Category Archives: economics

Complements

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Long time ago I drew this little picture to illustrate the difference between complementary products v.s. competing products.

You can’t complete the phone call without both the phone and the phone network.   They complement each other. You can’t pay the bill without both the check and the check clearing network, so they complement each other.    There competing means that of paying or communication.

The customer pays the cost to cross the entire cascade of complements. So, a trick of the capitalist’s trade is to strive to have the cost for any of the complementary products minimized. That leaves more money on the table for him.  The Telco tries to reduce the cost (or at least the apparent cost) of the phone. The Biller’s advocate for low postal rates and state subsidies for the check clearing network.  It looks to me like Google and Amazon work very hard to cut the cost of Internet access.

Since learning about all this I have joked that the grapefruit growers should give away the grapefruit spoons. And, I am delighted to report they do.

Well sort of.  Like the phone company you need to subscribe – in this case to a bag of fruit.

Complements, like suppliers and customers, are another member of the “can’t live with ’em, can’t live without ’em” relations.   Personally I suspect that competitive relationships account for a tiny percentage of what the firm’s managers need to manage.

Deceptive Status Signals

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This essay on deceptive status signals (aka DSS) is delightful for the
collection of tricks people use to look higher status than they really
are.

  • Pulled over for using a cell phone, but it turns out to be a toy.
  • Filling your grocery cart with high-priced goods, and then abandoning it.
  • Driving with the windows closed, signalling that you have air condition.
  • Shirts with no backs.
  • Expired credit cards
  • Packaging for luxury goods
  • Carrying Fast Food packaging
  • Wearing just the cap of a pen in your pocket
  • TV antenna, but no TV
  • Using infant formula
  • Houses with brick fronts, but otherwise made of mud.

If your into it the jargon in this essay is fun. “A related
DSS strategy is the display of a cheap item that is complementary to a
prestigious consumer good.” helps explains the TV antenna, luxury good packaging, …

So, I wonder: could I hack the stream of Ads
appearing in my browser to create a deceptive status signal.

Beveridge Curve Mystery Explained

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The Beveridge Curve names a correlation between supply & demand for talent/labor.  When the demand for talent (as measured by job listings) is high then the supply  (as measured by unemployment numbers) is low.  And visa versa.  If you ignore the red dots you can see what a nice correlation this is.  That seems unsurprising.

 

On the other hand the red dots are surprising.   Something bad happened in the current recession.  The supply of jobs increased but the unemployment rate didn’t fall as epected. But what?

This posting over at the WSJ provides a clue.  Just split the pool of unemployed into two camps.  Apparently the long term unemployed need not apply.  Why this is true in this recession and not others is food for thought.  That clearly needs a handful of insta-theories.

Who knew that the Right’s efforts to stop helping the long term unemployed are in fact merely an effort to defend the lovely honor of the Beveridge Curve.

Underutilization: labor

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The Bureau of Labor Statistics has six different ways to measure unemployment, and there are many more.  Here is a table of those six showing them for the states.  I was interested in how large the gap is between the measures.  So here’s a picture.  Notice that in states with a large supply of jobs the gap is small and as the supply weakens you get larger numbers of people who have had to settle for jobs they don’t really want.  For example part-time when they want full-time.

This includes two metro-regions (LA and NYC) and the 50 states is 51 because it includes DC.  The last four points are DC, Nevada, LA, and NYC.  The first four are North and South Dakota, Nebraska, and Wyoming.  I’m not clever enough to scale the points by population.   Puerto Rico is not shown.

Note that U-3 is the “official” number.  U-1 and U-6 are on the chart.

If you aspire to squeezing the most out of the pool of labor/talent then U-6 sets a goal.  But even that is low because these days a large segment of the population has dropped out of the labor pool entirely.  Presumably they would come back if the supply of jobs increased.

That 20% number in LA is amazing.  The 3.8 million people in LA is more than half the states.

Weoponization of the Politics of Currency

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The social sciences can be dangerous stuff.  Get you public health policies wrong people die.  Get your diplomacy wrong and all hell breaks loose.  Follow the wrong economic policies and folks starve or worse.

One of the charts that most effected me over the years is this one that shows when various nations abandoned the gold standard during the depression and the lead up to the 2nd world war.  I think you make a pretty straight forward argument that the 2nd world war might have been avoided if the sequence had been different.  Hard money kills.

All currencies have an agenda.  Sometimes their designers are too foolish to know what it is, but still.  Gift cards, frequent flier miles, credit cards, check clearing networks all have an agenda.  You can manage your nation’s currency to make workers insecure and increase the level of unemployment.

This essay by Charlie Stross about why Bitcoin is evil says many of the things I have been thinking.  He calls it a weapon by design.

I’ve wondered if nation states engage in cold warfare by viciously engaging in PR campaigns designed to advance the bad economic policies in their rivals.  I don’t see why not, all the other players in the democratic policy strive to guide social policies to their benefit.

Solar Power

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A large solar array in Westboro, who knew?

A large solar array in Westboro, who knew?

I am now an expert on solar power. A few nights ago I listened to a few talks about it, so there. Here are a few things I now think I know.

Solar panels cost has declined, sure. But what about other costs? Not so much. There are lots of other costs: framing, the installation, permitting, financing, site selection, the transaction costs to move power back into the grid, getting your tax rebate, political uncertainties, maintenance, the control electronics, the power-inverters, etc. etc.

For example there was a period a few years back when the price of panels rose, people who built arrays during that interval are a bit cranky about that. For example in my state the tax credit pool is draining out so the current boom is coming to an end.  I was quite amused by one person’s complaint about how hard these projects are to get past a New England town meeting.  That’s was principally about risk and financing.

So, coordination and other harder problems have come to dominate the industry. The cost decline of these systems is leveling off.  This is why you see these efforts to build arrays using robots.

All that makes large projects much more effective v.s. small ones. We have done a lot of projects here in Massachusetts over the last few years, and it’s employed a lot people. But reading between the lines I get the impression that many of those jobs were on little projects where the costs were disproportionately in the coordination costs.

Hot water? It was interesting to see the experts react to a question about solar water heating. They sort of did a collective sigh. Apparently a system that has moving parts and fluids is a pain. I guess that goes to explain why they are so rare. Most of my neighbors have little solar garden lights, none of them have solar heating of any form.

And yet, I look forward to steam-powered garden gnomes.

Bargaining Power

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One of the reasons that healthcare costs are high is how weak the buyers are when it comes time to bargain over price. The text book solution to this problem is to enable the buyers to pool their negotiating power into buying collectives.  For example, insurance companies might play that role; though then you get the agency problems (to you trust ’em?).  For example, the reason drugs and medical equipment is so much cheaper in other countries is the negotiating power held by the state’s health insurance programs.

A lack of bargaining power could happen on the supply side; and in some industries it does. For example farmers generally have no bargaining power, they are forced to take the price the commoditized market offers them. Minimum wage labor typically has no bargaining power when it comes to selling their time. Again these suppliers might be able to address the situation by pooling their negotiating powers. Alternatively they can wait and hope that scarcity will drive up prices.  There is a beautifully executed story in Red Plenty about a factory management’s carefully orchestrated accident intended to create supply scarcity.

So, I’m  a bit confused by an editorial in the NY Times today.  The article states that there are many generic “drugs” (aka commoditized) that are scarce today in the US. But it’s a bit hard for me to see exactly what they believe the cause is. I don’t think they explain it very well. So I have to guess.

The drugs they report are scarce are typically bought by hospitals, and those hospitals have been reasonably successful at consolidating their purchasing power.  They shop for the lowest price and award the contract for a given generic to a single manufacture. I think that’s where they made a mistake. The winner gains an advantage in the next round of the game, since next year when they go to get bids the losers have all gone out of business. In effect the buyer side forced the selling side to consolidate; and thus gave it the power to drive up prices. The scarcity is then, I think, just the consequence of that.

The article goes on to suggest that this might actually not be “dumb” but actually kind of criminal. To see why you need only shift your view a bit to recognize that the managers running the collective buying agent are middlemen, who they might want to maximize their margins.  In this story the middlemen are called “hospital purchasing organizations.”  In that case the middleman might work out an agreement with the provider. “Yeah, how about you give me a kickback. Oh, wait. Did I say kickback; I meant an administrative fee.” If that went sour; then the providers could buy protection from competition. Oh, another species of kind of regulatory capture.

That’s what the article suggests when they point out that the buying collectives have been granted some immunity from prosecution over kickbacks. I’m curious how these immunities differ from the analogous immunities one encounters around assorted industry trade associations, since it is often the case that if you want to enable collective action you need to turn down the regulations on conspiracies. Think for example about how anti-trust law is in tension with industrial standardization.  The article uses the word cabal.

This kind of thing is pervasive in supply chains. They are wonderfully weird. It’s just in ones that effect the public sphere and pull on the heart strings that we get to read NY Times editorials.

Hourly Cost of Healthcare?

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When you see a gas station with cheap gas are you actually observing?   Consider for example a gas station owner who hires people to pump his gas.  His costs are lower if he can skip providing health coverage.  Examples like that are one reason I support universal provision of healthcare is the powerful way that market competition works to eliminate it.  It’s an ethical puzzle, eh?

The national minimum wage is $7.25/hour, while spend $6,815 per person on health care.  If we presume a 40 hour work week, 52 weeks a year, that’s $3.40/hour.   Or to look at it another average premium for health insurance is $215/month, e.g. $1.29 an hour.

Setting standards, for things like provision of healthcare is one way to address the problems ethical and otherwise that market’s present.   But standards come in many forms, for example labeling.  Maybe the gas stations that have uninsured employees could be required to display a large shaming sign.  Or if you into techno-utopian solutions maybe we could spin up an App for your phone that let’s you look this info up.

The Times has an article today about how the people who pick our vegetables lack health insurance and providing it might cost a dollar an hour.  Well yeah.

prices are forward looking

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One of the old languages, Aymara, of South America has a unique feature.  Events in the past are said to be in front of the speaker, i.e. where he can see them; while those in the future are behind him.

If you think about it a little it makes sense.  You can’t see the future.  But, you can call up memories of the past.  So in sense that is all you can see.

But, yeah, doesn’t that treat memory as more valid your imaginary futures, your plans.  It hardly seems fair to treat one tenuous mental model as more real than the other.   It makes me wonder is Aymara the perfect language of nostalgia?

I was reminded of all that by this essay which digs into the common presumption that you deserve your income.

“Free market prices are essentially forward-looking.  Current prices send signals to producers as to where the demand is now, not where the demand was when individual producers decided on their production plans.”

I like to say that there are two simple naive ways to think about the price of something: that it cost to make v.s. what it value the buyer will extract from it.  If $cost < $value then we can negotiate.  There are uncountable reasons why this model is too simple, but it’s still useful.  In part because it’s nice and symmetric, the seller doesn’t want the buyer to know $cost and vis-a-versa.  They keep their secret, but it looms large in their mind.  During the negotiation the buyer strives to dampen the seller’s nostalgia and his own valuation; while the seller does the opposite.

If I have labored a life time to acquire some skill then I know that my $cost is high, but the market doesn’t care.  The market is just as likely to have a high $value for things that skills that were trivial to acquire.   This is a line of reasoning that I am familiar with for most products, but I’ll admit I’d never seen it so boldly stated for transactions involving skills.