Economics

Buying in Bulk: Money Saver or Self Sabotage?

Zachary Bartsch1 Comment

Recently, I’ve been buying a lot more non-durable goods when they are on sale. Whereas previously I might have purchased the normal amount plus one or two units, now I’m buying like 3x or 4x the normal amount.

What initially led me here was the nagging thought that a 50%-off sale is a superb investment – especially if I was going to purchase a bunch eventually anyway. I like to think that I’m relatively dispassionate about investing and finances. But I realized that I wasn’t thinking that way about my groceries. The implication is that I’ve been living sub-optimally. And I can’t have that!

If someone told me that I could pay 50% more on my mortgage this month and get a full credit on my mortgage payment next month, then I would jump at the opportunity. That would be a 100% monthly return. Why not with groceries? Obviously, some groceries go bad. Produce will wilt, dairy will spoil, and the fridge space is limited. But what about non-perishables? This includes pantry items, toiletries, cleaning supplies, etc. 

Typically, there are two challenges for investing in inventory: 1) Will the discount now be adequate to compensate for the opportunity cost of resources over time? 2)  Is there are opportunity cost to the storage space?

For the moment, I will ignore challenge 2). On the relevant margins, my shelf will be full or empty. I’ve got excess capacity in my house that I can’t easily adjust it nor lend out. That leaves challenge 1) only.

First, the Too Simple Version.

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Inflation is Here. Why? What Can We Do?

Jeremy Horpedahl2 Comments

The latest CPI release today shows that real inflation is here. Headline inflation for consumer prices is up 6.2% compared to a year ago and a almost full percentage point in just the past month (seasonally adjusted, so compared to the normal monthly increase).

Back in June, we could reasonably say that 45% of the increase that month (and 27% over the prior year) had been due to just the price of new and used cars, in the past month only 17% can be attributed to vehicle prices. That’s still a lot, considering cars are only about 8 percent of the overall CPI, but inflation is clearly showing up in other areas.

Gasoline prices (also car related!) are always volatile, but they are up sharply in the past year. The over 50% increase for regular unleaded gasoline translates to $1.22 more per gallon than a year ago (and $1.50 more gallon than Spring 2020), which is the largest nominal price increase consumers have seen in a 12-month period (the data stretches back to 1977).

But gasoline is only about 4 percent of consumer spending. What if we look more broadly? Even excluding energy prices, inflation is 4.7% over the past year, the highest increase since 1991.

The natural related questions are Why? And what can we do about it?

The Why question is tricky. The Federal Reserve is very interested in whether the increase in prices is caused by monetary policy. It very much guides their action. Consumers don’t really care that much. They just want the pain to stop. Unfortunately, though, part of the pain may be induced by consumers themselves: spending on goods is extremely high right now, with the year so far 18% above the comparable period in 2019. Higher spending will increase prices in any environment, but the strain it is putting on supply chains only exacerbates the problem. This is not to “blame the victim,” but rather to understand what is going on.

What can be done? That’s an even harder question. It’s convenient to blame the President for things like gas prices. And certainly many voters and pundits will blame him. This charge is not completely without basis, as there are certainly things at the margin a president could do to ease gas prices in the short run (allow more drilling, gas tax hiatus), but we shouldn’t oversell this. And in other areas too, perhaps there are changes that could be made at the margin. But given the massive increases in consumer spending (at least for now), any changes won’t put a dent in the overall inflation rate.

But what about at the individual level? Milton Friedman was asked this question in 1980. That year inflation was 13.5%, the highest since World War II. Friedman’s answer: high living. He said there is no asset which you can expect to protect you against inflation, so you should spend what you have now on something nice. Buy a nice house, a nice suit, a picture to hang on the wall. This is what economists sometimes call “the flight to real values,” or as Phil Donahue put it “convert your money into material things.” While this advice may make sense at the individual level, it doesn’t have great implications for the current supply chain issues.

Friedman did have clear advice for the nation: the Federal Reserve should stop increasing the money supply. Whether that advice will work in the current environment, or whether it will stall the economic recovery, is the hard question the Fed is wrestling with at this very moment.

Gen Z on The Great Resignation

Joy Buchanan2 Comments

Even though a housing price crash is often reported on as a crisis, it benefits first time homebuyers. Do the college seniors in 2021, likewise, see this “labor shortage” as a wonderful opportunity and stroke of luck for them personally? They overwhelmingly think of themselves as sellers of labor, not employers.*

Sometimes Samford students write for EWED if I felt like there was something that I and readers could learn from their perspective. This is accounting major Rachel Brinkley:

As a 21-year-old senior in college, the workforce is a confusing place. On the one hand, “The Great Resignation” is creating millions of jobs across America. It is a very encouraging time to be graduating college, as it appears that most of my peers and I will have no issues finding employment. Employers are currently struggling to compete in terms of compensation and benefits offered. I am majoring in accounting, and everyone that I have spoken to in my major has had at least one compensation increase since accepting their position. None of us have worked even one day on the job. This competition between employers creates favorable bargaining power for those entering the workforce, while putting a strain on employers.

While I may have confidence in my employment status after graduation, I will be starting at an entry level position for a firm that has a relatively structured promotional process. Like most large accounting firms, the promotions within the firm are based on the number of years spent working at the firm. There may be a few exceptions to the standard promotional pace, but I am not very optimistic about climbing the corporate ladder any faster than I would under more typical economic conditions. This is due, in part, to the fact that the best jobs are hard to come by. At a large accounting firm, the structured promotional process limits the number of the most sought-after jobs.

This circumstance leads me to ask how it is possible to obtain a top job when competition for those positions seems to be increasing. We read “Deep Work” for class, and I think about the author’s advice. We will need to continue learning new skills to make it into top positions.

Are my students running through the halls celebrating the current state of the labor market? Maybe they should be, but they are not, especially if their focus is on what Rachel called “top jobs”. Some jobs, almost by definition, are limited because they are top-of-the-pyramid or “tournament” positions.

My current Fall students pointed out that they feel better than the last two batches of students graduating into a closed-down Covid world. Many of our previous students got hired virtually and I don’t know at what point if at all they have had in-person interactions with work colleagues.

*The truth is more complex in a large diverse economy. Even though I don’t think of myself as en employer, I am concerned that there will be no one to operate my upcoming flight to a conference. The airline I rely on has had to cancel hundereds of flights in the past week over labor issues.

Starship: Quantity has a Quality of its own

James BaileyLeave a comment

If the SpaceX Starship ends up working as planned, it will do the same things our rockets do now, but at one one-hundredth the price. In an inspiring blog post, Casey Handmer argues that even people within the industry have yet to appreciate the qualitatively different opportunities that this price drop would enable:

By refilling in LEO, a fully loaded deep space Starship can transport >100 T of bulk cargo anywhere in the solar system, including the surface of the Moon or Mars, for <$100m per Starship. Starship is intended to be able to transport a million tonnes of cargo to the surface of Mars in just ten launch windows, in addition to serving other incidental destinations, such as maintaining the Starlink constellation or building a big base at the Lunar south pole.

Second, and more importantly, shoehorning Cassini 2.0 or Mars Direct into Starship fails to adequately exploit the capabilities of the launch system. Not to pick on Cassini or Mars Direct, but both of these missions were designed with inherent constraints that are not relevant to Starship. In fact, all space missions whether robotic or crewed, historical or planned, have been designed with constraints that are not relevant to Starship. 

What does this mean? Historically, mission/system design has been grievously afflicted by absurdly harsh mass constraints, since launch costs to LEO are as high as $10,000/kg and single launches cost hundreds of millions. This in turn affects schedule, cost structure, volume, material choices, labor, power, thermal, guidance/navigation/control, and every other aspect of the mission. Entire design languages and heuristics are reinforced, at the generational level, in service of avoiding negative consequences of excess mass. As a result, spacecraft built before Starship are a bit like steel weapons made before the industrial revolution. Enormously expensive as a result of embodying a lot of meticulous labor, but ultimately severely limited compared to post-industrial possibilities. 

Starship obliterates the mass constraint and every last vestige of cultural baggage that constraint has gouged into the minds of spacecraft designers. There are still constraints, as always, but their design consequences are, at present, completely unexplored. We need a team of economists to rederive the relative elasticities of various design choices and boil them down to a new set of design heuristics for space system production oriented towards maximizing volume of production.

As they say, read they whole thing, especially the part about space tractors. I leave you with one final quote:

It is time to raise the scope of our ambition and think much bigger

Zuckerberg Wants to Suck You into His Metaverse

Scott BuchananLeave a comment

Facebook founder Mark Zuckerberg has been making a lot of noise in the past few months about the “metaverse”, and now has changed his company’s name from Facebook to “Meta Platforms” (MVRS on the NASDAQ). What, you may ask, is the metaverse?

The term itself has been around for a while. Wikipedia defines it as, ”The metaverse is an iteration of the Internet part of shared virtual reality, often as a form of social media. The metaverse in a broader sense may not only refer to virtual worlds operated by social media companies but the entire spectrum of augmented reality.” In the near term, it will to be embodied by people wearing headsets with Augmented Reality (AR) goggles (with little projector screens in front of your eyes) connected over the internet to other people wearing AR googles. Instead of seeing people on flat screens (think Zoom calls), both you and they will seem to be in the same room, interacting with each other in 3-D. You and they will each be represented by digitally constructed avatars. Eventually your body would have various sensors attached to it to convey your position and motions, and your sense of touch for objects you are handling. For instance, this just in:

Together with scientists from Carnegie Mellon University, artificial intelligence researchers at Meta created a deformable plastic “skin” less than 3 millimeters thick….When the skin comes into contact with another surface, the magnetic field from the embedded particles changes. The sensor records the change in magnetic flux, before feeding the data to some AI software, which attempts to understand the force or touch that has been applied.

Zuckerberg gave a presentation on October 28 touting his company’s pivot.  In his words:

The next platform and medium will be even more immersive, an embodied internet where you’re in the experience, not just looking at it, and we call this the metaverse….When you play a game with your friends, you’ll feel like you’re right there together in a different world, not just on your computer by yourself. And when you’re in a meeting in the metaverse, it’ll feel like you’re right in the room together, making eye contact, having a shared sense of space and not just looking at a grid of faces on a screen. That’s what we mean by an embodied internet. Instead of looking at a screen, you’re going to be in these experiences.  You’re going to really feel like you’re there with other people. You’ll see their face expressions. You’ll see their body language. Maybe figure out if they’re actually holding a winning hand…

Next, there are avatars, and that’s how we’re going to represent ourselves in the metaverse. Avatars will be as common as profile pictures today, but instead of a static image, they’re going to be living 3D representations of you, your expressions, your gestures that are going to make interactions much richer than anything that’s possible online today. You’ll probably have a photo realistic avatar for work, a stylized one for hanging out and maybe even a fantasy one for gaming. You’re going to have a wardrobe of virtual clothes for different occasions designed by different creators and from different apps and experiences.

Beyond avatars, there is your home space. You’re going to be able to design it to look the way you want, maybe put up your own pictures and videos and store your digital goods. You’re going to be able to invite people over, play games and hang out. You’ll also even have a home office where you can work…

We believe that neural interfaces are going to be an important part of how we interact with AR glasses, and more specifically EMG input from the muscles on your wrist combined with contextualized AI. It turns out that we all have unused neuromotor pathways, and with simple and perhaps even imperceptible gestures, sensors will one day be able to translate those neuromotor signals into digital commands that enable you to control your devices. It’s pretty wild.

The reactions to all this I have seen on the internet have not been particularly positive. Some suggest that this is largely a publicity stunt to deflect attention from recent revelations of hypocritical and harmful decisions by Facebook management. The Guardian scoffs:

First came the Facebook papers, a series of blockbuster reports in the Wall Street Journal based on a cache of internal documents leaked by Frances Haugen, a former employee turned whistleblower.

The dam broke wider last week after Haugen shared the documents with a wider consortium of news publications, which have published a slew of stories outlining how Facebook knew its products were stoking real-world violence and aggravating mental health problems, but refused to change them.

Now the regulatory sharks are circling. Haugen recently testified before US and UK lawmakers, heightening calls to hold the company to account.

Facebook, meanwhile, appeared to be living in another universe. Its rebrand to Meta this week has prompted ridicule and incredulity that a company charged with eroding the bedrock of global democracy would venture into a new dimension without apologizing for the havoc it wreaked on this one.

Ouch. Privacy advocates are concerned about the implications of identity theft taken into the 3D domain: imagine some malicious actor sending a realistic avatar of you around cyberspace doing things you would not do. Also, it is widely recognized that too much time on today’s (flat) screens is unhealthy; how would 3D glasses make that better?

Scott Rosenburg at Axios notes some more prosaic shortcomings of Zuck’s beatific vision:

The real you is just sitting in a chair wearing goggles…The video mock-ups of the metaverse Zuckerberg unveiled showed us what remote-presence wizardry might look like from within the 3D dimension. But they omitted the prosaic reality of most current VR… Right now, the metaverse isn’t “embodied” at all. It’s an out-of-body experience where your senses take you somewhere else and leave your body behind on a chair or couch or standing like a blindfolded prisoner…

Today’s headsets mostly block out the “real world” — and sometimes induce wooziness, headaches and even nausea. Why it matters: If you fear screen time atrophies your flesh and cramps your soul or find Zoom drains your energy, wait till you experience metaverse overload….

Virtual-world makers will feel the same incentives to boost engagement and hold onto users’ eyeballs in the metaverse that they have on today’s social platforms.

That could leave us all nostalgic for our current era of screen-blurred vision, misinformation-filled newsfeeds and privacy compromises.

What to Read: Claudia Goldin’s Career and Family

Jeremy Horpedahl2 Comments

A better battery is an excellent gift, but for the gift that never needs recharging, a book is always a great idea. So this week Joy asked us to recommend a book. Again, this would be great as a gift or for yourself!

My recommendation is a very new book: Claudia Goldin’s Career and Family, which just came out this month. Confession: the book is so new, that I’ve only read about half of it so far! But this book is, as they say, self-recommending.

Goldin has spent almost her entire academic career studying the history of women’s participation in the US labor force. I think it’s fair to say that there is no person living today that knows more about the subject, possibly no one ever. This book is her attempt to sum up much of her research into a cohesive narrative about the changes in women’s labor force participation throughout the 20th century.

Her 2006 AEA Ely Lecture, “The Quiet Revolution,” was an earlier attempt to explain these long changes, and it is highly readable still today. Her 2014 AEA Presidential Address, “A Grand Gender Convergence,” is also excellent (watch the video of it too!). But this book brings all the ideas together into a complete narrative, tracking five cohorts of women and their experience in the labor force from 1900 to 2000. The last of these five cohorts matches the title of her book, the generation of women that entered the labor force since 1980 and now have a reasonable chance of achieving both an career and a family, rather than having to chose between the two.

This does not mean, and certainly Goldin would not say, that the journey is over and all is well for women today. Goldin focuses primarily on college graduates in this story, since they are the group most well-positioned to achieve the goal of having a career and a family. Obviously there are still challenges, and Goldin spends some time discussing one that the COVID pandemic revealed but was always there: the challenge of finding affordable childcare.

If you want a taste of the book, you can read or watch her 2020 Feldstein Lecture, “Journey Across a Century of Women.” But really the story is so complex that it does take a book to explain it all.

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Gifts for a Time of Inflation and Supply Bottlenecks

James Bailey1 Comment

I’ve never been great at gifts, and don’t have much in the way of specific ideas now. But I’ve been thinking about what the macroeconomic environment means for gift-giving.

First, as you’ve probably heard by now from us or elsewhere, if you want to get any physical gift I’d order it now, since shipping is a mess and prices are only going up. I’d especially recommend this for complex electronics that could become hard to find- its part of why I got my wife an iPad for her birthday this summer. Foreign food and drink that can be stockpiled is always a good idea, but perhaps especially now; think wine, Scotch, or Beirao liqueur (a Portuguese drink that was my favorite discovery this year). Wine and liquor make good stores of value in an time of inflation.

Alternatively, you could avoid the scarcity of physical goods by turning to the digital realm. If your economistic heart yearns to give cash, consider giving some your favorite stock or cryptocurrency instead- its both more personalized and less subject to inflation. Or if you think you can judge the recipient’s taste well enough, subscribe them to one of your favorite Substacks or podcasts. My recommendations:

Unsupervised Learning, Razib Khan– Genomics and History

The Diff, Byrne Hobart– Finance and Strategy

Astral Codex Ten, Scott Alexander– Rationality, Psychiatry, Everything

The Readers Karamazov– Funny podcast on literature and philosophy (now seems entirely free though)

Or if you really have money to burn, go for the Bloomberg subscription. I always run out of free reads on the Tyler Cowen articles and so can’t read Matt Levine, even though he has the magic ability to teach you finance while making you laugh. But the subscription is expensive and Mike Bloomberg doesn’t need the money, while the Substacks are relatively cheap and enable talented writers to spend a lot more time writing instead of needing to focus on a real job.

You Need a Better Battery

Jeremy Horpedahl1 Comment

As we did last year, Joy has asked us to recommend some gifts for our readers. My recommendation is simple: a battery.

But not just any battery. I’m not talking about adding to your cardboard box full of AAs, AAAs, and weird watch batteries.

Instead, what you and everyone on your gift list needs is a portable battery for charging your many devices. There are plenty of good options out there, but anything under 30 bucks with at least 20,000mAh (the standard measure for battery life) is what you want. Here’s a good one on Amazon right now which should be $25 after a coupon and gives you 36,800mAh of charging power.

How much battery life is that? An iPhone has around 3,000mAh of power. You can charge an iPhone over 10 times with this thing! That may sound like overkill, but if you are charging multiple devices on a long trip, this battery is worth its weight in gold (it weighs about 13.4 ounces, which would be about $24,000 worth of gold — maybe I’m exaggerating a little).

For better or worse, our devices are how we communicate, navigate, and entertain ourselves on a daily basis. Especially on long trips. You don’t want your phone to die when you land at a strange, new airport. You also don’t want your friend’s phone to die: more than once, I have been the “battery hero” by loaning my portable battery to a friend at a conference.

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La Dolce Vita Economica

mdmakowskyLeave a comment

I thought about writing about soccer (again). I thought about writing about time management and personal production functions. I considered writing about Lebron James or how I manage multiple research projects. I thought about writing about a classic, and entirely addictive to the point of career ruination, video game. They all seem a little redundant at the moment, though, because they are all the same basic story.

One soccer manager is over-exhausting their resources because of a confluence of bad contractual incentives while another team is witnessing a renaissance in a player they essentially forced to take 7 weeks off. While so many NBA careers of the 80s evaporated in a cloud of cocaine and clubbing, Lebron James’ entire life is built around managing the only two resources whose limits are salient to his life: his body and relationship with his family. Playing baseball growing up I watched pitchers blow out their arms before they finished puberty in service to Little League glory, while modern professional pitchers are (finally) on strictly managed pitch counts to maximize their expected output.

There are two manners in which I armchair quarterback the rest of the world. One is the things in which I have just enough knowledge to be frustrated by others decisions, but no so much as to actually know what I am talking about. These frustrations are ephemeral, they flatter myself to the point of mild embarrassment upon reflection, and, if I am being honest with myself, are fun.

The other manner is resource management. These are the times when armchair quarterbacking is less fun and more exasperating because they are the moments when outsiders, with inferior levels of narrowly-applicable expertise, are often actually right. Which is not to say the knowledge that resources are being poorly managed is uniquely held by outsiders. Insiders are more often than not quite aware of the suboptimal deployment and conservation of resources, but are unable to overcome the status quo institutions, incentives, or inertia of decision-making power loci. It’s obvious to lots of people that athletes, CEOs, doctors, and congressional representatives are over-extended. What’s not obvious is how to get out of these equilibria.

When I see most attempts at self-improvement, I am generally skeptical of anything that doesn’t start with the identification of a key resource that is salient to outcomes and the options available to better manage it. Maybe its calories and how to budget them. Maybe its time and how to better partition and conserve it. It could always be money, but in general I find that money is so immediately identifiable as a finite resource and entirely fungible that people who ostensibly are managing it poorly are, in actuality, failing at managing a different resource (time, emotional energy, vices, etc) that is intertwined with financial resources.

When I see successful firms, teams, and individuals, what I most often find myself admiring is not (just) a worldly talent, but a facility with managing resources that others haven’t yet adopted or mimicked. An appreciation for sleep, a protection of time blocked for creativity, an adeptness trading low opportunity competitive minutes for higher opportunity cost moments on the biggest stages. Or even just the ability to recognize that this is the moment to savor a 600 calorie dessert with a loved one because the emotional sustenance will make it easier to walk away from three vending machine Hostess pies during the high-stress moments in the week to come.

Once you learn to manage your donut-based caloric intake, the spreadsheet of your life will be revealed before you, an endless cascade of resources to be managed and optimized. A life with the right donuts at the right time. The dolce vita economica.

Reading Slavery and American Economic Development

Joy BuchananLeave a comment

Slavery is a bad and we should rid ourselves of it. One of the arguments made by abolitionists before the Civil War in the United States is that slaves make poor workers and therefore it’s not that costly to get rid of slavery. Of course, it doesn’t matter if slaves worked hard or not. Slavery was a moral abomination, regardless. However, it does make it easier to argue that we should direct government resources to fight enslavers when we can make a case that slavery makes the entire country poorer.

On the one hand, there were many non-slave workers and farmers in North America, demonstrating that products including cotton could be produced by free labor. On the other hand, slavery as an institution expanded into the South and the West, presumably because of the economic advantage it gave to slave-owners.

In Slavery and American Economic Development, economist Gavin Wright states that whether or not slaves were as productive as free/wage labor is hard to measure and also is not hugely important. Slavery might have provided wealth to slave owners in the South, but that is only because of the institutional setting that was created explicitly to maintain the slave society.

The American South had some of the best land in the world for growing cotton and cotton became a lucrative export crop thanks to British demand before the Civil War. Before the Civil War, there were some extremely profitable plantations on which slaves worked. It is true that some enslavers became rich and that drives up what appears to be the GDP per capita in the South at the time.

Wright explains that a slave owner living closer to the East Coast was better able to go on an entrepreneurial venture into Alabama to clear a large plantation for cotton farming than a typical free family farmer. The slave owner could obtain large loans and had a future guarantee of workers (thanks to the local laws and police state). So, something like a modern corporation employing free labor could also have accomplished the venture. But, at the time, it was an opportunity that was easier for enslavers to take advantage of. Free farmers also expanded West into the United States, but they tended to move more slowly and focus on subsistence (e.g. wheat for consumption). That is, partly, what Wright means when he speaks of slavery as a “system of property” as opposed to just a “system of production”. That helps explain why slavery was on the rise in the American South.

Wright also examines slavery as a political regime. In a place with many slaves, resources had to be allocated to policing and preventing revolts. It might have been individually rational for a landowner to offer freedom to slaves as a form of compensation for work, but this was disallowed by that broader political environment. So, everyone was somewhat trapped. Most importantly, the slaves were abused and trapped. But the free residents of the South had to live in a stagnant society. Governments did not invest in schooling, even for white children.

Municipalities in the North were booming and attracting free migrants with public investments. These investments set the North on a path to overtake the South economically and demonstrate which system is superior for creating wealth. Wright blames property owners in the South for continuing to fail to vote for good institutions that foster economic growth after the Civil War.