Category Archives: Economics

Economics

The Myth Of Price Gouging

Iain Murray says there’s no such thing, joining me and the WSJ in continuing to expose this myth. He also says that the usual economic ignorami are sponsoring a bill for a federal anti-gouging law.

I’ve got a better idea.

Paul Dietz suggested in comments that a federal anti-rent-control law should be constitutional. I would think that a federal anti-anti-gouging law (that is, a federal law that proscribed states from passing anti-gouging laws) would be as well, since the Supreme Court has essentially decided that the Commerce Clause will justify anything, and that federalism is essentially dead. After all, state anti-gouging laws cause people to drive across state borders in order to get gasoline during shortages, or more perversely, to drive to states with the laws to get cheaper gas (until it runs out). It’s exactly the same situation as we have with Canada and prescription drugs. So this clearly affects interstate commerce at least as much as a leukemia victim growing pot in their back yard. It might also have the effect of moving modern liberals even further into the previously despised federalist camp, and make them rethink their long-sought desire for Big Brother in Washington.

While I mourn the passage of federalism, we should at least take advantage of it to do some good. I would hope that if we really had a Republican congress, that an anti-anti-gouging law would have better chance of passage than an anti-gouging law. But then, I would have hoped that a supposedly Republican congress wouldn’t have exploded the federal budget over the past four years as this one has…

Economics

Do Your Part to Prevent Shortages

When everyone was talking about avian flu, I got my doctor to write a Tamiflu prescription that I could get filled before the rush. I just sent off my order for a satellite phone ($1000 including 300 prepaid minutes good for one year). I told them not to hurry so the flood victims could get theirs first. That’s also going to be my present to my dad come December since he lives in Florida–don’t spoil it for him, it’s a surprise. By bidding up the price of goods well in advance of disaster, manufacturers will make more of them.

The best shortage prevention technique known to Man (and provably the only one that always works) is raising prices. Rand brought this up. Now WSJ has joined the act with their piece “In praise of ‘Gouging'”.

Economics

Non-Mutual

“Non Mutual” was the accusation when The Prisoner was pilloried for not having enough community spirit. Mutual funds are being accused of being non-mutual by Ross Miller in his paper that decomposes an actively managed mutual fund into an active market neutral part and a passive part that looks just like an index. What he finds is that expense ratios on the active part look like about 7% if you consider most funds only have about 10% of their portfolio actively managed and that means the 1% vs. the .3% annual fees for managed vs. index fund has to be attributed just to the managed portion. This is great for hedge funds that if their fund is going up 10% a year only charge 2% fees + 20% of the 10% profits or 4% altogether. That’s quite a bit less than the comparable active mutual fund.

This is make quite a stir in financial circles.

Economics

Ascendant Dragon

China is in the news these days for buying up Unocal, Maytag and IBM PC. If you check out the latest CIA world factbook you can see that China’s purchasing power is more than half of US with the second largest economy. If you project out the growth rates (9.1% and 4.4%) you can see China catching up to the US in 2015 when we both have $19 trillion economies (maybe $23 trillion adding in inflation).

Year China($B) US($B)
2004 7262  11750
2005 7923  12267
2006 8644  12807
2007 9430  13370
2008 10289 13959
2009 11225 14573
2010 12246 15214
2011 13361 15883
2012 14577 16582
2013 15903 17312
2014 17350 18074
2015 18929 18869

China will continue to grow its economy faster than US because its per capita income is still quite low ($5600 vs $40000 in 2004 est) and will still be less than 1/3 of US per capita income in 2015.

My favorite implication is for space policy. A China committed to space nostalgia (e.g., Moon landings) might get the US to devote thought to rationalizing commercial space policy. Mike Griffin started in this direction.

Economics

Adopting Landing Slot Auctions

There is a good, but incomplete proposal for landing slot auctions at Chicago O’Hare at AW&ST, June 6, p.31. (Subscription required)

It includes the following:

  • Rolling auctions annually for 5 year rights
  • Forced reauction so that every airline must participate
  • Peak time pricing
  • Same price regardless of plane size

One thing that is not decided is “who should get the increased revenues that [the Justice Dept.’s] regime would likely generate or what should be done with them.”

My proposal is that the money go to the current rights holder for existing rights and the airport for new rights. That includes the auction winners. I.e., the rights would be resold and the former owner would get the proceeds. This gives the airport the right incentive to make improvements that allow more landings. It also turns the rights into capital assets. We might see better stewardship of them.

We might also see less screaming from existing rights holders because if they get the money, they are no worse off than under the current system. (Unless they were going to go bankrupt and stiff their creditors.)

Economics, Political Commentary

Don’t Quota Me

Chinese apparel have been slapped with a quota. Quotas are worse than tariffs, but first here’s a little background.

The rash of China bashing is well-timed to keep the Chinese buying dollars according to Yuan Answers? (WSJ, 6/10, subscription required). A triangular trade where US sends dollars and st0ck and title deeds overseas to the rich savers of the world and imports lots of stuff in one way shipping containers from China is not a bad thing. In fact, it can be sustained indefinitely with the US capital st0ck continuing to grow. It is a testament to how our laws are not quite as bad as everyone else’s.

In economics we talk about how tariffs and quotas both imply a “deadweight social loss”. When prices are artificially raised via a tariff, the customer prices rise and the supplier prices fall. The quantity sold also falls. It is this last part that is the first component of deadweight loss. By reducing the quantity sold, profitable trades without the tariff become unprofitable because they are not profitable enough to beat the “spread” between the supplier and customer prices induced by the tariff. All this is Economics 101.

A quota has an additional element beyond this kind of loss. In a quota, the supply price rises too. That means that any supplier who can produce at the new higher price will try to fulfill their quota. Thus suppliers who would have cut back production under a tariff will continue to produce to fulfill their quota. Everyone is cut back pro-rata (or according to some formula, e.g., 7.5% more than last year even if growth would otherwise be 500%) and not according to who is the most efficient. Coase might say that quota shares could be traded, but this entails higher transactions expense than the decentralized trade that occurs with a competitive market price.

The additional inefficiency is happily born by international suppliers who receive a major benefit when a quota is imposed–higher prices. So the quota is a collusive bargain between the Government, the domestic suppliers and the foreign suppliers to raise prices on the consumers at the cost to the economy of two kinds of deadweight social loss. Diffuse harm, concentrated benefit. Can one file a class action law suit against an industry association that lobbies for selfish policy?

Economics, Political Commentary

Don’t Quota Me

Chinese apparel have been slapped with a quota. Quotas are worse than tariffs, but first here’s a little background.

The rash of China bashing is well-timed to keep the Chinese buying dollars according to Yuan Answers? (WSJ, 6/10, subscription required). A triangular trade where US sends dollars and st0ck and title deeds overseas to the rich savers of the world and imports lots of stuff in one way shipping containers from China is not a bad thing. In fact, it can be sustained indefinitely with the US capital st0ck continuing to grow. It is a testament to how our laws are not quite as bad as everyone else’s.

In economics we talk about how tariffs and quotas both imply a “deadweight social loss”. When prices are artificially raised via a tariff, the customer prices rise and the supplier prices fall. The quantity sold also falls. It is this last part that is the first component of deadweight loss. By reducing the quantity sold, profitable trades without the tariff become unprofitable because they are not profitable enough to beat the “spread” between the supplier and customer prices induced by the tariff. All this is Economics 101.

A quota has an additional element beyond this kind of loss. In a quota, the supply price rises too. That means that any supplier who can produce at the new higher price will try to fulfill their quota. Thus suppliers who would have cut back production under a tariff will continue to produce to fulfill their quota. Everyone is cut back pro-rata (or according to some formula, e.g., 7.5% more than last year even if growth would otherwise be 500%) and not according to who is the most efficient. Coase might say that quota shares could be traded, but this entails higher transactions expense than the decentralized trade that occurs with a competitive market price.

The additional inefficiency is happily born by international suppliers who receive a major benefit when a quota is imposed–higher prices. So the quota is a collusive bargain between the Government, the domestic suppliers and the foreign suppliers to raise prices on the consumers at the cost to the economy of two kinds of deadweight social loss. Diffuse harm, concentrated benefit. Can one file a class action law suit against an industry association that lobbies for selfish policy?