleasant activities until later.

The researchers assigned the adults in India to one of two incentive contracts. Under the first, participants earned a reward each day they hit 10,000 steps. Under the second, they earned a reward only if they walked 10,000 steps at least five times in a week.

The researchers found that the second contract — what they call a “time-bundled” incentive — increased exercise more for people who were especially impatient.

It turned out that while it was hard for such people to sacrifice immediate pleasure, it was also true that forgoing pleasure in the future didn’t seem all that bad to them.

The clever feature of “time-bundled” contracts is that they persuade people to do something they dread by tying it to something that seems great. For a college student it might be very appealing to get a lot of money in exchange for a series of low-key Fridays in the future. The attractiveness of the overall bundle can persuade an impatient person to forgo short-term temptations, like going to a party tonight."

Zombies might return and fighting them is art as well as science

See Zombies Could Stunt the Bank Recovery: Europe’s lockdown-support programs risk creating the kind of festering bad-debt problems that damaged its economy after the financial crisis by Rochelle Toplensky of The WSJ. Excerpts:

"The region’s generous lockdown-support programs and patchwork of insolvency laws could create so-called zombie firms—inefficient companies kept alive by cheap debt. Last month, the European Central Bank said this remains a risk."

"Following both the global financial crisis and the eurozone crisis, nonviable companies in Europe were kept alive by politicians worried about job losses and lenders hesitant to acknowledge bad debts. The zombies lowered markups, net investment and productivity in their markets as well as inflation in the wider economy, according to a recent report from the Federal Bank of New York—problems that have come back to bite their lenders too."

"Pandemic support programs, such as loans and bankruptcy moratoria, aspire to give businesses the time needed to secure their finances and pivot operations to better serve pandemic and post-pandemic customers. Sometimes, though, the support simply provides cheap funds that help unsustainable companies limp on. It is very hard for policy makers to get the timing right on these programs: Rolling back too early could hurt viable businesses, but too late can create zombies."

"New accounting rules aim to recognize loan losses earlier, but these estimates are art as well as science. Payment holidays make it particularly difficult to know who might be in genuine trouble"

I use the book The Economics of Public Issues in my micro classes. Chapter 1 is called "Death by Bureaucrat." It discusses how the Food and Drug Administration can make either a Type I error or a Type II error.

Type I error: The FDA approves a drug before enough testing is done and when people take it, there are harmful side effects.

Type II error: The FDA tests a drug longer than necessary to stay on the safe side. But people might suffer because the drug is not yet available. 80,000 people died waiting for Septra to be approved.

The FDA would usually rather make a Type II error because the public can blame the FDA if a Type I error occurs.

What if we think about government aid to business like a new drug. The passage in red in the article above indicates that the government cannot be sure which way to go: give assistance for too long and create Zombies (which seems like a Type I error because harm is caused by a policy that is too easy) or not long enough and lose good firms (which seems like a Type II error because good firms are not helped because a policy is too strict, like people not getting a drug in time).

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?.

Joseph Schumpeter, Capitalism and Intellectuals

Are business cylcles imbedded in longer cycles called financial cycles?

Wall Street Journal Reports Zombies Chasing Ghosts (and banks are friendly to these zombies)  

  

Do We Have A Zombie Economy?

The CPI increased 1.4% in 2020

The 1.4% means that the CPI in December 2020 (260.474) was 1.4% higher than what it was in December 2019 (258.811).

The 260.474 means that what cost $100 in 1982 cost $260.47 in December 2020.

Now the CPI can go up and down during the course of the year and the Bureau of Labor Statistics calculates it for every month. So if it increased every month but then fell quite a bit in December, it might not look like there was much inflation.

They also calculate an average CPI over the twelve months and then compare that to the one for the previous year. That inflation rate for 2020 was 1.2%. Those two figures are usually pretty close to each other, but not always. 

In 2008, the Dec.-Dec. method gives a 0.1% inflation rate while the monthly averaging method was 3.8%. In 2009, those numbers were 2.7% and -0.4%. So they can be pretty far apart.

To see this data (actually going back to 2013), go to Consumer Price Index Data from 1913 to 2021.

See also Prices, and Confusion, Set to Rise as Pandemic Fades: Price gains remain muted, but only because services demand is still depressed by the Covid-19 crisis by Justin Lahart of The WSJ. Excerpts:

"The things that have kept inflation low during the Covid-19 crisis are a lot different than the ones that used to keep it low. A whipsawing of prices when the pandemic passes is something to look out for.

The Labor Department on Wednesday reported that U.S. consumer prices rose 0.4% in December from November, putting them 1.4% above their year earlier level. Core prices, which exclude food and energy items to better capture inflation’s trend, rose 0.1% from November, and were up 1.6% on the year. 

The Federal Reserve’s aim is for 2% inflation, and the consumer price measures it follows run cooler than the Labor Department’s.

Under inflation’s hood, though, there are some big shifts. Prices for food at home—groceries and the like—remain elevated as a result of the pandemic, and were up 3.9% in December from a year earlier. Meanwhile, prices for lodging at hotels and the like were down 11.2%."

"Core goods prices were up 1.7% on the year last month" (excluding food and energy)

"Core services prices were up 1.6%"

Monkeys seem to be selfish and rational

From Marginal Revolution.

"At the Uluwatu temple in Bali, monkeys mean business. The long-tailed macaques who roam the ancient site are infamous for brazenly robbing unsuspecting tourists and clinging on to their possessions until food is offered as ransom payment.

Researchers have found they are also skilled at judging which items their victims value the most and using this information to maximise their profit.

Shrewd macaques prefer to target items that humans are most likely to exchange for food, such as electronics, rather than objects that tourists care less about, such as hairpins or empty camera bags, said Dr Jean-Baptiste Leca, an associate professor in the psychology department at the University of Lethbridge in Canada and lead author of the study.

Mobile phones, wallets and prescription glasses are among the high-value possessions the monkeys aim to steal. “These monkeys have become experts at snatching them from absent-minded tourists who didn’t listen to the temple staff’s recommendations to keep all valuables inside zipped handbags firmly tied around their necks and backs,” said Leca.

After spending more than 273 days filming interactions between the animals and temple visitors, researchers found that the macaques would demand better rewards – such as more food – for higher-valued items.

Bargaining between a monkey robber, tourist and a temple staff member quite often lasted several minutes. The longest wait before an item was returned was 25 minutes, including 17 minutes of negotiation. For lower-valued items, the monkeys were more likely to conclude successful bartering sessions by accepting a lesser reward.

Here is the full story, via David Curran."

Car makers face ‘chipageddon’

See Ford, Other Auto Makers Cut Output, Idle Workers on Chip Shortage: Sector starts 2021 by idling plants, faces a ‘chipageddon’ with semiconductors in short supply by Ben Foldy of The WSJ. 

It is interesting that the demand increase for other products has affected the car market (see the passage in red below). Excerpt:

"A chip shortage that has disrupted vehicle production in other parts of the globe is reaching U.S. shores, stifling output for major car companies and dimming prospects for a smooth recovery from the pandemic.

Ford Motor Co. is planning to idle a Louisville, Ky., factory for a week starting Monday, because of parts shortages stemming from limited supplies of semiconductors now vital to everything from display screens to transmissions. The move will lead to the temporary layoffs of about 3,900 workers at the plant, which builds two popular SUVs, the Ford Escape and Lincoln Corsair.

Honda Motor Co. , Fiat Chrysler Automobiles NV and others are also wrestling with the shortage, leading them to reduce output on everything from big pickup trucks to compact sedans.

As manufacturers globally try to recoup production lost last spring because of the pandemic, many have been hit with sporadic parts shortages, shipping bottlenecks and other challenges related to the health crisis, such as high absenteeism.

Now, they are also dealing with chip shortages. The problem was first observed at Chinese factories late last year and is spreading to the rest of the world, as demand for electronics has surged during the health crisis, particularly with many people still spending most of their time at home. The global chip industry has struggled to meet demand."

Cold Snap Sparks Record Rise in Natural Gas Prices in Asia

Traders are struggling to secure enough vessels to transport LNG from the U.S. Gulf Coast to Asia in time to meet rampant demand 

By Joe Wallace of The WSJ. 

Good article illustrating supply and demand issues. It seems that an increase in demand and a decrease in supply are raising the price of LNG.

Excerpts:

"A blast of cold weather in northeast Asia [the demand increase] and a shortage of ships for transporting gas have sparked a scramble for cargoes of liquefied natural gas, igniting a steep rise in prices [I don't think there is a shortage of ships just fewer ships available which has raised their price which gets passed on to the LNG customers-this is the price of a resource increasing (with shipping being a resource in getting LNG to customers) and that reduces supply. Remember that supply means producing and getting a good to customers-if it is stockpiled somewhere but not where the customers can get it does not count as supply]

Prices for LNG shipped to China, Japan and South Korea, all major importers, have surged from record lows to all-time highs in less than a year. The regional price benchmark assessed by S&P Global Platts rose to $28.221 per million British thermal units on Monday, and has shot up 87% so far in 2021.

LNG is 15 times more expensive than it was when coronavirus hammered demand for oil and gas in the spring of 2020, the nadir of a years long slump in gas prices globally. In some cases, prices paid on the ground for cargoes have exceeded the levels indicated by Platts.

“It is a perfect storm,” said Toby Dunipace, executive director for LNG at London shipbroker Simpson Spence Young. Stores of gas in East Asia were severely depleted after the mercury plunged, he added.

Despite outages for producers in Australia, Norway and elsewhere, there is no global shortage of LNG. The trouble is moving gas to where it is needed [I agree that there is no shortage of LNG-shortage would mean that price is below where supply and demand intersect and that quantity demanded is greater than quantity supplied-this is not the case because price has risen due to the increase in demand and decrease in supply].

Freezing weather in Asia—temperatures plumbed as low as minus 3 degrees Fahrenheit in Beijing last week, a half-century low—is creating more demand for gas, which is burned to generate electricity and warm homes and offices. A lack of available ships means gas can’t move fast enough from the U.S. and Europe, where it is plentiful, to sate this demand."

"But traders are struggling to secure enough vessels thanks to delays at the Panama Canal, which is dealing with a seasonal backlog of container ships that has been aggravated by the strong demand for consumer goods during the pandemic. Instead of waiting in line for over a week, some LNG carriers are taking the long route to Asia around the Cape of Good Hope. Circumnavigating the cape adds about 17 days to the voyage from the Gulf Coast to Tokyo" [This extra time again adds to the total production cost which reduces supply]

"Charter prices for vessels moving LNG from the Gulf Coast to Europe rocketed to $322,500 a day Friday from about $190,000 a day at the end of 2020" [This why I said earlier that there is no shortage of ships-there might be fewer ships delivering LNG than there used to be, but the price is higher due to the decrease in supply-quantity supplied still equals quantity demanded]

"Utilities are competing for a small number of cargoes that could be delivered by February. Traders are passing higher shipping rates onto end users."

There is a positive relationship between prosociality and labor market success

See Prosociality predicts labor market success around the world by Fabian Kosse & Michela M. Tincani. Published in Nature Communications.

Adam Smith said when people act selfishly they are led, as if by an invisible hand, to make society better off. For example, if a business wants to make a profit, it is in their interest to make a good product at a reasonable price. But that is good for society.

But what if you are, say, altruistic and that makes you better off? Does that violate the invisible and or is it consistent with it?

Here is the abstract from the article. The authors say that elements of prosociality include reciprocity, altruism, and trust.

"Abstract

A large literature points to the importance of prosociality for the well-being of societies and individuals. However, most of this work is based on observations from western, educated, industrialized, rich, and democratic (WEIRD) societies, questioning the generalizability of these findings. Here we present a global investigation of the relation between prosociality and labor market success. Our analysis uses experimentally validated measures of prosociality and is based on about 80,000 individuals in 76 representative country samples. We show a sizable and robust positive relation between prosociality and labor market success around the world that does not systematically differ across continents or by countries’ economic development. These findings generalize the positive relation between prosociality and labor market success to a wide geographical context."

Rampant shoplifting leads to another Walgreens closing in S.F.

In my macro courses we read a chapter in the book The Economics of Macro Issues. The chapter discussed how nations with common law systems, where property rights are better protected than in nations with civil law systems, have higher growth rates.

See Rampant shoplifting leads to another Walgreens closing in S.F. By Phil Matier of The San Francisco Chronicle. Excerpts:

"After months of seeing its shelves repeatedly cleaned out by brazen shoplifters, the Walgreens at Van Ness and Eddy in San Francisco is getting ready to close.

“The last day is Nov. 11,” Walgreens spokesman Phil Caruso said

The drugstore, which serves many older people who live in the Opera Plaza area, is the seventh Walgreens to close in the city since 2019.

“All of us knew it was coming. Whenever we go in there, they always have problems with shoplifters, ” said longtime customer Sebastian Luke, who lives a block away and is a frequent customer who has been posting photos of the thefts for months. The other day, Luke photographed a man casually clearing a couple of shelves and placing the goods into a backpack.

“I feel sorry for the clerks, they are regularly being verbally assaulted,” Luke said. “The clerks say there is nothing they can do. They say Walgreens’ policy is to not get involved. They don’t want anyone getting injured or getting sued, so the guys just keep coming in and taking whatever they want.”

For security reasons, Walgreens declined to provide details on their security policies, but Caruso did say that “the safety of our team members and customers is our top concern.”

A recent trip to the store revealed aisle after aisle of empty or near-empty shelves. Beauty supplies appear to be a favored target.

Most of the remaining products were locked behind plastic theft guards, which have become increasingly common at drugstores in recent years.

But at Van Ness Avenue and Eddy Street, even the jugs of clothing detergent on display were looped with locked anti-theft cables.

When a clerk was asked where all the goods had gone, he said, “Go ask the people in the alleys, they have it all.”

Homeless encampments are common in the neighborhood, including two just across Eddy Street.

No sooner had the clerk spoken than a man wearing a virus mask walked in, emptied two shelves of snacks into a bag, then headed back for the door.

As he walked past the checkout line, a customer called out, “Sure you don’t want a drink with that?”

Just across busy Van Ness and down a block, a competing CVS pharmacy was fully stocked.

The difference? The CVS had a security guard at the door.""

Under California law, theft of less than $950 in goods is treated as a nonviolent misdemeanor. The maximum sentence for petty theft is six months in county jail. But most of the time the suspect is released with conditions attached.

The Van Ness location is at least the third Walgreens to close in the city in the past year."

"It’s hard to pin down how much the market forces that prompted the closure of 200 Walgreens nationwide was a factor in the local closures and how much theft contributed — or if it was a combination of reasons.

In February, the local news website Hoodline reported that an employee at the Market Street store said the store couldn’t cope with the shoplifting, which was costing the company $1,000 a day.

“Organized retail crime in San Francisco has increased the challenge for all retail, and Walgreens is not immune to that,” company spokesman Caruso said.

Jay Cheng, public policy director for the San Francisco Chamber of Commerce, said the rising incidents of shoplifting and worsening street conditions have made it difficult for all neighborhood retail stores to continue to operate in San Francisco."

"Some stores have hired private security firms or off-duty police officers to deter would-be thieves.

But security is expensive and can cost upward of $1,000 a day.

Add in the losses from theft, and the cost of doing business can become too high for a store to stay open."

With No Commute, Americans Simply Worked More During Coronavirus

Employees spent over 22 million extra hours on their primary job each workday

By Jo Craven McGinty of The WSJ. Excerpts:

"From mid-March to mid-September, Americans spent 60 million fewer hours commuting to and from work each day, according to one estimate, as lockdown orders to curb the spread of Covid-19 forced many employees to clock in from home."

"Primary jobs absorbed the largest chunk of the extra time—about 35.3%, or more than 22 million hours each workday, according to an analysis of census and survey data published last month.

Another 15.5% (more than nine million hours) was spent on home improvements and chores; 11.1% (nearly seven million hours) was devoted to child care; and 8.4% (more than five million hours) went to second jobs."

"Paradoxically, even as workers reported spending more than a third of their former commuting time on their primary jobs, they simultaneously said that, overall, they worked less. They spent 36.4 hours a week working on average before the pandemic, compared with 32 hours during the pandemic."

"in the pandemic economy, just over half of paid employees worked from home."

"In a study published in the Quarterly Journal of Economics in 2014, to which Dr. Bloom contributed, researchers followed employees of Ctrip, a large Chinese travel agency, for nine months to see whether employees would work from home or “shirk from home.”

In that experiment, 500 call-center employees were randomly assigned to work in the office, and another 500 were randomly assigned to work from home.

The performance of those working from home increased 13%.

“They were logged onto their computers longer,” Dr. Bloom said [ Nicholas Bloom, an economist at Stanford University]. “They processed calls quicker. Their success rates were nearly identical.”

Encouraged by the results, the travel agency offered the option to work from home to all its employees and saw performance increase more than 20%."

Related posts:

Companies Start to Think Remote Work Isn’t So Great After All

Since people feel more disorganized and chaotic when they are at home, should business leaders take this into account when they consider whether to make remote working the norm after the pandemic subsides?

Remote work is surprisingly productive (for now, but what about in the long-run?)  

Does a Raise or Remote Work Sound Better? 

Used vehicle prices up as supply sinks, but relief is coming

By TOM KRISHER of AP.

This is from last October but it is a good example of how supply and demand work. Excerpts:

"It cost a whole lot more to buy a used SUV, car, truck or van last month than it did before the coronavirus hit, and that almost singlehandedly caused September’s modest consumer price increase.

Blame it on the pandemic, which knocked supply and demand way out of whack, causing prices to spike.

The good news is that inventories are being replenished, and prices are beginning to drop.

“The law of supply and demand worked,” said Earl Stewart, owner of a Toyota dealership in North Palm Beach, Florida. “I think things are coming back to normal.”

When the novel coronavirus made its way to the industrial Midwest and the South in March and April, it forced automakers to shutter factories, and many dealers closed. Sales of new vehicles tanked. With few vehicles being traded in for new ones, and leases being extended, the supply of used vehicles dried up.

At the same time, automakers weren’t producing many lower-priced cars, forcing many buyers into the used-vehicle market. Plus, people who were wary of returning to public transit ended up buying vehicles. Many were armed with government stimulus checks as a down payment. [these factors increased demand]

Also, lenders had moratoriums on repossessions of vehicles, cutting off another source of used vehicles, said Alex Yurchenko, senior vice president of data science for Black Book, an automotive analytics firm that helps dealers determine vehicle prices. [these factors decreased supply]

As a result, the average asking price of a used vehicle that was 10 years old or less rose more than 9% from $19,800 in May to $21,600 in September, Yurchenko said."

"Now, new-vehicle production is pretty much back to normal, but inventory hasn’t been replenished because of growing demand, especially for pickup trucks, said Jeff Schuster, senior vice president at LMC Automotive, a consulting firm."

"That has pushed new-vehicle prices to record levels, pricing many lower-income people out of the market and sending them to used vehicles. J.D. Power reported the average new vehicle price hit an all-time high of $35,655 in September." [if we consider new and used cars to be substitutes, we know that when the price of one goes up, the demand for the other will increase]

World Bank has lowered its projections for global growth in the 10 years that began in 2020

See Covid-19 Aftermath Could Spell a ‘Lost Decade’ for Global Economy, World Bank Says: Bank lowers growth outlook as pandemic disrupts trade, investment and education by Yuka Hayashi of The WSJ. Excerpt:

"Even before Covid-19, the World Bank had lowered its projections for global growth in the 10 years that began in 2020. The pandemic is exacerbating that trend, raising the prospect of a “lost decade” ahead, the World Bank said Tuesday, as it also cut its forecasts for the coming year.

The bank’s semiannual Global Economic Prospects report attributes the long-term downgrade to lower trade and investment caused by uncertainty over the pandemic, along with disruptions in education that will hamper gains in labor productivity.

“If history is any guide, unless there is substantial reform, we think the global economy is headed for a decade of disappointing growth outcomes,” Ayhan Kose, the bank’s acting vice president for equitable growth and financial institutions, said in an interview.

Before the pandemic, the bank projected that potential global growth between 2020 and 2029 would slow to a yearly average of 2.1%, from 2.5% in the previous decade, as a result of aging populations and lower productivity growth. On Tuesday the bank lowered its projection to 1.9%. Potential output assumes the world economy is operating at full employment and capacity."

It might not seem like a big deal to drop from an annual growth rate of 2.5% to 1.9%. But if, for example, your annual income is $30,000 and it grows 2.5% in each of the next 10 years, it will be $38,400. If it only grows 1.9%, it will end up at $36,200.

That is roughly a $2,200 difference and that means alot to most people.

Each year you would make a little bit more at the 2.5% rate. Adding up the differences for each of the 10 years comes to about $11,300. 

This reminds me of the Rule of 72. If you want to know how long it will take a number to double, divide 72 by its annual growth rate. An economy that grows 2.5% a year will double in 28.8 years while the economy that grows 1.9% a year will double in 37.9 years. It will take an extra 9 years to double incomes.

Related post:

Does Democracy Cause Only A Slight Gain In Economic Growth?

Why Are Americans So Distrustful of Each Other?

The U.S. is the only established democracy where the level of social trust is falling instead of rising. Our political leaders can help turn the tide.

By Kevin Vallier. He is a professor of philosophy at Bowling Green State University and has written a book called Trust in a Polarized Age. Excerpts:

"Strikingly, the U.S. is the only established democracy to see a major decline in social trust. In other nations the trend was in the opposite direction. From 1998 to 2014, social trust increased in Sweden from 56.5% to 67%, in Australia from 40% to 54%, and in Germany from 32% to 42%. Meanwhile, the U.S. is becoming more like Brazil, where trust is around 5%. What makes America unique?

Social science research has found that three important factors behind a country’s level of social trust are corruption, ethnic segregation and economic inequality. Each of these plays some role in the U.S., yet none seems to fully explain our loss of trust.

The large difference in social trust between Sweden and Brazil correlates with their levels of corruption: On the World Bank ranking of countries’ effectiveness at controlling corruption, Sweden is near the top in the 98th percentile, while Brazil is in the 42nd. The U.S. is in between, in the 84th percentile. But that ranking didn’t change much between 1996, when measurement began, and 2016, even as social trust in the U.S. declined.

International data also show that increasing ethnic diversity can lower social trust. In fact, some research suggests that the negative relationship between diversity and trust is stronger in the U.S. than in almost any other country. 

But as trust theorists have dug deeper, they’ve found that this negative effect is largely correlated not with diversity itself but with segregation. When ethnic groups are concentrated in small geographical areas and have little contact with one another, distrust is high; with greater contact, the effect shrinks. And while ethnic diversity has increased in the U.S. considerably since 1980—around a 50% increase as measured by the National Equity Atlas Diversity Index—ethnic segregation has decreased somewhat.

Social trust has also been found to correlate strongly with economic inequality in over 100 countries, leading many trust theorists to conclude that increasing inequality lowers social trust. Among rich nations, the U.S. has seen the greatest increase in inequality in recent decades. In 1980, the top 1% of the population took home 10.9% of total pretax income; that share increased to 14.4% in 1989, 17.5% in 1999 and 19.6% in 2007.

This rising inequality likely contributed to the decline of social trust over the same period. But 2007 marked the peak of inequality in the U.S. The next year it dropped due to the financial crisis, and it has not exceeded 2007 levels since; yet social trust continues to decline. This may be because the perception of inequality has increased even as the actual level of inequality remained high and stable.

One confounding factor in the trust-inequality connection is the role played by the welfare state in redistributing income. Countries with large welfare states usually have less inequality, which might suggest that redistribution increases trust by lowering inequality. However, trust seems correlated best with “pre-fiscal” inequality, the level that exists before taxes and transfers. State redistribution that decreases economic inequality has no effect on trust, even when the redistributive effect is quite large.

In fact, low trust may be more of a cause of inequality than an effect, since research has found that trusting societies prefer welfare state policies. In Sweden, which has one of the lowest post-fiscal levels of inequality in the world, there is much greater support for welfare policies than in the U.S. Arguably, that’s because Americans are far more likely than Swedes to think that recipients of economic transfers don’t deserve them or will misuse them."

"Recent American history bears out that idea. The beginning of our current political polarization is often dated to 1968, when the Republican Party became nationally competitive through Southern realignment. In that year, according to the American National Election Survey, 56% of Americans believed most people can be trusted; in 2018, after a half-century of increasing partisan division, only 31.5% did.

Growing up under polarized political institutions may lead young people to generalize from partisan distrust to social distrust. Americans are sorting themselves into social silos, seldom interacting with unlike-minded others, leading to less moderation and more radicalization. This may be due in part to social media, though recent research on the effect of social media has reached mixed conclusions on this question. But the effect is clear: In 2017, around 70% of Democrats said that Donald Trump voters couldn't be trusted, and around 70% of Republicans said the same of Hillary Clinton voters."

Jeff Bezos vs. Joseph Schumpeter

In his book Capitalism, Socialism, and Democracy the economist Joseph A. Schumpeter discussed whether or not entrepreneurs would be come obsolete because technical progress would be come routine once it was controlled by big business and committees. A little bit like medieval knights or military generals becoming obsolete in times of peace.

But it seems like Bezos wants Amazon to act like a new company all the time so it does not atrophy the way Schumpeter says big companies might.

After excerpts from this article I will have excerpts from the book to give you an idea of what Schumpeter was saying.

See How Amazon Wins: By Steamrolling Rivals and Partners: CEO Jeff Bezos still runs the e-commerce giant with the drive of a startup trying to survive, and that strand of its corporate DNA is becoming a liability by Dana Mattioli of The WSJ.

"He still exhorts employees to consider Amazon a startup. “It is always day one,” he likes to say. Day two is “stasis, followed by irrelevance, followed by excruciating, painful decline, followed by death.” Mr. Bezos originally considered calling his company Relentless, and www.relentless.com still redirects to Amazon’s site." 

Now some Schumpeter:

"modern largest-scale business represents a petrified form of capitalism."

"let us glance at that possibility . . .  that methods of production have reached a state of perfection which does not admit of further improvement.

A more or less stationary state would ensue. Capitalism, being  essentially an evolutionary process, would become atrophic. There would be nothing left for entrepreneurs to do. They would find themselves in much the same situation as generals would in a society perfectly sure of permanent peace."

"economic progress tends to become depersonalized and automatized. Bureau and committee work tends to replace individual action"

"Or take another military analogy. Warfare in the Middle Ages was a very personal affair.The armored knights practiced an art that required lifelong training and every one of them counted individually by virtue of personal skill and prowess. It is easy to understand why this craft should have become the basis of a social class in the fullest and richest sense of that term.But social and technological change undermined and eventually destroyed both the function and the position of that class. Warfare itself did not cease on that account. It simply became more and more mechanized—eventually so much so that success in what now is a mere profession no longer carries that connotation of individual achievement which would raise not only the man but also his group into a durable position of social leadership. 

Now a similar social process—in the last analysis the same social process—undermines the role and, along with the role, the social position of the capitalist entrepreneur. His role, though less glamorous than that of medieval warlords, great or small, also is or was just another form of individual leadership acting by virtue of personal force and personal responsibility for success.His position, like that of warrior classes, is threatened as soon as this function in the social process loses its importance, and no less if this is due to the cessation of the social needs it served than if those needs are being served by other, more impersonal, methods."

"To sum up this part of our argument: if capitalist evolution—“progress”—either ceases or becomes completely automatic, the economic basis of the industrial bourgeoisie will be reduced eventually to wages such as are paid for current administrative work excepting remnants of quasi-rents and monopoloid gains that may be expected to linger on for some time. Since capitalist enterprise, by its very achievements, tends to automatize progress, we conclude that it tends to make itself superfluous—to break to pieces under the pressure of its own success. The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and“expropriates” its owners, but in the end it also ousts the entrepreneur and expropriates the bourgeoisie as a class which in the process stands to lose not only its income but also what is infinitely more important, its function."

How Capitalism Saved Christmas

The commercialization of the holiday, a familiar lament this time of year, helped rescue Christmas from the grip of violent street gangs

By Jason Zweig of The WSJ. Economists talk about how gift giving can be inefficient (see related posts linked below). But if the emphasis on gift giving reduced the chaos caused by the gangs, maybe it it is worth it (or not quite so inefficient). Excerpts:

"Everyone seems to complain about how Christmas has been commercialized. But without the business of gift-giving that sprang up in the 19th century, Christmas might still be what it once was for many people: a riotous bacchanalia in which drunken gangs brawled in the streets and bashed their way into houses demanding money and alcohol.

With the hard work of the harvest behind them, December was downtime for Americans, as it had been for Europeans as far back as the raucous Saturnalias of ancient Rome. The Puritans were so offended by the disorder surrounding Christmas that celebrating the holiday—by feasting, “playing either at cards or at dice,” or even just taking the day off from work—was illegal in Massachusetts from 1659 to 1681. The fine was five shillings, roughly $50 in today’s money."

"In the 1800s, at Christmastime in cities like Boston, New York and Philadelphia, gangs of drunk young men, dressed in outrageous disguises, marauded through the nighttime streets, often setting off firecrackers, lighting fires or shooting guns in the air."

"These gangs were called “mummers” and “fantasticals” for their flamboyant costumes or “callithumpians” for the rough music they banged out on pots, pans and other makeshift instruments. Rampaging from house to house, the mobs might smash windows, tear down fences or wrench the handles off doors if homeowners wouldn’t let them in.

Once inside, they helped themselves to food, commandeered alcohol, spit tobacco on the carpets and wiped their greasy hands on the curtains. Not even the watchmen hired by local residents could deter them."

"“As soon as Santa Claus entered the picture,” says Prof. Nissenbaum, “people had to go shopping.” Santa Claus was part of a broader movement to domesticate the holiday by creating a warm, comforting family event centered around giving gifts to children. Mayors, merchants and the middle class all wanted to get the violent Christmastime gangs off the streets.

“There’s a general taming of the holiday that goes on throughout the 19th century,” says Penne Restad, author of “Christmas in America” and a retired historian at the University of Texas, Austin. The mass marketing of Christmas gifts, she says, was “a way of creating boundaries.”

"As the holiday became about giving gifts to family and friends, rather than about seizing food and drink from strangers, the seasonal street gangs faded away."

Related posts:

Is Christmas Gift Giving Inefficient?

Are Homemade Gifts Better Or More Special?

What Melvin Anthropologist Konner Fails To See When He Criticizes Economists And Their Views On Gift Giving  

Conflicting opinions from economists on the value of giving gifts

Use Data to Buy Gifts

Capitalism, rationality and double-entry bookkeeping

In his book Capitalism, Socialism, and Democracy the economist Joseph A. Schumpeter discussed the deep and widespread rationalizing influence that capitalism had on society, particularly that of double-entry bookkeeping.

Excerpts:

"the rational attitude presumably forced itself on the human mind from economic necessity; it is the everyday economic task to which we owe our elementary training in rational thought and behaviour’— I have no hesitation in saying that all logic is derived from the pattern of the economic decision."

there is "inexorable definiteness and, in most cases, the quantitative character that distinguish the economic from other spheres of human action, perhaps also to the unemotional drabness of the unending rhythm of economic wants and satisfactions. Once hammered in, the rational habit spreads under the pedagogic influence of favorable experiences to the other spheres"

"capitalism develops rationality and adds a new edge to it in two interconnected ways.

First it exalts the monetary unit—not itself a creation of capitalism—into a unit of account. That is to say, capitalist practice turns the unit of money into a tool of rational cost-profit calculations, of which the towering monument is double-entry bookkeeping." 

Without going into this, we will notice that, primarily a product of the evolution of economic rationality, the cost-profit calculus in turn reacts upon that rationality; by crystallizing and defining numerically, it powerfully propels the logic of enterprise. And thus defined and quantified for the economic sector, this type of logic or attitude or method then starts upon its conqueror’s career subjugating— rationalizing—man’s tools and philosophies, his medical practice, his picture of the cosmos, his outlook on life, everything in fact including his concepts of beauty and justice and his spiritual ambitions."

"The rugged individualism of Galileo was the individualism of the rising capitalist class."

"rising capitalism produced not only the mental attitude of modern science, the attitude that consists in asking certain questions and in going about answering them in a certain way, but also the men and the means."

"capitalism—and not merely economic activity in general—has after all been the propelling force of the rationalization of human behavior."

"all the features and achievements of modern civilization are, directly or indirectly, the products of the capitalist process."

"The capitalist process rationalizes behavior and ideas and by so doing chases from our minds, along with metaphysical belief, mystic and romantic ideas of all sorts."

The Staggers Rail Act of 1980 got American freight transportation back on track

See When Democrats Were Deregulators by Ian Jefferies. Mr. Jefferies is president and CEO of the Association of American Railroads. 

This is something I usually talk about when I cover regulation. Excerpts:

"The bipartisan Staggers Rail Act of 1980, passed by a Democratic Congress and signed by President Jimmy Carter, deregulated the freight railroad industry. When Mr. Carter signed the law on Oct. 14, he said that “by stripping away needless and costly regulation in favor of marketplace forces wherever possible, this act will . . . benefit shippers throughout the country by encouraging railroads to improve their equipment and better tailor their service to shipper needs.”"

"Previously, railroad rates and service were set by government, and carriers were often forced to provide service on lines lacking commercial viability. Railroads publicly posted rates for specific commodities independent of market conditions. The impact on railroads was predictable and disastrous. At one point, 1 in 5 rail miles was serviced by bankrupt railroads."

By allowing large railroads to shed inefficient, low-density or unprofitable lines to focus on core businesses, the Staggers Act not only improved service along the mainline network; it helped give birth to a short-line rail industry that today operates 50,000 miles of the 140,000-mile network that spans across the United States.

The Staggers Act maintained ample protections for customers that lack effective competition. The market is allowed to work where competition exists, while the government can intervene where it doesn’t.

The Staggers Act continues to provide economic dividends. “As we appreciate the achievements of rail deregulation, it is useful to realize that the policy succeeded in large part because it brought buyers and sellers closer together to achieve mutual benefits,” Brookings Institution researcher Clifford Winston wrote in 2005.

Since 1980, freight railroads have poured more than $710 billion of their own funds back into their operations. Average rail rates are 43% lower today than in 1981 when adjusted for inflation. This translates into at least $10 billion in annual savings for U.S. consumers. Safety and service are at historically high levels."