Category: Economics

Government Quotas Raise U.S. Sugar Price from 17 Cents a Pound to 31 Cents a Pound

Every semester in my principles of microeconomics course, I show the students a wonderful old 60 Minutes segment on the U.S. government’s sugar quotas program. I tell them, alas, that the policy is still the same. Below is recent evidence:

(p. C1) . . . , U.S. sugar farmers have successfully blocked efforts to significantly increase imports, assuring them of little price competition.

Restrictions on imports have caused American users to pay much more than the rest of the world for sugar. That gap recently blew out to its widest in a decade.
Mr. Vilsack’s comments raised the prospect of increased demand for global sugar and drove prices up 2.7%, or 0.44 cent, to 16.98 cents a pound on ICE Futures U.S. Prices for U.S. domestic sugar dropped 2.1%, to 30.8 cents a pound. That narrowed the gap between the two to 13.82 cents a pound.

For the full story, see:
CAROLYN CUI and BILL TOMSON , ILAN BRAT. “USDA Says It May Relax Sugar Quotas For This Year.” The Wall Street Journal (Weds., APRIL 14, 2010): C1 & C2.
(Note: ellipsis added.)
(Note: the title of the online version of the article is “USDA Says It May Relax Sugar Quotas.”)

Much of the Value of “Chinese” Imports is Added Outside of China

(p. A17) In a 2006 paper, Stanford University economist Lawrence Lau found that Chinese value-added accounted for about 37% of the total value of U.S. imports from China. In 2008, using a different methodology, U.S. International Trade Commission economist Robert Koopman, along with economists Zhi Wang and Shang-jin Wei, found the figure to be closer to 50%. In other words, despite all the hand-wringing about the value of imports from China, one-half to nearly two thirds of that value is not even Chinese. Instead, it reflects the efforts of workers and capital in other countries, including the U.S. In overstating Chinese value by 100% to 200%, the official U.S. import statistics are a poor proxy for job loss.

Seldom noted in the union-controlled discussion of trade on Capitol Hill is that the jobs of large numbers of American workers depend on imports from China. The proliferation of transnational production and supply chains has joined higher-value-added U.S. manufacturing, design, and R&D activities with lower-value manufacturing and assembly operations in China.
According to a widely cited 2007 study by Greg Linden, Kenneth L. Kraemer and Jason Dedrick of the University of California, Irvine, each Apple iPod costs $150 to produce. But only about $4 of that cost is Chinese value-added. Most of the value comes from components made in other countries, including the U.S. Yet when those iPods are imported from China, where they are snapped together, the full $150 is counted as an import from China, adding to the trade deficit and inflating EPI’s job-loss figures.
In reality, those imported iPods support thousands of U.S. jobs up the value chain–in engineering, design, finance, manufacturing, marketing, distribution, retail and elsewhere. A 25% tariff on imports from China would penalize the non-Chinese companies and workers who create most of the iPod’s value.

For the full commentary, see:
DANIEL IKENSON. “China Trade and American Jobs; Studies suggest that one-half to two-thirds of the value of ‘Chinese’ imports is added in other countries, including the U.S.” The Wall Street Journal (Fri., APRIL 2, 2010): A17.

Folsom Shows How FDR Lied, Bought Votes and Deepened the Depression

NewDealRawDealBK.jpg

Source of book image: http://mises.org/misesreview_detail.aspx?control=347

FDR has never been one of my heroes. But in the last few years, I have read two books that have revealed him to have been much worse than I expected. In earlier posts, I have praised Amity Shlaes’ The Forgotten Man.
Here I praise Burt Folsom’s New Deal or Raw Deal?
Folsom documents how the economic policies of Roosevelt lengthened and deepened the Great Depression.
But what I think I will remember most about the book, is the example after example of how FDR lied to both friend and foe; and the example after example of how FDR used government spending programs to buy votes.
I found this book very unpleasant. Rather than listen to another chapter in the car, I sometimes found myself playing music.
But we need to read this book. We need to know what really happened, so we can guard against it happening again.
In the next few weeks, I will quote a few of the more memorable and significant passages in Folsom’s book.

Book discussed:
Folsom, Burton W., Jr. New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America. New York: Threshold Editions, 2008.

Taxpayers Taking a Haircut as States “Scramble” to Find Something New to Tax

HaircutTaxpayer2010-04-05.jpg“A LITTLE OFF THE TOP; Michigan residents may have to pay a 5.5 percent tax for haircuts. States across the nation are considering similar taxes on services to solve their budget problems.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 1) In the scramble to find something, anything, to generate more revenue, states are considering new taxes on virtually everything: garbage pickup, dating services, bowling night, haircuts, even clowns.

“It’s hard enough doing what we do,” grumbled John Luke, a plumber in the Philadelphia suburbs. His services would, for the first time, come with an added tax if the governor has his way.
Opponents of imposing taxes on services like funerals, legal advice, helicopter rides and dry cleaning argue that this push comes as businesses are barely clinging to life and can ill afford to see customers further put off by new taxes. This is especially true, they say, in states like Michigan and Pennsylvania, where some of the most sweeping proposals are being considered this spring.
But this is also a period of economic gloom for states. Pension funds are in the red, federal stimulus help will soon vanish, and revenues from traditional sources like income and property taxes are slumping ever lower, with few elected officials willing to risk voter wrath by raising them.
. . .
(p. 20) But from coast to coast, desperate governments are looking to tap into new revenue streams.
In Nebraska, a lawmaker has introduced a bill to tax armored car services, farm equipment repairs, shoe shines, taxidermy, reflexology and scooter repairs. In Kentucky, Jim Wayne, a state representative, and some fellow Democrats are proposing taxing high-end services: golf greens fees, limousine and hot-air-balloon rides, and private landscaping.
In June, voters in Maine will decide whether to accept a state overhaul of its tax system that would newly tax services like tailor alterations, blimp rides, and entertainment provided by clowns, comedians and jugglers.

For the full story, see:
MONICA DAVEY. “States Seeking Cash Hope to Expand Taxes to Services.” The New York Times, First Section (Sun., ed: March 28, 2010): 1 & 20.
(Note: ellipsis added.)
(Note: the online version of the article is dated March 27, 2010, and has the title “States Seeking Cash Hope to Expand Taxes to Services.”)

ServicesTaxedGraph2010-04-05.jpg Source of graph: online version of the NYT article quoted and cited above.

Speculators Absorb Risk Others Do Not Want to Bear and They Make Prices More Accurate

(p. A19) Speculators earn a profit by absorbing risk that others don’t want. Without speculators, investors would find it difficult to quickly hedge or sell their positions.

Speculators also provide us with information about the fundamental values of investments. When the fundamentals appear favorable, they buy. Otherwise, they sell. If their forecasts are correct, they profit. This causes prices to more accurately forecast an investment’s value, spreading useful information.

For the full commentary, see:
DARRELL DUFFIE. “In Defense of Financial Speculation; It is not the same thing as market manipulation.” The Wall Street Journal (Weds., FEBRUARY 24, 2010): A19.

Quants Confused Mathematical Models and Reality

QuantsBK.jpg

Source of book image: http://seekingalpha.com/article/188632-the-quants-review-when-the-money-grid-went-dark

(p. 7) The virtually exclusive use of mathematical models, Mr. Patterson says, was what separated the younger cohorts of quants from their Wall Street forebears. Unlike Warren Buffett or Peter Lynch, the quants did not focus on so-called market fundamentals like what goods or services a particular company actually produced. Seldom if ever did they act on old-fashioned gut instinct. Instead, they focused on factors like how cheap a stock was relative to the rest of the market or how quickly its price had risen or fallen.

Therein was the quants’ flaw, according to Mr. Patterson. Pioneers like Mr. Thorp understood that while the math world and the financial world have much in common, they aren’t always in sync. The quant traders’ model emphasized the most likely moves a stock or bond price could make. It largely ignored the possibility of big jolts caused by human factors, especially investor panics.
“The model soon became so ubiquitous that, hall-of-mirrors-like, it became difficult to tell the difference between the model and the market itself,” Mr. Patterson declares.
Move ahead to August 2007 and beyond, when markets swooned on doubts about subprime mortgages. Stocks that the model predicted were bound to go up went sharply down, and vice versa. Events that were supposed to happen only once in 10,000 years happened three days in a row.

For the full review, see:

HARRY HURT III. “Off the Shelf; In Practice, Stock Formulas Weren’t Perfect.” The New York Times, SundayBusiness Section (Sun., February 21, 2010): 7.
(Note: the online version of the article is dated February 20, 2010.)

The reference to Patterson’s book, is:
Patterson, Scott. The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. New York: Crown Business, 2010.

Huge Greenhouses Dependably Yield a Variety of Ripe Tomatoes Even in Winter

TomatoGreenhouseWinterMaineInside2010-04-04.JPG“Some of the more than 500,000 plants at Backyard Farms at its Maine greenhouse.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. D1) AN icy mixture of rain and sleet fell on the glass roof of Greenhouse Two at Backyard Farms here, but as its big blue door slid open and the warm, green, celery smell of tomato plants wafted out, it was summer.

When it was built three years ago, the company’s first 24-acre greenhouse in Madison was already the largest building in Maine. This second connected greenhouse, completed last year, brought the total area under glass to some 42 acres, or roughly the size of 32 football fields. Even in the depths of winter, a million tomatoes ripen indoors to harvest each week, snipped from their vines by workers in T-shirts and shorts.
. . .
Once, if you wanted tomatoes out of season, you mainly had to settle for hard pink ones picked green in the fields of Florida or Mexico and shipped by truck. Commercial greenhouses could do better, but they were a niche market.
Backed by consumer demand for fresh tomatoes year round, the indoor acreage devoted to growing tomatoes has become nearly six times as large since the early 1990s, said Roberta Cook, a marketing economist who helped write what many in the industry consider to be the definitive report on greenhouse tomatoes in 2005.
Those tough pink ones are still good and cheap enough for most fast food restaurants and the food service industry, which buy about half the fresh tomatoes sold in the United States. But with shoppers willing to pay a pre-(p. D5)mium — even $4 to $5 a pound — for red vine-ripened ones with more flavor, greenhouse tomatoes now represent more than half of every dollar spent on fresh tomatoes in American supermarkets, according to figures from the Perishables Group, a market research firm in Chicago.
. . .
Advances in genetics have allowed breeders to cross-pollinate precisely for control over specific attributes like size, color, disease resistance, firmness for shipping and levels of acids and sugars, the balance of which accounts for the bulk of a tomato’s flavor. Too little sugar turns fruit tart. Too little acid turns it bland. Too little of both leaves tomatoes with little flavor.
As tomatoes ripen on the vine they develop more of those sugars and acids and other flavor elements. But most of the major farms growing tomatoes that are sold fresh year round are in areas where the climate is more hospitable to varieties best picked green.
By creating their own climate — whether in Arizona, Maine or Canada — greenhouses allow growers to pick and ship tomatoes only when they’re ripe.

For the full story, see:
CHRIS LADD. “Endless Summer, Even in Maine.” The New York Times (Weds., March 31, 2010): D1 & D5.
(Note: ellipses added.)
(Note: the online version of the article is dated March 30, 2010, and has the title “Giant Greenhouses Mean Flavorful Tomatoes All Year.”)

TomatoGreenhouseWinterMaine2010-04-04.JPG“Even as snow falls outside, workers harvest tomatoes year-round at Backyard Farms in Madison, Maine. About 200 of them tend a half-million plants under 42 acres of glass, roughly the same amount of floorspace as in the Chrysler Building.” Source of caption and photo: online version of the NYT article quoted and cited above.

If We Want More Jobs, We Need More (Steve) Jobs

(p. A19) Mr. Obama and his advisers need to grasp this essential fact: Entrepreneurs are not just a cute little subsector of the American economy. They are the whole game. They will give us tomorrow’s Apples and the multiplier effect of small businesses and exciting new jobs that go with them. Entrepreneurs are necessary to keep our large multinationals on their toes. It’s no coincidence that the entrepreneurial flowering of the 1970s forced a managerial revolution in large companies during the 1980s and 1990s. Without Steve Jobs, there would have been no Lou Gerstner to reinvent IBM in the ’90s. Entrepreneurs like Steve Jobs make everyone better.

For the full story, see:
RICH KARLGAARD. “Apple to the Rescue?” The Wall Street Journal (Thurs., JANUARY 28, 2010): A19.

“Coase’s Penguin” and the Motives for “Commons-Based Peer Production”

(p. 108) Noted Yale law professor Yochai Benkler has a theory. In a widely circulated and famous essay on the Internet called “Coase’s Penguin,” he offered his thinking on why people participate in efforts such as Linux and other “free” projects. There was already a culture, before Wikipedia, of folks donating their time, effort, and skills to the collective good for no monetary gain or immediate compensation. Benkler observed this part of the hacker ethos and was curious to know what the common thread was.

He dubbed it “commons-based peer production.” It’s a fancy moniker for the phenomenon of people working together toward the same end–creating computer code or content that is free to be copied, distributed, used, and modified by others.
Benkler believes the Internet and the “free culture” movement have allowed individuals to connect and combine their efforts in ways unprecedented in history. The legal academic is not shy to combine scholarship outside his area of training by drawing on economics, sociology, and technology to form his theory.
According to Benkler, if monetary rewards and the creation of corporate firms have been the accepted driving force for human innovation and progress, there has to be something else driving volunteers in Linux, Wikipedia, and other “free” projects that have become so pervasive and monumental in the digital age.
He asserts the motivation comes from two main things other than money: the “socio-psychological” reward of interacting with others, and the “hedonic” personal gratification of the task.
Wikipedia’s magic occurs when these two things come together. One person’s personal affection and indulgence—mapmaking, grammar checking, baseball statistics, history of stamps—easily finds a home in Wikipedia’s amalgam of topics, where it also feeds into and inspires activities by others.

Source:
Lih, Andrew. The Wikipedia Revolution: How a Bunch of Nobodies Created the World’s Greatest Encyclopedia. New York: Hyperion, 2009.

Daniel Pink on What Motivates Workers to Work Well

DriveBK.jpg

Source of book image: online version of the WSJ review quoted and cited below.

Daniel Pink’s Free Agent Nation was a provocative account of how the entrepreneur benefits from being an entrepreneur. I enjoyed the book, and reference it frequently.
I have not had a chance to read Pink’s recent Drive, but hope to do so soon.

(p. A17) Science, Mr. Pink says, has shown that we are motivated as much intrinsically, by the sheer joy and purpose of certain activities, as extrinsically, by rewards like pay raises and promotions.

The science that Mr. Pink is referring to rests largely on the work of Edward Deci and Richard Ryan at the University of Rochester and Mihaly Csikszentmihalyi at Claremont Graduate University. These three researchers have found that we do our best work when motivated from within, when we have control over our time and decisions and when we feel a deep sense of purpose. Under such conditions, we can achieve real mastery over whatever it is that we do.
The modern workplace, Mr. Pink laments, is too often set up to deny us this opportunity. Firms that hope to optimize efficiency by making their employees clock in and out, attend compulsory meetings, and receive pay for performance are de-motivating through excessive control. What they should be doing, he argues, is giving workers the chance to do their best work by granting them more autonomy and helping them to achieve the mastery that may come with it.
Mr. Pink cites an Australian software firm, Atlassian, that allows its programmers 20% of their time to work on any software problem they like, provided it is not part of their regular job. The programmers turn out to be much more efficient with that 20% of their time than they are with their regular work hours. Atlassian credits the 20% with many of its innovations and its high staff retention. Companies as large as Google and 3M have similar programs that have produced everything from Google News to the Post-It note.
. . .
. . . : Beyond serving our basic needs, money doesn’t buy happiness. We need a greater purpose in our lives. Our most precious resource is time. We respond badly to conditions of servitude, whether the lash of the galley master or the more subtle enslavement of monthly paychecks, quarterly performance targets and the fear of losing health insurance. Work that allows us to feel in control of our lives is better than work that does not.     . . . , these lessons are worth repeating, and if more companies feel emboldened to follow Mr. Pink’s advice, then so much the better.

For the full review, see:
PHILIP DELVES BROUGHTON. “More Than a Paycheck; Workers are more efficient, loyal and creative when they feel a sense of purpose–when work has meaning.” The Wall Street Journal (Tues., Feb. 2, 2010): A17.
(Note: ellipses added.)
(Note: the online version of the review is dated Feb. 5, 2010.)

“Real Innovation in Technology Involves a Leap Ahead”

iPad2010-03-16.jpg“GAME CHANGER? After months of anticipation, Apple unveiled its iPad tablet computer last week.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 1) The more, the better. That’s the fashionable recipe for nurturing new ideas these days. It emphasizes a kind of Internet-era egalitarianism that celebrates the “wisdom of the crowd” and “open innovation.” Assemble all the contributions in the digital suggestion box, we’re told in books and academic research, and the result will be collective intelligence.

Yet Apple, a creativity factory meticulously built by Steven P. Jobs since he returned to the company in 1997, suggests another innovation formula — one more elitist and individual.
This approach is reflected in the company’s latest potentially game-changing gadget, the iPad tablet, unveiled last week. It may succeed or stumble but it clearly carries the taste and perspective of Mr. Jobs and seems stamped by the company’s earlier marketing motto: Think Different.
. . .
(p. 6) Great products, according to Mr. Jobs, are triumphs of “taste.” And taste, he explains, is a byproduct of study, observation and being steeped in the culture of the past and present, of “trying to expose yourself to the best things humans have done and then bring those things into what you are doing.”
His is not a product-design philosophy steered by committee or determined by market research. The Jobs formula, say colleagues, relies heavily on tenacity, patience, belief and instinct. He gets deeply involved in hardware and software design choices, which await his personal nod or veto. Mr. Jobs, of course, is one member of a large team at Apple, even if he is the leader. Indeed, he has often described his role as a team leader. In choosing key members of his team, he looks for the multiplier factor of excellence. Truly outstanding designers, engineers and managers, he says, are not just 10 percent, 20 percent or 30 percent better than merely very good ones, but 10 times better. Their contributions, he adds, are the raw material of “aha” products, which make users rethink their notions of, say, a music player or cellphone.
“Real innovation in technology involves a leap ahead, anticipating needs that no one really knew they had and then delivering capabilities that redefine product categories,” said David B. Yoffie, a professor at the Harvard Business School. “That’s what Steve Jobs has done.”

For the full commentary, see:
STEVE LOHR. “The Apple in His Eye.” The New York Times, Week in Review Section (Sun., MARCH 4, 2010): 1 & 6.
(Note: ellipsis added.)
(Note: the online version of the article is dated January 29, 2010 and had the title “Steve Jobs and the Economics of Elitism.”)