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Why Aren’t They Leveraging Their Awesome Market Power?

March 15th, 2014 · No Comments · Uncategorized

Monopsony power (a supplier of labor who can set wage prices) is cited as a primary reason for labor price floor decrees, especially to justify minimum wage hikes or cartelization of workers.

Monopsony provides a reasonable theoretical justification that effectively bypasses the issue of inefficiency (the theory gets to the “right” price) etc.

The problem in this instance is that if you look at the top low-wage employers in the U.S, there is significant overlap with the companies cited in this USA Today piece, “Nine retailers closing the most stores”.

Weakened companies cannot afford the real estate and personnel costs that go along with supporting hundreds of unprofitable locations. The clearest proof of the problem was RadioShack’s recent decision to close more than 1,000 stores.

RadioShack is hardly alone. During that last several years Gap has closed 20% of its locations. Even Macy’s, which has forecast strong earnings and is considered the most successful of the mid-market retailers, closed stores recently.

My question is: If these companies have such awesome price-setting power in regards to labor, why are their margins so weak? Why are competitive pressures forcing them to close stores, and yet it’s asserted they don’t compete for labor?

I’ll bet there’s that one special study somewhere that can reconcile this.

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It’s Not Just Buildings, They Can’t Keep Track of Cars Either

March 15th, 2014 · 1 Comment · Uncategorized

I’ve been meaning to write about this for a long time, and Alex Tabarrok’s post about the NPR piece: “Government’s Empty Buildings Are Costing Taxpayers Billions” has inspired me.

Tabarrok says:

The NPR article is excellent but it vastly underestimates the size of the problem. In addition to empty buildings, the Federal government owns/controls millions of acres of land that are worth hundreds of billions and perhaps even trillions of dollars. The land is not being used to its full value or potential even though maintenance costs runs in the tens of billions annually.

in 2012, it was reported that a local municipality (not even a Federal agency) had misplaced — get thishundreds of Toyota Priuses for five years. Miami-Dade County bought them, forgot about them and then let them rot in a parking garage for a couple thousand days.

I am reminded of something Don Boudreaux expressed recently regarding Krugman’s Econ 101 textbook.

I’ll likely write more in a follow-up post about Jim Gwartney’s excellent presentation, but I conclude this post by asking you to suppose that the above passage from Krugman and Wells had ended not with:

An important part of your education in economics is learning to identify not just when markets work but also when they don’t work, and to judge what government policies are appropriate in each situation.

but, instead, ended with:

An important part of your education in economics is learning to identify not just when governments work but also when they don’t work, and to judge what market policies are appropriate in each situation.

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Solving Global Warming: Are the Democrats Really Constrained by the GOP?

March 12th, 2014 · No Comments · Uncategorized

Tim Carney quotes NYT climate-change reporter, Coral Davenport who asserts: “The members know that serious climate change legislation stands no chance of passage in this divided Congress.”

If the congress were not divided, what would happen? In 2009 the Democrats held the majority in the house and senate. Of course, they also held the presidency. What action was taken on this matter which is “the defining issue of our generation”?

In 2009, five bills designed to tax/reduce carbon dioxide emissions were introduced: H.R. 1337, 1760, 2880 and S.R. 2877, 1399.

Only S. 2877 (111th): “Carbon Limits and Energy for America’s Renewal (CLEAR) Act” even made it to committee. There it promptly died. There are nine steps a bill needs to take to become law. Only S. 2877 made it past step one.

What else made it as far as step two? How about H.Con.Res. 142, which in 2012 specifically opposed “federal efforts to establish a carbon tax on fuels for electricity and transportation.” It did better than 80 percent of the green tax efforts. Also, it was cosponsored by three Democrats: Nick Rahall, Tim Holden, and Collin Peterson.

It’s the Republicans who are single-handedly holding us back? How about those Democrats who want to get re-elected?

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Options Have Value, or Why Voting is Rational

March 9th, 2014 · No Comments · Uncategorized

For as long as I have been studying economics, economists have been proclaiming the act of voting is irrational. The conventional wisdom is that since the odds of your vote making a difference are essentially zero, it makes no sense to do it.

But since people DO vote, many explanations have been proffered for for why this is the case. Notions such as avoiding stigma and Kant’s categorical imperative are put forth.

I have discovered what I believe is a powerful incentive to vote, yet one that I have not yet seen offered up elsewhere.

A few years back, a budding politician I knew had been rapidly and effectively eliminated from his campaign for office thanks to opposition research that revealed he had not voted in over 20 years. Given this perceived apathy and lack of involvement, he was immediately forced out of the electoral landscape.

From this I learned that if you don’t vote you effectively lose your right to pursue public office.

Given that, I’ve recently asked a few people the following related questions:

1) How much would you pay for a perfectly intelligent agent to vote for you automatically in a way that would reflect your preferences? No filling out a ballot again ever, yet your vote would be recorded effortlessly.

2) How much would you need to be paid to waive your right to ever run for public office?

So far, in every instance the amount claimed for option one is less than the amount for option 2.

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Conflict of Visions: #Ukrainefail and the Smart Set

March 4th, 2014 · No Comments · Politics

Reset button
The conservative blogosphere is reveling in some serious schadenfreude this week. Mitt Romney and Sarah Palin have been more than vindicated after being mocked and criticized for statements regarding Putin and the Ukraine.

Not only have they been proven spot-on in their predictions about the Ukraine being at risk, and Putin’s ambitions, but also at least one prominent Ivy League political science major (who writes for Foreign Policy Magazine) has been forced to publicly apologize. Too add insult to injury, the Washington Post who once said “Barack Obama’s clear-eyed view of the road ahead makes him the better choice for president.”, now claims his foreign policy is “based on fantasy.”

It’s particularly challenging for the opposition to wave multiple predictions away as “lucky” especially given the diametrically opposed assertions made by the intelligentsia:

As recent as a week ago, Time Magazine’s Moscow correspondent (and writer for Foreign Policy) Simon Shuster wrote the headline “No, Russia Will Not Intervene in Ukraine.” Ouch.

Take this statement from Rachael Maddow, who sports a Stanford public policy degree with a Doctor of Philosophy degree in poli sci from Oxford. Here she references Romney’s criticism of Obama’s dealings with Putin:

“The problem is the former governor just doesn’t have any real policy chops in this area. He’s out of his depth, and struggles when the subject takes center stage.
It’s not just that Romney is uninformed; it’s that he hasn’t figured out how to fake it.”

Are Smarts Overrated?

How does one explain that highly educated professionals who sport high I.Q.’s, went to the best schools and possess local knowledge (live in Moscow!) are simply unable to see what a “provincial” University of Idaho journalism major can?

How can a Harvard graduate say “The Soviets have always found the rubles to match our military escalation…to assume that they’re the ones who would buckle is madness.” When the Eureka College grad understood that the Soviet planned economy was not structured to respond adequately to the demands of the complex modern economy?

Vision Trumps Education and I.Q.

Peter Drucker claimed “culture eats strategy for lunch.” In a similar vein, (many) years ago I asserted “give me a slow 68020 running the Mac OS over a fast ‘486 running DOS any day” In other words, a good model running on a slow brain beats a brainiac running a bad model every time.

Constrained vs Unconstrained Thinkers and Foreign Policy

I’ve written many times about Thomas Sowell’s A Conflict of Visions. He deals with the differing visions (models) surrounding war and conflict (emphasis mine):

“As in other areas of human life, the unconstrained vision seeks to discover the special reasons for evils involving force and violence—war and crime, for example—while the constrained vision takes these evils for granted as inherent in human nature and seeks instead to discover contrivances by which they can be contained—that is, to discover the causes of peace or of law and order.”

In other words, for the unconstrained conflict is an abnormal condition, hardly something to be counted on.

For the constrained, conflict is the normal condition and should be anticipated, absent safeguards (usually via deterrence).

How can the unconstrained thinkers who seek peace best achieve their goals? In a nutshell, try reset (“overcharge”?) buttons and apology tours:

“Steps for a peace-seeking nation to take to reduce the probability of war therefore include (1) more influence for the intellectually or morally more advanced portions of the population, (2) better communications between potential enemies, (3) a muting of militant rhetoric, (4) a restraint on armament production or military alliances, either of which might produce escalating counter-measures, (5) a de-emphasis of nationalism or patriotism, and (6) negotiating outstanding differences with potential adversaries as a means of reducing possible causes of war.”

How do the constrained promote peace? Sowell claims it’s by:

“(1) raising the cost of war to potential aggressors by military preparedness and military alliances, (2) arousal of the public to awareness of dangers, in times of threat, (3) promotion of patriotism and willingness to fight, as the cost of deterring attack, (4) relying on your adversaries’ awareness of your military power more so than on verbal communication, (5) negotiating only within the context of deterrent strength and avoiding concessions to blackmail that would encourage further blackmail, and (6) relying more on the good sense and fortitude of the public at large (reflecting culturally validated experience) than on moralists and intellectuals, more readily swayed by words and fashions.”

The constrained view aligns closely with the rhetoric of Palin and Romney. Sounds a bit barbaric doesn’t it? Like maybe from a less civilized era? Like maybe something from the “19th century”?

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26 Hours on an Aircraft Carrier at Sea: Unexpected Takeaways

January 27th, 2014 · 1 Comment · Uncategorized

I returned from a whirlwind trip to San Diego 48 hours ago. Thanks to my friend Dennis Hall, I was able to experience spending a day (and overnight) on the aircraft carrier USS Carl Vinson.

Going into it I knew that I would be having the experience of a lifetime — a tailhook landing at sea, a catapult takeoff, seeing F/A-18 Hornet fighters up close, landings and takeoffs from the carrier deck, etc. etc. And while I will be posting photos and videos of many of these fun and thrilling experiences, the first postings since my return will be about the unanticipated things I discovered on my trip.

Here’s a quick overview of what the trip was about. I was a part of a group of 15 civilian bloggers and social media types that were invited to “embark” for an overnight tour of a massive aircraft carrier located about 100 miles off the coast of Mexico. During the 26 hours we were aboard, we were treated like royalty, and taken to all of the major functional areas of the ship (with the exception of the reactor room.)

At each location we were provided with an in-depth overview of the functions provided by the team there and encouraged to ask questions of anyone and everyone we came into contact with. This included a lengthy briefing and Q/A session with Rear Adm. David F. Steindl, commander of Carrier Strike Group 1.

One of the many unanticipated takeaways from this trip was that this kind of ship has a myriad of critical roles.

It’s not just about warfighting.

Aid: If you think the job of an aircraft carrier is to help fight wars, you’re right — but that’s only one facet of their mission. Much of what a carrier and crew do is deliver humanitarian aid to places like Haiti and the Philippines where earthquakes and typhoons have hit. A nuclear powered aircraft carrier contains 150 hospital beds, a three bed ICU, plus an operating room with surgeon and anesthesiologist. Their desalinization plants can produce more than 400,000 gallons of fresh water per day.

Deterrence: Also, it’s clear that the mission of *not* fighting wars is important. When four acres (that’s just the upper deck) of sovereign America can be delivered almost anywhere in the world along with a contingent to 60-plus aircraft and a compliment of long range missiles, it makes quite an impression.

I learned during our formal dinner with the Executive Officer(XO) of the ship, that the commander of the single (one) aircraft carrier owned by the Chinese navy had dined with him at that same table. Given the apprehension over China’s recent aggressive moves at sea, I felt reassured that a potential adversary had seen first-hand the awe-inducing show that the Carl Vinson can put on.

More to come, this is just a small sample of what a civilian discovers when they attend the ultimate field trip.

The thrill-ride aspect of the voyage came from our takeoff from and landing on the ship. See the landing we experienced below. Felt like we pulled 2 to 3 G’s…

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Taleb on Statistics

December 31st, 2013 · No Comments · Economics

A favorite of mine from Fooled by Randomness:

“It is a mistake to use, as journalists and some economists do, statistics without logic, but the reverse doses not hold: It is not a mistake to use logic without statistics.”

I frequently see conclusions from those who lean on tortured data sets in order to reach preferred policy conclusions riddled with internal inconsistencies. Several of these show up in the many documented “Krugman Kontradictions.”

Not sure these two things can be separated. It appears to me that internal consistency is a critical element of robust statistical analysis.

A personal example. For decades, a good friend and I have done simultaneous eye rolls whenever we hear people say things like “I can’t sell my house” (or car, boat, concert ticket etc. etc…) In the decades we’ve hung out, it’s come up scores of times. We agree that if you “can’t sell” something, you are charging too much. In other words, demand curves slope downwards.

Sadly, this same friend will enthusiastically reference Steve Keen and his notion that demand curves can be any shape. And in any particular instance where it’s required, he can make (or find) the data appear to sing that song. Of course the contrary data exists too. One can make the data look any way one wants. The difference is the logic.

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Krugman and The Fallacy Of The Crucial Experiment

December 2nd, 2013 · 5 Comments · Uncategorized

Krugman decided to write about the minimum wage today.

As one would expect, he is all for raising it. He provides non-controversial assertions that:

  • It’s low by historical standards.
  • Foreign competition is not a relevant factor.
  • He likes the E.I.T.C. and it compliments the minimum wage nicely.
  • The public favors it.
  • A higher minimum wage raises earnings.

So far so good, but unfortunately as an economist it’s hard for him not to escape talking about the economics of it all. That’s where he gets a little lazy. He begins by providing some decent rhetorical cover:

Doesn’t that violate the law of supply and demand? Won’t the market gods smite us with their invisible hand? The answer is that we have a lot of evidence on what happens when you raise the minimum wage. And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings.

“A lot of evidence?” Okay! Nice. Finally. Krugman the Nobel winning economist will no doubt provide us with more than that ONE STUDY that all minimum wage advocates throw out incessantly. There have to be scores of them, right?

While there are indeed more wage studies that back up the notion that traditional supply and demand curves don’t exist in the labor market, he provides none. For those who are after data and peer-reviewed research, He links us to a page that cites two (2) studies as evidence. One is (you guessed it) that tired old Card and Krueger research. The other takes us to a 404 page.

What does Krugman’s “a lot of evidence” page link to that’s not a 404? How about a meta-analysis of scores of research papers that concludes: Based on their comprehensive reading of the evidence, Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. They reduce employment opportunities for less-skilled workers and tend to reduce their earnings; they are not an effective means of reducing poverty; and they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital.

In the field of scientific criticism, Krugman and his acolytes are invoking something called the Fallacy of The Crucial Experiment. This is where one claims an idea has been proven by a single pivotal discovery.

Following the theme of The Crucial Experiment, two can play. For some time, I’ve wanted to challenge the folks who lean so heavily/exclusively on Card and Krueger to a little game. For every study you invoke that apparently invalidates the law of supply and demand (where the minimum wage has no negative effect on employment), I’ll match it. Below is my counter to Card Krueger, plus an extra. Now I’m one ahead of Krugman. Happy to keep playing in the comments.

“We confirm our earlier findings that business assistance living wage laws boost wages of the lowest-wage workers, at the cost of some disemployment…” Here.

These disemployment effects in turn imply `minimum wage’ elasticities of about -0.4 (ranging from -0.3 to -0.5). Here.

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Counting Your Chickens Before They Hatch

November 27th, 2013 · No Comments · Politics

A little less than a month ago, my pal Steve engaged in a little triumphalism via posts documenting the decline in Republican favorability:

It’s Working: Pubs’ Polls Plummeting
Congressional Republicans’ Approval Ratings in Freefall. Dems Hold Steady

I’d be remiss to not update him with the latest headiness and charts, and adapt one of his closing lines:

“Give the Republicans Democrats enough rope and they’ll hang themselves? It seems to be working.”

Business Insider: The Disastrous Launch Of Obamacare Has Caused A Remarkable Collapse In Democratic Poll Numbers
CNN: CNN/ORC poll: Democrats lose 2014 edge following Obamacare uproar
Time: Poll: Congressional Dems in Trouble
Business Week: Obamacare’s Support From Democrats Slips in New Poll

From Real Clear Politics:
Dem meltdown

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About that Medicare Efficiency…

November 27th, 2013 · No Comments · Uncategorized

I’ve been meaning to write up a response to the oft-repeated claim that Medicare is much more efficient than private insurance but then the Wall Street Journal hit the high points for me.

Usually that canard is put out when I advocate for markets in the medical sphere — and I used to fall for it. Didn’t take me long to realize that heavily regulated collectivization via organizations that spend big lobbying bucks is not what I am promoting, and my debate opponent is slyly trying to change the subject on me.

Also, it’s pretty easy to diffuse the issue by bringing up that the IRS staff and overhead (who collects the money) is not in that accounting, and neither is the 25% deadweight loss that the CBO allocates to the taxation that funds it. See: “In Circular A-94, OMB has estimated the “excess burden of taxation” at 25 percent of revenues.”

This from the WSJ (Emphasis mine):

Many on the left tell us the solution is Medicare-for-All, because Medicare is so much more efficient than private insurers, spending a mere 2% on overhead compared to 20% or higher for private plans. Extraordinary claims require extraordinary proof, and the idea that a bureaucratic agency with no obvious incentive for efficiency is inexplicably efficient certainly qualifies. Yet many in the media are prepared to pass along this claim as a found item.

This requires overlooking a lot. Even if overhead-to-medical spending were the right measure, much of Medicare’s overhead is hidden on the books of other agencies, including Health and Human Services, which provides management, and the IRS, which handles revenues.

Then there’s the fact that Medicare keeps overhead low by under-spending on fraud prevention. Why? Because health-care providers are a powerful force in every congressional district and find Medicare audits annoying. The government’s own accountants suggest tens of billions of dollars are being left on the table by Medicare failing to match private spending on policing caregivers.

But these are the tiddly objections. Ask yourself: If the overhead ratio is the right measure of insurer efficiency, which is the least efficient insurer? Answer: The one with the healthiest customers, who consume little or nothing in the way of medical services. An insurer with perfectly healthy customers would spend 100% of revenues on overhead.

Medicare serves the oldest and sickest Americans, and necessarily shovels out a high percentage of its revenues on medical care. But this tells you nothing about whether it’s getting value for money. And most of the real evidence suggests not—up to a third of Medicare spending is useless and merely exposes beneficiaries to unnecessary medical risk.

This is a guesstimate, of course, but one with many fathers. A study last year by Rand Corp. and former Medicare chief Donald Berwick found between $166 billion and $304 billion of unnecessary spending in $900 billion in annual Medicare and Medicaid spending. A Dartmouth study in 2003 found that high-utilization Medicare regions spend 60% more per patient than low-utilization regions, with no difference in outcomes. A 2005 Harvard study found that end-of-life spending on comparable Medicare patients varied by a factor of five among California hospitals.

Look, if Medicare had cracked the secret of administering large sectors of the economy more efficiently than the private sector can, we’d be wise to hand the entire economy over to Medicare. We don’t hear too many making this argument. Most understand that our real problem is a systematic insensitivity to the price and value of medical services that afflicts government and private plans alike.

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