278 (17 August 2016)

Welcome to week 278!  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 an Internet title search.

(11 August 2016): “Orangutan able to guess a taste without sampling it, just like us” (https://www.sciencedaily.com/releases/2016/08/160811101027.htm)

——–“Without having tasted a specific new juice mix before, an orangutan in a Swedish zoo has enough sense to know whether it will taste nice or not based on how he recombined relevant memories from the past.  Only humans were previously thought to have this ability of affective forecasting, in which prior experiences are used to conjure up mental pictures about totally ne situations, says Gabriela-Alina Sauciuc of Lund University in Sweden, in Springer’s journal Animal Cognition.

********I wasn’t aware there was a journal devoted to cognition in non-human animals but I’m glad there is.  In microeconomics agents play a central role—they make things happen by way of making decisions in line with their preferences.  It has been easy to assume that only human beings have preferences but anyone who shares a life with a bird, cat, llama, or mule knows that they have preferences, too.  What is different here is that some researchers have devoted time and effort to demonstrating these preferences.  Here is the link to the original article, “Affective forecasting in an orangutan: predicting the hedonic outcome of novel juice mixes” (http://link.springer.com/article/10.1007/s10071-016-1015-0).

********The term ‘affective forecasting’ is a new one for me.  It is “an ability that allows the prediction of the hedonic outcome of never-before experienced situations, by mentally recombining elements of prior experiences into possible scenarios, and pre-experiencing what these might feel like” (Abstract of the article at the link).  The description of the methods of the studies indicates that preferences are constructed (forecasted) from preferences for simpler items and then combined in some way.  All this has something to say about experience goods (https://en.wikipedia.org/wiki/Experience_good) and the experience economy (https://www.amazon.com/Experience-Economy-Updated-Joseph-Pine/dp/1422161978/).  If non-human beings have preferences, do they trade, too?  Something more to consider on the way to creating an economics that considers all sentient beings.  Time to revisit Gordon Tullock’s The Economics of Non-Human Societies (https://www.amazon.com/Economics-Non-Human-Societies-Gordon-Tullock/dp/1882969189/)?

********Gordon Tullock passed away on election day (4 November 2014), a synchronistic event for someone who wrote so much about the political process, including voting.  He is one of those people who made great contributions to economics even though he reportedly took only one economics course during his life.  Many argue that he should have received the Nobel Prize in Economics in 1986, when his long-time collaborator James Buchanan was so recognized.  There is less information about Tullock’s life and work than there should be, in my estimation.  Two obituary notices provide a hint of his accomplishments.  One is from The Washington Post (https://www.washingtonpost.com/news/volokh-conspiracy/wp/2014/11/05/gordon-tullock-rip/?utm_term=.bdf005c5db57) and another is from Forbes (http://www.forbes.com/sites/fredsmith/2014/11/06/in-memoriam-gordon-tullock/#3056db7847ca).

******** For the record, I was alerted to the orangutan story by the daily Economist Espresso: http://link.economist.com/view/540fcaaf3b35d03b58af7e894e4xb.dux/c5b6b5c7.

(13 August 2016): “Fiscal multipliers: Where does the buck stop?” (http://www.economist.com/news/economics-brief/21704784-fiscal-stimulus-idea-championed-john-maynard-keynes-has-gone-and-out)

********This is the fourth of six briefs on economics.  It deals with the notion of the multiplier, which stemmed from the 1931 writings of Richard Kahn and was given currency by John Maynard Keynes in The General Theory of Employment, Interest, and Money (1936).  Kahn noted that “public spending would yield both the primary boost from the direct spending, but also ‘beneficial repercussions’.  If road-building, for instance, took workers off the dole and led them to increase their own spending, . . . then there might be a sustained rise in total employment as a result.”  As this article points out, the existence and size of multipliers continues to be a point of contention among economists to this day.  This controversy is focused on macroeconomic (national) multipliers rather than regional multipliers.  There is no argument that regional multipliers, say for the Asheville, North Carolina Metropolitan Statistical Area (https://en.wikipedia.org/wiki/Asheville_metropolitan_area), exist and can be substantial.

********Last week Bloomberg mentioned the first brief on economics, which dealt with “the lemons problem” (http://www.economist.com/news/economics-brief/21702428-george-akerlofs-1970-paper-market-lemons-foundation-stone-information) in “The Dirty Little Secret of Finance: Asymmetric Information” (https://www.bloomberg.com/view/articles/2016-08-11/the-dirty-little-secret-of-finance-asymmetric-information).  It’s worth a look, as it notes: “The upshot of all this . . . is that asymmetric information, which is nothing more than a nuisance in most markets, is at the core of finance.  It’s key to the way traders, including high-frequency traders, make their profits.  And it’s probably at the root of why markets break down and crash.”  All this circles back to the controversy about the existence and size of multipliers.  I suspect that in the multipliers are larger in the presence of asymmetric information.

(13 August 2016): “Where We Spend Is Upending Traditional Retail” (http://www.wsj.com/articles/where-we-spending-is-unending-traditional-retail-1471041884)

——–“U.S. retail sales barely budged in July according to data released Friday, capping a week of tepid earnings results from department stores and underlining a seismic shift in consumer spending.  Americans are still splashing out, but they are splurging less on goods such as apparel and electronics and more on entertainment, travel and health care. . . . Retail now represents only a slice of household outlays, with consumption of services making up about two-thirds of all personal expenditures.”

********The article points to a dramatic shift in consumer purchases from goods to services, as well as pointing toward a continuing movement from concrete-and-mortar stores to online for the purchase of goods.  I was especially intrigued by the graphic “Twenty Years of Spending” that accompanies the article.  It took me awhile to figure it out but it shows how the ranking of various consumer categories have changed over time.  The most dramatic change has been the climb of the percentage of spending on Nonstore (mostly interest) spending, shown in gray.  Also noteworthy are the fluctuations for Gasoline stations and Home and garden.  This is definitely worth a look.

(15 August 2016): “It’s Getting Harder and More Expensive to Make Cars in Mexico” [SR](http://www.wsj.com/articles/mexicos-auto-production-boom-is-driving-up-labor-costs-1471201920)

——–Labor costs at auto-manufacturing plants in Mexico are increasing.  As a result, “Retention and retraining programs are becoming the norm as are bonuses for employees who agree to stay in place, especially those with valued skills. . . . The pressure isn’t yet so severe that it is undermining the rationale for moving production to Mexico.  But it is an unexpected sticker shock—labor is one of the few costs manufacturers can control—and threatens both profitability and production quality.”  Labor competition is “most pronounced in Mexico’s industrial strongholds—cities such as Juárez in the north of Mexico—and in the central, heartland states of Guanajuato, Aguascalientes and San Luis Potosi.  In Guanajuato, manufacturers including Honda and Mazda Moto Corp are busing workers from as many as two hours away, labor recruiters.”

********The pressure on the internal labor markets of Mexico is much reminiscent of the pressure on the internal labor markets of China.  In both cases, increased demand for labor services due to increased manufacturing output has resulted in increased wage rates.  I suspect that one result of this in Mexico will be, as it has been in China, the relocation of some production facilities to (rural) areas where wage rates are lower.  The article made me think of Boom, Bust, Exodus: The Rust Belt, the Maquilas, and a Tale of Two Cities (https://www.amazon.com/gp/product/0199765618/), by Chad Broughton.

********Even the most locally rooted businesses, for example, the Hershey Co. of Hershey, Pennsylvania, must be alive to the possibility of the migration of their signature businesses.  An examination of that possibility appears in “Hershey, Pa., Is the Town That Chocolate Built” [SR](http://www.wsj.com/articles/hershey-pa-is-the-town-that-chocolate-built-1471301344).  On June 30th Mondelez International Inc. offered “to buy Hershey for $23 billion.  Hershey’s board rejected the bid.”

(15 August 2016): “Economic Slump Sends Big Ships to Scrap Heap” (http://www.wsj.com/articles/economic-slump-sends-big-ships-to-scrap-heap-1471192256)

——–“Up until a year ago, the shipping industry was ordering ships in droves.  This year, orders of new vessels have fallen to a record low and companies can’t get rid of ships fast enough.”  This year about “1,000 ships that have the combined capacity to haul 52 million metric tons of cargo . . . will be dragged onto beaches, cut into pieces and sold for scrap metal this year.  That is second only to the record amount of capacity of 61 million so-called dead weight tons that were scrapped and recycled in 2012.”  According to Basil Karatzas of New York-based Karatzas Marine Advisors Co., “Given the tremendous overcapacity, it will take much more recycling and at least two to three years of no growth in capacity to see some balance between supply and demand.”  As a result of the increasing number of scrapped ships, the price of scrap steel has fallen significantly.  Two years ago “India, Pakistan and Bangladesh were paying about $460 a ton of steel.  Last year it was $300 and it is now roughly $250. . . . South Asian scrapyards recycle about three-quarters of all ships every year.  The remainder goes to yards in China and Turkey.”

********Evidently the business that reduces ship to scrap is called “ship breaking.”  The shipping industry seems like it should be very interesting to analyze.  There are freight rates to consider, as well as the prices of new ships and scrap.  Then there is the durability of ships, not to mention their vintage.  With the seeming rise anti-trade sentiment in the U.S., there will be many people looking to understand these (adaptive) relationships more carefully.

May you have a good week!

Bruce

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