Economists: Stay away from my car!

I'm reading an article by an economist about how consumers incorporate fuel economy into their vehicle purchasing decisions. I was first skeptical when I read this:

"a. Model

Automobiles are purchased for the travel services they provide."

Really, is that all? What about style, image, fun?

Then I read this:

"Performance is measured by turning circle..."

That was it. Her one measure for "performance" was turning circle. Wow. It's no wonder that real-world buying decisions haven't been exactly what (most) economists have predicted.

The Upside of $140 Oil

“We’re really fine-tuning to get to that sweet spot of efficiency,” said Mr. Edwards of Delta.

Profit-motivated corporations increasing efficiency in the face of price signals. Shocking!

It's from a NYT article about the measures that airlines are going to in order to reduce weight and save fuel which includes such tactics as washing the engines more often (obvious), taking less water aboard (potentially annoying) and bringing only one set of manuals into the cockpit to save a couple of pounds (desperate).

How long can it be before airlines go the fully efficient route and start charging passengers by the pound?

Admittedly there is some resistance to these measures. Exempli gratia:

Northwest has studied everything from providing customers with packing tips to serving soda from two-liter plastic bottles rather than individual cans. But it decided that customers would balk at that idea.

“They like the can,” Mr. McGraw said. “They want the can.” [original emphasis]

Halo 3 Promotes Suicide Bombing among Lower Classes

In the game, at least. Here is an interesting first-hand account from Clive Thompson, writing in Wired.

It was after pulling this maneuver a couple of dozen times that it suddenly hit me: I had, quite unconsciously, adopted the tactics of a suicide bomber -- or a kamikaze pilot.

It's not just that I'm willing to sacrifice my life to kill someone else. It's that I'm exploiting the psychology of asymmetrical warfare.

...

I, however, have a completely different psychology. I know I'm the underdog; I know I'm probably going to get killed anyway. I am never going to advance up the Halo 3 rankings, because in the political economy of Halo, I'm poor.

Specifically, I'm poor in time. The best players have dozens of free hours a week to hone their talents, and I don't have that luxury. This changes the relative meaning of death for the two of us. For me, dying will not penalize me in the way it penalizes them, because I have almost no chance of improving my state. I might as well take people down with me. Full article.

The pointer to this comes from a Freakonomics post describing the surprising finding that most suicide bombers are not, in fact, from the lowest, least educated classes of society, but are often rather middle-class. Link.

Should have invested in the Loonie...

Or better yet, the Twoonie! Once again, a sad day falls upon American currency. I thought that these images from XE.com were illustrative. If you're familiar with the rate tables at XE, you know that there is something a bit off about the below table (click to enlarge):



What's that little blue question mark next to the rate in the USD/CAD cell? That's not normally there... Well, what happens when you hover over it? Let's see (again, click to enlarge):



Yikes, you know it's bad when XE, a favorite site of professional currency speculators the world over (not to mention Japanese housewives), goes to the trouble to tell you that, yes, you are reading it correctly, the US Dollar is worth less than its Canadian counterpart. Ouch... Just for historical perspective, eight years ago today, one US Dollar was worth about $1.46 Canadian. That's about what the Euro will get you in US Dollars today. Oh how the tables have turned.

It's gotten so bad that everyone's favorite French President has had to give the US Congress a lesson on fiscal responsibility! The shame! A financial lesson from France! What is the nation coming to? What's next, a France backing the US on matters of national defense? Apparently yes.

Efficient Giving

It's always been a difficult question for me and I'm sure it is for many others but I'm finally getting some traction on it, thanks to some good old economic principles.

If you live anywhere with a certain level of urban density (even Ann Arbor counts) you're sure to run into the situation. Someone, often looking extremely desperate, asks you for money in the street. What are you supposed to do? You know that you have money in your pocket, probably some coins that would be relatively easy to give. Should you give?

There are several approaches available to answer this question:

1. The deontological approach.
If you happen to ascribe to a certain moral or religious code that is 1) deontological in nature, (i.e. it's the action and not the consequences that count) and 2) gives direction for this situation, then you probably have nothing to worry about. Just give as you're told to give and don't look back, consequences be damned.

2. The consequentialist approach.
If you are a consequentialist by accident or choice, then you have to think a little bit harder about what to do in this situation. This is where economics comes in handy as I'll show below.

3. The "other" approach.
Maybe you don't care or you can't be bothered to care and you pass by indifferently. Presumably this is even easier than the first approach though I wouldn't recommend floating through your life without giving consideration to what's happening around you.

Analysis
I used to ascribe to the first position. I thought that inequality was a terrible thing (I still do) and that I would do well to empty my wallet whenever asked by someone who appeared to be poorer than me. I gave away a bunch of money like this and, as you will read, I'm now quite certain that I accomplished very little, except, perhaps, encouraging the very situation that I was trying to eliminate. Whereas I used to believe that right actions made me a good person regardless of their consequences, I can no longer support that position. For a number of reasons, I'm now a confirmed consequentialist.

Back to the issue at hand, what is a person concerned with the consequences of his/her actions supposed to do when someone in the street asks for money?

Simple: Never, ever, ever give money to someone who makes their "living" from begging.


Begging in Brussels

Explanation
Like I said above, inequality really bothers me and I think that you should give your money to poor people, just not those who are putting all of their effort into begging. Rather, give it to the poorest person who expects it the least. This idea comes courtesy of Tyler Cowen of Marginal Revolution fame. Here is his original post on the topic.

Basically, the idea is that giving to beggars only encourages more beggars which guarantees only that begging will continue. In fact, it also guarantees that an economy will grow around this industry, with "producers" providing the beggars and collecting the majority of the profits. Here is a shocking story from the BBC about doctors in India cutting off the limbs of beggars so that they are more valuable to the gangs that "own" them.

I strongly suspect that there are criminal gangs exploiting the disabled in Paris as well. When you see a woman who is so crippled that she cannot walk on her own begging four floors below ground in the metro, it stands to reason that someone brought here there, set her down, and will collect her when the day is over. Presumably they give her food and shelter but they money that goes into her cup does not stay with her. It is imperative to not support this form of exploitation.

Even in less extreme cases, where there is not the criminal exploitation of the disenfranchised, it is not wise to encourage begging. If a beggar knows that a particular begging spot is worth $5,000 per year, he will devote $5,000 worth of effort to get that spot, effort which could have been spent on far more healthy and productive pursuits (paraphrased from Cowen's comments here). If you don't like the situation of beggars, don't give to them!

Finally, getting to the point that finally motivated me to write this today, the beggar might not be as poor as you think. This Freakonomics post suggests that, in some cases, beggars might be making more than police officers. It's something that I've thought about often. Imagine the Paris metro, it's really busy. If a beggar sits in one place he might see 150 people go past him/her in one minute during a busy period, perhaps as few as 20 in a less busy period. There are easily three busy periods per day, each lasting at least an hour each. Let's assume that the beggar is there for seven hours each day (it is France after all, can't work more than 35 hours per week), that would put the beggar there for three busy hours and four not so busy hours. Given the sixty minutes in an hour, that translates to 31,800 people passing by the beggar each day (some, perhaps most of these people are passing twice, meaning that there are maybe 16,000 unique metro-users). This is really easy to imagine given that RER Line A (there are four others, plus the 16 metro lines) regularly handles more than one million passengers per day. So, if 1% these 16,000 unique metro-users gives a euro, the beggar makes 160 euros for seven hours of "work" for an hourly rate of about 23 euros per hour. Not bad at all. Even if only half as many people give money, it's still 80 euros per day, or about 12.50 euros per hour.


Gypsy women begging with their children in Lyon

To wrap it all up, giving to beggars encourages only more begging, which is bad for the individuals and for the society. It can, and often does, encourage criminal enterprises to exploit the most vulnerable members of society, to the point of for-profit mutilation. And finally, beggars may not be as bad off as you think and, when the global financial markets as well constructed as they are, you could easily give to someone in much more need who will use the money for more productive endeavors. Case in point, Tyler Cowen's newest project, giving his personal money directly to individuals in India.

Just to be certain that my point is not lost: poverty and income inequality are bad things, I don't like them at all. I think that I, and everybody else who can afford it, should give a lot of their money to people who need it more than they do. Just do it in a responsible way. It may not be the most convenient way of doing it, but if you're going to do the right thing, it's your duty to do it the right way.

What's the word...

...oh yeah, that's it, UNCONSCIONABLE.

Have a look at this post on the Freakonomics Blog regarding the markup on generic drugs at pharmacies compared to the price at Costco and Sam's Club. Here's the meat of it:

Even once you factor in the cost of buying a membership at Costco and Sam’s Club, the price differences were astounding. Here are the prices he found at Houston stores for 90 tablets of generic Prozac:

Walgreens: $117

Eckerd: $115

CVS: $115

Sam’s Club: $15

Costco: $12

Those aren’t typos. Walgreens charges $117 for a bottle of the same pills for which Costco charges $12.

Now, I'm all for the market deciding the price of goods in most cases. If someone is willing to pay $20 for a pound of bananas, by all means someone should sell them at that price. However, drugs are not bananas and high prices encourage non-compliance with doctors' orders, thereby putting patients at considerable risk. Furthermore, as the author of the post notes, one explanation for this is that elderly people, the largest consumers of prescription medications, are most likely to continue shopping at the corner pharmacy rather than shop around for a better deal. As the blog author says, "Talk about information asymmetry; talk about price discrimination."

This is a very clear example of "Just because you can, doesn't mean that you should."

Found originally on Boing Boing.

Film Revenues and Piracy

Here's are some interesting numbers and commentary on last year's film revenues. It seems that the largest increase in film revenues has come in the countries that have the most piracy (Brazil, China, India). Especially interesting is the method that the film industry uses to calculate the losses it has suffered as a result of piracy:

Piracy loss calculations are based on the number of legitimate movies - movie tickets and legitimate DVDs - consumers would have purchased if pirated versions were not available.

Not exactly the method that I would use... How do you calculate this? Any ideas?

The Intersection of Private Equity and Environmentalism

The largest leveraged buyout ever is taking place and it has a uniquely environmental twist to it. Two private equity firms, Kohlberg Kravis Roberts & Company and Texas Pacific Group, are working to buy TXU, a Texas utility company. The price on the table is currently $45 billion. Not a small chunk of change for a bunch of individuals to bring together.

Though the deal is certainly remarkable for being the scale of the numbers involved and it may be interesting to ponder the consequences of utilities being traded around by investors, the most remarkable aspect is the degree to which environmental groups have been involved in the negotiations. The New York Times has this analysis of the situation and Business Week has this to say, but basically the deal went like this; KKR and Texas Pacific thought that buying TXU would make a good investment. One complication, however, was that TXU has long been the bane of environmental organizations because of its heavy reliance on coal power plants and its plans to build more of them in the future. (Coal is the least efficient fuel when considering carbon dioxide emissions per unit of energy produced.) So, what did the private equity firms do? They brought environmental groups, specifically the NRDC and Environmental Defense, directly to the table and worked to find a solution that the environmental groups would agree too.

Here's the result, taken from Marc Gunther:
1. TXU will drop plans for eight of the 11 coal plants.
2. TXU will support federal legislation regulating carbon emissions.
3. TXU will form a “sustainable energy advisory board” whose members will include Ralph Cavanaugh of NRDC, who knows more about the utility business than anyone else in the environmental movement, and Jim Marston, head of Environmental Defense’s Texas office, which had filed a couple of lawsuits against TXU.
4. TXU says it will “adopt corporate governance and executive compensation programs that tie the operations and goals of the company to climate stewardship.” In other words, executives will be paid more if their operations emit less.

So this seems pretty amazing and forces you to wonder why the private equity firms had such an interest in getting into the good graces of environmental groups before buying this utility company. Well, personality surely had something to do with it. David Bonderman is the co-founder of Texas Pacific and has plenty of environmental sensibilities to his name, serving on the boards of the World Wildlife Fund, The Wilderness Society and other environmental organizations. William Reilly, the EPA administrator under George H. W. Bush and long time conservationist is an investor at Texas Pacific.

So, was it just that these guys with a tinge of green at the private equity firm felt bad about buying a utility company and tried to clean their consciences as best as they could? Maybe, but I wouldn't discount for a second the interest that these guys have in making fiscally sound investments. That is their job after all and they aren't going to do anything that is going to hurt the bottom line of their deals. It would seem, then, that the answer is that these guys realize the economic consequences of pollution and, specifically, global warming. One the one had there is the threat of constant litigation against environmental groups and on the other hand is the fact that eventually the US Congress is going to begin to limit greenhouse gas emissions. The bottom line is that being environmentally irresponsible is quickly becoming an inefficient way to operate a corporation.

This, to me, is a great sign and is exactly as environmental regulation should work. There should be no expectation that corporations will act in the interest of the environment on their own. Their primary obligation is to their shareholders, plain and simple, and whatever costs they can externalize they should and will. Thus, all of the environmentalists who get upset at the corporations themselves are misguided and wasting their breath screaming at corporations to change their ways. Only insofar as environmentally-sound behavior is in the interest of the corporations shareholders should the corporation be expected to behave as such. The second main obligation that corporation has is to follow government regulations. As a purely free market would offend our moral sensibilities (people buying and selling other people, contract killers hanging up their shingle next to the barber, 7 year-olds working 16 hours a day in a factory, etc...) it is the place of the government to look at the consequences of the market and constrain it where necessary. Since individual most corporations have no desire or interest in considering the environmental consequences of their actions it falls on the role of the government to do so. Furthermore, other groups of interested individuals can make it their objective to lobby the government for increased regulation and work to ensure that corporations are behaving according to the regulations.

In this case we see all of these aspects coming together in a way that pleases the shareholders of the corporation, the private investors buying the corporation, and the environmental groups concerned about the activities of the corporation, not to mention the people of the world who will suffer less as a result of the reduced emissions. All in all, I find this to be great news and I hope that a trend develops and continues. I would think that, given the noteworthy size of this deal, that other investors will have to take notice of the environmental aspect as well.

How a Corporation Succeeds

Here is a great article from the New York Times Sunday Magazine about the remarkable trajectory of Toyota, especially compared to its American competitors. It's a long article but well worth the read if you have any interest in matters of economics, corporate governance, or group decision making in general.

In my opinion, the fact that is most telling of Toyota's method of success comes on the final page:

Toyota began developing the Prius at a time, 1991, when gas was plentiful and cheap.

There aren't many words there, but it says a lot about the perspective of the company and how it goes about making it's decisions.

A longer quote says essentially the same thing:

Toyota expects to be in business 100 years from now, one person in the company’s West Coast office told me, long after oil has been depleted or rendered unusable because of its carbon content, and for that reason it has placed all its bets on hybrid technologies. Indeed, Toyota created its hybrid systems not so much with the current era in mind, but because it views hybrids as more practical and energy-efficient. Whether the future is in biodiesel, ethanol or hydrogen doesn’t seem to matter; the hybrid system could be adapted to any of those fuels, says Bill Reinert, Toyota’s U.S. engineer in charge of advanced vehicle planning. Reinert also told me that the current Toyota system already has the ability to accommodate the larger battery capacity of a plug-in hybrid, which would use electric power for local trips and fuel only for longer excursions. But those large batteries don’t yet exist. Was that extra capacity put there on purpose? “Hell, yes,” he says. “This company is not stupid.”

Of course, this is just about product decisions, not the processes that have also been key to Toyota's success. That you can read about in the article. It's long, but I guarantee you that it's worth it.

Why I like The Economist

I just shared three articles from The Economist, one of my favorite magazines. Two are about France and one is about Detroit. All come from a British, free-market perspective. All are informative. Read them!

(Also, if there should ever be something that you miss on my Shared Items, simply click the "Read more..." link at the bottom right of the widget, it will take you to a page with every item ever shared.)