America Needs a Return to First Principles

"The authors credit the 'micro-foundations of the economy' for having driven living standards “to heights unimaginable at the nation’s founding. Those foundations—Mr. Cogan’s first principles—are private property rights, the rule of law, free and competitive markets, and limited government. The last includes “subsidiarity,” meaning that no central authority should do what can be done by a more local body, and no public institution should do what can be left to private enterprise. 

'When you think about what drives America’s GDP,' Mr. Cogan says, 'it’s millions of individuals working, investing, saving and making allocative decisions with these microfoundations in place.'

"The authors identify as the 'sine qua non' of American prosperity the 'three I’s”—ideas, individuals and institutions ...  'a sound economic governance framework liberates the individual, encourages the promulgation of new ideas, and ensures the proper functioning of institutions.' A policy that offends any of these elements—by restricting the individual, stifling ideas or letting institutions stray beyond their proper limits—is likely to harm the economy." (Tunku Varadarajan, WSJ, April 2022).

For more, visit Reinvigorating Economic Governance.

This lesson should be the main one taught by economics

"The main lesson of economics is the mutual gains from trade and the peaceful social cooperation under the division of labor that a modern commercial society engenders" Peter J. Boettke, “Liberalism, Socialism, and Our Future,” The Struggle for a Better World (2021).

So says Don Boudreaux.

An Economics Lesson From a Science Teacher: Life is about Trade-offs

“Life is not determined by what you want. Life is determined by the choices you make.”

"In high school, theater emerged as my main interest. I couldn’t wait to audition for plays and musicals. But I had a problem. I also wanted to play soccer and baseball. Kids compete in these sports year-round now, but when I was growing up soccer was a fall deal and baseball a spring affair. The rehearsals for the plays and musicals conflicted with games and practices. There was no way around it. I had to make a choice."

"In a world without limits, we wouldn’t have to make choices. In an environment of plenty rather than an environment of scarcity, the laws of economics might not apply. But scarcity and limits do constrain our choices, and the laws of economics do apply—to all of us, whether we like it or not."

Matthew Hennessey, WSJ, April 2022

How Ikea tricks you into buying more stuff

The home furnishings giant enlists a maze-like layout, cheap food, and crafty psychology to get you to fill up your cart.

To Prosper, Can Netflix Become a Multi-Trick Pony?

An opinion in the WSJ (April 2020) discusses the plight and dilemma Netflix faces in April 2022. 

1. “Netflix named many culprits for its lousy first quarter: a war in Ukraine, the world’s recovery from stay-at-home Covid, competition from new streamers, password sharing—nearly one-third of Netflix viewers apparently are stealing the service.”

2. “The nagging question remains: Is pure-play, lowest-common-denominator streaming a business model that’s built to last?” When the marginal cost of another “widget” equals $0, competition tends to push price towards $0.

3. “‘There is no question that deep-pocketed technology companies, Apple being a great example, Amazon being another. . . . I don’t want to suggest their [streaming affiliates] are loss-leader businesses, but they are in those businesses for other reasons.’” The optimal price for streaming is lower when a firm sells complements than when it does not. 

4. “management overspent on content in hopes of creating a steady stream of irresistible hits.” Integrating backwards may not have been wise.

5. “Mr. Hastings’ surrender on ads is likely to be the first of many surrenders of things that made Netflix a shining brand and consumer favorite.” Here are three ways to monetize content when marginal cost and price = $0. 

1. Make the consumer the product by selling ads and/or information about the consumers

2. Sell complements

3. Sell upgrades

6. “It means becoming just another impure, conflicted brand that users snark about even if they feel compelled to consume it. Is Netflix ready for that?” Strategy and brand evolve as conditions change.

Of Trade War and Prices

"Donald Trump’s trade policy picked winners and losers among U.S. businesses and manufacturers."

"About $111 million in tariffs has been paid to the U.S. Treasury over the last four years. But $1.3 billion, according to Harbor, has been pocketed by U.S. aluminum mills and U.S. and Canadian smelters.

"That’s because producers can charge tariff prices even for scrap, domestically produced aluminum, and Canadian aluminum that is no longer subject to tariffs."

"Thus Harbor calculates that beverage manufacturers paid 92% of the $1.4 billion in tariff costs on non-tariffed aluminum."

(WSL, April 2022)

Elon Musk Offers to Buy Rest of Twitter at a Valuation of More Than $43 Billion

Use the Rational Actor Paradigm to predict whether the board will recommend to accept or to reject the offer. Also, when would something be in the best interest of the shareholders but not in the best interest of the company?

"Twitter confirmed it had received Mr. Musk’s offer and said its board would carefully review the proposal to determine the course of action that it believes is in the best interest of the company and its shareholders" (WSJ, April 2022).

"“I am not playing the back-and-forth game,” Mr. Musk said. “I have moved straight to the end.”

Mr. Musk said he would pay $54.20 a share in cash, representing what he said was a 54% premium over the day before he began investing in Twitter and a 38% premium over the day before his investment was publicly announced.

“It’s a high price, and your shareholders will love it,” Mr. Musk said. “Twitter has extraordinary potential. I will unlock it.”"

"On Wednesday, Twitter shares closed at $45.85. In premarket trading Thursday, the stock rose nearly 9% to $49.90. During the past year, Twitter’s shares have traded between $31.30 and $73.34."

Two addenda

1. After the offer the Board installed a poison pill to make more difficult any acquisition without the Board's approval. Poison Pills can benefit shareholder by creating a bidding war and giving the Board more bargaining power with suitors. They can harm shareholders if they squelch deals that transfer assets from moving to higher valued uses.
2. This opinion (WSJ, April 2022) praises the Board's decisions to install the poison pill and then to agree to terms with Musk. 

Robbing Peter to Pay Paul? The Redistribution of Wealth Caused by Rent Control

Ahern and Giacoletti (March 2022) report that big winners from rent controls are rich White tenants and big losers are poor Black owners. They conclude that "to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention."

Abstract

We use the price effects caused by the passage of rent control in St. Paul, Minnesota in 2021, to study the transfer of wealth across income groups. First, we find that rent control caused property values to fall by 6-7%, for an aggregate loss of $1.6 billion. Both owner-occupied and rental properties lost value, but the losses were larger for rental properties, and in neighborhoods with a higher concentration of rentals. Second, leveraging administrative parcel-level data, we find that the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were more likely to be minorities. For properties with high-income owners and low-income tenants, the transfer of wealth was close to zero. Thus, to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.

JCPenney’s CEO Is Done Chasing New Customers. ‘We Are Loving Those Who Love Us.’

The WSJ (April, 2022) reports that "JCPenney’s new chief executive isn’t trying to win new customers or court younger, hipper buyers. Instead Marc Rosen hopes to revive the 120-year-old retailer by focusing on those who already shop there: budget-conscious American families." IMO the article describes good and bad strategies.

Walmart Dangles $110,000 Starting Pay to Lure Truck Drivers

"In the U.S., median annual pay for heavy-truck and tractor-trailer drivers was $47,130 in 2020" (WSJ April 2022).

Walmart uses two prongs to address the shortage of drivers.

1. Higher wages.  "In the U.S., median annual pay for heavy-truck and tractor-trailer drivers was $47,130 in 2020"
2. Training workers from other departments to become truck drivers. "Walmart has moved 17 workers from its warehouse operations through its truck-driver training program so far, she said, and it aims to add hundreds of drivers through the program by the end of the year."

Surging interest rates push mortgage demand down more than 40% from a year ago

CNBC (April, 2022) reports that the law of demand works in the mortgage market. The price of a loan is the interest rate. The article reports that the quantity of mortgages demanded has fallen precipitously as interest rates have risen. The recent surge in the price of houses may have reduced the quantity of houses demanded and therefore reduced the demand for mortgages. How much of the 40% mentioned in the article is a change in demand and how much is a change in quantity demanded is hard to disentangle. 

Robot Subscription Services Let Companies Automate on the Cheap

"I’m paying $10 to $12 an hour for a robot that is replacing a position that I was paying $15 to $18 plus fringe benefits” (Bloomberg, March 2022).

Egg Prices Jump as Bird Flu Hits Poultry Flocks

The title of this article in the WSJ (April 2022) explains itself.

Fertilizer Prices Surge as Ukraine War Cuts Supply, Leaving Farmers Shocked

WSJ, March 2020. The title explains itself.

Harvested and Ready to Export, Bananas Bound for Russia Have Nowhere to Go

The WSJ (March 2022) reports that an embargo of bananas to Russis and gridlock at ports has created a "glut" of bananas. "Consider this quote: "With a glut on the market that has sharply lowered prices, many farmers are leaving bananas to rot in the fields—low prices don’t cover the cost of production." Which cost is price below, average variable cost or average total cost?