Welcome to week 376! The articles below caught my attention this week. What are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********). Article titles preceded by [SR] require a subscription.
(24 August 2016): “Why Behavioral Economics Is Really Marketing Science” Evonomics
********Yes, the date is correct. This piece, by much-published marketing professor Philip Kotler, was noted by Bloomberg writer Barry Ritholtz earlier this week. It provides some interesting comments about the development of the disciplines of economics and marketing, ultimately arguing that behavioral economics shares with marketing science an empirical orientation that conventional (neoclassical) economic theory shares with neither. Part of that empirical orientation is due to a desire to determine what really affects individual human behavior, which leads one to take a careful at the institutions.
(31 May 2019): “Half of Americans Are Effectively Poor Now. What The?” Eudaimonia
********The value of this piece, which has an edge to it, is that it introduced me to the term ALICE (Asset Limited, Income Constrained, Employed). In a sense it provides an indication of the number of people who are working but still find themselves unable to “afford a budget that includes housing, food, childcare, healthcare, transportation, and a cellphone.” As far as I can tell, ALICE is a project of The United Way—you can learn more about ALICE here. Access to state and county level data is available here. The United Ways of some states produce individual ALICE reports, as can be found here, but North Carolina is not one of them.
(24 June 2019): “Why Transparency on Medical Prices Could Actually Make Them Go Higher” The New York Times
——–“It makes intuitive sense—publish prices negotiated within the health care industry, and consumers will benefit. That’s the argument behind the executive order issued Monday by President Donald Trump that is intended to give patients more information about what health care will cost before they get it. But the peculiarities of the United States health care system, with its longstanding secrecy around negotiated health care prices, mean there is very little research on the possible effects” of the order. “That means that scholars examining the question have had to reach far beyond the health care industry, and even beyond the United States, for answers about what might happen. Their favorite studies come from markets like Chilean gasoline, Israeli supermarkets and Danish ready-mix concrete. The scholarship suggests that more transparency in health care could backfire, causing prices to rise instead of fall.” The case of Danish concrete, “Government-Assisted Oligopoly Coordination? A Concrete Case,” is much cited by health economists. “The Danish government, in an effort to improve competition in the early 1990s, required manufacturers of ready-mix concrete to disclose their negotiated prices with their customers. Prices for the product then rose 15 percent to 20 percent.” The question remains, how similar is “Danish ready-mix concrete in the 1990s . . . to American health care today”?
********An important point is made later in the article regarding who has what knowledge. “The question is whether the [price] transparency will be more useful to hospitals or to consumers. If you think the answer is consumers, you think transparency will lower prices.” But consumers and producers can benefit from the knowledge of health-care substitutes. And, at least in the concrete case, may especially benefit producers.
********While we are on the topic of concrete, I was intrigued by “Cement Produces More Pollution Than All the Trucks in the World” Bloomberg.com. Specifically, the manufacture of concrete “is responsible for 7% of global carbon dioxide emissions, more than what comes from all the trucks in the world.” In some quarters the push is to on to user greener (and more expensive) concrete. This article is a partner of another Bloomberg piece “What’s Wrong With Modern Buildings? Everything, Starting With How They’re Made.” It notes that construction, not just concrete, “is responsible for 11% of global carbon emissions, according to a report from C40, a group of leading metropolitan authorities.” You can download the report here. You can learn more about C40 here.
(28 June 2019): “Subway Got Too Big. Franchisees Paid a Price.” The New York Times
——–”Subway is the largest fast-food company in the world by store count, with more than 24,000 restaurants in the United States alone. It got that way thanks in large part to entrepreneurial immigrants. Unlike at chains such as McDonald’s and Burge King, where many franchises are operated by investment firms, Subway owners are mostly individuals and families. The company’s co-founder, Fred DeLuca, made stores easy to open; most new franchisees are charged a $15,000 initial fee, compared to $45,000 at McDonald’s. In exchange, Subway operators must hand over more revenue than at other chains—8 percent of gross sales—while also agreeing to other fees and stipulations.” Among those stipulations, embedded in more than 600 pages of text, Subway notes that it can revise its rules “at any time during the term of your Franchise Agreement under any condition and to any extent.”
********The article takes a close look at the alleged mis-dealings of Subway with some of its franchisees. At the center of these allegations is a system of evaluation that uses “development agents” to oversee franchisees, where some of these agents stand to benefit by seeing some of Subway’s franchisees fail. This is highly reminiscent of principal-agent problems, where an agent, in pursuing her self-interest, does not simultaneously pursue the interest of the principal. A central figure in the article is Rebecca Husler, a former inspector for Subway, who notes that “her boss ordered her to find violations at stores” and thus cause franchisees to lose their businesses. In this way, she served as kind of a “hit man” for her boss. The article clearly shows the dramatic power differential between company and franchisee. Perhaps that is why the number of Subway’s in the U.S. has decreased “by more than 2,000 since 2015.”
(30 June 2019): [SR] “Drink Makers Seek More Recycled Plastic” The Wall Street Journal
——–“Beverage companies with ambitious goals to use more recycled plastic in their packaging are facing a shortage of discarded containers from recycling programs. Less than a third of the six billion pounds of plastic most commonly used for drink bottles and food containers is recovered by U.S. recycling programs. Most of what is recovered becomes polyester fiber for rugs and clothing or plastic sheeting. Just a fifth, some 330 million pounds, ends up in new bottles and food containers. Big drink0and-food makers will need four or five times that much recycled plastic to meet the targets they have set to satisfy consumer calls o was less and reuse more, according to the Association of Plastic Recyclers.” However, “the volume of plastic or bottles—technically known as polyethylene terephthalate, or PET—has been stagnant for years.” Ironically, “beverage companies also have worked for decades against one of the most effective recycling practices: deposit programs that pay a nickel or dime for each bottle returned,” arguing that the programs are effectively a tax on their product and give rise to logistical costs handling containers. Instead, companies are calling for enhanced curb-side recycling. But “Fees for curb-side recycling service have been rising to counter falling prices for scrap materials caused by lower exports of old paper, cardboard and plastics to China.”
********Presumably the cost of curb-side recycling falls on individual waste producers i.e., households, businesses, and other organizations, rather than on beverage companies.
(1 July 2019): [SR] “’VC: An American History’ Review: The Seed Spreaders” The Wall Street Journal
********VC stands for Venture Capital and the reviewer is Marc Levinson, author of The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, which is still one of my favorite books.
——–“The question of whether the venture-capital industry creates any social benefit looms over Tome Nicholas’s” book. “Mr. Nicholas, a professor at Harvard Business School, is evidently a fan of American-style venture capital . . . But his book doesn’t demonstrate that venture capital is promoted in the U.S. is the best way, or even a good way, to support risk-taking.” As Nicholas makes clear, “the venture-capital industry in its modern incarnation is a creation of the U.S. government. The Small Business Investment Act of 1958 led to the creation of hundreds of venture-investment companies, which were entitled to federal loans and extremely favorable tax treatment. A 1979 aw allowed pension funds to invest in venture capital. And reductions of tax rates on capital gains since the 1970s have allowed venture capitalists to collect their pay mainly through capital gains rather than more highly taxed wages, minimizing their tax bills. At the same time, the federal government has been a major customer of VC-funded startups in computing, software and semiconductors. As Mr. Nicholas puts it: ‘Government policy had powerful supply-and demand-side effects.’” Although the U.S. approach to venture capital has contributed to economic dynamism, by some measures “other countries may have more dynamic economies . . . The Bloomberg Innovation Index has ranked the U.S. eighth among the most innovative countries in 2019 . . . the leaders for this year are South Korea and Germany, which don’t provide venture capital the American way. . . . So perhaps the history of U.S. venture-capital investing is not quite the triumph the Mr. Nicholas would have us believe.”
********Here is the link to the book. It will be released on July 9th. Although certainly not a positive review, perhaps it shouldn’t be taken to task for not addressing the question “What is the best way to support risk taking?” What comes through for me is the importance of federal government policies in creating the U.S. approach to venture capital.
(3 July 2019): “Sun, Sand, and the $1.5 Trillion Dark Offshore Economy” Bloomberg Businessweek
——–“The British Virgin Islands is home to more than 400,00 companies that hold $1.5 trillion in assets. You wouldn’t know it if you walked through Road Town, the capital of this Caribbean archipelago. Hens and roosters compete brazenly with cars on the single narrow lane of Main Street. Law firms that set up and serve thousands of offshore companies occupy modest buildings next to brightly painted wooden houses that host cheap beauty salons and clothing shops with names like Goodfelllas. Besides a few mangled green street signs on Main Street, few roads are marked. The BVI doesn’t have mail delivery its businesses and 32,000 residents use post office boxes as their addresses, which is why one P.O. box in Road Town can be the nominal home to thousands of companies from around the world. Hundreds of lawyers, accountants, and company agents work from buildings dotted around the main island of Tortola. In some tax havens—Luxembourg, Monaco, or even parts of the Cayman Islands—money is dripping off every corner. In the BVI, the wealth passes through almost without a trace.”
********So begins the story about the BVI and its place “in the dark offshore economy,” which was “illuminated by the 2016 Panama Papers leak, in which 11.5 million documents from the law firm Mossack Fonseca were released by the International Consortium of Investigative Journalists.” The disclosures “sparked probes worldwide into money laundering, sanctions violations, and tax avoidance, and it didn’t pass without notice that more than half the companies outed in the leak were registered in the BVI.” Subsequently, the U.K. Parliament passed a law requiring Overseas Territories to create public registers that would make company ownership more transparent, starting in 2020, but that may extend as far as 2023. Interestingly, as I write this on July 4th, “Parliament can legislate for the territories, but islanders, who are U.K. citizens, can’t vote in U.K. elections unless they live in the U.K.”
********It appears that the dark offshore economy of the BVI is legal, although the uses of the opportunities provided by the BVI often have an illegal dimension, e.g., money laundering. This seems, then to notice the recent “Heist Issue” of Bloomberg Businessweek. I read two—“America’s Busiest Bank Robber Was a Product of the Opioid Crisis” and “It Took Only 16 Minutes for Thieves to Swipe a Million-Dollar Gold Coin.” Surely these are premeditated, and presumably rationally planned, acts.
May you have a good week!