The rise of the Chinese consumer

by  Tyler Cowen in

The Chinese are rapidly becoming world-class shoppers:

Luxury-goods firms are thus becoming wildly excited about the possibilities–in China and beyond. Armani plans to open 20-30 new stores on the mainland by 2008. Prada will invest $40m in China in the next two years, and almost double the number of stores there this year to 15. Louis Vuitton will open its first full-range shop on the mainland in Shanghai in September, and will have 13 stores by year end.

As the Chinese travel more, they are broadening not only their minds but also the range of luxury goods they come into contact with. Once abroad, their favourite activity seems to be shopping. During last month’s Golden Week holiday, around 380,000 mainland tourists visited Hong Kong in just ten days, almost 80% up on 2002. (Last year, SARS kept numbers down.) Mainlanders spend more per person in Hong Kong than any other tourists. From this summer they can travel as individuals to 12 of 15 EU countries (but not Britain, Ireland or Denmark).

“The Chinese go to Paris, stay at two- star hotels, eat cheap Chinese food and spend all their time shopping,” says a luxury-firm executive with glee. Christopher Zanardi-Landi, general manager in China for Louis Vuitton, says that the industry is preparing for “a huge wave” of Chinese shoppers. While they have hitherto catered mainly to Japanese tourists, “luxury stores in Paris are starting to employ Mandarin-speaking assistants,” he says.

But for now, Hong Kong remains the favoured destination for mainlanders. That is why so many luxury stores are opening in Hong Kong. In the past three months, Zegna, Ferragamo, Louis Vuitton, Prada and Dior (among others)ve opened in bigger and better-designed spaces. Hong Kong’s property developers are delighted.

Here is the full story. Here is the previous installment of “China Facts.”

Kidney swaps II

by  Alex Tabarrok in

The Wall Street Journal reports (subs. required) that the kidney swap idea I wrote about earlier is beginning to be implemented. Here are they key points:

Last year, 43% of kidneys transplanted in the U.S. came from living donors, up from 28% a decade ago.

But a biological barrier often blocks a transplant from a relative. In about a third of all would-be pairs, blood types are incompatible. In others, the sick person has antibodies that can initiate a rejection of the donated organ. It’s heartbreaking “to have the treasure of the live donor and then have that not go forward because of a biological obstacle,” says Massachusetts General Hospital transplant surgeon Francis DelMonico.

Occasionally, transplant centers spot a way out: One New England father with blood type A couldn’t donate a kidney to his daughter with blood type B. So he gave a kidney to a teenager with blood type A, and the teenager’s sister gave a kidney for the man’s daughter.

Such swaps, however, typically occur only when happenstance alerts surgeons to the possibility. Economist Alvin Roth and co-authors have devised an algorithm, however, that computes all the possible swaps and which is incentive-compatible.

…when Dr. Saidman gave the economists details on 45 pairs in which the would-be donor was unable to give a kidney to the intended recipient. Even though each of the 45 had a donor willing to spare a kidney, all were stuck waiting for the right person to die. With swaps involving two kidneys, the economists found, eight transplants were possible. If swaps involving three kidneys were possible, then 11 transplants were possible.

Addendum: Alert readers will note that kidney swaps are quite similar to organ clubs an idea for saving lives that has been implemented by Lifesharers.

Trade as a substitute for migration: Outsourcing update

by  Tyler Cowen in

New Border Patrol uniforms, ordered in the wake of the agency’s transfer last year to the Department of Homeland Security, arrived this month and some agents are not very happy: The new uniforms were “Made in Mexico.”

How many of the people who made those uniforms would have otherwise migrated? Has the Border Patrol found at least one (partial) solution that works? Here is the full story.

Think again!

by  Alex Tabarrok in

Interested in “seductive math problems for the modern mind”? Every day Jan Nordgreen, a Norwegian living in Bolivia, posts a new puzzle on his elegant and fun blog, Think Again!

Here is a recent challenge:

A party consists of three couples. At the end of the party one of the husbands asks the others how many new acquaintances they made during the evening. Everybody gives a different answer. What did his wife answer?

Why do Asian central banks buy so many dollars?

by  Tyler Cowen in

Why exactly are the Japanese and Chinese foreign banks buying so many U.S. dollar-denominated securities? And if such purchases are so important in keeping our economy afloat, ought we not try to figure out whether they are likely to stop?

Foreign central banks are on a spending spree. As recently as 2001, central banks bought just $10.7 billion in Treasury securities on a net basis. But their net purchases have risen dramatically: to $43.1 billion in 2002 and $128.5 billion in 2003.

With each passing quarter, foreigners have become more significant consumers of U.S. government debt. In 2002, non-Americans accounted for about half of net purchases of Treasury securities. But in the first quarter of 2004 they accounted for 150 percent! That is–the rest of the world bought a net $679.8 billion in Treasury securities while U.S. brokers and dealers sold a net $202.7 billion.

I can think of a few theories:

1. They think dollars are a good investment. Well, at one level this must be true tautologically. But why do those two central banks have such a special attachment to this investment vehicle?

2. They think they will receive geopolitical favors in return. I view this as a relatively optimistic scenario. It suggests, among other things, that the game can continue for a long time. Mutual gains from trade have a strong attraction. It also would mean that American “imperialism” has a lower economic cost than is usually believed. It leads countries to want to buy our Treasury securities as a favor to us. On the darker side, it means that our fiscal irresponsibility has a higher cost than is usually believed. It forces us to play numerous games on the international stage.

3. China and Japan want to keep the value of the yuan and yen low, as part of a mercantilist export-promotion strategy. I take this to be the standard wisdom. I”m certainly not dismissing it, but I do have a few questions. Aren’t there easier ways to subsidize exports? Why are exporters the dominant interest group here? Isn’t a country wealthier when its currency is stronger in real terms?

4. They are building up an endowment, for the same mix of self-evident and obscure reasons that universities do. It is a symbol of status, stability, and commitment to the long haul. It helps them be taken seriously as countries.

5. They have a stake in American prosperity. They’re willing to hold an inferior portfolio if it keeps the U.S. — obviously a major market — fat, healthy and addicted to imports.

6. They are incredibly risk-averse. What safer investment could you find?

7. They are just plain, flat-out stupid. I call this the uh-oh scenario. They won’t stay stupid forever.

I suspect there is truth in all seven hypotheses.

This Slate article offers some useful background and the above quotation. And here is some (numerically overstated) good news:

The day may come when the Chinese government stops being the lender of last resort to America, but if it does stop, there are a billion or so Chinese citizens ready to take up the cause. Given the legal right to do so, they would yank deposits out of the Chinese banking system and invest in U.S. securities.

Addendum: If I look at my own portfolio, I am doing much the same thing. I believe that most assets are overpriced and I don’t know where else to put my money.

Shorter patent lives mean shorter lives

by  Alex Tabarrok in

People talk about the high price of pharmaceuticals as if high prices lasted forever. In fact, within a year of the expiration of a pharmaceutical’s patents, prices will typically fall by more than 50 percent as generic producers enter the market. Patents nominally last for 20 years but the effective patent life is much lower because patents are typically granted years before a product has cleared FDA review. The effective patent life of the average new pharmaceutical in the 1990s averaged just 12 years (see here for some references). Competition from competing but non-infringing pharmaceuticals makes the de facto patent life even shorter.

Thus, my response to the seniors and others clamoring for lower pharmaceutical prices is to be more patient. Does this sound harsh? Consider this, the people who are demanding price controls are not simply asking for lower drug prices they are asking for lower prices on the newest drugs. Lower prices for drugs introduced 15 years ago are already here. Remember, those drugs were recently considered the very best modern medicine has to offer, so it’s not like I am expecting those who can’t afford the newer medicines to go back to using leeches.

Price controls or other such plans such as reimportation may bring cheaper pharmaceuticals for a short period but we will then have a much smaller supply of new drugs forever. Only the shortsighted would buy that prescription.

Payola II

by  Alex Tabarrok in

Following my earlier post, an astute reader pointed me to an excellent analysis of payola:

[Payola] helped new musicians gain airplay. Payola combatted conformism and racism in the music business… Chuck Berry’s “Maybellene,” his first hit and still one of his most popular songs, was given initial airplay because of payola. Leonard Chess of Chess Records went to well-known disk jockey Alan Freed with a large catalog of material. Chess offered Freed partial songwriting credits on any song of his choice, provided that he would play and promote the song. Freed now had a stronger incentive to pick the best song and to promote it. After listening to hundreds of recordings, Freed picked “Maybellene.” Berry became a star, and the Freed estate continues to receive royalties…

The discussion, of course, is from Tyler’s book In Praise of Commercial Culture. (Yup, he’s the astute reader also!). See the book for more, including how racism factored into the payola “scandals.”

The world’s 100 largest economic entities

by  Tyler Cowen in

Fifty-one are corporations, and General Motors comes in at number twenty-three, just ahead of Denmark (the data are from 2000, Wal-Mart should be higher than listed, among other changes).

Here is the full list, courtesy of the ever-interesting Geekpress.com.

To be sure, these comparisons are problematic. Yearly sales are not strictly comparable to gross domestic product. Furthermore countries “hold” human capital and other forms of wealth in ways that corporations do not. Read Eric Rasmusen on the immense wealth of the United States. So these measures underestimate the economic significance of nations relative to corporations. Still they offer an object lesson in the importance of effective culture and incentives. How should Bangladesh feel, 133 million people strong, with a yearly gdp smaller than the sales of Hewlett-Packard?

Addendum: Here is more detail on why the comparisons are misleading. In a nutshell, gdp figures are based on “value added.”

Markets in everything: marital odds

by  Tyler Cowen in

The betting odds that Jennifer Lopez will divorce Marc Anthony before the end of the year: 3 to 1

The odds that Demi Moore and Ashton Kutcher will marry before the end of the year: 1 to 2

The odds that Justin Timberlake and Cameron Diaz will marry before the end of the year: 5 to 1

Prince Charles and Camilla Parker Bowles? 8 to 1

The odds that David and Victoria Beckham will divorce have gone from 50 to 1 to 2 to 1 to 8 to 1 within the year.

Here is the full story (NYT, registration required). Here is one market site.

Addended Query: Would it help your marriage to have the odds publicly posted?

Government spending: Brad asks me to tell my readers certain truths

by  Tyler Cowen in

Read him, he is correct that counting the number of agency spending cuts does not measure overall fiscal responsibility. My original post, titled “Has Bush Cut Back Government Bureaucracy?,” noted that he is 0-15 in this regard. That relates to my title, conclusion, and what I put in bold face print. I didn’t mean to endorse the data [I wrote “This is a highly imperfect proxy…”] for all other purposes, including for overall measures of fiscal responsibility across Presidents. And I am happy to report that, in my opinion, Clinton had better economic policies than most American Presidents, fiscal policy included.

This issue has come up a few times lately, so I will restate our general policy. There is writing, and there is linking. A link does not itself constitute a specifically inferable opinion on what is being linked to.

While we are on the topic, Brad has another excellent post about government spending under Reagan.

Why is Payola Illegal?

by  Alex Tabarrok in

Actually, payola isn’t illegal if it goes to the station, rather than to the DJ, and if it is disclosed. But if radio stations don’t want their DJs profiting from payola they can easily write this into their contracts. Since contract law can handle the DJ issue it seems doubtful that the real intent of the Federal Communications Act was simply to help radio stations from being abused by their employees. Apparently, the requirement of disclosure was a big enough deterrent to prevent the real issue, payola to the stations, although some stations occasionally do play songs “as presented by Arista Records.”

The issue is further complicated by the role of Billboard magazine and other radio charts. Getting on the chart may generate momentum thus

Canadian pop rocker Avril Lavigne’s new song “Don’t Tell Me” aired no fewer than 109 times on Nashville radio station WQZQ-FM.

The heaviest rotation came between midnight and 6 a.m., an on-air no man’s land visited largely by insomniacs, truckers and graveyard shift workers. One Sunday morning, the 3-minute, 24-second song aired 18 times, sometimes as little as 11 minutes apart.

But what many chart watchers may not know is that the predawn saturation in Nashville — and elsewhere — occurred largely because Arista Records paid the station to play the song as an advertisement….The practice is legal as long as the station makes an on-air disclosure of the label’s sponsorship — typically with an introduction such as “And now, Avril Lavigne’s ‘Don’t Tell Me,’ presented by Arista Records.”

Using advertising to bias the charts in this way seems like a relatively new phenomena so I don’t think it explains the animus towards payola. Correcting this problem, say by counting only top-hour plays, doesn’t seem so difficult either.

Should we worry about Mexican remittances?

by  Tyler Cowen in

Our trade deficit has reached a record high, and Mexicans are sending billions of dollars home to their poorer relatives. Is this a problem?

Most importantly, poverty in Mexico declines. Many recipients earn no more than a dollar or two a day. As for America, sending the funds does not damage the U.S. economy. For purposes of comparison, let’s say that Mexicans came to this country, worked to earn money, and then burned the dollar bills. Would this “trade deficit” hurt us? No. Wiring funds to Mexico has similar effects. If the dollars don’t come back, it is as if they have been burned. We have earned seigniorage by trading paper for goods. If the dollars do come back, someone is investing in the U.S. or buying exports.

The level of remittances does mean that we should be less worried about the trade deficit. Think of the remittance as redistributing wealth within Mexico, but without costing the United States real resources.

To some extent our trade deficit may reflect an inadequately low rate of saving. But wiring money abroad is not the central cause of low savings. First, migrant workers often contribute to our capital stock. Second, sending the money to Mexico is probably a substitute for spending it (most senders of remittances are themselves relatively poor, and thus have lower savings rates). So when these people “burn” their money by sending it abroad, they are lowering the real quantity of American resources devoted to consumption. Let’s not confuse sending money with sending real resources.

Read Econopundit for a more negative spin. Randall Parker inclines negatively on remittances as well. I often agree with Randall, but on this issue I am ready to send away…

How to read difficult books

by  Tyler Cowen in

Yes, today is the hundredth anniversary of “Bloomsday,” June 16, 1904, the day on which the adventures of Leopold Bloom (Ulysses) start. The book, long a favorite of mine, is not nearly as difficult as it is sometimes thought to be.

Here are a few tips for reading otherwise difficult works of fiction:

1. Try reading the last chapter first. Don’t obsess over the sequential.

2. Read through the first time, following each voice or character, skipping passages as you need to. Then reread the book as a whole in order. This works especially well for Faulkner.

3. Try reading the first fifty pages three times in a row before proceeding.

4. Don’t be afraid to skip over material and return to it later. This is necessary for the first fifty pages of Nostromo.

5. Read through without stopping, and then try the book again, but with some idea of where things are headed.

6. Read some of the secondary literature first. I don’t like CliffNotes, but in general don’t be afraid to go low when looking for help.

7. Read the book out loud to yourself or to others.

8. Simply give up.

I’ve found that some combination of these tricks almost always works.

By the way, here are some recent writings on Ulysses and the centenary.