Tuesday, September 19, 2017

In Australia, as Renewables Surge the Price of Electricity Doubles

Activist happy talk that transitioning to renewables will be cheap is entirely specious.

By Ronald Bailey of Reason.

"The price of electricity is soaring in Australia largely because of mandated adoption of renewable power generation.

Yes, the price of renewable energy continues to fall, but mandating the installation of current wind and solar power technologies still boosts the price of electricity in countries pursuing decarbonization strategies as a way to mitigate climate change.

In an op/ed, "Green Madness: Australia Has Gone from Cheapest to Most Expensive Power," in The Australian, Flinders University economist Judith Sloan details what has happened to electricity prices as the government has enacted its Renewable Energy Target (RET) scheme.


Sloan observes:
The kicker is the fact renewable energy, with its preferential dispatch status and low operating costs, sends ­dispatchable power plants into early retirement and kills off the incentives to build new ones. Note that since 2011 nearly 6000 megawatts of coal-fired plant capacity has been withdrawn from the ­market, or close to 12 per cent of total capacity.
Now the point is often made that we have reached this appalling position — high-cost, unreliable electricity affecting, in particular, the competitiveness of our heavy industries — because of very poor government policy.
But whether the outcome was entirely unintended is not so clear-cut. From the time John Howard introduced the first version of the renewable energy target, it was a one-way street to more subsidised, intermittent renewable energy and an investment strike in dispatchable energy. This was the aim; it could not have been otherwise.
Australia's RET scheme has set a national renewable energy target of 20 percent by 2020. As of July, renewables accounted for about 18.8 percent of Australia's electric power generation, 41 percent coming from hydroelectric plants, 31 percent wind, 18 percent rooftop solar, and two percent from large solar farms.

Consider the cases of Germany and Denmark, two countries which have been aggressively mandating the switch to wind and solar power.

As Reuters reports Germany "has been getting up to 85 percent of its electricity from renewable sources on certain sunny, windy days this year." Overall, Deutschland got about 35 percent of its electricity from renewable sources in the first half of 2017. Rather stupidly, Germany is phasing out its no-carbon nuclear power plants which supplied 25 percent of the country's electricity in 2011, which has since fallen to 14 percent.

Interestingly, Germany still generates 43 percent of its electricity by burning coal, mostly lignite. In order to prevent manufacturers in search of lower energy prices from leaving, Germany charges very low wholesale prices for electricity, but has some of the highest retail rates in the world.
IEEE Spectrum noted that renewables provided about 56 percent of Denmark's power as of March, 2017.

In 2016, hydropower generated 6.5 percent of the United States renewable energy. Wind and solar accounted for 5.6 and 0.9 percent respectively.

I have concluded that the balance of the evidence suggests that unmitigated man-made climate change could likely pose significant problems for humanity as the 21st century unfolds. That said, activist happy talk asserting that mandating the adoption of current versions of renewable energy technologies as a way to transition from fossil fuels will be cheap is entirely specious. The trade-offs between using cheap fossil fuels now to spur economic growth and the risks of future climate change must be acknowledged."

Global warming predictions may have been too gloomy

By Ben Webster, Environment Editor of The London Times.

"When 194 nations met in Paris in 2015 and agreed to try to limit the increase in global average temperature to 1.5C, many scientists dismissed the goal as unattainable.

They said it would be politically and economically impossible to cut emissions fast enough and that the world would have to prepare for the effects of an increase of more than 1.5C, including worse droughts and heatwaves and islands disappearing beneath rising seas.

Now it turns out the scientists were being too pessimistic and had been led astray by computer models which overstated the rate of warming.

Other factors have also contributed to the new, more optimistic assessment, including the cost of renewable energy and China’s emissions growth both falling faster than almost anyone had predicted.
Many climate sceptics had, however, repeatedly criticised climate scientists’ computer models for being “on the hot side” and diverging from the slower warming trend shown in actual records.

Computer models remain the best way of working out how quickly we need to cut emissions to avoid catastrophic climate change, but climate scientists could be nimbler at revising them when actual temperature readings diverge from predictions."

Monday, September 18, 2017

Why Home Care Costs Too Much

Regulations often require that nurses do simple tasks like administer eyedrops

By Paul Osterman in The WSJ. Excerpts:

"There are two million home health aides in the U.S. They spend more time with the elderly and disabled than anyone else, and their skills are essential to their clients’ quality of life. Yet these aides are poorly trained, and their national median wage is only a smidgen more than $10 an hour.

The reason? State regulations—in particular, Nurse Practice Acts—require registered nurses to perform even routine home-care tasks like administering eyedrops. That duty might not require a nursing degree, but defenders of the current system say aides lack the proper training. “What if they put in the cat’s eyedrops instead?” a health-care consultant asked me. In another conversation, the CEO of a managed-care insurance company wrote off home-care aides as “minimum wage people.”

But aides could do more. With less regulation and better training, they could become as integral to health-care teams as doctors and nurses. That could improve the quality of care while saving buckets of money for everyone involved."

"Then, with improved training, aides could take on some tasks now done by nurses, such as giving patients those eyedrops or other prepackaged medicines. It’s just a matter of scaling up existing curricula. A monthlong program, developed by the nonprofit Paraprofessional Health Institute, teaches aides about chronic diseases, handling clients with dementia, and performing simple medical tasks. New York state has created an “advanced aide” classification to recognize such training."

"Yet the potential cost savings are considerable. There are 2.3 million Medicaid patients receiving long-term care at home. Imagine if even half of them replaced one hourlong nurse’s visit a month with a stop by a trained aide. Assuming the nurse makes $35 an hour and the aide $15, that’s an immediate savings of roughly $275 million a year."

Americans Get Richer: The latest Census data show economic gains across income groups

WSJ editorial.
"Liberals can’t credit welfare programs whose growth has slowed thanks in part to reforms imposed by Congress. According to the most recent data, the Social Security disability rolls fell by 25,000 in 2015 after growing by 1.3 million between 2009 and 2014. The number of food stamp recipients dropped by 3.4 million between 2013 and 2015. In 2014, 99 weeks of unemployment benefits finally ceased.

Most of the recent income growth has been due to more Americans working—and Americans working more. Between 2015 and 2016, the number of people with earnings—i.e., income from employment—rose by 1.2 million. Meanwhile, the number of full-time, year-round workers increased by 2.2 million as many people moved out of part-time jobs.

Labor force participation hasn’t much budged since its nadir two years ago, but unemployment among minorities and less-educated workers has dropped sharply amid a tightening labor market. Job growth is a function of an improving economy and lower infra-marginal taxes on work as government welfare has been scaled back.

Liberals are bemoaning that the Gini coefficient, which measures income inequality, didn’t post a significant decline last year. But income inequality drops principally during recessions as the wealthy lose a larger share of their earnings than everyone else. As we learned in the Obama years, the preoccupation with inequality leads to economic policies that reduce growth, which leads to more inequality.

The left also overlooks that millions of middle-class Americans are moving into higher income brackets, as Mercatus Center researcher Dan Griswold points out. The share of Americans earning less than $35,000 (in real 2016 dollars) fell to 30.2% from 38.2% between 1967 and 2016 while the proportion earning more than $100,000 has roughly tripled to 27.7%."

Sunday, September 17, 2017

Does It Matter If We Call Entrepreneurs Heroes?

Should society call entrepreneurs heroes? Are they like heroes from mythology? Those may seem like strange questions for an economist to ask. But they matter for several reasons. Dwight Lee and Candace Allen argued that if we don't honor entrepreneurial accomplishments, we won't get enough startups. Deirdre McCloskey says that economic growth only took off around the year 1800 because the West began according dignity to entrepreneurs. The work of entrepreneurs parallels the hero's adventure in mythology. The idea has been gaining attention recently, being discussed in The Wall Street Journal while Jeffery McMullen has called for scholars to once again take it seriously. Even Joseph Campbell, the author of The Hero With a Thousand Faces, one of the inspirations for Star Wars, called the entrepreneur the real hero in American capitalistic society in a radio interview (see appendix). 
            Cyril Morong was the first to examine the similarities between entrepreneurs and mythological heroes.[i],[ii] He compared entrepreneurship research to The Hero With a Thousand Faces to see if the activities of entrepreneurs corresponded to the hero's adventure. What is the hero's adventure? According to Campbell
"The standard path of the mythological adventure of the hero is a magnification of the formula represented in the rites of passage: separation-initiation-return, which might be named the nuclear unit of the monomyth. A hero ventures forth from the world of common day into a region of supernatural wonder; fabulous forces are there encountered and a decisive victory is won; the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man."

How is this similar to the entrepreneur's adventure?
            The hero's journey begins with a call to adventure. He or she is awakened by some herald which touches his or her unconscious world and creative destiny. The entrepreneur, too, is "called" to the adventure. By chance, he or she discovers a previously unknown product or way to make a profit. The lucky discovery cannot be planned and is itself the herald of the adventure. Israel Kirzner sees successful entrepreneurship as result of a lucky discovery of a new opportunity for economic profit, but it is luck that was due to alertness while leading a life of purposeful action.[iii]
            The entrepreneur must step out of the ordinary way of producing and into his or her imagination about the way things could be to discover the previously undreamt of technique or product. The "fabulous forces" might be applying the assembly line technique or interchangeable parts to producing automobiles or building microcomputers in a garage. The mysterious adventure is the time spent tinkering in research and development. But once those techniques are discovered or developed, the entrepreneur now has the power to bestow this boon on the rest of humankind.
            Heroes and entrepreneurs both bring change. Campbell refers to the constant change in the universe as "The Cosmogonic Cycle" which "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero." This is similar to Joseph Schumpeter's theory of entrepreneurship called “creative destruction.” A successful entrepreneur simultaneously destroys and creates a new world, or at least a new way of life. Henry Ford, for example, destroyed the horse and buggy age while creating the age of the automobile. The hero also finds that the world "suffers from a symbolical deficiency" and "appears on the scene in various forms according to the changing needs of the race." The changing needs and the deficiency correspond to the changing market conditions or the changing desires for products. The entrepreneur is the first person to perceive the changing needs.
            Candace Allen and Dwight Lee say that "society needs heroes" and that "entrepreneurs are heroes in every sense." Yet they are not often see as heroes-in fact the opposite seems to be true even though they are indispensable to economic progress. One problem is that economists have not generally promoted entrepreneurs as being important. They acknowledge that creative destruction was "the hallmark of entrepreneurship" without mentioning the parallel to Campbell. Entrepreneurs are motivated not just by money but also by "service to something transcendental."  Their views can be summed up with:
“Just as the society that doesn't venerate winners of races will produce fewer champion runners than the society that does, the society that does not honor entrepreneurial accomplishment will find fewer people of ability engaged in wealth creation than the society that does.”[iv]
            Dwight Lee and Candace Allen Smith covered similar ground in a later article but also used Campbell, notably the "separation-initiation-return" core of the monomyth (although they still missed the creation destruction connection between Campbell and Schumpeter). They suggest that entrepreneurs are seen negatively due to political biases and the fact that their role in capitalism is poorly understood.[v] Calling them heroes might offset this.
            Jeffery McMullen argues that seeing entrepreneurs as heroes doesn't mean that they are hyper-individualistic lone rangers, cutoff from the rest of society. They may receive some community support, but a new venture still requires someone to act, to take the first step. This requires courage due to uncertainty. They are heroic because they bear personal costs. McMullen also bases his observations on the work of Campbell and Schumpeter. He calls on scholars to end their hostility to calling entrepreneurs heroes. Otherwise, we are all "vulnerable to the tyranny of cautious conformity while subjecting our social systems to the constant threat of stagnation."[vi]
            Charles Murnieks, Jeffery McMullen, and Melissa Cardon also mention entrepreneurs being heroes (citing Campbell and Schumpeter). Using surveys, they found that entrepreneurs experienced positive emotions (PE) when they perceived that their self-identity as entrepreneurs matched that of society or their environment. That is, if the entrepreneurs saw themselves as risk-takers who enhance social welfare, and if the entrepreneurs thought that society saw them that way as well, positive emotions were experienced.
            Their empirical findings may support Allen and Lee's contention that society should honor entrepreneurial accomplishments:
"challenging environments are part of what makes a hero’s actions valiant. In a similar manner, we contend that dynamic environments may play a key role in framing an entrepreneur’s actions as courageous or innovative, because the individual is seen to act in the face of uncertainty and turbulence. Stakeholders (such as mentors, family members, or investors) who advise entrepreneurs should know and accentuate this point. By providing reaffirming feedback in dynamic and challenging environments, these stakeholders can elevate the PE experienced by the entrepreneur and motivate them to continue on their journey. In essence, this strategy can help separate the generation of PE from the success of the venture in some cases."[vii]
The "reaffirming feedback" is a way to honor the entrepreneur which motivates them to "continue on their journey."
            The idea that entrepreneurs might be heroes is now starting to reach the popular media. Barbara Haislip reported on how storytelling, especially about the founders, can be a marketing tool for businesses. She interviewed Angela Randolph of Babson College who said “Stories about founders and new innovations are often in the form of a myth and follow the hero’s journey.” Randolph then described the hero's journey as outlined in Campbell. Telling the founding story about "the hero’s call to action...pulls the audience in" if they can trigger "strong emotions."[viii]
            This question may be relevant now since entrepreneurship may be in decline. Jeffrey Sparshott reported that “the share of private firms less than a year old has dropped from more than 12 percent during much of the 1980s to only about 8 percent since 2010. In 2014, the most recent year of data, the startup rate was the second-lowest on record, after 2010.”[ix] Honoring and respecting the work of entrepreneurs might be a way to reverse this trend.[x]
            Also, historically, it may have only been when entrepreneurs became respected that economic growth took off. Deirdre McCloskey argues that what made the world so wealthy today, when average world income in 1800 was just $1 to $5 per day (adjusted for inflation)  was a change in ideas:
"...in Holland and then in England. The revolutions and reformations of Europe, 1517 to 1789, gave voice to ordinary people outside the bishops and aristocrats. Europeans and then others came to admire entrepreneurs..."
It was a "Middle-Class Deal" that gave entrepreneurs dignity and liberty to seek profit and generate social welfare. This led to a flurry of inventions, innovations and new institutions that made our modern world and therefore "the ordinary people, and especially the very poor, were made much, much better off." She even says "People had to start liking "creative destruction...""[xi]
            In fact, one of her books is titled Bourgeois Dignity: Why Economics Can’t Explain the Modern World. McCloskey writes
"that the modern world was made not by the usual material causes, such as coal or thrift or capital or exports or imperialism or good property rights or even good science, all of which have been widespread in other cultures and at other times."[xii]

McCloskey even credits "the Kirznerian entrepreneur [for allowing her] to make progress on the puzzle of economic growth." What is entrepreneurship? It is an "unhirable factor" or "alertness" and "can't be something that can be provided routinely, such as the services of banking or management. It must be creative."[xiii] Creativity comes from stepping outside the normal way of doing things, "jumping over the edge and moving into the adventure" (see the Campbell interview in the appendix). So the entrepreneur is just like the hero in mythology.[xiv]


Tape #1901: "Call of the Hero" with Joseph Campbell interviewed by Michael Toms. New Dimensions Foundation audio tape from a live interview on San  Francisco's radio station KQED. The following exchange was part of a discussion of the question of: What is creativity?

Toms: In a sense it's the going for, the jumping over the edge and moving into the adventure that really catalyzes the creativity, isn't it?

Campbell: I would say so, you don't have creativity otherwise.

Toms: Otherwise there's no fire, you're just following somebody else's rules.

Campbell: Well, my wife is a dancer. She has had dance companies for many, many years. I don't know whether I should talk about this. But when the young people are really adventuring, it's amazing what guts they have and what meager lives they can be living, and yet the richness of the action in the studio. Then, you are going to have a concert season. They all have to join a union. And as soon as they join a union, their character changes. (emphasis added, but Campbell changed the tone of his voice) There are rules of how many hours a day you can rehearse. There are certain rules of how many weeks of rehearsal you can have. They bring this down like a sledgehammer on the whole thing. There are two mentalities. There's the mentality of security, of money. And there's the mentality of open risk.

Toms: In other societies we can look and see that there are those that honor elders. In our society it seems much like the elders are part of the main stream and there is a continual kind of wanting to turn away from what the elders have to say, the way it is, the way to do it. The union example is a typical one, where the authority, institution, namely the union comes in and says this is the way it's done. And then one has to fall into line or one has to find something else to do.

Campbell: That's right.

Toms: And it's like treating this dichotomy between elders and the sons and daughters of the elders. How do you see that in relationship to other cultures?

Campbell: This comes to the conflict of the art, the creative art and economic security. I don't think I have seen it in other cultures. The artist doesn't have to buck against quite the odds that he has to buck against today.

Toms: The artist is honored in other cultures.

Campbell: He is honored and quickly honored. But you might hit it off, something that really strikes the need and requirements of the day. Then you've given your gift early. But basically it is a real risk. I think that is so in any adventure, even in business, the man who has the idea of a new kind of gift (emphasis added) to society and he is willing to risk it (this is exactly what George Gilder says in chapter three, "The Returns of Giving" in his book Wealth and Poverty). Then the workers come in and claim they are the ones that did it. Then he (the entrepreneur) can't afford to perform his performance. It's a grotesque conflict, I think between the security and the creativity ideas. The entrepreneur is a creator; he's running a risk.

Toms: Maybe in American capitalistic society the entrepreneur is the creative hero in some sense.

 Campbell: Oh, I think he is, I mean the real one. Most people go into economic activities not for risk but for security. You see what I mean. And the elder psychology tends to take over.

This discussion ended and after a short break a new topic was discussed.

[i] Cyril Morong, "The Creative-Destroyers: Are Entrepreneurs Mythological Heroes?" (Presented at the annual meetings of the Western Economic Association, July), 1992, available at: http://cyrilmorong.com/CreativeDestroyers.pdf

Cyril Morong, "The Calling of the Entrepreneur," The New Leaders: The Business Bulletin for Transformative Leadership, November/December 1992, p. 4, available at:  http://cyrilmorong.com/ENTREPRENEURshort.pdf

Cyril Morong, "Mythology, Joseph Campbell, and the Socioeconomic Conflict,” The Journal of Socio-Economics, Volume 23, No.4, Winter 1994, pp. 363-382, available at:  http://cyrilmorong.com/MythCampbellSocioEconomic2.pdf
[ii] Wyn Wachhorst in Thomas Alva Edison: An American Myth (Cambridge, MA: MIT Press, 1981), pp.74-86, uses Joseph Campbell's book The Hero With a Thousand Faces to analyze part of Edison's early life, although Wachhorst suggests that Edison might have been more trickster than hero. Wachhorst quotes David McClelland from The Achieving Society with: "Interestingly, David McClelland found that Hermes, the trickster of the Greek pantheon, is the mythological type which best reflects the "achievement personality [of entrepreneurs]."" Morong (1992a) also mentions tricksters. The word entrepreneur does not appear in the index of the Edison book. So Wachhorst probably did not look at any research on entrepreneurs in general. He did not mention Schumpeter and creative destruction, either. Wachhorst often compares Edison to Prometheus, suggesting that using electricity is like stealing fire.

[iii] Israel Kirzner, Perception, Opportunity, and Profit (The University of Chicago Press, 1979), p. 163, 181.

From personal correspondence with Israel Kirzner he writes "I should point out in my own treatment of the entrepreneur, he is not seen as a "hero." Moreover, in my own treatment pure luck is not seen as entrepreneurial. (but as the act of deliberately putting oneself into a situation which one hopes will prove lucky is entrepreneurial)." It is my contention that the best way for a person to put themselves into a situation in which they will be lucky is for them to follow Campbell's advice that is based on his analysis of the hero's adventure. This is to follow your bliss, to listen to the wisdom of your heart and do what you love, not what the social system would have you do. If you follow your bliss, you are a hero. I believe that the most successful entrepreneurs follow their bliss and are therefore heroes. Jeffery McMullen (cited below) also mentions that entrepreneurs follow their bliss.
Joseph Schumpeter, The Theory of Economic Development (New Brunswick, NJ:Transaction Books, 1983), p. 923 lists three classes of motives for entrepreneurship: the will to found private kingdom, the will to conquer, and the joy of creating. The first, although seemingly only greedy, ranges, however, from "spiritual ambition down to mere snobbery." The second was like a sporting event, with money used to keep score, and not an end in itself. The entrepreneur of the third class of motives is in it for the sake of "exercising one's energy and ingenuity" and for the delight in venturing. All three classes of motives are anti-hedonistic, with the third being the most so. This certainly makes it plausible to see the entrepreneur as someone who follows his or her bliss.

[iv] Candace Allen and Dwight Lee, "The entrepreneur as hero," Journal of Private Enterprise, Volume 12, No. 1, Fall 1996, pp. 1–15.

[v] Dwight Lee and Candace Allen Smith,  “The Entrepreneur on the Heroic Journey,” The Freeman, Vol. 47 No. 4, April 1997, available at: https://fee.org/articles/the-entrepreneur-on-the-heroic-journey/

[vi] Jeffery McMullen, "Are we confounding heroism and individualism? Entrepreneurs may not be lone rangers, but they are heroic nonetheless," Business Horizons, Volume 60,          Issue 3, May–June 2017, pp. 257–259.

[vii] Charles Y. Murnieks, Jeffery S. McMullen, and Melissa S. Cardon, "Does Congruence with an Entrepreneur Social Identity Encourage Positive Emotion Under Environmental Dynamism?" Journal of Small Business Management, 27 February 2017, doi:10.1111/jsbm.12335, abstract available at: http://onlinelibrary.wiley.com/doi/10.1111/jsbm.12335/abstract

[viii] Barbara Haislip, "Tell Me a Story," The Wall Street Journal, May 1, 2017, page R8, available at: https://www.wsj.com/articles/an-entrepreneurs-story-can-be-the-perfect-marketing-tool-1493604360

[ix] Jeffery Sparshott, "Sputtering Startups Weigh on U.S. Economic Growth," The Wall Street Journal, October  23, 2016, available at: https://www.wsj.com/articles/sputtering-startups-weigh-on-u-s-economic-growth-1477235874

[x] Allen and Lee (1996) mention that "during the 1980s almost 90 percent of all business characters on television were portrayed as corrupt." It does not seem like there are many movies or TV programs even now that show entrepreneurs in a positive light.

[xi] Deirdre McCloskey, "Liberty and Dignity Explain the Modern World": An Essay Based on Bourgeois Dignity: Why Economics Can't Explain the Modern World, November 2011, available at: http://www.deirdremccloskey.com/articles/bd/briefBD.php.
[xii] Deirdre McCloskey, "Ideas, Not "Capital," Enriched the World," March 19, 2016, available at: https://fee.org/articles/ideas-not-capital-enriched-the-world/

[xiii] Deirdre McCloskey, "A Kirznerian Economic History of the Modern World,"  June 17, 2011, available at: http://www.deirdremccloskey.com/editorials/kirzner.php

[xiv] McCloskey also writes that the growing freedom and increasing respect for entrepreneurs "created more and more opportunities for Kirznerian alertness." Furthermore "Austrian discovery and creativity depends also on the other virtues, in particular on Courage and Hope" and "A new rhetorical environment in the eighteenth century encouraged (literally: "gave courage" to the hope of) entrepreneurs." She does, however, see a weakness in that Kirzner does not consider the audience of the entrepreneur, the customers and the rhetoric they use.

Saturday, September 16, 2017

Poverty does not cause social problems (and the cream rises to the top)

Great post from Scott Sumner.
"Pity poor New Hampshire:
Manchester is at the heart of New Hampshire‘s opioid epidemic, which has first responders, lawmakers and health care administrators scrambling for solutions before the situation spirals further out of control.
Though other New England states such as Vermont and Maine have seen spikes in opioid-related deaths, the granite state ranks No. 2 in the nation, behind West Virginia, for the number of opioid-related deaths relative to its population. It ranks No. 1, though, for fentanyl-related deaths per capita.
So what makes New Hampshire so special?  Why so many deaths of despair? Perhaps because it has arguably the most successful economy in the entire world, with extremely high income, high education and extremely low rates of poverty:
Pop quiz:
Which U.S. state had the highest median income in 2016? . . .
New Hampshire.
The Granite State’s median household income last year was a whopping $76,260, nearly 30 percent higher than the national median of $59,039, according to the Census. . . .
One of the chief drivers of New Hampshire’s high median income is its poverty rate, which is the lowest in the nation. Only 6.9 percent of the state’s residents live below the poverty line, compared with a national average of 13.7 percent (in Mississippi nearly 21 percent of people live in poverty).
New Hampshire’s workforce is also among the best-educated in the country, according to previously released census data. Better-educated workers tend to make more money.
New Hampshire also has a very low level of inequality.

Of course it’s silly to argue that affluence causes addiction—correlation doesn’t prove causation.  But it’s equally silly to suggest that people in West Virginia become drug addicts because they are poor.  There are a billion poor people (by American standards) in China, and very few are heroin addicts.
Liu Qiangdong is one example of a Chinese poor person who did not become a heroin addict:
Liu Qiangdong is making up for lost time — and with vertiginous speed.
Again, like so many of China’s new titans, Liu’s family was so poor that until he went to university aged 18 he only tasted meat once or twice a year. His family, peasant farmers in arid coal country, 700km south of Beijing, had a few rice fields but they also had to hand over the crop to the government; these were the dire days after the Cultural Revolution. “From June until September we were able to eat corn — cornmeal porridge for breakfast, corn pancakes for lunch and dry cornbread for dinner; cornbread so tough it made your throat bleed,” he tells me. “The other eight months we ate boiled sweet potato for breakfast, sweet potato pancake for lunch and dried sweet potato for dinner.”
Now he is 43 and worth nearly $11bn.
Yes, that’s anecdotal, but consider this:
Virtually every Chinese millionaire or billionaire is self-made because capitalist reforms to the centrally planned communist economy only began in the early 1980s and did not really take off until the 1990s. But the modern super-wealthy often turn out to be descended from an earlier capitalist class. Richard [Liu] is no exception. Before the 1949 revolution his family were wealthy shipowners who transported goods along the Yangtze river and the ancient imperial canal from Beijing in the north to Hangzhou in the south. They lost everything when the communists took over and were forcibly resettled at least twice. One academic survey found more than 80 per cent of Chinese “elites” (those with income at least 12 times higher than the average in their area) are descended from the pre-1949 elite. Richard puts this down to “family culture”.
“My parents and grandparents taught us a lot — not Chinese or maths but a sense of values, of how you should be and how you should treat others,” he says. They also drilled into him the knowledge they had once been very rich but everything had been taken away — a lesson all too relevant even now.
You often hear a debate about what would happen if everyone suddenly lost everything, and the entire population was equally poor.  Liberals claim that people like Bill Gates become rich because they come from upper class families, with all sorts of advantages.  Conservatives claim that even if income were made 100% equal, within a few years the rich would regain their position and the poor would fall back.  Mao’s China provided a near perfect test of this theory, and we now know that the conservatives are right about this issue.  The cream does rise to the top.

Of course this is not true in every single case.  Sometimes highly talented people have bad luck and end up homeless.  Occasionally an idiot will win $100 million in a lottery, or maybe even get elected President.  But on average the more talented, more ambitious and harder working people will tend to succeed.  Being born white in America does give a person some advantages, but that doesn’t really explain very much.  Certainly not income gaps between American whites and Asians, or between Christians and Jews, or between immigrant blacks and American born blacks, or between Korean-Americans and Laotian-Americans, etc., etc."

Even as a wave of mergers has cut the number of major carriers to four and significantly reduced competition, lower-cost airlines continue to play a role in moderating ticket costs

By MICAH MAIDENBERG of the NY Times. Excerpts:
"Even as a wave of mergers has cut the number of major carriers to four and significantly reduced competition, lower-cost airlines continue to play a role in moderating ticket costs.
While such airlines offer a no-frills passenger experience and charge plenty of fees for such luxuries as additional bags or extra legroom, they are able to stimulate new demand from occasional fliers with relatively cheap prices and even take passengers from the major carriers.

This dynamic is not new: In 1993, researchers at the Department of Transportation called the same trend the “Southwest effect,” named for Southwest Airlines, which grew rapidly thanks to basic, low-cost flights. A recent study by a University of Virginia professor and a consultant at the Campbell-Hill Aviation Group calculated that average one-way fares are $45 lower when Southwest serves a market with nonstop flights. Researchers have shown other low-cost carriers also push down fares."

"Carriers like United and American do not compete with carriers like Frontier and Spirit on every type of passenger. Lucrative corporate accounts are owned by the big carriers, and business travelers avoid the cheaper airlines, often choosing to pay premium prices at the last moment to get seats on the flights that best fit their schedules.

But the low-cost carriers nonetheless force the big airlines to figure out a way to draw the most price-sensitive fliers in any given market — those who scour the internet for the cheapest tickets possible. Those customers make up a significant portion of travelers, meaning the major carrier cannot just ignore them."

"Delta, American and United Airlines have all rolled out “basic economy” fares. Such tickets are priced competitively against Spirit and Frontier, but do not offer the amenities that most consumers have come to expect on a flight, like receiving a seat assignment ahead of a flight or obtaining a refund for a ticket.

Of all the major carriers, United is fighting on price the most aggressively.
Scott Kirby, who was appointed as United’s president a year ago, has shifted the carrier’s strategy toward the low-cost airlines, mirroring one he helped to drive when he served as a top executive at American.

Pushing back against Wall Street’s wishes to limit capacity growth, United is adding seats in a number of its major markets across the country. It has, for example, swapped out smaller jets for larger planes to increase the number of seats it has available to sell, and matched fares offered by low-cost carriers."

"The current skirmishes do not amount to a broad-based fare war. Many routes in the United States are dominated by a single carrier, insulating them from price competition.

The cost of a round-trip domestic ticket averaged more than $490 in the first half of the year, up slightly compared with 2016, according to Airlines Reporting Corporation, a company that settles flight transactions between a number of carriers and booking services like Expedia.

The jostling, however, has left airline investors skittish. As the publicly traded airlines in July reported earnings for the second quarter, shareholders sold off their shares, worried about the fight over fares and capacity increases.

But anxiety among investors is good news for fliers. Travelers on routes that are competitive will probably be able to snap up good deals."

Friday, September 15, 2017

A Poll of Economists on Price Gouging

From David Henderson.

"In May 2012, the IGM Forum, based at the University of Chicago Booth School, did a poll of economists on a proposed anti-price-gouging law in Connecticut. The economists polled were on the IGM's panel of "experts." To clarify, the vast majority of economists on the panel are experts in their own field. Their knowledge of items outside their field, as much of the polling data on many other issues show, ranges from very good down to sketchy.

Here's the exact wording of the statement with which the economists were asked to agree or disagree:

Connecticut should pass its Senate Bill 60, which states that during a "severe weather event emergency, no person within the chain of distribution of consumer goods and services shall sell or offer to sell consumer goods or services for a price that is unconscionably excessive."

Now here's the good news: Only 8% of the economists polled agreed or strongly agreed. 51% of those polled disagreed or strongly agreed.Moreover, when they were asked to weight their answers by their confidence in their answers, the results shifted strongly toward opposition. 7% agreed or strongly agreed. But 77% agreed or strongly disagreed.
Some of the economists acted like lawyers. David Cutler, a health economist at Harvard, opined:

Without defining "unconscionably," I don't know what to think about this.

But no one knows what "unconscionably" means. That wouldn't stop the enforcers. Does Professor Cutler really have much doubt about how such a law would be enforced? As Richard Schmalensee of MIT pointed out, "unconscionably" is a bug, not a feature. He wrote:
Seeks to prevent prices from clearing markets; never a good thing. Standard is hopelessly vague so increases risk for affected businesses.

Richard Thaler of the University of Chicago expressed thoughts similar to ones I wrote recently in criticizing his more recent statement. I had written:
As I pointed out in my interview, by allowing price gouging, we get, to some extent, the best of both worlds. We get the traditional merchants like Wal-Mart, who worry about reputation, stocking certain supplies in advance and not raising prices. We also get the fringe, one-time suppliers, bringing in more supplies in response to the higher prices they can charge.

Thaler said it more succinctly, writing:
Not needed. Big firms hold prices firm. "Entrepreneurs" with trucks help meet supply. Are the latter covered? If so, bad.

I wish he had said that in his recent radio interview. Of course, it's possible he did but that the Marketplace producers cut that portion."