Economics – Page 244 – artdiamondblog.com

Candy Competition

Source of graphic: online version of the WSJ article quoted and cited below.

In class, we discuss how consumers pay higher prices for candy and soft drinks because the U.S. government limits on how much foregin sugar we can import. Sometimes a student will claim that candy companies would not lower prices if the price of sugar declined. And sometimes that issue leads to a discussion of whether the candy industry is competitive.
The graphic above, and the quotation below, provide some relevant evidence.

(p. B1) The global confectionary industry has long lacked a dominant player. The top 10 manufacturers controlled just 47% of the $141 billion market as of 2006, the most recent available data. . . .
. . .
If the Wrigley acquisition is successful, Mars will become the world’s largest confectionary company with about 14.4% of the market, overtaking Cadbury’s 10.1%, based on 2006 figures, the latest available, from Euromonitor International.

For the full story, see:
JULIE JARGON and AARON O. PATRICK. “More Sweet Deals in the Candy Aisle?; Cadbury and Hershey in the Spotlight in the Wake of Mars-Wrigley Linkup.” The Wall Street Journal (Tues., April 29, 2008): B1-B2.
(Note: ellipses added.)

New York Rent Control Limits Incentives to Build Apartments

“Tryn Collins, left, and Mary Hill share small quarters at a loft building in Brooklyn that was transformed from a factory.” Source of caption and photo: online version of the NYT article quoted and cited below.

New York City has had rent control in effect for decades. Economists predict that one effect of rent control is that incentives are reduced to build and maintain apartments. As a result, those seeking living space, have fewer options. (For example, the WSJ a few years ago ran a front page article explaining how some enterprising New Yorkers were living in abandoned elevator shafts.)
The article quoted below, provides additional evidence.

(p. A1) One “room” is a cramped cubby that measures, in all, perhaps 25 square feet, just enough for a full-size mattress and whatever can be stashed beneath. The first-floor rooms, in the basement, are musty and windowless, like caves. The second-floor rooms have plywood walls but no doors, only cut-out windows that overlook a kitchen cluttered with day-old dishes, a chore wheel and the odd paintbrush.
One of the residents likens her home to a “giant treehouse.” Another says it is like “living in a public bathroom.”
“Where the stalls are just superficial sight lines that block the other person, but you can hear everything they do,” said Robyn Frank, a 23-year-old artist. She had just moved in to the McKibbin lofts in East Williamsburg, Brooklyn, and sometimes they literally become bathrooms. They are known for their giant, raucous parties; revelers occasionally urinate in the halls.
This is life in what some refer to as the McKibbin “dorms,” a landing pad for hundreds of postcollegiate creative types yearning to make it as artists, and live like them too, in today’s New York.
Newcomers marvel that such a place exists: two sprawling, almost identical five-story former factories filled with mostly white hip young things, smack in the middle of a neighborhood that has little in common with Williamsburg proper, its cocktail-mixing neighbor to the west.
Perhaps 300 people live in each building, which face each other and sit, respectively, at 248 and 255 McKibbin Street. Between one and eight people live in each loft. Few were born before the mid-1980s. Rents can range from $375 for one person to roughly $800 for a space.

For the full story, see:
CARA BUCKLEY. “Young Artists Find a Private Space, Only Without the Privacy.” The New York Times (Weds., May 7, 2008): A1 & A17.

Why Most Economists Oppose the Gas Tax Holiday

(p. A31) Most economists oppose the Clinton-McCain gas tax holiday because they can’t see how consumers will benefit. In fact, “most” is an understatement; when challenged to name one economist willing to back her plan, Mrs. Clinton’s response was to disparage the whole profession.
Why are economists so opposed? In the short run, the supply of gasoline is basically fixed; it takes a while to build a new refinery. The demand for gasoline, in contrast, is more responsive to price; we’re already seeing greater use of public transportation and brisk sales of fuel-efficient cars. When you combine fixed supply with flexible demand, it’s suppliers, not demanders, who pocket the tax cut. That’s Econ 101.
. . .
When the public rejects the mundane explanations for high gas prices — big boring facts like rapid Asian growth — politicians aren’t going to correct them. The best we can expect is for Washington to try to channel the public’s misconceptions in relatively harmless directions. We could do a lot worse than the gas tax holiday; in fact, we usually do.

For the full commentary, see:
BRYAN CAPLAN. “The 18-Cent Solution.” The New York Times (Thurs., May 8, 2008): A31.
(Note: ellipsis added.)

For Happiness, “Income Does Matter”

Source of graph: online version of the NYT article quoted and cited below.

(p. C7) . . . , Betsey Stevenson and Justin Wolfers argue that money indeed tends to bring happiness, even if it doesn’t guarantee it. They point out that in the 34 years since Mr. Easterlin published his paper, an explosion of public opinion surveys has allowed for a better look at the question. “The central message,” Ms. Stevenson said, “is that income does matter.”
To see what they mean, take a look at the map that accompanies this column. It’s based on Gallup polls done around the world, and it clearly shows that life satisfaction is highest in the richest countries. The residents of these countries seem to understand that they have it pretty good, whether or not they own an iPod Touch.
If anything, Ms. Stevenson and Mr. Wolfers say, absolute income seems to matter more than relative income. In the United States, about 90 percent of people in households making at least $250,000 a year called themselves “very happy” in a recent Gallup Poll. In households with income below $30,000, only 42 percent of people gave that answer. But the international polling data suggests that the under-$30,000 crowd might not be happier if they lived in a poorer country.
. . .
Economic growth, by itself, certainly isn’t enough to guarantee people’s well-being — which is Mr. Easterlin’s great contribution to economics. In this country, for instance, some big health care problems, like poor basic treatment of heart disease, don’t stem from a lack of sufficient resources. Recent research has also found that some of the things that make people happiest — short commutes, time spent with friends — have little to do with higher incomes.
But it would be a mistake to take this argument too far. The fact remains that economic growth doesn’t just make countries richer in superficially materialistic ways.
Economic growth can also pay for investments in scientific research that lead to longer, healthier lives. It can allow trips to see relatives not seen in years or places never visited. When you’re richer, you can decide to work less — and spend more time with your friends.
Affluence is a pretty good deal. Judging from that map, the people of the world seem to agree. At a time when the American economy seems to have fallen into recession and most families’ incomes have been stagnant for almost a decade, it’s good to be reminded of why we should care.

For the full commentary, see:
DAVID LEONHARDT. “Economic Scene; Money Doesn’t Buy Happiness. Well, on Second Thought . . . .” The New York Times (Weds., April 16, 2008): C1 & C7.
(Note: ellipses in text added; ellipsis in title in original; the title in the online version was “Economic Scene; Maybe Money Does Buy Happiness After All.” )

Source of graphic: online version of the NYT article quoted and cited above.

Franklin Roosevelt Exposed in The Forgotten Man

Source of book image: http://blog.syracuse.com/shelflife/forgotten.jpg

Amity Shlaes’s new history of the Great Depression is at once depressing and encouraging. It is depressing in showing how vulnerable human progress is to the threat from a dishonest, slick orator, who has not a clue about how the economy works. It is encouraging in that it shows so clearly that the length and depth of the Great Depression was due to easily avoidable mistakes in policy, rather than due to some fundamental flaw in capitalism, as has occasionally been claimed.
Although the book does not shy away from pointing out the flaws of Coolidge, Hoover and Willke, it mainly shows how F.D.R.’s routine whimsical policy reversals and double-dealings, alienated not only his original opponents, but many of his early friends and allies.
The New Deal policies to seize business profits, reduced business incentives to take risks: if the risks turned out badly, the business would lose the investment, while if the risks turned out well, the profits would be taxed away by the federal government.
In addition, the sheer unpredictability of New Deal policies further led the prudent to delay investments, thereby further impeding recovery.
The book is well-written, and should be equally well-read.

The reference for the book is:
Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York: HarperCollins, 2007.

Creative Destruction Brings Triumph of Brain Over Brawn in the Labor Market

(p. 435) . . . , the inexorable growth in the proportion of our GDP that is conceptual, especially technological, has increased the value of intellectual power relative to the value of human brawn many times over many generations. I am old enough to remember when physical prowess on the job was the source of legend and reverence. A large statue of Paul Bunyan, the mythical logger, still oversees the northern Minnesota lake country. Stevedores of a century ago were extolled for their brute strength. Today, the activities once carried out by stevedores are often run by young women at a computer console.

Source:
Greenspan, Alan. The Age of Turbulence: Adventures in a New World Economic Flexibility. New York: Penguin Press, 2007.

Hoosiers Were Right to Be Behind the Times

I am a Hoosier by birth and upbringing, and I am not ashamed to admit it, in spite of the fact that “hoosier” is a pejorative in some circles.
Until recently, in Indiana we swam against the tide, in rejecting Daylight Savings Time. It never made sense to me that in order to take advantage of sunlight, the government needed to mandate that the clocks be changed twice a year.
Why couldn’t those who want to use the hours of sunlight differently, simply adjust their own schedules, for example, by getting up earlier or later?
Well the article quoted below, suggests that us Hoosiers may have been wiser than we knew.

(p. D1) For decades, conventional wisdom has held that daylight-saving time, which begins March 9, reduces energy use. But a unique situation in Indiana provides evidence challenging that view: Springing forward may actually waste energy.
Up until two years ago, only 15 of Indiana’s 92 counties set their clocks an hour ahead in the spring and an hour back in the fall. The rest stayed on standard time all year, in part because farmers resisted the prospect of having to work an extra hour in the morning dark. But many residents came to hate falling in and out of sync with businesses and residents in neighboring states and prevailed upon the Indiana Legislature to put the entire state on daylight-saving time beginning in the spring of 2006.
Indiana’s change of heart gave University of California-Santa Barbara economics professor Matthew Kotchen and Ph.D. student Laura Grant a unique way to see how the time shift affects energy use. Using more than seven million monthly meter readings from Duke Energy Corp., covering nearly all the households in southern Indiana for three years, they were able to compare energy consumption before and after counties began observing daylight-saving time. Readings from counties that had already adopted daylight-saving time provided a control group that helped them to adjust for changes in weather from one year to the next.
Their finding: Having the entire state switch to daylight-saving time each year, rather than stay on standard time, costs Indiana households an additional $8.6 million in electricity bills. They conclude that the reduced cost of lighting in afternoons during daylight-saving time is more than offset by the higher air-conditioning costs on hot afternoons and increased heating costs on cool mornings.
“I’ve never had a paper with such a clear and unambiguous finding as this,” says Mr. Kotchen, who presented the paper at a National Bureau of Economic Research conference this month.

For the full story, see:
JUSTIN LAHART. “Daylight Saving Wastes Energy, Study Says.” The Wall Street Journal (Weds., February 27, 2008): D1 & D4.

Searching for Curb Parking Causes 30% of Central Business District Congestion

(p. A19) MOST people view traffic with a mixture of rage and resignation: rage because congestion wastes valuable time, resignation because, well, what can anyone do about it? People have places to go, after all; congestion seems inevitable.
But a surprising amount of traffic isn’t caused by people who are on their way somewhere. Rather, it is caused by those who have already arrived. Streets are clogged, in part, by drivers searching for a place to park.
Several studies have found that cruising for curb parking generates about 30 percent of the traffic in central business districts. In a recent survey conducted by Bruce Schaller in the SoHo district in Manhattan, 28 percent of drivers interviewed while they were stopped at traffic lights said they were searching for curb parking. A similar study conducted by Transportation Alternatives in the Park Slope neighborhood in Brooklyn found that 45 percent of drivers were cruising.
. . .
If cities want to reduce congestion, clean the air, save energy, reduce greenhouse gas emissions and improve neighborhoods — and do it all quickly — they should charge the right price for curb parking, and spend the resulting revenue to improve local public services.

For the full commentary, see:
Donald Shoup. “Gone Parkin’.” The New York Times (Thurs., March 29, 2007): A19.
(Note: ellipsis added.)

Lack of Legal Status for Poor Keeps Them “In Constant Fear”

The passage below is quoted from a WSJ summary of an article in the July 16, 2007 issue of Time:

(p. B5) Writing in Time magazine, Ms. Albright, former U.S. secretary of state, and Mr. de Soto, a Peruvian-born economist who heads the Institute for Liberty and Democracy in Lima, say that about half of the world’s population work in shadow economies. They generally lack birth certificates, legal addresses or, crucially, deeds to their shacks and market stalls. “Without legal documents, they live in constant fear of being evicted by local officials or landlords,” write Ms. Albright and Mr. de Soto, who co-chair the U.N. Commission on Legal Empowerment of the poor. As a result, the poor are unable to invest or even plan for the future.

For the full summary, see:
“The Informed Reader; Poverty; Lack of Strong Legal Identity Helps Keep Down World’s Poor.” Wall Street Journal (Fri., July 6, 2007): B5.

The Free Market Works

The story quoted below tells how outsourcing high-tech jobs to India has bid up the salaries of high-tech Indian engineers, thereby reducing the appeal of further outsourcing. Marvelous how the market works!
Another lesson from the story applies to forecasting: mechanical extrapolation of current trends is inferior to prediction that takes account of predictable changes in prices (in this case, salaries).

(p. A15) Around the century’s turn, when U.S. companies first began flooding to India for its cheap labor, pundits warned that the subcontinent could increasingly rob the U.S. of high-end white-collar jobs. Debate was especially sharp in Silicon Valley, then in a slump, because India annually turns out nearly 500,000 engineering graduates.
. . .
Several years on, the forces of globalization are starting to even things out between the U.S. and India, in sophisticated technology work. As more U.S. tech companies poured in, they soaked up the pool of high-end engineers qualified to work at global companies, belying the notion of an unlimited supply of top Indian engineering talent. In a 2005 study, McKinsey & Co. estimated that just a quarter of India’s computer engineers had the language proficiency, cultural fit and practical skills to work at multinational companies.
The result is increasing competition for the most skilled Indian computer engineers and a narrowing U.S.-India gap in their compensation. India’s software-and-service association puts wage inflation in its industry at 10% to 15% a year. Some tech executives say it’s closer to 50%. In the U.S., wage inflation in the software sector is under 3%, according to Moody’s Economy.com.
Rafiq Dossani, a scholar at Stanford University’s Asia-Pacific Research Center who recently studied the Indian market, found that while most Indian technology workers’ wages remain low — an average $5,000 a year for a new engineer with little experience — the experienced engineers Silicon Valley companies covet can now cost $60,000 to $100,000 a year. “For the top-level talent, there’s an equalization,” he says.

For the full story, see:
Pui-Wing Tam and Jackie Range. “Second Thoughts: Some in Silicon Valley Begin to Sour on India; A Few Bring Jobs Back As Pay of Top Engineers In Bangalore Skyrockets.” Wall Street Journal (Tues., July 3, 2007): A1 & A15.
(Note: ellipsis added.)

Non-Market Health Care Pricing Results in Health Care Shortages

(p. A22) When my Labrador retriever became acutely lame, we were able to locate a veterinary orthopedic expert in Atlanta within 48 hours who was able to repair a ruptured tendon within one week. But my prospects of identifying an endocrinologist who can care for my daughter’s diabetes when she turns 18 are much less promising.
The limited number of endocrine specialists is a not a consequence of limited demand — everyone is aware of the epidemic of diabetes we are facing. There are also shortages of generalists and other specialists, and the reason is the absence of market signals — i.e., market-based prices — for influencing the supply of physicians in various specialties.
The roots of this problem lay in the use of administrative pricing structures in medicine. The way prices are set in health care already distorts the appropriate allocation of efforts and resources in health care today. Unfortunately, many of the suggested reforms of our health care system — including the various plans for universal care, or universal insurance, or a single-payer system, that various policy makers and Democratic presidential candidates espouse — rest on the same unsound foundations, and will produce more of the same.
. . .
One important lesson of the 20th century is that, while markets are far from perfect, more choices are available when people are able to use free markets to interact with each other. Markets may not get the prices exactly correct all the time, but they are capable of self- correction, a capacity that has yet to be demonstrated by administrative pricing.
It tells you something when the supply of and demand for specialist veterinary care is so easily matched when the prices of these services are established on the market — while shortages and oversupplies are common for human medical care when the prices of these services are set by administrators in the public sector. Will health-care reformers — and American citizens — get the message?

For the full commentary, see:
Robert A. Swerlick. “Our Soviet Health System.” Wall Street Journal (Tues., Jun 5, 2007): A22.
(Note: ellipsis added.)