Category: Economics

Let’s put aside the simple explanations, such as "Nobody goes there."  Let’s also put aside artificially contrived scarcities, such as for Super Bowl tickets or hot restaurants on Saturday night.  We are left with the following:

1. Some stores put impulse purchases next to where you wait in line.  If the line is too quick you won’t spend any more money.  Borders uses this strategy very effectively, it is harder for Home Depot.

2. The authority of final decision-making is to some extent indivisible, plus managers can only be hired in integer numbers.  Yet some stores require more managerial attention to resolve disputes than others.  I never bicker over price in the supermarket, but ever try to get a late fee waived in a video store?

3. Some stores may use growing and shrinking lines as a substitute for changing prices.  The waiting time in line at my Giant is often longest late at night.  In essence they are charging you a higher price to shop late at night.  The company "wins back" some of this tax by skimping on labor costs.  Perhaps this system of "flex prices" is easier than altering the bar codes or price stickers on an hourly basis.

4. Long lines may serve the cause of price discrimination.  Perhaps the store offers personalized shopper services, free home delivery, or other services at a premium.  These ancillary benefits might be more profitable if shopping takes just a bit of time.  Low-income demanders won’t mind so much, high-income demanders may be pushed to the extra services.

5. Rentals take more time to process than do cash transactions.  Some of the incidence of this burden falls on consumers.  If rentals take twice as long to process, and consumers arrive at random rates, the profit-maximizing solution is not generally to double the number of service clerks.  This would lead to an excess of idle labor during the day.

6. Many consumers are a pain.  But they are less likely to complain or slow down the process when the line behind them is long.  So attempts to shorten the line are to some extent counteracted by the increasingly difficult behavior of your fellow man.  This lowers the store’s return to line-shortening.  The store prefers to capture some of these rents by cutting back on service, rather than allowing their more difficult consumers to push everyone around.

7. Perceptual biases and selection – It feels like you are waiting in line most of the time because you are.  When you are not waiting, the experience ends quite rapidly.

Explanation number two is taken from Caroline Mayer’s "A Perpetual State of Pause," The Washington Post, December 5, not yet on-line. 

A woman’s effort to assuage her 6-year-old son’s fears of his grandfather’s ghost by selling it on eBay has drawn more than 34 bids with a top offer of $78 [TC: the price is now up to 15K, as of Sunday morning].

Mary Anderson said she placed her father’s "ghost" on the online auction site after her son, Collin, said he was afraid the ghost would return someday. Anderson said Collin has avoided going anywhere in the house alone since his grandfather died last year…

Anderson also put her father’s metal walking cane up for auction so she would have something to actually send the winning bidder. The proceeds from the auction will go to buy Collin a special present, she said.

Here is the full story.  Here is the auction.  Here is an elastic supply of copycats.

He [Joe Stiglitz] actually told me that he faced [spoke to] a hundred thousand people at Bombay…I did tell him that he should not get too excited, because I grew up in Bombay and when I went for a walk to the beach, I normally saw about two hundred thousand people! So that doesn’t mean very much in Bombay.

Here is the whole interview, which has numerous interesting bits on India, globalization, and economic development.  Here is my earlier post on population density in Bombay.

The dollar’s share of global foreign-exchange reserves has already fallen from 80% in the mid-1970s to around 65% today. And yet does the dollar really risk losing its status as the world’s main currency? The same question was asked in the early 1990s after the dollar’s previous long slide, but the dollar’s pre-eminence survived. Then, however, there was no alternative to the dollar. Today the euro exists, and could yet emerge as a rival to the greenback.

The requirements of a reserve currency are a large economy, open and deep financial markets, low inflation and confidence in the value of the currency. At current exchange rates the euro area’s economy is not that much smaller than America’s; the euro area is also the world’s biggest exporter; and since the creation of the single currency, European financial markets have become deeper and more liquid. It is true that the euro area has had slower real GDP growth than America. But in dollar terms the euro area’s economic weight has actually grown relative to America’s over the past five years.

Where the dollar has failed is as a store of value. Since 1960 the dollar has fallen by around two-thirds against the euro (using Germany’s currency as a proxy before 1999) and the yen (see chart 1). The euro area, unlike America, is a net creditor. Never before has the guardian of the world’s main reserve currency been its biggest net debtor. And a debtor may be tempted to use devaluation to reduce its external deficit–hardly a desirable property for a reserve currency.

Here is the full story.

My (cautious) take:  The Euro area is rich in accumulated bank accounts but running a massive long-run deficit, most of all on human capital.  Plus what will happen when countries start rejecting the EU constitution in their referenda?  And don’t currency markets have some tendency to long-run mean reversion, suggesting the dollar will make a comeback someday? So I say no, the Euro will not become the world’s reserve currency.  That being said, every prediction I have made about the Euro has been wrong to date.  I said it wouldn’t happen, it can’t last long, and it won’t rise in value.  That is 0-3, must I now step away from the plate? 

Thanks to Kevin Postlewaite for the pointer.

Immigration can help offset some of the side-effects of an ageing population in Europe but would be nowhere near sufficient to salvage struggling pension schemes, the United Nations said on Monday.

The UN’s 2004 world economic and social survey said even with immigration projected to average 600,000 a year between 2000 and 2050, Europe’s population was expected to decline by 96m in that period.

“Incoming migration would have to expand at virtually impossible rates to offset declining support ratios, that is, workers per retirees,” the UN report said.

It estimates that France would have to bring in nearly 90m migrants to 2050 to maintain 1995 support ratios, compared with the nearly 4m projected. Germany would have to accept more than 181m immigrants, against 10.5m projected between 2000 and 2050.

Europe does not need to replicate previous support ratios, but still the prognosis is grim.  By the way, don’t take this as an argument against immigration, there is no way to solve the problem without it.  But many different things will have to go well to avoid a major European fiscal crisis.

And this fact will surprise many:

The study revealed that Latin American immigration to the US roughly doubled over the 1990s, while the total number of Latin American migrants remained stable, as the end of military conflicts in Central America allowed many migrants to return home…

Here is the full story. Here is the original UN report.

An Australian phone company is offering customers the chance to blacklist numbers before heading out for a night on the town so they can reduce the risk of making any embarrassing, incoherent late-night calls.

A survey of 409 people by Virgin Mobile, a joint venture of The Virgin Group and Optus, found 95 percent made drunk calls [TC: surely the percentage is lower in good ol’ New Zealand…].

Of those calls, 30 percent were to ex-partners, 19 percent to current partners, and 36 percent to other people, including their bosses.

The company also found that 55 percent of those polled would grab for their phone first the next morning to check who they had drunkenly dialled, compared with just eight percent who went for the headache pills first.

Here is the link, and thanks to Courtney Knapp for the pointer.

All [social security] benefits are based on something called the primary insurance amount.  This amount, in turn, is based on a worker’s earnings, indexed to the growth in average real wages, for the highest 35 years of earnings…So every retiring worker gets to take advantage of overall economic prouductivity, pushing up the level of wages during the time in which the work was performed.  This adjustment allows the purchasing power of benefits to grow over time…the purchasing power of benefits paid to today’s teenager are scheduled to be 60% higher than benefits paid to a typical worker who retired in 2001.

…If benefits were indexed to prices, however, Social Security would, at this very minute, be in balance over the long-term – the system would be permanently solvent.  Not only would future revenues equal future costs, but there would be a surplus…

Did you get that right?  Just stop boosting benefits.

That is by Susan Lee, from The Wall Street Journal Op-Ed page, November 23.

I want to comment on a common error in the discussion of my post Nature, Nuture, and Income.  (See for example the comments at Jane Galt, Kevin Drum and also the trackbacks).

Despite my warning, many people thought that graph was saying something important about the average income of adoptees versus that of biological children.  Hence many people argued that "the results" were explained by discrimination against Korean Americans, poor nutrition of the adoptees before being adopted, or low IQ of children given up for adoption.

For the record, Asian Americans in general and the children in this sample have higher income and more education than the average American.  More fundamentally, however, these comments have misunderstood what is to be explained.  It is true that the average income of the adoptees was lower than that of biological children but the adoptees are also younger.  Once you control for this and a few similar factors the mean income difference goes away (think of shifting the adoptee line up).  What remains, and this is the key point, is that the biological line is upward sloping and the adoptee line is flat.

What my post and the paper are all about is the difference in the slope of the two lines, i.e. why is it that child income increases with parental income for biological children but not for adopted children.

Addendum: Suppose we control for age and other factors which in effect will raise the adoptee line then we could phrase the results as ‘adoptees do better than biological children raised in poor households but worse than biological children raised in rich households.’  The explanation is simple from the genetic point of view – adoptees are drawn more or less randomly while high income parents tend to pass on high-income genes and low income parents tend to pass on low-income genes.  It’s going to be very difficult, however, to explain why poor parents treat their adopted children better than their biological children but rich parents treat their adopted children worse.

Who wants to talk about economic armageddon?  Not me, I want to know,

What if the alpaca bubble bursts, as did the emu, ostrich and llama bubbles?

That’s from a front-page (!) article on alpacas in the New York Times.  But seriously, alpacas do make for an amusing illustration of bubble economics.

Alpaca fleece is very nice but five pounds, a year’s worth of production from one alpaca, is worth only $200 while alpacas sell for about $20,000.  The price of alpacas is supported not by their earnings but by the prospect of capital gain, specifically the hope that more people, "attracted by the lifestyle," will enter the alpaca business driving up demand.  A Ponzi scheme with a cute face.

The Ponzi scheme has some prospect of continuing a little while longer because export and import controls make it difficult to bring new alpacas into the country.  Furthermore, a breeding registry uses DNA analysis to prevent competition from "riff-raff."  Breeders like to think that the registery is about improving quality.  More likely it’s about holding down supply and creating a bubble focal point.

Why does the price of a highly valued art work by a famous artist plummet when it is revealed to be a forgery?  Can the aesthetic value drop by nearly as much as the price? I doubt it, despite what my art-loving co-blogger may argue.  The price drops because the artist’s name is a focal point for buyers – the buyers aren’t buying because of the aesthetic pleasure of the object so they can’t buy on taste alone.  Instead they must buy what they think others will buy.  Who knows how the intial craze begins?  But once it does the artist’s name is a focal point that brings on the inflating returns.  The alpaca registry does the same thing for alpaca buyers – it coordinates the buyers on the bubble object even if alpaca fleece from non-registered alpacas is just as soft.

My guess is that the alpaca bubble will burst quite soon.  Why?  Because when the rubes in the street know what an alpaca is, someone is about to be fleeced.    

The eminent Stephen Roach says yes.  The nub of the argument is that foreigners will abandon the dollar, thereby ceasing to fund our dual deficits.  This will force interest rates to skyrocket and lead to a rash of U.S. bankruptcies.  Brad DeLong is less alarmist, but wonders why long bonds are not plummeting in price.

Before you sign up for space tourism, keep the following in mind:

1. Doomsayers usually compare one financial flow to another; today they are focusing on trade deficits, budget deficits, and U.S. savings rates.  It is easy to make measured flows appear unsustainable, because indeed they probably are.  However it is less common for a flow-based problem to be compared to the total stock of wealth.  One very rough estimate pegs the U.S. as worth well over $100 trillion net.  And don’t forget the recent increase in the future expected value of China and India.  Problems with flows are real, but they won’t, in general, bring us to our knees.

2. The late 1970s were a terrible time by many measures.  The prime rate approached 20 percent, gold was above $800 an ounce, inflation and unemployment were high at the same time, and the U.S. was seen as having lost world leadership.  By 1983 — a mere few years later — matters were running well once again.  If a collapse did come today, we might expect a comparably quick recovery.

3. The doomsayers are not obviously richer than the rest of us.  Many of them (they know who they are!) do not invest on the basis of their gloomy prognoses.  And no, buying a house is not enough, I want to see at least five percent of your net worth in puts on T-Bond futures.

4. Richard Cooper offers the best case for sustainability of the status quo.

The most likely outcome: We will limp along with a government that refuses to accept fiscal responsibility.  A ruling political party will not raise taxes and/or cut spending until the last possible moment.  It will always look toward the problem falling in someone else’s lap.  In the meantime, the wealth of the world, and the benefits of investing in the U.S., will bail us out.  (Didn’t Winston Churchill once say "The Americans always do the right thing, once they have exhausted all other options", or something to that effect?) 

A few decades from now the crunch will come, as growing Medicare and Social Security liabilities are matched against low levels of accumulated savings.  We will have Western European levels of taxation and growth for a good twenty years or more, unless we get lucky with productivity growth in the meantime.  The costs will be very real, but economic Armageddon does not appear to lie around the corner.

…none of the increase in U.S. GDP in the short term will come at the expense of China, Malaysia, or Taiwan.  Rather, the bulk of the adjustment to the lower value of the dollar will be borne by the euro area, Canada, Mexico, and Japan.

Read the whole thing, if you wish to feel better (for the U.S.) about the falling dollar.

Overall, the more scare stories you read about a falling dollar, the less you should worry.  The Major Media aren’t exactly ahead of the curve on an issue like this.  Their scare-mongering means that the real dangers have already been capitalized and digested.  It is when you read blog posts like this one that you should fear the worst…

Addendum: Here is a new blog about the global economy, with much on the falling dollar, thanks to Dan Drezner for the pointer.  Dan, by the way, is the place to go for analysis and updates on the Ukraine.