Mark Twain, Free Trade and Tariffs

Twain supposedly said that "free traders win the arguments and the protectionists win the votes."

Tariffs are in the news again. See Stocks tumble as Trump threatens to hike tariffs on China by Emily McCormick of Yahoo Finance. Also, I covered tariffs in some of my classes recently (see link below).

Marc-William Palen, a lecturer in imperial history at the University of Exeter, wrote an article titled How Mark Twain Became a Free Trader. Click here to go to Palen's page.

Here is an excerpt, where Palen discusses a part of A Connecticut Yankee in King Arthur’s Court. After that, I have another quote from the book that also shows Twain's support for free trade.

"The culture of free trade also manifested itself in the writing of Mark Twain.

Famed satirist Twain had been a supporter of the Republican protectionist policy up until Cleveland’s 1887 tariff message. It was at this point that Twain became a convert to free trade and gave Cleveland his endorsement.

Twain’s newfound antipathy for protectionism found outlet in A Connecticut Yankee in King Arthur’s Court (1889).

In it, Twain’s protagonist, Hank Morgan of Hartford, Connecticut, awakens to find himself transported to sixth-century England.

As Hank traipses across the land, he comes across a smith by the name of Dowley. Hank and Dowley immediately begin discussing “matters of business and wages” over dinner.

The sixth-century tributary kingdom in which Dowley abides appears at first glance quite prosperous in comparison to Hank’s Hartford.

“They had the ‘protection’ system in full force here,” Hank explains, “whereas we were working along down toward free-trade, by easy stages,” a veiled reference to Cleveland’s speech and the Democrats’ proposed lower tariff bill of 1888.

The others at the Dark Age dinner table listened “hungrily” as Dowley began to question Hank on the rate of wages in Gilded Age America.

“In your country, brother,” asked Dowley, “what is the wage of a master bailiff, master hind, carter, shepherd, swineherd?”

Upon hearing Hank’s reply of a quarter cent, “the smith’s face beamed with joy…. ‘With us they are allowed the double of it!…. ‘Rah for protection—to Sheol with free-trade!’”

To which Hank, unmoved, “rigged up” his “pile-driver” to drive the smith “into the earth—drive him all in—drive him in till not even the curve of his skull should show above ground.”

Hank replies to Dowley that, while the wages in the smith’s land were indeed double those of Connecticut, late-19th-century Americans could buy goods at prices well less than half what Dowley and his countrymen paid, making the high wage argument superfluous.

Hank thought he had scored a point against the blacksmith and had “tied him hand and foot.”

But Dowley “didn’t grasp the situation at all, didn’t know he had walked into a trap… I could have shot him, from sheer vexation. With cloudy eye and a struggling intellect,” Dowley admitted he did not understand Hank’s argument. At which point their dinnertime discussion only deteriorated further.

Twain’s Hank was a literary representation of late-19th-century America’s free traders. These were men who prided themselves on their intellectual superiority and the economic soundness of their arguments.

They were, however, frustrated time and again by what they perceived as pernicious protectionist propaganda that nevertheless struck a chord in the heart of the ignorant American worker.

Twain’s extreme language hints as well at how fierce the tariff debate had become within the presidential election of 1888 – the “Great Debate” between Democratic free trade and Republican protectionism."

In a discussion of how the government raises revenue, Hank says:

"In my day, in my own country, this money was collected from imposts [a tariff or import duty], and the citizen imagined that the foreign importer paid it, and it made him comfortable to think so; whereas, in fact, it was paid by the American people, and was so equally and exactly distributed among them that the annual cost to the 100-millionaire and the annual cost to the sucking child of the day-laborer was precisely the same"

To see why it might work this way, click here.
 
Related posts:

Chapter 33 Of Mark Twain's A Connecticut Yankee in King Arthur’s Court Is Titled "SIXTH CENTURY POLITICAL ECONOMY" And Deals With "Money Illusion"

Mark Twain On Work And Pay

Mark Twain On Labor Markets And How Wages Should Be Decided-By Government Fiat Or By Markets?

Mark Twain Understood That It Is The Purchasing Power Of Wages That Matters

Some Companies Offer To Pay All College Expenses For Their Workers

See Now Hiring, With Attractive New Perk: Free College Degree: Companies say benefits of a happy, better-educated staff outweigh the costs of paying for workers’ college education by Kelsey Gee of The WSJ.

Offering a good benefit in a tight labor market that leads to retention of workers reminds me of the "efficiency wage theory" that says that companies pay above market wages to lower worker turnover. This cuts hiring and training costs. Workers might also work harder so that they can keep a job that offers so many benefits.

There also might be economies of scale involved. That is when average cost falls as quantity increases (think of a factory that produces thousands of cars compared to producing only one car-the average cost is lower the more cars you produce, up to a point, since you spread the fixed cost of the factory over more cars).

If the broker firm can deliver thousands of student at once to a school, that lowers their average cost and the college might want to offer a lower tuition to get that many students so easily.

Also, if the broker acts as a single buyer or monopsony, then they can get a lower price. Monopsonies pay less than what would be the price if there was competition or many buyers in the market.

Excerpts:

"Some of America’s largest companies are proposing that a good job can lead to a free college education, reversing the norm that requires workers to get the degree before launching a career.

Walt Disney Co. DIS 3.08% , Discover Financial Services DFS 4.93% and Yum Brands Inc.’s YUM 2.60% Taco Bell are among the high-profile employers sending front-line workers back to school, often paying the cost of tuition, fees, books and other expenses upfront and in full. The companies say the benefits of a content and potentially better-trained staff outweigh the costs.

Many large employers have long offered limited tuition-assistance perks to staff, reimbursing up to the federal tax-exempt maximum of $5,250 a year—after the student successfully completes course work. For most people, though, paying out-of-pocket and then waiting for the company benefit to kick in later proved too much of a barrier, said Jon Kaplan, Discover’s vice president of training and development.

Even so, Mr. Kaplan said, with around 80% of Discover’s 7,000 call-center and field staff lacking a college degree, the company saw a good return on every dollar invested in tuition, as participating employees stayed with the firm longer and moved into more senior positions at a higher rate."

"To secure new corporate partners, Brandman pays an undisclosed fee to Guild Education, a Denver startup that brokers deals between companies and colleges."

"The cost of a bachelor’s degree from a four-year U.S. institution averages $33,000 a year, according to the Education Department. Guild said that by providing schools a large number of part-time and full-time students, it can negotiate the total price down to between $6,000 and $10,000 in some cases"

"Some companies, including Walmart, pay 100% of those costs directly to the school, according to Guild, with minimal or no expense for workers."

"Other companies, including Taco Bell, cover up to $5,000 or so a year in costs up front and negotiate deals on textbooks and other student services for employees."

"the company now offers the college benefit to all 210,000 employees, after a pilot version last year boosted retention among participants by one-third to 98%."

"In the tightest labor market in decades, Disney, Discover and other companies say covering the full cost of college can help them hold on to valuable talent that has become more expensive to attract."

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

See The Obama-Trump Economic Boom: The current expansion may soon be America’s longest, and neither inflation nor tariffs are likely to stop it by Alan S. Blinder. He is a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve. Excerpts:

"A common answer in the modern era is that the Federal Reserve clamps down to fight inflation. But today inflation remains quiescent despite extremely low unemployment. That the Fed didn’t raise interest rates in January, even with the federal-funds rate barely above inflation, suggests that Jerome Powell may be an even more dovish Fed chair than Janet Yellen. It sure doesn’t look as if an overzealous Fed will squelch the expansion.

Another common expansion killer, though not lately, is a spike in the price of oil. Predicting the price of oil is a fool’s errand, and I won’t try. But a jump to, say, $90 or $100 a barrel doesn’t look likely any time soon."

Lots of people are fretting about a full-scale trade war with China. That remains possible—and a threat to the world trade system. But would it derail the U.S. expansion? Not unless it’s a whopper. Exports to China are only about 1% of U.S. gross domestic product. Even if they fell by half—well, you can do the math. America’s total exports to all countries are vastly larger. But lately, our bellicose president doesn’t sound inclined to declare trade war on Canada. Let’s hope it stays that way.

According to legend, stock-market crashes often end booms, but that’s an exaggeration. A crash may have to coincide with some other financial calamity, as in the banking, bond and mortgage disasters of 2008-09. In contrast, the U.S. economy sailed right through the megacrash of 1987. The current expansion has already survived a market “correction” in December without much apparent damage. So while I never predict stock prices, a market crash ranks low on my expansion worry list.

Last but certainly not least, expansions are sometimes killed by sudden drops in either consumer or business confidence—or rather by the declines in spending that such drops engender. Might that happen in the next few months? I suppose so, but recent economic data don’t point in that direction.

Recent political “data” are a different matter. It is certainly possible that the U.S. will find itself in a full-fledged constitutional crisis in the coming months, precipitated by, say, the “national emergency” over immigration. What then? If business managers and market traders behave like Mr. Trump’s base, they’ll shrug it off: Constitution, shmonstitution. But if threats to democracy shake confidence, look out.

A low probability, you say? I agree. My bet is that the current expansion will sail through June, setting a new record."

See also You Never Know When a Recession Will Sneak Up on You by Austan Goolsbee. He a professor of economics at the University of Chicago’s Booth School of Business and was an adviser to President Barack Obama. Goolsbee seems to think a recession is more likely than Blinder and that an unforseen event that hurts confidence is more likely. Excerpts:

"recessions don’t come only from large, foreseeable events. Modest, unpredictable incidents can cause economic downturns if they lead businesses or consumers to freak out."

Seemingly small events can cause enormous problems. Think back to 2001 and the last recession of a “normal” size. (The recession that started in December 2007 was, by far, the deepest and longest since the Great Depression — about as far from normal as a recession can be.)

The 2001 recession developed when the internet bubble popped, or at least that’s how we tend to remember it. But go back and check the numbers. The internet accounted for, at most, about 2 percent of the economy then. If we use the logic we’ve been applying to trade wars and government shutdowns, it would seem that popping the internet bubble shouldn’t have been enough to cause a recession. But it did.

The reason it did was that the pop freaked out people outside just the internet sector. Consumer confidence plunged, and businesses stopped investing. The recession spread far beyond its origin.

In this sense, virtually every recession in the last 40 years coincided with a signal of fear, like a significant drop in consumer confidence. Sometimes confidence fell and didn’t spiral into recession, but all recessions have started with a confidence spiral."

"Another government shutdown could spiral into something far more damaging than the small decline in workers’ share of the economy that the simple math suggests. An escalating trade war with China could ignite a recession, even if the numbers show that trade isn’t a large share of the United States economy. These events just need to spook consumers or businesses into putting off spending, and then more dire consequences can start to snowball."

"If something scares people enough, it can start a recession, and you probably won’t know until it’s too late.

That’s because recessions are hard to recognize at the start. Looking back, for example, we know that a recession officially began in April 2001, yet scarcely anyone understood that then. In June 2001, only 7 percent of economists in the monthly Blue Chip survey believed a recession was underway. In the months before that 2001 recession began, only 16 percent of economists expected that a recession would start within the next year. Now, 25 percent of economists in a Wall Street Journal survey say they expect a recession within the next year, and anxiety seems to be growing."

What Did The Justice Department warn the Academy of Motion Picture Arts and Sciences about?

See Justice Department Warns Academy Over Potential Oscar Rule Changes Threatening Netflix by Ted Johnson of Variety. This relates to anti-trust laws, something I covered in my classes recently. Excerpts:

"The Justice Department has warned the Academy of Motion Picture Arts and Sciences [AMPAS] that its potential rule changes limiting the eligibility of Netflix and other streaming services for the Oscars could raise antitrust concerns and violate competition law.

According to a letter obtained by Variety, the chief of the DOJ’s Antitrust Division, Makan Delrahim, wrote to AMPAS CEO Dawn Hudson on March 21 to express concerns that new rules would be written “in a way that tends to suppress competition.”

“In the event that the Academy — an association that includes multiple competitors in its membership — establishes certain eligibility requirements for the Oscars that eliminate competition without procompetitive justification, such conduct may raise antitrust concerns,” Delrahim wrote.

The letter came in response to reports that Steven Spielberg, an Academy board member, was planning to push for rules changes to Oscars eligibility, restricting movies that debut on Netflix and other streaming services around the same time that they show in theaters. Netflix made a big splash at the Oscars this year, as the movie “Roma” won best director, best foreign language film and best cinematography."

"Delrahim cited Section 1 of the Sherman Act that “prohibits anticompetitive agreements among competitors.”

“Accordingly, agreements among competitors to exclude new competitors can violate the antitrust laws when their purpose or effect is to impede competition by goods or services that consumers purchase and enjoy but which threaten the profits of incumbent firms,” Delrahim wrote.

He added, “if the Academy adopts a new rule to exclude certain types of films, such as films distributed via online streaming services, from eligibility for the Oscars, and that exclusion tends to diminish the excluded films’ sales, that rule could therefore violate Section 1.”"

As Costs Skyrocket, More U.S. Cities Stop Recycling

With China no longer accepting used plastic and paper, communities are facing steep collection bills, forcing them to end their programs or burn or bury more waste.

By Michael Corkery of The NY Times. In one of my classes, we are reading the chapter on recycling in The Economics of Public Issues. So I thought this recent NY Times article would be relevant. Excerpts:

"Philadelphia is now burning about half of its 1.5 million residents’ recycling material in an incinerator that converts waste to energy. In Memphis, the international airport still has recycling bins around the terminals, but every collected can, bottle and newspaper is sent to a landfill. And last month, officials in the central Florida city of Deltona faced the reality that, despite their best efforts to recycle, their curbside program was not working and suspended it.

Those are just three of the hundreds of towns and cities across the country that have canceled recycling programs, limited the types of material they accepted or agreed to huge price increases."

"China, which until January 2018 had been a big buyer of recyclable material collected in the United States. That stopped when Chinese officials determined that too much trash was mixed in with recyclable materials like cardboard and certain plastics."

"recycling companies are . . . charging cities more, in some cases four times what they charged last year."

"many waste companies had historically viewed recycling as a “loss leader,” offering the service largely to win over a municipality’s garbage business."

"While there remains a viable market in the United States for scrap like soda bottles and cardboard, it is not large enough to soak up all of the plastics and paper that Americans try to recycle. The recycling companies say they cannot depend on selling used plastic and paper at prices that cover their processing costs"

How Odysseus Started The Industrial Revolution

Factory work may have been a commitment device to get everyone to work hard. Odysseus tying himself to the mast was also a commitment device. Dean Karlan, Yale economics professor explains how commitment devices work:

"This idea of forcing one’s own future behavior dates back in our culture at least to Odysseus, who had his crew tie him to the ship’s mast so he wouldn’t be tempted by the sirens; and Cortes, who burned his ships to show his army that there would be no going back.

Economists call this method of pushing your future self into some behavior a “commitment device.” [Related: a Freakonomics podcast on the topic is called "Save Me From Myself."] From my WSJ op-ed:

Most of us don’t have crews and soldiers at our disposal, but many people still find ways to influence their future selves. Some compulsive shoppers will freeze their credit cards in blocks of ice to make sure they can’t get at them too readily when tempted. Some who are particularly prone to the siren song of their pillows in the morning place their alarm clock far from their bed, on the other side of the room, forcing their future self out of bed to shut it off. When MIT graduate student Guri Nanda developed an alarm clock, Clocky, that rolls off a night stand and hides when it goes off, the market beat a path to her door."

 See What Can We Learn From Congress and African Farmers About Losing Weight?

Something like this came up recently in the New York Times, in reference to factory work and the Industrial Revolution. See Looking at Productivity as a State of Mind. From the NY Times, 9-27. By SENDHIL MULLAINATHAN, a professor of economics at Harvard. Excerpts:

"Greg Clark, a professor of economics at the University of California, Davis, has gone so far as to argue that the Industrial Revolution was in part a self-control revolution. Many economists, beginning with Adam Smith, have argued that factories — an important innovation of the Industrial Revolution — blossomed because they allowed workers to specialize and be more productive.

Professor Clark argues that work rules truly differentiated the factory. People working at home could start and finish when they wanted, a very appealing sort of flexibility, but it had a major drawback, he said. People ended up doing less work that way.

Factories imposed discipline. They enforced strict work hours. There were rules for when you could go home and for when you had to show up at the beginning of your shift. If you arrived late you could be locked out for the day. For workers being paid piece rates, this certainly got them up and at work on time. You can even see something similar with the assembly line. Those operations dictate a certain pace of work. Like a running partner, an assembly line enforces a certain speed.

As Professor Clark provocatively puts it: “Workers effectively hired capitalists to make them work harder. They lacked the self-control to achieve higher earnings on their own.”

The data entry workers in our study, centuries later, might have agreed with that statement. In fact, 73 percent of them did agree to this statement: “It would be good if there were rules against being absent because it would help me come to work more often.”"

The workers, like Odyssues, tied themselves to the mast to resist the temptation of slacking. This made it possible for factories to generate the large output of the Industrial Revolution.

Is There Economic And Political Meaning In "The Wizard of Oz?"

To get a handle on this, you can read Money and Politics in the Land of Oz By Quentin P. Taylor.  Below is an excerpt from the Taylor paper:

"Dorothy, the protagonist of the story, represents an individualized ideal of the American people. She is each of us at our best-kind but self-respecting, guileless but levelheaded, wholesome but plucky. She is akin to Everyman, or, in modern parlance, “the girl next door.” Dorothy lives in Kansas, where virtually everything-the treeless prairie, the sun-beaten grass, the paint-stripped house, even Aunt Em and Uncle Henry-is a dull, drab, lifeless gray. This grim depiction reflects the forlorn condition of Kansas in the late 1880s and early 1890s, when a combination of scorching droughts, severe winters, and an invasion of grasshoppers reduced the prairie to an uninhabitable wasteland. The result for farmers and all who depended on agriculture for their livelihood was devastating. Many ascribed their misfortune to the natural elements, called it quits, and moved on. Others blamed the hard times on bankers, the railroads, and various middlemen who seemed to profit at the farmers’ expense. Angry victims of the Kansas calamity also took aim at the politicians, who often appeared indifferent to their plight. Around these economic and political grievances, the Populist movement coalesced.

In the late 1880s and early 1890s, Populism spread rapidly throughout the Midwest and into the South, but Kansas was always the site of its most popular and radical elements. In 1890, Populist candidates began winning seats in state legislatures and Congress, and two years later Populists in Kansas gained control of the lower house of the state assembly, elected a Populist governor, and sent a Populist to the U.S. Senate. The twister that carries Dorothy to Oz symbolizes the Populist cyclone that swept across Kansas in the early 1890s. Baum was not the first to use the metaphor. Mary E. Lease, a fire-breathing Populist orator, was often referred to as the “Kansas Cyclone,” and the free-silver movement was often likened to a political whirlwind that had taken the nation by storm. Although Dorothy does not stand for Lease, Baum did give her (in the stage version) the last name “Gale”-a further pun on the cyclone metaphor.

The name of Dorothy’s canine companion, Toto, is also a pun, a play on teetotaler. Prohibitionists were among the Populists’ most faithful allies, and the Populist hope William Jennings Bryan was himself a “dry.” As Dorothy embarks on the Yellow Brick Road, Toto trots “soberly” behind her, just as the Prohibitionists soberly followed the Populists.

When Dorothy’s twister-tossed house comes to rest in Oz, it lands squarely on the wicked Witch of the East, killing her instantly. The startled girl emerges from the abode to find herself in a strange land of remarkable beauty, whose inhabitants, the diminutive Munchkins, rejoice at the death of the Witch. The Witch represents eastern financial-industrial interests and their gold-standard political allies, the main targets of Populist venom. Midwestern farmers often blamed their woes on the nefarious practices of Wall Street bankers and the captains of industry, whom they believed were engaged in a conspiracy to “enslave” the “little people,” just as the Witch of the East had enslaved the Munchkins. Populists viewed establishment politicians, including presidents, as helpless pawns or willing accomplices. Had not President Cleveland bowed to eastern bankers by repealing the Silver Purchase Act in 1893, thus further restricting much-needed credit? Had not McKinley (prompted by the wealthy industrialist Mark Hanna) made the gold standard the centerpiece of his campaign against Bryan and free silver?"

Now an excerpt from an economics textbook by Irivin B. Tucker:

"Gold is always a fascinating story: The Wonderful Wizard of Oz was first published in 1900 and this children's tale has been interpreted as an allegory for political and economic events of the 1890s. For example, the Yellow Brick Road represents the gold standard, Oz in the title is an abbreviation for ounce, Dorothy is the naive public, Emerald City symbolizes Washington, D.C., the Tin Woodman represents the industrial worker, the Scarecrow is the farmer, and the Cyclone is a metaphor for a political revolution. In the end, Dorothy discovers magical powers in her silver shoes (changed to ruby in the 1939 film) to find her way home and not the fallacy of the Yellow Brick Road. Although the author of the story, L. Frank Baum, never stated it was his intention, it can be argued that the issue of the story concerns the election of 1896. Democratic presidential nominee William Jennings Bryan (the Cowardly Lion) supported fixing the value of the dollar to both gold and silver (bimetallism), but Republican William McKinley (the Wicked Witch) advocated using only the gold standard. Since McKinley won, the United States remained on the Yellow Brick Road."

But not everyone agrees with this. Economist Bradley Hansen wrote an article titled The Fable of the Allegory: The Wizard of Oz in Economics in the Journal of Economic Education in 2002. Here is his conclusion:

"Rockoff noted that the empirical evidence that Baum wrote The Wonderful Wizard of Oz as an allegory was slim, but he compared an allegorical interpretation to a model and suggested that “economists should not have any difficulty accepting, at least provisionally, an elegant but controversial model” (Rockoff 1990, 757). He was right—we did not have any difficulty accepting it. Despite Rockoff’s warning, we appear to have accepted the story wholeheartedly rather than provisionally, simply because of its elegance. It is as difficult to prove that The Wonderful Wizard of Oz was not a monetary allegory as it is to prove that it was. In the end, we will never know for certain what Baum was thinking when he wrote the book. I suggest that the vast majority of the evidence weighs heavily against the allegorical interpretation. It should be remembered that no record exists that Baum ever acknowledged any political meanings in the story and that no one even suggested such an interpretation until the 1960s. There certainly does not seem to be sufficient evidence to overwhelm Baum’s explicit statement in the introduction of The Wonderful Wizard of Oz that his sole purpose was to entertain children and not to impress upon them some moral. The Wonderful Wizard of Oz is a great story. Telling students that the Populist movement was like The Wonderful Wizard of Oz does seem to catch their attention. It may be a useful pedagogical tool to illuminate the debate on bimetallism, but we should stop telling our students that it was written for that purpose."

I found a review of the book in the NY Times from 1900 and it does not mention anything about OZ having political or economic meaning. The book was also made into a musical a few years later and none of the reviews of the musical mention any political or economic meaning.

The World Is Getting Quietly, Relentlessly Better

By Greg Ip of The WSJ.

"As recently as 1980 nearly half the world lived in “extreme poverty,” that is, consuming less than the basic necessities, which the World Bank values at $1.90 a day in 2011 dollars, adjusted for the differing costs of goods and services between countries. The proportion of people in extreme poverty was projected to fall to an estimated 8.6% last year and, given the correlation between growth and poverty, is almost certain to drop further this year.

Rising incomes alone cannot capture how much better life has gotten. “Nathan Rothschild was surely the richest man in the world when he died in 1836,” economists Max Roser and Esteban Ortiz-Ospina wrote in 2017. “But the cause of his death was an infection—a condition that can now be treated with antibiotics sold for less than a couple of cents. Today, only the very poorest people in the world would die in the way that the richest man of the 19th century died.”

"The world first eradicated a disease, smallpox, in 1980. It could soon eradicate a few more: 2016 saw just 46 new cases of paralytic polio recorded; in 2017, there were just 25 new infections of Guinea worm, a painful and disabling parasitic infection. These victories come not through laboratory breakthroughs but the meticulous application of tried-and-true tools, such as vaccination and improved sanitation."

"As with disease, poverty is being eradicated not through technological miracles but basic rules of growth: Invest more in your human and physical capital, open yourself to markets and trade—that’s right, globalization is good—and incomes will rise."

"As of September, more than half the world—3.8 billion people—are middle-class or rich, Homi Kharas of the Brookings Institution and Kristofer Hamel of World Data Lab found. They define middle class as consuming between $11 and $110 a day, in 2011 dollars adjusted for varying costs between countries."

Related post:

The short history of global living conditions and why it matters that we know it

Some History of Insurance

See Insuring Against Disaster: Insurance policies go back to the ancient Babylonians and were crucial in the early development of capitalism by Amanda Foreman of The WSJ. Excerpts:

"the basic principle of insurance—pooling risk in order to minimize liability from unforeseen dangers—is one of the things that made modern capitalism possible.

The first merchants to tackle the problem of risk management in a systematic way were the Babylonians. The 18th-century B.C. Code of Hammurabi shows that they used a primitive form of insurance known as “bottomry.” According to the Code, merchants who took high-interest loans tied to shipments of goods could have the loans forgiven if the ship was lost. The practice benefited both traders and their creditors, who charged a premium of up to 30% on such loans.

The Athenians, realizing that bottomry was a far better hedge against disaster than relying on the Oracle of Delphi, subsequently developed the idea into a maritime insurance system. They had professional loan syndicates, official inspections of ships and cargoes, and legal sanctions against code violators."

"In Christian Europe, insurance was widely frowned upon as a form of gambling—betting against God. Even after Pope Gregory IX decreed in the 13th century that the premiums charged on bottomry loans were not usury, because of the risk involved, the industry rarely expanded. Innovations came mainly in response to catastrophes: The Great Fire of London in 1666 led to the growth of fire insurance, while the Lisbon earthquake of 1755 did the same for life insurance.

It took the Enlightenment to bring widespread changes in the way Europeans thought about insurance. Probability became subject to numbers and statistics rather than hope and prayer. In addition to his contributions to mathematics, astronomy and physics, Edmond Halley (1656-1742), of Halley’s comet fame, developed the foundations of actuarial science—the mathematical measurement of risk. This helped to create a level playing field for sellers and buyers of insurance. By the end of the 18th century, those who abjured insurance were regarded as stupid rather than pious. Adam Smith declared that to do business without it “was a presumptuous contempt of the risk.”"

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

The insurance market has a problem, though. The customers don’t always tell their insurance company their bad habits (like smoking, riding a motor cycle without a helmut, etc.). So they don’t know how risky you are and therefore don’t know what price to charge you. So sometimes these markets are not efficient.

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

TV chefs showcase recipes using mutton, prices jump

By Lucy Craymer of The WSJ. When tastes increase, demand shifts to the right, raising price. That might have happened since chefs have been featuring this meat, increasing consumers' desire for it. Also, farmers have been raising less sheep in order to move into more profitable products. When the price of good A rises, the supply of good B decreases or shifts to the left (if a firm can produce both products)
 
Excerpt:

"Prices of mutton and other sheep meat are hovering near record highs as more people around the world gain a taste for the strong-flavored red meat.

The growing popularity of ethnic cuisine in the U.S. has introduced a new generation to sheep meat through the likes of kebab platters and mutton biryani, an Indian rice dish with meat and spices.

American and British TV chefs in recent years have showcased burger and stew recipes using mutton, which comes from sheep that are more than a year old. Some casual and fine-dining restaurants are also adding mutton dishes to their menus.

The wholesale price of mutton from New Zealand, where a third of the world’s exports come from, averaged 4.17 New Zealand dollars ($2.85) a kilogram for the year through Sept. 30, up 45% from the previous year. Wholesale lamb prices were up 25% to NZ$7.08 a kilogram, according to an industry association, Beef & Lamb New Zealand.

The higher wholesale prices have translated into higher prices in American stores. U.S. retail prices of ground lamb were around $7.67 a pound earlier this month, up by more than half from a year ago, according to U.S. Department of Agriculture data. Lamb fetches a significant premium to ground beef, which sold at $4.98 a pound.

Rising U.S. consumption in recent years has helped push up prices for mutton and lamb at a time when consumers in China, the Middle East and sub-Saharan Africa are also clamoring for more of the meat.

Sheep populations in Australia and New Zealand—the world’s largest producers and exporters of the meat—on the other hand, have fallen to near their lowest levels in a century. Many former sheep farmers over the years shifted into dairy farming or growing wheat and other higher-yielding crops."

A Special Valentine's Message On Romantic Love

The first one is Researchers at AAAS Annual Meeting Explore the Science of Kissing. The following quote gives you an idea of what it is all about: "Kissing, it turns out, unleashes chemicals that ease stress hormones in both sexes and encourage bonding in men, though not so much in women." I guess economists call this "interdependent utility functions." Meaning that what brings one person pleasure brings brings the other person pleasure, and vice-versa.

The other is Cocoa Prices Create Chocolate Dilemma. (that is from 2009) The article opens with "Soaring cocoa prices are creating a Valentine's Day dilemma for chocolate makers. They don't want to raise retail prices when recession-weary consumers are trying to limit their spending." The problem is crop diseases in Ivory Coast and Ghana. You might need to be a WSJ subscriber to read the whole article.

Here is a new article from yesterday's San Antonio Express-News (2-13-2011). Romance in bloom at workplace: Survey indicates 59% have taken the risk-filled leap. It seems like many people admit to having a romance at work and/or meeting their spouse at work. So what starts out as economic activity leads to some other needs being met.

Now the economic definition of romantic love.

 Abstract: "Romantic love is characterized by a preoccupation with a deliberately restricted set of perceived characteristics in the love object which are viewed as means to some ideal ends. In the process of selecting the set of perceived characteristics and the process of determining the ideal ends, there is also a systematic failure to assess the accuracy of the perceived characteristics and the feasibility of achieving the ideal ends given the selected set of means and other pre-existing ends.

The study of romantic love can provide insight into the general process of introducing novelty into a system of interacting variables. Novelty, however, is functional only in an open system characterized by uncertainty where the variables have not all been functionally looped and system slacks are readily available to accommodate new things. In a closed system where all the objective functions and variables must be compatible to achieve stability and viability, adjustments in the value of some variables through romantic idealization may be dysfunctional if they represent merely residual responses to the creative combination of the variables in the open sub-system."

The author was K. K. Fung of the Department of Economics, Memphis State University, Memphis. It was from a journal article in 1979. More info on it is at this link. The entire article, which is not too long, can be found at this link.

Then there was this related article: Love really is blind, U.S. study finds. Here is an exerpt:

"Love really is blind, at least when it comes to looking at others, U.S. researchers reported on Tuesday.

College students who reported they were in love were less likely to take careful notice of other attractive men or women, the team at the University of California Los Angeles and dating Web site eHarmony found.

"Feeling love for your romantic partner appears to make everybody else less attractive, and the emotion appears to work in very specific ways in enabling you to push thoughts of that tempting other out of your mind," said Gian Gonzaga of eHarmony, whose study is published in the journal Evolution and Human Behavior.

"It's almost like love puts blinders on people," added Martie Haselton, an associate professor of psychology and communication studies at UCLA."

More links:

How to Be a Better Valentine, Through Economics by economist Paul Oyer.

Here’s what science says is the secret ingredient to making your love spark 

Can Giving Up Money And Material Things Lead To More Love?

What Do Men In China Need To Get A Bride?

Adam Smith, Marriage Counselor

A Special Valentine's Message On Romantic Love

Can You Put A Price Tag On Love?

Do Opposites Attract? Not Usually, Except Maybe When It Comes To Money

Return of the Love Headhunters

eHarmony To Provide Personal Counselors To Help You Find Mr. Or Ms. Right

Economist Paul Zak, aka Dr. Love (he studies the brain with "neuroeconomics")

This is your brain on love   (brain scans and biology seem to confirm the economic definition given above)

Dollars & Sex: The Blog of Economist Marina Adshade

Do Women Really Value Income over Looks in a Mate? by Marina Adshade

Toxic Smoke Is Africa’s Quiet Killer. An Entrepreneur Says His Fix Can Make a Fortune

By Peter S. Goodman of The NY Times.

Eric Reynolds decided to give away stoves that burn clean wood pellets which he would sell (much cleaner than what people use now). That reminds me of the razor-razorblade model and "freemiums." He also needs very high sales to take advantage of "economies of scale." More on each of these later.

Excerpts:

"Philanthropic efforts were focused on distributing cleaner-burning stoves. For-profit ventures were developing models for sale. But all of these undertakings were bedeviled by the same problem. The high-tech stoves that limited toxic smoke were as much as $150 each — preposterously expensive for African villagers, many of whom lived on less than 50 cents a day. The cheaper models were useless. 

Most manufacturers were obsessed with keeping costs low, given that customers were poor. But the stoves still produced smoke, or took too long to cook, or required that the wood be chopped into little pieces — an extra burden. The women doing the cooking (and it was overwhelmingly women) were not inclined to use them. As Mr. Reynolds returned to Rwanda for research, he saw many of these models stuck behind houses or propped up by the cooking fire as stools.

To succeed, a stove had to be so convenient and clean burning that women preferred it over their existing cooking method.

Mr. Reynolds began testing stoves made in Italy, India, the United States and China. He tried making his own."

"He settled on a Dutch-made stove that reduces wood down to clean-burning gases. Using pellets reduced the need for wood by 90 percent compared with charcoal. But those stoves cost more than $75.

Then came the epiphany: Inyenyeri could supply the stoves for free while collecting revenue from subscriptions for pellets. Rwanda was urbanizing rapidly, and city dwellers rely on charcoal. They would be eager to switch to pellets, which were 30 to 50 percent cheaper.

“If you sell fuel every day rather than selling a stove every two years,” Mr. Reynolds says, “that’s a business.”

Customers in rural areas could not afford to buy pellets, but Inyenyeri could serve them with a barter system. People could gather sticks, though less than they needed for cooking, and exchange them for pellets. Inyenyeri would use the sticks to make more pellets.

In this way, Inyenyeri would effectively become a utility providing clean cooking fuel. It would construct a network of factories to produce pellets. The bigger the business grew, the cheaper the cost of making them. As charcoal rose in price — a trend propelled by growing numbers of people flocking to cities and needing the product — the more appealing pellets would look."

But one crucial element is still missing — scale.

In every company projection, a steep increase in customer numbers is required for the business to become profitable. Inyenyeri now needs to persuade investors to deliver the cash to buy hundreds of thousands of stoves and erect new pellet plants."

Economies of scale-That is when average cost falls as quantity increases (think of a factory that produces thousands of cars compared to producing only one car-the average cost is lower the more cars you produce, up to a point, since you spread the fixed cost of the factory over more cars).

Razor-Razorblade Model by Will Kenton of Investopedia. Excerpt:

"The razor-razorblade model is a pricing tactic in which a dependent good is sold at a loss (or at cost) and a paired consumable good generates the profits. Also known as a "razor and blades business model," the pricing and marketing strategy is designed to generate reliable, recurring income by locking a consumer onto a platform or proprietary tool for a long period. It is often employed with consumable goods, such as razors and their proprietary blades. The concept is similar to the "freemium," in which digital products and services (such as email, games or messaging) are given away for free with the expectation of making money later on upgraded services or added features.

If you've ever purchased razors and their matching replacement blades, you know this business method well. The razor handles are practically free, but the replacement blades are expensive. The strategy has been erroneously attributed to King Camp Gillette, who invented the disposable safety razor and founded the company that bears his name. Today, Gillette (and its parent Procter & Gamble) employs the strategy to great profit."

There's no such thing as free cheesecake

See Cheesecake Factory's free cheesecake promotion goes awry, one person arrested by Sarah Whitten of CNBC. Excerpts:

• Cheesecake Factory celebrated its 40th anniversary with a free cheesecake promotion with DoorDash.
• The promotion brought crowds of delivery drivers to stores.
• Police were called to one Cheesecake Factory restaurant after a fight broke out while drivers were picking up orders.
• One person is arrested on disorderly conduct charges.

"A free cheesecake promotion celebrating Cheesecake Factory's 40th anniversary turned ugly as orders and DoorDash delivery drivers flooded restaurants. A brawl broke out at one location, and one person was arrested.

The nationwide promotion, which kicked off at 11:30 a.m. local time Wednesday, offered 40,000 free slices of cheesecake to customers who ordered through the DoorDash app. The promotion comes at a time when more restaurants are adding delivery and digital ordering capabilities to meet growing consumer demand for fast and convenient access to food.

Within two hours, all free slices had been ordered, leading some disappointed respondents to complain on social media that they were not able to get their hands on a piece of cheesecake, or if they did, it arrived hours after it was ordered."

"The promotion brought crowds of DoorDash delivery drivers to restaurants, disrupting business. Some locations saw drivers double parking their vehicles so they could enter the restaurant and pick up their orders.

In one instance, police were called to a Cheesecake Factory in Arlington County, Virginia, after a fight broke out while drivers were picking up orders."

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

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

Related posts about problems when thing are given away for free:

Chaos ensues when stuffed bears are given away (almost) free of charge.

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

What happens if you give electricity away for free? (Tesla post)

Taco Bell Gives Away "Free" Tacos, Problems Arise.

IHOP Gives Away Free Pancakes And Gets Slammed.

There Is No Such Thing As Free Salt (Or Sand) .

Trees Are Scarce In San Antonio!

Free Can Be Deadly. (give aways lead to stampedes)

More Free Give Aways Lead to Trouble. (A shopping mall in California gave away free gift certificates)

Josh Hamilton’s grand slam causes a flooring and countertop shortage 

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.

TV chefs showcase recipes using mutton, prices jump

By Lucy Craymer of The WSJ. When tastes increase, demand shifts to the right, raising price. That might have happened since chefs have been featuring this meat, increasing consumers' desire for it. Also, farmers have been raising less sheep in order to move into more profitable products. When the price of good A rises, the supply of good B decreases or shifts to the left (if a firm can produce both products)
 
Excerpt:

"Prices of mutton and other sheep meat are hovering near record highs as more people around the world gain a taste for the strong-flavored red meat.

The growing popularity of ethnic cuisine in the U.S. has introduced a new generation to sheep meat through the likes of kebab platters and mutton biryani, an Indian rice dish with meat and spices.

American and British TV chefs in recent years have showcased burger and stew recipes using mutton, which comes from sheep that are more than a year old. Some casual and fine-dining restaurants are also adding mutton dishes to their menus.

The wholesale price of mutton from New Zealand, where a third of the world’s exports come from, averaged 4.17 New Zealand dollars ($2.85) a kilogram for the year through Sept. 30, up 45% from the previous year. Wholesale lamb prices were up 25% to NZ$7.08 a kilogram, according to an industry association, Beef & Lamb New Zealand.

The higher wholesale prices have translated into higher prices in American stores. U.S. retail prices of ground lamb were around $7.67 a pound earlier this month, up by more than half from a year ago, according to U.S. Department of Agriculture data. Lamb fetches a significant premium to ground beef, which sold at $4.98 a pound.

Rising U.S. consumption in recent years has helped push up prices for mutton and lamb at a time when consumers in China, the Middle East and sub-Saharan Africa are also clamoring for more of the meat.

Sheep populations in Australia and New Zealand—the world’s largest producers and exporters of the meat—on the other hand, have fallen to near their lowest levels in a century. Many former sheep farmers over the years shifted into dairy farming or growing wheat and other higher-yielding crops."

A wave of the tech giants making inroads into the banking business with data tracking algorithms

See A $150,000 Small Business Loan—From an App: Square and other tech firms are jumping into banking, using their vast troves of data to determine creditworthiness by Peter Rudegeair of The WSJ.

Economists say that banks are financial intermediaries. They bring savers and borrowers together. But so are these tech companies that process customer payments. It allows them to learn how good a credit risk the businesses are since they know what there sales are.

Excerpts:

"Last week, the San Francisco company took another step towards banking: It filed paperwork to open its own bank in Utah that would make loans to small businesses and offer deposit accounts to both companies and the general public.

Few things terrify today’s bank CEOs more than the specter of a big technology company elbowing them aside. Square’s new push puts it at the forefront of technology firms aiming to challenge banks not just on payments or digital apps but on the banks’ core business of making loans. Tech firms’ vast troves of customer data can give them a built-in advantage. PayPal Holdings Inc. has extended more than $6 billion in small-business loans since 2013, using data it collected by processing payments for Internet retailers. Over the past seven years, independent merchants that sell goods on Amazon have borrowed more than $3 billion from the e-commerce giant, which approves loans based on sellers’ historical volumes, Amazon reviews and other factors.

Older tech companies and financial firms have recently jumped into the fray. Last year, Intuit Inc. started offering loans to businesses that use its Quickbooks software based in part on the data contained in their accounting statements. First Data Corp. now lets businesses that use payments devices from Clover, a Square competitor that it owns, take out loans based on their sales history.

A team of techies at Square dreamed up its lending program, now called Square Capital, in 2013 when Square was around four years old. Their cumulative work experience in the financial industry was little more than a single yearlong stint at Goldman Sachs Group Inc.

Customer feedback drove the idea. Small-business owners that used Square’s payments services complained they couldn’t get bank loans, either because their personal credit scores were too low or their businesses didn’t generate enough revenue. Square Capital has since extended more than $3.5 billion in loans and cash advances to small businesses."

"It extended about 200,000 business loans in the 12 months ending Sept. 30—more than three times the number of loans banks provided through the entire Small Business Administration over the same period. But the average size of its business loans is about $6,500, much smaller than what banks typically offer."

"Square loans are funded by money managers, and if they decide to stop purchasing the credits, Square Capital would have to slow down its lending. To keep those investors happy, Square Capital also has to charge higher interest rates than banks, which are funded by low-cost deposits."

"Square is trying to achieve a delicate balance of offering banking services without triggering bank-level regulations."

"The bank that Square wants to open would be classified as an “industrial loan company,” a niche type of financial institution that can offer banking services without oversight from the Federal Reserve."

"Square makes automated decisions about riskiness by leveraging its data trove of businesses’ credit-card transactions. Square also looks at more detailed information, like whether a business is attracting repeat customers."

"Most customers never have to fill out a formal application, and Square can deduct repayments from a company’s daily take.

To offload risk, Square sells the bulk of its loans to outside investment firms."

Toxic Smoke Is Africa’s Quiet Killer. An Entrepreneur Says His Fix Can Make a Fortune

By Peter S. Goodman of The NY Times.

Eric Reynolds decided to give away stoves that burn clean wood pellets which he would sell (much cleaner than what people use now). That reminds me of the razor-razorblade model and "freemiums." He also needs very high sales to take advantage of "economies of scale." More on each of these later.

Excerpts:

"Philanthropic efforts were focused on distributing cleaner-burning stoves. For-profit ventures were developing models for sale. But all of these undertakings were bedeviled by the same problem. The high-tech stoves that limited toxic smoke were as much as $150 each — preposterously expensive for African villagers, many of whom lived on less than 50 cents a day. The cheaper models were useless.

Most manufacturers were obsessed with keeping costs low, given that customers were poor. But the stoves still produced smoke, or took too long to cook, or required that the wood be chopped into little pieces — an extra burden. The women doing the cooking (and it was overwhelmingly women) were not inclined to use them. As Mr. Reynolds returned to Rwanda for research, he saw many of these models stuck behind houses or propped up by the cooking fire as stools.

To succeed, a stove had to be so convenient and clean burning that women preferred it over their existing cooking method.

Mr. Reynolds began testing stoves made in Italy, India, the United States and China. He tried making his own."

"He settled on a Dutch-made stove that reduces wood down to clean-burning gases. Using pellets reduced the need for wood by 90 percent compared with charcoal. But those stoves cost more than $75.

Then came the epiphany: Inyenyeri could supply the stoves for free while collecting revenue from subscriptions for pellets. Rwanda was urbanizing rapidly, and city dwellers rely on charcoal. They would be eager to switch to pellets, which were 30 to 50 percent cheaper.

“If you sell fuel every day rather than selling a stove every two years,” Mr. Reynolds says, “that’s a business.”

Customers in rural areas could not afford to buy pellets, but Inyenyeri could serve them with a barter system. People could gather sticks, though less than they needed for cooking, and exchange them for pellets. Inyenyeri would use the sticks to make more pellets.

In this way, Inyenyeri would effectively become a utility providing clean cooking fuel. It would construct a network of factories to produce pellets. The bigger the business grew, the cheaper the cost of making them. As charcoal rose in price — a trend propelled by growing numbers of people flocking to cities and needing the product — the more appealing pellets would look."

But one crucial element is still missing — scale.

In every company projection, a steep increase in customer numbers is required for the business to become profitable. Inyenyeri now needs to persuade investors to deliver the cash to buy hundreds of thousands of stoves and erect new pellet plants."

Economies of scale-That is when average cost falls as quantity increases (think of a factory that produces thousands of cars compared to producing only one car-the average cost is lower the more cars you produce, up to a point, since you spread the fixed cost of the factory over more cars).

Razor-Razorblade Model by Will Kenton of Investopedia. Excerpt:

"The razor-razorblade model is a pricing tactic in which a dependent good is sold at a loss (or at cost) and a paired consumable good generates the profits. Also known as a "razor and blades business model," the pricing and marketing strategy is designed to generate reliable, recurring income by locking a consumer onto a platform or proprietary tool for a long period. It is often employed with consumable goods, such as razors and their proprietary blades. The concept is similar to the "freemium," in which digital products and services (such as email, games or messaging) are given away for free with the expectation of making money later on upgraded services or added features.

If you've ever purchased razors and their matching replacement blades, you know this business method well. The razor handles are practically free, but the replacement blades are expensive. The strategy has been erroneously attributed to King Camp Gillette, who invented the disposable safety razor and founded the company that bears his name. Today, Gillette (and its parent Procter & Gamble) employs the strategy to great profit."

Some 43% of College Grads Are Underemployed in First Job

Chances of graduates using some humanities degrees in first job can be better than some vocational degrees like business and fitness studies

By Melissa Korn of The WSJ. Excerpts:

"College graduates who studied homeland security and law enforcement had a 65% probability of being underemployed in their first job out of school, the report found. Those with degrees in psychology and biology stood chances of 54% and 51%, respectively, of working jobs that don’t require college degrees.

Engineers had only a 29% probability of being underemployed, the best outcome for any major."

"While the average starting salary for a bachelor’s degree holder employed in a job that actually requires such a degree is $46,000, underemployed graduates make an average $36,000"

"Graduates of liberal arts areas like philosophy, foreign languages, ethnic and gender studies, history and English all have a better-than-even chance of landing a job that fits their education level.

They may not pay well, with teaching and social services popular destinations, but graduates can expect to fare better in terms of landing credential-appropriate roles than transportation, culinary services, agriculture and public administration majors."

"job prospects and earnings vary widely by college major, with some counterintuitive results. For example, the bottom quartile of architecture and engineering majors earn far less than the top quartile of humanities and social science majors."

The World Is Getting Quietly, Relentlessly Better

By Greg Ip of The WSJ.

"As recently as 1980 nearly half the world lived in “extreme poverty,” that is, consuming less than the basic necessities, which the World Bank values at $1.90 a day in 2011 dollars, adjusted for the differing costs of goods and services between countries. The proportion of people in extreme poverty was projected to fall to an estimated 8.6% last year and, given the correlation between growth and poverty, is almost certain to drop further this year.

Rising incomes alone cannot capture how much better life has gotten. “Nathan Rothschild was surely the richest man in the world when he died in 1836,” economists Max Roser and Esteban Ortiz-Ospina wrote in 2017. “But the cause of his death was an infection—a condition that can now be treated with antibiotics sold for less than a couple of cents. Today, only the very poorest people in the world would die in the way that the richest man of the 19th century died.”

"The world first eradicated a disease, smallpox, in 1980. It could soon eradicate a few more: 2016 saw just 46 new cases of paralytic polio recorded; in 2017, there were just 25 new infections of Guinea worm, a painful and disabling parasitic infection. These victories come not through laboratory breakthroughs but the meticulous application of tried-and-true tools, such as vaccination and improved sanitation."

"As with disease, poverty is being eradicated not through technological miracles but basic rules of growth: Invest more in your human and physical capital, open yourself to markets and trade—that’s right, globalization is good—and incomes will rise."

"As of September, more than half the world—3.8 billion people—are middle-class or rich, Homi Kharas of the Brookings Institution and Kristofer Hamel of World Data Lab found. They define middle class as consuming between $11 and $110 a day, in 2011 dollars adjusted for varying costs between countries."

Related post:

The short history of global living conditions and why it matters that we know it

Some Companies Offer To Pay All College Expenses For Their Workers

See Now Hiring, With Attractive New Perk: Free College Degree: Companies say benefits of a happy, better-educated staff outweigh the costs of paying for workers’ college education by Kelsey Gee of The WSJ.

Offering a good benefit in a tight labor market that leads to retention of workers reminds me of the "efficiency wage theory" that says that companies pay above market wages to lower worker turnover. This cuts hiring and training costs. Workers might also work harder so that they can keep a job that offers so many benefits.

There also might be economies of scale involved. That is when average cost falls as quantity increases (think of a factory that produces thousands of cars compared to producing only one car-the average cost is lower the more cars you produce, up to a point, since you spread the fixed cost of the factory over more cars).

If the broker firm can deliver thousands of student at once to a school, that lowers their average cost and the college might want to offer a lower tuition to get that many students so easily.

Also, if the broker acts as a single buyer or monopsony, then they can get a lower price. Monopsonies pay less than what would be the price if there was competition or many buyers in the market.

Excerpts:

"Some of America’s largest companies are proposing that a good job can lead to a free college education, reversing the norm that requires workers to get the degree before launching a career.

Walt Disney Co. DIS 3.08% , Discover Financial Services DFS 4.93% and Yum Brands Inc.’s YUM 2.60% Taco Bell are among the high-profile employers sending front-line workers back to school, often paying the cost of tuition, fees, books and other expenses upfront and in full. The companies say the benefits of a content and potentially better-trained staff outweigh the costs.

Many large employers have long offered limited tuition-assistance perks to staff, reimbursing up to the federal tax-exempt maximum of $5,250 a year—after the student successfully completes course work. For most people, though, paying out-of-pocket and then waiting for the company benefit to kick in later proved too much of a barrier, said Jon Kaplan, Discover’s vice president of training and development.

Even so, Mr. Kaplan said, with around 80% of Discover’s 7,000 call-center and field staff lacking a college degree, the company saw a good return on every dollar invested in tuition, as participating employees stayed with the firm longer and moved into more senior positions at a higher rate."

"To secure new corporate partners, Brandman pays an undisclosed fee to Guild Education, a Denver startup that brokers deals between companies and colleges."

"The cost of a bachelor’s degree from a four-year U.S. institution averages $33,000 a year, according to the Education Department. Guild said that by providing schools a large number of part-time and full-time students, it can negotiate the total price down to between $6,000 and $10,000 in some cases"

"Some companies, including Walmart, pay 100% of those costs directly to the school, according to Guild, with minimal or no expense for workers."

"Other companies, including Taco Bell, cover up to $5,000 or so a year in costs up front and negotiate deals on textbooks and other student services for employees."

"the company now offers the college benefit to all 210,000 employees, after a pilot version last year boosted retention among participants by one-third to 98%."

"In the tightest labor market in decades, Disney, Discover and other companies say covering the full cost of college can help them hold on to valuable talent that has become more expensive to attract."