Econ Readings

"Why is Pay Lagging? Maybe Too Many Mergers in the Heartland," New York Times. Jan 25 2018.

o A wave of farm-equipment dealership consolidations is not only affecting consumers, but also jobs and wages because there are fewer employers and competition. This problem is even worse in rural areas, where commuting times are an issue o With these consolidations, the number of separately owned dealerships are decreasing. As machinery is growing more complex and expensive, the "volume discount" on machinery is only geared for larger dealerships, so mechanics or smaller dealerships cannot afford the new equipment. o Consolidation affects perfect competition and real wages, and also creates barriers of entry for new businesses. These farming-equipment dealerships like John Deere are able to buy out smaller firms and share the profits. You can also think of this in terms of game theory and legal "collusion" through mergers. - Concept: Monopoly/Oligopoly, Perfect Competition, (Game Theory)

Metcalf, Gilbert E., "Market-based Policy Options to Control U.S. Greenhouse Gas Emissions," Journal of Economic Perspectives 23(2), Spring 2009.

o All economists on both sides of the instrument choice debate agree on a comprehensive carbon pricing policy using either a carbon tax or cap-and-trade system (permits) o The US should aim to reduce administrative costs by setting the point of compliance high, and also needs to determine what should be done with the revenues generated from carbon pricing to minimize the impact on low-income households o Implementing carbon pricing provides an opportunity to end current energy subsidies and regulatory programs that would no longer be needed with a meaningful carbon price o Global participation in greenhouse gas reductions is essential for solving the global problem developed countries cannot just reduce emissions without the participation of developing countries or the carbon-intensive manufacturing just shifts locations with no real drop in total emissions - Concept: Externalities, Taxes and Permits

"The Geopolitics of 5G," The Economist. July 16 2020

o America's war on Huawei (a Chinese company and the largest provider of telecoms equipment in the world) was escalated when they used powers designed to stop the transfer of military technology to bar the company from receiving American components vital to the systems it sells. America announced it would target the entire supply chain around the world next (fears security breaches from the company). o The Western world faced with the question of "how to cope with a technology superpower whose values are fundamentally opposed to our own" o Unlike in America and China (who each have 3 major networks), the EU has failed to create a single digital market and has a multiplicity of telecom operators and are prevented from consolidating (which keeps the prices lower for mobile phone users, but the fierce competition and high costs are hurting the companies) o It's possible that a ban on Huawei could catalyze the "new deal" on regulation that network operators in the EU crave. Governments which realize that their actions are delaying 5g and driving up its costs might see their way to easing merger restriction. This way Europe can maintain its technological autonomy and not have to rely on China or be pushed around by America. - Concept: Monopoly/Oligopoly, Perfect Competition

"The Amazon-Walmart Showdown that Explains the Modern Economy" New York Times June 16, 2017.

o Both companies want to compete in the market to sell all types of goods o Both companies are expanding into each other's domains (Amazon Retail | Walmart Online) o Both companies are having positive returns to scale which allows them to expand, this may lead to monopoly as other stores cannot compete with that level of logistics and technology o Small stores are suffering from negative returns to scale, so the gap between winners (big stores) and losers (small stores) is increasing o The ones that are losing most are the workers - Concept: Firm Costs, Monopoly, Returns to Scale and how they affect competition

"Flexible Figures," The Economist. Jan 30 2016.

o Businesses have always offered different prices to different groups of customers (ex. student discounts, military discounts, elderly discounts) o Dynamic Pricing: changing prices by the minute and tailoring them to what is known about the income, location and spending history of individual buyers - Concept: Demand, Price Discrimination

Mellinger, Andrew D., Jeffrey D. Sachs and John L. Gallup, "Climate, Coastal Proximity and Development"

o Climate and coastal proximity are 2 key geographical elements of economic development. The economic density near temperate ecozones can be 18 times greater than non-temperate ecozones o FDIs prefer coastal areas. Absolute advantage, comparative advantage. Africa has high transportation costs which greatly affect a country's ability to trade. These, in turn, are affected by geography (landlocked-ness, natural harbors, navigable rivers, proximity of population to coasts) - Concept: Firm Costs

"The IMF adds to a chorus of concern about competition" The Economist April 4, 2019

o Concerns: 1) Shrinking share of economic pie for workers over the past years 2) Disappointing investment from companies and lack of productivity growth 3) Competition is shrinking, there is fear of monopoly 4) The markups rose on 8%, the 10% of high markup firms are 50% more profitable o This is decreasing competition and decreasing the investment in physical capital, so firms prefer to merge than to compete o The text concludes that regulators are being too lax and slow on putting barriers against monopoly. - Concept: Demand, Perfect Competition, Monopoly

"Stakeholder capitalism gets a report card. It's Not Good," New York Times Sept 20 2020.

o Corporations have to balance social concerns vs. shareholder interests? o The coronavirus, as well as the economic devastation and ongoing movement against racial injustice have collectively posed the first test of corporations so far, they are failing as they still appear to be focused on profit o Companies can trigger immediate gains in their stock prices by cutting costs through layoffs or slashing benefits - Concept: Optimization

Markups

%markup=(-1)/ε_P =(P-Mc)/P

"Moral Hazard: A Tempest-Tossed Idea," The New York Times. Feb 25 2012.

- Concept: Asymmetric Information

"The Dirty Little Secret of Finance: Asymmetric Information," Bloomberg. Aug 11 2016.

- Concept: Asymmetric Information

"Criminal Deterrence: A Review of the Literature" Aaron Chalfin and Justin McCrary, Journal of Economic Literature. 2017.

- Concept: Decision under uncertainty

"When Big is not Beautiful" The Economist. Aug 6 2020

Anti-trust regulators used to reject all the mergers, but in the 70s the Chicago school convinced them to let more mergers happen because mergers can help companies operate more efficiently and otherwise that the market would sort everything out. Now we're at the other extreme of not enough competition, and regulators only look at how prices will change for consumers—maybe they should look at other types of welfare? - Concept: Monopoly, Oligopoly, Game Theory

"Businesses are proving quite resilient to the pandemic," The Economist. May 16, 2020.

Companies are vulnerable to large scale shocks around the world, though in the face of COVID-19, businesses seem to be holding up rather well. It is actually demand, rather than supply, that is lacking.o Though it is the case that supply chains have been disrupted and efficiencies have declined since the pandemico One way companies can avoid pain from unexpected disruptions is to keep as diverse a supplier base as feasible—something which also helps you deal with customers quick to change their preferences. Another is to maintain spare manufacturing capacity and not slashing inventory which forces companies to have low stock on hand when necessaryo If companies had insured themselves/their supply chains against potential disruptions early this year before the pandemic struck, it would have paid off substantiallyo If everyone has the expectation that the government will come in and bail you out in the face of a shock, no firm will have the incentive to incur extra costs for more resilient supply chains- Concept: Decision under uncertainty

Gutiérrez and Philippon, "How EU Markets Became More Competitive Than US Markets: A Study of Institutional Drift," NBER Working Paper, 2019.

EU markets appear more competitive than US markets, and it's because EU institutions enforce the free market more strongly than any individual country would. Countries that had weak institutions benefit from the EU's competition enforcement. Political and lobbying expenditures are higher in the US (because it doesn't have such strong institutions?) - Concept: Monopoly, Oligopoly, Game Theory

Elasticity

E_x=x/Q ∂Q/∂x

"What harm do minimum wages do?" The Economist Aug 13 2020.

Economic theory logic says that a minimum wage makes labor too expensive for firms so they fire people, but the real world is more complicated—markets aren't perfectly competitive, people can't find new jobs immediately, nobody knows what the real marginal product of their labor is. Comparing similar places where one increases minimum wage, we find out that jobs are not lost in the place with a minimum. Maybe some industries are monopsonies and a minimum wage is correcting their market distortion. There's a lot we don't know, but now economists don't think minimum wages are always bad. - Concept: Firm Production

Engel's Law

Food is a necessity so the proportion of income spent of food falls as incomes rise 𝜆(𝑀) = 1 - (𝜓/𝜃) = prop.Manufacturing=1-(units food/food per person)

Markup marginal revenue

MR=P(1+1/ε_p )=P+Q ∂P/∂Q

"New York becomes first city in US to approve congestion pricing," The Guardian, Apr 1, 2019.

NYC will charge tolls to go into Manhattan, the money will go to subway system. People are skeptical that the subway will improve, and some people complained. - Concept: Externalities

"How a raise for workers can be a win for everybody," Seema Jayachandran, The New York Times Jun 18 2020.

Raising wages makes workers more productive ("efficiency wage")—firms can then raise prices and consumers maybe don't mind, because they're getting higher quality. This especially applies to low wage work (grocery stores). Raising wages does not lead to lower employment. In nursing homes higher wages make patients live longer. Government action is important—so all the firms are affected and there isn't competitive advantage. - Concept: Firm Production

"Overhaul Tax for the 21st Century," The Economist. August 11 2018

Taxes are done badly. Missed opportunity: property taxes (because housing has become expensive so homeowners have money). Rich countries are "worried" about growing inequality but are using regressive labor taxes. Tax systems haven't adopted to technological change. Taxes should be convenient, simple and hard to avoid. - Concept: Public goods and cost-benefit analysis

Marginal Rate of Substitution

The exchange rate between goods to keep utility constant MRS=(MU_1)/(MU_2 )=P_1/P_2 =(MU_1)/P_1 =(MU_2)/P_2

Simple growth model

Y/Y=sA-d ; (%GDP change=rate of econ growth) =(savings)(technology)-(depreciation)

Market Power

_H=∑s_i^2=(market share squared,summed N of firms times)

"Death of the death tax," The Economist. November 25 2017.

history of inheritance taxes - Concept: Public goods and cost-benefit analysis

"Job Market Signaling through Occupational Licensing," Peter Q. Blair and Bobby W. Chung, NBER Working Paper, 2018.

o Discussion of occupations that allow for licensing (hair stylists, mechanics, etc.) and their role in sending signals and how they can close wage gaps between genders and races o The study compares the wage premium of job licenses (based on gender, race, etc.) in states that ban the box (asking if you have a felony record) vs. states without the ban o When licensing was removed, employers were distinguishing potential employees by observable characteristics (such as gender or race) o The moment you put the licensing in, it helps those who are usually discriminated against in the labor market (based on their gender or race). Including licensing is especially helpful in places that don't ask about felony records (ban the box states). o If you have licensing for jobs where people with felony convictions are not allowed to work, then the employer feels very secure by you having the license, so they don't have to lean on observable information about you...they are put at ease by the fact that you have the license o The researchers were able to tease out the effect of the licensing premiums on reducing wage gaps between blacks, whites, males, women, especially in places where the employers are leaning on those observable characteristics to make unfair assumptions about your past in terms of your criminal record - Concept: Asymmetric Information

"History's Biggest Firms," The Economist. July 7 2018.

o Does the size of a firm (and its profits) matter in terms of the GDP of the country where it's located? Yes, as some products cannot become more popular and the concentration of power can result in a competitive or political backlash. o In history, only 6 firms have gotten into trouble when having profits between 0.08%-0.54% of the GDP of their countries, and these cases the government had to intervene. (East India Company, Standard Oil, US Steel, IBM, AT+T, and Microsoft). o Apple currently has profits at 0.28% of GDP. By 2027, it is expected that Amazon, Apple, Alphabet and Microsoft will have profits above the historical median of 0.24% with Facebook, Tencent and Alibaba not far behind. o Tech giants' argument on why size doesn't matter: Today's firms are more global, so you cannot compare them to a single country's GDP (gives them too much clout) Political institutions today are less corrupt, so big firms may be less able to capture governments o If today's tech giants were broken up, in some cases this could actually benefit investors - Concept: Oligopoly, Market Competition

Grossman, Michael. "Smoking, Drinking, and Drug Use Respond to Price Changes," NBER Digest.

o Drugs are sensitive to changes in price o This article examines the relationship between prices of alcohol and illicit drug consumption. Grossman finds that drug consumption rises as the price of any given drug falls. He contrasts the prices and teenage consumption rates of alcohol and a few common street drugs with those of cigarettes. Consumption of cigarettes has fallen as prices have risen. The opposite happens for other drugs and alcohol. Grossman argues that legalization and taxation could be a route to lowering consumption rates and a better way of controlling drugs rather than criminalization - Concept: Demand, Price Elasticity

"What's the Right Number of Taxis (or Uber or Lyft Carts) in a City?" New York Times Aug 10 2018.

o Firms/Cities have to balance the needs of various constituencies and contradictory demands o Quick pick up times vs. Added congestion due to more cars o Wages vs. Price of a ride o An economist conducted a study and realized that in Austin, TX, the perfect level of rides was 4.1 per uber or Lyft driver, so the congestion is not so much in the city and the clients don't have to wait so much time - Concept: Optimization, Supply and Demand, Externality (Congestion)

"Africa's high birth rate is keeping the continent poor" The Economist Sept 22 2018.

o High birth rates in many African countries are a determinant of poverty as they slow down development. High birth rates are concentrated in areas where it is harder to implement the programs to alleviate poverty and sickness. They also contribute to a high dependency ratio. The author suggests that a combination of public messaging, schooling for girls, and stability in previously unstable areas will contribute to reduced birth rates in the future. o The Quantity of Children vs. the Quality of Children Price change: Education policy (the price of education affects the quality of children) - a swivel in the budget constraint Income Effect Dominates: the price of education decreases as the quantity of children increases, so the fertility rate remains high - Concept: Demand, Consumer Theory: how the income and substitution effect affect a consumer's choices

Furman, Jason and Douglas Holtz-Eakin, "Why Mass Incarceration Doesn't Pay," The New York Times, April 21, 2016.

o Incarceration in the US is growing, the rate now four times the world average with about 2.2 million in prisons or jails. Congress is considering bipartisan legislation to loosen tough sentencing laws but is facing resistance from some lawmakers. Economists on the other hand agree that the sentencing laws are failing and need to be changed. o Cost-Benefit Analysis Prisons and jails play an essential role in managing violent criminals and reducing crime, particularly helping people in poor communities who are the most likely to be victims of murder, robbery or other violent crimes Law of "diminishing marginal benefit" applies incarcerating additional people or adding years to sentences: (1) as the prison population grows, the additional prisoner is more likely to be a less risky, nonviolent offender and the value of incarcerating them is low (2) longer sentences have little deterrent effect on crime and arrest rates and don't generate meaningful gains in public safety Adding prisoners or years can be harmful by creating recidivism (the tendency to reoffend): individuals may build criminal ties while incarcerated, lose their job market skills, have trouble reentering society after release. Creates a loss of freedom, loss of earnings, risk to health and safety, strains marriages and can increase behavioral problems of the person's children. The costs of incarceration should not exceed the benefits. We should be promoting employment and wage growth and investing in education to reduce incarceration and crime - Concept: Public goods and cost-benefit analysis

"Pigouvian Taxes," The Economist. Aug 19 2017.

o Pigou (who wrote the "The Economics of Welfare") wanted to improve the lives of the poor and saw bounties and taxes as the best way to offset externalities o Taxes are often an efficient way to discourage negative externalities and encourage positive externalities ("internalities") o Can have a "double dividend" of creating social benefits by putting a price on harm AND taxes collected can be used to lower taxes elsewhere (Ex. Finnish carbon tax reduced taxes on labor) o Pigouvian taxes are used to nudge behavior...we talked about this when it comes to emissions. By placing a tax on CO2, producers are meant to pay the cost of the negative externality (pollution) o Politics matters! Pigouvian taxes can be seen as punishing the poor as they are more likely to generate these externalities (smoke more, drink more) Hard to apply to global problems such as global warming, because imposing a domestic carbon tax could encourage importing or force companies to relocate (there is no such thing as a global carbon tax) o Other Problems: Monopolies can still use their power to reduce their supply of goods and a new tax won't have any extra effect; a large alcohol firm could absorb the cost of a tax which takes away its effect on the rowdy drinkers (could legitimize bad behavior) Coase Theorem: Externalities are a problem of ill-defined property rights. Parties affected are better suited to bargain for an acceptable, market- based solution to externalities rather than a heavy-handed tax (Ex. Bakery with loud machinery next to a quiet doctor's office. If the law gives the baker the right to be noisy, the doctor could pay him to be quiet.) Hard to monetize the social cost - Concept: Externalities, Taxes

"Information Asymmetry: Secrets and Agents," The Economist. July 23 2016.

o Refers to economist Akerlof's paper on "lemons" Consumers are likely to set a benchmark for themselves when they go to a dealership because they don't want to pay a high price for a bad car "lemon". However, when they tell the dealer this benchmark price, it isn't high enough for a good car "peach". Therefore, the dealer only shows them lemons. This is inefficient because the consumer would be willing to spend more for a peach and instead are paying a higher price for lemon. o Similar problem in job market today with signaling skills Employers in Washington took out the credit score to reduce discrimination. However, this had a negative effect because employers relied on education and other signaling that reduced the number of minorities and young people even more. o Companies signal for multiple reasons For example, a restaurant in a fancy part of town signals, "yes, we have good food and we can afford to be here" o Debate on Education Are we just using it self-servingly to signal to future employers or are we using it to better society? o This creates a principal-agent problem. A party with more information (agent) can do something that affects a party with less information (principal) Example with contractor and homeowner Moral Hazard occurs when the agent has incentives that are contrary to the principal o Adverse selection: Riskier types more likely to participate in certain behavior Insurance problem - Concept: Asymmetric Information, Moral Hazard, Principal-Agent Problem

"The Peter Pan Syndrome" The Economist. May 17 2014.

o The Peter Pan Syndrome = firms prefer to stay small than to grow, mostly because of tax and regulation (policy subsidies: cheap electricity tariff, not paying employee social security) o High cost of staying small: a) Lack of efficiency, technology and innovation, b) Hurts growth small firms are much less productive and export less trouble with integration into global value chain o SMEs (Small and medium-sized enterprises) pay higher loan interest (private borrowing) than big firms (borrowing from banks). Perhaps if you are a big firm, you have more credits so it's easier to borrow - Concept: Firm Costs

"The market for driverless cars will head towards monopoly" The Economist Jun 7 2018.

o The market for driverless cars will be dominated by a handful of firms because of large returns to scale and regulation. A small number of firms are investing large sums of money to produce the software that will allow for driverless cars. Once created, it can be replicated almost at almost zero cost. Because of the cost of development, the cost for individual owners will be prohibitively high and the market will favor rideshare services. Finally, safety regulation will create barriers to entry for firms who cannot demonstrate large-scale safe operation. - Concept: Firm Production, Increasing Returns to Scale and how this prevents Perfect Competition, Monopoly

"How to design carbon taxes," The Economist. Aug 18 2018.

o There are two ways used to price carbon emissions: 1) tax on each tonne of CO2 2) Fixed number of tons that companies can make. This second is the model used by the USA, although the tax raises money and also is 50% better on cutting emissions. o Taxes in America are almost symbolic, as politicians don't want to upset the voters. The result is that the prices are not high enough to reduce the carbon emissions. In some places, they fixed that changing the name from "tax" to "fee", "contribution" or "levies". IMF paper found that taxes are better at cutting emissions BUT it's a harder sell on the political side. o A 49% carbon tax will leave 59% of Americans worse, 75% of them are in the top-bottom. But if those taxes are used to alleviate the income personal-tax, they can help Americans save more than 700 USD. o Another way is to give tax-credit to "clean exports", supporting business that are choosing clean business to partner. This can be helpful for developing countries and must be researched by the World Trade Organization. - Concept: Externalities, Carbon emissions/Pollution, Taxes

"Clause and effect", The Economist. October 29th, 2011.

o When there is regulation, it generates unemployment. If the unemployment rate is high, then regulation may not be the right decision. o The business cycle matters when assessing the cost of new regulations. There is a growing view that cost-benefit analysis should go further than just considering what a firm pays to comply with a rule or the premium a consumer pays as a result of new regulation. o In some circumstances, regulation can require more jobs (by Resources for the Future, a think-tank). Meanwhile, Mr. Greenstone (MIT) found that between 1972 and 1987 polluting industries in counties that were subject to heavier regulation lost 590,000 more jobs than the other counties. o In reality job change is seldom so frictionless. Steven Davis of the University of Chicago and Till von Wachter of Columbia University estimates that being laid off costs a typical male worker 11% of his future earnings, in present-value dollars. During a recession, when longer spells of unemployment lead to more loss of human capital, that rises to 19%. o In a recent paper they examine an Environmental Protection Agency (EPA) rule that limits pollution emissions from pulp and paper plants. The EPA estimated that the rule's benefits exceeded its costs by $27m. It also reckoned 900 workers, about 1% of the sector's total, would be displaced. After incorporating their lost lifetime earnings, the authors conclude the rule's costs surpassed its benefits by $63m. o Ideally, cost-benefit analysis would consider not just the number of workers affected by a new rule but also the industry in question, the availability of other jobs nearby, the transferability of their skills and, crucially, the stage of the business cycle. Lighter regulation when unemployment is high, heavier regulation when unemployment is low. - Concept: Public goods and cost-benefit analysis, Regulation