Tuesday , September 22 2020
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[email protected] (Luke Froeb)

Articles by [email protected] (Luke Froeb)

Satire of economists’ belief in markets

7 days ago

From the Atlantic, "The Market as God," by a Divinity professor:

A few years ago a friend advised me that if I wanted to know what was going on in the real world, I should read the business pages. Although my lifelong interest has been in the study of religion, I am always willing to expand my horizons; so I took the advice, vaguely fearful that I would have to cope with a new and baffling vocabulary. Instead I was surprised to discover that most of the concepts I ran across were quite familiar. 

Expecting a terra incognita, I found myself instead in the land of déjà vu. The lexicon of The Wall Street Journal and the business sections of Time and Newsweek turned out to bear a striking resemblance to Genesis, the Epistle to the Romans, and Saint Augustine’s City of God. Behind

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Are we in a stock market bubble?

8 days ago

The graph above plots Prof Robert Shiller’s cyclically adjusted price/earnings ratio or CAPE. Shiller is the bubbleologist who predicted the 1999 stock market bubble using a graph like the one above as well as the 2007 housing bubble.  The price/earnings ratio is a measure of the value of a stock, and we see that when it goes above 20, we generally see subsequent declines.  However, we have been above this value for the past decade.  DISCLAIMER:  If I really knew, I wouldn’t be teaching school.  HT:  ZeroHedge.com

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Should we ban private label brands?

9 days ago

Democrat Rep. Cicilline thinks so:  

Rep. Cicilline says, “you can be one or the other. You can’t set all the rules, control the marketplace, and also sell on it.” What he forgets is that vertical integration benefits consumers and businesses alike. If America followed Cicilline’s way, this new law would drive up the prices of everyday goods. In fact, it would be illegal for CVS to sell generic over-the-counter medications, leaving low-income Americans with fewer options and higher prices.And don’t forget the beneficial effect that private brands have on competition within a store:And most consumers like having these generic brands as options because they’re cheaper, force prices down of name brands, and can even push companies to improve their quality.

So who benefits from this?  Rival

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Are we in a housing bubble?

11 days ago

Chapter 9 tells us that, in the long run, we should be indifferent between renting and owning.  The above plots the price of a housing relative to the price of renting.  Currently its is about 40% higher.  I suspect Shiller would say we are in a bubble.  Here is a piece I found on the web:’It would suggest declining home prices in the near future,’ Shiller, who teaches at Yale University, told Bloomberg Television on Thursday. ‘I wouldn’t be at all surprised if house prices started falling.’

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Why is the Chinese yuan strengthening against the dollar?

11 days ago

Over the past six months, the dollar has depreciated relative to the Chinese yuan, falling from 7.1 yuan to only 6.85 yuan, a 3.5% decline.  It may be that Chinese citizens (who have high savings rates) are more reluctant to invest in the US or to hold their savings in dollars.  The strong yuan is hurting China’s recovery:China’s currency has climbed more than 5% from this year’s low in May, the best performance in Asia. A strong yuan is an obstacle when the nation’s economy is recovering from the coronavirus pandemic and confronted with escalating tensions with the U.S. because it could undermine the attractiveness of exports.The yuan’s gain versus its trading partners’ currencies is smaller compared with its move against the dollar. The Bloomberg CFETS RMB Index Tracker, which measures

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RIP Paul Michael Saint

15 days ago

I fondly remember Mike as the rare student who cared not about grades, but rather on the ideas and how to apply them.  Generations of students will know him through the Chapter Four story of how he (CEO) designed an incentive pay scheme for his company.4.5 Tie Pay to Performance Measures That Reflect EffortMeasuring performance is a critical part of any organization, as the following story illustrates. In 1997, a 50-year-old chief operating officer (COO) with a bachelor’s degree in journalism and a law degree managed a consulting firm with 10 account executives. The COO was in charge of keeping clients happy and ensuring that the account executives were working in the best interests of the company. The COO earned a flat salary of $75,000.After taking classes in human resources, economics,

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Arbitrage opportunity in betting markets?

19 days ago

The Iowa Electronics Markets sell contracts that payoff $1 if a particular candidate is selected.  The prices can be interpreted as probabilities if Price=Expected Payoff=Prob[win]*$1.  Below, the implied probabilities seem to track the polls, which suggests that Biden has a big lead.  However, this educational betting market is thin (mostly students, only $40,000 or so).  The much bigger betting markets in London has the election as much closer: Trump is trading at -120 (Prob[win]=54%) and Biden is trading at 110 (Prob[win]=47%).  Here is a calculator for converting "American odds" to probabilities.  Here are three reasons why the polling may be different from the betting markets.  The one that seems most plausible to me is, "Theory #3: People don’t trust polling after 2016."  In 2016,

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One in eight women will get breast cancer, but who gets screened?

21 days ago

Answer: those less likely to get the disease, and when they do, it is caught at an earlier stage. 

[embedded content]  The video suggests that if you are doing benefit-cost analysis of screening (Chapter 3), you will understate the benefits of screening because of selection bias (Chapter 17). To see this clearly, imagine that only people who don’t have the disease get tested. In this extreme case, there is no information revealed by the test, i.e., the test has zero benefit and some cost.  The same intuition is behind the selection bias:  less information is revealed by testing a selected group who are less likely to have the disease than if the testing had been done randomly, i.e., over the population.  The second part of the answer above, catching breast cancer at an earlier stage

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California plays chicken with Uber and Lyft

29 days ago

Washing Post Opinion piece:Most recently, Uber and Lyft, based in San Francisco, announced they would close their California operations after a court ordered them to reclassify drivers as employees [under new law AB5]. They’re still running at the moment, having secured a last-minute stay, pending appeal, but ultimately, unless that appeal proves fruitful or the law changes, they say they’re pulling out. …

And you should believe them, though AB5’s architect, Democratic Assemblywoman Lorena Gonzalez of San Diego, seems to think they’ll blink if she just shows enough steely will. “These are billion-dollar companies who are publicly traded,” she told a local television station. “They have enough money to treat their employees correctly.”
The pandemic has shifted the game, however. Now

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Deterring partying

August 23, 2020

Syracuse University suspended students who attended a party where social distancing was not practiced.
…Vice Chancellor for Strategic Initiatives and Innovation J. Michael Haynie said the gathering of first-year students "may have done damage enough to shut down campus, including residence halls and in-person learning, before the academic semester even begins."Because the individual expected costs of partying (the probability of suffering harm from infection times the cost of harm) are much lower than benefits for young people, it is easy to predict that young people are more likely to party.   And, because the costs of partying fall on the University, while the benefits of partying accrue to the students, it is easy to understand why the University wants to deter partying.  Deterrence

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Taxes destroy wealth: Uber and Lyft may exit California

August 18, 2020

From Foundation for Economic Education:On Friday, Uber and Lyft may exit California, which will leave hundreds of thousands of drivers unemployed and millions of Californians chasing more expensive cabs. …

In September of 2019, the California state legislature passed AB5, harshly restricting independent contracting (the gig economy).   … By requiring ride-sharing apps such as Uber and Lyft to reclassify their drivers as full employees, the law mandated that the companies provide healthcare and benefits to all the drivers in their system and pay additional taxes. … Legislators didn’t realize the drastic implications their legislation would have…

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Power point tips

August 18, 2020

from Garr Reynolds.  My favorite is 2. Limit Bullet Points & Text Your presentation is for the benefit of the audience. But boring an audience with bullet point after bullet point is of little benefit to them. Which brings us to the issue of text. The best slides may have no text at all. This may sound insane given the dependency of text slides today, but the best PowerPoint slides will be virtually meaningless with out the narration (that is you). … HT:  Kimberly Pace

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Is the 10% dollar depreciation good or bad?

August 16, 2020

Project Syndicate reports that the depreciation helps US producers: In the US, meanwhile, the dollar’s depreciation has been welcomed as an overwhelmingly positive development for the economy, at least in the short term. After all, economic textbooks tell us that a weakening dollar boosts US producers’ international and domestic competitiveness relative to foreign competitors, makes the country more attractive for foreign investors and tourism (in price terms), and increases the dollar value of revenue earned overseas by home-based companies. That is also all good for US stock and corporate bond markets, which benefit further from the greater attractiveness of dollar-denominated securities when priced in a foreign currency. …but it hurts foreign producers:But the reaction has been less

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Why are Gold, Stocks, and Bonds appreciating?

August 10, 2020

DISCLAIMER:  If I really knew, I wouldn’t be teaching school!  

The Bloomberg Dollar(BBDXY) tracks the performance of a basket of 10 leading global currencies versus the U.S. dollar.  The above represents a decline in the price of a dollar (as it cannot buy fewer foreign currencies)

 ZeroHedge says that it is because the dollar is depreciating. As the dollar loses value (relative to other currencies), people shift money out of dollars into assets that (hopefully) won’t lose value as the dollar declines. This increases demand for these assets which raises their price.

Of course, one has to beware confusing correlation with causation:  just because the prices move in opposite directions does not mean that one is causing the other to move.  There could be a third factor that is

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What correlates with COVID deaths rates?

July 16, 2020

From interview based on paper by Prof. Christopher Knittel:Race was a central factor. … For example, if you live in a county in which African Americans make up 87% of the population (which is the highest share we found), the COVID-19 mortality rate is 10 times higher than a county with no African Americans (a 0% share).
Commuting in any form: Our analysis found that a 20.6% increase in public transportation use was linked to a nearly tenfold increase in the mortality rate during this pandemic.
Working from home:  We also find that a higher share of people not working, and thus not commuting either because they are elderly, children or unemployed, is correlated with higher death rates.
Counties with higher home values, higher summer temperatures, and lower winter temperatures have higher

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Unicorns by Region

July 13, 2020

Innovation leads to growth, and growth really matters:  In the late 1950s, Nobel Laureate Robert Solow attributed about seven-eighths of the growth in U.S. GDP to technical progress. As Solow later commented: “Adding a couple of tenths of a percentage point to the growth rate is an achievement that eventually dwarfs in welfare significance any of the standard goals of economic policy.” Although the number of unicorns is a noisy measure of innovation, the relative number of unicorns in the EU may be a harbinger of future low growth, and is perhaps due to the burden of the EU regulation.  In my field of antitrust, there are big differences in how similar laws are enforced, e.g., CPI article or SSRN:EC is run by politicians; US agencies by antitrust professionals EU skepticism
of markets

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The Fourth of July

July 4, 2020

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, –That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, …

And from MarginalRevolution.com, Thomas Jefferson’s clause deleted by Northerners and Southerners involved in the the slave trade:

…He has waged cruel war against human nature itself, violating its most sacred rights of life and liberty in the persons of a distant people who never

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Which industries will be in the best shape when we return?

June 29, 2020

In the 2×2 table above from the Shrewd Samaratan, via MarginalRevolution, there are two dimensions:Purchases
"Gone Forever," goods and services whose purchases were abandoned during the shutdown, vs.
"Snap-Back," purchases that were postponed by the shutdown.
Income Elasticity of Demand measures sensitivity of demand to income.
High Income Elasticity, goods whose demand falls as income falls, vs
Low Income Elasticity, goods whose demand is relatively insensitive to income.  

The colors correspond to the outlook for each industry: Orange box:  lost profits from abandoned purchases, and low future demand because income has fallen.
Green box: delayed profits from postponed purchases; and relatively high future demand.

The two off diagonal boxes are in-between these two extremes: Blue

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Allowance teaches kids about opportunity cost

June 9, 2020

[This essay was written more than a decade ago by the late Steve Dalton to teach kids the purpose of an allowance.  Its lesson could have come straight out of Chapter 3.]

"We cannot always build the future for our youth, but we can build our youth for the future." Franklin Delano Roosevelt

Why give an allowance?

For one big reason: To help your youngsters learn how to manage money. An allowance is not to relieve you of paying for some of your children’s wants or needs. It is the best and most hands-on method of teaching your children how to spend and save. By using their own funds, their limit becomes real and tangible to them- -they only get a certain amount each week, rather than having your seemingly infinite wallet–and it will quickly become obvious that they can’t have

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Run experiments to measure the effects of advertising (and make money)

June 5, 2020

Readers of this blog know that we are big fans of randomized control trials (RCT’s).  Here is a story from a new book, The Power of Experiments, taken from a review by Strategy & Business. eBay used to pay Google about $50 million annually for ads by search terms that included the company name, such as eBay or eBay shoes. To determine whether this was worth the money, they ran an experiment, turning Google ads on and off, and tracking the traffic coming to eBay from Google ads (paid) vs. traffic coming from organic search (unpaid). They discovered that paid advertising was cannibalizing traffic from organic search:

…the experiments found that in markets where the company didn’t advertise, it got a spike in traffic from unpaid organic links. “Evidently, users who Googled ‘eBay’ (or

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Sharing risk

June 1, 2020

In general, if one party is less risk averse than another, contracts can create wealth by moving risk from a lower-value use to a higher-value one.  The classic example is insurance which moves a lottery from consumers willing to pay to get rid of it, to an insurance company willing to assume it for a fee.Now Google sharing cancellation risk with hotels through its pay-per-stay program that charges hotels for advertising only after a guest has finished a stay.  If guests cancel, e.g., due to a pandemic, then the hotel does not have to pay for Google for the ad that lead to the booking. Among the other benefits:It guarantees a certain profit, which had been impossible so far because of the reign of the cost-per-click model (CPC). 
 It is good for your cash flow (using the Commission per

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Bad ideas from Nashville politicians

May 26, 2020

Potential exam question:QUESTION:  Nashville currently has had a ban on evictions for about two months.   In about two weeks this ban will expire. Question:  What would happen if we followed Councilman Sean Parker’s call for banning "Evictions … until Davidson County’s unemployment rate returns to 2.8%…"
ANSWER: In the short run, it would reduce incentives for renters to pay rent in a timely manner.  This would reduce the value of owning and building housing, which would reduce the supply of housing in Nashville, which would increase price of housing and rents.  The policy would end up hurting would-be home buyers and renters, the very people that it is designed to help.

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Marriott’s changed strategy when it realized it was competing on the wrong dimension

May 23, 2020

New paper identifies a strategy mistake by Marriott:
Early in the 1980s, Marriott operated a chain of large, higher-end full-service hotels that typically had 300-500 rooms.

While attractive to higher-income tourists, these hotels were not attractive to business travelers who wanted lower-prices and larger rooms.  Marriott surveyed its business customers and learned exactly what these customers valued, and what they didn’t:
…many business travelers did not value out-of-room amenities such as full service restaurants, lobbies, or meeting space as much as firms believed, and valued in-room amenities such as larger and better-appointed rooms more than they thought.

The results of this analysis were a surprise to Marriott executives … The results indicated that some out-of-room

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May 22, 2020

Many business problems are questions of causality:
How much will sales increase if I increase my advertising budget?
Will employee productivity increase, if I raise the wages to new employees?
Will productivity be hurt if I allow employees to work from home?

Anyone who has read this blog knows that I am huge fan of randomized control trials ("experiments") as they get rid of the "selection bias," or "reverse causality."  For example, each of the following factors would bias simple correlations:

When sales increase, advertising budgets typically increase
New employees are younger and less experienced than older ones
Low productivity employees may be more inclined to work from home.  

In this interview, Josh Angrist details some of experiments he ran to figure out that:Allowing laptops

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Moral Hazard: over-reporting of COVID-19 deaths

May 18, 2020

For a variety of reasons (many asymptomatic cases, lack of random testing), it is difficult to measure the infection rate or the death rate of COVID-19.  Deaths due to COVID-19 is probably the best data we have, but there is good reason to doubt these data as well:

…The CARES Act adds a 20 percent premium for COVID-19 Medicare patients.  

 Incentives matter. When the government increased the disability compensation for air traffic controllers, a lot more controllers suddenly started claiming to be disabled. When unemployment insurance payments increase, more people become unemployed and stay unemployed for longer periods. When the government offers flood insurance that charges everyone the same insurance premium regardless of the risk level in their area, more people build homes in

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