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What do National Review, The Hill, The Orange County Register, The Week, The New York Post, The American Spectator, NPR, Vox, The Huffington Post, The New York Times, and The Washington Times all have in common.  At first blush the answer is probably nothing substantial other than that they are all media outlets of one fashion or another that publish in English (spoken or written) in the United States and that each tends to cover political content of the day.  But there the commonality seems to end.

National Review, The New York Post, The American Spectator, and The Washington Times are all to the right-of-center while the Hill, NPR, Vox, The Huffington Post, and the New York Times are left-of-center and The Orange County Register and The Week sit somewhere in-between.

But the fall of 2015 saw each of these publications issue articles on the structural problems and the corresponding growing issues of the Affordable Care Act (ACA).  In other words, concerns about the economic integrity of the system, more commonly known as ObamaCare, are being raised all across the political spectrum and that, in and of itself, is worth noting.   Regardless of your politics, the immutable facts of economics remain constant and, unfortunately, merciless.

Now to be clear, I personally like the overall aims of the ACA. The idea of opening access to regular health care to the largest possible segment of American society is laudable.  As is the aim of lowering cost by competition and keeping coverage transportable by lessening the ties between policy and place of employment.  These are admirable requirements that are firmly couched in the ethical notion that man is intrinsically worth something – that each human being has a value quite independent of his economic output.

But while we can ignore economics in defining our ethically-based goals we can’t ignore it in our plans to achieve these goals.  Immutable laws of nature, both inanimate and human, must be taken into account.  As well discussed in this interchange

there is no logical support that allows us to go from the idea that human life, in general, is the most valuable thing in society, to the idea that an infinite value should be place on an individual human life, since there is not a infinite amount of resources to apply to the well-being of any person.

And yet, the enactment of the ACA seems to have been done in full denial of this economic reality of life.  The evidence for this is found peppered throughout the coverage that came out this past fall.

In the article Obamacare Is Dead, Kevin D. Williamson of the National Review, notes that of the 21 million participants needed to provide a cost-sharing base, only about half are actually participating.  In addition, the current demographics are heavily weighted towards the sick and/or elderly, who are looking for a payout, while the younger and healthier buyers, needed to offset the rising costs, are staying away.  There are several mechanisms used by this latter group to ‘opt-out’.  Some decide that their most rationale course of action is to simply pay the penalty rather than join.  Others, 12 million in last sign-up cycle, took advantage of the 30 exemptions.  As a result, and despite the federal subsidies, already half of the co-ops have gone under financially.  Williamson also points out that the ACA further distorts the notion of insurance, turning it into a badly-constructed cost-sharing program, and that private industry (e.g Medi-Share) does a much better job of delivering health care than government.

Robert Pear of The New York Times points out in his article Many Say High Deductibles Make Their Health Law Insurance All but Useless that many consumers are complaining that ‘sky-high’ deductibles make it impossible to actually go to see a doctor.  Pear cites many cases, the most startling being a median deductible of $5000 in Miami, with the obvious implication that there are policies for which the deductible is even higher (probably much higher depending on the spread of the distribution).

Deductibles this high cause a perverse outcome in which the healthiest people stay out of the exchanges altogether.  The reason is that the law gives them a disincentive.  David Catron, of The American Spectator, argues in his piece entitled ObamaCare Endures the Death of a Thousand Facts, that a healthy consumer faced with high deductibles (e.g. the Miami median of $5000 mentioned above) is quite rational in electing to give up their health coverage, even if the premiums are low, and pay the small penalty ($695) – it is cheaper to stay away.  This approach is especially attractive since the consumer can’t be denied coverage later if a catastrophic illness were to arise.

It is true that not all plans have high deductibles.  Policies with relatively low deductibles use higher premiums to offset the cost.  So the consumer has to pay one way or another – either up front with the premiums or on the return with deductibles.  And, as Sarah Kliff of Vox notes (Why Obamacare premiums are spiking in 2016), it looks like premiums are heading up across the board.  So even affordable premiums, independent of deductible size, may be a thing of the past. In her analysis, Kliff lays the blame at the feet of insurance companies who “underestimated how sick health law enrollees would be.”

But the flood of sick enrollees shouldn’t have unexpected and, therefore, underestimated.  The ACA attracts the sick while giving the healthy (and their money) a reason to run and hide.  These kinds of perverse economic incentives are at the root of massive losses in the state-run co-ops.  Akash Chougule (Obamacare Enters a Downward Spiral as Co-ops Fail and Enrollment Slows) notes that:

• 22 of 23 co-ops lost money in 2014 despite receiving $2.4 billion in taxpayer support
• Iowa and Nebraska co-op offered artificially low rates causing a tenfold increase in enrollment over what was expected; this forced the co-op into liquidation
• Louisiana’s co-op went under due to “onerous burdens” sending 16,000 enrollees looking for new policies

Chougule also points out that individual-market insurance costs rose by 49% in 2014, so the additional increases that Kliff sees on the horizon amount to adding salt to the wound.

I could go on but I’ll stop here by noting that I barely scratched the surface of all the articles that are out there.  Additional food-for-thought is easy to find.  Here is a sample

• ObamaCare’s predictable collapse – Rick Manning of the Hill
• Obamacare at 5: Sick and getting worse – Mark Landsbaum of The Orange County Register
• The quiet unraveling of ObamaCare – Shikha Dalmia of The Week
• A new taxpayer bailout to cover up ObamaCare’s failure? – Betsy McCaughey of the New York Post
• Many Health Co-Ops Fold, Others Survive Startup Struggles – NPR
• The Figment of Affordable Health Care – Washington Times

Each and every one, spanning all parts of the political spectrum, is touting the gloom and doom of the ACA.  Each and every article serves as a reminder that there is no such thing as a free lunch.  To bad the champions of the ACA didn’t want to recognize that.

Well we just finished another haul through that end-of-year spending frenzy that passes for yule-tide spirit.  This bit a crass consumerism in the name of the virgin birth often leaves a bad taste in my mouth and a reasonably large dent in my wallet.  But it also gives ample opportunity to observe and even dissect American economics with particular focus on the household-to-firm side of the three-legged stool that comprised the bulk of our economic activity.

Now before I report on my observations, I think, in the interest of full disclosure, that I make it abundantly clear, that I prefer to make the majority of my holiday purchases online.  There are several reasons for this.  The most important reason is that I would rather spend my precious time with family and friends rather than slogging through a mall but I would be remiss if I didn’t mention that I simply don’t like interacting with people that much.  It helps that the majority of gifts I look to purchase are easily obtained with a little cyber-spending.

All that said, this past holiday season emphasized one point with emphasis.  Despite dire predictions to the contrary, I see no end in sight for brick and mortar establishments.

Often over the past 10 or 15 years we’ve all heard that brick and mortar establishments – ranging from big box stores like Best Buy to mom-and-pop stores just across the street – were facing insurmountable competition from the online presences.  The end was nigh so said the gloomiest of the economic pundits and yet here we are years later and brick and mortar shops are still here.

To be sure, they are not quite in the same embodiment that they were in before the internet revolution.  The fierce competition from online vendors, particularly Amazon, has substantially changed the face of how books are purchased. But brick and mortar establishments have adapted in the face of this competition.  They’ve capitalized on those facets of their business that give them the greatest advantage and have responded to free-market forces in a way that would make Adam Smith proud.

And what are those facets that give them an edge over the internet providers?  Well, a little bit of thought should convince you that the primary advantage that brick and mortar provides its customers is what I like to call purchase certainty.  Purchase certainty takes several forms that are best illustrated with examples.

First type of purchase certainty is certainty in the quality of the product.  Most of us, I am sure, have had the experience where the item online looks good but when it arrives it is a disappointment.  The one that personally affects me is the purchase of comics.  I like to selectively collect comics and my emphasis is on finding good stories.  I am willing to compromise on the art provided that the story has good exposition and is thought-provoking.  Individual comics can run between 2 and 4 dollars for 32 pages of material at a comics specialty shop and, when it is realized that a good story can run between 10 and 40 issues, the dollar cost can be quite high in comparison with other mediums.  This cost can be substantially reduced by buying in advance through online services (e.g. Discount Comics Buyer Service), which gives discounts of, on average, 40%. Of course, the publishers are willing to provide this discount to receive the improved certainty in forecasting the number of books they will need to print.  The flip side is that as a consumer I pay for their improved certainty with loss of certainty of my own as to the quality of the product.  The brick and mortar establishment allows me to directly observe the product before purchasing at the cost of a higher price that is the premium associated with the freedom they provide and the corresponding uncertainty they face (will I or won’t I buy).  Of course, brick and mortar stores are most vulnerable in this advantage since a consumer may go to the showroom to see the quality and then turn to online to buy.  But I believe people are starting to become economically savvy to the fact that they can’t have their cake and eat it too and are willing to not exploit this vulnerability.

The second type of purchase certainty involves returns.  As a consumer buying from a brick and mortar you know that you will have a much easier (and more certain) experience trying to make a return.  Recently, my wife purchased a costume from the Amazon marketplace.  When the package arrived, the item sent looked nothing like the item shown online (another example of the item quality certainty discussed above) and she resolve to return it.  However, the process to return it was slow and cumbersome.  It took weeks to get the vendor to even agree that they had made a mistake and another month or so to get the shipping label and receive the refund.  The closure process for brick and mortar stores is faster and more certain again offering a tangible advantage over the online experience.

The third type of purchase certainty is the certainty in enjoyment. Being able to go to a brick and mortar store and find what you wanted (even if you didn’t know you wanted it until you saw it) means that there is greater certainty in getting instant gratification than is possible online.  The extra time that one gets to enjoy the purchase is valuable in its own right and is yet another advantage that brick and mortar businesses offer over their online competitors.

So while it is true that some businesses have suffered from their competition with online rivals, the majority of brick and mortar stores have adapted to showcase their unique advantages.  The ultimate winner is the consumer and the ultimate loser is those pundits who predicted the demise of the brick and mortar experience. Brick and mortar businesses are there to stay.

It’s always interesting to get perspective on things associated with the economy before jumping to conclusions.  Taking a long, hard look at things from the vantage of a few years after the events have come and gone help to put them in context and also help to frame the right kind of questions to ask, which often leads to interesting answers.

Gasoline prices are a case in point.  Only a few years ago the average price of a gallon of gasoline ranged between $3.00 and $4.00 and people were lamenting the high prices – sometimes in very funny ways.

That trend continued well into 2014, before trailing off substantially in the fall of that year as the influence of the world-wide energy boom finally propagated into the US economy as a whole.  These trends are nicely summarized by AAA’s historic fuel report chart reproduced here

Of course the energy boom has to be understood as really resulting from two different forces.  The first is the well-publicized increase in oil production around the world (supply) and the second is the profound change in driving and car-purchasing habits that many people engaged in during the oil price-peaks in 2011-2013 (demand).  It is difficult to judge the interplay between these two effects to the point where a sharp line can be drawn which delineates the influence of one from the other.  Nonetheless, it is clear that increase of supply of oil on the world stage is the main force driving prices.

During the ‘high price’ years, the accusation was often leveled against the oil companies that they were price gouging – their greed led to our misery.  That claim may or may not be true, but it is well-supported that their ‘greed’ is the primary motivation for the current downward pressure on gasoline prices, giving us one of the longest ‘low price’ periods in recent memory.

It is conceivable that for most people this claim is nonsense.  After all, if they believe greed results in price gouging, how then can greed drive prices down?  The answer to this question is found in the law of supply and demand and in the outcomes of the dynamics of the Prisoner’s Dilemma.

The fastest way to drive up oil prices is to lower the supply relative to the demand.  The law of supply and demand is a well-known principle but one whose full implications are often difficult to understand.  One such point is that rising prices to do not imply rising profits.  Other factors, such as market share and rising production costs, are reflected in the costs as well.  In the particular case of gasoline prices, market share is the key feature.

Currently, there is more oil on the world stage than at any other point in recent times.  So the ‘logical’ question to ask is why don’t the greedy oil producers simply cut production thereby lowering the supply.  Lower supply with current demand equals higher prices equals higher profits.

This logic is flawed since it implies that all the oil producers are in perfect collusion with each other and that their collusion is so solid that each member will be content with the profit-sharing plan they all agreed to (predicated, of course, that they have actually entered into an agreement at all).  Since the going in position is that the producers are greedy – here defined to mean that they will attempt to maximize their profits – one has to grant the strong possibility that one or more of them will betray the others when the order to lower production comes.  Betrayal will mean that oil production will remain high and prices low, so that the net effect to the consumer is negligible; but to the producer who betrays first, their profits will soar as their market share increases.  Since total profit is determined by profit per unit and the number of unit sold, the betrayer can increase his profit without lowering production, providing the other producers don’t think the same way.

But the other oil producers aren’t saps and they can work this out just as well as their fellow co-conspirators.  So they all ‘betray’ the cartel and either keep their production steady or increase it, regardless of whatever they may say to each other.  The overall effect is that greed keeps oil supplies high and prices low.  This outcome is a direct consequence of free market forces and is good for the consumer.

So the next time you go to the pump and fill up your tank on $1.95/gallon gasoline, take a moment to thank a greedy oil producer for their greed.

Well the Thanksgiving holiday is again upon us with its yearly promise of turkey, football, and absolutely absurd number of Black Friday commercials.  And once again, the actual story of the first Thanksgiving is lost in the constant background noise of consumption originating from our loving media who are quite happy to submerge sensible thinking underneath the constant drumbeat of buy, buy, buy.

As I’ve written elsewhere, the real story of the Pilgrims is one more deeply rooted in what modern economists would call game theory and behavioral psychologists the equity theory of motivation.  The story starts with the contractual agreement that the Pilgrims entered into in order to have their voyage to the New World funded.  That agreement required them to share the production and support of the new colony communally.  This forced socialism led to almost complete disaster and scarcity was the order of the day.  Only after they abandoned shared farming and allocated individual plots of land for each family did they thrive rather than just survive.

In his account of the Plymouth Colony, Governor William Bradford cites the various interpersonal frictions caused by how one colonist viewed another.  The old felt that they didn’t get the respect they deserved when forced to work the same ‘mean’ chores as the young.  The strong felt indentured by the weak who could not work as hard.  Bradford goes on to chide the vanity of Plato for recommending the abolishment of property rights and the establishment of a commonwealth.

What Bradford observed first hand is that people measure their happiness in relation to what others do.  When standing on his own, each Pilgrim felt entitled to his bounty, took satisfaction in his attainments, and lowered his resentment to his neighbors.  Bradford is perhaps the first adherent to equity theory.

Now despite what passes for common knowledge in certain circles, the same type of concerns that dominated that early colonial life in the 1620s are also at play in our technically advanced world nearly 400 years removed.  The saga of Gravity Payments shows clearly how unearned attainments by some can be viewed as an insult or even a threat by others.

But what brought all of this much closer to home was the recent departure of a co-worker to greener pastures.  I had the privilege before he left of being able to sit down to speak frankly with him about the reasons he was leaving.  His primary reason for calling it quits was the fact that he viewed his effort as being unrewarded in relation to his peers.  He didn’t quite phrase it as concisely as that but that was the gist of it.  From his point-of-view, his efforts were undervalued by a management who couldn’t actually articulate their set of expectations.

Of course, no one should be rewarded simply for working hard; regardless of the effort put forth, a worker must produce.  But likewise a business can’t simply hope that by promoting some workers over others that the entire work force will be able to infer a set of expectations.  Management must be able to articulate what they prize and be able to give clear rules by which the employees can measure their own output in relation to their peers.  Fairness is a central concept in human behavior and it governs how people perceive an activity as worthwhile or worthless.  By stating a set of objectively measured criteria for promotion, businesses can expect to keep a larger percentage of the work force willing to stay and work, even for lesser wages.  It is when the management of a business is thought to be arbitrary and capricious that friction ensues with departures following shortly.

Unfortunately, the business my friend was leaving seems not to have learned this message.  His departure is one of many in the past year and more are likely.  It seems that the Pilgrims story still has a lot to teach us if only we would listen.

In his 1988 book Innumeracy, the mathematician John Allen Paulos explores the inability of many people, some highly educated some not, to grasp what large numbers really mean.  The book was something of a best-seller and is often discussed within certain intellectual and academic circles but its influence seems to be short-reached based on the fact that people still seem to be innumerate.

This failure is particular troublesome when the large numbers are associated with probability and statistics, and even more bothersome when the large numbers are about money and the statistics are about who holds what in terms of wealth.

A recent example of this kind of sloppy thinking is found in the following video, which went viral recently

As Neil Cavuto, the host of the show, pointed out to Keely Mullen, the organizer of the Million Student March, the central question here is not one of judgement but of numbers.  Society can decide politically where it stands on her three core demands for free public college, the cancellation of student debt, and an across the board $15 dollar/hour minimum wage.  The economics question is how to pay for it.

And here the innumeracy comes rushing to the front and crashing down on her.  All she could say in defense of her program is that she doesn’t believe Cavuto when he says that confiscating the wealth of the rich would not be enough to pay for her core demands.  She couldn’t argue with his points.

At the heart of the discussion was the concept of ‘who pays for this all’.  Here her poor understanding of large numbers has harmed her.  The basic numbers are:

• The total wealth in the US held by households and nonprofits is approximately $82 Trillion dollars
• The wealthiest 1% holds, on average, 35.86% of the wealth
• Student debt is 1.2 trillion dollars
• The average US cost for public colleges is $9410/year
• The number of students enrolled in higher education is 17.5 million students

Now let’s do some trivial analysis; analysis that any fifth grader should be able to do, let alone a college educated activist.  First let’s calculate the wealth held by the one percent by multiplying the percentage wealth held by the total wealth.  This value comes out to be 29 trillion dollars of wealth.  It is a misleading number but we’ll come back to that.  Next let’s estimate the total cost for public college.  A reasonable estimate is that about 2/3 of the student population attends public college resulting in a yearly cost of around 110 billion dollars.  So, on the surface, if we make the one percent cough-up their fair share there should be ample money to meet the first two demands.

Just for giggles, let’s assume their fair share is 100%.  How long can we run the system?  Well 29 trillion take away 1.2 trillion for student loan forgiveness leaves just under 28 trillion of with which to pay for free college.  At 100 billion a year, that gives us about 255 years of free college.  So what if the system eventually runs out we will all be cozily dead and by that time (255 years into the future) we may not need college – we can just learn like they did in the matrix.

At the very minimum, Keely could have thrown these numbers into Cavuto’s face.  Had she done so, he no doubt would have pointed out the difference between wealth and fungible wealth.  To understand the difference, let’s consider how that 29 trillion held by the one percent is put to use.

For the sake of argument, let’s assume that all 29 trillion were placed in a simple savings account and then ask what purpose does that money serve?  Clearly the bank will loan it out for some businesses to get started, or loan it to a family to buy a house, and so on.  So we can’t simply take the money out of the bank and spend it on colleges with no consequences.  True the money is in the economy either way, but only in certain cases is it used to produce while in other ways its movement results in nothing.

In reality, that 29 trillion is tied up in lots of ways and earmarking it for one function will hurt people who depend on it for other functions.  The pros and cons of such a movement is what economics is all about. If we can only tap a tenth of that wealth, then the free-college system can only sustain itself for 25 years; hardly long enough for Keely’s own children to attend for free. But what about the fact that the one percent will earn more? Well if we confiscate their money what incentive do they have to accumulate vast wealth again? Why not just be a normal working class dude like the rest of us, with all their needs take care of (but by whom?)?

Of course, a more profitable use of Keely’s time would have been to rail against the following two statistics.

• The cost of college has grown four times faster than inflation
• The amount of wealth held by the one percent has fluctuated only about 2% (1 standard deviation) up or down in the last 35 years

So what she should really be marching about with her 999,999 fellow students (or is that number too large?) is the fact that higher education is a bubble market – it consumes lots of money and produces far too many students for whom the numbers simply don’t add up.

One of the most rich and interesting components of economics is associated with the management of Risk and Knowledge.  As Taylor puts it in his textbook Principles of Economics: Economics and the Economy

This interplay between knowledge and risk (I prefer the term knowledge over information as the former implies a judgment that the latter lacks) is profound.  Management of risk in the face of what the future holds for securities is at the heart of hedge funds and derivatives.

Similarly, the issuance of insurance policies and the premiums by which they are underwritten is based on actuarial science where probabilities and impacts lead to expected outcomes and costs.

Interest required of a borrower is also linked to the risk that borrower represents in repayment and thus the interest rate is set accordingly – both in personal loans and in the offering or corporate bonds and stocks.

Naturally, we expect that a legitimate function of government is to ensure as free a flow of information as possible and we rightly view the pursuit of violators as a function of the courts.  Just ask Martha Stewart about insider trading or Ford about the Pinto.

With the advent of the internet, it was natural to expect that there would be better flows of information now that most everyone was ‘wired’.  Certainly CNet Reviews and Angie’s List seem to provide a forum for consumers to trade information on their experiences thus allowing others to gather knowledge and to make more informed decisions.

However, all is not well in paradise.  An increasingly larger number of companies are making ‘gag orders’ a part of the implicit contract between seller and buyer, with often draconian punishment awaiting a buyer who has the temerity to place a bad review on Yelp or to speak unfavorably on Facebook.

These gag orders are the digital equivalent to insider trading.  They are designed to keep information in the hands of a few and away from the buying public at large in the hope that, with less information, the public will make ill-informed and unknowledgeable choices.

And so it was with a some delight that I heard that Senator John Thune was providing Yelp Help by sponsoring S.2044 – Consumer Review Freedom Act of 2015.

Under this act, consumers will be protected from the bullying gag clauses by declaring such clauses, usually hidden in the terms of service (talk about a lack of information), invalid, thereby ending the punishment that would accompany honest reviews.  Gone would be stories of customers placing bad reviews on Yelp and then finding that they owe $3500 in fines for a dispute over $20 of merchandise.   Businesses would still retain rights to sue for libel for any grossly inaccurate reviews.  So kudos to what seems to be a sensible law that moves us one step closer to the ideal of a free flow of information.

Paul Bloom recently penned an article for the Atlantic entitled People Don’t Actually Want Equality that I found intriguing and which I think dovetails nicely with some points that have been central to the topics covered here.

Bloom opens his piece by noting that people from all sides of the aisle and all corners of the political landscape are talking about income inequality and the gap between the rich and the poor.  All of them seem to wanting to change the structure of society to close these gaps by redistribution of wealth or income without bothering to see if inequality is really want they want to fix.

He goes on to say that

According to his analysis, Frankfurt contends that people are, in fact, bothered not by inequality but by one of several factors that walk hand-in-hand with economic inequality but that are not related to it.  The first factor is that, in some cases, economic inequality is caused by structural or local injustices.  The classic story of the theft of one person’s idea that gains a fortune for another person falls into this case (what I like to call the Facebook narrative).  The second factor is that we would like to see everyone in society have a minimal level of subsistence.  A society where are citizens were incredibly poor would be equal but no one wants it.

Paul Bloom cites his own research at Yale as help to clarify the distinction between ‘equality’ and ‘fairness’.  He talks about a situation where two boys Dan and Mark are asked to clean their room in return for a reward of erasers.  When confronted with the sum total of 5 erasers, they would rather chuck one eraser so that each had two if they felt each had contributed the same amount of work but were content in an unequal distribution if an independent assessment concluded that one of them did more.

These considerations mesh well with the premises of Equity Theory discuss in earlier in connection with the situation at Gravity Payments.  People are not so concerned with inequality when someone is seen to have earned more.  Inequality rankles the sensibilities of the outraged only when the fairness principle is violated.

A variation of the Ultimatum Game bears this out.  In the traditional game, the responder will reject the proposer’s proposal unless the split is nearly 50-50, even though it harms the responder to do so.  However, in variations of the game where the proposer is chosen by some contest or assessment of skill, the responder is much more willing to take an ‘unfair’ cut.  The interpretation is that the responder recognizes the proposer’s superior skill and is willing to make concessions.

This also seems to be the psychology at play in the debacle of the early years of the Plymouth Colony.  The prospect of communal farming, which, theoretically, should have resulted in near equality, lead almost to total ruin due to the issues of fairness.  Only when each family stood on its own with its own land did the colony actually thrive.

So it seems that income inequality is not what people are concerned about.  The rich can be rich as long as there is justification for why they are rich.  The poor can also be poor as long as a minimum standard of living is meet.

Maybe we should start talking about income justification – just a thought.

It’s that time of year again.  Pumpkins festoon front yards.  Horror movies abound in theaters.  Candy is sold by the ton.  And costumes, scary, sexy, and just plain crazy are purchased, modified, and tailored just for the bacchanalia of the that most weirdest of nights in the fall – Halloween.

But what can Halloween actually say about economics?  After all, this is a column on economics, wealth, money, and time.  Well it turns out that Halloween night, after the trick-or-treaters have returned with their loot, provides the ideal setting for playing a game that illustrates how trade builds wealth.  The name of the game is called the candy trading game.

The basic mechanics of the game is as follows.  Take the trick-or-treaters to a big room and ask them to sort their candy into piles of similar types:  M&Ms with M&Ms, Kit Kats with Kit Kats, Spree with Spree and so on.  Then ask them to value each of their pieces of candy on a scale of 1-10, with 1 being the least liked and 10 being the most liked.

Since the valuation of candy is an individual and subjective thing, most likely each participant will have a pile of favorites (say Snickers) and a pile of yucks (say Black Licorice Twizzlers).  Given a mostly random distribution of candy that results from going door-to-door, each costumed candy collector will find that the value that they ascribe to their haul will be somewhere around the 5 mark.

Now, without adding or subtracting any candy, allow the make-believe menaces to freely trade with each other.  Soon Lik ‘Em Aids will be changing hands for Black Cows; Pixie Stixs for Reeses’ Peanut Butter Pumpkins, and so on.

Finally, stop the trading (albeit temporarily) and ask the crew to reevaluate their stash.  Generally, the results will show that all groups report an increase in the value of their candy holdings even though no candy has entered or exited the economic ecosystem.  The increase in value is, or course, variable, but when this game is played in more controlled settings (say a classroom), the increases can be quite dramatic.  Increases of 30 to 60 percent have been seen in all groups simply be re-arranging who has what.

This is perfectly expected.  Anyone who has ever trick-or-treated, or has chaperoned those who have, know that a time-honored tradition upon returning home is to trade with each, eat what you like, and hold onto what you don’t (either until you can justify throwing it out or until you get desperate enough to eat it).

The only mystery and horror is why, when we grow up, are we confronted with businesses and governments hell-bent in stopping free trade.  I guess devils can be found even outside Halloween.

Some economists have argued for a long time that the establishment of a minimum wage would have a negative impact select segments of the economy or on society as a whole but there haven’t been controlled experiments that I am aware of that try to support this claim.  That is up until now.

As of April of 2015, we may finally have a Petri dish in which to examine the role of price fixing in the labor market and we have a man by the name of Dan Price to thank.

Dan Price is the CEO of Gravity Payments, a Seattle-based credit card processing company of about 120 employees [1] who has decided to set an-across-the-board minimum salary of $70,000 for each of his employees.

According to the article by Riley and Harlow entitled Gravity Payments CEO defends $70,000 minimum salary, Mr. Price had read a study that concluded that employees have substantial increases in their personal happiness until they reach a salary of $75K, after which the gains are less pronounced.  Citing this study as motivation, Price then decided to unilaterally set the minimum salary resulting in significant raises for 70 employees, 30 of which will see their yearly earnings essentially double.  To cover this expense, Price has cut his own salary from $1 million down to the minimum set by his own rule.

While the long-term results are yet unknown, the immediate results speak volumes about human nature, incentives, and the realities of the economy as Gravity Payments has seen some positive effects, some unintended consequences, and a heap of negative outcomes.

As cited in the Business Insider article by Rachel Sugar, some employees are ecstatic about the raise.  One member said that the extra money would allow him to fly his mom from Puerto Rico to Seattle for a visit – something he was never able to do before because of the relative relationship between his earnings and the price of air travel.  In addition, scores of new businesses have flocked to Gravity Payments due to what is viewed as their progressive stand. Sugar also notes that there may be some incentive for employees to work harder to justify their new, higher wages.

This kind of enthusiasm was no doubt anticipated by Price but other outcomes were no doubt unforeseen.  In his article Why A $70,000 Minimum Salary Isn’t Enough For Gravity Payments, David Burkus points out that the company was inundated with emails, phone calls, and social media posts that have proved a distraction to the day-to-day operations of the company.  In addition, they’ve been flooded with job application from people seeking employment in this brave new world.

But all of this is overshadowed by the strong, negative elements that resulted.  The New York Times had a lengthy article entitled A Company Copes With Backlash Against the Raise That Roared in which its author, Patricia Cohen, presents the responses of two key employees who quit over Price’s move.

One such employee is Grant Moran, a webdeveloper, who left Gravity Payments saying

More troubling is the story of Maisey McMaster, who Cohen describes as ‘one of the believers’ in Price’s business approach.  McMaster join Gravity Payments when she was 21 and in her five years of employment had gain the position of financial manager by putting in long hours that left little time for her husband and her family.  Originally onboard with the raises, she began to have her doubts.  When she approached Price about her concerns she said he accused her of being selfish.  She eventually quit Gravity Payments saying

Other negative side effects have included clients who left due to worries about the prospect of higher fees that they believe will be needed to cover the increased labor costs or because of the discomfort of the political statement they perceived.  In addition, Price has alienated segments of the Seattle entrepreneur set who see this move as setting a dangerous precedent.  Steve Duffield, the chief executive of the DACO Corporation, is quoted as saying

Those are the facts.  But what to make of them.  As Riley and Harlow note, Price thinks any company can match his model but does that really make sense?

First, let’s take a look at that ecstatic employee with the mother living in Puerto Rico?  Would he really be able to fly his mother into Seattle if everyone in the United States had a $70K minimum salary?  Of course not!  The cost of plane travel would also have to increase to cover the higher labor associated with pilots, mechanics, flight attendants, and service workers.

How about the large marginal increase in happiness as a result of the higher salaries.  Here there are two sides to examine.  For the employees who receive a huge bump up it isn’t at all clear that happiness will follow.  As Sugar points out, many have begun to worry that their performance doesn’t merit the extra money.  They will obviously split into two sets – the first rising to the occasion and working even harder and the second taking their windfall as a gift and changing nothing associated with their work ethic.  Will the first set be happier?  Maybe…but it is likely that some of them will long for the days where they had less money and fewer responsibilities.  Those in the second set will then antagonize those who are actually earning the money, especially those who didn’t receive much of a bump in the first place.   In addition, it is a reasonable concern to wonder if the minimum salary is simply too much money too early in the careers as many of the employees are 30 and under.  Doesn’t this minimum salary hurt their competitiveness in the labor market should they want or need to move to ‘less progressive’ companies?  After all, it is reasonable to suppose that the gains in happiness that correlated with the rise in salary to $75k were as much a product of the employee’s achievement – the realization that they were ahead of their peers through fruits of their efforts.  Also to what hope of future success can the employee look if there is nowhere else to rise?

Burkus suggests that the way to understand this dynamic is through the equity theory of motivation as proposed by the organizational psychologist J. Stacey Adam.  According to equity theory every employee in an organization is always analyzing their outlay in effort against what they get in return in relation to what others are doing.  This model fits the complaints leveled by Moran and McMasters that led to their departure from Gravity Payments.

So with all this negative outcome, why did Price do what he did?  Steve Tobak grapples with this question in blog for Entrepreneur entitled The Sad Saga of the $70,000 Minimum Salary Company.  To summarize, Tobak thinks Price acted impulsively without considering he bad incentives he would be instilling.  I, however, have a much more cynical interpretation. As discussed in the Times article, Lucas Price, Dan’s brother, and co-owner of the business filed a suit prior to this minimum salary initiative citing that

I can’t help thinking that this whole episode really comes down to sibling rivalry – a chance for Dan to stick it to Lucas in a way that Dan look like some kind of folk hero.

A recent article by Larry Summers, entitled The global economy is in serious danger, recently caught my eye.  For those who don’t know, Lawrence (Larry) Summers is a professor at Harvard and served as the Secretary of the Treasury from 1999 to 2001.  No doubt the inflow of cash into the treasury during his tenure, a fact many economists credit to the ebullient spirit associated with ‘the new digital economy’ and the automatic stabilizers in the economy, did much to give him a reputation as an economic seer.  But generally, I tend to take what he has to say with a huge shaker of salt mostly based on such idiotic sentiments as

This current ‘chicken little’ prophesy of doom is really no exception.  Although, to ‘be fair’, he does make some valid points in some areas but the bulk of his analysis is repackaged Keynesianism, which, oddly enough, may actually work in the particular situation the global economy is in.

In a nutshell, Summers warning center on secular stagnation where slow growth in the developed world hurts the emerging markets which, in turn, hurts the industrial countries.

To support this claim, Summers cites the IMF’s revision of growth forecasts for the US, Europe, and China downward.  On the surface, this seems to be a slam dunk of a pronouncement but looking under the veneer one should ask if the IMF foresaw the global financial crisis of 2008.  If they didn’t, which I suspect they did not, why start believing them now?

Summers also cites a curious statistic to make us feel all scared inside about the slowdown in growth in China.  He points out that China poured more concrete in the time span from 2010 to 2013 that the United States did in the entire twentieth century.  This statistic, which is explained in more detail here, seems genuine but who cares.  Again, without any context whereby the statistic is put on level footing it is hard to know what to make of it.  During the bulk of the twentieth century concrete was not the chosen material for building.  Only in the last third of that century did steel reinforced concrete really rise to a common building material, with granite and brick being much preferred prior to that time.  A more meaningful comparison would have been to show how much the US used in the span between 2010 and 2013 and even then the comparison would be misleading as the US isn’t trying to catch up to the developing world nor is it trying to lift over a billion souls up to a higher standard of living almost overnight.

In another curious meandering of his thought made manifest in print, Summers writes

Okay, which one is it Larry?  Should we ignore the market because it is inefficient and often wrong about economic fundamentals or should we listen to the adverse signals that originate from it?

Sigh…

Despite all this intellectual-sounding fluff, the odd thing is that I think Summers has a point.  Currently the amount of money in the economy is high and inflation is low.  More dollars should be chasing the same amount of goods leading to growth and, perhaps, inflation.  But it isn’t happening.

Summers doesn’t seem to venture a guess as to why but he comes close to a hint.  He mentions that China is suffering from a hangover due to unproductive investment.  What a surprise – a Keynesian actually suggesting that economic activity is not enough – that an economy needs to invest wisely.

And so finally, we arrive at the only useful nugget to be found in Summers’ analysis.  Governments, businesses, and households all have to be prudent and wise in their investments.  In the late 90s through to 2008, they were generally overly enthusiastic and made stupid investments and took on unsupportable debt.  Post financial crisis, governments have layered even more burdensome regulation on the economy; regulations that they continually tinker with to show how responsible they are.  Businesses are sitting on cash timidly afraid to take risk.  Households have hunkered down and are waiting to see what their so-called leaders will do.

Someone has got to get the ball rolling again and perhaps Summers is right in saying that it is government that needs to do this. But if this is the case, then businesses and household need to be vigilant in making sure that increased government spending is done wisely.  We don’t need anymore hangovers.