Category Archives: economics

An introduction to Richard Thaler, winner of this year’s Nobel Prize for Economics

Often times it is hard to appreciate the work of Nobel Prize winners, including those in Economics. Thaler is not one of those people. His work is very approachable for laypeople, and the benefits of his work is obvious.

Here’s one example, of how his work led to better results for people in terms of pensions.

Youtube is a great source of videos on Thaler. If you want to get started understanding what is behind his thinking, you can start there.
In addition, the New York Times covers his award winning here and it is another good introduction. Finally, here is a piece in the Times that Thaler wrote himself, on the power of Nudges. If you do anything, read that.

Good to see him win.

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A cautionary tale of what low taxes and libertarianism brings

Amish women on the beach
There can be many lessons that can be drawn from the story here: The Rise and Fall of the ‘Freest Little City in Texas’

The ones I drew were

  • You get the society you pay for. In this case, the people of this part of Texas were unwilling to pay for anything, and they got nothing in return. It’s hard to believe this even needs to be said in this age, but apparently it does.
  • Even basic services cost money. That money comes from taxes or service fees.
  • Those services are expensive to pay for individually: it makes much more sense for people to pool their money (in the form of taxes),  to make it cheaper overall for everyone.
  • Taxes are only part of what makes a society, but a society that is based on money and that does not have taxes is no society at all.
  • Only a society that does not depend on money can get away without taxes. Typically those a tightly knit,  cohesive, pre-money communities that depend heavily on sharing and barter. These communities are more socialist or communist in nature as opposed to libertarian. More like an Amish community or hippie commune or a religious community of some form.
  • The best way to have a libertarian society is to have one of great abundance. Scarcity requires people to share and work together if they want to survive.

It’s a good story. Read it for yourself and draw your own conclusions.

(Photo above is Amish women on the beach)

Wages, Nash equilibrium, and the productivity paradox: a small theory of my own

Economists write a lot about the mystery of why productivity is not increasing, with pieces such as this. There’s even a section on it in Wikipedia.

My own theory is that limited wage increases is also limiting the benefits of productivity aids. How I think this works is so:

  1. Employers wont raise wages for employees.
  2. Employers deploy technology that should result in productivity gains.
  3. Employees take the technology deployed and use them to decrease their efforts.
  4. The employer sees some productivity gains and assumes that is the limit for the technology deployed.

Look at this chart:

In much of the world economy, all the job growth is in the services sector (green line), not the manufacturing sector (red line). Achieving productivity gains in the manufacturing sector is more straightforward: replace people with robots and you are done. It’s not as straightforward as that in the services sector. In some services sector jobs, it is not possible to decrease effort without it being visible. But in many services sector jobs, it is. If employees cannot improve their lives by making more money, they may decide to do so by working less and working right up to the point where they don’t lose their job.

If you look at employment as a game, then we currently have a Nash equilibrium where the employees know that they won’t get paid more working for the same company, because that is the best strategy for the company. Therefore the best strategy for the employee is to minimize their effort without getting fired and while showing little if any productivity gains.

That’s to me is key reason why I think we have the productivity paradox.

I would add that the reason this is a paradox is because no one wants to admit that this is happening. It seems like a failure on both the employers and the employees side. The employee wants to be seen as a good worker and the employer doesn’t want to admit it could be paying more. Instead technology is brought in to solve an organizational problem, which is something technology cannot do.

(Chart from Business Insider).

 

 

Foodism and the problem with home-cooked meals

I was prepared to argue with this article in Vox from some time ago: The problem with home-cooked meals , because I am a big proponent of such meals.  However, the closer I read it, I think the main issue I have with it is the title. If it was titled “The difficulties in preparing home-cooked meals”, I would have been more receptive. Read the article. If you are a foodist like myself, it might seem hard to understand at first that people have difficulties with home-cooked meals, but like many things, the difficulties arise from lack of time, knowledge, and resources (money but also access to good food, even if you have money).

I believe that there are a number of ways to address those difficulties. First, I think city governments need to treat access to food the same way they treat access to other things such as transportation, water, parks and even sunlight. If housing doesn’t have access to water or electricity or transportation, then developers shouldn’t be allowed to build it and people should not be expected to move there. Access to good food should be part of that set of restrictions.

Second, we need to better educate people on how to prepare food.  Too much of our education system is spent on academic topics. Kids should be taught a wide range of subjects, and one of those should be how to prepare food no matter how much time or a budget you have. (They should also be taught how to manage finances, how to do basic home repairs, and how to deal with personal difficulties, among other topics.) There is a wealth of information available on food preparation, but often to me it seems aimed at foodists and is aspirational. There’s nothing wrong with aspiring to make good food. In addition, though, people should learn how to make straightforward nutritious food, with anything from 2 ingredients on up, with or without a recipe, in 2 minutes or over 2 days.

Third, we need to change our emphasis on a form of eating. There is a belief that some North Americans have that home cooked meals should be prepared and eaten a certain way. Often this certain way involves 30 minutes to an hour of food preparation followed by an equal amount of time eating it. Culturally that may have been the way it was done, but there is nothing that says we must continue to eat that way. You should be able to prepare and eat good meals with the resources you have.  If that means a 5 minute preparation and a 5 minute stand up meal, so be it. Better that than 30 minutes spent eating over processed food in a chain restaurant.

Finally, we need a more expansive and less snobby approach to what constitutes good food. If you are a foodist and you want to cook with homemade stock, fresh herbs, wine and hard to source ingredients, and that works for you, that’s great. For most people, if you have limited access to good food, then you can still make good meals with what you have available, and there is no shame in that.  Besides, the social status of ingredients come and go: eat the best you can with what you have, be that a roasted chicken and a salad or a bowl of chunky vegetable soup.

For many people, food is a means to an end: I’m hungry, I eat food, I’m no longer hungry. For others, their life revolves around food. Wherever you fall on that spectrum, having an open mind about how others eat and being open to alternative ways to dealing with food will benefit everyone, including yourself.

(Image is of a ham, painted by Manet.)

P.S. In case you don’t think it is a word, here is the definition of definition of foodism, from the Oxford English Dictionary:  “A keen or exaggerated interest in food, especially in the minute details of the preparation, presentation, and consumption of food.” Therefore people who have foodism are foodists.

 

 

Two interesting pieces on UBI (universal basic income)

There have been many articles written on UBI. (If you don’t know what it is, it’s  universal basic income: a cash payment made to every individual in the country).

Two of the more interesting ones I’ve read are here: The UBI already exists for the 1% – Medium, and this one here (on how India is looking to do it).

UBI is coming. It may take some time though.

Is the FED broken? Some random thoughts.

Is the FED  (Federal Reserve System) broken? If not broken then certainly being strongly tested, as this piece shows to me: The Fed Is Searching for a New Framework. New Minutes Show It Doesn’t Have One Yet. – The New York Times.

Since the start of the Great Recession, the target interest rate has gone from just over 5% to just over 0% and has more or less stayed that way for over half a decade. (See the chart). After a very long pause, the chairwoman of the Federal Reserve has begun the process of raising interest rates,  a process that her predecessors have engaged in over recent decades as they put their own distinctive stamp on the economy. (See A History of Fed Leaders and Interest Rates – The New York Times). Some of them, like Paul Volcker, have been hugely successful in shaping the economy. Others, like Alan Greenspan, also have shaped the economy hugely, but I would add, unsuccessfully. So what should the FED do?

Paul Krugman has his take, here. Perhaps an extreme inflation target is the answer, just like Volcker’s extreme interest rates were the answer for their time. However, I don’t think they are symmetrical, and the goals of a higher inflation target would be dampened down by other forces. Furthermore, the FED and most other central banks seem only capable dealing with tamping down inflation and not so capable when dealing with unemployment.

The Chairwoman is signalling she will be raising rates soon. We should see what the effect is, and how the economy and President Trump and Congress responds. If the economy goes into a recession, that would say to me the FED is broken.  If the economy does not go into a recession, I would say this means the FED still has a limited role in managing the economy. Let’s see.

Uber is reaching an inflection point (and may be reaching a crisis point)

Why? According to Bloomberg:

After touting profitability in the U.S. early this year, the ride-hailing company is said to post second-quarter losses exceeding $100 million.

A main source of the losses: subsidizing Uber drivers. As Christopher Mims commented on Twitter, “So Uber is a giant machine for transferring wealth from venture capitalists to underemployed Americans”. This is both clever and something that can’t go on indefinitely. It makes clearer to me now why Uber is keen to make self driving cars work. Sure, Uber could charge more for cabs or pay cab drivers less, but in either case, they risk losing market share.

The losses this quarter certainly are an inflection point. It remains to be see if it is a crisis point. That will depend on how the VCs see this loss. I believe they will have patience and they haven’t reached a crisis point yet. Uber should hope that their investors have the same patience that Amazon’s investors have.

For the rest of the story, see: Uber Loses at Least $1.2 Billion in First Half of 2016 – Bloomberg (Image above via the Bloomberg article)