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.

Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards

See Big Technology Stocks Dominate ESG Funds: The most commonly held S&P 500 stocks in actively managed sustainable equity funds last fall were giants including Microsoft, Alphabet and Apple by Akane Otani of The WSJ. Excerpts:

"Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards.

Instead, many of them look a lot like a portfolio of big technology stocks.

The five most commonly held S&P 500 stocks in actively managed sustainable equity funds last fall were Microsoft Corp., MSFT 0.89% Alphabet Inc., GOOG 0.40% Visa Inc., V 1.39% Apple Inc. and Cisco Systems Inc., CSCO -0.74% according to an RBC Capital Markets analysis.

Companies focused on issues that the environmental, social and governance (ESG) movement has come to be associated with, such as renewable energy, clean water, and racial and gender diversity, are relatively underrepresented among such funds. For instance, NextEra Energy Inc. is the world’s largest operator of wind and solar farms. It wasn’t on RBC’s list of widely owned stocks in ESG funds. But big tech companies like Amazon.com and Facebook are on the list.

The data point to one of the biggest frustrations critics have about the world of socially conscious investing: There is no industrywide rulebook to determine what should go into ESG funds.

Some fund managers screen out all companies from a certain industry, like oil and gas, and focus on smaller, lesser-known firms at the forefront of areas like clean energy or boardroom diversity. That risks delivering returns that might drastically trail behind the broader market. So the institutions behind the biggest ESG funds often follow another playbook: They try to minimize how much their fund deviates from the broader market by creating a portfolio that, for the most part, looks like today’s technology-dominated S&P 500—just stripped of the companies with the worst ESG practices within each industry."

"Many of the tech companies that are among the most popular stocks in sustainable funds have earned high ratings across multiple elements that analysts consider in evaluating ESG practices.

Index provider MSCI Inc. gave Microsoft an “AAA” rating on ESG—the highest possible score, awarded to just 4% of companies in the software and services industry. It cited the company’s strength on privacy and data security, corporate governance, lack of corruption and instability, and clean-tech-innovation capacity.

Yet other companies often included in sustainable funds have struck investors as more controversial choices.'

MSCI gave Facebook and Amazon poor ratings on privacy and data security and on labor management, respectively. The two stocks are held by a number of large sustainable funds anyway since they satisfy other criteria. For instance, Brown Advisory’s Sustainable Growth Fund excludes companies that conduct animal testing for nonmedical purposes, own fossil-fuel reserves, derive revenue from “controversial weapons,” or defy the United Nations Global Compact Principles—but doesn’t have in its prospectus any language that disqualifies companies with controversies related to user privacy or labor rights."

"'The fact that definitions of ESG can vary so much from firm to firm has caught the eye of the Securities and Exchange Commission. The agency has sent letters to companies asking advisers how and what they determine are socially responsible investments, The Wall Street Journal reported last year.

Republican SEC Commissioner Hester Peirce has criticized not only the ESG movement but also the way that companies produce ESG ratings and scorecards—saying in a June speech that “ESG is broad enough to mean just about anything to anyone.”"

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?

Why Doing Good Makes It Easier to Be Bad

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

Should you invest according to religious guidelines?

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges)

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

A Special Valentine's Message On Romantic Love

But first some links to related news stories:

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

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? What if companies do that because buyers demand it? Maybe if they didn't they would not maximize profits. That is what Padmanabhan's article is about.

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."

Here is a link to another interesting article by Prasad Padmanabhan: Corporate activism in politics creates business strategy dilemmas.

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

Are kids getting "too much" screen time?

Kids might be spending alot of time on their phones, computers tablets, etc. watching videos, texting, etc. But is it too much?

A person can do too much (or too little) of anything. The optimal amount is found where marginal cost (MC) equals marginal benefit (MB). It is a good idea to keep doing something if the MB of the next unit is greater than the MC. In fact, you keep doing it right up to where they are equal (there is a graph below to illustrate this).

So I was glad to see this article in the NY Times Sunday magazine recently: Is Screen Time Really Bad for Kids? by Kim Tingley. It discusses a study done on the effect of screen time on kids. But in addition to looking at the harms (or costs), it also mentions the benefits. One of the costs it mentions is what "they’re not doing instead" or one of economists' favorite concepts, opportunity cost (which is the value of the best foregone alternative). If you are looking at a screen you are not doing something else, like exercising or sleeping. Excerpt:

"they found that “digital-technology use has a small negative association with adolescent well-being.” But to put that association in context, they used the same method to test the relationship between adolescent well-being and other variables. And in all the data sets, smoking marijuana and being bullied were more closely linked with decreased well-being than tech use was; at the same time, getting enough sleep and regularly eating breakfast were more closely tied to positive feelings than screen time was to negative ones. In fact, the strength of the association screen time had with well-being was similar to neutral factors like wearing glasses or regularly eating potatoes.

Not finding a strong association doesn’t mean that screen time is healthy or safe for teenagers. It could come with huge risks that are simply balanced by huge rewards. “The part that people don’t appreciate is that digital technology also has significant benefits,” says Nick Allen, director of the Center for Digital Mental Health at the University of Oregon. These include helping teenagers connect with others. The real conclusion of the Nature paper is that large surveys may be too blunt an instrument to reveal what those risks and benefits truly are. What’s needed are experiments that break “screen time” into its component parts and change one of them in order to see what impact that has and why, says Ronald Dahl, director of the Institute of Human Development at the University of California, Berkeley. A screen-related activity may be beneficial or harmful depending on who is doing it, how much they’re doing it, when they’re doing it and what they’re not doing instead. “If we just respond to emotions or fears about screen time, then we actually could be interfering with our ability to understand some of these deeper questions,” he says."

The graph I mentioned is below and here is some explanation of what it means.

Marginal benefit-The additional benefit received by consuming one more unit of a good.

Marginal cost-The additional cost of producing one more unit of a good.

Suppose that the graph below shows the marginal benefit and marginal cost of some good. The best or optimal amount would be 14, where marginal benefit and marginal cost cross (where they cross is called "allocative efficiency").

Why is this the best quantity?  SEE THE GRAPH BELOW. Suppose that we currently have 11 items. If we get the 12^th, the cost will be 12 and the benefit will be 16. This makes sense, to spend $12 to get $16 in benefits. It makes sense to keep consuming this item as long as MB > MC. You keep getting better of as we you get closer to 14. It would be a mistake to move beyond 14, since you would be made worse off. We would give up $15 to get the 15^th item while it only brought in $13 in benefits. This would make you $2 worse off.

(MC slopes upward since that is consistent with the Law of Increasing Opportunity Cost, the idea that as you produce more of a good, its opportunity cost increases. If you are giving up, say, sleep, to have more screen time, every additional hour of screen time is more costly in terms of sleep lost because 1 hour of lost sleep is not too bad, but losing a 2nd hour hurts more than losing the first hour (or if it is study time, more costly in terms of lower grades). MB slopes downward since every time you consume one more of something, your marginal or additional benefit falls, like when the first slice of pizza is better than the second and the second is better than the third, etc.)

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.

Why Your Uber Ride Can Cost as Much as a Plane Ticket

Ride hailing apps, promising cheap and easy travel, cannibalized New York’s taxi industry. What happens when they no longer feel like a bargain?

By Ginia Bellafante of The NY Times. Someone living in Brooklyn paid $192 to get to LaGuardia airport for a "trip that typically ran about $35." Excerpts:

"prices always climb when demand is very high, and demand is always high during the holidays."

"A number of factors combined to produce this new reality. Chief among them, according to James Parrott, an economist who analyzes data on ride-hailing services both as an independent academic and adviser to the city’s Taxi and Limousine Commission is the fact that Uber and Lyft had discounted prices in advance of each company’s initial public offering last year.

Rides were artificially cheap. When those IPOs were completed, fares went up (presumably) to satisfy shareholder demand for profitability. Nevertheless, entry onto Wall Street has been disappointing. 

Beyond that, last February, a congestion surcharge imposed by the State of New York went into effect for Uber and Lyft (along with their competitors), which imposed an additional $2.75 fee for cars traversing Manhattan’s central business district. At the very same time, the city’s mandatory wage increase for drivers — which ensures a minimum hourly wage of $17.22, after expenses — also took hold."

"the wage increase, Mr. Parrott told me, has left Uber and Lyft paying a combined additional $50 million a month in driver pay. And then there is the cap on the number of new vehicles the city allows Uber and Lyft to operate, which was extended over the summer, a factor suppressing supply."

"if Uber stops seeming like a reasonable alternative to yellow taxis, people will use it less."

"One possible solution to any uneven distribution of burden might be to lift caps in parts of the city where congestion is less of a concern than it is in the core of Manhattan, below 96th Street. This would make more cars available in places where they are needed, which would in turn deflate prices in less affluent parts of the city.

Lawmakers could also think about simply making the cost of beginning a trip by Uber or Lyft in Manhattan more expensive than it is and leave the rest of the city alone."

Fed Has Many Tools to Deter Recession, Former Chairman Bernanke Says

Quantitative easing, forward guidance could be equivalent to 3 percentage points of rate cuts, Mr. Bernanke

By David Harrison of The WSJ. Excerpts:

"The Federal Reserve has ample tools for fighting a potential recession even though its benchmark interest rate remains historically low, former Fed Chairman Ben Bernanke said."

"Under the current economic conditions, those methods, known as “quantitative easing” and “forward guidance,” represent the equivalent of up to 3 percentage points of cuts in Fed interest rates, he said."

Economists say broad structural changes to the economy such as an aging population or technological advances will hold down interest rates for the foreseeable future.

Right now, the Fed’s benchmark rate is in a range of 1.5% to 1.75%.

By contrast, rates peaked at 5.25% before the financial crisis."

"Mr. Bernanke’s argument that quantitative easing and forward guidance together account for 3 percentage points of rate cuts could soothe the Fed’s fears."

Cocoa Cartel Stirs Up Global Chocolate Market

Ivory Coast and Ghana, which combined produce more than 60% of the world’s cocoa, join forces

By Alexandra Wexler of The WSJ. Excerpts:

"The West African nations of Ivory Coast and Ghana, which combined produce more than 60% of the world’s cocoa, have banded together to form their own chocolate-coated version of the Organization of the Petroleum Exporting Countries.

Like OPEC, whose control over crude oil output has largely driven global oil prices since 1960, the decision by the world’s top two cocoa producers to join forces is expected to raise the cost of candy bars, ice cream and cake. The two-nation chocolate bloc has decided to charge an extra $400 per metric ton of cocoa, which is currently trading around $2,500 per metric ton. 

“COPEC,” as some in government and industry have dubbed the new partnership, is already stirring confusion and unease in the $107.3 billion global chocolate market. The new premium, the second attempt to create a cartel in the cocoa market in the last 50 years, is due to take effect in October."

"Traders expect others to explore alternate sources of cocoa beans. Several smaller cocoa-producing countries are considering their own premiums, looking to the heavyweights as an example."

"Some chocolate companies have already begun buying beans with the premium attached. Most big cocoa users strike cocoa contracts months or more than a year in advance, to secure pricing for the massive quantities they need.

The $400 premium means about a 16% jump in the price of cocoa from Friday’s closing price of $2,520 a metric ton on the ICE Futures U.S. exchange, the New York market that secures future supply."

"The new premium charge “is essentially a $1.2 billion tax on the cocoa industry,” said Eric Bergman, vice president at brokerage JSG Commodities Inc."

"The world’s largest confectioners say they support Ghana and Ivory Coast’s initiative because it should help improve farmer incomes and livelihoods, increasing sustainability in the sector. Companies under increased public scrutiny over supply chains see their public support as taking a stand on a social issue."

"In the past, large multinationals have seen cocoa prices well above $3,000 a metric ton and dealt with them by making candy bars smaller, adjusting the amount of cocoa used in their products and in many instances, by raising prices."

"In Ivory Coast and Ghana, farmers generally sell cocoa beans to local middlemen at a price set each year by the government. The middlemen combine beans from many small farms and sell them in bulk to the government, which then markets to international processors. The processors turn the beans into products like cocoa powder and butter, then sell those to companies like Mars and Hershey."

"According to the World Bank, 80% of cocoa farmers, or four million people and their families, live on less than $3 a day. That statistic hasn’t shifted significantly in years. While cocoa prices go up and down on the international market, living costs for farmers have steadily risen."

"COPEC will have to succeed where other efforts to control cocoa prices have failed: From the early 1970s to the late 1980s, global cocoa supply was managed under an international commodity agreement. It attempted to regulate global prices by buying and withholding cocoa to control supply.

The cartel, made up of most cocoa-producing countries, ultimately failed due to chronic underfinancing and attempts to stabilize the cocoa price at too high a level. When the agreement was eventually suspended, prices fell nearly 40%, and remained low for years as oversupply depressed the market. Since then, there has been a shift toward futures markets to manage that type of risk.

Now, Ivory Coast and Ghana “are following an OPEC-type model,” said Cobus de Hart, an economist at NKC African Economics, a consulting firm.

Unlike the oil-pumping block, the countries would need to regulate an agricultural commodity that takes years from planting to begin producing cocoa beans, he said.

“How are you going to tell the farmers to produce less if it’s the only way they’re earning a living?” Mr. de Hart said. “Oil can stay in the ground, but it’s going to be really hard to get farmers to stop producing.”

Kip Walk, senior director of sustainability at Blommer Chocolate Co., North America’s largest cocoa processor, says the higher prices could lead farmers to dramatically expand their crop, which could see a rise of planting in protected forests or removing children from school to help harvest beans, two issues chocolate companies have been working to address.

Cocoa processors and chocolate makers say they are investing billions in programs that address sustainability issues, such as helping recruit youth to cocoa farming and teaching advanced-growing techniques to small farmers. To make up for the increase in cocoa bean prices, multinationals could cut funding from these programs established just a few years ago to avoid a global cocoa shortage, sustainability experts warn."

"Mars’s Mr. Gerbino said the company will continue to invest in its sustainability initiatives, in addition to paying the premium. Nestlé SA is spending around $45 million a year, up from about $10 million annually a decade ago."

Obscure Model Puts a Price on Good Health—and Drives Down Drug Costs

Concept called QALY places dollar value on the health medicines can restore; ‘starting to influence decision-making’

By Denise Roland of The WSJ. Excerpts:

"The makers of the cholesterol-lowering drug Praluent, which first went on sale for $14,600, offered to sell it for as little as $4,500, after rebates. A new migraine drug called Aimovig, expected to cost up to $10,000 a year, went on sale for $6,900. And Zolgensma, a lifesaving gene therapy for children that its maker said might cost up to $5 million, was priced at $2.1 million.

Behind all the price restraint was a complex economic model invented decades ago to determine how to price health care fairly. These days, a little-known Boston nonprofit group is using it to shame drug manufacturers to lower their prices.

The Institute for Clinical and Economic Review, an outgrowth of Harvard Medical School with no political affiliation or official policy-making role, has latched onto the concept, called the QALY, for “quality-adjusted life year.” It puts a dollar figure on a year of healthy life, calculates how much health a drug restores to a sick patient, then prices drugs accordingly."

"The model, pioneered by U.S. and Canadian economists in the 1960s, has been used for years in slightly different form in many countries, including Canada and the U.K. In the U.S., drugmakers long have opposed such pricing systems, arguing they could lead Medicare to refuse to pay for expensive drugs and cut patients off from new treatments."

"Unlike much of the rest of the world, the U.S. generally doesn’t exclude medicine on the grounds of cost from its publicly funded health-care programs, Medicaid and Medicare. Because of that, drugmakers can typically charge much more than elsewhere in the world.

That is where QALY (pronounced QUAL-ee) comes into the picture. It works like this: One year spent in perfect health equals one QALY. A year with some kind of health problem that affects quality of life would be worth less than one QALY. How much less depends on the severity of the problem."

"For someone suffering from untreated rheumatoid arthritis, though, those 24 years could be marked by extreme pain and loss of mobility and translate to just 10 QALYs. If a certain drug reduces the pain and improves mobility, it might add back another five QALYs, for a total of 15. ICER works out the QALY benefit by reviewing the available data on the drug and translating the outcomes into QALYs.

ICER has affixed a maximum value, $150,000, for each QALY a drug can add. That is based on various health-economics studies into how much Americans are willing to pay for health care and how health-care expenditure compares to per-capita income around the world.

Because the arthritis drug adds five QALYs, the maximum cost should come out to five times $150,000, or $750,000. That cost is then spread over the 24 years the patient is expected to use it. That comes out to $31,250 per calendar year."

"That gives such government buyers leverage over drugmakers in price negotiations and has proved effective at significantly lowering drug prices. Branded prescription drugs in England can cost less than half of what they do in the U.S.

The approach also can cut off patients from new drugs if they are priced above the maximum those governments have set.

England has just emerged from a yearslong standoff with Vertex Pharmaceuticals Inc. over the cystic fibrosis drug Orkambi. The National Health Service, the U.K.’s free-for-everyone, government-funded health-care system, in 2016 used a QALY-based assessment to determine that the drug’s £104,000 ($132,000) a year price tag was too high.

It refused to pay for it. Negotiations on a compromise took nearly four years. Last month, the two sides announced a deal, without disclosing the final price.

Concerns like those are at the heart of the U.S. government’s unease with QALY-based methodology. The Obama administration banned its use in the Medicare program in the 2010 Affordable Care Act.
“This is a cultural issue,” says Steve Miller, chief clinical officer at Cigna Corp., an insurer. “This is America not wanting to put a value on the price of a life.”"

"In the U.S., insurers don’t have the option that makes cost-per-QALY analyses so effective in curbing drug prices in other countries: the ability to walk away. They are prohibited from refusing to pay for treatments solely on the grounds of cost.

They can, however, nudge customers toward better-value drugs by throwing up barriers, such as higher copays, for pricier ones. They also can use those levers to extract bigger discounts from drugmakers. Some are using ICER’s cost-per-QALY reports to help with that."

"Many drugmakers, though, say QALYs are too blunt a tool for measuring the value of drugs and don’t take into account a new medicine’s novelty or its effect on the lives of caregivers, not just patients. Critics also say the values used in QALY calculations are arbitrary and unscientific.

“You win or you lose, based on some arbitrary, nontransparent, non-peer-reviewed report,” says Terry Wilcox, executive director and co-founder of Patients Rising, an industry-funded group that campaigns for improved access to drugs.

The ICER spokesman says that before each planned report, the organization engages with manufacturers, patient advocacy groups and doctors, seeks public comment and shares its economic models with drugmakers. He says the reports eventually appear in peer-reviewed journals."