Category: Economics
Lines are overrated, and totally empty restaurants are underrated
Some readers (or journalists) ask me if I have further principles for finding good food which are not outlined in my ethnic dining guide or in An Economist Gets Lunch. Of course I do, though many of them are not easily articulated in the medium of print (some involve scent, for instance, others are about the intangible feel of a place).
Here is one I should have put in the book: Lines are overrated.
Furthermore totally empty restaurants are (often, not always) underrated.
Natasha and I recently took two friends out to a new Bangladeshi restaurant in Arlington, which by the way was spectacular. But as they first walked into the restaurant, they seemed taken aback that the place was empty and indeed it felt more than a bit deserted, as if no one had eaten there for days.
I showed no sign of wishing to leave.
Here is the logic. Let’s say a restaurant allows a line to form outside the door. Why don’t they just raise their prices? Well, for one thing the line, and the accompanying difficulty of getting a reservation, is a way of marketing the restaurant to potential customers. Which means the place needs marketing in some manner, which means its audience is in some way not so well-informed about where they ought to be eating. They tend to be trendy people who follow…lines. Conformists, in other words.
A lot of places with lines are quite good but when they fall they fall hard. In the meantime, the presence of a line indicates the place extracts consumer surplus in some fairly inefficient ways, so why should you go, especially if you are not a conformist? I recall the wise words of my undergraduate differential equations teacher, Professor Lim, who once averred “I don’t want in line.”
What about a totally empty, deserted restaurant? Well, it depends on ethnicity. If it’s an Ethiopian place, it means everyone is coming much later. Go anyway, and enjoy the personal attention you get.
What about an Afghani or Pakistani place or for that matter a Haitian place? They may make their livings doing catering or weddings. In those cases, emptiness is often a sign of quality. It means they make their food for truly demanding customers who demand the best for ceremonial purposes. It means they have not learned how to sell out or dumb down their food, and they just don’t have enough compatriots in the neighborhood to put many people in the seats on a regular basis (for these reasons, emptiness is not a good sign in say the Eden Center, where the number of Vietnamese diners is quite high, or say in Mexican restaurants on Kedzie street in Chicago, and so on). Very often empty restaurants come from cultures where consumption is intensely seasonally cyclical, and that is positively correlated with food quality.
Purveyors of empty restaurants are also Adam Smith’s classic overconfident, delusional entrepreneurs. That’s who I want cooking for me, as most great food is not in fact that profitable.
Best yet is the restaurant which bars its door and remains locked altogether.
The Living Wallet (markets in everything, the culture that is Japan)
A Japanese company has finally found a possible answer to out of control spending. A so-called “Living Wallet” is equipped with runaway skills, the ability to call out for help, and dodge your ready-to-reach-out hands rolled into one. It’d be no surprise if Rebecca Bloomwood would swear by it to keep her shopaholic tendencies.
The folded wallet has wheels that make it move away once it detects your hands reaching out for it. But if you happen to get a hold of the wallet, cries of “Don’t touch me!” and “Help me!” can be heard. If you’re persistent enough, it activates its last resort to save your bills from being spent and your cards from being swiped. It automatically sends an email to your mom that you might just find you pleading to a robotic wallet, “Don’t tell my mother!”
The Living Wallet is also connected to a mobile app that checks one’s spending, all to make sure that one stays away from unnecessary shopping or any impulsive buying. That’s what you can expect once you put your Living Wallet in “Save Mode.” If you put it in “Consume Mode,” you can expect something else yet, still a little crazy.
Once you let it know that you have enough money for spending, it puts on Beethoven’s Symphony No. 9, 4th Movement.
There is a bit more here, with photos and a short video, via the excellent Mark Thorson.
How to reform Obamacare
Obviously we remain in a gridlocked political period, but if a new deal on health care reform could be cut, what would it look like? What should it look like? In my latest New York Times column I attempt to peer into that future. Here is one excerpt:
One way forward would look like this: Federalize Medicaid, remove its obligations from state budgets altogether and gradually shift people from Medicaid into the health care exchanges and the network of federal insurance subsidies. One benefit would be that private insurance coverage brings better care access than Medicaid, which many doctors are reluctant to accept.
To help pay for such a major shift, the federal government would cut back on revenue sharing with the states and repeal the deductibility of state income taxes. The states should be able to afford these changes because a big financial obligation would be removed from their budgets.
By moving people from Medicaid to Obamacare, the Democrats could claim a major coverage expansion, an improvement in the quality of care and access for the poor, and a stabilization of President Obama’s legacy — even if the result isn’t exactly the Affordable Care Act as it was enacted. The Republicans could claim that they did away with Medicaid, expanded the private insurance market, and moved the nation closer to a flat-tax system by eliminating some deductions, namely those for state income taxes paid.
At the same time, I’d recommend narrowing the scope of required insurance to focus on catastrophic expenses. If insurance picks up too many small expenses, it encourages abuse and overuse of scarce resources.
The full column is here. Please allow me to add a few remarks which did not fit into the column proper (which is strictly limited at 900 words):
1. My argument does presuppose that the exchanges can at the technical level, in some manner, end up working for enough states to carry this option forward. I still think this is likely, but today it appears less likely than even a week ago when I drafted the column. The biggest danger is that we enter an “adverse selection death spiral,” even if the technical problems eventually get fixed. It has to be seen as easy for young, healthy people to buy health insurance on the exchanges, otherwise they probably will not work.
2. I view this reform as more likely to come through a Republican President than a Democrat. A Republican has to do something which counts as “getting rid of Obamacare,” yet simply returning to the status quo ex ante would not be so popular with mainstream voters. This is the most likely direction for such reforms.
3. I did not have enough space to talk about more immigration for physicians and nurses, liability reform, and other supply-side reforms. They are very important.
4. I have been reading for years that ACA is just like the health care reform proposal from The Heritage Foundation from the early 1990s. Well, sort of. I view the proposal in my column as closer to the ideas many conservatives were pushing in the 1990s. But if they are indeed “the same thing,” then fine, there should be no problem supporting one rather than the other!
5. I view my proposal as a third- or fourth-best exercise, it is neither first nor second best. It may be the best we can do from where we stand, subject to the caveats in #1 however.
Here are some related remarks from Ross Douthat. He argues that conservatives should be hoping that the exchanges succeed, because the relevant alternatives are worse and because the exchanges themselves can serve as a foundation for future reforms.
Mexico fact of the day
Today, nearly 40 percent of auto jobs on the continent are in Mexico.
There is more here, from Brad Plumer, interesting throughout.
Michael Pettis, *Avoiding the Fall*, and China’s economic growth
Last night I read the new and excellent Michael Pettis book Avoiding the Fall: China’s Economic Restructuring. It is the single best treatment I know for understanding the dilemmas of the current Chinese economy and the need for restructuring. My favorite bits are those comparing the current Chinese economy to the Brazilian growth of the 1960s and 70s, also investment-driven, and lasting longer than most people thought possible, and culminating in the crack-up of the 1980s, which turned out to be a lost decade for Brazil.
By the way, China’s economy continues to defy the China skeptics (a group which includes me):
China’s economy expanded 7.8 per cent in the third quarter from the same period a year earlier, marking an acceleration from the second quarter when it grew by 7.5 per cent.
The rebound in the world’s second-largest economy was largely the result of government efforts to shore up growth with looser monetary policy and a “mini-stimulus” of investment in infrastructure such as rail and subway systems.
The full FT article is here. As Pettis stresses, such developments are likely to intensify the eventual “discontinuity,” but of course the China skeptics have not yet been proven right…
Does Texas portend the future of the United States?
I am pleased to have the cover story of this week’s Time magazine, please note that full story is gated. Nonetheless here is one excerpt:
Jed Kolko, chief economist for San Francisco–based real estate website Trulia, says that from 2005 to 2011, 183 Californians moved to Texas for every 100 Texans who moved to California. “Home prices, more than any other factor, cause people to leave,” Kolko says.
…the federal government calculated the Texas poverty rate as 18.4% for 2010 and that of California as about 16%. That may sound bad for Texas, but once adjustments are made for the different costs of living across the two states, as the federal government does in its Supplemental Poverty Measure, Texas’ poverty rate drops to 16.5% and California’s spikes to a dismal 22.4%. Not surprisingly, it is the lower-income residents who are most likely to leave California.
On the flip side, Texas has a higher per capita income than California, adjusted for cost of living, and nearly catches up with New York by the same measure. Once you factor in state and local taxes, Texas pulls ahead of New York—by a wide margin. The website MoneyRates ranks states on the basis of average income, adjusting for tax rates and cost of living; once those factors are accounted for, Texas has the third highest average income (after Virginia and Washington State), while New York ranks 36th.
Here is a summary of some parts of the article, with numerous quotations from the piece.
Here is a good Timothy Noah piece on migration and real estate prices. Here is another relevant piece. Here is a good (AEA-gated) Ed Glaeser review of Enrico Moretti.
European energy fact of the day
…utilities have suffered vast losses in asset valuation. Their market capitalisation has fallen over €500 billion in five years. That is more than European bank shares lost in the same period.
The full article from The Economist is here, interesting throughout. The article starts with this paradox:
On June 16th something very peculiar happened in Germany’s electricity market. The wholesale price of electricity fell to minus €100 per megawatt hour (MWh). That is, generating companies were having to pay the managers of the grid to take their electricity. It was a bright, breezy Sunday. Demand was low. Between 2pm and 3pm, solar and wind generators produced 28.9 gigawatts (GW) of power, more than half the total. The grid at that time could not cope with more than 45GW without becoming unstable. At the peak, total generation was over 51GW; so prices went negative to encourage cutbacks and protect the grid from overloading.
The trouble is that power plants using nuclear fuel or brown coal are designed to run full blast and cannot easily reduce production, whereas the extra energy from solar and wind power is free. So the burden of adjustment fell on gas-fired and hard-coal power plants, whose output plummeted to only about 10% of capacity.
One implication is that solar and wind receive implicit subsidies from coal and gas plants, through the medium of a backstopped power supply, and those subsidies will be harder to maintain as solar and wind become more important and the installed base of non-renewables weakens.
From this week’s Economist there is also a good piece on problems with water supply in northern China.
Do parents seek to maximize the social value of their children?
Let’s say a genetic test indicated a 90% chance that a child-to-come would be troubled with obsessions and unhappy and unsuccessful, and a ten percent chance that the child would grow up to be one of America’s leading entrepreneurs. Or more modestly, in the positive scenario the child would be comparable to a worker or a scientist who creates $5 million in social value a year. I believe most parents would feel uneasy about this genetic lottery, even though its expected social value is unambiguously high. Telling the parents that the expected value of the child for society would be high would not distract them very much from the costs of the risk.
As I see it, many upper middle class parents desire their child to be slightly more successful than they are, and in related but not identical fields and ways. They certainly would be happy if their child turned out to be the next Bill Gates (and more secure in their retirement), but not that much happier from a parental point of view. Parents qua parents can get only so happy, and if your kid turns out well by your standards you are already pretty close to that maximum.
Notice how children differ from money. Big dollar prizes induce risk-taking, at least from some entrepreneurs who have a strong desire for more and more money. But big “parental prizes,” such a siring a true genius, might not induce much risk-taking with the identities or natures of children.
This is one possible institutional failure if there were “market-based” eugenics, namely that parents would be too risk-averse a social point of view. We would end up with too much sameness, both across children and across the generations, and not enough monomaniacal creators.
How Medicare influences private payment systems (model this)
There is a new paper by Jeffrey Clemens and Joshua D. Gottlieb on this topic, the abstract is here:
We analyze Medicare’s influence on private payments for physicians’ services. Using a large administrative change in payments for surgical procedures relative to other medical services, we find that private payments follow Medicare’s lead. On average, a $1 change in Medicare’s relative payments results in a $1.30 change in private payments. We find that Medicare similarly moves the level of private payments when it alters fees across the board. Medicare thus strongly influences both relative valuations and aggregate expenditures on physicians’ services. We show further that Medicare’s price transmission is strongest in markets with large numbers of physicians and low provider consolidation. Transaction and bargaining costs may lead the development of payment systems to suffer from a classic coordination problem. By extension, improvements in Medicare’s payment models may have the qualities of public goods.
This paper, which seems quite sound to me, has a few implications.
First, if you are unhappy with the American health care system, government is more at fault for the problems of the private sector than it may at first appear. We have a much more governmental system than most of its critics care to admit and that goes even beyond government health care spending as a percentage of total health care spending.
Second, we could cut Medicare reimbursement rates, by limiting the doc fix, without old people all very rapidly going to the back of the health care queue.
Third, the authors find that the larger Medicare becomes, the stronger this “pass through” effect generally will be. In other words, this result will be all the more true in our future.
Fourth, the cross-sectoral price transmission result implies that long-run supply elasticities in the sector are not large, which also does not bode well for the future of health care access in an aging society.
Overall this is a depressing paper, although it implies that successful Medicare cost control could have significant cross-sectoral benefits, beyond Medicare itself.
Apple trade: factor endowments or increasing returns?
That’s real apples, not the company. Timothy Taylor reports:
But even within the production of apples, there is global specialization. The US economy both exports and imports apples, depending on the season, but overall runs a trade surplus in apples. However, the U.S. runs a substantial trade deficit in frozen apple juice concentrate, relying heavily on imports from China. Here are some statistics about U.S. trade in apples from the U.S. Department of Agriculture (which are helpfully archived on-line at Cornell University).
You should note that both increasing returns models and Heckscher-Ohlin approaches to trade can give rise to what is commonly called “specialization,” and thus citing specialization does not answer the question posed in the title of this post and it need not necessarily favor increasing returns to scale models.
By the way, here is a new Paul Krugman paper on trade (pdf).
Brink Lindsey predicts a slowdown of economic growth, even if we innovate more
Brink’s new paper is here, here is one excerpt:
Consider the four constituent elements of economic growth tracked by conventional growth accounting: (1) growth in labor participation, or annual hours worked per capita; (2) growth in labor quality, or the skill level of the workforce; (3) growth in capital deepening, or the amount of physical capital invested per worker; and (4) growth in so-called total factor productivity, or output per unit of quality-adjusted labor and capital. Over the course of the 20th century, these various components fluctuated in their contributions to overall growth. The fluctuations, however, tended to offset each other, so that weakness in one element was compensated for by strength in another. In the 21st century, this pattern of offsetting fluctuations has come to a halt as all growth components have fallen off simultaneously.
The simultaneous weakening of all the components of economic growth does not mean that slow growth is inevitable from here on out. The trends for one or more of them could reverse direction tomorrow. Nevertheless, it is difficult to resist the conclusion that the conditions for growth are less favorable than they used to be. In other words, growth is getting harder.
Brink offers further remarks here. On October 29, at noon, I’ll be doing a Cato Forum with Brink on this paper.
Banksy Comments on the Nobel Prize?
Mashable: Street artist Banksy set up a stall in New York’s Central Park Saturday, selling his original pieces — worth tens of thousands of dollars each — for $60.
The event was documented on video and posted on Banksy’s website. It took several hours for the first artwork to be sold, to a lady who managed to negotiate a 50% discount for two small canvases. There were only two more buyers, and by 6 p.m. the stall was closed with total earnings of $420.
For comparison, in 2007 Banksy’s work “Space Girl & Bird” was purchased for $578,000, and in 2008 his canvas “Keep it Spotless” was sold for $1,870,000.
What would Fama, Shiller and Hansen say about these asset prices?
Maximizing revenue for non-reproducible art is a matching process, the artist must find the handful of buyers in the world willing to pay the most (see An Economic Theory of Avant-Garde and Popular Art) so perhaps one can explain this as a failure of marketing.
An alternative explanation is that modern art is a bubble, people buy only because they expect to sell to others–take away this expectation and the art doesn’t sell. (Fashions and fads can help the latter explanation a long but there still needs to be an expectation of a future sucker buyer.)
Or perhaps Banksy is commenting on an earlier Nobel winner.
Equilibria in health exchanges
There is a recent paper (pdf) by Handel, Hendel, and Whinston, and it covers the issue of adverse selection through the new ACA exchanges. The second paragraph of the abstract is this:
We find that market unravelling from adverse selection is substantial under the proposed pricing rules in the Affordable Care Act (ACA), implying limited coverage for individuals beyond the lowest coverage (Bronze) health plan permitted. Although adverse selection can be attenuated by allowing (partial) pricing of health status, our estimated risk preferences imply that this would create a welfare loss from reclassification risk that is substantially larger than the gains from increasing within-year coverage, provided that consumers can borrow when young to smooth consumption or that age-based pricing is allowed. We extend the analysis to investigate some related issues, including (i) age-based pricing regulation (ii) exchange participation if the individual mandate is unenforceable and (iii) insurer risk-adjustment transfers.
The core result here does not require individuals to violate the legal mandate, although the paper has a good and sobering discussion of that topic as well. The adverse selection here is occurring across plans of differing quality. On the positive side, having everyone enrolled in the “least comprehensive” plan can be a plus rather than a minus, depending on your point of view. On the negative side, the paper does not consider how suppliers might respond by limiting the quality of their network and making the least comprehensive plan even less useful.
For the pointer I thank Dan in Euroland.
Cohorts born in the late 1930s and 40s did especially well
Via @ClaudiaSahm, there is a new paper (pdf) from Emmons and Noeth at the St. Louis Fed, the abstract is here:
The global financial crisis and ensuing Great Recession reduced the income and wealth of many families, but older families generally fared better than young and middle-aged families. The Federal Reserve’s Survey of Consumer Finances reveals that being young was a significant risk factor during the downturn, regardless of a family’s race, ethnicity, or education level. Among older families, those headed by someone 70 or over fared slightly better than those headed by someone between 62 and 69. Income and wealth also increased most strongly among older families during the two decades preceding the crisis. Part of the explanation for favorable income and wealth trends among currently living older Americans is a positive birth-year cohort effect. After controlling for a host of factors related to income and wealth, we find that cohorts born in the late 1930s and 1940s have experienced more favorable income and wealth trajectories over their life courses than earlier- or later-born cohorts. While it is too soon to know how cohorts born in recent decades will fare over their lifetimes, it appears that the median Baby Boomer (born in the 1950s and early 1960s) and median member of Generation X (born in the late 1960s and 1970s) are on track for lower income and wealth in older age than those born in the 1930s and 1940s, holding constant many factors other than when a person was born.
One driving force seems to be that the older generation was simply more motivated to save. And here is a dramatic sentence:
Among young and middle-aged families, the median levels of net worth were 30.5 percent and 24.1 percent lower in 2010 than in 1989, respectively.
The paper presents many interesting facts, but I would start with pp.9-10.
From The Guardian, here is an argument that middle class youth in Great Britain today will end up faring worse than did their parents.
Lars Peter Hansen Nobelist
Hansen’s work is the most technical and most difficult to explain to a layperson. The brief version is that in 1982 Hansen developed the Generalized Method of Moments a new and elegant way to estimate many economic models that requires fewer assumptions and is often more powerful than other methods.
Here is the basic idea in a nutshell. The method of moments is an old and intuitive technique for estimating the parameters of a data generating process. A moment is an expectation of the form E(X^r), where r can be an integer. For example if r=1 then the first moment, E(X), is just the mean (you may also know that together the first and second moments, E(X^2), define the variance). If the true mean in the data generating process is M then we can write a moment condition, E(X)-M=0. Now the method of moments says to estimate M we should solve that condition by replacing, E(X), with the sample mean. In other words, a good estimator for the unknown population mean is the sample mean, i.e. the mean in the data that you have. Pretty obvious so far.
Now let’s start to generalize. First, there are many moments other than the mean and variance. Indeed economic theory often provides moment conditions that may be written E(f(X,M))=0 where M now stands for a moment not necessarily the mean and f can be a non-linear function. For example, rational expectation models often provide conditions that E(f(X))-M=0, i.e. that forecasts should equal true values, or macro models imply that various differences, such as in consumption levels should not be correlated and so forth. Indeed, finance and macroeconomic theory provided a surplus of moment conditions and many of these different conditions imply something about the same parameter. Now, and this is key, when we have more moment conditions than parameters we can’t choose the parameters to make all the moment conditions true, i.e. we can’t make all those moment conditions equal to zero. So what to do?
What Hansen did with the generalized method of moments is show that when we have more moment conditions than parameters we can best estimate those parameters by giving more weight to the conditions that we have better information about. In other words, if we have two conditions and we can’t force both of them to zero by a choice of parameter then choose the parameter such that the moment condition we know the most about (least variance) is closer to zero than the one we know less about. Again, the idea is intuitive, but Hansen showed how to make these choices and then he proved that when the parameters are chosen in this way they have good statistical properties such as consistency (they get closer to the true values as the sample size increases). Importantly, estimating a model using these moment conditions does not require untenable assumptions on the entire distribution of returns. Hansen then also showed, such as with Hansen and Hodrick (1980) and Hansen and Singleton (1982, 1983) how these methods could be applied to a large class of macro models and finance models including asset pricing, the latter of which links Hansen with the work of Fama and Shiller as does the important bound discovered by Hansen and Jaganatthan (1991).