Coyote Blog

The Arizona Republic reports that the Arizona Department of Water Resources has set six priorities for managing expected water shortages in the future.  The six are listed in one of those annoying click-bait page-flipping things, so I will summarize them below:

1. Resolve water disputes
2. Pursue reclaimed water
3. Expand monitoring (of the public's water use)
4. Look at water transfers (between communities)
5. Go for desalinization
6. Find funding (for large scale projects)

What is missing here?  Well I will give you a hint.  This article was on the very same page (at least online) of the newspaper -- Phoenix has the cheapest water in the country!

If you live in Phoenix, you’re probably paying one of the cheapest annual water bills in the country, even with the rate increase that took effect this month, according to a recent national report on public water systems.

The February report by Food & Water Watch said the lead-tainted water supply in Flint, Michigan, was the most expensive in the country, with customers there paying $910.05 a year. It said Phoenix residents paid just $84.24 a year, then the lowest rate in the nation.

A city water department official said the rates could be a little misleading – rates jump for heavy users, one factor that has helped Phoenix keep water use down even as the number of water users has risen sharply.

But even after the 3 percent increase that took effect March 1, analysts say Phoenix rates are probably still among the lowest, if not the lowest, in the country for residential customers who don’t use large amounts of water in a month.

This is absurd.  Why does the state agency need to go around spying on private water use and begging for funding when price is such an obvious lever to match supply and demand.  Raise the freaking prices!  Are we drawing from lakes and groundwater faster than they can replenish themselves?  Raise the dang price until demand falls to a sustainable level.  As an extra bonus, this would help solve the funding problem, and have it solved by water users themselves rather than taxpayers.

By the way, I ask these questions but I actually know the answers -- government officials don't want to take the heat when the prices rise.  They want to pander to the public and hand them populist goodies like cheap water, and then manage the inevitable water crisis with authoritarian actions like rationing and surveillance that increase their personal power.

And congrats to our newspaper:  It has article after article, day after day, listing all the dire water shortages that face the area, and then they write this article with nary a mention that having the country's lowest water rates might be related.

I have written about the National Industrial Recovery Act many times, a love-note from FDR to Mussolini's fascist economic system that was thankfully overturned by the Supreme Court.  Its intent was to make the corporate-crony state the default economic system of the US.

Essentially, the NIRA cartelized the US economy, creating government-sponsored cartels in every industry that would set prices and wages as well as output and quality.  You can imagine exactly how well upstart competitors would have fared under this system.  I am pretty sure, for example, that the government mainframe cartel would never have let apply, or even DEC, see the light of day.

Now, a couple of academics have laid the blame for the long duration of the Great Depression at the NIRA's doorstep.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.
In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Hmm.  Certainly wages and prices are going to be especially "sticky" if the government creates cartels to keep them that way.

If you listened to the media and political candidates, you would quickly come to the conclusion that the quickest way to prosperity and wealth is to have a worthless currency.  Every politician the world over argues for devaluing their own currency vs. other nations, with the logic that this helps domestic manufacturers by making imported competitors more expensive and making their own products less expensive to buy in other countries.  **

While the latter two statements are nominally true, the only way this actually helps an economy is if one ignores everyone except manufacturers in markets dominated by international trade.  What it ignores is that a falling currency makes purchases more expensive for everyone else.  Consumers and service industries and even manufacturers who depend on imported raw materials all suffer from a falling currency.  And this is not even to mention the effect on wealth -- if one's savings are all in assets denominated in the falling currency, one is clearly losing wealth as the currency falls.

Well, for the first time in a really long time, I actually saw an article this week that focuses on some of the problems of having a falling currency.  via zero hedge.

“I’ve never seen it that high. It’s usually $6.99, maybe $8 but that seems like quite a jump.”

Grapefruit isn’t the only produce to soar in price as fresh fruit has increased by 12.4 per cent since December 2014, and fresh vegetables are up 14.4 per cent, according to data from Statistics Canada released Friday. Led by those surging produce prices, Alberta’s annual inflation rate rose last month by 1.5 per cent, year over year.

The high prices are a direct result of adverse weather in the United States and the lower Canadian dollar since most produce is imported, said Jason Wiebe, president of Chongo’s Market at the Crossroads Farmers Market.

“Tomatoes trade the same as the TSX. It’s a commodity, too, and all produce is traded in U.S. dollars. In November, the retail cost of tomatoes on the vine was $1.99 a pound. Now I have to sell the same box at $3.99 pound.

“What’s going to be really interesting going forward is what happens to local growers come summer. With the dollar, they can make one and half or two times as much exporting than selling here.”

And that may only be the beginning of higher food costs, according to ATB chief economist Todd Hirsh.

“Going forward I think we’ll see even higher upward pressure on imported fruits and vegetables. If not for weather conditions, certainly that low Canadian dollar will affect it. Because the numbers we’re talking about today are from December and now in January we’re almost five to six per cent lower on that dollar….If people insist on eating fresh tomatoes and pineapple in January, they’ll be forced to pay for it.”

 

** To my eye, every government in the industrialized world is working as hard as they can to hammer down the value of their own currency.  As a result, a rising currency tends to mean only that the country in question has a central bank that is not working as hard and as fast as other countries to trash their currency.  All of which makes accusations that China is manipulating its currency an enormous joke.  Several trilling dollars in QE here and they are the ones manipulating their currency?

I will confess that there is much about advanced economics that I have trouble following, because I just don't have the background.  I suspect I am more comfortable with a mal-investment model of recessions because it is something I can see and understand as a business guy, whereas when talk gets into monetary policy I can quickly get lost.

For example, in this Arnold Kling review of Scott Sumner's book on the Great Depression, I totally get this:

Sumner's theoretical framework starts with a straightforward explanation for fluctuations in employment and output. Large shortfalls in output and employment occur when relatively flexible prices fall in relation to relatively sticky wages. When firms face high wages and low prices, they have to cut back on employment and output.

A business guy (outside of a commodity business) would probably say he sees a fall in demand for his product rather than a fall in prices, but I understand enough economics to know that these are essentially interchangeable -- the business is seeing a fall in demand at the old price but would likely see the same old demand if the price were lowered.

However, when I read stuff like this, I start to get lost.

If investors believe that the future path of monetary policy is expansionary, then they will immediately start to bid up prices for sensitive commodities. This means that if the central bank sends a credible signal today that it will maintain an expansionary stance going forward, this can quickly raise prices relative to wages, leading to a rapid expansion of employment and output.

I understand it intellectually, but I certainly don't go on a buying spree the moment the Fed announces more QE (though in retrospect looking a the rise in financial asset prices over the last few years, I should have).

But where I was going with all this is there are real-world effects that I am positive contribute to the depth of recessions that I seldom see in these economic theories.  For example, economic theories tend to assume firms are properly staffed heading into the downturn, such that layoffs are driven by the fall in prices/demand.

But that is not ever the case.  In my experience, it is an iron law of organizations that their staffing grows fat in the good times.  No matter how tough or attentive the management, firms will put on too much staff.

My personal theory is that organizations have a life of their own.  Almost literally.   In many ways the organization acts as a living entity with a mind of its own, trying to grow and feed itself.  It does not consider what size it should be, any more than a deer heard is concerned about its size vs. the available food supply.  It will keep growing until it is culled by an outside  force (lack of food or a predator).

I think of organizations the same way, and the only way to check its growth is with active management from the top.  Managers have to constantly stay on top of the organization's size and be pruning or culling it constantly (depending on the metaphor you want to latch on to).  However, because of scale economies, profits tend to grow faster than revenues at the top of the business cycle.  This creates a certain comfort level among management, and since pruning the organization is emotionally difficult -- at the least saying no to people's resource requests and at the most demanding layoffs --managers don't keep up with their job in this area in the good times.  No one notices that a 15% profit growth could have been 20% if they organization had properly been kept in check.

Then comes the downturn.  Demand and/or prices are falling, and profits are falling faster than revenues, and the crisis is now at hand.   Now that we have overcome whatever emotional starting friction there is to have layoffs, we might as well do the job right and cut not only what is required to keep up with falling prices, but we might as well take a look at the bloat we accumulated in the good times and right-size that away as well.  In fact, many businesses I have worked for or with as a consultant like to overshoot what they might have previously thought of as the right-size point, and cut even deeper, hoping that the limited resources will push the organization into finding new inefficiencies in how it does things.

And thus, in my view, the degree of layoffs in a recession will tend to be larger than that one might predict solely from sticky wages and declining  prices/demand.

By the way, for those of us who are skeptical about the government's ability ever mange a task efficiently, this organizational theory is one explanation.  Often commenters make the mistake of assuming that when I criticize tendencies in government organizations to look after themselves (rather than their mission) that I am singling government out as somehow operating differently from the private world.  That is not true.  Government is made up of the same human beings as businesses (though perhaps there is some negative self-selection) and government organizations are going to have the same tendencies as private organizations.

The difference is one of correction mechanisms and incentives.  Eventually, the private organization must clean out the bloat or else it will fail and go out of business entirely (unless of course the government bails it out, see: GM).  There is no such accountability with government organizations.   They just deficit spend or demand more taxes when they get bloated.   Making this worse are the incentives of  government agency leaders.   Lacking a profit metric or even a customer service metric, government agency managers typically get their pay and prestige set based on the budget and headcount of the organization they run, so cost and headcount cutting run directly counter to their incentives.  Combine this with higher barriers in government organizations to cleaning house (e.g. public union power and politicization of what should be efficiency decisions) and we get the dysfunctionality of government.  But again note, this is an issue of accountability mechanisms and incentives, not of having better or worse or smarter people.

[This is first in a series of comments I would like to post at Mother Jones, but I have been banned]

Liberal Kevin Drum is crowing that the ACA is "doing exactly what it was designed to do" in "successfully browbeating" and "threatening" young people to buy health insurance, a product that in most cases they don't want and can ill afford -- particularly since the rules of Obamacare risk-rating jack up the prices to young healthy people in order to subsidize the premiums of older, wealthier, more politically powerful people.  Wow, the term "liberal" has sure come a long way, hasn't it?  Those of us who still respect the dignity and autonomy of individuals, and by the way are horrified at the idea of having younger lower income people forced to subsidize older higher income people, would like our term "liberal" back.

I will say, though, that it is nice to see Progressives being more up-front about their authoritarianism.

Mark Perry makes the (updated) case for index funds.  I need no convincing, as most** of my savings (such that they are) are in Vanguard index funds of various sorts.

But as I was reading his article, I couldn't help thinking that there is a flaw with the "everyone should be in index funds" advice -- if everyone actually was 100% in index funds, they would not work.  Index funds are premised on the idea that stock prices are pretty well reflective of the information out there in the marketplace -- the company's future prospects, the strength of its market position, the direction of external factors such as economic growth and interest rates, etc.  But this is only going to be true if there are investors out there trying to pick stocks and beat the market -- ie if everyone is not in index funds.

It sort of reminds me of the old economics joke where a man is walking down the street with an economist, and the economist walks right past a $20 bill lying on the ground.  The man says to the economist -- "do you realize you just walked past a $20 bill?" and the economist answered, "It couldn't really be there -- in an efficient market, someone would have already picked it up."

In some ways, the stock pricing paradox here is just an example of a larger phenomena which for the lack of a better name I call "the joy of shopping."  People make fun of shopping all the time, but economically shopping is really a miracle.  All the things we attribute to prices and efficient markets and competition and the accountability of markets depend on shopping.  Individuals have to be out there making price-value trade-offs between products, or between buying something and not buying something.   For example, at least half of everything wrong with health care economics can be explained by lack of shopping.

The interesting thing is that only a small percentage of consumers in any particular market have to be hard-core shoppers (meaning they do tons of research and compare prices across multiple sellers) for all of us to benefit.  I seldom look at a price in Wal-Mart because I know other people who care a lot have enforced a discipline on Wal-Mart.  Just as with my Vanguard mutual funds, I depend on that core of folks who walks the aisles of Wal-Mart checking every price against Amazon and Target.

** I do enjoy picking stocks, and have a particular affinity for shorting things too early.  I never, ever let this portfolio grow to more than 5% of my total savings, and treat it explicitly as a sandbox to play in rather than real investments on which my future well-being depends.

From Chris Dillow via Arnold Kling:

I would rather have second-rate politicians who know they are duffers than ones who believe they are brilliant.

I am sympathetic with this statement but for a reason that Dillow does not mention.  No one is smart enough to try to manage certain complex systems, like the economy.  They don't have the information or the ability to set prices, fix (or even correctly identify) "market failures, assess the preferences of 300 million individuals, or any of the other things politicians try to do -- no matter how freaking brilliant they are.   Really smart people in politics (or people who think they are really smart) also have a tendency to want to substitute, by force, their judgement and decision-making for my own.

A reader sent me this article on renewables by Tom Randall at Bloomberg.  I would like to spend more time thinking about it, but here are a few thoughts. [Ed:  sorry, totally forgot the link. duh.]

First, I would be thrilled if things like wind and solar can actually become cheaper, without government subsidies, than current fossil fuels.  I have high hopes for solar and am skeptical about wind, but leave that aside.

Second, I think he is selling renewables the wrong way, and is in fact trumpeting something as a good thing that really is not so good.  His argument is that the decline in capacity factors for natural gas and coal plants is a sign of the success of renwables.  The whole situation is complex, and a real analysis would require looking at the entire power system as a whole (which neither of us are doing).  But my worry is that all the author has done is to demonstrate a unaccounted-for cost of renewables, that is the reduction in efficiency of coal and natural gas plants without actually being able to replace them.

Here is his key chart.  It purports to show the total US capacity factor of each energy mode, with capacity factor defined as the total electricity output of the plant divided by what the electricity output could be if the plant ran full-out 24/7/365.

First, there is a problem with this chart in terms of its data selection -- one has to be careful looking at intra-year variations in capacity factor because they vary a lot seasonality, both due to weather and changes in relative fuel prices.  Also, one has to be hugely suspicious when someone is claiming a long term trend but only shows 18 months of data.   The EIA can provide some of the data for a few years ahead of his table.  You can see it is pretty volatile.

I won't dwell on the matter of data selection, because it is not the main point I want to make, but the author's chart looks suspiciously like cherry-picking endpoints.

The point I do want to make is that reducing the capacity utilization, and thus efficiency, is a COST not a benefit as he makes it out.  Things would be different if renewables replaced a lot of fossil fuel capacity at the peak utilization of the day (the total capacity of a power system has to be sized to the peak daily demand).  But the peak demand in most Western countries occurs late in the day, long after solar has stopped producing.  Germany, which relies the most on solar, has studied this and found their peak electricity demand is around 6PM, a time where solar provides essentially nothing.   Wind is a slightly different problem, because of its hour to hour unpredictability, but suffice it to say that it can't be counted on in advance on any particular day to provide power at the peak.

This means that one STILL has to have the exact same fossil fuel plant capacity as one did without renewables.  Yes, it runs less during the day and burns less fuel, but it still must be built and exist and be staffed and in many cases it still must be burning some fuel (even if producing zero electricity) to be hot and ready to go.

The author is arguing for a virtuous circle where reductions in capacity factors of fossil fuel plants from renewables increases the total cost per KwH of electricity from fossil fuels (because the capital cost is amortized over fewer kilowatts).  This is technically true, but it is not the way power companies have to look at it.  Power companies have got to build capacity to the peak.  With current technologies, that means fossil fuel capacity has to be built to the peak irregardless of their capacity factor.  If these plants have to be built anyway to cover for renewables when they disappear during the day, then the capital costs are irrelevant at the margin.   And the marginal cost of operations and producing power from these plants, since they have to continue to exist, is around $30-$40 a MwH, waaaay under renewables still.

In essence, the author is saying:  hurray for renwables!  We still have to have all the old fossil fuel plants but they run less efficiently now AND we have paid billions of dollars to duplicate their function with wind and solar plants.  We get to pay twice for every unit of electricity capacity.

Environmentalists are big on arguing that negative externalities need to be priced and added to the cost of things that generate them -- thus the logic for a carbon tax.  But doesn't that mean we should tax wind and solar, rather than subsidize them, to charge them for the inefficiently-run fossil fuel plants we have to keep around to fill in when renewables inevitably fail us at the peak time of the day?

By the way, speaking of subsidies, the author with a totally straight face argues that renewables are now cheaper than fossil fuels with this chart:

He also says, "Wind power, including U.S. subsidies, became the cheapest electricity in the U.S. for the first time last year."

I hate to break it to the author, but a Ferrari would be cheaper than a Ford Taurus if the government subsidized it enough -- that means nothing economically other than the fact that the government is authoritarian enough to make it happen.  All his chart shows is that solar is more expensive than coal and gas in every state.

And what the hell are those units on the left?  Does Bloomberg not know how to annotate charts?  Since 6 cents per Kw/hr is a reasonable electricity cost, my guess is that this is dollars per Mw/hr, but it is irritating to have to guess.

When politicians argue about small business growth, they argue about stuff like taxes and access to capital and, god help me, completely irreverent (to small business) stuff like the ExIm Bank.

I would argue that there has been a fundamental shift in the economy relative to small business over the last four years, but it has nothing to do with any of that stuff.  I would summarize this shift as follows:

Ten years ago, most of my company's free capacity was used to pursue growth opportunities and refine operations.  Over the last four years or so, all of our free capacity has been spent solely on compliance.

Let me step back and define some terms.  What do I mean by "free capacity?"  In a small, privately-held company, almost all the improvement initiatives spring from the head of, or must heavily involve, the owner.  That would be me.  I have some very capable staff, but when we do something new, it generally starts with me.

So OK, our free capacity is somewhat limited by my personal capacity as owner and President.   But actually, I have a head full of ideas for improving the company.  I'd like to do some new things with training that takes advantage of streaming video.  I'd like to add some customer service screening to our application process.  But my time turns out not to be the only limit -- and this is one of those things that HBS definitely did not teach me.

In the real world, there are only so many new things I can introduce and train my line managers to do, and that they can then pass down to their folks.  An organization can only accept a limited amount of new things (while still doing the old things well).  This is what I mean by "free capacity"  -- the ability to digest new things.

Over the last four years or so we have spent all of this capacity on complying with government rules.  No capacity has been left over to do other new things.  Here are just a few of the things we have been spending time on:

• Because no insurance company has been willing to write coverage for our employees (older people working seasonally) we were forced to try to shift scores of employees from full-time to part-time work to avoid Obamacare penalties that would have been larger than our annual profits.  This took a lot of new processes and retraining and new hiring to make work.  And we are still not done, because we have to get down another 30 or so full-time workers for next year
• The local minimum wage movement has forced us to rethink our whole labor system to deal with rising minimum wages.  Also, since we must go through a time-consuming process to get the government agencies we work with to approve pricing and fee changes, we have had to spend an inordinate amount of time justifying price increases to cover these mandated increases in our labor costs.  This will just accelerate in the future, as the President's contractor minimum wage order is, in some places, forcing us to raise camping prices by an astounding 20%.
• Several states have mandated we use e-Verify on all new employees, which is an incredibly time-consuming addition to our hiring process
• In fact, the proliferation of employee hiring documentation requirements has forced us through two separate iterations of a hiring document tracking and management system
• The California legislature can be thought of as an incredibly efficient machine for creating huge masses of compliance work.    We have to have a whole system to make sure our employees don't work over their meal breaks.  We have to have detailed processes in place for hot days.  We have to have exactly the right kinds of chairs for our employees.  We have to put together complicated shifts to meet California's much tougher overtime rules.  Just this past year, we had to put in a system for keeping track of paid sick days earned by employees.  We have two employee manuals:  one for most of the country and one just for California and all its requirements (it has something like 27 flavors of mandatory leave employers must grant).  The list goes on and on.  So much so that in addition to all the compliance work, we also spent a lot of work shutting down every operation of ours in California, narrowing down to just 3 contracts today.  There has been one time savings though -- we never look at any new business opportunities in CA because we have no desire to add exposure to that state.

Does any of this add value?  Well, I suppose if you are one who considers it more important that companies make absolutely sure they offer time off to stalking victims in California than focus on productivity, you are going to be very happy with what we have been working on.  Otherwise....

I fully understand the dangers of extrapolating from one data point**, but for folks who are scratching their head over recent plateauing of productivity gains and reduced small business origination numbers, you might look in this direction.

By the way, it strikes me that regulatory compliance issues set a minimum size for business viability.  You have to be large enough to cover those compliance issues and still make money.  What I see happening is that as new compliance issues are layered on, that minimum size rises, like a rising tide slowly drowning companies not large enough to keep their head above water.  We are keeping up, but at times it feels like the water is lapping at our chin.

**Unrelated Postscript:  I have found that in the current media/political world, people love to have only one data point.  Why?  Well, with two data points you are are stuck with the line those points define.  With just one, you can draw any line you want in any direction with any slope.

In reading reviews of European restaurants to try to find places to dine, I saw a lot of criticisms of their service.  There seems to be a meme among travelers that Austrian restaurants in particular often have bad service.

I am not sure I can agree with this -- we had a lot of good wait-staff in Austria  But I can say that they had to service a LOT more tables than a typical American waiter.  I don't know what the standard is today, but it used to be that 4-6 tables was the max American restaurants considered that a waitperson could cover and still provide acceptable service.  In Austria, the number was often double that.  I watched one gentleman memorably service almost 20 tables during the busy lunch hour at a museum cafe in Vienna.  I can tell you he was working his butt off but we still had to wait for basic service like ordering or paying our bill or getting our food delivered.

I pair this information with a second factoid from a travel book we read when trying to figure out what tipping policy was over there.  The book, as well as most other sources we consulted, said that tips for waiters in Austria and Germany could be less generous because waiters were paid much more than in the US -- a fact that the source considered a point of superiority over the US for the Europeans.

That may or may not be -- personally, I have never like the US tradition of restaurants outsourcing the paying of their staff to the customers.  But it may well be that these higher wages have their cost in the form of reduced customer service, as restaurants are forced to minimize their higher cost staff to keep prices reasonable.

Verizon's decision to stop subsidizing smartphone purchases in exchange for 2-year contract lock-ins is going to be a big change in the industry.  It will be interesting to see what happens to handset prices.  A while back someone I know had a Verizon iphone that they lost.  They were talking about going out and buying a new one to replace it.   I said, "uggh, an $800 hit."  They looked at me like I was crazy.  They said they had paid something like $300 for it.  I pointed out that that was likely with a 2-year contract lock-in, and that a replacement would go full price which can run over $800 depending on which version they had.

They did not believe me.  In fact they were almost indignant that I would suggest such a thing.  And went running off the the Verizon store with every confidence an iPhone 6 plus could be purchased for $200-$300.

This situation has obtained for a decade.  It will be interesting to see what happens to iPhone sales when customers are exposed to something closer to the true price.  Since most iPhones without contract go for more (substantially more in fact) than the laptops I am buying my employees, I can't help but think that iPhone revenues will suffer.  (Of course, the result could be everyone who wants a new iPhone switching to AT&T from Verizon  -- it is not at all clear Verizon's new no-subsidy rates are low enough to be a better net deal than the old rates+subsidy).

I use Verizon because my business operates in the boondocks and Verizon is almost always the last carrier standing when I drive out to our locations.  I wonder if Verizon will now be allowing unlocked phones?  I presume this will be the case -- T-Mobile is the other company that ended phone subsidies and I moved my unlocked Nexus to them.

By the way, the current T-Mobile $50 a month plan allows unlimited data and text when roaming in 120 countries, and $0.20 a minute international calls from any of these countries.  This is even better than you can do with the old method of buying an international sim card and switching when you land.   No other US carrier is even in the ballpark.  You have to pay Verizon $20 a month or so to get them to reduce international roaming text costs to 50 cents each with some paltry amount of data.  For international travelers, there is no other choice even close to T-Mobile among US carriers.

This is really interesting, and I suppose not surprisingly, quite under-reported.  It appears the blue state model is even worse than we thought for combating poverty.  Not only does it suppress economic growth, but it also tends to raise prices of housing and other necesities

The familiar official [poverty] measure is more than 50 years old, and is showing its age. It has two huge shortcomings: it considers the cost of living to be the same in the 48 contiguous states (a patently ridiculous proposition when considering that the average rent in San Francisco in the first quarter of 2015 was $3,458 vs. $867 in Houston), and it doesn’t account for in-kind benefits, such as Section Eight housing subsidies and Electronic Benefit Transfer cards (food stamps).

Thus, the federal government’s main poverty gauge undercounts material poverty levels in high-cost states such as California, New York, and Hawaii, while over-counting true poverty in much of the low-cost Midwest and South.

Responding to concerns from Congress, advocates for the poor, and academics, some 20 years ago the U.S. Census Bureau began developing an alternative measure of poverty to address weaknesses in the official measure. The Census Bureau’s new, more comprehensive Supplemental Poverty Measure (SPM) is the result....

The authors use this data to compare Texas and California

	Official Poverty Measure Rate, 2011-2013	Supplemental Poverty Measure (SPM) Rate, 2011-2013
California	16.0%	23.4%
Texas	17.2%	15.9%
National Average	14.9%	15.9%

The share of minorities in California and Texas is about 50 percent higher than in the nation as a whole, triple that of Wisconsin or Minnesota, more than quadruple that of Iowa, and about six-and-a-half times that of New Hampshire. Thus, it is an illuminating measure the wellbeing of America’s four largest racial or ethnic groups in the two most-populous states that one-fifth of Americans call home. The table below shows the average SPM for four years, 2010 to 2013, for these four groups.

	White, non-Hispanic SPM Rate, 2010-13	Black, non-Hispanic SPM Rate, 2010-13	Hispanic SPM Rate, 2010-13	Asian SPM Rate,2010-13
California	14.8%	30.1%	33.7%	17.9%
Texas	9.7%	19.9%	22.7%	14.1%
National Average	10.8%	24.7%	27.7%	17.1%

I guess its time for a disparate impact suit against California!

In a related bit of data, here is the real value of $100 in each state (higher is better) which is sort of the inverse of cost of living.  States with higher costs of living will have lower numbers

Leading to this interesting outcome:

Rocochet asks this question over the weekend:  What are your top 5 causes of the fall of the Roman Empire.  OK, I will take a shot at this from my decidedly amateur perspective:

1. Demographic collapse, caused by a series of plagues (perhaps even an Ur version of the black death) and possibly climate change (colder) that depopulated the western half of the empire
2. A variety of policies (e.g. grain dole) that shifted population from productive farms to the cities.  In the 19th century, this shift was to be growth-inducing as farm labor was moving into growing factories, but no such productivity revolution existed in Roman cities.  The combination of #2 with #1 left huge swaths of farmland abandoned, and the Romans dependent on grain ships from North Africa to feed the unproductive mouths in large Italian cities.  It also gutted the traditional Roman military model, which depended strongly on these local farmers for the backbone of the army.
3. The Romans lost their ability to be innovative in including new peoples in their Empire.  The Romans had a bewildering array of citizenship and tax statuses for different peoples who joined or were conquered by the empire.  For hundreds of years, this innovation was hugely successful.   But by the 4th and 5th centuries they seemed to have lost the trick.  The evidence for this is that they could have solved multiple problems -- the barbarians at the gates and the abandonment of farm land and the need for more soldiers -- by finding a way to settle barbarians on empty farm land.  This is in fact exactly what the barbarians wanted.  That is why I do not include the barbarian invasions as one of my five, because it did not have to be barbarian invasions, it could have been barbarian immigration.  Gibson's thesis was that Christianity killed the Roman Empire by making it "soft".  I don't buy that, but it may have been that substituting the Romans' earlier incredible tolerance for other religions in their Pagan period with a more intolerant version of Christianity contributed to this loss of flexibility.
4. Hand in hand with #3, the Roman economy became sclerotic.  This was the legacy of Diocletian and Constantine, who restructured the empire to survive several centuries more but at the cost of at least an order of magnitude more state control in every aspect of society.  Diocletian's edict of maximum prices is the best known such regulation, but in fact he fixed most every family into their then-current trades and insisted the family perform the same economic functions in all future generations.  Essentially, it was Ayn Rand's directive 10-289 for the ancient world, and the only reason these laws were not more destructive is that the information and communication technologies of the time did not allow for very careful enforcement.
5. Splits in the governance of the empire between west and east (again going back to Diocletian) reduced the ability to fund priorities on one side of the empire with resources from the other side.  More specifically, the wealthy eastern empire had always subsidized defense of the west, and that subsidy became much harder, and effectively ended, in the century after Diocletian.

I will add, as a reminder, that to some extent this is all a trick question, because the Roman Empire really did not totally fall until the capture of Constantinople in 1453.  So I should have stated at the outset that all of the above refers to the fall of the western empire in the late 5th century, which in part explains why #5 is there in the list.

And, if you were in a room of historians of this era, you could quickly get into an argument over whether the western Roman empire really fell in the late 5th century.  For example, the Visigothic Kingdom in the area of modern southern France and Spain retained a lot of Roman practices and law.  But I have gone with tradition here and dated the "fall" of the empire to 476 when the Roman Emperor was deposed and not replaced.

Bloomberg (via Zero Hedge) had this chart on Disney theme park entrance prices:

A few random thoughts:

• This highlights how hard it is to do inflation statistics correctly.  For example, the ticket being sold in 1971 is completely different from the one being sold in 2015.  The 2015 ticket gets one access without additional charge to all the attractions.  The 1971 ticket required purchase of additional ride tickets (the famous, among Disney fans, A-E tickets).  So this is not an apples to apples comparison.  Further, Disney has huge discounts for multi-day tickets.  The first day may cost $105, but adding a fourth day to a three day ticket costs just a trivial few bucks.  Local residents who come often for a single day get special rates as well.  So the inflation rate here grossly overestimates that actual increase in per person, per trip total spending for access to park attractions
• This is a great case in pricing strategy.  Around 1980, the Bass family bought into a large ownership percentage of Disney.  The story I am about to tell is often credited to their influence, but I am not positive.  Never-the-less, someone had a big "aha!" moment at Disney.  They realized that families were taking trips just to visit DisneyWorld.  These trips cost hundreds, even thousands of dollars.  The families were thus paying hundreds of dollars per person to enjoy Disney, of which Disney was reaping... $9.50 a day.  They had a stupendously valuable product (as far as consumers were concerned) but everyone else in the supply chain was grabbing most of the value they created.  So Disney raised prices, on the theory that if a family were paying over a thousand dollars to get and stay there, they would not object to paying an extra $50 at the gate.  And they were right.

One of the critiques of any trade deal of late is that there should be penalties for countries guilty of "currency manipulation."  The concern is that countries will devalue their currency in an effort to make their own exports cheaper to other nations while making it harder for other countries to export back to them.  As an example, if the Chinese were to do something that cuts the value of the Yuan in half vs. the dollar, their products look very cheap to American consumers while American-produced goods suddenly look a lot more expensive to Chinese consumers.

I have two brief responses to this:

1. I find it hilarious that anyone in the United States government, which has a Federal Reserve that has added nearly $2 trillion to its balance sheet in the service of cramming down the value of the dollar, can with a straight face accuse other nations of currency manipulation.  In practice in today's QEconomy, currency manipulation means another country is doing exactly what we are doing, but just doing it faster.
2. As an American consumer, to such currency manipulation by other countries I say, Bring it On!  If China wants to hammer its own citizens with higher prices and lower purchasing power just to subsidize lower prices for me, I am happy to let them do it.  Yes, a few specific politically-connected export businesses lose revenues, but trying to prop them up is pure cronyism.  Which is one reason I think Elizabeth Warren is a total hypocrite.  The constituency of the poor and lower middle class she presumes to speak for are the exact folks who shop at Walmart and need very price break on everyday goods they can get.  Senator Warren's preferences for protectionist trade policies and a weak dollar will hurt these folks the most.

The tech site Engadget directed me to this article on Visual FX and CGI as a "must-read".  What I found was one of the odder economics and business hypotheses I have encountered lately.

The article begins by relating that VFX and digital effects specialty houses all lose money, even when they are providing effects for wildly profitable movies (e.g. Avengers) and purports to explain why this should be.  The author believes that this is a result of Hollywood purposely criticizing the artistry of VFX movies as a way to keep returns in the VFX companies down (and thus increase the returns of film producers).

As the debate surrounding what visual effects are worth rages on, it is clear that the studios themselves have an interest in perpetuating the myth that VFX are the product of clinical assembly lines and the results are equally lifeless and mechanical. Blaming computers for the dumbing down of movies has become a journalistic trope that is bandied about to squeeze the one part of the Hollywood machine that has no union or organizational skill to push back. The right hand asserts they are something not worth paying top dollar for, while the left lines up an interminable roster of VFX-based box office juggernauts for the foreseeable future.

The author goes so far as to say that Avatar was denied the best picture Oscar specifically to support the anti-VFX sentiment and keep returns of VFX companies down (emphasis added).

In 2010, James Cameron’s Avatar became the highest grossing film of all time just 41 days after its release, raking in an incredible $2.7 billion by the end of its run. Weta Digital, the VFX studio that created the majority of the visual effects, along with Lightstorm Entertainment, invested years in developing the tools and talent necessary to create Cameron’s almost entirely computer generated vision, with the cost of making the film rumored to be upwards of $500 million. Cameron had promised to show the world what visual effects could do and he succeeded. The results were universally lauded as visually stunning and unparalleled.

Yet, rather famously, the film and Cameron were snubbed that year at the Academy Awards, both for Best Picture and Best Director. The blame was laid at the feet of the critical success of The Hurt Locker. However, awarding Avatar the Academy’s highest honor would have been acknowledging visual effects as not only lucrative, but high art as well, worthy of its astronomical price tag. And that was a bargaining chip Hollywood was unwilling to concede to an industry it continues to hold hostage with threats of outsourcing to unskilled laborers around the globe.

This hypothesis seems outlandish, and in fact the author never really provides any evidence whatsoever for her hypothesis.   At least equally likely is that Hollywood insiders are snobbish and conservative and reject new approaches to film-making in a way that the public does not.  Or it could be that Avatar wasn't a very good movie (go try to watch it again today, you will be surprised what a yawner it is).  So why are VFX companies really losing money on profitable films?   Let's take a step back, because there is a useful business lesson buried in here somewhere.  I think.

This discussion is a sub-set of an age-old business problem -- how do rents in a supply chain get divided up?   Think of the billion plus dollars the new Avengers movie will make.  Everyone in the supply chain for making that movie, from the actors to the caterers to the VFX houses to the distribution companies believe their contribution has immense value, and that they should be getting a solid cut of the profits.  But profits in a supply chain are not divided up based on some third party assessing value, they are divided up by negotiation.  And the results of that negotiation depend on a lot of factors -- the number of competitors, the uniqueness of the service, regulatory rules, etc.  The most visible example of this sort of negotiation we see frequently in the news is in sports, where players and team owners are explicitly negotiating the division of the end revenue pie between themselves.

If we return to the article, the author actually gives us a hint of the true dynamic that is likely bringing down VFX profits.

The international subsidies-driven business model under which VFX companies operate has been well documented. In pursuit of tax rebates offered by various governments to produce films in their jurisdiction, studios insist that VFX companies open branches in these locations or reduce their bids by the amount of the subsidy in question. Even as studios, directors, and audiences demand the latest in cutting edge technology, VFX houses must underbid one another to get the work and many have been shuttered due to operational losses in the wake of explosive blockbuster budgets. The cost of research and development, shrinking schedules, and the unlimited changes that are the building blocks of every tentpole film, are shouldered entirely by VFX houses.

This is the best clue we get to the real problem.  Here is what I infer from this paragraph:

1. This is a high fixed cost industry.  There are enormous up-front investments in research into new techniques and large investments in the latest technology, which presumably must be constantly refreshed because it has a short half-life before it is out of date.  The situation is worsened by government policy, which provides incentives for VFX companies to build extra capacity in multiple countries, losing economy of scale benefits from large concentrated production facilities.    One would presume from this that these companies' marginal cost of output, say 15 seconds of finished effects, is way way below their total costs.
2. There is rivalry among VFX companies that seem to have excess capacity, such that bidding for work is very aggressive.  In such situations (think American railroads in the late 19th century) competitors lower prices down to marginal cost to keep their capacity and their trained people working.  Over time, of course, this leads to numerous bankruptices

I will add a third point which the author fails to cover.  To do so I will return to one of my favorite things I learned at Harvard Business School (HBS).  At HBS, in the first two days of strategy class, we studied two very different business cases.  The first was of a water meter manufacturer, a dead boring predictable unsexy business.  The second was a semiconductor company, which was hip and cool and really sexy.  It turned out that the water meter company coined money.  The semiconductor business was in and out of bankruptcy.

Why?  Well the water meter company had limited investment (made the same meters the same way for decades) and made most of its money off the replacement market, where it had no competitors since users pretty much had to replace with the same meter.  The semiconductor business had numerous shifting competitors and was constantly trying to scrape up enough investment money to keep up with shifting technology.  But there was one more difference.  By being sexy, tons of people wanted to be in the semiconductor business. They got non-monetary benefits from being in it (ie it was cool and interesting).  When there is an industry where lots of people are getting into the business for reasons other than making money, look out!  The profits are probably going to be terrible.   This is why most restaurants fail.  The business-for-sale listings are awash in brew pubs.   The aviation industry was like this for years, and I would argue this also suppresses rents in farming.

I don't know this for a fact, but I would bet that the VFX industry attracts a lot of people because it is sexy.  Yes, like a lot of programming, the actual work is detailed and dull.  But if the coding is detailed and dull, would you rather be doing it for Exxon's new back-office system or to put Ironman on the big screen (and have your name deep into the film credits, seen by the dozen or so people who hang around waiting for the Marvel Easter egg at the end)?

This is why I think a conspiracy theory to believe Hollywood is dissing the artistry of VFX movies as a way to keep VFX company rents down is silly.  It is totally unnecessary to explain the bad rents.  Had you told me it was a high investment business with huge fixed costs and much lower marginal costs and alot of rivalry driven by participants who piled into the business because it was sexy, I would have told you to stop right there and I could have immediately predicted poor returns and bankruptcies.

So what can VFX companies do?  I have no idea.  The first idea I would offer them is branding.  If you are buried deep in the supply chain and want to increase your bargaining power, one way to do it is to develop a brand with the end consumer.   If consumers suddenly latch on to, say, the CoyoteFX brand as being innovative or better in some way, such that they might be more likely to go to a movie with CoyoteFX sequences, then CoyoteFX now has a LOT more power in negotiations with producers.  Dolby Sound is a great example -- you probably don't even know what it is but movies used to advertise they had it.  Certain camera technologies like Panavision are another, where movies actually sold themselves in part on the features of one member of their supply chain.  As a digital house, Pixar effectively did this -- so well in fact its brand actually was bigger than Disney's (its distributor) for a while, and Disney was forced to buy them.  This does not happen just in movies.  I just bought a car that advertised it had a premium Bose sound system.  The car maker doesn't advertise who made, say, the fuel tanks, so my guess is that Bose, via branding, gets a better cut of the supply chain than does the fuel tank maker.

We are already seeing articles bemoaning the strong dollar as somehow a threat to the American economy.  Don't believe it.  Maintaining a weak dollar is yet another crony government program that benefits a tiny minority of admittedly vocal and politically connected Americans.

First, a bit of an aside.  It is amazing to me that the US dollar can be strong at all right now, given the actions of the Fed.  With its near infinite QE and zero-interest rate programs, one would expect the dollar to be weak (Oversimplifying, driving down the returns on financial assets reduces the overseas demand for them, thus reducing the demand for dollars, driving down the price of dollars).  But it turns out that the rest of the world (esp. Japan and the EU) are actually working twice as hard to trash their own currencies (they are actually heading into negative interest rate territory, not just zero) and thus on a relative basis, the dollar is stronger.

Companies that export or compete a lot with manufacturers in other countries hate the strong dollar.  It makes their domestically produced products more expensive vis a vis products manufactured in other countries.  Many of these companies have powerful political voices, and some have large unions with even more powerful political voices.  They lobby for a weaker dollar.  Part of that lobbying is often to portray other countries as nefariously "manipulating" their currencies to hurt the US.

What these countries that are weakening their own currencies are actually doing is trashing the prosperity of the vast majority of their citizens to protect the earnings of a few politically powerful producers.  Japan is a great example.  Japan is a country in which consumers have been stomped on from decades in order to reduce the price of the country's exports.  Japanese consumers pay far more for everything than we do, all so their exporters can lower their prices in the US.

This is the same in China.  We frequently host visiting Chinese students.  You know what every one of these kids do on their trip to the US?  They bring an empty suitcase that they fill up with electronic and fashion goods they buy here, many of which were actually manufactured in China  (I have never, ever have hosted a Chinese student that did not buy at least one Chinese-manufactured iPhone here).

So, we must oppose this currency "manipulation" that impoverishes Japanese, Chinese, and European citizens in favor of giving much lower prices to Americans -- Why?

We should celebrate the strong dollar.  It makes every one of us richer.  Not just when we buy Chinese electronics, but even when we buy American-made products that now must be less expensive to compete with foreign products and which benefit from cheaper inputs in their own manufacturing.

Years and years ago I wrote a hypothetical post about Chinese interventions to maintain a trade surplus form a Chinese consumer's perspective in a post from our sister publication Panda Blog.  I think it holds up really well.  It said in part:

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

I teach one 90-minute class a year in the senior economics elective at my kids' high school.  The teacher gives me a pretty free ability to cover whatever I wish.

Rather than trying to cover some school of thought, I instead focus the class on the seen and unseen (starting with quotes from Bastiat and Hazlitt).  We have about 12 economic problems, where we start with the seen, and then introduce the unseen.  We start with the classic broken window as the first one.

I teach the class with role play.  I give every student a couple of business cards with their role typed on them.  When I call on them I have them advocate for their role.  I have started to give a small food reward at the end of class to the student who best gets into character -- this has helped the role play immensely.   Let's take one example I do towards the end of the class involving price gouging after a hurricane.

We begin with the governor of Florida who has just signed an anti-price-gouging law.  We talk about how everyone hates price-gouging after a disaster.  What could be worse, right?

We then talk about a woman who spends most of her time at home, but rushes out to fill her gas tank right after the storm hits.  She has to wait in line for gas for 2 hours because everyone else has done the same as she, racing to the station, but she doesn't mind because she doesn't have anything else to do and feels better.  If asked if she would have topped off her tank if the price jumped to $6 from $3, she says no way.

Then we have an owner of a roofing company enter the fray.  His men are working 14 hours a day to put roofs on houses.  He is making a lot of money, and doing a lot of good as well.  Nothing is more important to people than fixing the roof before the next rain.  He may be the most important man in Florida at that moment.  But he can't keep up with demand, and worse, his guys are having to sit for 2 hours at a time to fill up their company trucks, when they should be repairing roofs.   He would gladly pay $10 a gallon if he could just keep his men on the job and not in gas stations.

So at this point we discuss "fairness".  It seems fair not to raise prices to "take advantage" of a disaster.  But is it fair to allocate gas away from the busiest and most productive whose time is most valuable to the people who are least productive and have the lowest value for their time?  We discuss how price caps shift rationing from price to queuing, and the people who get the product shift from those who most value it to those who assign the lowest value to their own time.

Finally, we discuss a guy in Georgia who has a tanker of gas he was going to send to a station in Atlanta.  They need the gas more in Florida, but they aren't paying more for it under the new price-gouging law, and so with his higher costs of driving all the way to Florida vs. Atlanta he is going to sell the gas in Atlanta.  If the price of gas in Florida were to rise to $6, he would send his truck of gas to Florida in a heartbeat.

This is the kind of discussion we have.   We will end up in a debate, with kids pointing out all kinds of things -- eg poor people who have a life or death need and might be shut out at $6.  We don't try to resolve things, but want them to understand there are unseen consequences to actions like price-gouging laws that must be considered along with the seen.  They may end up dismissing the unseen as less important than the seen, but it should not be ignored.

If anyone finds themselves in the same situation as me needing to teach a group (it could be adults as well) you are welcome to use my materials.  I actually print the business cards on Avery two-sided business card paper.  Attached are separate files for the front and back of cards as well as a sort of discussion key I use to guide the conversation.  We get into things, at least tangentially, like public choice theory and concentrated benefits / dispersed costs.

If you want to use the materials, you are welcome to email me with questions.  But these are all public domain so help yourself without permission.  (By the way, in trying to match the front to the back of each card in your mind, remember there is a mirroring effect, so the text on the right card on the backs in any given row goes with the front of the card on the left of the same row in the other file).

economics class discussion guide

economics class biz cards front

economics class biz cards back

My absolute favorite example of corporations using social causes as cover for cost-cutting is in hotels.  You have probably seen it -- the little cards in the bathroom that say that you can help save the world by reusing your towels.  This is freaking brilliant marketing.  It looks all environmental and stuff, but in fact they are just asking your permission to save money by not doing laundry.

However, we may have a new contender for my favorite example of this.  Via Instapundit, Reddit CEO Ellen Pao is banning salary negotiations to help women, or something:

Men negotiate harder than women do and sometimes women get penalized when they do negotiate,’ she said. ‘So as part of our recruiting process we don’t negotiate with candidates. We come up with an offer that we think is fair. If you want more equity, we’ll let you swap a little bit of your cash salary for equity, but we aren’t going to reward people who are better negotiators with more compensation.’

Like the towels in hotels are not washed to save the world, this is marketed as fairness to women, but note in fact that women don't actually get anything.  What the company gets is an excuse to make their salaries take-it-or-leave-it offers and helps the company draw the line against expensive negotiation that might increase their payroll costs.

Postscript:  Yes, I understand the theory of negotiation and price discrimination, as used by auto dealers.  One can make an argument that setting prices high (or wages low) and then allowing negotiation by the most wage or price sensitive is the best way to optimize profits, and that Pao's plan in the long-term may actually raise their total compensation costs for the same quality people.  I don't think she is thinking that far ahead.

California is the #2 rice grower in the nation, with 22% of US production.

There is a debate growing in California about whether crops like almonds (that use a lot of water) should be allowed.  But all that authoritarian command and control debate about "allowing" certain activities is unnecessary.  Just raise prices to some sort of supply and demand matching level (it is a bit awkward to do this because there is not a true free market in water supply but any attempts have got to be better than the current absurdly low prices).  Then the almond growers themselves, and the rice growers, and the golf courses, and everyone else will decide if they can still operate in CA or not.  No politicians' commands necessary.

Raising prices also creates a secondary benefit over government-imposed rationing -- it provides incentives for people to seek out and invest in new sources of supply.  Desalinization, any one?

This quote from a hotel owner in Venezuela that now asks its patrons to bring their own toilet paper caught my eye:

Camacho says she refuses to buy toilet paper from the black market on principle.

“In the black market you have to pay 110 bolivares [$0.50] for a roll of toilet paper that usually costs 17 bolivares [$ 0.08] in the supermarket,” Camacho told Fusion. “We don’t want to participate in the corruption of the black market, and I don’t have four hours a day to line up for toilet paper” at a supermarket….

I see this all the time, the notion there is somehow a "correct" price that no one is willing to charge.   There is nothing real about the 17 bolivares price.  It is a fiction.  There are only two real prices in the market -- 110 bolivares PLUS any risk/penalty from breaking the law or 17 bolivares PLUS 4 hours of your personal time.  My sense is that if the legal risk of buying on the black market is low, and you knew the average order size and the value people placed on their own time, you would find these two prices converging.  But in any case, it is dumb to continue to insist that 17 bolivares is the "right" price.

I really, really did not want to have to write yet another post on this.  99+% of all climate funding goes to alarmists rather than skeptics.   Greenpeace laments donations of funds to skeptics by Exxon of a million dollars or so and wants to drive out all such funding when Greenpeace and Tides and the US Government are giving literally billions to alarmists.  Despite this staggering imbalance, the only stories you ever see are about the dangers and bias introduced by that measly 1% skeptics get.  I guess that 1% is spent pretty well because it sure seems to have people running in circles declaring the sky is falling.

One would think that at some point the world would wake up and realize that criticizing the funding sources behind an individual does not actually rebut that individual's arguments.

Potential bias introduced by funding sources (or some other influence) are a pointer -- they are an indication there might be a problem warranting deeper examination of the evidence introduced and the methodology of collecting that evidence.  Such potential biases are not themselves evidence, and do nothing to rebut an argument.  A reasonable way to use such biases in an argument would be something like:

I want to begin by noting that Joe may have had a predisposition to his stated conclusion even before he started because of [funding source, political view, whatever].  This means we need to very carefully look at how he got to his conclusion.  And I intend to show you that he made several important errors that should undermine our acceptance of his conclusions.  They are....

Unfortunately, nowadays people like the New York Times and our own Arizona Representative Raul Grijalva seem to feel like the job is done after the first sentence.  They have decided that the best way to refute recent scientific work by a number of climate scientists is to try to show that some of their funding comes from fossil fuel companies.

Beyond the strange implicit assumption that fossil fuel funding would automatically "disprove" a research paper, there is also an assumption that oil company funding is "unclean" while government or non-profit environmental group funding is "clean".  Remember the last time you saw a news story about a climate alarmist's funding?  Yeah, neither do I.

There is no justifiable reason for this asymmetry.  Funding does not potentially introduce bias because it is sourced from for-profit or non-profit entities.  In fact, the motivation of the funding source is virtually irrelevant.  The only relevant questions related to bias are:

1. Did the funding source demand a certain conclusion at the outset of the study as the price of the funding -- or --
2. Is there a reasonable expectation that the source would deny future funding if the conclusions of the study don't go their way

My sense is that #1 is rare and that the real issue is #2.

But #2 is ubiquitous.  Sure, if a group of skeptical scientists suddenly started writing papers about 8 degree warming predictions, Chevron is going to be less likely to fund their future research.  But on the flip side if Michael Mann suddenly started saying that future warming will only be a modest 1-2 degrees, do you think that he would continue to get funding from Greenpeace, the Tides Foundation, the WWF, or even from an Obama-run Federal agency?  No way.   There is absolutely no less bias introduced by Chevron funding than from Greenpeace funding, because in each case there can be a reasonable fear by the researcher that future funding would be denied by that source if the "right" answer was not reached.

Postscript & Disclosure of Biases:  I have never received any outside funding for this blog or my climate work.  However, if Chevron were to send me a check for a million dollars, I would probably cash it.  I do own individual shares of ExxonMobil stock as well as shares of the Vanguard S&P500 index fund, which includes equities of a number of energy companies.  I also am a frequent purchaser of gasoline and electricity, as well as a number of other products and services whose prices are tied to energy prices (e.g. air transportation).  As a consumer, I would rather not see the prices of these products rise.  I buy a lot of food, whose price might be improved by longer growing seasons.  My camping company tends to benefit from rising gasoline prices, because rising prices causes people to stay closer to home and camp at the type of places we operate.  It is hard to predict how regional climates will change if overall global temperatures rise, but since many of my campgrounds are summer escapes at high altitude, they would probably benefit somewhat from rising temperatures.  I own a home in Arizona whose value would probably be lessened if the world warmed 2-3 degrees, because it would make winters in the northeast and midwest more bearable and thus hurt Arizona as a location for a winter second home.  Global warming may reduce the life of my dog as we are less likely to walk her when it is over 100 degrees out which makes her less healthy.  I own land in Hawaii that might be more valuable if sea level rises puts it 6-8 inches close to the ocean.  I am planning a vacation to see the tulips bloom in Holland and changes in climate could shift the blooming date and thus cause me to miss the best colors.  Fifteen years from now my daughter would like a June wedding and changes to climate might cause it to rain that day.  My daughter also owns 5 shares of Walt Disney and their earnings might be helped by global warming as nostalgia for cooler weather could greatly increase DVD sales of "Frozen".

I wrote the other day about how Kevin Drum was confused at why broadband stocks might be rising in the wake of news that the government would regulate broadband companies as utilities.  I argued the reason was likely because investors know that such regulation blocks most innovation-based competition and tends to guarantee companies a minimum profit -- nothing to sneeze at in the Internet world where previous giants like AOL, Earthlink, and Mindspring are mostly toast.

James Taranto pointed today to an interesting Richard Eptstein quote along the same lines (though he was referring to hospitals under Obamacare):

Traditional public utility regulation applies to such services as gas, electric and water, which were supplied by natural monopolists. Left unregulated, they could charge excessive or discriminatory prices. The constitutional art of rate regulation sought to keep monopolists at competitive rates of return.

To control against the risk of confiscatory rates, the Supreme Court also required the state regulator to allow each firm to obtain a market rate of return on its invested capital, taking into account the inherent riskiness of the venture.

I have to say I told you so, but, from a reader, Staples threatens to fire anyone who works over 25 hours:

Part-time Staples workers are furious that they could be fired for working more than 25 hours a week.

The company implemented the policy to avoid paying benefits under the Affordable Care Act, reports Sapna Maheshwari at Buzzfeed. The healthcare law mandates that workers with more than 30 hours a week receive healthcare.

If Staples doesn't offer benefits, it could be fined $3,000 in penalties per person.

I can tell you from personal experience that $3000 is a staggering penalty.  For a full time worker at $8 an hour, this is over 2 months pay -- 2 months pay extra the company has to pay but the worker never sees.

As I have written before, we have moved heaven and Earth to get every employee we can in our company converted to part-time.  We had absolutely no alternative -- after seeking quotes from about 20 places, no one would offer our company any sort of health insurance plan at any price**.  So no matter what we did, we were facing the $3000 penalty for each full-time workers, so all we could do to manage the situation was convert full-time workers to part-time.

** We have seasonal workers, which makes insuring us awkward and expensive because there are high administrative costs with people constantly going on and off the plan.  We also have a very old work force.  Obamacare prevents insurers from charging the much higher premiums to older people that our costs might justify -- it milks younger people with prices well above their cost to serve to pay for subsidizing older people.  Insurers would be crazy to voluntarily add groups that are purely old people, they would lose their shirt.  So they refuse to quote us.

This letter to customers from San Francisco bookstore Borderlands is making the rounds.  Apparently, the new "living wage" legislation in San Francisco is killing this store:

In November, San Francisco voters overwhelmingly passed a measure that will increase the minimum wage within the city to $15 per hour by 2018.  Although all of us at Borderlands support the concept of a living wage in [principle] and we believe that it’s possible that the new law will be good for San Francisco – Borderlands Books as it exists is not a financially viable business if subject to that minimum wage.  Consequently we will be closing our doors no later than March 31st.  The cafe will continue to operate until at least the end of this year.

I find the authors surprisingly open to the Progressive assumptions behind this bill, despite the death of their business.  I don't know if this is a pair of hipsters destroyed by their own cause, or if the nods towards Progressivism are merely boiler plate that is required in any San Francisco conversation, like having a picture of Lenin on your wall in Soviet Russia.

Anyway, I found the language here familiar because I spent most of last year writing such letters to angry customer bases.  In our case, fortunately, we had the ability to raise prices so the letters were to defuse customer irritation rather than to announce a closure.  Here is one example I wrote in Minnesota:

Labor and labor-related costs (costs that are calculated as a percentage of wages, like employment taxes) make up nearly 50% of our costs.  The Minnesota minimum wage is set to rise from $7.20 to $9.50 in the next two years, an increase of 31%.  Since wages and wage-related costs are half our expenses, the minimum wage increase raises our total costs by 15.5%. This means that all by itself, without any other inflation in any other category of expenses, the minimum wage increases will drive a $3.10 increase in our camping fees (.155 x $20).  Note that this is straight math.  The moment the state of Minnesota passed their minimum wage increase, this fee increase was going to be required.

One of the problems with these minimum wage increases is that the people behind them, with their hazy assumptions and flawed understanding of economics, typically think that companies will just absorb the increase.   Our net profit margin runs in the 4% range, so it difficult to see how any such retail company can absorb a 15+% cost increase, but it happens all the time.  After some trial and error, the "this is straight math" phrase seems to work the best in communicating the need for price increases.