Biblical Adverse Selection

And Jesus said, Behold, two men went forth each to buy a new car.

And the car of the first man was good and served its owner well; but the second man’s was like unto a lemon, and worked not.

But in time both men grew tired of their cars, and wished to be rid of them. Thus the two men went down unto the market, to sell their cars.

The first spoke to the crowd that had gathered there, saying honestly, My car is good, and you should pay well for it;

But the second man went alongside him, and bearing false witness, said also, My car is good, and you should pay well for it.

Then the crowd looked between the cars, and said unto them, How can we know which of ye telleth the truth, and which wisheth falsely to pass on his lemon?

And they resolved themselves not to pay for either car as if it were good, but to pay a little less than this price.

Now the man with a good car, hearing this, took his car away from the market, saying to the crowd, If ye will not pay full price for my good car, then I wish not to sell it to you;

But the man with a bad car said, I will sell you my car for this price; for he knew that his car was bad and was worth less than this price.

But as the first man left, the crowd returned to the second man and said, If thy car is good, why then dost thou not leave to keep the car, when we will pay less than it is worth? Thy car must be a lemon, and we will pay only the price of a lemon.

The second man was upset that his deception had been uncovered; but he could not gainsay the conclusion of the market, and so he sold his car for just the price of a lemon.

And the crowd reasoned, If any man cometh now to sell his car unto us, that car must be a lemon; since we will pay only the price of a lemon.

And Lo, the market reached its Nash equilibrium.

From username42 on Reddit. Hat tip: Michael Lane.

Your challenge: Explain an economics principle the King James Way.

The meaning of death, from an economist’s point of view

A few days ago Garett Jones came to my office door and asked “what do we really know about labor supply?”  I said we might as well extend the query to labor demand.  In any case, here was part of my answer, paraphrased of course:

I’ve been much influenced by having kept a dining guide blog/website for almost thirty years, and seeing so many places come and go.  On one hand, I see the stickiness of plans.  A restaurant opens up, and the proprietor has the intent to be a certain thing.  They’re not going to take the pupusas off the menu, just because the price of corn has gone up.  Similarly, increases in the minimum wage might not much alter the hiring plans of the restaurant.  The very act of starting a business selects, to some extent, for people who stick to their plans.  The dishes still need to be washed, and many owners are not at the margins of considering serious automation.

That said, sooner or later these restaurants pass from the scene.  And when the El Salvadoran place closes, there is a real competition across competing food visions.  Will it be pupusas, roast chicken, or kebab?  Once again, relative prices will exert their influence, on both the supply and demand sides of the market.  In fact, pupusa places are slightly in retreat, as they cannot always bid for their higher area rents — it is hard to sell a pupusa for more than a few dollars and at the same time the requisite labor is harder not easier to come by and demand seems stagnant at best.

Similarly, if the minimum wage is high, the new restaurant, if indeed it is even a restaurant, will economize on the number of laborers required to make the food.  The plan for a true Bengali sweets shop will not get off the ground.  You might see storage space or a less labor intensive means of food preparation.

We thus come to a truth that is both happy and sad: death and turnover are how relative prices imprint their impact on the world.

And that, to an economist, is the meaning of death.

What I’ve been reading

The Story of Silver, by um…William Silber, probably is the best book on silver, as I suppose it should be.  How many other books have this same property of coincidence of name and topic?  Did James Igel ever write a book on hedgehogs?

Adrian Tinniswood, The Royal Society & the Invention of Modern Science is the best short introduction to its stated topic.

Linn Ullmann, Unquiet: A Novel.  A novel, yes, but also a not so thinly veiled memoir of life with her two very famous parents Ingmar Bergman and Liv Ullmann.  Fantastic if you already know the back story, but at the very least readable if you don’t.

Kenneth M. Pollack, Armies of Sand: The Past, Present, and Future of Arab Military Effectiveness.  Pollack takes a look at the systematic dysfunctionalities behind Arab militaries, arguing most of them have been worse than the North Korean or Somalian fighting forces.  Jordan in 1948, Hizbullah, and early ISIS are the main exceptions here, British training in the former case being a factor and morale a factor in the latter two cases.

Andrew S. Curran, Diderot and the Art of Thinking Freely.  A good filling-in of what were to me many blanks in the life of Diderot, a figure whom I never can decide whether he is underrated or overrated.

Do land use restrictions increase restaurant quality and diversity?

Daniel Shoag and Stan Veuger say yes, but I am not so convinced.

It turns out that metrics of land use restrictions are correlated with restaurant quality, across cities.  To cut to the chase, Los Angeles ranks number one on this index, and I can agree with that assessment in terms of food quality and also diversity.  (Other good food cities, such as Miami, also rank high on the index.)  Yet for the metropolitan area near L.A., food is generally best where the land use restrictions are least binding.  Beverly Hills and Santa Monica have some decent fancy restaurants, but the real gems are to be found elsewhere, in fringes such as northeast Hollywood, Silverlake (gentrifying a bit too much these days, however), north Orange County, Monterey Park, and so on.  Pasadena has hardly anywhere excellent to eat.

I would suggest an alternative channel of influence: urban areas with high inequality have both better food (see An Economist Gets Lunch, but basically imagine the wealthier people generating demand and the poorer people supplying cheap labor) and more building restrictions.  The wealthier people decide to do something to keep the poorer people out of their neighborhoods.

I hate to say “correlation does not prove causation,” but…correlation does not prove causation.

Via the excellent Kevin Lewis.

What should I ask Emily R. Wilson?

I will be doing a Conversation with her, no associated public event.  She is the translator of a splendid and highly readable Homer’s Odyssey, which I named as the very best book of the year for last year.  She is also a professor at the University of Pennsylvania, a classicist, a Seneca scholar, and an all-around very smart person.  Here is her Wikipedia page.

So what should I ask her?

Further new results on the marginal rate of income taxation

I study optimal income taxation when human capital investment is imperfectly observable by employers. In my model, Bayesian employer inference about worker productivity drives a wedge between the private and social returns to human capital investment by compressing the wage distribution. The resulting positive externality from worker investment implies lower optimal marginal tax rates, all else being equal. To quantify the significance of this externality for optimal taxation, I calibrate the model to match empirical moments from the United States, including new evidence on how the speed of employer learning about new labor market entrants varies over the worker productivity distribution. Taking into account the spillover from human capital investment introduced by employer inference reduces optimal marginal tax rates by 13 percentage points at around 100,000 dollars of income, with little change in the tails of the income distribution. The welfare gain from this adjustment is equivalent to raising every worker’s consumption by one percent.

That is from the Harvard job market paper of Ashley C. Craig, via Steven Hamilton.

If the gdp deflator is off, which financial investments should you make?

Many people suggest that we are under-measuring the benefits of innovation, and thus real rates of economic growth are much higher than we think.  That in turn means the gdp deflator is off and real rates of interest are considerably higher than we think.  Someday we will all realize the truth and asset prices will adjust.

Let’s say that view is correct (not my view, by the way), how should that change your investment decisions?

One implication, it seems to me, is that you should short the goods and services which are being produced so rapidly under this regime.  If that is hard to do, short their substitutes.  Say the new innovative growth is coming from the internet sector, and internet activity is a good substitute for collecting stamps (which seems to be true), well short stamps if you can.  At least get them out of your diversified portfolio.

Similarly, you may wish to invest in companies which produce goods not easily substituted for over the internet.  One observer has mentioned “perfume” to me in this connection, though I do not have the expertise to render a judgment.

More generally, if real rates of return are high, but not perceived as high by most investors (who are still victims of fallacious “great stagnation” arguments and the like), at some point those investors will learn.  With more rapid growth enriching the future, and with the realization of such, there will be a sudden demand to shift funds into the present, so as to equalize marginal utilities.  So bond prices will fall and that means you should short bonds and buy puts on bonds.

Don’t load up on land and public utilities.  Incumbent firms also may fall in value.

You also might fear this new technological progress will bring some fantastic but hard-to-afford new goods and services.  How about life extension or immortality but priced at $10 million?  The way to hedge that risk is to invest in life extension companies, but even more than their earnings prospects might dictate.  That is the best way to insure against life extension being too costly to afford.  Note that poorer investors should do this, but the very wealthy do not need to.

What else?

I thank B. and S. and Alex T. for relevant discussions connected to this post.

Valentine’s day markets in everything

Looking to get yourself a present this Valentine’s Day? The El Paso Zoo has you covered. It will name a cockroach after your ex and then feed it to a meerkat live on camera.

You can message the zoo on Facebook with your ex’s name, then wait patiently for February 14 to watch the roach get devoured during the “Quit Bugging Me” meerkat event, which will live-stream on Facebook and the zoo’s website. The names of those exes will also be displayed around the meerkat exhibit and on social media starting February 11. The zoo calls it “the perfect Valentine’s Day gift.”

Here is the story, via LegalNomads.  Just when I think I have all of these covered, one comes along that is worse than anything I was expecting…

Stop demeaning billionaires and you were unfair to Howard Schultz

Here is my Bloomberg column on that point.  Furthermore, that tape of Schultz is much better than what many media sources reported, here is the excerpt on that:

In an interview, Schultz was asked whether billionaires have too much power. He responded by noting that the moniker “billionaire” has become a “catchphrase” and proceeded to reframe the question: “I would rephrase that and I would say that people of means have been able to leverage their wealth and their interest in ways that are unfair.” So he didn’t necessarily disagree with the premise of the question. Nor did he say that other people shouldn’t use the term “billionaires.”

For the record, he also noted that such people have “unbelievable influence,” and that speaks to the problem of inequality. And he included corporations (not just people) and the political ideologies of the two major parties as part of the problem.

Is that such a terrible answer? Not only on the merits, but also in explaining why Schultz might want to move away from the term “billionaire” as the sole locus of blame? Then again, maybe that’s just what you would expect a billionaire to say.

You can watch the interview here, and note the rest of the column is making more general points about how we should talk about people and their wealth:

My parents taught me never to ask a person how much he or she earns. I was told that it was rude, and I still believe that. It follows that we also should not ask people about their net wealth. And, out of politeness, perhaps it is also inappropriate to openly discuss the range of their net wealth.