Coffee’s Supply & Demand Dance during Prohibition

Zachary BartschLeave a comment

I’ve written about coffee consumption during US alcohol prohibition in the past. I’ve also written about visualizing supply and demand. Many. Times. Today, I want to illustrate how to use supply and demand to reveal clues about the cause of a market’s volume and price changes. I’ll illustrate with an example of coffee consumption during prohibition.

The hypothesis is that alcohol prohibition would have caused consumers to substitute toward more easily accessible goods that were somewhat similar, such as coffee. To help analyze the problem, we have the competitive market model in our theoretical toolkit, which is often used for commodities. Together, the hypothesis and theory tell a story.

Substitution toward coffee would be modeled as greater demand, placing upward pressure on both US coffee imports and coffee prices. However, we know that the price in the long-run competitive market is driven back down to the minimum average cost by firm entry and exit. So, we should observe any changes in demand to be followed by a return to the baseline price. In the current case, increased demand and subsequent expansions of supply should also result in increasing trade volumes rather than decreasing.

Now that we have our hypothesis, theory, and model predictions sorted, we can look at the graph below which compares the price and volume data to the 1918 values. While prohibition’s enforcement by the Volstead act didn’t begin until 1920, “wartime prohibition” and eager congressmen effectively banned most alcohol in 1919. Consequently, the increase in both price and quantity reflects the increased demand for coffee. Suppliers responded by expanding production and bringing more supplies to market such that there were greater volumes by 1921 and the price was almost back down to its 1918 level. Demand again leaps in 1924-1926, increasing the price, until additional supplies put downward pressure on the price and further expanded the quantity transacted.

We see exactly what the hypothesis and theory predicted. There are punctuated jumps in demand, followed by supply-side adjustments that lower the price. Any volume declines are minor, and the overall trend is toward greater output. The supply & demand framework allows us to image the superimposed supply and demand curves that intersect and move along the observed price & quantity data. Increases toward the upper-right reflect demand increases. Changes plotted to the lower-right reflect supply increases. Of course, inflation and deflation account for some of the observed changes, but similar demand patterns aren’t present in the other commodity markets, such as for sugar or wheat. Therefore, we have good reason to believe that the coffee market dynamics were unique in the time period illustrated above.

*BTW, if you’re thinking that the interpretation is thrown off by WWI, then think again. Unlike most industries, US regulation of coffee transport and consumption was relatively light during the war, and US-Brazilian trade routes remained largely intact.

Should Medicare Cover Anti-Obesity Drugs?

James Bailey2 Comments

It seems like we finally have anti-obesity drugs that are effective and come without deal-breaking side effects: GLP-1 inhibitors like semaglutide (Wegovy). But they are currently priced over $10,000 per year for Americans. Should insurance cover them?

So far Medicare has decided to cover these drugs only to the extent that they treat diseases like diabetes (which these drugs were originally developed to treat) and heart disease (Wegovy reduces adverse cardiac events by 20% in overweight patients with heart disease). Just based on the diabetes coverage, Medicare was already spending $5 billion per year on these drugs in 2022, making semaglutide the 6th most expensive drug for Medicare with prescriptions still growing rapidly. The addition of other indications for specific diseases, like heart disease coverage added last month, is sure to expand this dramatically, especially if trials confirm other benefits.

But with almost 3/4 of Americans now officially overweight, weight loss makes for a bigger potential market than any specific disease. Medicare currently spends about 15k per beneficiary for all medical care; if they actually paid for an 11k/yr drug for 3/4 of their beneficiaries, their spending could rise to 23k per beneficiary per year. The effect on Medicare Part D, which covers prescription drugs and currently spends about 2.5k per beneficiary per year, would be even more dramatic, with spending quadrupling. This would blow a huge hole in the federal budget, where health insurance already accounts for about 1/4 of all spending (and Medicare 1/2 of that 1/4).

Of course, the reality would not be nearly that bad. Not all overweight people would want to take a weight loss drug, even if it were covered by insurance; the side effects are real. To the extent people do take the drugs, the reduction in obesity could lead to lower spending on treatments for things like heart attacks. Rebates can already reduce the cost of these drugs to be less than half of their list price, and Medicare may be able to negotiate even lower prices starting in 2027. Key patents will expire by 2033, after which generic competition should dramatically lower prices. Competition from other brand-name GLP-1 drugs could lower prices much sooner.

Patents always come with a tradeoff: they encourage innovation in the future, but mean high prices and under-use of patented goods today. The government does have one option for how to lower the marginal price of a drug without discouraging future innovation: just buy out the patent. This would likely cost hundreds of billions of dollars up front, but this could be recouped over time through lower spending, while bringing large health benefits because the drug would be much more widely used if it were sold at a price near its marginal cost of production.

Of course, for now supply of these medications is the bigger problem than the cost. Even with the current high prices and insurers tending not to cover drugs of weight loss alone, demand exceeds supply and shortages abound. The manufacturers are trying to ramp up production quickly to meet the large and growing demand, but this takes time. Insurers like Medicare covering weight loss drugs wouldn’t actually mean more people get the drugs in the short run, it would simply change who gets to use them.

But once production ramps up, I do expect that it will make sense for Medicare to cover weight loss drugs. The health benefits appear to be so large that the drugs are cost effective even at current prices, and prices are likely to fall substantially over time. The big restriction I suspect will still make sense is to require that patients be obese, rather than merely overweight, since being “merely” overweight (BMI 25-29) probably isn’t that bad for you:

Source

Disclosure: Long NVO

Update 4/18/24: I started thinking about this question because of an interview request from Janet Nguyen at Marketplace. She has now published an excellent article on the subject that also includes quotes from John Cawley of Cornell, who knows a lot more than I do on the subject.

Social Media, Mental Health, and Young People

Jeremy Horpedahl1 Comment

What’s the connection between social media use and mental health, especially among young people? You’ve probably heard a lot about this recently, in the media, by politicians, and among friends chatting about their kids. Lots of assertions are made, but there is also a bit of research on this topic. As someone who frequently uses social media myself, as well as a parent of young children, and a teacher that works every week with young college students, I am particularly interested in this topic.

Jonathan Haidt and various co-authors have been trying to catalog all the research on the topic and figure out if there is a connection between the decline in teenage mental health and the rise of social media use. Haidt also has a new book on this topic, as well as the decline of “free play” among kids, which I have not yet read but I’ve looked through his documents that contain all of the underlying and summaries of the research he is citing. I’ll read the book soon, as I’m certainly part of the intended audience (see the last sentence of the above paragraph). And while this research is very much outside of my area of expertise, my training as an economist has taught me how to read academic papers and to be convinced by evidence, so once again I’m very much the intended audience on this score as well.

Please read this post as my attempt to understand the evidence and start to form conclusions and/or critique what Haidt is saying. It’s a work in progress, and I’ll write more as I read and think more about it.

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Historians Admit To Inventing Ancient Greeks

Scott BuchananLeave a comment

This just in:

Scholars apologize for attributing Western democracy to a make-believe civilization.

WASHINGTON—A group of leading historians held a press conference Monday at the National Geographic Society to announce they had “entirely fabricated” ancient Greece, a culture long thought to be the intellectual basis of Western civilization.

The group acknowledged that the idea of a sophisticated, flourishing society existing in Greece more than two millennia ago was a complete fiction created by a team of some two dozen historians, anthropologists, and classicists who worked nonstop between 1971 and 1974 to forge “Greek” documents and artifacts.

“Honestly, we never meant for things to go this far,” said Professor Gene Haddlebury, who has offered to resign his position as chair of Hellenic Studies at Georgetown University. “We were young and trying to advance our careers, so we just started making things up: Homer, Aristotle, Socrates, Hippocrates, the lever and fulcrum, rhetoric, ethics, all the different kinds of columns—everything.”

“Way more stuff than any one civilization could have come up with, obviously,” he added.

According to Haddlebury, the idea of inventing a wholly fraudulent ancient culture came about when he and other scholars realized they had no idea what had actually happened in Europe during the 800-year period before the Christian era.

Frustrated by the gap in the record, and finding archaeologists to be “not much help at all,” they took the problem to colleagues who were then scrambling to find a way to explain where things such as astronomy, cartography, and democracy had come from.

Within hours the greatest and most influential civilization of all time was born.

“One night someone made a joke about just taking all these ideas, lumping them together, and saying the Greeks had done it all 2,000 years ago,” Haddlebury said. “One thing led to another, and before you know it, we’re coming up with everything from the golden ratio to the Iliad.”…

Around the same time, a curator at the Smithsonian reportedly asked for Haddlebury’s help: The museum had received a sizeable donation to create an exhibit on the ancient world but “really didn’t have a whole lot to put in there.” The historians immediately set to work, hastily falsifying evidence of a civilization that— complete with its own poets and philosophers, gods and heroes—would eventually become the centerpiece of schoolbooks, college educations, and the entire field of the humanities.

Emily Nguyen-Whiteman, one of the young academics who “pulled a month’s worth of all-nighters” working on the project, explained that the whole of ancient Greek architecture was based on buildings in Washington, D.C., including a bank across the street from the coffee shop where they met to “bat around ideas about mythology or whatever.”

“We picked Greece because we figured nobody would ever go there to check it out,” Nguyen-Whiteman said. “Have you ever seen the place? It’s a dump. It’s like an abandoned gravel pit infested with cats.”

She added, “Inevitably, though, people started looking around for some of this ‘ancient’ stuff, and next thing I know I’m stuck in Athens all summer building a…Parthenon just to cover our tracks.”

Nguyen-Whiteman acknowledged she was also tasked with altering documents ranging from early Bibles to the writings of Thomas Jefferson to reflect a “Classical Greek” influence—a task that also included the creation, from scratch, of a language based on modern Greek that could pass as its ancient precursor.

Historians told reporters that some of the so-called Greek ideas were in fact borrowed from the Romans, stripped to their fundamentals, and then attributed to fictional Greek predecessors. But others they claimed as their own.

“Geometry? That was all Kevin,” said Haddlebury, referring to former graduate student Kevin Davenport. “Man, that kid was on fire in those days. They teach Davenportian geometry in high schools now, though of course they call it Euclidean.”

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Happy April Fools…the above excerpt was pasted verbatim from a classic article published in the news-satire site The Onion. I thought it was a clever piece, which did a worthy service highlighting the wide-ranging achievements of a relatively small people group (compared to the teeming masses of ancient Mesopotamia and Egypt) in a relatively short period of time.

Apologies to any Greeks reading this post – -my wife has been to Greece and tells me it is in fact a very beautiful country.

Rhesus Politik

mdmakowskyLeave a comment

Thailand has a legitimate problem with roving gangs of monkeys that recently achieved significant scale leading to territorial violence in Lopburi :

The sophistication of the monkeys in question is such that gangs have been known to take a train two hours to find rival territory that is sufficiently resource rich and for which they have adequate numbers to the challenge the local monkeys. They also seem to have a rudimentary familiarity with firearms that makes tranquilizing them at any scale challenging.

There appears to be some theory behind mitigation strategies, tranquilizing and apprehending group leaders being number 1. What else might a little basic theory suggestion? Any alternative strategies?

The first question that comes to mind is whether there is a means to tilt the resource calculus towards exurban territories. That seems challenging simply given the calorie density of urban groceries and refuse. It’s probably too difficult to raise the price of resources sufficiently on their own (locked garbage cans, closed door supermarkets), but maybe the offering of monkey feeding sanctuaries outside of city limits that are within sight/smell of train lines? That could be useful means of concentrating then populations in an area that would then enable second-level strategies. And yes, I am already imagining small monkey cities wherein we can study their emergent politics. I’ve already titled my 2029 paper “Rhesus Politik” and before you ask, 1) No you can’t have the title, and 2) yes, you can be a co-author.

What about the violence as it stands within Lopburi? Can we shift the payoffs away from Hawk and towards Dove strategies? Can we increase each monkey’s expected cost of violence or decrease their payoff to exerting dominance? Perhaps an evolutionary tax on weight i.e. taking the largest monkeys out of the gene pool, the equivalent of neutering and spaying? Melee violence has signficant returns to scale, so perhaps we could expect less violence if groups were smaller. Can we change the optimal scale of individual gangs through artificial pheremones simply dousing them with knockoff Drakkar Noir? If Big Science has an genetically modified banana high in the amino acids that lead to introversion, now is a great time to share it. Personal experience suggests that if we start blasting Elliot Smith songs through the streets will monkeys begin to break off under the crushing weight of their own ennui.

I’d suggest fomenting another agricultural revolution amongst monkeys, but the initial reduction in violence over rival turf would eventually evolve into feudal violence between stationary bandits, which I fear would lead to a net increase in violence, at least for the first few thousand years. Instead, I believe we would be better served giving groups of monkeys the necessary institutions for establishing and adjudicating property rights, changing the payoffs such that the exchange of resources were preferable to violent expropriation. We’ve lived this evolutionary history before, we know how it goes. Maybe this time we can skip to the democratic peace and pax economica.

Classroom activities for teaching Monetary Policy

Joy BuchananLeave a comment

I got lucky last week. I saw this tweet go by just in time to learn about some activities the I added to my unit on monetary policy.

It’s called the Monetary Policy Unit Plan

https://learn.mru.org/lesson-plans/monetary-policy-unit

I’m not using all of it, but it’s very helpful to see what other instructors have come up with to make teaching monetary policy more fun and more effective. You have to sign up to access it, using your official instructor email address.

It can feel relatively easy to talk to students about their role in the economy as consumers. It is relatively hard to lecture about central banking, because it is less relatable to everyday life. These exercises help us get into the “mind” of a bank.

Thank you to Econiful and Marginal Revolution University for making these resources available. There will probably be an equivalent for fiscal policy produced in the future.

Where the fish has no name

Zachary Bartsch1 Comment

When discussing the median voter theorem with my public policy class, I went on an informative and educational tangent about ranked choice voting.

We gave an example in which we would go out to eat, each pay our own way, but we must all go to the same restaurant in town. We went through the multiple rounds of voting, eliminating least popular alternatives, and came to a conclusion. The winning restaurant was Tropical Smoothie. If you are not familiar, it is nothing to write home about. However, it is also inoffensive and they provide what they say that they will.

The students quite enjoyed the exercise and the process drove the point home that there are perfectly reasonable alternatives to the typical one – man – one – vote status quo.

Entirely separate

Last weekend, my family purchased a new beta fish. There are six people in our family with four children, ages ranging from one to six years old. Thanks to an offhand comment by my wife, I realized that it was such a beautiful opportunity to teach the kids about ranked choice voting. Everybody in the family suggested a name for the fish. The options were: Hibiscus, Jack Sparrow, Bubbles the 2nd <3, sparkels, camouflage, and ‘no’. Which do you prefer?

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Daniel Kahneman: Psychologist and Economist, Pathbreaker and Popularizer

James Bailey1 Comment

Daniel Kahneman, the psychologist who won a Nobel prize in economics and wrote the best-selling book “Thinking Fast and Slow“, died yesterday at age 90. Others will summarize his biography and the substance of his work, but I wanted to highlight two aspects of his style that I think fueled his unusual success among both the public and economists.

For the public, I found his writing to be unusually engaging:

Daniel Kahneman’s new book amazes me. Not so much due to the content, though I’m sure that will blow your mind if you haven’t previously heard about it through studying behavioral economics or psychology or reading Less Wrong. It is the writing style: Kahneman is able to convey his message succinctly while making it seem intuitive and fascinating. Some academics can write tolerably well, but Kahneman seems to be on a level with those who write popularly for a living- the style of a Jonah Lehrer or Malcolm Gladwell, but no one can accuse the Nobel-prize-winning Kahneman of lacking substance.

This made me wonder if it is simply an unfair coincidence that Kahneman is great at both writing and research, or causation is at work here. True, in more abstract and mathematical fields great researchers do not seem especially likely to be great writers (Feynman aside). But to design and carry out great psychology experiments may require understanding the subject intuitively and through introspection. This kind of understanding- an intuitive understanding of everyday decision-making- may be naturally easier to share than other kinds of scientific knowledge, which use processes (say, math) or examine territories (say, subatomic particles) which are unfamiliar to most people. Kahneman says that he developed the ideas for most of his papers by talking with Amos Tversky on long walks. I suspect that this strategy leads to both good idea generation and a good, conversational writing style.

But how did a psychologist get economists to not just take his work seriously, but award him the top prize in our field? One key step was learning to speak the language of our field, or coauthor with people who do. For instance, summarizing the results of an experiment as showing indifference curves crossing where rationally they should not:

Finally, something that helped Kahneman appeal to all parties was that he avoided the potential trap of being the arrogant behavioral economist. Most economists have a natural tendency toward arrogance, kept somewhat in check by our belief that most people are fundamentally rational. Behavioral economists who think most people are irrational can be the most arrogant if they think they are the only sane one, and should therefore tell everyone else how to behave. But Kahneman avoided this by seeming to honestly believe he is just as subject to behavioral biases as everyone else.

“The Pope and the Price of Fish”

Jeremy Horpedahl1 Comment

Christians across the world are observing the season of Lent right now, concluding this week. This important period of religious observance involves personal sacrifice of some sort, and for Western Christians a common form of sacrifice is abstaining from consuming meat on Fridays during Lent. But there is one exception: most Christians allow consumption of fish on Fridays, in lieu of other kinds of meat.

But abstaining from meat on Fridays was not always a practice reserved for Lent. Catholics used to abstain from meat for the entire year prior to a 1966 decree by Pope Paul VI. This decree relaxed the rules on fasting and decentralized them. In the US, Catholic Bishops chose to eliminate meatless Fridays, except during Lent.

No doubt this was an important religious change, but it was also an important economic change. And the first question an economist would ask is: how did this impact the price of fish? In our simple supply and demand framework, this should result in a decrease in demand, which would lower the price of fish. Did that happen?

In 1968, economist Frederick Bell asked just that question in an article published in the American Economic Review titled “The Pope and the Price of Fish.” The short answer is that yes, the price of fish did indeed decline!

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It’s Not Too Late to Get Your Eclipse Glasses for the April 8 Solar Eclipse

Scott BuchananLeave a comment

Surely you have heard by now that a solar eclipse is coming. As the April 8 date approaches, the media/social media coverage will likely rise to a roar. I think we all know that the experience of being in the path of a total solar eclipse is eerie and memorable – – birds and insects can fall silent as night-like darkness falls, and a noticeable chill may be felt in the air.

Maps abound of the eclipse path across North America. For the U.S.,  it starts in Texas around 1:30 Central time, traverses southern Indiana and northern Ohio around 3:10 Eastern and ends in northern Maine about 3:30. Here is a snip I took from this NASA map, where I zoomed in the Midwest/Northeast section, and traced in red the lines of 90% totality:

If you really want the 100% experience, and if you want it to last the full four minutes, you must be in a relatively narrow strip. And if you want to have good chance of not having clouds obscure the fun, you may need to fly to central Texas. Buffalo, New York is in the middle of the eclipse path, but it is a notoriously overcast place.

But lots of folks, including residents of Chicago, Toronto, and the Boston-Washington corridor, live within the zone of (nearly) 90% totality, where you can see the moon sliding across most of the sun’s disk over the course of a few minutes, and experience significant darkening. The next solar eclipse to touch the U.S. will not be until 2044, and that will be barely visible from three less-populated states, Montana, North Dakota, and South Dakota.

So, I suggest you take the opportunity to enjoy this one to the max. This absolutely entails using special glasses with filters designed for safe viewing of the sun. Do not even think of looking at the sun without such glasses, and be alert lest children pick up the wrong cues and try to look at the sun.

The good news is that eclipse glasses are still available. I ordered some from Amazon a couple days ago that arrived two days later, and I saw them for sale in Lowe’s today. I got some extra to share with random friends and strangers. This can be a great chance to interact with neighbors and children.

The price per pair of glasses varies a lot, so do comparison shop.  I look for ones that say “CE and ISO Certified” like these. Be safe and have fun!