Milton Friedman in Practice

A recent article on cnbc.com describes alternative ways to pay for college. But the one method that garnered my attention was an individual who used crowdsourcing to generate enough money to pay university tuition. The reason why it was interesting to me is because Milton Friedman, in Free to Choose, actually conjectured that this would be a feasible solution for paying your way through college without loans. His argument was that outside investors would contribute capital with the expectation that you would repay them a certain percentage of your salary for a fixed term. It was (ideally) a win-win situation in that you didn't have to defer purchasing a home or new car due to student loans, and the investors, if they used proper vetting, would have a reasonable rate of return.
I just thought it was really neat to see it in action, though I'm curious as to if this will result in a drop in humanities.

Freakonomics falls flat

I finally got around to picking up that fabled book at the library. The one titled Freakonomics that asked such tantalizing questions as "Why does a drug dealer still live at home with his mother?" So I sat down to begin reading it and put it down in favor of finishing another book. When I returned to this book with a fresh mind, I was able to finish it with a feeling of drudgery rather than of being an eye witness to an expose.
The book doesn't tie together each chapter, but it isn't supposed to and we are warned of this. We're also given a snippet from a glowing review of the book at the start of each chapter as if to constantly remind us that the book is great stuff. There's just one problem.
Most of the links tying the juxtapositions together ("How is a schoolteacher like a sumo wrestler," "How is the Ku Klux Klan like a group of real estate agents") are so spider silk-thin that you could make the assertion about practically any two groups.  Answers: they both have incentives to cheat, and they both closely control information.  How broad is that paint brush?
What is interesting about the book is the information it provides in the chapters, and not necessarily the conclusions. Through the chapters, we learn the issues involving teachers cheating for EOG testing, how the decline of the Ku Klux Klan was precipitated by Superman, reasons for decline of crime, and children's names being a reflection of the socioeconomic status they belong to.
The chapter that I enjoyed the most dealt with crack cocaine dealers. The bulk of the chapter was based on field research conducted by a grad student in the Chicago area who actually embedded himself into a gang to  understand how it operated. And as he found out, it closely mirrored a franchise, where the local gang paid a percentage of revenue to the head gang in order to operate under their name.
The end of the chapter segues into the following chapter dealing with declining crime. The reason for this, the authors conclude, is that people were having more abortions which effectively brought about the reduction in crime since there weren't as many kids in the next generation growing up into criminals. The authors compare different cohorts in different states to show that the crime reduction was correlated with the legalization of abortion. States that legalized early noted a decreased drop, and states that legalized later noted a drop after their legalization.
I remember reading this and thinking that something didn't really jive. Attempting to control for a bunch of different factors in a study is hard enough, and it wasn't stated just how long the study was conducted, nor did it point to any other study supporting their findings. So I read the conclusion with not just a grain but a spoonful of salt.
The Economist published an article on the same issue that arrived at a different conclusion. Conducted by two economists in Boston, they found a flaw in the test conducted with the authors' data and discovered that the effects of abortion on crime were cut in half with the original data and reduced by two thirds when using updated numbers. The economists ultimately decided that they couldn't answer the question of whether abortion reduces crime or not in the scope of their study. A statistician would put it bluntly as a "failure to reject the null hypothesis," which means that you can't prove your alternative hypothesis, which in this case is abortions cause fewer crimes.
Overall the book fell flat for me. The title is misleading; it should read something like, "Pell-Mell Random Factoids." The most exciting thing about the book is the questions asked on the dust cover. The answers, however, are far more routine. I believe the authors are trying to convey some of the principles of economics in an interesting setting, but like I said, the conclusions they reach as to why these things happen isn't really groundbreaking. Nothing exciting, new, or revolutionary is put forth in the book. My recommendation? Pick up Milton Friedman's Free to Choose instead of this book. 

The Flipside of Showrooming

Nancy Thomas, President of the Retail Merchant's Association of Richmond, wrote an editorial in the Times Dispatch in support of the recent bill Marketplace Fairness Act. She outlines the problem with online retailers not having to pay sales tax and is in favor of having an equal tax liability for brick and mortar stores and online retailers. One of the examples of showrooming she uses is a restaurant GM attempting to order bar stools from a restaurant supplier. The GM sat down with the supplier and spent some time going over the different furniture, but decided to order from an online retailer, pointing out the lower online price. The restaurant supplier matched the price, but still had to add on sales tax to the transaction which was a deal breaker. The online retailer got the sale.
Economists would say that this is an example of a free rider problem because the B&M restaurant supplier provides a service, in this case the sales staff, that costs them wages and time, and yet the transaction ultimately occurs with an online retailer that doesn't incur those costs by not providing those services.
Resale price maintenance was intended to combat this because it's an agreement between manufacturers and distributors/retailers that the goods they sell won't be below a certain minimum price. This allows retailers to charge more for goods with the addition of having better service, and discounters would find it very difficult to undercut prices because of the fixed minimum price.
There's only one problem. Resale price maintenance has been illegal since 1911. The argument against it was, obviously, that setting a minimum price prevents competition and therefore should be illegal. Greg Makiw has more to say about it on his blog, and points out that the service is considered a public good and that price resale maintenance is one way of increasing that public good.
I don't know of any previous challenges to the anti-trust ruling, but there's one currently going on right now and it will be interesting to see which way the Supreme Court decides.
And as far as the idea being kicked around in Henrico and Richmond for a meals and prepared food tax? You run into the issue equality versus efficiency. Hopefully they take a close look at the luxury tax enacted by Congress in the early 90's and understand what it is that they want.

Is Showrooming Really so Bad?

For those of you who follow business news, I'm sure you've heard all about showrooming and Best Buy's plan to unveil store kiosks sometime in the future to combat showrooming.  Showrooming is something we've  all probably unintentionally done before, and I'll give you the following scenario:

You're in the market for a new set of speakers and you go to the local electronic goods chain to see what they have. The store's great because you can see side by side comparisons, the sales staff answers your questions, and you can try the speakers out. Then you get down to brass tacks and find out how much it costs. Always the conscientious shopper, you decide to hold off for a few days to see if you can find a better deal elsewhere for a lower cost. If not, then you'll simply come back to the store and purchase the speakers. When you get home you go on the internet and see that not only can you buy the same speakers from Amazon, but you can buy them for 10 percent cheaper than the store's price.

Congratulations, you've entered into the brave new world of showrooming.

Businesses say that this is a bad thing; they're having to pay for the stores, the sales people, and the inventory only to have people come in and test products only to buy them elsewhere. In other words, businesses are bearing the cost of this benefit to consumers. Is this bad? It sure is if you're the brick and mortar store. But it's great if you're the customer! You're effectively saving whatever the price difference is between the online store and the local store. And what if that price difference would be a deal breaker at the brick and mortar store? You're still able to make the purchase because of the online retailer. Economists might say that showrooming increases consumer surplus at the cost of producer surplus and allows more marginal buyers into the market. The layman would say that it allows more people to buy goods at a lower price than what they'd pay.

Some might say that this is unfair, but quite honestly this is no different than any other competition a B&M retailer would face. Prior to online shopping, customers probably did the exact same thing that they're doing now by shopping around for the best price. I think the only difference is just the volume of sales being completed online.

So what could be the outcomes for B&M retailers that are combating showrooming and online retailers?

1. The B&M retailers launch their own online stores and duke it out with Amazon and their like until one emerges victorious.
2. B&M retailers lobby congress for some sort of online sales tax. The losers would be the consumers who can't buy goods for cheaper and online retailers.
3. B&M retailers get better at controlling their costs or more effective management of inventory so that they can offer their goods at competitive prices compared to the online retailers.
4. B&M retailers effectively go out of business or convert to serving specialty and niche markets with online retailers servicing the majority of consumers. Due to the increased volume of sales and required costs to support it, the online retailer is forced to increase prices.

I'm sure the permutations and different combinations are more numerous than the four I've listed, but one thing is for certain: consumers will be able to determine the outcome by their purchasing preferences and their willingness to pay.

The Unfairness of Taxes

Suppose that you're a state government and the depression of 2009 severely hurts your state's economy. Prices are fluctuating, debts are rising, and unemployment is ticking upwards. What do you do? You lower the unemployment tax for businesses in the hopes that they will hire on more people since it's a little more affordable. But at the same time you borrow money from the federal government to fund unemployment insurance programs for the people who are out of work.
Fast forward 4 years so that it's the year 2013 and your deferred loan from the federal government is due. How do you continue to fund your unemployment programs with a significant amount of people still out of work?
Now, imagine that you're a state senator and you have to grapple this thorny issue. You don't necessarily want to cause people to pay higher taxes, so you brainstorm and come up with the brilliant idea that you'll be able to fund the unemployment programs by increasing the tax on businesses. Instead of making employees take home less of their paycheck, businesses will now have to foot the bill for the unemployment insurance programs. This should work, right?
Well, it works in a sense in that any tax you raise will be paid. But who you want to pay may not necessarily be paying the majority or even any of the tax you impose upon them.

Economists have a term for this and it's called the tax incidence and it describes how taxes are shared among participants in the market. Since we're talking about employers and employees, we're actually talking about a market where employees sell their skills, talents, and labor to businesses in exchange for wages and salaries. If you were to plot the different amount of people who participate in the labor market against the price of labor, you would see an overall trend where business would hire lots and lots of people if labor were very cheap. And on the other side, you would see more and more employees being available to work when the price of labor increases. This makes sense, because after all, if labor were cheap, businesses could create goods while not having to pay as much money for wages, and if labor were expensive, more people would want to to work and get paid more. But there's a happy medium that's called the equilibrium point and the market price which really just means that every worker would be hired on by businesses at the wages they both agree upon.

But getting back the to the taxes, there's also something economists call elasticity which refers to how much the quantity of a good sold changes in relation to a change in its price. Take gasoline and the price of meals at restaurants as examples. More often than not, when gasoline prices increase, we wind up paying more at the pump, usually because there aren't any other fuel options for your car. We'd call gasoline inelastic because the amount you buy isn't going to change much compared to its price. But what about an elastic good? Say a restaurant increases the price of its meals 25% so that they're $5 more expensive, but the result being that their business drops off by 50%. We'd say this is elastic, because more people are deciding to eat at home due to the higher price.
Talking about gas and meals and the amount you may buy when prices change isn't really an unfamiliar idea; it's something you probably encounter every day. But for a labor market, supply of labor and demand for labor still exhibit these same trends of elasticity.

And this idea of elasticity is actually pretty important for determining economic policy, but it also determines who has to bear the brunt of a tax.
On the whole, demand for labor is relatively elastic, and you've probably encountered this by picking up a newspaper and reading about businesses having poor profits and responding by laying off scores of employees. But the supply of employees in the marketplace is relatively inelastic, and if anything, it usually increases because more and more people enter the workforce each year. The difference between the elasticity of demand and supply means that any change in wage price will result in a large change in the amount of employees a business will want to have.
Unfortunately, an unemployment tax has the same effect as increasing wage prices in the labor market, resulting in unemployment due to decreased demand for workers. The demand actually shifts the amount of the levied tax, and will result in lower paid wages to workers.
But how is this important in determining who pays the tax? The tax affects the less elastic participants in the market, in this case the employees. Even though the businesses are paying all of the tax, they're getting most of that money from the decrease in wages and the decrease in employees that they would normally hire.

So even though businesses are the ones being taxed, you still wind up paying most of it.