Wednesday assorted links

Lessons from “The Profit”

I’ve learned a lot about industrial organization watching The Profit, a reality-TV show on CNBC featuring businessman Marcus Lemonis. In each episode Lemonis buys into a failing small-to-medium-sized business and works to turn it around. Lemonis doesn’t invest in a random sample of businesses nor even in a random sample of failing businesses. Nevertheless, the lessons that The Profit teaches are consistent with the new literature on management which has increased my confidence both in the show and the literature.

Image result for the profitIn the perfectly competitive model, price is equal to average cost and firms operate efficiently at minimum cost. Yet, Syverson finds that in the typical US industry a firm at the 90th percentile of the productivity distribution makes almost twice as much output with the same inputs as a firm at the 10th percentile. It’s not easy to measure inputs or outputs, of course, but even firms producing very uniform products show big productivity differences.

How can firms that use inputs so inefficiently survive? In part, competition is imperfect which gives inefficient firms a cushion because they can charge a price higher than cost even as costs are higher than necessary. Another reason is that small firms eat their costs.

A typical firm on The Profit, for example, has decent revenues, sometimes millions of dollars of revenues, but it has costs that are as high or higher. What happened? Often the firm began with a competitive advantage–a product that took off unexpectedly and so for a time the firm was rolling in profits without having to pay much attention to costs. As competition slowly took hold, however, margins started to decline and the firm found itself bailing. But instead, of going out of business, the firm covers its losses with entrepreneurs and family members who work without pay, with loans which grow ever larger, and by an occasional demand shock which generates enough surplus revenue to just keep going.

The correct metaphor for competition isn’t a boxing match that knocks out the inefficient firm. The correct metaphor is a slow tide. Inefficient firms must scramble for a bit of high ground but as the tide ebbs and flows they can occasionally catch a breath when their head bobs above the profit line. An inefficient firm can survive for years before it inevitably sinks.

The second lesson from The Profit is that management matters and it matters in systematic and fairly easy to replicate ways. If mis-measurement explained productivity differences, Lemonis would not be able to successfully turn firms around. But he can and does. How?

One of the first things Lemonis does in almost every episode is get the numbers right so he can calculate which products are selling and which have the highest price-to-cost margin. Concentrate production on high-margin, big sellers. Drop the rest. Simple; but many firms don’t know their numbers.

Second, in episode after episode, Lemonis cleans up shop. Literally. He cleans the shop floor and gets rid of inventory that isn’t selling. He then arranges the floor to improve process flow (made easier by concentrating production on fewer products). He then creates an inventory system, tracks orders and the inputs needed to create those orders, and takes advantage of costs savings through economies of scale in input purchases.

Can it be so simple? To be sure, Lemonis is a smart guy but very little of what he does takes genius. We know this because we now have robust evidence from India and Mexico that better management increases profits and productivity and that such increases can be sustained over the long run. In the studies from India and Mexico, randomly selected firms were given access to a “management intervention” and their productivity and profits improved and stayed higher for years after the intervention ended.

Moreover, what were these management interventions? Did some bright Harvard grad recommend a complicated swap-options deal? A new chemical process? A new management form? No. By and large, the interventions were simple. Just like the Lemonis interventions.

Here, for example, are some pictures of the storage systems used in the Indian textile firms which were part of the management study (from Nick Bloom’s slides). This is exactly the kind of thing one sees on the Profit and the recommendations to create an inventory control system are exactly the same. Management 101.

This is the sense in which the lessons of The Profit are consistent with the new literature on management and increase confidence in both.

Another lesson from The Profit is that firm problems are personal problems. The son who can’t step out from the shadow of the father and the father who can’t let go. The two brothers who haven’t gotten over the death of their father and the problems this creates in the firm they have inherited. The siblings who are still fighting to get their parent’s attention. If Lemonis has a genius skill it’s in keeping his temper and working through bullshit problems to get to the real festering issues that are at the root of inefficiencies.

Now, in this case, there is surely some selection going on. Personal drama makes for good television but the general point strikes me as true and correct and important. It’s difficult to run a business like a business. The analytical mindset that can separate business problems from personal problems isn’t natural. Many people cannot separate business decisions from their own preferences and emotional biases, which is one reason why great business leaders are rare.

I’ve learned a lot about IO from watching The Profit but could business people learn about running a firm by seeing more reality-TV? Robin Hanson argues:

If one can learn….from just watching the inside story of real firms over several years, that suggests a big win: record the full lives of many rising managers over several years, and show a mildly compressed and annotated selection of such recordings to aspiring managers.

I agree with Robin, Reality-TV MBAs could offer a lot of value. The Profit is a good place to start.

Mexico City travel tips

I’m a loyal MR reader and follower of your work.  I’m so grateful for your work and your generous spirit.  I’m sure you get inundated with email and other correspondence but I’m adding to the pile by requesting that someday you’ll post advice for a Oaxaca or Mexico City visit.  I assure you that it would be carefully studied and utilized.

Happy Easter!

Here are my tips for Mexico City, taken from an email I sent to a friend a while ago, note I start with food but do not end there:

“1. Your number one task is to find a seller of tlacoyos in the street. This is likely a solo woman with a stand, on a corner. They are all over Mexico City, though whether in Condesa I am not sure. The vegetarian offerings are no worse, also, with beans and blue corn tortilla and cheese.  Get these, and they are in general quite sanitary.  You simply need to ask around, they will not be in highly visible places. I think about them often.

2. Ask for “tacqueria” rather than tacos, the latter might lead you into a restaurant.

2b. Most food in Condesa will be fine but underwhelming, think Clarendon. Try to find street food there.

3. The street food is the best food there and it is safer to eat than the restaurant food (though the latter is usually safe too).

4. Try a sandwich once or twice, just ask around, no need for a fancy place, these usually close by mid-afternoon. My favorite sandwich is the Hawaii, though I believe that is a purely subjective judgment, I do not think it is the best per se. The whole bakery culture there is quite interesting and often neglected by food people but it is important.

5. When you take a taxi out to the pyramids, there is excellent food along the way, in the middle of nowhere, have the driver stop and bring you somewhere. The pyramids are one of the best sights in this hemisphere, by the way, better than those in Egypt I think. There are also smaller pyramid sites on the way to the big pyramid site, worth visiting and also near some superb food.

6. Favorite fancy place there is Astrid and Gaston, not cheap but it won’t bankrupt you either.  Peruvian/Mexican fusion, nice to sit in too.

7. If you need a break from Mexican food, the Polish restaurants there are quite good, that would be my back up choice. Of Asian food the Japanese offerings might be the best. French and German can be quite good there, though not original.  Avoid “American.” Other Latin cuisines will in general be quite good there, including the steakhouses.

8. Go to Coyoacan (a suburb, sort of, but not far) and see the Frida Kahlo museum.  The food stalls (“comedores”) there are not only excellent, but they look the most sanitary and mainstream of just about any in Mexico. Even your aunt could be tempted to eat there. A good stop, try a whole bunch of things for $1.50 a piece, you could spend two hours there eating and not get bored and get to sample a lot of the main dishes.  Also a fun hangout.

9. When we flew into the airport, we immediately asked the taxi driver to bring us somewhere superb for a snack. Of course there was somewhere within five minutes, right nearby. Do this if you can open a line of communications.

9b. Walking is often the wrong way to find great food there, unless you are walking and asking. Walking and looking doesn’t work so well, because you are on the wrong streets if you are walking to just be walking around. Vehicles are the key, or asking and then walking to follow the advice, not to follow your walking instincts.

10. Chiles en Nogada is a seasonal dish, superb, I am not sure if they will still have it but ask around and get it if you can. It is delicious and a real treat, not to be forgotten.

11. Treat breakfast as a chance at some street food, don’t fill up on a traditional breakfast, least of all a touristy Mexican one. It will always be OK, but rarely interesting, even if it sounds somewhat authentic. Get a tlacoyo or something in the street. Any food represented by an Aztec word will be excellent, pretty much as a rule.

The non-food tips I will send separately. But the food is all about improvising, not about finding good restaurants. Most of the mid-tier restaurants are decent but for me ultimately a bit disappointing. Either go fancy or go street. Don’t trust any of the guidebook recommendations for mid-tier places, they will never be bad but mostly disappoint compared to the best stuff there.

Non-food

The Anthropology Museum is a must.

My personal favorite museum is Museo del Arte Popular, the popular art museum downtown, but I consider that an idiosyncratic preference.

Visit the Palacio de Bellas Artes and the murals there, and across the street House of Blue Tiles, get a juice there and see their murals too. Then walk from there down to the Zocalo on the main street, there is the number one walk in Mexico for a basic introduction to downtown. In fact that is the first thing I would do to get an overview of downtown and the older part of the city, even though that is not where you will end up hanging out.

The mural sites are in general excellent, I believe the best one is called Ildefonso.

I often find male clothes shopping there to be highly profitable, good mix of selection and prices. Polanco is the part of town you would go to for that, right near Pujol and also Astrid and Gaston, in fact.

Hotel Camino Real is a classic site, you can get a drink there at night with the funny colored lights. The movie Bring me the Head of Alfredo Garcia was shot there in part, a great film. The Mexico City movie is Amores Perros, a knockout. Y Tu Mama Tambien is another, you probably know these already. I also like the old Mexican movies of Luis Bunuel, made while he lived there for a while.

The classic Mexico novel is Roberto Bolano, *The Savage Detectives*, a great read and one of the best novels of the latter part of the 20th century, the English translation is first-rate too, as good as the Spanish in my view.

I don’t like much of the music, but perhaps that is the point.  Control Machete, a Mexican rap group, works pretty good as soundtrack while you are being driven around the city.

The Alan Riding book, while now badly out of date, is still an excellent overview of the older Mexico, great for background, Distant Neighbors it is called.

Have a cabbie drive you around different neighborhoods, to see rich homes, poorer sections, particular buildings. Mexico City is first-rate for contemporary architecture although most of it is quite scattered, no single place for walking around it that I know of.

Art galleries there are good for browsing, often in or near Polanco, the wealthy part of town.

Insurgentes is a good avenue for cruising.

Avoid Zona Rosa altogether at all costs, bad stuff, lots of pickpockets, no redeeming virtues whatsoever, do not be tempted.”

Interview with MbS

There are many excellent bits in this Jeffrey Goldberg exchange, here is one:

MbS: Saudi Arabia is a network of thousands of absolute monarchies, and then has a large absolute monarchy. We have tribal monarchies, town monarchies. Moving against this structure would create huge problems in Saudi Arabia. The Saudi fabric is much more complicated than you think.

Jean Bodin would be proud.  And this:

Goldberg: Do you believe in women’s equality?

MbS: I support Saudi Arabia, and half of Saudi Arabia is women. So I support women.

MbS does seek to do away with Saudi guardianship laws, and he also seems to fully support Israel’s right to exist.  This is one of the best interviews you will read this year.

Tuesday assorted links

In Praise of Modern Principles

Writing about economics for a large audience at Marginal Revolution taught Tyler and me to get to the point quickly, use vivid examples, and avoid unnecessary math and other jargon. We brought all these lessons to our textbook, Modern Principles of Economics. We wanted to teach modern topics such as tying and bundling–pricing schemes familiar to students from cell phone plans, Cable TV and software sales yet not discussed in most principles textbooks–while recognizing that most students who take a principles course will never take another economics course. The most complicated math function in our book is the square root function.

Fortunately, judging by the reception of MP, we have succeeded in our goals. Modern Principles is used in a wide-range of universities and colleges throughout the United States, at places like the University of Pennsylvania, UCLA, and Minnesota and also Henry Ford College, Rock Valley College and the SUNY Colleges. Here are a few reactions from users of Modern Principles.

I can’t tell you how many people I have met who took economics in college, and who hated it. If only they had started with Cowen and Tabarrok. Modern Principles is one of the few books that will immerse students into the elegance and beauty of our science, and which will create a lifelong love of economics.

Lee E. Ohanian,
Professor of Economics, UCLA
and Senior Fellow, Hoover Institution
Stanford University

Cowen and Tabarrok’s Modern Principles and the accompanying videos make for an unbeatable combination for both students and instructors. The intuition is clear and the examples—both contemporary and interesting—draw students into the material. This text is a fantastic tool for showing students how economics impacts their daily lives in choices great and small. My students come to class with questions, eager to discuss in more detail the concepts covered in the videos and text.

Abigail Hall,
Department of Economics,
University of Tampa

I have tried multiple textbooks over the last ten years. None of them engage my students as well as Modern Principles by Cowen and Tabarrok. The writing is fresh and lively. The videos are clear and entertaining. It is a book that attracts students who will never take another economics course and excites economics majors.

Randy T. Simmons,
Professor of Political Economy,
Utah State University

Here’s a cool video explaining some of the features of Modern Principles.

Gender pay gap observation

…according to a new analysis of 2,000 communities by a market research company, in 147 out of 150 of the biggest cities in the U.S., the median full-time salaries of young women are 8% higher than those of the guys in their peer group. In two cities, Atlanta and Memphis, those women are making about 20% more. This squares with earlier research from Queens College, New York, that had suggested that this was happening in major metropolises. But the new study suggests that the gap is bigger than previously thought, with young women in New York City, Los Angeles and San Diego making 17%, 12% and 15% more than their male peers, respectively. And it also holds true even in reasonably small areas like the Raleigh-Durham region and Charlotte in North Carolina (both 14% more), and Jacksonville, Fla. (6%).

The figures come from James Chung of Reach Advisors, who has spent more than a year analyzing data from the Census Bureau’s American Community Survey. He attributes the earnings reversal overwhelmingly to one factor: education. For every two guys who graduate from college or get a higher degree, three women do. This is almost the exact opposite of the graduation ratio that existed when the baby boomers entered college. Studies have consistently shown that a college degree pays off in much higher wages over a lifetime, and even in many cases for entry-level positions. “These women haven’t just caught up with the guys,” says Chung. “In many cities, they’re clocking them.”

Chung also claims that, as far as women’s pay is concerned, not all cities are created equal. Having pulled data on 2,000 communities and cross-referenced the demographic information with the wage-gap figures, he found that the cities where women earned more than men had at least one of three characteristics. Some, like New York City or Los Angeles, had primary local industries that were knowledge-based. Others were manufacturing towns whose industries had shrunk, especially smaller ones like Erie, Pa., or Terre Haute, Ind. Still others, like Miami or Monroe, La., had a majority minority population. (Hispanic and black women are twice as likely to graduate from college as their male peers.)

That is not the final word, but here is more from Time magazine.

Could John McCain have been elected president?

If the supply of mortgage credit had not contracted from 2004 to 2008, McCain would have received half the votes needed in nine crucial swing states to reverse the outcome of the election. The effect on voting in these swing states from local contractions in mortgage credit supply was five times as important as the increase in the unemployment rate; if unemployment had not increased from 2004 to 2008, that improvement in local labor markets would only have given McCain only 9% of the votes needed to win the nine crucial swing states.

Here is more from Alexis Antoniades and Charles W. Calomiris.

The new Census study on the minimum wage

By Kevin Rins and John Voorheis, this is one of the most thorough and detailed studies to date.  Here is one excerpt:

…we find that raising the minimum wage increases earnings growth at the bottom of the distribution, and those effects persist and indeed grow in magnitude over several years. This finding is robust to a variety of specifications, including alternatives commonly used in the literature on employment effects of the minimum wage.

How does their work differ from other treatments?:

Most public datasets commonly used in the minimum wage literature have limited ability to address how earnings growth responds to minimum wage increases because they are either composed of repeated cross-sections or have panel dimensions that cover relatively limited periods of time.

My personal view still is that the next generation of firms likely will create fewer jobs, and aggregate output and employment will be lower.  I would rather look for measures that boost both efficiency and equity, and not just along the shorter time horizons.  But on the pro-minimum wage side, you should consider that those immediately affected by the wage hike do seem better off, and their higher income in the meantime may itself bring some efficiency-enhancing gains.

Sentences about dairy

But there has never been a culture more dependent on milk than the desert nomads known as the Bedouins.

And originally, ice cream was only for aristocrats.

Others [in 18th century France] called ice cream fromage.

Jefferson liked to serve ice cream on sponge cake with a lightly baked meringue on top.

The United States became the ice cream country.

Fidel Castro took a personal interest in developing Cuban ice cream, and he was determined that Cuba would make better ice cream than the United States.

Ice cream is in general more profitable than milk, but ice cream cones are one of the more profitable ways to sell ice cream.

Those are all from the newly forthcoming and entertaining Mark Kurlansky book Milk: A 10,000 Year Food Fracas.

Regression Discontinuity Works

Robert Lalonde’s famous 1986 paper, Evaluating the Econometric Evaluations of Training Programs with Experimental Data, shattered the confidence of the profession by showing that the advanced econometric techniques of the day, by and large, failed to recover the results from a randomized controlled trial. The profession has been busy since that time developing new methods and techniques.

A new paper compares regression discontinuity with RCTs and RD works very well.

Theory predicts that regression discontinuity (RD) provides valid causal inference at the cutoff score that determines treatment assignment. One purpose of this paper is to test RD’s internal validity across 15 studies. Each of them assesses the correspondence between causal estimates from an RD study and a randomized control trial (RCT) when the estimates are made at the same cutoff point where they should not differ asymptotically. However, statistical error, imperfect design implementation, and a plethora of different possible analysis options, mean that they might nonetheless differ. We test whether they do, assuming that the bias potential is greater with RDs than RCTs. A second purpose of this paper is to investigate the external validity of RD by exploring how the size of the bias estimates varies across the 15 studies, for they differ in their settings, interventions, analyses, and implementation details. Both Bayesian and frequentist meta‐analysis methods show that the RD bias is below 0.01 standard deviations on average, indicating RD’s high internal validity. When the study‐specific estimates are shrunken to capitalize on the information the other studies provide, all the RD causal estimates fall within 0.07 standard deviations of their RCT counterparts, now indicating high external validity. With unshrunken estimates, the mean RD bias is still essentially zero, but the distribution of RD bias estimates is less tight, especially with smaller samples and when parametric RD analyses are used.

Do earthquakes make men more risk tolerant?

We investigate whether individuals’ risk preferences change after experiencing a natural disaster, specifically, the 2011 Great East Japan Earthquake. Exploiting the panels of nationally representative surveys on risk preferences, we find that men who experienced greater intensity of the earthquake became more risk tolerant a year after the Earthquake. Interestingly, the effects on men’s risk preferences are persistent even five years after the Earthquake at almost the same magnitude as those shortly after the Earthquake. Furthermore, these men gamble more, which is consistent with the direction of changes in risk preferences. We find no such pattern for women.

That is from a newly published paper by Chie Hanaoka, Hitoshi Shigeoka, and Yasutora Watanabe.  What else will have this effect?

Those old service sector jobs (Ansichten eines Clowns)

At first they came for the clowns, and I said nothing:

Then McDonald’s terminated its regional Ronald McDonald program at the end of last year, though it’s vague about the reasons for the move…

One former Ronald, who believes their number was as high as 300 nationally, said he earned $64,000 in 2016, plus a $2,000 expense account, a car, and health and dental insurance, a fortune in clowning.

Now, that sort of income and security may be disappearing.

“Young people have not been excited by clowns,” says Richard “Junior” Snowberg, a World Clown Association founder and a retired professor [sic]. “They’re more excited by entertainment on screens.”

The World Clown Association has 2,400 members, about half its peak membership in the 1990s.

I believe roboclowns are not to blame, nor is it trade with China:

“I’ve been told that ‘you can’t come to the hospital. You’ll scare people.’ That was really heartbreaking,” says veteran Tricia “Pricilla Mooseburger” Manuel, 56, of Maple Lake, Minn. “It’s diminished my income. The damage is done in so many respects. There’s a whole generation that, when they think of a clown, they think of something scary.”

Though, Manuel adds, “people still love us in nursing homes.”

That is from Karen Heller at The Washington Post, via Michael Rosenwald and Mark Thorson.

Sunday assorted links