Showing posts with label Source: Wall Street Journal. Show all posts
Showing posts with label Source: Wall Street Journal. Show all posts

Friday, February 13, 2015

The Middle-Class Comeback Is Under Way

Wall Street Journal op-ed "The Middle-Class Comeback Is Under Way" (February 12th, 2015) makes a painful error while trying to pin the world's woes on the Fed.
The Fed’s easy-money policies were also slamming the middle class by encouraging speculation in—and thus pushing up the price of—commodities like oil and food, which are an incidental expense for the rich and a real burden for everyone else.
Normally of the left, this sort of talk belongs in the economic dark ages (60's, 70's).  Markets are driven by supply and demand.  Speculators essentially never take delivery of their product: they purchase a contract for future delivery with the intent to sell later.  They can, of course, sell to other speculators, but eventually speculators must sell to an agent that will actually take delivery of oil.

Assume first there is no storage market.  Agents who take delivery inelastically supply oil, and demand determines price.  This price determines what the delivery agent is willing to pay, which pins down the price they are willing to buy from speculators.  Whatever heights the oil may reach during speculation is pinned down by what it will actually be worth when it arrives.  Speculation can't impact prices at the pump in this world.  (One might say: "but maybe they can sell at a higher price to the agent and he will pass it on to consumers!"  The question this raises is "if he could sell at a higher price to consumers, why wasn't he before?  They don't care about his costs, only their value and the price.")

There is little difference with a storage market.  With a storage market, speculators can actually temporarily bring up prices, but only at a loss to themselves, if they brought it up incorrectly.  Say speculators anticipate (or act like they anticipate) a demand shock: oil will be pricier, they think.  They purchase many shares and drive the price up because they think it will be valuable in the future.  This causes less oil to go on the market today, and the price at the pump to rise today, and less oil is consumed.

After this, there will be a sharp plunge in oil prices, as storage capacity is sold but demand hasn't gone up.  (That is, speculators could potentially shift supply down and then up.  If there is no fundamental demand shift, this will cause a rise, then a fall in prices, easily mappable to storage).

Inventories did not change enough, and prices were not sharply changing enough, to allow speculation to have any role in the rise in oil prices.  Instead according to Knittel and Pindyck (2013), it seems that (as economic theory would predict) speculation lead to the smoothing of oil supply over demand shocks, actually reducing the price volatility (but not changing the level: changing the level over the long run is highly unrealistic, for the reason discussed earlier).

While theory and empirics line up to tell a clear story (viz., speculators are not to blame for price rises the way you ever read in newspapers), February 12th's Wall Street Journal's op-ed page doesn't just seem to abandon coherence of multiple signals, but even a sensible signal to begin with.  For shame.

Theory: the Federal Reserve is a liberal "long con."  The idea is to drive conservatives to heights of irrationality, causing the party to twist itself in knots to blame the Fed for each new and imagined ill, bringing them to the point of making up easily refuted historical and current "facts."

Monday, June 7, 2010

Auctions for Overbooking

Wall Street Journal article "Auctions for Overbooking" (June 6th, 2010) suggests (wisely) that airlines have auctions for bumped seats--that if they overbook a flight by five people, they offer increasing amounts of money to someone who gives up their seat until five people have given up their seat.
The airlines also benefit because an auction may save them money over a set price or a government penalty. More importantly, United, American and the rest are assured that fewer passengers are unhappy at the end of the process. That's no small matter given the reputation for poor service that most airlines have with the public.
More than this, airlines are guaranteed to save money by selling bumps to the lowest bidders. In particular, if an auction is held to elicit five passengers to give up their seats, certainly the passengers who face the lowest cost for getting bumped will be the ones to accept the airline's offer first. This means that the airline will pay (at best) a total amount equal to the sum of the five lowest values of flying. However, if people instead know before they purchase a ticket for a flight that on average, some people are forcibly bumped, then they will shave the amount that they are willing to pay for a ticket by the probability that they are bumped times the cost of getting bumped. This means that the price of tickets falls from the marginal value to the marginal value minus the probability of getting bumped times the marginal cost of getting bumped. In general, this marginal cost will exceed the lowest costs of the passengers and so the airline will receive less total revenue when it randomly bumps passengers than when it holds an auction to buy back overbooked seats.

Wednesday, March 24, 2010

The More, The Better

Wall Street Journal book review "The More, The Better" (March 24th, 2010) discusses the book "The Next Hundred Million", by Joel Kotkin. It gives Kotkin's hypothesis, that come 2050, the U.S. will be vastly better off than its European and Asian counterparts, both of whom are aging or projected to age greatly while the U.S. stays relatively young.

For Mr. Kotkin, population growth translates into economic vitality—the capacity to create wealth, raise the standard of living and meet the burdens of future commitments. Thus a country with a youthful demographic, in relative terms, enjoys a big advantage over its global counterparts. In the next four decades, Mr. Kotkin observes, "most of the developed countries in both Europe and Asia will become veritable old-age homes" because of stagnant population growth. And the economies of these countries, already devoted to a vast welfare-state apparatus, will face crushing pension obligations—but without the young workers to defray the cost.


Corrections largely sees Mr. Kotkin as correct about the implications for the welfare states of Europe and a mis-formed age structure in China due to its one-child policy. However, Corrections does not see youth and population as the driver of economic vitality, but only a relatively small portion of it. What matters for international comparisons, Corrections conjectures, is human capital. In the world today, there are relatively few technological state secrets that allow one state to be wealthier than another. Natural resources and human capital, instead, are the drivers of per-capita wealth.

As displayed graphically below, Corrections has used Robert Barro and Jong-Wha Lee's dataset from "International Data on Educational Attainment: Updates and Implications" (WP 2000) to construct a graph of the populations and educational trends of four different regions of the world: Advanced Countries, East Asia/Pacific, South Asia, and Transitional Economies. The data can be found here. Note that a drop in population for Transitional Economies is due to the exit of several countries of the Soviet Union and a move of East Germany from transitional to Advanced after German reunification.

The phenomenon Corrections wishes to point out is the difference between population, (click to enlarge) proportion of population at an educational level (click to enlarge), and total population with a given education (click to enlarge). A discussion of the graphs follows their display.







Corrections suggests that while the population of the West and advanced economies has slowed in growth and has been shrinking, the total population with higher education has been rising. Insofar as population shrinkage hampers specialization, then Corrections can recognize the process through which population shrinkage suggests a declining GDP. However, in the case of advanced economies, we expect per capita GDP to grow dramatically, as institutions (such as Universities) shrink less quickly than population, and human capital per capita rises. Corrections could see Europe as being subjected to these forces positively.

Thursday, February 25, 2010

Why Won't Anyone Clean Me?

Wall Street Journal article "Why Won't Anyone Clean Me?" (February 24th, 2010) misses a fundamental insight into incentives. It speaks on firm incentives to attempt to clean up fridges by educating consumers, and putting reminder cards in fridges on how to store items and clean the fridge. However, it also describes Whirlpool's efforts to make a messy fridge less impactful.

For its new refrigerator, Whirlpool Corp. spent months inventing a shelf with microscopic etching so it can hold a can of spilled soda.

The technology is just one weapon against a dirty kitchen secret: Most Americans clean their fridges only once or twice a year.

[...]

Whirlpool hopes that increasing the amount of storage space might help. The company's new shelves—to be released later this year—are 25% roomier than previous models. And the microscopic etching creates surface tension, causing liquids to bubble up around the perimeter instead of spilling over, it says. Currently, shelves in Whirlpool's refrigerators have a plastic rim to help contain spills. Unfortunately, the rims have "the side effect of crud getting stuck in there," says Carolyn Kelley, brand manager of Whirlpool refrigeration. The new shelves—available on new Whirlpool models that cost from $1,199 to $1,499—would eliminate that problem because they don't require a rim to stop leaks.

It is important to note that when one makes a fridge that lowers the cost of it being in a messy state (such as microscopic etching), individuals will substitute time away from cleaning and to other activities. Messiness is less costly, so we invest fewer resource into avoiding messiness (cleaning).

This same issue is a common mistake made by doctors who become frustrated when individuals smoke more after there are medical advances in cancer treatment, or when quitting cigarettes is made easier. The mistake is understanding the end goal of consumers: it is not to minimize dirtiness or maximize life, but to maximize a weighting of both quality and quantity of life.

The article reads as though technology lowering the cost of messiness and education to have consumers clean the fridge have a common thread: a more clean fridge. Corrections suggests that both are working against one another when it comes to a more clean fridge, but work together to make life easier for the consumer.

Friday, February 5, 2010

The Necessity of Obamanomics

Wall Street Journal opinion editorial "The Necessity of Obamanomics" (February 4th, 2010)

You don't have to be an orthodox Keynesian to understand that as long as the private sector is deleveraging the public sector has to borrow and spend in order to keep the economy moving forward. Spending on the original stimulus will peak soon; spending for additional unemployment insurance and the jobs bill will add about $90 billion.


You may not have to be an "orthodox Keynesian," to believe that the government can stimulate aggregate demand as a pareto-improving (or some "aggregate" utility improving) government intervention, but if you aren't an orthodox Keyesian (whatever that means), you might find yourself as a hydraulic Keynesian or neo-Keynesian. Perhaps familiarity with economics breeds an inability to understand when a non-economist such as Robert Reich makes contentious claims seem ordinary.

Corrections disputes Reich's point, and suggests that even if you don't have to be an "orthodox Keynesian," to understand government intervention is currently necessary for some reason, you have apparently heard of some secret consensus that has evaded Correction's ears.

Thursday, December 31, 2009

Judges Consider New Factor at Sentencing: Military Service

Wall Street Journal editorial "Judges Consider New Factor at Sentencing: Military Service" (December 31st, 2009) waves its hands at, but fails to actually observe any externalities in military service that require the parallel justice system it describes. Specifically, it notes that military veterans coming back from foreign deployment have received special judicial treatment in light of their service.

As more soldiers return home from combat overseas and end up in the criminal-justice system, a number of state and federal judges are deciding to show former soldiers leniency in light of their service. Some veterans are receiving probation coupled with psychological treatment, generally for nonviolent crimes that normally would land them in prison.

The article gives an example of one judge's reasoning:

'We dump all kinds of money to get soldiers over there and train them to kill, but we don't do anything to reintegrate them into our society,' says John L. Kane, a federal judge in Denver. Earlier this month, Mr. Kane sentenced an Iraq war veteran convicted of bribery to probation instead of prison.

Yet Judge Kane's argument does not appear to have sound foundations, in the understanding of Corrections. The United States has a volunteer army. Individuals who sign up are doing so because the total discounted lifetime path of wages (cognitive and monetary) are higher than their next best alternative. If they were not, individuals would choose their "next best" (contradictorily, their best) alternative.

If the cost of joining the army, including the probability an individual survives, breaks down psychologically and commits crimes upon their return is too high, individuals will opt out of military service. They will do so until wages are increased or the future costs that cause them to commit crimes are decreased. This is the proper market solution to unfortunate military conditions. If military service is unattractive and unfortunate, fix it through wages, rather than through fringe benefits, like reducing disincentives on producing negative externalities to others (crime), an unsound economic proposition.

Individuals who perform military service are paid in a variety of ways. The public honors them as protectors of freedom. They are paid a wage. They gain fringe benefits through discriminatory governmental hiring practices. The military should make sure it is paying in the most efficient manner, and it is by no means clear that removing disincentives from criminal activity is welfare-enhancing.

The only case in which offering these fringe benefits to soldiers makes sense to Corrections is if ex ante the military has difficulty predicting the single individual of many to pay higher wages in the form of a light sentence, and ex post it can identify them, that the value of this benefit is high, and the moral hazard it poses is low, an unconvincing conjecture.

One might add that there could simply be sample selection in sentencing. Individuals with military service might be less prone to recidivism, incarcerating them less effective, and lighter sentences may be efficient. The article does not address this, though Corrections sees it as a possibility.

Saturday, December 19, 2009

New York Can Do Better By Juvenile Offenders

Wall Street Journal opinion editorial "New York Can Do Better By Juvenile Offenders" (December 18th, 2009) neglects one potentially large channel through which crime rates are lowered. Specifically, it appears focused only of incapacitation, omitting deterrence.

What does $210,000 buy in New York State? These days, as two recent reports demonstrate, that's what it costs to lock up one child in a brutal juvenile justice system so dysfunctional that its reform-minded commissioner, Gladys Carrion, advises judges not to place children in her facilities.

And

We could not do worse. But 10 years of research shows that we know how to do much better—incarcerate less, and use the latest research to treat delinquents in community-based programs.

The Empire State runs one of the country's largest juvenile prison systems. At its height in 2005, it operated 31 facilities housing 2,500 children. Like many other states in the 1970s and '80s, New York responded to rising crime rates with a get-tough approach that included more punitive laws, more arrests, and more incarceration for both juveniles and adults. In an iconic moment in 1995, the state put razor wire fences around its juvenile facilities.

This approach doesn't work: Almost every boy and girl (nine out of 10 boys and four out of five girls) who leaves state custody is rearrested before the age of 28 and, even within just three years, 75% are rearrested. And the costs are jaw-dropping. This year the operating budget for the juvenile facilities will top $220 million.

It is important to note that there are two ways through which the "get-tough" approach reduces crime. The first is longer prison sentences incapacitates past offenders from committing current crimes because they are locked up for their past crime. The second is longer prison sentences deter past and prospective offenders because it is costly, insofar as it is unpleasant and undesirable, to be locked up.

In Economic Inquiry (Levitt, 1998) there is strong evidence that both deterrence and incapacitation play roles, but that deterrence plays a much larger role in preventing crimes, especially for property crimes. Additionally, in American Law and Economics Review (Katz, Levitt, Shustorovich, 2003) shows that poorer prison conditions, represented by a higher death rate among prisoners, deters crime.

The article in the Wall Street Journal completely neglects deterrence as a factor that mitigates crime rates. Even if more prison sentences and worse prison conditions increases crime rates for those who were incarcerated, which the article, without proper counterfactual, does not show, it is unclear whether this is still an effective tactic through the channel of deterrence.

Monday, December 14, 2009

Tough Times for Big Law

Wall Street Journal opinion editorial by Elizabeth Wurtzel, author of Prozac Nation "Tough Times for Big Law" (December 14th, 2009) concerns itself with a number of recruits for the law firm Cravath, Swaine & Moore.  Last year, every single one of those recruits turned down an offer of $80,000 plus student loan and benefits, not to work and be put on a furlough of sorts until the economy recovered.  Wurtzel is particularly concerned by this development:

...here's something weirder: I've been told that none of the graduates of Yale Law School who were headed for Cravath accepted their offer of $80,000 to surf and sunbathe, or go forth and save the world. Since no one at either institution is willing to discuss this—and I don't blame them, because I would be embarrassed too—I don't know this for certain. But here's what I'm sure of: Not everybody took Cravath up on this peachy keen opportunity to do anything for a year with pay and benefits. And that by itself is disturbing enough.

If even one person said no to $80,000 for bubkes, I'd question the sanity and intelligence of that sole holdout. Cravath recruits the best and the brightest kids from the most highly ranked law schools—and given $80,000 and a dream, all many of them could do was report to work on Monday.

Yet Wurtzel, in her acidulous censure of youth's follies, overlooks the possibility that human capital depreciates. If knowledge concerning Miss Wurtzel's jejune Uniform Commercial Code and the Rule Against Perpetuities is a function of use of that knowledge in the period previous to this, as well as a costly means to re-obtain it (presumably studying) then individuals may want to keep that capital from depreciating in the cheapest way possible. This may include paying to work, if their human capital is valuable enough and reconstructing it from non-use (i.e. from studying) is costly enough.

We may add, more trivially, that the lion's share of payment for entry-level individuals at Cravath, Swaine & Moore is in all likelihood not their benefits, nor their salary, but instead the future expected value of a path that brings them to be a partner in the firm, or signal their value to other firms and clients.

Friday, November 27, 2009

The Jobless Gender Gap

Wall Street Journal opinion editorial "The Jobless Gender Gap" (November 27th, 2009) presents an informative piece, with what may be too-simplistic an analysis of the recession's unemployment gender gap.  It argues that the unemployment rate for men has risen because traditionally male sectors have been hit harder, and that government stimulus spending has been unevenly distributed to women, who have lost fewer jobs.

What has happened to men is fundamentally a product of the times.  This recession made America's already declining manufacturing sector decline more rapidly.  About half of all job losses have been in manufacturing and construction, overwhelmingly male sectors.
And
Government policy has also exacerbated this trend.  The stimulus dollars were disproportionately directed away from those who lost the most jobs.  The Obama administration estimated early this year that more than four in 10 stimulus jobs were going to women, about twice women's estimated job losses.
There are a number of concerns raised by this line of argument.  First and foremost, it is worth noting that numbers delivered from political entities  naturally suffer from a principal-agent problem.

Secondly, and more interestingly, it is unclear that we would expect what happens to men to be "a product of the times."  If employers can easily substitute men's labor for that of women, then we expect that if men are fired, the wages of women go down.  Men are now competing for their jobs.  However, it is not difficult to believe that women, even working women, could have a higher shadow wage than men.  This can mean a higher unemployment rate for women, in spite of the fact that their specific industry was not hit by the recession.

It is worth noting that the industries people are employed in are dynamic--just because men lost jobs in one industry does not mean they will not gain jobs in another.

Tuesday, November 17, 2009

Where are the Doctors to Implement ObamaCare?

Wall Street Journal editorial "Where are the Doctors to Implement ObamaCare?" (November 17th, 2009) is mistaken in its causal conclusion concerning the need for more minority doctors. Specifically, it drew the conclusion that because (obstensibly) white doctors tend to practice in white communities and minority doctors tend to practice in minority communities, that we need to emphasize more minority doctors because minority communities are more in need of doctors.

Furthermore, the physician workforce does not reflect the ethnicity of the population, underscoring health disparities that result in a higher incidence of chronic diseases and higher mortality in minority and low-income populations. Because minority physicians are more likely than non-minority physicians to practice in ethnically diverse communities, it is vital for medical schools to train a diverse workforce of physicians to practice with a clear emphasis on prevention, and with cultural competency and sensitivity.


Let's imagine a world in which doctors of different races are choosing where to serve. If we imagine a world with the weakest possible racism, where I don't care where/who I serve, but as a tiebreaker, all other things being equal, I use race. I'm not willing to pay one penny to be a racist. In essence, no one is a racist, and only uses race as a tiebreaker. Then we should still see perfect segregation for one race. The figure below indicates our matching model (click to enlarge).



But in this model, if we wanted to serve underserved minority areas, how might we go about doing it? The economic answer appears to be that we can train Ku Klux Klan members just as easily as we could Black Panthers. Why? Because it is only the marginal racist that matters. The KKK members will certainly serve white areas, and doctors who don't care will be pushed to serving minorities. We can see this in our new figure (click to enlarge).



Our "no racism exists" model above doesn't change our conclusion that it doesn't necessarily matter if a new doctor is minority or not--it is the marginal racist that matters, and if, at the margin, we have doctors who aren't racist, then we shouldn't care what race doctor we introduce--teaching Ku Klux Klan members may help minorities as much as teaching Black Panthers.

Saturday, November 14, 2009

U.S. Signals Shift on Asia-Pacific Trade

The Wall Street Journal's editorial "U.S. Signals Shift on Asia-Pacific Trade" (November 14th, 2009) is mistaken and slightly misleading in its dismissal of the Trans-Pacific Strategic Economic Partnership Agreement,

Although touted by free trade advocates, the combined size of the four economies [Singapore, Chile, New Zealand and Brunei] in the pact is smaller than Belgium's economy.


A more apt comparison might be to say that the nominal GDP of the four countries exceeds that of Taiwan, which often finds itself as the United States 10th largest trading power, by approximately 25%. Or that their GDP measured by purchasing power parity (PPP) exceeds that of Belgium by 58%.

GDP can be misleading--production prices can matter much more. If another country, very large, has exactly the same prices and technologies as us, then we are, in most cases, indifferent to trade, as are they. The more different the production prices, the larger the gains to trade. We should note that the ratio of PPP to GDP is a crude measurement of the difference in prices between countries. As the countries in question have relatively high PPP to nominal GDP ratios, they are to be seen as more attractive trade partners than a similarly-sized economy with PPP to nominal GDP ratio close to one.

Furthermore, GDP is not a good measure of gains to trade for a country. To use the classic example, when a secretary trades with a doctor to save him 2 hours of administrative work, she does not save him the $15/hour he pays her--his gain from trade is the $485/hour he now makes doing what his comparative advantage is (doctoring for $500/hour). Her "GDP" may be $30, but her worth in trade was $875.