Month: March 2007

A loyal MR reader asks:

How come parking in New York City (well, Manhattan, at least) is always
priced so that the first hour is very expensive ($10-ish), but staying
for the whole day is only slightly more expensive (typically about
double the one hour rate).  Everywhere else in the country it’s pretty
much a flat rate of $X/hour give or take a bit.  You’d think the high
land value of Manhattan implies the largest cost of running a parking
lot was "rent" so prices would be closer to a per-hour charge.

Maybe the tourists (i.e., New Jerseyites) are high demanders and bad searchers.  They also park for only part of the day, either to see a museum or to attend a meeting.  Charging a high upfront rate is a way to gouge these sorry souls.  Commuters are more price sensitive, but they account for the bulk of the parking only in other American cities; furthermore since they park for the whole day they pay the same daily price no matter how skewed the rate for the first hour.

It is very hard to tell from the ingoing sign what a Manhattan spot is really going to cost.  Yet it is an equilibrium for the price of parking to be non-transparent.  You can put on your sign "This spot is really only $25," but that is not credible.  For how many hours?  A vaguer sign will fool the fools (sounds like $20 but adds up to $40), but not irritate the regular customers and the smarter people who know better.

Might there also be a supply side explanation?

Manhattan parking is more packed in, which means an attendant has to reshuffle the cars when people come in and out.  Those labor costs are fixed, no matter how long a particular car stays in a particular spot.  So that charge is passed along to any parking visit, whether it lasts long or not. 

And is the relevant competitor to a parking house a cab or a subway ride?  The cab or subway charges by the trip, and not by how long you stay in your new location.  Might the resulting competitive equilibrium also involve a fixed, per trip charge on the part of the garage?  If a garage charges you evenly by the hour, parkers with shorter single visits will drive around and repark in different garages, rather than take cabs.  But theirs is a stupidity which the individual firm wishes to capture for itself, rather than allowing it to spread to the market more generally.  And that again means a high fixed cost for parking at all, so as to lock them in.

Note that Manhattan parking usually has open spots, even in the middle of the day.  D.C. parking does not, try finding an available midtown garage at 1:30 p.m.  Why is the value of excess capacity greater in Manhattan?  I suspect it all comes back to those naive New Jersey tourists, out for a quick joy ride to MOMA.

#31 in a series of 50.

I rather like the title "voodoo priest of free market economics" so I am happy to take the blame for the sub-prime mortgage defaults and at the same time stick a few pins in Nouriel Roubini.

Roubini and others generating hysteria about defaults in the mortgage market are credit snobs – they think credit is something that only the rich can handle.  Just look at the language that Roubini uses to analogize borrowers – they are "reckless patients" who "spent the last few years on a diet of booze, drugs and artery clogging junk food."  Similarly, the Washington Post tells us that it’s the end of the "borrowing binge."

Yeah, we get it.  Credit is ok for us, the "sober" borrowers but poor people can’t handle credit.  Too much credit among the poor generates decay and social pathology.  Credit must be regulated.  We can’t, for example, have credit stores in poor neighborhoods.  Don’t you know that credit is bad for people without self-discipline?   Let the poor buy on installment credit?  That’s unconscionable.  Today’s furor over sub-prime mortgages is the same old story.

Basic economics says that people should borrow so that they can consume based upon their permanent income.  Modern day financial markets are finally making this possibility a reality.  Combine financial innovation, strong US economic performance and a global savings glut and it makes sense that credit should become easier to obtain.  We see the benefits of financial innovation in bringing credit to the poor not just in the United States but around the world.  Will Roubini
next be calling for the retraction of Muhammad Yunus’s Nobel Prize?

The fact that there are defaults is partly a learning process in response to financial innovation, and thus evolution, but also partly a simple matter of risk.  Defaults are to be expected.  I see no reason to expect contagion.  All lending statistics must now be marked to the global financial market which means that diversification is now more extensive than ever before and thus net risk is lower.  Moreover, the whole point of recent financial innovation (and reformed bankruptcy law) has been to reallocate risk way from borrowers and towards those lenders in the world wide market for capital who are in the best position to handle the risk. 

The democratization of credit worries the credit snobs.  The credit snobs fear that capitalism isn’t just for the rich. 

Michael Mandel serves up a dose of common sense:

…subprime
adjustable-rate mortgages, which are the heart of the problem, make up
just 7% to 8% of the total home mortgage market.  Still, in absolute
terms the size of the defaults could be enormous.  Some estimates
suggest that banks and other lenders could take a hit of $300 billion
or more.

But remember, the tech bust devoured about $9 trillion
in corporate equity; next to that, the subprime problem looks like an
insect bite–unless it spreads to the rest of the mortgage market.  But
at least so far that doesn’t appear to be happening: Mortgage rates for
good borrowers have actually been going down.  In early February, for
example, the average rate for 15-year fixed rate mortgages was 6.06%,
according to Freddie Mac.  As of Mar. 8, that was down to 5.86%.

For an alternative perspective, here is Nouriel Roubini’s Who is to Blame for the Mortgage Carnage and Coming Financial Disaster? Unregulated Free Market Fundamentalism Zealotry.

In other words, I am to blame.  If not me, then Alex.  Blame Alex.

Professor [David] Teece doesn’t dispute estimates that his career earnings from expert consulting amount to at least $50 million.

That is from today’s WSJ, it is a fascinating article about economic consulting.  Teece estimates that sixty people at his firm earned $500,000 or more last year.  Here is Teece’s home page.  Here is another article on Teece.

Tyler suggests that dollarization raises prices.  I am in Panama investigating.  It´s true that the price of goods here, with the exception of some labor intensive goods like food preparation and taxi service, is similar to the U.S.  Despite Tyler´s recondite arguments, however, I think dollarization lowers not raises real prices.

The argument to the contrary is mostly an illusion.  When there is an exchange rate the nominal exchange rate can depart far from the real exchange rate.  Over a matter of months a country can become very cheap or very expensive for tourists.  The real exchange rate, however, is much more stable than the nominal exchange rate.  So when dollarization fixes the nominal exchange rate a country is unlikely to become either very cheap or very expensive.  Add in the selection argument that tourists visit when the country is cheap and its easy to see why it might appear that dollarization raises prices.  (and for residents there is a selection effect also, dollarization happens when the country has been pushed to the wall.)

Overall, however, currency is mostly neutral and in the case of dollarization the effects if anything will be positive.  For a country like El Salvador or Panama dollarization brings lower transaction costs and higher quality money which lowers real prices.

Addendum:  Tyler, however, is correct about numero 6.

Most unions are found in manufacturing, but the new pro-union arguments emphasize the creation of unions in service industries.  I can think of a few differences between manufacturing and services:

1. Labor costs are more important in service industries, so unions have less scope to raise wages.  This is Megan McArdle’s argument.

2. There is more long-term fixed capital in manufacturing, and that gives unions greater scope to confiscate those quasi-rents.  This is related to #1.  (In a service industry, would the transfer be taken away from the return to brand name capital?)

3. On average there is more market power in manufacturing, which again gives unions greater room to raise wages in those sectors.  In a perfectly competitive industries, extra wage demands will bankrupt the firm. 

4. Many service sector firms face less foreign competition, but I believe they nonetheless face more competition overall.  Lower fixed costs mean a more competitive industry, which brings us back to #3.

5. Jobs have shorter duration in service industries, which tightens the link between wages and the current state of the labor market.  That also means a smaller role for unions.

6. We have a mental model of service sector companies such as Wal-Mart, which try to get by on the cheap in labor markets.  It is harder to make the same claim about General Motors.

The bottom line: Except for #6, most of the effects imply that unions will be less effective in the service sector.  You’ll all think of some mechanisms I didn’t, but my tentative conclusion is that unions bring both lower costs and lower benefits in service industries.

I might add I once belonged to a service sector union, in a supermarket as a teen.  It was not a pretty picture.  I paid high dues and received no apparent benefit, relative to the workers in non-unionized supermarkets.  I even heard rumors of corruption.

A loyal MR reader asks:

Are the markets adapting to the warmer world?…

# Are the prices of real estate in cooler areas of the world going up at the expense of the prices in warmer areas of the world?
# Is R&D money being invested in cheaper and more efficient cooling systems for buildings, cars, individual people?
# Are the shares of wine producers in the UK or Germany going up?  As the south of the UK gets warmer, the quality of the wine should increase.  What is happening to wines from regions where grapes won’t grow in the future?
# How about ski resorts? Would you start a new one now?

It is hard to specify the relevant comparison or "event study" (what should the price of a UK winery be?), but I haven’t heard of significant market price adjustments in secondary assets.  This NYT article, about real estate price effects, is mostly speculative.  Corn and ethanol prices are way up, so why not Canadian real estate?  Most of all, the time horizon of many pending global climate changes might be thirty years or more, maybe a century.  The claim of Nicholas Stern is that "we," standing in for the social welfare function, should care about the future more than markets do; evaluating that view, here are my posts on the social discount rate.

A few of you asked for posts on carbon taxes but that has been covered already.  A carbon tax will work only with some probability, mostly because international cooperation may not be forthcoming.  That means it is best to sub in a carbon tax for some other tax, in balanced budget fashion.  Here is a more general post on global warming.

#This counts for at least two more in a series of 50.  I’ll say I’m up to 30.

Addendum: Glen Whitman links to David Friedman.