Category: Economics

Beating the Market Depends “on Your Ability to Be a Reader of People”

(p. B1) The person who helped inspire the passive-investing boom, the late economist Paul Samuelson, became wealthy from his active investments.

The greatest active investor of our time, Warren Buffett, advocates investing passively.

. . .

(p. B6) Prof. Samuelson’s decisions show why investors shouldn’t become so doctrinaire about index funds that they completely cut themselves off from any chance, however rare, of doing better.

In 1970, the same year he became the first American to win the Nobel Prize in economics, Prof. Samuelson began buying stock in Mr. Buffett’s Berkshire Hathaway Inc., at a cost that eventually averaged about $44 per share. (Berkshire’s A shares traded this week at approximately $290,000 apiece.)

. . .

In an interview this week, Mr. Buffett says Prof. Samuelson believed the same thing he does: that markets are “generally very efficient but not perfectly efficient.”

Mr. Buffett adds, “I do think if you know something about finance and about people, you may be able to identify someone out there who can overperform. But for every one you identify who can, there’ll be 1,000 others who don’t turn out to be able to.”

Continues Mr. Buffett: “You’re betting enormously on your ability to be a reader of people, even more than your ability—or theirs—to select securities. They’re all promising overperformance and spending a lot of money on selling it very persuasively. Overwhelmingly this is a world of salespeople.”

For the full commentary, see:

Jason Zweig. “THE INTELLIGENT INVESTOR; From a Skeptic, a Lesson on Beating the Market.” The Wall Street Journal (Saturday, December 22, 2018): B1 & B6.

(Note: ellipses added.)

(Note: the online version of the commentary has the date December 21, 2018, and has the title “THE INTELLIGENT INVESTOR; What You Can Learn From One of Warren Buffett’s Smartest Investors.”)

Founder Re-Acquires StubHub

In my book Openness to Creative Destruction: Sustaining Innovative Dynamism, I praise project entrepreneurs for having as their main goal, not wealth or fame, but making a ding in the universe (to use Steve Jobs’s phrase). I also suggest that they are more likely to succeed, in part because they are more likely to stick with the venture they founded. But there may be exceptions to my narrative. Eric Baker sounds like a project entrepreneur who left his start-up because of conflicts with his co-founder, and who now is back in charge.

(p. B4) Eric Baker long envisioned bringing together the two ticketing companies he started.

This week eBay Inc. agreed to sell its StubHub unit, a business Mr. Baker launched nearly two decades ago, to Geneva-based Viagogo Entertainment Inc., the ticketing firm with a large European presence he has been running since 2006.

The $4.05 billion all-cash deal would create a global ticketing juggernaut in the booming business of live events. It would also put StubHub back in the hands of the person who early on saw the opportunity in the legitimate resale of tickets.

. . .

“You had to pay through the nose or find people on the street corner to purchase from,” says Mr. Baker. He felt there had to be a better, more efficient way to find tickets and imagined that could happen online.

He headed to Stanford Graduate School of Business that fall and, together with classmate Jeff Fluhr, started StubHub—then called Liquid Seats—in 2000.

. . .

Mr. Baker and Mr. Fluhr—who was chief executive and had majority ownership of the company—had their differences, and in 2004 Mr. Baker left at the board’s direction, said people familiar with the decision.

. . .

When eBay bought StubHub in 2007, Mr. Baker says he opposed the deal. “It’s rare you have the opportunity to have a business like that,” he says. “To me, you try to hold on to something that’s working.”

For the full story, see:

Anne Steele. “StubHub Acquisition Puts Co-Founder Back in Charge.” The Wall Street Journal (Monday, December 2, 2019): B4.

(Note: ellipses added.)

(Note: the online version of the story has the date November 29, 2019, and has the title “The Tale Behind StubHub’s Sale: How Eric Baker Bought Back the Ticket Seller.”)

My book, mentioned above, is:

Diamond, Arthur M., Jr. Openness to Creative Destruction: Sustaining Innovative Dynamism. New York: Oxford University Press, 2019.

Oligopolists Compete Intensely

(p. B3) The race is on between the world’s largest videogame console makers, this time during a period of heightened demand for at-home entertainment through the coronavirus pandemic.

Sony Corp. SNE 1.45% on Wednesday said two versions of the PlayStation 5 would go on sale in November, one for roughly $400 and another for $500. Both consoles will be sold in a small number of countries including the U.S. and Japan starting Nov. 12 and the rest of the world a week later.

Last week, Microsoft Corp. said it would release two new consoles as well, the Xbox Series X for $499 and the Series S for $299, on Nov. 10.

For the full story, see:

Sarah E. Needleman. “Videogame Rivalry Heats Up.” The Wall Street Journal (Thursday, September 17, 2020): B3.

(Note: bracketed year added.)

(Note: the online version of the story was updated Sep. 16, 2020, and has the title “Sony to Launch Two PlayStation 5 Models This Fall.”)

Least-Well-Off Were Gaining Before Pandemic

(p. A3) U.S. families’ income and wealth rose in the years heading into the coronavirus pandemic, with those in lower-income and lower-wealth categories reaping relatively large gains, the Federal Reserve said in a report on household finances.

. . .

The distribution of wealth between low- and high-income households narrowed slightly in the latest survey period, Fed economists said, a shift from the 2010-to-2016 period when incomes largely stagnated for all but the most well-off after the 2007-2009 recession.

Families in the lowest two income groups recorded large percentage increases in median net worth, suggesting the decadelong expansion benefited a wide swath of society. Net worth rose 37% to $9,800 for the lowest earners, and increased 40% to $44,000 for the second-lowest group. The median net worth of the highest and second-highest groups declined 8% and 9%, respectively.

For the full story, see:

Harriet Torry. “Household Wealth Rose Before Crisis.” The Wall Street Journal (Tuesday, September 29, 2020): A3.

(Note: ellipsis added.)

(Note: the online version of the story was updated Sep. 28, 2020, and has the title “Household Wealth Rose in Years Before Pandemic, Fed Says.”)

California Energy Shortage Partly Due to Government Mandated Price Ceiling on Energy Imported from Out-of-State

(p. B9) As California keeps facing electricity shortages, the discussion around its grid often veers to extremes.

. . .

Should California . . . have shut down less natural gas and nuclear power? That is definitely part of the issue, and future shutdowns might need to slow.

. . .

. . . at least some of the shortage is addressable through market rules.

For example, California has a hard import bid cap of $1,000 per megawatt hour. Christopher DaCosta, regional director of western power markets at Wood Mackenzie, says that surrounding areas have a softer cap and are able to pay more. During this summer, that meant power plants often rerouted electricity to higher bidders than California.

For the full commentary, see:

Jinjoo Lee. “To Keep Lights On, California Needs Power Play.” The Wall Street Journal (Thursday, September 17, 2020): B9.

(Note: ellipses added.)

(Note: the online version of the commentary has the date Sep. 16, 2020, and has the title “How to Keep the Lights On in California.”)

Chinese Communists Have Failed to Reform Toward Free Markets

(p. B6) China is the only major world economy reporting any economic growth today. It went first into Covid-19 and was first out, grinding out 3.2% growth in the most recent quarter while the U.S. shrank 9.5% and other advanced economies endured double-digit declines. High-tech monitoring, comprehensive testing and aggressive top-down containment measures enabled China to get the virus under control while others struggled. The Middle Kingdom may even deliver a modest year-over-year economic expansion in 2020.

This rebound is real, but behind the short-term numbers the economic restart is dubious. China’s growth spurt isn’t the beginning of a robust recovery but an uneven bounce fueled by infrastructure construction.

. . .

An honest look at the forces behind China’s growth this year shows a doubling down on state-managed solutions, not real reform. State-owned entities, or SOEs, drove China’s investment-led recovery.

. . .

For years, the world has watched and waited for China to become more like a free-market economy, thereby reducing American security concerns. At a time of profound stress world-wide, the multiple gauges of reform we have been monitoring through the China Dashboard point in the opposite direction. China’s economic norms are diverging from, rather than converging with, the West’s. Long-promised changes detailed at the beginning of the Xi era haven’t materialized.

Though Beijing talks about “market allocation” efficiency, it isn’t guided by what mainstream economists would call market principles. The Chinese economy is instead a system of state capitalism in which the arbiter is an uncontestable political authority. That may or may not work for China, but it isn’t what liberal democracies thought they would get when they invited China to take a leading role in the world economy.

For the full commentary, see:

Daniel Rosen, and Kevin Rudd. “China Backslides on Economic Reform.” The Wall Street Journal (Wednesday, September 23, 2020): A17.

(Note: ellipses added.)

(Note: the online version of the commentary has the date Sep. 22, 2020, and has the same title as the print version.)

Amazon’s Culture “Asks a Lot of Questions”

(p. B2) John Mackey helped popularize organic food when he co-founded Whole Foods Market four decades ago. Over the past several months, his chain of more than 500 stores has scrambled to adapt to another major shift in how Americans buy groceries.

. . .

The pandemic has accelerated an online-grocery movement that Whole Foods was already seeking to capitalize on as part of Amazon.com Inc. Mr. Mackey sold Whole Foods to the online-retail juggernaut for $13.4 billion in 2017, one of the decisions he recounts in his new book out this month, “Conscious Leadership: Elevating Humanity Through Business.”

. . .

WSJ: What merger challenges have you’ve learned from?

Mr. Mackey: Amazon has a culture that asks a lot of questions. We took a little longer to get used to that, but that’s no big deal. That’s how you learn things. They’re trying to understand our business. They want to know everything. And I think that’s healthy.

WSJ: What’s the biggest leadership lesson you’ve adopted from Jeff Bezos?

Mr. Mackey: Amazon wants you to write up a document explaining your ideas, defending them, and then you can have discussions. That’s a practice Whole Foods has adopted. Amazon’s also very data-driven. As opposed to acting from the gut, Amazon says, “Show us the data.” That’s been a good discipline for us. We do it ourselves, even when we’re not talking to Amazon.

For the full interview, see:

Jaewon Kang, interviewer. “BOSS TALK; Rugged Individualism in the Grocery Aisle.” The Wall Street Journal (Saturday, September 12, 2020): B2.

(Note: ellipses added. In both the print and online versions, “WSJ” and “Mr. Mackey” are bolded, as are the questions asked by Jaewon Kang. The bolding is not visible in the theme used for this blog.)

(Note: the online version of the interview has the date Sep. 11, 2020, and has the title “BOSS TALK; Whole Foods CEO John Mackey Says Many People Are Done With Grocery Stores.”)

The book co-authored by Mackey and mentioned above is:

Mackey, John, Steve Mcintosh, and Carter Phipps. Conscious Capitalism: Elevating Humanity Through Business. New York: Portfolio, 2020.

Apple Is First U.S. Firm to Reach Two Trillion in Market Value

(p. B1) Apple Inc. on Wednesday [Aug. 19, 2020] became the first U.S. public company to eclipse $2 trillion in market value, a dizzying achievement that highlights the iPhone maker’s commanding role in the world economy.

Shares of Apple rose as much as 1.4% to $468.65, eclipsing the $467.77 mark needed to reach the milestone. They ended the day up 0.1% at $462.83, putting the company’s market value just below $2 trillion.

For the full story, see:

Amrith Ramkumar. “Apple’s Stock-Market Valuation Touches $2 Trillion Mark Intraday.” The Wall Street Journal (Thursday, August 20, 2020): B1-B2.

(Note: bracketed date added.)

(Note: the online version of the story was updated Aug. 19, 2020, and has the title “Apple Surges to $2 Trillion Market Value.”)

Natural Experiments Are Equal to Randomized Double-Blind Clinical Trials in Showing Causality

(p. B6) . . . randomized controlled trials are the gold standard in medicine. Using randomization (by, say, flipping a coin to assign patients to a new treatment or not) is the best way to determine whether treatments work.

Unfortunately, randomized trials take time — which is a problem when doctors need answers now. So doctors and public health officials have been turning to available real-world data on patient outcomes and trying to make sense of them.

. . .

“Large-scale randomized evaluations have been less common in economics, prioritizing the need for economists to identify often creative but sometimes narrow natural experiments to estimate the causal effects of treatments,” said Amitabh Chandra, an economist at the Harvard Business School and the Kennedy School of Government.

Ashish Jha, recently appointed the dean of the Brown University School of Public Health, said that while “natural experiments have causal interpretations, typical associational studies in medicine do not, which may make some medical researchers less comfortable interpreting the results.”

. . .   Most doctors can relate to recent comments by the Food and Drug Administration director Stephen Hahn in last week’s congressional pandemic hearing. “In a rapidly moving situation like we have now with Covid-19,” he said, decisions are made “based on the data that’s available to us at the time.”

For the full commentary, see:

Anupam B. Jena and Christopher M. Worsham. “THE UPSHOT; What Coronavirus Researchers Can Learn From Economists.” The New York Times (Thursday, July 2, 2020): B6.

(Note: ellipses added.)

(Note: the online version of the commentary has the date June 30, 2020, and has the same title as the print version.)

Boeotia Was “an Early Model of Democratic Federalism”

(p. C12) Mr. Cartledge, a professor emeritus at Cambridge and author of popular history books such as “The Spartans,” “Thermopylae,” “Alexander the Great” and “Democracy: A Life,” has picked an opportune time to look afresh at Thebes and Boeotia. The modern city of Thebes, an uninspiring market town, would not normally attract tourists, but is home to a glittering new museum, among the most up-to-date in Greece, featuring exhibits of archaeological finds (many unique in type) and historical objects from prehistory to the present. (One exhibit is titled, provocatively, “The Intellectual Radiance of Boeotia.”) There is a book forthcoming, from scholar James Romm, about Thebes’s “Sacred Band,” its elite unit of soldiers, made up of pairs of devoted homosexual lovers. Thebes is in the spotlight.

. . .

The biography of the Theban leader Epaminondas (418 B.C.-362 B.C.) written by Plutarch is, unfortunately, lost. Even so, his reputation shines. Admired by figures from Cicero and Montaigne to Sir Walter Raleigh (who called him “the worthiest man that ever was bred by the nation of Greece”), Epaminondas seems to have had a philosophical bent as well as a brilliant military mind.

. . .

Perhaps his greatest act, . . ., even if it might have been intended more to inconvenience the Spartans than as a benevolent deed, was freeing the helots of Messenia, a people that had been enslaved by the Spartans for 300 years. He helped found a new capital city for the Arcadian federation (Megalopolis), and also for the ex-helots (Messene). Maybe Epaminondas was not only the Nelson of his age, but the Lincoln as well. He died in battle and was buried alongside his male beloved, Caphisodorus, with an epitaph that listed his children (daughters, being female) as the cities Messene and Megalopolis; it ended “Greece is free.”

Mr. Cartledge’s command of the historical material is effortless and exhaustive, and his appreciation of Thebes is persuasive. Between the radical but self-destructive democracy of Athens and Sparta’s totalitarian oligarchy (both imperialist), Thebes and Boeotia stand in the middle as an early model of democratic federalism—the “united states” of Boeotia, for instance, shared a currency. It was Thebes that dealt a critical blow to Spartan domination, and a Theban leader who freed a long-enslaved people. Alexander the Great himself adopted military tactics from Epaminondas. If Thebes’s period of hegemony was brief—barely a decade—it also changed the course of the ancient world.

For the full review, see:

A.E. Stallings. “Greece’s Mythic Heartland.” The Wall Street Journal (Saturday, September 12, 2020): C12.

(Note: ellipses added.)

(Note: the online version of the review has the date Sep. 11, 2020, and has the title “‘Thebes: The Forgotten City of Ancient Greece’ Review: Mythic Roots.”)

The book under review is:

Cartledge, Paul. Thebes: The Forgotten City of Ancient Greece. New York: Abrams Press, 2020.

Litan and Mankiw Endorse Paying People to Take Vaccine

(p. 5) What’s the best way to get the economy back on track after the Covid-19 recession? Simple: Achieve herd immunity. And what’s the best way to achieve herd immunity? Again, simple: Once a vaccine is approved, pay people to take it.

That bold proposal comes from Robert Litan, an economist at the Brookings Institution. Congress should enact it as quickly as possible.

. . .

Recent research by the University of Chicago economists Austan Goolsbee and Chad Syverson has found that the government-mandated shutdowns account for just a small part of the decline in economic activity. The main reason people aren’t spending is that they are afraid to leave their homes and contract the virus. That hypothesis explains my own behavior. I have not stepped foot on an airplane or inside a restaurant for six months.

. . .

Immunology, meet economics. One of the first principles of economics — perhaps the most important — is that people respond to incentives. Applying this principle to the case at hand, Mr. Litan recommends that the government pay $1,000 to whoever gets the vaccine. With a large enough incentive, most Americans are likely to get vaccinated.

This proposal is textbook economics. (I’ve written some of the textbooks.) As all economics students learn, when an activity has a side effect on bystanders, that effect is called an externality. In the presence of externalities, the famous theorems of economics that justify laissez-faire do not apply. Adam Smith’s vaunted invisible hand can no longer work its magic.

A classic example of a negative externality is pollution, and the simplest and least invasive policy solution is a tax on emissions. In economics-speak, such a tax internalizes the externality: It induces polluters to take the cost of pollution into account by giving them a financial incentive to cut emissions. That’s why I have written here many times that a tax on carbon emissions is the best way to deal with global climate change.

Vaccination confers a positive externality. When you get vaccinated, you benefit not only yourself but also your fellow citizens by helping society take a step toward herd immunity. In this case, internalizing the externality requires not a tax but a subsidy, as Mr. Litan suggests.

For the full commentary, see:

N. Gregory Mankiw. “A Vaccine Subsidy Licks 2 Crises With One Shot.” The New York Times, SundayReview Section (Sunday, September 13, 2020): 5.

(Note: ellipses added.)

(Note: the online version of the commentary has the date Sept. 9, 2020, and has the title “Pay People to Get Vaccinated.”)

The Robert Litan op-ed mentioned above is:

Litan, Robert E. “Want Herd Immunity? Pay People to Take the Vaccine.” Brookings Institute Op-Ed. (Tues., Aug. 18, 2020) URL: https://www.brookings.edu/opinions/want-herd-immunity-pay-people-to-take-the-vaccine/.>

The Goolsbee and Syverson NBER working paper mentioned above is:

Goolsbee, Austan, and Chad Syverson. “Fear, Lockdown, and Diversion: Comparing Drivers of Pandemic Economic Decline 2020.” NBER Working Paper #27432, June 2020.