Month: May 2008

Price controls by any other name

Mom-and-pop service stations are running into a problem as gasoline marches toward $4 a gallon: Thousands of old-fashioned pumps can’t register more than $3.99 on their spinning mechanical dials.

The pumps, throwbacks to a bygone era on the American road, are difficult and expensive to upgrade, and replacing them is often out of the question for station owners who are still just scraping by.

Many of the same pumps can only count up to $99.99 for the total sale, preventing owners of some SUVs, vans, trucks and tractor-trailers to fill their tanks all the way.

As many as 8,500 of the nation’s 170,000 service stations have old-style meters that need to be fixed – about 17,000 individual pumps, said Bob Renkes, executive vice president of the Petroleum Equipment Institute of Tulsa, Okla.

Here is the full story, thanks to William Griffiths for the pointer.

Taken to the Cleaners, Again

A tariff on imports of coat hangers from China is raising dry cleaning costs.  The Aplia Econ blog runs the numbers:

Advocates of trade restrictions often argue that protection will save
jobs. Since we can observe price and cost increases associated with
trade restrictions, we can estimate how much it costs to save each job
in a protected industry. According to the NPR story, there are roughly
30,000 dry cleaners in the U.S., and on average, each pays an
additional $4,000 per year due to the hanger tariff. This indicates an
average annual cost of 30,000 firms x $4,000 per firm = $120 million.
According to the U.S. International Trade Commission’s report,
U.S. employment in wire hanger manufacturing was 564 workers in 2004
and fell to 236 workers by 2006. Let’s assume that employment in this
sector would have fallen to zero in the absence of the tariff, and that
with the tariff, employment will recover to 2004 levels. In other
words, assume the tariff "saves" 564 jobs. Dividing the cost of the
tariff to U.S. dry cleaners ($120 million year) by the number of jobs
saved (564 jobs) indicates that each job saved costs about $212,765 per
year. Keep in mind that the typical full-time worker in this sector
earns about $30,000 per year. Even if we assume that industry
employment doubles, the cost of the tariff is still roughly $120,000
per job.

Japanese retailing is more efficient than most people think

Kyoji Fukao,
professor at Hitotsubashi University’s Economic Research Institute,
thinks so too. The team he heads provides much of the Japanese data
that go into international comparisons. He argues that the usual
measures of service sector efficiency – value added per man hour and
total factor productivity, which incorporates capital and labour inputs
– are crude and hard to compare across borders.

He cites Japan’s
retail sector, regularly branded as inefficient. The basic measure of
retail-sector productivity is how much of a product an employee can
shift in an hour. On this measure, Germany does well. That turns out to
be because of restricted opening hours, which oblige customers to make
hefty purchases in one go. Japan does badly. Cavernous US superstores
do better than cramped noodle or tofu shops. Japan also has a dense
network of convenience stores on almost every city block, open 24
hours, allowing people to shop whenever they want. This makes them
inefficient, since purchases are less concentrated.

No allowance
is made, either, for the fact that Japanese shops tend to be within
walking or, at most, cycling distance. Figures do not capture the
inconvenience of having to travel, or the externalities associated with
long shopping expeditions: traffic accidents, pollution, road

Here is the full article, interesting throughout.  The quality of Japanese service, by the way, is miles ahead of anywhere else (though stores don’t like to take returns) and those subjective pleasures of the shopping experience don’t get picked up by the numbers either.  I can’t imagine how a Japanese would feel moving to Germany or Austria.

Why are books so outrageously expensive in Brazil?

That’s from a reader request.  I’m no expert on Brazil, but here are a few possibilities:

1. Most Brazilians do not read.  I don’t mean they can’t read, I mean they don’t read for leisure so much.  I was stuck at the Sao Paulo airport for seven hours and did not see a single person reading a book, not once.

Taking that as given, low demand means high prices.  That’s why Stephen King paperbacks are cheap and Edward Elgar (the name of an academic publisher) tomes go for $100 and up.

2. Brazilian retailing is not in every way efficient.  Efficient retailing in the traditional sense is, by the way, bad for the quality of your food because it means it is easy to serve large numbers.  And Brazil has some of the world’s best food, and so inefficient retailing for its books.

3. No other supply source is right nearby and the Portuguese language does not produce an extremely thick market.  Note that the Portuguese of Portugal is very different from the Portuguese of Brazil.

4. The Brazilian currency may be overvalued at the moment, at least in purchasing power parity terms, due to Brazil’s commodity exports.

Measuring Up

The subtitle of this excellent book, by Daniel Koretz, is What Educational Testing Really Tells Us.  Here is one excerpt:

The distressingly large achievement differences among racial/ethnic groups and socioeconomic groups in the United States lead many people to assume that American students must vary more in educational performance than others.  Some observers have even said that the horse race — simple comparisons of mean scores among countries — is misleading for this reason.  The international studies address this question, albeit with one caveat: the estimation of variability in the international surveys is much weaker than the estimation of averages.

…We are limited to more general conclusions, along the lines of "the standard deviations in the United States and Japan are quite similar."  Which they are.  In fact, the variability of student performance is fairly similar across most countries, regardless of size, culture, economic development, and average student performance.

I was shocked to read this but the book is highly reputable and persuasive.

How happy is Iceland?

Highest birth rate in Europe + highest divorce rate + highest
percentage of women working outside the home = the best country in the
world in which to live…Iceland, the block of sub-Arctic lava to which these statistics apply,
tops the latest table of the United Nations Development Programme’s
(UNDP) Human Development Index rankings, meaning that as a society and
as an economy – in terms of wealth, health and education – they are
champions of the world.

Here is much more, interesting throughout, and I have been an admirer since I visited the country in the mid 1990s.  The author emphasizes that Icelandic women have kids when they want to, often at young ages, and they accept that the father may not be around much but the whole family steps in to help out.

I was wondering whether the proclivity of Icelanders to leave their country (many are highly educated and speak fluent English and thus pursue opportunities elsewhere) somehow counts against these happiness claims.  But oddly I think not.  In part it is their intelligence and balance that makes them want to explore other locales.  In percentage terms, hardly any Japanese leave Japan but this counts against the happiness of the country rather than for it.  Country-specific capabilities can in the long run be stunting or reflect stuntedness.

I’ve not yet thought through what this means for the economists’ tendency to use revealed preference as a measure of value.  There are perhaps two margins of rejecting: the people who are not very good at enjoying something or not able to enjoy it because it is bad, and the people who are very good at enjoying something wonderful and thus wish to build upon that strength and move on to something else.

It is perhaps a Buddhist idea to suggest that the happiest country in the world is a totally empty one.

Pointers are from Seth Roberts and Nadav Manham.

Had I mentioned…?

That Tokyo is the best food city in the world?  That’s by an order of magnitude; Paris and others aren’t close.  At this point my best guess is that Osaka is number two. 

I thank Yan Li for the pointer to the link, which is interesting on another topic as well.  We visited a quite amazing toilet shop here, which was impressive most of all for its seriousness, not just for its product.  It was I believe on the 26th floor (L-Building, Shinjuku), so there is no walk-in trade for them.  They play stormy Beethoven and offer talking toilets, toilets that perform lab tests on your ****, and toilets that can be programmed to do things I hadn’t even thought of before.

Economists Know the Price of Everything

In other disciplines to leave your
university because another offers to pay you more entails personal humiliation
and status degradation to a not inconsiderable degree: you are supposed to value
ideas and colleagues and students, not cash. In economics, however, the thrust
of the discipline makes a failure to respond to market forces a moral fault in

Brad DeLong explaining why public universities are having an especially difficult time hiring and keeping economists now that the privates are boosting salaries to a tremendous degree.  Experience at GMU is consistent.  See David Warsh (here and here) for the backstory.   

The economics of vending machines

Japan has so many, but why?  You can cite love of gadgets, etc. but I want something more general.  After all, Japanese retailing has a very high ratio of small stores serving a local clientele; surely Japanese vending machines are another example — albeit an extreme one — of that more general trend.

First we must look to the shortage of storage space in homes.  I suspect few Japanese want to buy big piles of stuff at Costco.  So buy smaller "portions" and in the meantime the inventories are stored in the vending machines, where they are more or less at your disposal. 

Cars of course are another means of storage and also a way to transport goods in bulk (NB: you carless people have a hard time pigging out at the public library, you poor souls).  But most Tokyo residents don’t use cars so again they buy goods in smaller numbers which again points us to the vending machine.  Buy one disgusting sweet fizzy juice, drink it on the spot, and walk to your nearest vending machine when you need another one.

You’ll notice that vending machines are especially popular for canned and bottled liquids, where the ratio of storage and carry costs to per unit value is relatively high.

This article associates vending machines with the nomadic lifestyle.

The “afternoon effect” for artworks

One resilient puzzle identified in the literature is the “declining
price anomaly.” This effect was identified by Ashenfelter (1989) and is
an obvious repudiation of the law of one price. It refers to the
observation that as an auction proceeds, the prices of the lots
decline, even for identical goods (e.g., wines). Beggs and Graddy
(1997) established the existence of the “declining price anomaly” for
heterogeneous goods using data for Contemporary and Impressionist art
auctions. This has generated great interest and a number of papers now
report somewhat conflicting results in this respect, although the
majority still seems to find evidence in favor of this anomaly (see
Ashenfelter and Graddy 2003, and Ginsburgh and van Ours 2007.) In light
of this controversy, it is of interest to investigate whether or not
Latin American art auctions are also subject to the declining price
anomaly or the so-called “afternoon effect” (“morning after effect”
would be a more appropriate name in this context as Latin Art auctions
occur in two parts, the first starting late in the day, say 7pm, and
the second starting earlier the following day, usually 10am.) In line
with previous research (Beggs and Graddy 1997), we find strong evidence
that the “declining price anomaly” holds for Latin Art data, even after
controlling for auction and artist unobserved characteristics (dummies)
and a huge array of paintings characteristics, including reputation and

Here is the link and yes I do believe this is true.  I believe it is mostly neuroeconomics at work, namely that we are more excited by new offerings than by familiar offerings.  Similarly, a painting that has been "shopped around" usually goes for a lower price than a comparable picture coming on the market for the first time in many years; admittedly it is hard to segregate out the selection bias here.  So if the same Jasper Johns print is being auctioned at 10 a.m. and 1 p.m., some people just don’t want to wait with their bids.  I wonder also if there is a theorem about how an asymmetric distribution of risk-averse bidders, fearing they might not get the work at all, could generate the same price pattern,

An alternative hypothesis — likely true in part — is that even "identical" artworks differ slightly in quality and the auction houses sell the better one first, if only to create a price precedent and excitement effect for the second one later in the day.