EclectEcon

Liquor in the Grocery Stores? in Ontario??

When I lived in California or Hawaii or Michigan, I could buy wine, beer, and liquor in the grocery store, off the shelf. It is convenient and inexpensive. Now, Ontario [I mean the province in Canada, not the city in California] is taking very small baby steps in that direction.

The Ontario government is pushing ahead with a plan to put liquor kiosks in grocery stores, a bid to shake up the way alcohol is sold in the province and head off the champions of privatization ahead of a possible spring election.

It won't be much of a "shake up", believe me. Many large grocers already have kiosks that sell Canadian wine. Having additional kiosks to sell liquor is a small step. But this is nowhere near the much freer markets in other jurisdictions.

• The kiosks would be required to use only LCBO [Liquor Control Board of Ontario] employees. It is their union which has led the fight against privatization of liquor sales in Ontario, and this is a back-handed sell-out to the union by the provincial liberal party. This connection between the gubmnt and the LCBO union is likely one of the reasons these kiosks have been approved but that we will nothave beer and wine sales at convenience stores in Ontario.
• The prices would still be set by the LCBO. The prices for liquor here in Ontario are high, but not as high as they are in Saskatchewan, where gubmnt control of liquor sales is even more serious.
• The kiosk sales would have to be separate from the grocery sales (and quite likely separate from the wine kiosks, whose employees do not receive the pay and benefits paid to LCBO employees). A shopper would not be able to put a bottle of wine, some scotch, and a six-pack in the shopping cart along with produce, meat, frozen foods, etc. and pay for them all at once at the checkout.
• The gubmnt would control how many kiosks could be created and in which stores. This plan should create considerable additional opportunity to extort bribes attract campaign contributions from grocery retailers.

The only benefit I see from the change (and it is not really a small one despite my scorn for the plan) is that people who are happy to buy the types and brands of liquor sold at the kiosks will be saved an extra trip to an LCBO outlet. I imagine, however, that the kiosks will be expected to favour Ontario and Canadian products primarily, if not exclusively, much as the wine kiosks already do.

And those of us like Ms Eclectic and me, who like single-malt scotches, will almost surely be out of luck.

Related articles

Chateauneuf-du-Pape

The Continuing War on the "War on Drugs"

Wouldn't you think we had learned enough during prohibition? Like this person, I'm a bit of a prude regarding drug use and alcohol abuse, but also like this person I favour dismantling the so-called "war on drugs" as expeditiously as possible.

 Even though I’m personally a prude on the issue of drugs, that doesn’t stop me from opposing the Drug War, both for moral and practical reasons. After all, how can any sensible and decent person want laws that produce these outrageous results?

The DEA trying to confiscate a commercial building because a tenant sold some marijuana.

The government seeking to steal a hotel because some guests sold some marijuana.

Cops raiding an organic nursery and seizing blackberry bushes.

The feds grabbing cash from innocent bystanders in legal cases.

The government arresting a grandmother for buying cold medicine.

Cops entrapping an autistic teen to boost their arrest numbers.

And don’t forget the misguided War on Drugs is also why we have costly, intrusive, and ineffectiveanti-money laundering laws, which result in other outrages, such as the government arbitrarily stealing money from small business owners.

Though not every enforcement action leads to grotesque abuse of human rights, sometimes the Drug War merely exposes the stupidity of government.

Economists have long been critical of the "War on Drugs", both on ethical grounds and on expediancy grounds. Over 40 years ago, Milton Friedman argued against the so-called war soon after it was announced. And he made his case very clearly in this 1998 piece that appeared in the NYTimes. His conclusion:

Can any policy, however high-minded, be moral if it leads to widespread corruption, imprisons so many, has so racist an effect, destroys our inner cities, wreaks havoc on misguided and vulnerable individuals and brings death and destruction to foreign countries?

The Sad Chronology of Too Many Price-Control Programmes

Elitist interventionists are convinced they can amend the workings of the market to make lives better for at least a targetted segment of the population. They are almost always wrong. From Cafe Hayek,

... from page 268 of Armen Alchian’s profound 1976 essay “Problems of Rising Prices,” as it is reprinted in Vol. 1 of The Collected Works of Armen A. Alchian(2006) (original emphasis):

The so-called shortage of gasoline and energy in the United States [during the 1970s] was precisely and only such a political attack.  It could not have been brought about more cleverly and deceitfully even if the politically ambitious had explicitly written the script.  Inflate the money stock; when prices rise, impose price controls to correct the situation.  These controls lead to shortages which “require” government intervention to assure appropriate use of the limited supply and to allocate it and even to control and nationalize the production of energy.  The powers of political authorities are increased; the open society is suppressed.

Brilliant. And it should be a fair warning for today and the future.

Taxes, Incentives, and Cigarettes: People Respond to Incentives

There is some fairly compelling evidence that when cigarette prices go up, there is a slight decline in smoking, especially among teenagers. At the same time, though, if the price of cigarettes is raised because of an increase in the excise tax imposed on cigarettes, recorded sales of cigarettes drop off considerably. Sales decline much more than actual smoking declines. Here is what happens.

When one jurisdiction raises its excise tax on cigarettes, many people for whom arbitrage is inexpensive buy their cigarettes elsewhere --- in a neighbouring city or state. Failing that, if the price differential is sufficient to provide adequate rewards for transportation and risk, people will smuggle cigarettes from the low-tax jurisdictions to the higher-tax jurisdictions. Here is a graph of the effect, via the Tax Foundation:

To be honest, I expected the dots to fall closer to the line. The imprecision of the correlation should not, however, detract from the overall effect that "people respond to incentives." Higher excise taxes create an increased incentive for smuggling (and/or counterfeit tax stamps).

In  Ontario we experience a variant of this relationship. When the provincial gubmnt raises the tax on cigarettes, more non-native smokers have an incentive to head to the reserves to buy their cigarettes, where cigarettes can often be found for sale at much lower prices because aboriginal Canadians are allowed to buy tobacco products tax free.  [see this, for some details]

The result in all cases, though, is that the higher tax has less of an impact on smoking than would be indicated from legal sales, and the gubmnt policy has the effect of inducing more economic activity into black-market illegal activities.

A Serious Problem with Big Gubmnt

The bigger the gubmnt budget, the greater is the incentive for various vested interests to use scarce resources for lobbying. This is doubly inefficient:

• Lobbying itself is a diversion of scarce resources away from production, trying to effect a redistribution of the output instead.
• Lobbying tends to be a negative sum game. The more some interests spend on lobbying, the more their rivals must spend to counter those efforts. The effect is that even more scarce resources are diverted away from production and into redistribution attempts.

Lobbying is effective because people, including politicians, respond to incentives. But the problem is not lobbying per se. The problem is that big gubmnt, with its big budgets, creates more of an incentive for special interests to engage in lobbying. From this [via MA]:

For all intents and purposes, big government in Washington has created a niche market for insiders who learn the specialized skill of transferring money from those who earned it to those with political pull. It's the same across the Western world...

Washington is rich because government is big and the beneficiaries of this system are enjoying their status as America’s new gilded class. It’s even gotten to the point where children and other family members also put their hands in the cookie jar.

The column continues with numerous examples of how relatives of politicians are able to use their connections to enhance their own wealth.

The solution? Smaller gubmnt. That would reduce the payoffs to lobbying and hence reduce the extent of cronyism.

How to Beat the Market: Track the Transactions of SEC Employees

I don't know how they obtained the data necessary for this study, but the conclusions should not be surprising no matter how disappointing/disgusting they are. SEC employees have inside information, and apparently they use it to their advantage.

Goodbye SAC Capital. Hello SEC Capital.

A new study released by Rajgopal of Emory and White of Georgia State confirms what most have long known: SEC employees are immaculate stock pickers and "that a hedge portfolio that goes long on SEC employees’ buys and short on SEC employees’ sells earns positive and economically significant abnormal returns of (i) about 4% per year for all securities in general; and (ii) about 8.5% in U.S. common stocks in particular." But those wily regulators are tricky indeed: instead of frontrunning good news and outperforming on the upside, the "abnormal returns stem not from the buys but from the sale of stock ahead of a decline in stock prices." In other words, in a market in which hedge funds have given up on shorting stock, the best outperformer is none other than the very entity that is supposed to regulate and root out illicit market activity!

From the study's summary:

We use a new data set obtained via a Freedom of Information Act request to investigate the trading strategies of the employees of the Securities and Exchange Commission (SEC). We find that a hedge portfolio that goes long on SEC employees’ buys and short on SEC employees’ sells earns positive and economically significant abnormal returns of (i) about 4% per year for all securities in general; and (ii) about 8.5% in U.S. common stocks in particular. The abnormal returns stem not from the buys but from the sale of stock ahead of a decline in stock prices. We find that at least some of these SEC employee trading profits are information based, as they tend to divest (i) in the run-up to SEC enforcement actions; and (ii) in the interim period between a corporate insider’s paper-based filing of the sale of restricted stock with the SEC and the appearance of the electronic record of such sale online on EDGAR. These results raise questions about potential rent seeking activities of the regulator’s employees.

No foolin'. Public-spirited gubmnt employees just getting a little for themselves while they do good.

For more details and a partial explanation, see this in WaPo.

How Many Sociology Majors Does It Take to Flip a Burger? Fewer Every Year

Some years ago, when I was explaining to a class of introductory economics students that a rise in the minimum wage would reduce the quantity demanded of unskilled labour, one student said, "But my sociology prof says this is wrong. He says it will still take the same number of people to flip burgers no matter what."

I pointed out that capital-labour substitution doesn't have to take place at a fast-food emporium. Instead, the rise in the minimum wage would make quick-frozen mass-produced meals in large grocery stores more attractive, leading to less demand for fast food from places like McDonald's or Burger King, ceteris paribus.

I also pointed out that technology, even in the fast-food industry, has changed with more capital substituting for labour. Increasingly food is being prepared in an industrial setting with large amounts of capital and substantial economies of scale. In economics jargon, the production function for fast-food is not fixed-co-efficients.

And now there's this.

Robot hamburger factory makes 360 Gourmet Burgers every hour for gourmet burgers at fast food prices - meanwhile fast food human workers demonstrate for higher wages ...

It does everything employees can do except better:

* it slices toppings like tomatoes and pickles immediately before it places the slice onto your burger, giving you the freshest burger possible.

* their next revision will offer custom meat grinds for every single customer. Want a patty with 1/3 pork and 2/3 bison ground to order? No problem.

* Also, our next revision will use gourmet cooking techniques never before used in a fast food restaurant, giving the patty the perfect char but keeping in all the juices.

* it’s more consistent, more sanitary, and can produce ~360 hamburgers per hour.

The labor savings allow a restaurant to spend approximately twice as much on high quality ingredients and the gourmet cooking techniques make the ingredients taste that much better.

They will launch the first restaurant chain that profitably sells gourmet hamburgers at fast food prices.

Their current device can pay for itself in less than one year, making equipment sales a second path for Momentum Machines.

And for more details, see this [via Jabber]

Smartphone Theft

I have not had my smartphone stolen, but I know several people who have.

In one case, the person was walking in a European city with his suitcase in one hand, holding his phone in the other hand texting with his thumb (i.e., he did not have a tight grip on the phone). Someone just ran by and grabbed it. My friend couldn't run fast while carrying his suitcase, and he didn't want to set the suitcase down to chase the thief.

In another case, someone left her smartphone on a school desk. She wandered away, and when she returned, it was gone.

Here is one other relevant incident not involving smartphone theft: The only time I have ever been pick-pocketed was in Madrid. In preparation for traveling there, I had read warnings about pickpockets, and so I had my passport and wallet in my front pockets and had my hands on top of them. But while I was in a crowded market, someone stole my transit pass from my rear pocket.

These three incidents all highlight the advice in this article [via MA]:

One of the best ways to prevent smartphone theft is to keep an alert hand on the device at all times. Don't loosely hold your smartphone as you lollygag down the sidewalk. Keep a firm grip and keep it close to your body. Better yet, leave it concealed in an interior pocket.

I don't always follow this advice. Often, while returning from theatre or music rehearsals late at night, I walk through one of the dodgier parts of downtown, texting or checking my email. I do keep a firm grip on the phone, I don't "lollygag down this sidewalk" at those times, and I tend to put it in a front pocket at times when I feel wary of my surroundings, but I could probably use more care in those situations.

But here is some additional good advice about things to do now, before the phone is stolen:

In case of theft, you'll want to know your smartphone's serial number and model number. Both are usually listed under the "settings" tab or imprinted on the back of the device. Importantly, smartphones also have a unique device identification number, known as an International Mobile Equipment Identifier (IMEI).

The IMEI is a 15- to 17-digit numerical code assigned to each smartphone by manufacturers. It allows carriers to remotely disable your smartphone when you contact them [source: MPDC].

The carrier can also enter your smartphone's IMEI into a national database that tracks stolen smartphones. All major carriers in the U.S. participate in this database, as do a few international carriers. This database feeds into the Global System for Mobile (GSM) and Universal Mobile Telecommunications Service networks [source: Rouse].

To learn your smartphone's IMEI, dial *#06# and the number will appear on the screen. If your phone is an older model, this may not work. However, you can also turn your phone off, remove the battery and record the IMEI under the label. Be sure to keep the information in a different location than your smartphone [source: Wollan].

You should also install a tracking app. For iPhones, you can try Apple's Find My iPhone. Or, if you have iOS 7 installed on your iPhone, you can remotely launch Activation Lock if your phone is stolen. This technology prevents thieves from erasing your phone's data or disabling location apps. It also prevents thieves from restoring or reactivating your smartphone [source: Friedman]. For Android smartphones, there are several third-party apps including Where's My Droid and Lookout [source: Wollan].

If your smart phone is stolen, call the police and give them the serial and IMEI numbers and any locations identified by your phone's tracking app.

Efficiency, Borrowing Items from the Lost & Found, and Theft

Last summer I wrote a short blog post about borrowing things like umbrellas or sweaters from the Lost & Found. I lamented that due to our socialization we feel reluctant to do this but instead we inventory these things for our own personal use.

I was not suggesting that people should borrow things from the Lost & Found, especially not given what appear to be the extant morality systems under which most of us operate. Doing so would at the very least seem bad form to most people.

And I certainly was not recommending that people just take things from the Lost & Found. But apparently at Heathrow Airport, nine employees decided that some of the items in the Lost & Found were sufficiently valuable or attractive that they should just take the items rather than let the loot go to auction for charity or [horrors!] be retrieved by the original owners [ht MA].

Nine members of staff at Heathrow Airport have been arrested on suspicion of stealing items from lost property, police have confirmed.

The suspects, six men and three women, are accused of being involved in 43 separate thefts, between May and September this year.

Apparently all nine of the suspects made bail the next day, but I have not been able to learn what has happened in any of the cases.

This news item leads me to think of a couple of things

• Envy is an important force in directing human action. I can readily imagine some employees at Heathrow justifying their actions with, "Well, it was just going to go to charity anyway, so I might as well have it." In fact, I can recall several incidents from my past when people took things from me that I had been planning to give away, using precisely that justification: "You were planning to give it away anyway...."
• If it were acceptable to borrow things from the Lost & Found (e.g. umbrellas or sweaters), how many "borrowed" items would be returned for others to use? One of the major problems with common-property goods (which, I guess, is what they would be) is that people try to possess them for their own use or over-exploit them. And do you think borrowers would be as careful with them or devote much to the maintenance of them? Examples abound showing that we tend not to.

Imagine: you lose an unlocked smartphone. I don't know about you, but even if I knew I wouldn't get it back, I would much rather it was sold at auction with the proceeds going to charity than that some airport employee take it.

Technology Saves Baby Jesus

I guess it shouldn't surprise me, but apparently there are numerous thefts of baby Jesus from nativity scenes. Video surveillance has probably deterred some of the potential thefts, and so have fences around the scenes. Now some churches are resorting to using built-in GPS trackers to locate and recover the stolen baby Jesus [ht MA].

Each year, Baby Jesus figurines are stolen from nativity scenes across the country. Now, church owners are fighting back.

A GPS device is put inside the doll to prevent theft.

"And the beauty of this is it really works and it's simple to use,” said Alan Czyzewski, Parishioner at St. Ambrose Church in New Jersey.

Brickhouse Securities gives out free GPS devices to qualified religious institutions. Then they track the movements.

"We then monitor it from our cloud-based mapping system, and set up alerts so that they'll get a text message or an e-mail if Baby Jesus is in motion,” said Todd Morris, CEO of Brickhouse Securities.

If the motion is detected early enough, the theft can be prevented, as in, "Hey, what are you doing there? Put the baby Jesus back!"

Otherwise, the figurine can be tracked and located more often than not.

What are the odds alcohol is involved in the thefts?

What Is the Price Elasticity of Demand for Newly Published Books?

When books are newly published (almost always in hardcover editions), the sticker prices are quite high. Some retailers, such as Walmart, Costco, Chapters, Barnes & Noble, and Amazon discount these titles heavily, sometimes as much as 30-40%. They do this not because they love consumers, and not because they love book readers, but because they expect doing so will increase their overall profits.

In the process, these deep discounts mean that smaller bookstores with smaller volume and higher per-unit costs find it difficult to compete. Slowly the smaller bookstores that specialized in customer browsing and knowledgeable staff are being competed out of business.

Some people find this form of creative destruction sad. Others see it as a spur to innovation and new forms of growth. But simply put, the smaller bookstores are being out-competed because they are inefficient compared with the large firms that offer mega discounts. In part they are being out-competed because they offer a service (browsing and knowledge -- see this) for which they cannot effectively charge a price. But in part they just do not have the sales volume required to cover such discounting.

The gubmnt of Quebec is trying to forestall the tide of competition by prohibiting deep discounts on newly published books.

Specifically, retailers — online, digital and traditional — would not be allowed to offer discounts to Quebecers greater than 10 per cent on new books for the first nine months of their release.

Their goal is to protect the less efficient smaller bookstores. The effect, however, is to reduce the quantity demanded of new books in Quebec bookstores, large or small.

Unless Quebec can somehow interfere with the mails, people in Quebec can and will order new books from elsewhere. Also, sales of ebooks cannot easily be limited or controlled. And, of course, many people will wait out the 9-month period of the price controls and buy the book for a lower price later.

How big might these substitution effects be?

I'm expecting that sales of new books in Quebec will fall by roughly 20% during the first year after this law is imposed. Most of that drop in sales will occur at the big-box stores, of course, but I really doubt that smaller bookstores will have a noticeable increase in their own sales. Rather than leave the big-box or online retailers for the smaller, protected, stores, people will either buy the books at the big-box stores anyway, shop online, or defer their purchases.

The result will be that fewer new books will be sold in Quebec, especially to price-conscious consumers/readers. This sounds like a law designed to protect inefficient businesses, but it will not help them much, if at all, and meanwhile it will hurt consumers.

Bullying in the NFL

Hazing seems to be somewhat common in sports at all levels. What happened to Jonathan Martin was more than hazing. It was bullying.

What are the odds that he will sue Incognito, the Dolphins, and the NFL?  I think the odds are pretty high that he will sue them. But I doubt if the suit will come to trial; I expect there will be a non-disclosure-type settlement. The NFL doesn't want this to go to trial.

Update: a FaceBook friend [Barb] suggests a better term for what happened to Martin is "harassment". Good distinction.

Also see this, by Russ Roberts, about "the code" in the NFL (and other sports).

A Frightening Thought about Saving for Retirement

Gabriel drew this to my attention. It is a scandalous confiscation in an attempt to relieve sovereign debt constraints.

Poland Confiscates Half Of Private Pension Funds To "Cut" Sovereign Debt Load

On Wednesday, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.  The funds would effectively be left with only the equities portions of their assets, even this would be depleted, and there will be uncertainty about the number of new savers joining.

But why is Poland engaging in behavior that will ultimately be disastrous to future capital allocation in non-public pension funds (the type that can at least on paper generate some returns as opposed to "public" funds which are guaranteed to lose)? After all, this is a last ditch step which no rational person would engage in unless there were no other option. Simple: there were no other option, and the driver is the same reason the world everywhere else is broke too - too much debt.

By shifting some assets from the private funds into ZUS, the government can book those assets on the state balance sheet to offset public debt, giving it more scope to borrow and spend. Finance Minister Jacek Rostowski said the changes will reduce public debt by about eight percent of GDP. This in turn, he said, would allow the lowering of two thresholds that deter the government from allowing debt to raise over 50 percent, and then 55 percent, of GDP. Public debt last year stood at 52.7 percent of GDP, according to the government's own calculations.

To summarize:

1. Government has too much debt to issue more debt
2. Government nationalizes private pension funds making their debt holdings an "asset" and commingles with other public assets
3. New confiscated assets net out sovereign debt liability, lowering the debt/GDP ratio
4. Debt/GDP drops below threshold, government can issue more sovereign debt

Ok, so it's Poland, not England or the US or Canada. Nevertheless, it highlights a concern: why save for my retirement if those savings are likely to be taxed at high rates to support pensions for those who don't save? It's like the old fable about the Ant and the Grasshopper.

Another Tribute to Ronald Coase

From The Economist, with some clear explanations of two of Coase's major contributions. 

About "the Nature of the Firm"

As he watched American car plants in action, he realised that the existence of the firm compensated for a critical flaw in the price-setting mechanism. In the real world it is often costly for buyer and seller to arrive at a final price. “Transaction costs”, like the need to negotiate or draw up contracts, prevent the price mechanism from working smoothly. Firms would exist, he reckoned, when it was cheaper and easier to co-ordinate activity within a centrally planned organisation than to spell out contract details for every step in the production process.

And about "The Problem of Social Cost"

Mr Coase himself recognised life is more complex than theory. Neither private bargaining nor a pollution tax can make a market perfectly efficient given transaction costs like the expense of monitoring a factory’s emissions.

Ronald Coase

Ronald Coase was another of my heroes in economics. He was a gentleman,  and he was brilliant.

His writing was obtuse and laboured. I first read his two classic articles about 1) the nature of the firm and 2) the problem of social cost when I was in graduate school in the late 1960s, and it was a struggle. 

1. "The Nature of the Firm" was a brilliant piece about why firms exist. One of the answers provide by Coase (in many more words than this and with much more subtlety) was that if transaction costs for making deals in the market are high, then it is more efficient for there to be firms to carry out some economic actions. When I read it, I didn't grasp the importance of the article; I thought it was trivial and silly. The major thrust and importance of the article didn't dawn on me until much later in my career, when I understood the importance of transaction costs a bit better, even though much of my early research had been on a related topic.
2. I absolutely hated "The Problem of Social Costs" when I first read it. I was actually offended that someone might even consider examining the possibility that a pollutee could pay a polluter to stop polluting. And it was SO long and painful to read. Only when I re-read the paper 15 years later did I understand and appreciate the elegance of the paper and its examples. Of course understanding the simple propositions of what has come to be known as "the Coase Theorem" makes reading that article so much easier. 

Some personal notes:

• In the early 1980s, we tried to persuade Professor Coase to visit the law and economics workshop at The University of Western Ontario. When I called to invite him, he declined quite apologetically, saying that he really didn't like to travel anymore.
• The year before he won the Nobel Prize in Economics, for some reason I was sent a card from the prize committee asking for my recommendation. I assume a similar card was sent to everyone in the American Economic Association, but I took it seriously and nominated Ronald Coase, noting his contributions in those two articles. It is silly, I know, but I claim partial credit for his having won the award the next year.
• Some years later, when I was president of the Canadian Law and Economics Association, we were discussing who to invite as our keynote speaker. I recall one member of the executive saying, "We should invite Coase. He isn't getting any younger, you know." That was probably about 20 years ago. 
• I have had arguments with people who minimize the importance of the Coase Theorem, pointing out that it is likely nothing more than a restatement of Adam Smith's invisible hand or maybe even a tautology. My reaction, however, is that Coase pointed out the importance of understanding property rights (and their enforcement) and transaction costs. It is when the basic conditions of the Coase Theorem are NOT met that we understand the brilliance of Coase's work. And that has always been fun.

Others will mention other work by Coase. Others will point out that Simon Rottenberg did a version of the Coase Theorem for professional sports before Coase wrote his article. They will be right on both counts. But that doesn't detract from the amazing impact that Coase had on our understanding of economic issues.

Ronald Coase died today. He was 102.

Minimum Wage Laws and Capital-Labour Substitution

Economists generally teach our students that if the minimum wage is increased by law, the effect will be that firms will have an incentive to use more capital and less labour. A colleague in the socionomology department once countered, "How do you use more capital goods and fewer burger flippers?" presumably referring to his own department's graduates. 

He made the mistakes of assuming:

• there is no substitution possible in the use of capital for labour in burger flipping. (i.e., in economics jargon, he assumed that the burger production function has fixed co-efficients)
• there is no substitution possible elsewhere in fast-food burger establishments.
• that if the price of burgers went up, people would not substitute away from burgers.

Capital-Labour Substitution in Burger Production.

Consider what fast-food burger production looked like back in the 1960s vs what it looks like now. We had no microwaves when I worked at one then; rather, burgers were produced on grills and kept warm in bins. We fried burgers in batches of 9, and depending on the expected demand and time of day we would do as many as 54 at a time. Nowadays, burgers are prepared to order with computerized ordering and microwaves to finish them. 

Capital-Labour Substitution Elsewhere in Fast-Food Establishments

This item is what prompted me to write this post [h/t many people on FB, including Kip Esquire]. 

McDonalds recently went on a hiring binge in the U.S., adding 62,000 employees to its roster. The hiring picture doesn't look quite so rosy for Europe, where the fast food chain is drafting 7,000 touch-screen kiosks to handle cashiering duties.

The article also points out that computerized order allows McDonalds to track the orders and collect a lot more data, which they also expect will be valuable. But the point is that this is capital substituting for labour in ways we didn't imagine 20 or 30 years ago. 

Demand Curves for Burgers Are NOT vertical

The implicit assumption behind many incorrect arguments is that when the prices of burgers increase, people will still buy just as many burgers. Not so. 

As the price of burgers rises, some people, some of the time, will substitute away from burgers. The most likely substitutes for burgers are other fast foods, but if wage increases in the fast food industry are generally imposed, then people will substitute away from fast food restaurants to other types of fast food that can be mass-produced with even more capital-labour substitution, e.g. frozen foods from grocery stores: pizzas, pizza pockets, sliders, etc. -- things that can be microwaved quickly at home. The result will be a general substitution away from labour and toward capital in the economy. 

Fortunately, in many North American markets, the legislated minimum wage is near or even below the equilibrium wage rate for York University socionomology graduates unskilled workers, and so these effects are minimal at best. But in other markets the effects are being felt. And in those markets, raising the minimum wage would only make a bad situation worse.

Obama's Promise: We Will Make the Middle Class Worse Off

That's not what he said. But he might as well have. What he says is that the US must take things from the wealthy or high-income people and pay more attention to the middle class and to the poor. Well, the middle class has been harmed by his policies (from the WSJ):

Their explanation: 

Median incomes typically fall during recessions. But the striking fact of the Obama economy is that median real household income has fallen even during the recovery.

While the declines have stabilized over the last two years, incomes are still far below the previous peak located by Sentier of $56,280 in January 2008. No wonder Mr. Obama is now turning once again to his familiar political narrative assailing inequality and blaming everyone else for it. He wants to change the subject from the results on his watch.

The core problem has been Mr. Obama's focus on spreading the wealth rather than creating it.

 

A Perfect Example of The Coase Theorem: a Houston Restaurant Bans Children after 7pm

The Coase Theorem* points out that if property rights are well-defined and easily enforced, what we ordinarily think of as externalities will be internalized. Here is a good example [ht Ms Eclectic]:

A Houston seafood restaurant announced yesterday that it won't allow children eight years old and under during dinner hours, citing complaints from customers.

La Fisheria, owned by Mexican television celebrity chef Aquiles Chavez, posted on its Facebook wall this short message about its new dinner guidelines:

After 7:00 pm, people over eight years old only.

For your understanding,

Thank you.

... Chavez told the Houston Chronicle that the decision wasn't easy to make, nor did his wife agree with it. But he said he received enough complaints from customers about unruly children at dinner hours that it had to be done.

Chavez owns the restaurant and is estimating that the property will be worth more to him if he limits the hours when young children can be there. If he is correct, the reduction in business (after 7pm and earlier from those who are displeased with his policy) will be more than made up for by increased patronage by others after 7pm. 

The poorly behaved children caused a negative externality -- they reduced the satisfaction for others dining there, and neither the children nor their parents compensated the losers. So Chavez internalized the externality. 

Addendum: Ms Eclectic circulated this news item last week and was told by a young mother that sometimes the mother would like to ban her own children from their home dining room during meals.

*The Coase Theorem, as we all know, is named for its discoverer, Professor Theorem

If You Don't Want to Think about the Fiscal Future, Don't Read This

 

We Are All Going to Pension Hell

That is the title of this piece by Megan McCardle. It says, quite simply, that many, many states and municipalities -- far too many -- have promised their employees pensions that they cannot possible raise the funds to pay. 

If you define municipal debt simply as what states and localities have borrowed, the total nationwide comes to about $3 trillion. Nevertheless, these governments actually owe more than twice that much, according to estimates from groups like the States Project. The reason for the discrepancy is that states and localities carry another kind of debt -- promises of retirement benefits to public-sector workers -- and they have radically underfunded the systems that must pay for it. As Boston University Law School professor Jack Michael Beermann wrote recently in the Washington and Lee Law Review, the situation is a “double whammy” for future taxpayers, who not only will have to pay for “the consumption of prior generations” but also will receive “reduced government services” as increased spending on retirement debt crowds out other programs.

There is, in the end, a limit to how tightly past taxpayers, or their representatives, can bind the citizens of the future. It is a genuine tragedy that people who worked hard for the city of Detroit for 30 years should lose pension benefits. But that doesn’t mean that the city of Detroit should turn off the streetlights and get rid of schools and ambulance service in order to fund those lost pensions. And it’s hard to argue that the taxpayers of other places are morally obligated to step in.

But how much should cities have to cut, once the tax base is exhausted? Senior centers? Parades? Maintenance at city parks? We’d better start asking those questions, because pretty soon, we’re going to need to answer them.

It was okay to promise these pensions, but to leave them unfunded was totally irresponsible. And now everyone will be fighting to try to get some taxpayers in other jurisdictions to bail them out, either directly or indirectly. It will be a messy and costly round of rent-seeking.

My advice to individuals? Start saving more for your own retirement. Don't count on gubmnt defined-benefit pensions to be there the way people before you have collected from them.

And where possible, hide your assets. We know that savers will likely have some of their assets taken by law/tax/force to support the people who have received these unfunded pension promises. And knowing that, there's little incentive to save for yourself unless you can save in a way that hides the assets from the gubmnt.

Unpaid or Low-Paid Internships

Unpaid or low-paid internships, during which novitiates gain work experience and a line on the resume, and maybe even learn some useful skills, have come under attack lately. It is argued, and probably correctly, that only the young people who have some other means of support (well-off parents, trust funds, built-up savings, etc.) can afford to take these positions (vs what? working at a fast-food place?). 

Regardless of the merits of the arguments, here is a conditional prediction: 

If unpaid and low-paid internships are banned by law, some firms that currently offer low-paid or unpaid internships will open ancillary training academies that just happen to charge approximately what the legislated salary would be minus whatever the current salary (or zero) happens to be. 

This work around to sidestep a ban on unpaid or low-paid internships would be somewhat more costly than the current situation (or else it would be in place already) but with time and practice it would roughly approximate the current situation.

Some young people looking for work experience and resume lines are willing to work for low salaries, and some firms are willing/eagre to accommodate them. They will find a way to reach mutually beneficial arrangements.

People respond to incentives. 

Tide and Liquidity, Revisited

Remember my recent post about how people steal liquid Tide to trade for drugs?

My son, Adam Smith Palmer, lives in Texas. He sent the following photo of the liquid Tide section in a local store:

The sign says "this section is now being monitored by security." He says there were six such signs in that section but no such signs anywhere else in the store!

 

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Staying Liquid ...but not THIS liquid

Staying Liquid...but not THIS liquid

I have no idea what's going to happen in the financial markets, and I have considerable concerns about (a) the size of the US deficit, (b) the apparent liquidity crunch in China, and (c) continuing inexplicably low long-term interest rates. So I tend to stay fairly liquid (financially and alcohol-wise). 

But going this far to stay liquid perplexed me when I first read about it. [h/t Phil Miller]:

Tide Liquid detergent is such a hot commodity with criminals, it's even called "liquid gold."  Police say sometimes criminals are using Tide in place of cash,  and shoppers FOX 11 talked to aren't surprised at all.

"They're stealing tide and reselling for drugs and stuff like that... which is terrible and its easy to do that," said Jeania Jordan, who uses Tide detergent.

The San Bernardino Police Department confirms Tide, specifically the liquid detergent and the pods are commonly stolen and then traded for small amounts of drugs.

Then drug dealers will take the jugs of detergent and sell it at swap meets or laundry mats for less than in stores. ...

Some shoppers say the high price is exactly why they don't buy Tide, but criminals see it as an opportunity to sell the product for less on the black market.

The San Bernardino Police Department says they've seen the theft of Tide increase over the years, but the problem isn't isolated to that area, it's happening all over Southern California and the Nation.  In fact, laundry detergent is listed as the #2 most stolen item in the nation.

As Phil points out in his posting, it looks as if Tide liquid detergent generally satisfies the necessary conditions for being a medium of exchange, at least for some people. It is tradable, it is a store of value, and it can serve as a unit of account. The main drawback might be that it is not as liquid as currency: you might be able to exchange it for drugs from some dealers, but you can't easily buy groceries with it. So why go through all the hassles? For drug users, it is easier to steal a bunch of Tide and exchange it with drug dealers who then sell it to flea-market intermediaries than it is to steal cash or to steal Tide and resell it themselves. Once again it turns out that transaction and intermediation costs help explain economic behaviour.

Related articles

Tide Thefts Linked To Drug Users Trading Detergent For Crack

Drug Dealers Swapping Crack Cocaine For Stolen Laundry Detergent! Get The Soap Dish HERE!

Price Ceilings on Toilet Paper:Venezuelan Poop-o-nomics

Several weeks ago, the wire services were alive with stories about shortages of toilet paper in Venezuela [see here and here, for example, and this from The Atlantic is particularly fun]. A photo from The Atlantic:

The standard economic story about price ceilings was trotted out: the artificially low price leads to overconsumption (technically, an increase in the quantity demanded) and a reduction in the quantity supplied.

I started wondering about this. I mean, how much more toilet paper would you use if the price were 50% lower [in econ jargon, what is the price elasticity of demand]? I mean: you go, you wipe; are you gonna go more often just because toilet paper is cheap? 

But of course that's not what happens. When the price is low, people use toilet paper for wiping noses, for applying makeup, for padding certain areas, and I'm sure there are many other uses as well. If the price were higher, people would tend to use less for these purposes. And some people would almost surely even use less to wipe. So, just as we teach in introductory economics classes, the demand curve for toilet paper is downward-sloping from left to right.

What about the supply side? If the price of toilet paper is held below equilibrium, firms have less incentive to produce it. But that's not the entire story in Venezuela. Not much toilet paper is produced in Venezuela; instead, it is imported by the gubmnt and sold at low prices. From the BBC,

Venezuela's National Assembly has backed plans to import 39 million rolls of toilet paper, in an effort to relieve a chronic shortage.

Lawmakers voted to approve a $79m credit for the country's ministry of commerce, which will also be used to buy toothpaste and soap.

The products are currently in short supply in Venezuelan shops.

The oil-rich nation relies on imports, but currency controls have restricted its ability to pay for foreign goods.

In other words, the price of toilet paper is held sufficiently low that not much (any?) is produced domestically. Instead it is imported and resold by the gubmnt at a loss. The observed shortage comes about in part because of the price ceiling, but it is also the result of bureaucratic decisions about who gets how much foreign exchange to import what.

Photo from the BBC:

[h/t to JB, my favourite drug dealer, for the term poop-o-nomics.]

Protect Yourself Against Product Misrepresentation: Become a Knowledgeable, Experienced Consumer!

I like scotch. I am a somewhat knowledgeable and quite experienced scotch consumer.

I really doubt if someone could pass off cheap stuff to me even if they put it in a bottle that once held expensive stuff. And I'm quite sure they would not be able to pass off rubbing alcohol with food colouring as scotch of any kind.

But that's because I am an experienced consumer of scotch. This is clearly not only a personal benefit, but a social benefit: so long as there are knowledgeable, experienced Scotch drinkers like Ms Eclectic and me, then bars and pubs will be unlikely to try stunts like these.

State investigators say at least one bar in New Jersey was mixing food dye with rubbing alcohol and serving it as scotch.

That’s one of the details released Thursday about an investigation dubbed “Operation Swill.” Twenty-nine bars and restaurants in the state are accused of putting cheap booze in premium brand liquor bottles and selling it to patrons who thought they were buying the good stuff.

Maybe they could pass off Grant's as Johnny Walker, and I wouldn't know the difference. But quite frankly I wouldn't care because I'm not that fond of either. But let 'em try to pass off Islay Mist as Lagavulin, and I'll be suspicious.

So I figure we are doing the rest of society a favour by being so knowledgeable and experienced, right? Right?

More Evidence of How Unnecessary AntiTrust Cases Often Are: Microsoft

Remember those massive antitrust cases against Microsoft? Think of all the scarce resources devoted to prosecuting Microsoft and used by Microsoft to defend itself. I opposed those cases for two reasons:

1. Microsoft dominated only when their products were better than others. I switched to Word because WordPerfect for Windows was horrible. I switched to Internet Explorer (and then FireFox, Chrome, and Safari) as they got better than Netscape and Mosaic (?).
2. Competition is very powerful. Apple is making huge inroads into the PC market. Google is dominating Microsoft in many areas. And operating systems for tablets and smartphones are leaving Microsoft in an unenviable position of trying to catch up.

Also, see Winners, Losers, and Microsoft by Stan Liebowitz.

According to Motley Fool (though not in these words), these two points are important for understanding the future for Microsoft, its strengths and its weaknesses.

The rise of tablets and smartphones has shaken up the once dominant “Wintel” PC paradigm. In an attempt to re-establish its supremacy, Microsoft (NASDAQ: MSFT) designed Windows 8 to be a hybrid operating system, useful on a variety of platforms.

But Windows 8 adoption has been poor -- consumers seem baffled by the changes. Meanwhile, Windows tablets are selling poorly, and Windows Phone remains in fourth place. Can Microsoft turn things around, or should the company cut and run?

Windows 8 has failed

Microsoft released Windows 8 last October. The new version of Windows was the biggest redesign of the operating system since Windows 95. Unfortunately, consumers seem baffled by the changes, and Microsoft’s hardware partners have been public in their disappointment.

There are two ways to keep industries competitive in the long run without resort to antitrust laws that are often ineffective (and frequently downright anti-competitive themselves!):

1. Promote free trade. Don't let fat-cat monopolists use trade barriers to enhance their monopoly power.
2. Promote easy entry into industries. Don't let the fat cat incumbents bribe politicians into making rules/laws that inhibit competition from new entrants.

And always remember the sad truth that most antitrust policy can be summarized this way:

1. You must compete.
2. You must not win.

Scarcity, Economics, and Medical Care

One of the first things we do in introductory economics courses is try to make the point that because humans seem generally to have unlimited wants but because there are limited productive inputs, we are condemned to live with scarcity. Like it or not, we cannot have all we want of everything. We must make choices somehow.

This fact of human existence is crucial for understanding the problems we will increasingly face in the realm of medical care. As we move toward increased use of gubmnt programmes to provide the care, not everyone will be able to receive all the care they might want. This problem of scarcity will most often be stated as a problem of not being able to afford the medical care, but it really stems from a problem of scarcity: when customers don't have to pay directly, they want more than they would otherwise, and getting all the productive inputs to provide all that care (i.e. attracting them from alternative uses) is extremely costly, involving painful trade-offs. 

So we have to have a mechanism for deciding who gets the medical care. We must have some sort of rationing scheme. Some people might urge the use of the market to make this decision. Others might urge the use of co-pays and limits on some types of insurance to decide. Others openly recommend letting doctors, committees, and bureaucrats decide (aka death panels?).  But we have to acknowledge that not everyone will ever get all they want. Choices must be made somehow.

You may not like that reality. You might think people should behave differently. But the sad fact is that scarcity necessitates our making such choices. There is no way around it.

We see this problem now with cancer patients in the US. From the Washington Post, 

Cancer clinics are turning away thousands of Medicare patients. Blame the sequester.

... Oncologists say the reduced funding, which took effect for Medicare on April 1, makes it impossible to administer expensive chemotherapy drugs while staying afloat financially.

Patients at these clinics would need to seek treatment elsewhere, such as at hospitals that might not have the capacity to accommodate them.

It may seem that the sequester and a cut in funding for medicaid/medicare have caused this problem, and I suppose in the short-run that's right. But in reality, the problem is a much greater quantity demanded at current prices (zero!) than is supplied. 

The problem is an old one that economists have presented endlessly: whenever the gubmnt sets a price of zero and tries to guarantee that everyone who wants something at that price can have it, then shortages emerge. And then, to try to fix the problem, the gubmnt must decide how to ration the product. 

In this case the rationing is left to medical facilities. And they, quite understandably, are choosing to decline to treat those patients for whom the costs of treatment are extremely high. 

Whether we want to acknowledge it or not, these are death panels. These are groups of people deciding who should or should not receive treatments. 

Cypriot Theft

From the NYTimes,

Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than 100,000 euros effective Tuesday, hitting wealthy depositors — mostly Russians who have put vast sums into Cyprus’s banks in recent years. But even deposits under that amount are to be taxed at 6.75 percent, meaning that Cyprus’s creditors will be confiscating money directly from pensioners, workers and regular depositors to pay off the bailout tab.

I was first told about this situation yesterday by MA who sent me some early information.

It looks to me as if the Cypriot banks lost buckets and buckets of money by "investing" (actually speculating) in what they thought were low-risk mortgage-backed securities up until 2008. Then, in an effort to "stablilize" (i.e. bailout the owners of) the banks, the Cypriot gubmnt bailed them out, all in the name of protecting the depositors.

This sounds much like what happened in Ireland and threw their economy into such a spin. In order to reassure international investors, the gubmnt guaranteed deposits in the banks and in the process also guaranteed the bondholders of the banks. In Ireland, the gubmnt was able to fund the operation through increased taxes, spending cutbacks, and additional gubmnt bond issues. 

Cyprus doesn't have these options. The size of their bailout was about the equivalent of a full year's GDP for the country, and they simply could not raise taxes or cut spending enough to cover the bailout.

So they called on the IMF for help. And, no surprise, the IMF looked at the situation and saw no feasible way for the gubmnt to cover any loans the IMF might make to help them out. 

One option, for the Cypriot gubmnt to repudiate their debt, surely was considered. But debt repudiation would hurt the banks in the rest of the EU, and those banks and gubmnts likely lobbied the IMF to seek some other alternative. 

And that is when they settled on taxing deposits. This policy is horrendous. It is designed to steal wealth from large-depositor Russians who have tried to hide their money in Cyprus, but it will also hurt Cypriot businesses and people who have used the banks to save for (and plan for) their retirements, educations, etc.

My first reaction is "Since when did bondholders ever have a guarantee that their bonds would be repaid in full?" Ask the bondholders of pre-nationalized General Motors; ask bondholders of the Greek gubmnt. Why should bondholders of Cypriot gubmnt bonds or of Cypriot banks be protected from their inability or unwillingness to perform a fairly simple due diligence examination? A bond is not a guaranteed safe investment. Nor should it be.

My second reaction is that not only are Cypriots trying to drain their limits at ATMs, where total withdrawals until Tuesday are limited, but to the extent possible they will be using the internet and other options to prepay their credit card debts. I know that if I had $10K in the bank there, I'd try to put it on my paid up credit card balance and forego the interest income I might have earned in the bank to avoid the tax. But I don't know to what extent this is possible. 

In the end, I wonder if this will really happen. The parliamentary vote that was to have been taken today has been delayed until tomorrow. 

It was all started in the name of "protecting depositors" in banks that lost a lot of money several years ago. That sure seems ironic.

Related articles

Depositors burned, bondholders saved, a modern European bailout

Bailout Cuts Cyprus Bank Accounts, Withdrawals Barred

A look at Cyprus' decision to tax depositors

Cyprus parliament delays vote on bank deposits tax

The Cyprus precedent

I Smell Shortages, Lineups, Hoarding, Etc.

News like this is so depressing. Why won't people learn from experience (if not from economists)?

A group representing two-thirds of Argentina's supermarkets agreed to keep prices steady until the first of April.

The move comes days after the International Monetary Fund (IMF) censured Argentina for issuing inaccurate economic data.

The government says inflation is below 11% but economists say it is double.

Analysts have accused Argentina specifically of understating the rate of inflation since 2007 in order to keep interest rate payments on its debt low, and to flatter the political regime.

Some economists think the annual inflation rate could rise as high as 30% this year.

The supermarket agreement covers every item in all of the nation's largest chains.

They include Walmart, Carrefour, Coto, Jumbo and Disco.

Argentina's commerce ministry has asked consumers to monitor prices in the chains.

Next up: watch for cries about dirty speculators, calls to shoot hoarders, and extensive allegations about black markets and cronyism. There's a perfect model in Venezuela.

And seriously, the only way to deal with rampant inflation is to reduce the rate of growth of the money supply. If the gubmnt is printing money to fund its deficits, then deficit reduction will be necessary too.

Update: For more see this from Forbes.

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Argentina Freezes Supermarket Prices Amid Spiralling Inflation

Argentina freezes prices to break inflation spiral

Argentina pegs supermarket prices

Argentina freezes prices to break inflation spiral

Big Gubmnt and Cronyism, the case of electric cars

Argentine Markets Freeze Prices for 60-Days Amid 26% Inflation - Bloomberg

Prima Facie Evidence of a Lack of Competition:the case of e-books

Have you noticed how expensive e-books are? There might be a good reason, according to the US Department of Justice: collusion to fix prices (via MA).

Penguin has settled with the Department of Justice in the e-book price-fixing case brought against Apple and five publishers this year. Three of the other publishers involved: Hachette, Simon & Schuster and HarperCollins — have already agreed to settle.

Penguin and Macmillan were holdouts, insisting that the case had no grounds. "We did not collude," said Macmillan CEO John Sargent in April, when the DOJ brought its case.

They may not have colluded, and unless there is "smoking gun"-type evidence, we may never know for sure. However we do know from all our theoretical models that if the e-book industry were competitive, prices would tend to reflect the costs of publication. But when e-book prices exceed the prices of paperbacks for the same titles, and when paperbacks are more costly to produce, it's an indication that competition is not driving prices down to even approximately reflect publication costs. 

Higher prices for e-books probably reflects price discrimination across different consumers with different price elasticities of demand. But that type of price discrimination can occur only when there is a lack of competition.

What Legal Issues Are Involved with Snow-Stomp Art?

I had intended to do more work on my most recent snow-stomp art, depicting champagne being poured from a bottle into a champagne glass. But just as I was finishing the glass, a long-time resident of the condo building where we live (and in front of which I did the work) came out onto his balcony and asked me what I thought I was doing.

I explained with a big smile that I had made a bottle in the snow down the hill (which he could not see from his low balcony) and was now making the glass into which the champagne was being poured.

He informed me in a very officious manner that the condo doesn't own the hillside (where the bottle is); that is public property. He then asked if I had city permission to do that? 

Me: I'm just walking in the snow, making a design.

Him: And you know this part up here is owned by the condo. You have to get permission from the condo board to do anything.

Me: I'm just walking in the snow, making a picture for people to enjoy.

Him: But we have a person who is in charge of the landscaping here. You need to get board permission if you are going to change anything.

[etc. etc.]

Me: Oh. Okay.

and I left. 

I can't imagine there is any legal bar to my doing the snow-stomp art. And I can't imagine I need anybody's permission to do it in a public park or on the lawn of the condo where I live. Maybe if I had designed some sexually explicit erotica, it would be a different story; and maybe he objected to the depiction of alcohol use on the condo lawn; but I doubt it.

Quite frankly, I think he just objected to anyone having fun.