Social media, insurance and asymmetric information

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

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

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

Excerpts from the article, which explains how insurance companies are trying to get more information about you:

"Did you document your hair-raising rock-climbing trip on Instagram? Post happy-hour photos on Facebook ? Or chime in on Twitter about riding a motorcycle with no helmet? One day, such sharing could push up your life insurance premiums.

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

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

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

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

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

"Some insurers are using social media in handling claims. Insurers can check explanations of auto claims against Facebook testimonials about an accident. And they could challenge disability claims if posted photos from a ski trip, for example, contradict an impairment or illness."  

 Related posts:
Lose the Fat to Lower Your Insurance Rates
How Did Astronauts Of The 60s "Purchase" Life Insurance?
Should Overweight People Pay More For Health Insurance?
Should We Pay People To Adopt A Healthy Lifestyle? 
'Spy car' worries raised by new Allstate patent
Should your company or insurer reward you for meeting exercise goals?
How insurance companies are using technology to better assess how risky customers might be
The EU Says Insurers Can No Longer Discriminate On The Basis Of Gender
Some History of Insurance
Companies and governments are paying people to get healthy, and it works

Are business cylcles imbedded in longer cycles called financial cycles?

See Investors, Buy the Dips: The Economic Cycle Isn’t What It Used to Be by Jon Sindreu of The WSJ. Excerpts:

"Business cycles have historically happened at intervals of between five and eight years, so the current expansion is indeed an abnormally long one."

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

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

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

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

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

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

Related posts:

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

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

Is the U.S. student loan system broken?

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

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

Excerpts:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Related posts:

Who Is Most Likely To Default On Their Student Loans?

Student loan delinquency is higher than for other borrowing

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

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

What Chocolate Shortage? Cocoa Prices Steady as Record Output Projected

Supply concerns made cocoa the best-performing commodity of 2018

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

Excerpts:

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

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

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

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

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

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

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

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

By Marc Mitchell. He is an Assistant Professor at Western University. Excerpt: 

"In the past, the prevailing opinion was that health rewards, like paying people to lose weight, simply do not work. They may stimulate health behaviours in the short term but once removed, people will go back to doing what they were doing before, or worse.

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

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

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

From corporate benefits to Medicaid

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

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

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

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

Small but immediate rewards work better

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

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

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

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

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

Related posts:

Lose the Fat to Lower Your Insurance Rates
How Did Astronauts Of The 60s "Purchase" Life Insurance?
Should Overweight People Pay More For Health Insurance?
Should We Pay People To Adopt A Healthy Lifestyle? 
'Spy car' worries raised by new Allstate patent
Should your company or insurer reward you for meeting exercise goals?
How insurance companies are using technology to better assess how risky customers might be
The EU Says Insurers Can No Longer Discriminate On The Basis Of Gender
Some History of Insurance

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

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

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

Excerpts from Hilsenrath's article:

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

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

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

"Though the U.S. expansion has been a long one, it has lacked vigor. The growth rate has been the most anemic on record, and the jobless rate took years to recede, with lower-skill workers seeing their main gains in just the past couple of years.

Wage growth also has been slow, though when adjusted for very low inflation real wages have grown more robustly than in other expansions. For many households, meanwhile, growing student debt loads have been a burden, and many of the gains from a strong market and recovering home prices went to the highest-income households.

Since World War II, the average U.S. expansion has lasted just 58 months, less than half as long as the current one, but periods of extended growth have been common in many other nations.

Australia is enjoying its 28th straight year of growth. Canada, the U.K., Spain and Sweden had expansions that reached 15 years and beyond between the early 1990s and 2008. Without the Sept. 11, 2001, terrorist attacks the U.S. might have, too.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It is not clear if this is the case with Walmart. Here are excerpts from the article:

"Walmart Inc. WMT +0.21% is expanding its use of robots in stores to help monitor inventory, clean floors and unload trucks, part of the retail giant’s efforts to control labor costs as it spends more to raise wages and offer new services like online grocery delivery.

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

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

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

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

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

Related posts:

Robot Journalists-A Case Of Structural Unemployment?

Structural Unemployment In The News-Computers Can Now Tell Jokes 

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

Answer: a smell Gibson.

Robot jockeys in camel races

Are Computer Programs Replacing Journalists?

Automation Can Actually Create More Jobs 

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

Broncos to debut beer-pouring robot at upcoming game

Robots Are Ready to Shake (and Stir) Up Bars

Unemployment Isn’t What It Used to Be

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

By Neel Kashkari. He is president of the Federal Reserve Bank of Minneapolis. This gets at the relationship between inflation and unemployment. How low can unemployment go before inflation gets too high? Maybe we should look at some other statistic instead of the unemployment rate. Excerpts:

"In 2015 Federal Open Market Committee participants estimated that unemployment couldn’t go below 5.1% without triggering inflation. The rate is now 3.6%, which means 2.4 million more Americans have found work, yet inflation remains low."

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

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

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

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

Related posts:

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

Is There A Neutral Interest Rate? If So, How Much Is it?

Is The Phillips Curve Dead In Japan? Maybe not

Is The Phillips Curve Not Holding Up Well Because The Service And Goods Sectors Are Behaving Differently?

Has the Fed Flattened the Phillips Curve?

Nobody knows what the natural rate of unemployment is today

More on the natural rate of unemployment

How Central Banks Differ In Their Methods Of Calculating Inflation.

Fed Officials Disagree On Threat Of Inflation (from 2009)

Fed Chair Janet Yellen: "there remains considerable slack in the economy" (from 2014)

E-Commerce Might Help Solve the Mystery of Low Inflation

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

Fed Looks for Goldilocks Path as Jobless Rate Drops  

How elasticities affect Uber passengers and drivers

See Passengers May Pay a Lot More. Drivers Won’t Accept Much Less. by Austan Goolsbee. Excerpts:

"Yes, surge pricing — the practice of raising prices when demand is high — makes many people feel irate. But what people actually do is what is important. The most comprehensive study of rider behavior in the marketplace found that riders didn’t change their behavior much when prices surged. (Like most major quantitative studies about Uber, it relied on the company’s data and included the participation of an Uber employee.)

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

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

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

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

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

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

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

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

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

Supply, Demand and the High Price of Vanilla

See Vanilla fever by Wendell Steavenson in "The Economist." Excerpts:

"in 2014 the price of vanilla began to rise. Over the next three years it went from less than $40 per kilogram to more than $600 per kilogram."

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

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

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

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

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

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

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

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

"It was a stable if swampy system, but not all buyers felt they had fair access to Madagascar’s vanilla. In the early 1990s, as part of a wider privatisation policy, the World Bank insisted that vanilla prices be allowed to float. Yet no market institutions or regulations were put in place. In the ensuing free-for-all, the price of vanilla plummeted to below $40 a kilogram and farmers neglected the crop.

The path from pod to pot of ice cream is a long one and could not be hurried in the face of rising demand. Many vanilla vines grow on forested slopes and often lie several days walk from paved road. A newly planted vine takes three years to bear pods. Even once it does, says Henry Todd of Virginia Dare, it can take another two years for the fruit to reach a tub of ice cream."

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

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

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

"But why did the price rise so high? Though demand had risen, it hadn’t grown tenfold in three years. And although the Enawo cyclone blew through Sava in March 2017, it didn't destroy 90% of the vanilla vines.

In 2018, the price fell back a little to around $400, from a peak of over $600. Foreign buyers like Todd believe that the industry is still in “crisis” and publically rue the deterioration of quality caused by speculation. But privately, Todd and almost everyone else I speak to agree that money from the illegal rosewood trade fuelled the vanilla boom.

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

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

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

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

Related posts:

Vanilla is so valuable now that it needs to be guarded

Vanilla Is In The News Again

How Technology Has Changed The Distribution Of Income Among Musicians

See Music Superstars Are the New One Percenters: Huge stars like Beyoncé and Taylor Swift are dominating the concert-tour business like never before, as music’s top 1% takes home an increasingly large share of the pie by Neil Shah of The WSJ. Excerpts:

"A small number of superstars like Beyoncé and Taylor Swift is gobbling up an increasingly outsize share of concert-tour revenues, as music’s biggest acts dominate the business like never before.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here is an excerpt from The Wealth of Nations found at The Library of Economics and Liberty.

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

Now excerpts from Professor Padmanabhan's article, which says if companies want to make a profit, they have to do good.

"Rightly or wrongly, firms now believe that they should routinely report their performance along financial and nonfinancial lines to outside stakeholders. It seems important for them to prominently display their social and environmental performance in addition to their financial performance to stakeholders. Arguably, each generation of stakeholders believes it is more conscious about social and environmental issues than the previous generation. Hence, firms may seem to be pandering to the needs of these generational stakeholders by showcasing their nonfinancial performance as well.

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

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

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

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

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

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

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

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

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

Related posts:

Why Doing Good Makes It Easier to Be Bad

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

Can You Find Virtue by Investing in Vice?

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

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

Data show that socially responsible investments can outperform the S&P 500 index
 
Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

For a humorous view of this issue see

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

Why Doing Good Makes It Easier to Be Bad

By Abbas Panjwani. He is a journalist at Full Fact, the UK’s leading fact-checking charity. He has previously written for the Sunday Times.

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

But this article says that if you work in a "socially responsible company" it makes you think that it is okay to do something immoral, that somehow you have earned that right.

Excerpt:

"Oscar Wilde, the famed Irish essayist and playwright, had a gift, among other things, for counterintuitive aphorisms. In “The Soul of Man Under Socialism,” an 1891 article, he wrote, “Charity creates a multitude of sins.”

So perhaps Wilde wouldn’t have been surprised to hear of a series of recent scandals in the U.K.: The all-male charity, the President’s Club, which raised money for causes including children’s hospitals through high-valued auctions, was forced to close after the Financial Times uncovered sexual assault and misogyny at its annual dinner; executives of Oxfam, a poverty eradication charity, visited prostitutes while delivering aid in earthquake-stricken Haiti, and were allowed to slink off to other charities, rather than being castigated for their actions; and ex-Save the Children executives Brendan Cox and Justin Forsyth stepped down from their roles at other charities, after allegations of sexual harassment and bullying toward junior female colleagues resurfaced.

You might wonder how people who seem so good by occupation could be so bad in private. The theory of moral licensing could help explain why: When humans are good, it says, we give ourselves license to be bad.

In a recent paper, economists at the University of Chicago reported that working for a socially responsible company motivated employees to act immorally. In one experiment, people were hired to transcribe images of short German texts and paid 10 percent upfront, with the remaining payment being delivered if they completed the transcriptions, or if they declared the documents too illegible to transcribe. When they were told that, for every job completed or marked illegible, 5 percent of their wages would be donated to Unicef’s educational programs, the instances of cheating rose by 25 percent, compared to where no charitable donation was offered. Cheating manifested in both workers not completing jobs (taking the 10 percent upfront fee and running) and also workers saying that documents were too illegible to transcribe (and so receiving the full fee).

“The share of cheaters [was] highest when we frame corporate social responsibility as a prosocial act on behalf of workers,” the researchers, John A. List and Fatemeh Momeni, found. When the workers felt a greater sense that their own actions would lead to charitable donations, like Robin Hood, they in turn felt enough license to steal, essentially, from their employer to give to charity. “The ‘doing good’ nature of [corporate social responsibility] induces workers to misbehave on another dimension that hurts the firm,” List and Fatemeh concluded."

Related posts:

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

Can You Find Virtue by Investing in Vice?

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

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

Data show that socially responsible investments can outperform the S&P 500 index
 
Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

For a humorous view of this issue see

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

Why honey prices have climbed about 25% since 2013

See You’ll Need a Lot More Money to Buy That Jar of Honey: Beekeepers are in a sweet spot as consumer trends shift away from cane sugar and high-fructose corn syrup by Lucy Craymer of The WSJ. Excerpts, with my comments in brackets:

"Honey prices are starting to sting.

Global honey prices are at their highest levels in years, due to a new wave of consumer demand for natural sweeteners [demand increases because tastes or preferences increased with the opposite happening for sugar] and declining bee populations that are hampering mass production [supply decreases]."

"In addition, it is being used more as an ingredient in shampoos, moisturizers and other personal-care products that companies market as naturally made [another increase in demand due to tastes]."

"Retail honey prices world-wide recently averaged $4.69 a pound, according to market research firm Euromonitor International. Prices have climbed about 25% since 2013, while the cost of sugar has fallen around 30% over the same time frame."

"U.S. retail prices averaged $7.66 a pound in May, up 9% from a year earlier"

"Those prices have risen by about two-thirds in the last decade"

"Americans consumed 596 million pounds of honey in 2017, or an average of nearly two pounds per person—up 65% since 2009 [if demand shifts right, we expect both price and quantity to increase]."

"It has been touted by celebrities—including tennis starNovak Djokovic—for its health benefits and numerous scientific studies have shown it can help heal wounds, ulcers and burns [maybe this is part of the reason tastes increased]."

"Global honey production has been relatively stable over the past five years [but if supply shifted left that could cancel out the demand increase and leave quantity the same]."

"In the U.S., honey production peaked in 2014 and has fallen 15% since then [if supply shifted more to the left than demand shifted to the right, total Q falls-maybe the increased American quantity means less for consumers elsewhere]."

What happened in some earlier U.S. trade Wars?

Want to know how Trump's trade war ends? Look to the War of 1812 by Shawn Donnan of Bloomberg. 

"President Donald Trump’s escalating trade war against China has drawn plenty of historical parallels. The Chinese like to invoke the 19th-century Opium Wars and the national humiliation that followed. In the U.S. the comparison is increasingly to the Cold War against the Soviet Union, or the 1980s trade wars against Japan.

Ask Douglas Irwin, author of “Clashing Over Commerce: A History of U.S. Trade Policy,” however, and he argues the most accurate comparison from an American perspective is the War of 1812.

That conflict was born out of a trade war (a British embargo of France) and fought at least partly as a trade war (a British blockade of America). It also yielded another trade war.

Once the war was won, it prompted calls for a decoupling from a British economy with which America’s was deeply integrated, Irwin said. And like the current calls related to China, that was based on a bigger existential question for the U.S.

“We wanted to reduce our dependence on Britain, which was viewed as an enemy power,’’ said Irwin, a professor at Dartmouth.

In response, Washington began imposing higher tariffs on British goods to protect what it declared to be strategic U.S. industries. That action grew into manufacturers’ calls for protection from cheap British imports that would become a feature of political debate through the 19th century.

You can argue today’s economic stakes are undoubtedly much higher in value terms. But the War of 1812 and the dependence on British industry at the time presented a legitimate existential question. The British got all the way to Washington and set fire to the White House in 1814, after all.

Irwin is not hopeful about the future of Trump’s China trade war. He believes a resolution in the short term is unlikely. “If you are really asking for economic regime change that’s something no country, particularly one that is as nationalistic and proud as China, is going to deliver on,’’ he said.

Irwin fears it could all end in a new technology Cold War. His problem with the comparison with the conflict with the Soviet Union is that Moscow never posed a real economic challenge to the U.S. And with Japan the inverse was true.

“That is where China is really different,’’ he said.

The 1980s trade wars against Japan were also fought in a very different way, Irwin argues.

The Trump administration’s emphasis so far has been on tariffs and other defensive economic tools, he said. In the Reagan administration the focus was as much on offensive measures such as boosting research and development and American competitiveness. Reagan was also a vocal defender of free trade.

Complicated as it seemed at the time, the friction with Japan over everything from cars to televisions and semiconductors was simpler to deal with. Yet it still took time to sort out. That bodes badly for anyone hoping for a quick resolution with China.

“There were years of discussions and they were a much more market-oriented economy than China,’’ Irwin said. “And here the stakes are bigger.’’"

Mexicans buy fake cellphones to hand over in muggings

By Mark Stevenson of AP. This reminds me of "signaling" in economics. Here is Wikipedia says about it:

"In contract theory, signalling (or signaling; see spelling differences) is the idea that one party (termed the agent) credibly conveys some information about itself to another party (the principal). For example, in Michael Spence's job-market signalling model, (potential) employees send a signal about their ability level to the employer by acquiring education credentials. The informational value of the credential comes from the fact that the employer believes the credential is positively correlated with having greater ability and difficult for low ability employees to obtain. Thus the credential enables the employer to reliably distinguish low ability workers from high ability workers." 

 Here are excerpts from the AP article:

"Armed robberies have gotten so common aboard buses in Mexico City that commuters have come up with a clever if disheartening solution: Many are buying fake cellphones, to hand over to thieves instead of their real smartphones.

Costing 300 to 500 pesos apiece — the equivalent of $15 to $25 — the “dummies” are sophisticated fakes: They have a startup screen and bodies that are dead ringers for the originals, and inside there is a piece of metal to give the phone the heft of the real article.

That comes in handy when trying to fool trigger-happy bandits who regularly attack the buses, big and small, that ferry people from the poorer outlying suburbs to jobs in the city center."

"Now, many people carry a device worth hundreds of dollars in their pocket, and one that may also hold their bank or credit card information.

That’s where “dummy” vendors like Axel come in. Axel says he sells three or four dummy phones a week out of his stall in a downtown electronics marketplace"

"But Axel admits the victim would be in trouble if a thief caught them handing over a “dummy” phone.

“Obviously there are problems, because if the criminals search it or find out … there is going to be a problem.”

Because of that, some try a different strategy, spending a little more to buy a cheap but real second phone."

"the dummy trade started about 14 years ago, but for different reasons: Phone shops would buy dummies for their exhibition cases to protect against another type of crime, the so-called “sledgehammer crews” who can clear out a jewelry or electronics store in seconds by breaking windows."

Related posts:

A fake job reference can be just a few clicks away.

Fake Economist Fools Portugal.

Slave Redemption in Sudan. (Fake slaves are sold to those who buy slaves and then give them their freedom)

Can A Product Work Just Because It's Expensive?. (fake medicine)

If It Pays To Have Friends, Can You Pay To Have Friends?. (you can hire fake boyfriends)

Study: Half of American Doctors Give Patients Placebos Without Telling Them.

Saudis grapple with fake street sweepers .

Rent a White Guy: Confessions of a fake businessman from Beijing (by Mitch Moxley in The Atlantic Monthly)

Can adding a phantom third story to their homes help families find a wife for their son?

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

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

See Post from Harvard professor Greg Mankiw. He shows that over the last 30 years, when percentage of 25-54 year olds employed increased (similar to the unemployment rate going down), inflation was higher than when the percentage of 25-54 year olds employed decreased.

If the Phillips Curve is right (at least in the short-run), this is what we would expect: inflation to be higher when unemployment is lower.

According to today's WSJ, Fed. Vice Chair said the economy is not beyond full-employment even with unemployment at 3.6%, so high inflation in the near future is not a concern. Inflation does not seem to respond to low unemployment the way it used to.

See also The Economy Is Strong and Inflation Is Low. That’s What Worries the Fed. by Jeanna Smialek of The NY Times. Excerpts: 

"Inflation rose a scant 1.6 percent in the year ending in March, well short of the central bank’s 2 percent target. The Fed’s policymakers are worried about the continuing sluggishness, and President Trump has repeatedly cited low inflation as a reason for the central bank to start cutting interest rates.

“We are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!” Mr. Trump said in a recent tweet.

The Fed, for its part, is wrestling with how to respond to persistently low inflation amid what appears to be the weakening of a foundational economic relationship. Unemployment is at its lowest level since 1969, which should spur higher wages as companies compete for workers. Climbing labor costs should eventually get passed along to customers, driving inflation up. Instead, it is moderating."

"The breakdown leaves the Fed staring down an uncomfortable question. If officials can’t get that old chain reaction to work 10 years into an economic expansion, against a backdrop of tax cuts and high government spending, and with exceptionally low joblessness, will they ever?

The Fed’s chairman, Jerome H. Powell, has called weak inflation “one of the major challenges of our time.” In part to address it, he has led the Fed to embark on a yearlong review of its communications, tools and strategy. A major goal is determining what is reining in price gains and what can drive inflation back to the Fed’s target in a sustainable way.

Extra labor supply is one obvious culprit. Since 2016 at least some Fed officials have declared the labor market “at or near full employment.” But the job market keeps surprising them. Prime-age workers are hanging onto their positions for longer.

That’s provided an unexpected source of new employees, enabling brisk hiring to persist without a run-up in wages and prices. Average hourly earnings have shown progress without rocketing up.

Officials have repeatedly lowered their estimates of sustainable unemployment as a result, and Richard Clarida, the Fed’s vice chairman, has suggested that the jobless rate is “not far below many estimates” at that revised level.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, goes a step further. He thinks that the Fed, which has raised interest rates nine times since 2015, began doing so too early and that the economy remains below full employment. Premature tightening has convinced the public that inflation won’t rise to 2 percent this business cycle, he thinks, and now consumers and businesses are acting accordingly.

Beyond slack in the labor force and expectations, forces like technology and globalization may be restraining pricing power. Consumers with Amazon and Yelp in their pockets can easily avoid overpaying."

Related posts:

Is There A Neutral Interest Rate? If So, How Much Is it?

Is The Phillips Curve Dead In Japan? Maybe not

Is The Phillips Curve Not Holding Up Well Because The Service And Goods Sectors Are Behaving Differently?

Has the Fed Flattened the Phillips Curve?

Nobody knows what the natural rate of unemployment is today

More on the natural rate of unemployment

How Central Banks Differ In Their Methods Of Calculating Inflation.

Fed Officials Disagree On Threat Of Inflation (from 2009)

Fed Chair Janet Yellen: "there remains considerable slack in the economy" (from 2014)

E-Commerce Might Help Solve the Mystery of Low Inflation

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

Fed Looks for Goldilocks Path as Jobless Rate Drops