Author: Zachary Bartsch

Buying on Margin is Like an Option

Zachary Bartsch4 Comments

Over the winter break I was able to catch up on a lot of podcasts. I also began listening to the Marginal Revolution podcast (which is phenomenal). I especially enjoyed the final episode of season 1 about options and how many transactions can be characterized as giving someone an option. Here, the term option echoes a financial option. You pay today for the ability to do something in the future. In financial markets, you can purchase the right to buy or sell at a particular price in the future.

But lots of things count as options. Staying in the financial context, purchasing a stock gives you the option to sell that stock at the future spot price. So, in this way, something can be characterized as an option even though we are not accustomed to describing as such explicitly. More mundane transactions can also be interpreted as options. Assume that you buy a can opener. You are buying the option to have that tool on hand in the future and to open some shelf-stable food. You can choose to exercise the option simply by opening your kitchen drawer.

But financial options often include the possibility of losing money. It may be that your grocery purchases never include canned items and that you never have occasion to use your can opener. Maybe that’s a bad investment. You sunk your money into something that you never used. Except… You did in fact have the option to use the can opener. Maybe you had peace of mind that you were well prepared just in case a guest arrived with a can of something. Buying a can opener is like buying an option.

Returning to the realm of finance, let’s discuss buying on margin. Buying an asset on margin is when you borrow from your broker in order to purchase a financial asset. It’s not entirely free money. They have rules about the amount you can borrow and, of course, you must pay back the loan with interest.

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Intersectionality Eliminates Measured Hiring Bias

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The US Equal Opportunity Commission identifies characteristics by which an employee can’t be harassed, hired, paid, or promoted. A challenge with enforcing the non-discriminatory standards is that the evidence must be a slam dunk. There needs to be a smoking gun of a paper trail, recorded conversation, or multiple witnesses. Mere statistical regularities are insufficient for demonstrating that characteristics like race, age, or sex are being considered inappropriately.

If employees are all identically qualified, then we’d expect the employment at a firm to reflect the characteristics of the applicant pool, within a margin of error due to randomness. One difficulty is that plenty of discrimination can occur within that margin of error. A firm may not have sexist policies, but a single manager can be sexist once or even multiple times and still keep the firm-level proportions within the margin of error. This is especially stark if the company managers or officers are the primary positions for which discrimination occurs.

Another difficulty is that randomness can cause extreme proportions of employee characteristics. Having a workplace that is 95% male when the applicant pool is 60% male isn’t necessarily discriminatory. In fact, given a sample size, we can calculate how likely such an employee distribution would occur by randomness. Even by randomness, extreme proportions will inevitably occur.  As a result, lawsuits or complaints that have only statistical evidence of this sort don’t  go very far and tend not to win big settlements.

But this doesn’t stop firms from avoiding the legal costs anyway. Firms generally prefer not to have regulatory authorities snooping around and investigating. Most people break some laws even unintentionally or innocuously, and a government official on the premises increases the expected compliance costs. Further, even if untrue accusations are made, legal costs can be substantial. Therefore, firms have an incentive to ensure that they can somehow demonstrate that they are not being discriminatory based on legally protected characteristics.

However, as I said, extreme proportions happen randomly. If those extremes are interpreted as evidence of illegal discrimination, then the firms have an incentive to hire among identical applicants in a non-random manner. They have an incentive to tilt the scales of who gets hired in favor of achieving a specific distribution of race, sex, etc. People have a variety of feelings about this. Some call it ‘reverse discrimination’ or discrimination against a group that has not historically experienced widespread disfavor. Others say that hiring intentionally on protected characteristics can help balance the negative effects of discrimination elsewhere. I’m not getting into that fight.

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Keeping Receipts

Zachary Bartsch1 Comment

Online shopping is convenient and even the norm for many items. Going to the store sounds like a time-consuming labor or an exceptional outing. My family, for example, lives in a suburban location that doesn’t have well-priced grocery home delivery. Shipping only works for some non-perishables. So, for many items we order online and do ‘drive-up pick-up’. We don’t even need to go into the store for many items. And reordering the same items repeatedly is a breeze.

We are also accustomed to the ability to return things. If your blender breaks on your first smoothie, then no worries – you can return it. If the chocolate cookies don’t taste like chocolate? Return it – satisfaction guaranteed. You can buy three pairs of shoes in different sizes and then keep the ones you want at the original sale price. Return the others.

For me, besides the time saved and convenience, a major factor in my decision to make purchases online is the documentation. I don’t need to save the receipt in a shoe box, Ziploc, or file drawer – the online retailer keeps an archive of all my purchases. Often this includes the date, amount, and shipping details including delivery date. There’s a super convenient digital paper trail.

If I need to contact a seller in order to exercise a warranty, then I have their contact information. I don’t need to retain the product packaging or investigate the brand at a future inopportune time. For example, I recently bought a Little Tykes water table for my kids. As I was assembling it on Christmas Eve I realized that I was missing a small part. I was able to work around it. But I was also able to immediately contact the manufacturer with a copy of my invoice. I emailed the date of purchase, the product model number, and the instruction manual had conveniently included part numbers. They were able to ship me the parts after a single email. Online shopping, and the resulting trail of evidence, makes the process much more practical than keeping paper records in a likely unorganized fashion.

There are other benefits to the paper trail. Back before widespread online shopping, retailers would often offer rebates as a sales strategy. In the year 2004, I bought a computer hard drive for $120 before a $40 mail-in rebate. The retailer (or manufacturer, I can’t remember) was hoping that people saw the post-rebate price and then failed to redeem it. And that often happened.  You needed to fill out a rebate form on an index card, cut the UPC bar code of the product packaging, and then mail them with your receipt to the company rebate department in a stamped envelope. If you dragged your feet, then you’d probably lose an important piece of the crucial combination and lose out on your $40 rebate. If the items were lost in the mail, then you were shucks-out-of-luck. Now, rebates have gone the way of the dodo since receipts are automatically retained and retrievable.

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¡Hedonic Frijoles! …And Televisions!

Zachary Bartsch1 Comment

You may have seen on your social media recently that the price of TVs has fallen 98% since 2020. That’s certainly what the data from the BLS says. This would seem to imply that a one-thousand dollar TV in the year 2000 would now be priced at $20. While we have seen amazing things in the market for TVs, we’re not seeing $20 TVs.  One take away might be that the data is just wrong. But that data is always wrong. The question is how the data is wrong and whether it’s a problem.

The reason for the disagreement between the data and the price on the shelves is due to something called ‘Hedonic Adjustment’. The idea is that some goods have quality features that change over time, even if the price doesn’t change so much. In the case of TVs, we might see higher resolution, flatter screens, larger screen sizes, smart features, etc. TVs are not a stable set of qualities. They are a bundle of characteristics, and those characteristics have some wiggle room while still satisfying some sensible criteria for being a TV. In theory, every single good is a bundle of services that we value. The reason that the some CPI categories have fallen so much is not only because the price has fallen necessarily. Rather, the amount of services that we get from a TV has increased so that each dollar that we spend can purchase more of those TV features.

Continue reading for the gif.

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Tariffs: Bad for Revenue

Zachary Bartsch3 Comments

Economists are pretty united against tariffs. There are lots of complicated arguments. Keeping things simple, one reason is that they are bad for welfare. President-elect Trump seems to imply that tariffs can raise a lot of government revenue. But in lieu of what? The Tax Foundation estimates that there is absolutely no way that tariffs can replace all revenue from income taxes. The primary reason that they cite is that imports compose a tiny portion of the potential tax base. There are plenty of goods and services produced domestically that wouldn’t be subject to the tariffs. Any time we add a tax exemption, we’re adding complication, higher compliance costs, and distorting consumption patterns, etc.

For this post I singularly focus on the tax revenue.  In fact, let’s demonstrate what *maximizing* tax revenue looks like under three cases: 1) Closed economy with a tax, 2) Open economy with a tax, & 3) Open economy with a tariff. I’ll use some simple math to demonstrate my point. None of the particulars affect the logic. You’ll reach the same general results with different intercepts, slopes, etc. Let’s start with a domestic demand and domestic supply.

Closed Economy with a Tax

Whenever tax revenue is raised, there is a difference between the price paid by demanders and the price received by suppliers. In a closed economy a tax might be imposed on all goods. In these examples, I treat the tax as some dollar per-unit of output tax. But it’s a short jump to percent of spending taxes, and then another short jump to percent of income taxes. With this in mind, demanders pay more than the suppliers receive by the amount of the tax. Tax revenue is the tax rate times the number of units of output that are subject to the tax. That’s the thing we want to maximize.

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Excel’s Weird (In)Convenience: COUNTIF, AVERAGEIF, & STDEVIF

Zachary Bartsch1 Comment

Excel is an attractive tool for those who consider themselves ‘not a math person’.  In particular, it visually organizes information and has many built-in functions that can make your life easier. You can use math if you want, but there are functions that can help even the non-math folks

If you are a moderate Excel user, then you likely already know about the AVERAGE and COUNT functions. If you’re a little but statistically inclined, then you might also know about the STDEV.S function (STDEV is deprecated). All of these functions are super easy and only have one argument. You just enter the cells (array) that you want to describe, and you’re done. Below is an example with the ‘code’ for convenience.

=COUNT(A2:A21)
=AVERAGE(A2:A21)
=STDEV.S(A2:A21)

If you do some slightly more sophisticated data analysis, then you may know about the “IF” function. It’s relatively simple; if a proposition is true (such as a cell value condition), then it returns a value. If the proposition is false, then it returns another value. You can even create nested “IF”s in which a condition being satisfied results in another tested proposition. Back when excel had more limited functions, we had to think creatively because there was a limit to the number of nested “IF” functions that were permitted in a single cell. Prior to 2007, a maximum of seven “IF” functions were permitted. Now the maximum is 64 nested “IF”s. If you’re using that many “IF”s, then you might have bigger problems than the “IF” limitations.

Another improvement that Excel introduced in 2019 was easier array arguments. In prior versions of Excel, there was some mild complication in how array functions must be entered (curly brackets: {}). But now, Excel is usually smart enough to handle the arrays without special instructions.  Subsequently, Excel has introduced functions that combine the array features with the “IF” functions to save people keystrokes and brainpower.

Looking at the example data we see that there is an identifier that marks the values as “A” or “B”. Say that you want to describe these subgroups. Historically, if you weren’t already a sophisticated user, then you’d need to sort the data and then calculate the functions for each subgroup’s array. That’s no big deal for small sets of data and two possible ID values, but it’s a more time-consuming task for many possible ID values and multiple ID categories.

The early “IF” statements allowed users to analyze certain values of the data, such as those that were greater than, less than, or equal to a particular value. But, what if you want to describe the data according to criteria in another column (such as ID)? That’s where Excel has some more sophisticated functions for convenience. However, as a general matter of user interface, it will be clear why these are somewhat… awkward.

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The Mythology of Rice and Beans

Zachary Bartsch3 Comments

I’ve written about proteins twice before. Once concerning protein content generally and then another concerning amino acid content of animal proteins. The reason that I stuck to animal proteins initially was because I held a common and false belief: Singular vegetarian foods aren’t complete proteins. The meat-eaters gotchya claim is that meats contain complete proteins. After all, we’ve heard a million times that beans and grains are often eaten together because they form a complete protein. The native North Americans? Corn and beans. Subcontinent Indians? Rice and Lentils or chickpeas. Japan? Rice and soy. Choose your poor or vegetarian population in the world, and they combine beans and grains. We’ve always been told that it’s because the combination constitutes a ‘complete protein’.

But you know what else constitutes a complete protein? Any of those foods all by themselves. What the heck. I haven’t been lied to. But I’ve certainly been misled. Let me briefly tell you my research journey. My recommended daily intake (RDI) are from the World Health Organization and the amino acid data is from the US Department of Agriculture. Prices are harder to pin down in a representative way, but I cite those too.  

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The Price of a Complete [Animal] Protein

Zachary Bartsch2 Comments

I wrote about the protein content of different foods previously. I summarized how much beef versus pea and wheat flour one would need to eat in order to consumer the recommended daily intake (RDI) of ‘complete proteins’ – foods that contain all of the essential amino acids that compose protein. These amino acids are called ‘essential’ because, unlike the conditionally essential or non-essential amino acids, your body can’t produce them from other inputs. Here, I want to expand more on complete proteins when eating on a budget.

Step 1: What We Need

To start, there are nine essential amino acids with hard to remember names for non-specialists, so I’ll just use the abbreviations (H, I, L, K, M, F, T, W, V). The presence of all nine essential amino acids is what makes a protein complete. But, having some of each protein is not the same as having enough of each protein. Here, I’ll use the World Health Organization’s (WHO) guidelines for essential amino acid RDI for a 70kg person. See the table below.

Step 2: What We Need to Eat

What foods are considered ‘complete proteins’? There are many, but I will focus on a few animal sources: Eggs, Pork Chops, Ground Beef, Chicken, & Tuna. Non-animal proteins will have to wait for another time. Below are the essential amino acid content per 100 grams expressed as a percent of the RDI for each amino acid. What does that mean? That means, for example, that eating 100 grams of egg provides 85% of the RDI for M, but only 37% of the RDI for H.

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Lump Sum Taxes: Never by Popular Demand

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The tax code is complex. That’s not news. The US federal tax code is also very progressive. Apart from that, the tax code pushes social or other policy goals. The Earned Income Tax Credit, for example, acts as a negative income tax and increases after-tax wages for those who can claim it. The idea is to incentivize earnings.

Economists tend to really like lump-sum taxes (in theory). But, despite the profession’s influence, almost nobody supports them. First, what is a lump-sum tax? It’s a tax that ignores any activities of the target. A per capita lump-sum tax would target the young, the old, the indigent, the working, the rich, the disabled… everyone. The idea is that no behaviors, aside from breathing, incur or disqualify a person from owing the tax.

Economists like them because they don’t change the relative price of labor and leisure. Whereas a marginal tax rate reduces a worker’s effective wage, a lump sum tax leaves it unaffected. People aren’t disincentivized from working/earning. Using jargon, we say that a lump-sum tax is non-distortionary.

In the simple two-good model of consumption and leisure, marginal tax rates reduce the amount of consumption that one can afford with each hour of work, making leisure relatively more attractive. Lump-sum taxes reduce the affordable amount of both leisure and consumption. Affording less leisure is the same as saying that people work more hours. It happens for two reasons. 1) Poorer people must work enough to pay the inevitable tax bill and also reach an income level of sustenance. However much work sustenance entails, it’s surely more when there is a tax. 2) Since working and earning itself is not taxed, people at all levels of income decide to work more because their after-tax wage is higher relative to the case of a marginal income tax.

At this point someone gets what I call the “French” idea. The French idea is that if we provide a lump-sum subsidy, then we can all leisure more and consume less – the opposite of a lump sum tax. What a life! We can avoid the prisoner dilemma problem where we can’t credibly commit to shirking together or actually taking a lunch. By forcing a lump-sum subsidy on everyone, we’d work a little less and do it voluntarily. We can sit outside a cafe, enjoying our coffee, baguette, and cigarette without having to worry about our neighbor with their “go get’em” attitude making us look bad.

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More Productive than “Smart”

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Public choice economists emphasize the process by which we select political leaders. Electoral and voting rules influence the type of leaders we get. Institutional economists agree and go one step further. Who we choose matters less than the environment we place them in. Leaders, regardless of their personal qualities, respond to the incentives that surround them. The ultimate policies, therefore, largely conform to those incentives. From this perspective, it’s important to adopt institutional incentives for leaders to promote policies oriented toward economic growth and provide the option to flourish.

The same principle applies to the private economy. Productivity is crucial, and higher IQ often correlates with greater productivity. Yet, genetic endowment—including IQ—is beyond individual control. Many other determinants of productivity are not exogenous when we can affect policy. Let’s adopt policies that allow individuals with lower IQ to act productively as if they had higher IQ. Protecting the freedom to contract and private property rights creates conditions whereby even those at the lower end of the cognitive ability distribution can thrive. These principles expand their opportunities. Market signals give them valuable feedback on their activities and enable them to contribute to the economy.

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