216 (10 June 2015)

Welcome to week 216!  The articles below caught my attention this week.  Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by a title search.

You can find a pdf of this issue, a cumulative pdf for issues 1-208, and a cumulative pdf for issues 209-present at: https://sites.google.com/site/brucedeanlarson/the-invisible-forces.

(2 June 2015): “Who’s Murdering Thousands of Chickens in South Carolina?” (http://www.bloomberg.com/news/features/2015-06-02/who-s-murdering-thousands-of-chickens-in-south-carolina-)

********This article appeared in the print edition of Bloomberg Businessweek on 8 June 2015.  It relates the deaths of many chickens on South Carolina farms, deaths for which no conviction has yet been made but which were almost certainly intentional acts made by someone who knew the ins-and-outs of raising chickens.  The economic interest of this article stems from the use of the so-called tournament system of compensation in the chicken industry, a system that “is explicitly designed to punish those who underperform their peers—a recipe for resentment and grievance. . . . The tournament, like so much in the chicken business, is controlled by the integrators.”  Integrators are companies like Pilgrim’s Pride, the relevant firm for this article, that control all aspects of the production process except for raising the chickens.  The tournament works based on the measurement of “feed conversion,” i.e., how good each farmer is at converting feed to flesh: “Farmers who ranks at the top get a bonus; farmers at the bottom get a pay cut. . . . it’s a zero-sum game: The bonus for the top farmer is taken from the paycheck of the bottom one.  The feed conversion gap between top- and bottom-performing farms is often small, but the penalty can be large.  A recent tournament sheet for a Pilgrim’s farmer in the Sumter [South Carolina] area shows a difference in feed conversion between the top and bottom farm of just 3.6 percent, but the pay difference between them was 10.2 percent.  Placing at the top or bottom of the tournament can mean the difference between profit and bankruptcy.”

********The prime suspect in the case is a farmer who lost his contract with Pilgrim’s Pride.  Sheriff Randy Garrett of Clarendon County, South Carolina, says that the tournament system may have led the suspect to blame his problems on neighbors, noting that “They all know, ‘The better I perform, the more money I make, the less the other guy [makes].  They didn’t care about me when they were outperforming me.  So why should I care about them?”  All this suggests that “chicken” tournaments may be a socially divisive resource allocation mechanism.  In light of that, the new book by Nobel Laureate, Who Gets What—and Why: The New Economics of Matchmaking and Market Design (http://www.amazon.com/Who-Gets-What-Why-Matchmaking/dp/0544291131/) may be of interest.  Roth and Lloyd Shapley received the Nobel Prize in Economics for their work on market design in 2012 (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2012/).

(4 June 2015): “U.S. Workers Ask: Where’s My Raise?” [SR](http://www.wsj.com/articles/u-s-workers-ask-wheres-my-raise-1433385001)

——–The unemployment rate in some “thriving metropolitan regions across the U.S. is below where it was when the financial crisis blew a hole in the U.S. economy in 2008.  Now, many American workers are asking: Where’s my raise?”  In a study conducted by The Wall Street Journal, 33 metropolitan areas out of almost 400 had “unemployment rates and nonfarm payrolls last year [that had] returned to prerecession levels . . . but wage growth [rates] trailed the prerecession pace.”  Some reasons are: “tapping pools of workers who have disappeared from the U.S. unemployment tallies,” overseas competition making companies reluctant to raise wages in the fear of losing sales, psychologically-driven inertia, and meager “growth in productivity, which limits the incentive of companies to offer raises.”

********I would add that there were about 367 metropolitan statistical areas not discussed in the article and it would good to know what is happening there.  It seems like potential competition from those SMSAs would be a good reason why wage increases in the 33 areas have been limited.  At the national level, the May 2015 unemployment rate was 5.5%; the unemployment rate peaked in October 2009 at 10.0%.  You can see a graph showing the behavior of the unemployment rate over the last 10 years at: http://data.bls.gov/timeseries/LNS14000000.

(6 June 2015): “The Anti-Poverty Experiment” (http://www.wsj.com/articles/the-anti-poverty-experiment-1433517539)

********This article provides a broad summary of the so-called “randomista” movement in behavioral economics, especially as it relates to poverty, the essence of which is using experimental design, randomized trials, behavioral economics, and data to more-completely apply the scientific method to the subject at hand.  One of the most impressive practitioners, MIT economist Esther Duflo figures prominently.  Jeffrey Sachs of Columbia University is mentioned as one who takes more of a conventional approach.  I was struck by the way Duflo characterized their approaches, noting: “The big difference between Jeffrey Sachs and us [the randomistas] is that he knows what needs to be done, and we don’t.  We’re trying to learn it.”

********The immediately foregoing comment reminded me of an article read in The Chronicle of Higher Education, “The Attack on Truth” (https://chronicle.com/article/The-Attack-on-Truth/230631/).  The article is an extract, of sorts, from a forthcoming book by Lee McIntyre, Respecting Truth: Willful Ignorance in the Internet Age.  You can learn more about the book at: http://www.amazon.com/Respecting-Truth-Willful-Ignorance-Internet/dp/1138888818/.

(6 June 2015): “The Great Opiate Boom” [SR](http://www.wsj.com/articles/the-great-opiate-boom-1433531938)

——–[A review by Nancy Rommelmann of Dreamland: The True Tale of America’s Opiate Epidemic, by Sam Quinones.]  “Beginning in the mid-1990s, two opiates began to lay siege to the American middle class.  One was black-tar heroin, produced in the Mexican state of Nayarit.  The other was OxyContin, a legally prescribed painkiller.  Those who became addicted to one or both tended to be young.”  Before 1980 “the rule for prescribing narcotic painkillers was as little as possible for as short a time as possible. . . [But] this thinking changed when Dr. Hershel Jick and a colleague submitted a one-paragraph letter to the New England Journal noting that, according to their data, of 12,000 patients treated with opiates in a Boston hospital before 1979, ‘only four had grown addicted.’ . . . Cited and recited, Dr. Jick’s letter bolstered a growing push within medicine to treat pain more aggressively.  By the time the pharmaceutical company Purdue Frederick introduced a time-release painkiller called OxyContin in 1996, the accepted wisdom was that opiates were nearly non-addictive.”  At the same time, “there was a radical shift in where and how heroin was distributed.  Heroin had historically moved from Southeast Asia and Turkey through New York.  Organized crime and gangs ran the drug trade in big cities.  The product itself, a light brown or white powder, was greatly cut . . . until what the user wound up with was weak and expensive.  Not so the black-tar heroin coming from Nayarit . . . It was potent—80% pure—and it was cheap.”  As a result of these developments, “Children of the most privileged group in the wealthiest country in the history of the world were getting hooked and dying in almost epidemic number from substances meant to, of all things, numb pain.”

********Xalisco is a city in Nayarit.  As Quinones writes, “Guys from Xalisco had figured out that what white people—especially middle-class white kids—want most is service, convenience, . . . They didn’t want to go to skid row of or some seedy dope house to buy their drugs.”  The result was something like pizza delivery—heroin delivered by drivers who were prompt and polite.   Although not mentioned in this review, a recent story in Bloomberg Businessweek (http://www.bloomberg.com/news/articles/2015-06-03/quality-pot-is-changing-the-drug-war) notes that the increasing legalization (decriminalization) of marijuana in the U.S. is leading Mexican drug sellers to move out of pot production and into heroin production.  Closer to home, you can learn about opioid abuse and treatment in Western North Carolina at: https://mountainx.com/news/to-the-brink-and-back-opioid-abuse-and-treatment-in-wnc/.

********Coincidentally, The Economist has just begun to produce a series of videos, one of which connects with this topic.  Part of the Global Compass series, its title is “Drugs: War or Store?” (http://www.economist.com/content/global-compass-drugs-war-or-store?).  The fifteen-minute video relates drug decriminalization efforts in Portugal, drug war efforts in Colombia, and recent marijuana legalization in Colorado.

(8 June 2015): “U.S. Is Awash in Glut of S rap Materials” [SR](http://www.wsj.com/articles/the-big-business-of-u-s-scrap-takes-a-hit-1433669402)

——–“Waste has long been a major U.S. export, providing materials to be melted in foreign steel mills or made into new paper products.  But the strength of the dollar has made American waste pricier abroad, cutting demand in China, Turkey and other markets.”  Since 2011, when U.S. scrap exports peaked at $32.6 billion, exports of “scrap materials have fallen by 36% . . . [and] Prices of shredded scrap steel have plunged about 18% so far this year and are down 41% since early 2012.”  Nucor Corp., “the largest U.S. steelmaker, which makes most of its steel from melted scrap rather than iron ore” has benefitted from lower scrap prices.  Like scrap steel, the price of scrap cardboard has fallen—down 27% in the past year.

********Thus, the increased relative price of U.S. currency relative to other currencies has led to a fall in the demand for U.S. scrap, reducing its price in the U.S. and benefitting Nucor (and other U.S. users of scrap.  There are, of course, scrap collectors, i.e., scrap “aggregators,” who gather the scrap.  An accompanying three-minute video shows “A Day in the Life of a Scrap Collector” (http://www.wsj.com/video/a-day-in-the-life-of-a-scrap-collector/A742D8B3-908E-419E-AA5F-F1F5592F7B93.html) which is worth a look.

(9 June 2015): “Why Does the Cable-TV Bundle Exist Anyway?” [SR](http://www.wsj.com/articles/why-does-the-cable-tv-bundle-exist-anyway-1433807825)

——–Cable television effectively began in 1948 when John Walson charged $2 for the distribution of three local TV channels to suburban Philadelphia.  Systems soon emerged in Arkansas and Oregon.  Since then “the number of channels on the cable-TV dial has risen with seemingly unstoppable momentum . . . Sounds great, except that most people don’t want to pay for all 189 channels they typically get. . . . Now, pushback is building that could finally break the bundle.  Pay-TV subscriptions have alternatives through Internet services such as Netflix, Hulu and YouTube.  [Furthermore,] Distributors like Verizon’s FiOS are trying to find ways to offer flexibility in pay-TV packages . . . And networks including HBO and CBS are now selling their content directly to consumers without requiring a subscription to a distributor’s big bundle.  According to Patrick Parsons, professor at Pennsylvania State University’s College of Communication, “The technology of Internet-delivered TV programming is swamping the argument of whether cable operators ought to bundle of unbundle their cable channels.”

********This is yet another example of Internet-based disintermediation, of which there are many.  I did a quick Google Scholar search on the words ‘Internet’ and ‘disintermediation’ for 2015 and 376 results emerged.  Many more, certainly, for earlier starting times.  This is probably as a good a time as any to observe how many of the articles in The Invisible Forces Weekly embody an aspect of technological change and its consequences.  It leads me to want to learn more about the causes of technological change.

May you have a good week!

Bruce

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