Recent court decisions could have a big impact on big business (and small business)

This has been a big year for business in the courts. A U.S. district court approved the AT&T-Time Warner merger, the Supreme Court upheld Amex’s agreements with merchants, and a circuit court pushed back on the Federal Trade Commission’s vague and heavy handed policing of companies’ consumer data safeguards.

These three decisions mark a new era in the intersection of law and economics.

AT&T-Time Warner

AT&T-Time Warner is a vertical merger, a combination of firms with a buyer-seller relationship. Time Warner creates and broadcasts content via outlets such as HBO, CNN, and TNT. AT&T distributes content via services such as DirecTV.

Economists see little risk to competition from vertical mergers, although there are some idiosyncratic circumstances in which competition could be harmed. Nevertheless, the U.S. Department of Justice went to court to block the merger.

The last time the goverment sued to block a merger was more than 40 years ago, and the government lost. Since then, the government relied on the threat of litigation to extract settlements from the merging parties. For example, in the 1996 merger between Time Warner and Turner, the FTC required limits on how the new company could bundle HBO with less desirable channels and eliminated agreements that allowed TCI (a cable company that partially owned Turner) to carry Turner channels at preferential rates.

With AT&T-Time Warner, the government took a big risk, and lost. It was a big risk because (1) it’s a vertical merger, and (2) the case against the merger was weak. The government’s expert argued consumers would face an extra 45 cents a month on their cable bills if the merger went through, but under cross-examination, conceded it might be as little as 13 cents a month. That’s a big difference and raised big questions about the reliability of the expert’s model.

Judge Richard J. Leon’s 170+ page ruling agreed that the government’s case was weak and its expert was not credible. While it’s easy to cheer a victory of big business over big government, the real victory was the judge’s heavy reliance on facts, data, and analysis rather than speculation over the potential for consumer harm. That’s a big deal and may make the way for more vertical mergers.

Ohio v. American Express

The Supreme Court’s ruling in Amex may seem obscure. The court backed American Express Co.’s policy of preventing retailers from offering customers incentives to pay with cheaper cards.

Amex charges higher fees to merchants than do other cards, such as Visa, MasterCard, and Discover. Amex cardholders also have higher incomes and tend to spend more at stores than those associated with other networks. And, Amex offers its cardholders better benefits, services, and rewards than the other cards. Merchants don’t like Amex because of the higher fees, customers prefer Amex because of the card’s perks.

Amex, and other card companies, operate in what is known as a two-sided market. Put simply, they have two sets of customers: merchants who pay swipe fees, and consumers who pay fees and interest.

Part of Amex’s agreement with merchants is an “anti-steering” provision that bars merchants from offering discounts for using non-Amex cards. The U.S. Justice Department and a group of states sued the company, alleging the Amex rules limited merchants’ ability to reduce their costs from accepting credit cards, which meant higher retail prices. Amex argued that the higher prices charged to merchants were kicked back to its cardholders in the form of more and better perks.

The Supreme Court found that the Justice Department and states focused exclusively on one side (merchant fees) of the two-sided market. The courts says the government can’t meet its burden by showing some effect on some part of the market. Instead, they must demonstrate, “increased cost of credit card transactions … reduced number of credit card transactions, or otherwise stifled competition.” The government could not prove any of those things.

We live in a world two-sided markets. Amazon may be the biggest two-sided market in the history of the world, linking buyers and sellers. Smartphones such as iPhones and Android devices are two-sided markets, linking consumers with app developers. The Supreme Court’s ruling in Amex sets a standard for how antitrust law should treat the economics of two-sided markets.

LabMD

LabMD is another matter that seems obscure, but could have big impacts on the administrative state.

Since the early 2000s, the FTC has brought charges against more than 150 companies alleging they had bad security or privacy practices. LabMD was one of them, when its computer system was compromised by professional hackers in 2008. The FTC claimed that LabMD’s failure to adequately protect customer data was an “unfair” business practice.

Challenging the FTC can get very expensive and the agency used the threat of litigation to secure settlements from dozens of companies. It then used those settlements to convince everyone else that those settlements constituted binding law and enforceable security standards.

Because no one ever forced the FTC to defend what it was doing in court, the FTC’s assertion of legal authority became a self-fulfilling prophecy. LabMD, however, chose to challege the FTC. The fight drove LabMD out of business, but public interest law firm Cause of Action and lawyers at Ropes & Gray took the case on a pro bono basis.

The 11th Circuit Court of Appeals ruled the FTC’s approach to developing security standards violates basic principles of due process. The court said the FTC’s basic approach—in which the FTC tries to improve general security practices by suing companies that experience security breaches—violates the basic legal principle that the government can’t punish someone for conduct that the government hasn’t previously explained is problematic.

My colleague at ICLE observes the lesson to learn from LabMD isn’t about the illegitimacy of the FTC’s approach to internet privacy and security. Instead, it says legality of the administrative state is premised on courts placing a check on abusive regulators.

The lessons learned from these three recent cases reflect a profound shift in thinkging about the laws governing economic activity:

  • AT&T-Time Warner indicates that facts matter. Mere speculation of potential harms will not satisfy the court.
  • Amex highlights the growing role two-sided markets play in our economy and provides framework for evaluating competition in these markets.
  • LabMD is a small step in reining in the administrative state. Regulations must be scrutinized before they are imposed and enforced.

In some ways none of these decisions are revolutionary. Instead, they reflect an evolution toward greater transparency in how the law is to be applied and greater scrutiny over how the regulations are imposed.

 

Weekend reads: Big is bad edition — Truth on the Market

Big is bad, part 1: Kafka, Coase, and Brandeis walk into a bar … There’s a quip in a well-known textbook that Nobel laureate Ronald Coase said he’d grown weary of antitrust because when prices went up, the judges said it was monopoly; when the prices went down, they said it was predatory pricing; and when they stayed the same, they said it was tacit collusion. ICLE’s Geoffrey Manne and Gus Hurwitz worry that not much has changed since Coase’s time:

[C]ompetition, on its face, is virtually indistinguishable from anticompetitive behavior. Every firm strives to undercut its rivals, to put its rivals out of business, to increase its rivals’ costs, or to steal its rivals’ customers. The consumer welfare standard provides courts with a concrete mechanism for distinguishing between good and bad conduct, based not on the effect on rival firms but on the effect on consumers. Absent such a standard, any firm could potentially be deemed to violate the antitrust laws for any act it undertakes that could impede its competitors.

Big is bad, part 2. A working paper published by researchers from Denmark and the University of California at Berkeley suggest that companies such as Google, Apple, Facebook, and Nike are taking advantage of so-called “tax havens” to cause billions of dollars of income go “missing.” There’s a lot of mumbo jumbo in this one, but it’s getting lots of attention.

We show theoretically and empirically that in the current international tax system, tax authorities of high-tax countries do not have incentives to combat profit shifting to tax havens. They instead focus their enforcement effort on relocating profits booked in other high-tax places—in effect stealing revenue from each other.

Big is bad, part 3: Can any country survive with debt-to-GDP of more than 100 percent? Apparently, the answer is “yes.” The U.K. went 80 years, from 1779 to 1858. Then, it went 47 years from 1916 to 1962. Tim Harford has a fascinating story about an effort to clear the country’s debt in that second run.

In 1928, an anonymous donor resolved to clear the UK’s national debt and gave £500,000 with that end in mind. It was a tidy sum — almost £30m at today’s prices — but not nearly enough to pay off the debt. So it sat in trust, accumulating interest, for nearly a century.

fredgraphUK

How do you make a small fortune? Begin with a big one. A lesson from Johnny Depp.

Will we ever stop debating the Trolley Problem? Apparently the answer is “no.” Also, TIL there’s a field of research that relies on “notions.”

For so long, moral psychology has relied on the notion that you can extrapolate from people’s decisions in hypothetical thought experiments to infer something meaningful about how they would behave morally in the real world. These new findings challenge that core assumption of the field.

 

The week that was on Truth on the Market

LabMD.

[T]argets of complaints settle for myriad reasons, and no outside authority need review the sufficiency of a complaint as part of a settlement. And the consent orders themselves are largely devoid of legal and even factual specificity. As a result, the FTC’s authority to initiate an enforcement action  is effectively based on an ill-defined series of hunches — hardly a sufficient basis for defining a clear legal standard.

Google Android.

Thus, had Google opted instead to create a separate walled garden of its own on the Apple model, everything it had done would have otherwise been fine. This means that Google is now subject to an antitrust investigation for attempting to develop a more open platform.

AT&T-Time Warner. First this:

The government’s contention that, after the merger, AT&T and rival Comcast could coordinate to restrict access to popular Time Warner and NBC content to harm emerging competitors was always a weak argument.

Then this:

Doing no favors to its case, the government turned to a seemingly contradictory argument that AT&T and Comcast would coordinate to demand virtual providers take too much content.

 

 

Do biased stats provide bogus economics? A primer on publication bias and power

If you do research involving statistical analysis, you’ve heard of John Ioannidis. If you haven’t heard of him, you will. He’s gone after the fields of medicine, psychology, and economics. He may be coming for your field next.

Ioannidis is after bias in research. He is perhaps best known for a 2005 paper “Why Most Published Research Findings Are False.” A professor at Stanford, he has built a career in the field of meta-research and may be one of the most highly cited researchers alive.

In 2017, he published “The Power of Bias in Economics Research.” He recently talked to Russ Roberts on the EconTalk podcast about his research and what it means for economics.

He focuses on two factors that contribute to bias in economics research: publication bias and low power. These are complicated topics. This post hopes to provide a simplified explanation of these issues and why bias and power matters.

What is bias?

We frequently hear the word bias. “Fake news” is biased news. For dinner, I am biased toward steak over chicken. That’s different from statistical bias.

In statistics, bias means that a researcher’s estimate of a variable or effect is different from the “true” value or effect. The “true” probability of getting heads from tossing a fair coin is 50 percent. Let’s say that no matter how many times I toss a particular coin, I find that I’m getting heads about 75 percent of the time. My instrument, the coin, may be biased. I may be the most honest coin flipper, but my experiment has biased results. In other words, biased results do not imply biased research or biased researchers.

Publication bias

Publication bias occurs because peer-reviewed publications tend to favor publishing positive, statistically significant results and to reject insignificant results. Informally, this is known as the “file drawer” problem. Nonsignificant results remain unsubmitted in the researcher’s file drawer or, if submitted, remain in limbo in an editor’s file drawer.

Studies are more likely to be published in peer-reviewed publications if they have statistically significant findings, build on previous published research, and can potentially garner citations for the journal with sensational findings. Studies that don’t have statistically significant findings or don’t build on previous research are less likely to be published.

The importance of “sensational” findings means that ho-hum findings—even if statistically significant—are less likely to be published. For example, research finding that a 10 percent increase in the minimum wage is associated with a one-tenth of 1 percent reduction in employment (i.e., an elasticity of 0.01) would be less likely to be published than a study finding a 3 percent reduction in employment (i.e., elasticity of –0.3).

“Man bites dog” findings—those that are counterintuitive or contradict previously published research—may be less likely to be published. A study finding an upward sloping demand curve is likely to be rejected because economists “know” demand curves slope downward.

On the other hand, man bites dog findings may also be more likely to be published. Card and Krueger’s 1994 study finding that a minimum wage hike was associated with an increase in low-wage workers was published in the top-tier American Economic Review. Had the study been conducted by lesser-known economists, it’s much less likely it would have been accepted for publication. The results were sensational, judging from the attention the article got from the New York Times, the Wall Street Journal, and even the Clinton administration. Sometimes a man does bite a dog.

Low power

A study with low statistical power has a reduced chance of detecting a true effect.

Consider our criminal legal system. We seek to find criminals guilty, while ensuring the innocent go free. Using the language of statistical testing, the presumption of innocence is our null hypothesis. We set a high threshold for our test: Innocent until proven guilty, beyond a reasonable doubt. We hypothesize innocence and only after overcoming our reasonable doubt do we reject that hypothesis.

Type1-Type2-Error

An innocent person found guilty is considered a serious error—a “miscarriage of justice.” The presumption of innocence (null hypothesis) combined with a high burden of proof (beyond a reasonable doubt) are designed to reduce these errors. In statistics, this is known as “Type I” error, or “false positive.” The probability of a Type I error is called alpha, which is set to some arbitrarily low number, like 10 percent, 5 percent, or 1 percent.

Failing to convict a known criminal is also a serious error, but generally agreed it’s less serious than a wrongful conviction. Statistically speaking, this is a “Type II” error or “false negative” and the probability of making a Type II error is beta.

By now, it should be clear there’s a relationship between Type I and Type II errors. If we reduce the chance of a wrongful conviction, we are going to increase the chance of letting some criminals go free. It can be mathematically shown (not here), that a reduction in the probability of Type I error is associated with an increase in Type II error.

Consider O.J. Simpson. Simpson was not found guilty in his criminal trial for murder, but was found liable for the deaths of Nicole Simpson and Ron Goldman in a civil trial. One reason for these different outcomes is the higher burden of proof for a criminal conviction (“beyond a reasonable doubt,” alpha = 1 percent) than for a finding of civil liability (“preponderance of evidence,” alpha = 50 percent). If O.J. truly is guilty of the murders, the criminal trial would have been less likely to find guilt than the civil trial would.

In econometrics, we construct the null hypothesis to be the opposite of what we hypothesize to be the relationship. For example, if we hypothesize that an increase in the minimum wage decreases employment, the null hypothesis would be: “A change in the minimum wage has no impact on employment.” If the research involves regression analysis, the null hypothesis would be: “The estimated coefficient on the elasticity of employment with respect to the minimum wage would be zero.” If we set the probability of Type I error to 5 percent, then regression results with a p-value of less than 0.05 would be sufficient to reject the null hypothesis of no relationship. If we increase the probability of Type I error, we increase the likelihood of finding a relationship, but we also increase the chance of finding a relationship when none exists.

Now, we’re getting to power.

Power is the chance of detecting a true effect. In the legal system, it would be the probability that a truly guilty person is found guilty.

By definition, a low power study has a small chance of discovering a relationship that truly exists. Low power studies produce more false negative than high power studies. If a set of studies have a power of 20 percent, then if we know that there are 100 actual effects, the studies will find only 20 of them. In other words, out of 100 truly guilty suspects, a legal system with a power of 20 percent will find only 20 of them guilty.

Suppose we expect 25 percent of those accused of a crime are truly guilty of the crime. Thus the odds of guilt are R = 0.25 / 0.75 = 0.33. Assume we set alpha to 0.05, and conclude the accused is guilty if our test statistic provides p < 0.05. Using Ioannidis’ formula for positive predictive value, we find:

  • If the power of the test is 20 percent, the probability that a “guilty” verdict reflects true guilt is 57 percent.
  • If the power of the test is 80 percent, the probability that a “guilty” verdict reflects true guilt is 84 percent.

In other words, a low power test is more likely to convict the innocent than a high power test.

In our minimum wage example, a low power study is more likely find a relationship between a change in the minimum wage and employment when no relationship truly exists. By extension, even if a relationship truly exists, a low power study would be more likely to find a bigger impact than a high power study. The figure below demonstrates this phenomenon.

MinimumWageResearchFunnelGraph

Across the 1,424 studies surveyed, the average elasticity with respect to the minimum wage is –0.190 (i.e., a 10 percent increase in the minimum wage would be associated with a 1.9 percent decrease in employment). When adjusted for the studies’ precision, the weighted average elasticity is –0.054. By this simple analysis, the unadjusted average is 3.5 times bigger than the adjusted average. Ioannidis and his coauthors estimate among the 60 studies with “adequate” power, the weighted average elasticity is –0.011.

(By the way, my own unpublished studies of minimum wage impacts at the state level had an estimated short-run elasticity of –0.03 and “precision” of 122 for Oregon and short-run elasticity of –0.048 and “precision” of 259 for Colorado. These results are in line with the more precise studies in the figure above.)

Is economics bogus?

It’s tempting to walk away from this discussion thinking all of econometrics is bogus. Ioannidis himself responds to this temptation:

Although the discipline has gotten a bad rap, economics can be quite reliable and trustworthy. Where evidence is deemed unreliable, we need more investment in the science of economics, not less.

For policymakers, the reliance on economic evidence is even more important, according to Ioannidis:

[P]oliticians rarely use economic science to make decisions and set new laws. Indeed, it is scary how little science informs political choices on a global scale. Those who decide the world’s economic fate typically have a weak scientific background or none at all.

Ioannidis and his colleagues identify several way to address the reliability problems in economics and other fields—social psychology is one of the worst. However these are longer term solutions.

In the short term, researchers and policymakers should view sensational finding with skepticism, especially if those sensational findings support their own biases. That skepticism should begin with one simple question: “What’s the confidence interval?”

Originally published at Truth on the Market.

 

Unsurprising evidence that hiking the minimum wage hurts low wage workers

On July 1, the minimum wage spiked in several cities and states across the country. Portland, Oregon’s minimum wage will rise by $1.50 to $11.25 an hour. Los Angeles will also hike its minimum wage by $1.50 to $12 an hour. Recent research shows that these hikes will make low wage workers poorer.

A study supported and funded in part by the Seattle city government, was released this week, along with an NBER paper evaluating Seattle’s minimum wage increase to $13 an hour. The papers find that the increase to $13 an hour had significant negative impacts on employment and led to lower incomes for minimum wage workers.

The study is the first study of a very high minimum wage for a city. During the study period, Seattle’s minimum wage increased from what had been the nation’s highest state minimum wage to an even higher level. It is also unique in its use of administrative data that has much more detail than is usually available to economics researchers.

Conclusions from the research focusing on Seattle’s increase to $13 an hour are clear: The policy harms those it was designed to help.

  • A loss of more than 5,000 jobs and a 9 percent reduction in hours worked by those who retained their jobs.
  • Low-wage workers lost an average of $125 per month. The minimum wage has always been a terrible way to reduce poverty. In 2015 and 2016, I presented analysis to the Oregon Legislature indicating that incomes would decline with a steep increase in the minimum wage. The Seattle study provides evidence backing up that forecast.
  • Minimum wage supporters point to research from the 1990s that made headlines with its claims that minimum wage increases had no impact on restaurant employment. The authors of the Seattle study were able to replicate the results of these papers by using their own data and imposing the same limitations that the earlier researchers had faced. The Seattle study shows that those earlier papers’ findings were likely driven by their approach and data limitations. This is a big deal, and a novel research approach that gives strength to the Seattle study’s results.

Some inside baseball.

The Seattle Minimum Wage Study was supported and funded in part by the Seattle city government. It’s rare that policy makers go through any effort to measure the effectiveness of their policies, so Seattle should get some points for transparency.

Or not so transparent: The mayor of Seattle commissioned another study, by an advocacy group at Berkeley whose previous work on the minimum wage is uniformly in favor of hiking the minimum wage (they testified before the Oregon Legislature to cheerlead the state’s minimum wage increase). It should come as no surprise that the Berkeley group released its report several days before the city’s “official” study came out.

You might think to yourself, “OK, that’s Seattle. Seattle is different.”

But, maybe Seattle is not that different. In fact, maybe the negative impacts of high minimum wages are universal, as seen in another study that came out this week, this time from Denmark.

In Denmark the minimum wage jumps up by 40 percent when a worker turns 18. The Danish researchers found that this steep increase was associated with employment dropping by one-third, as seen in the chart below from the paper.

3564_KREINER-Fig1

Let’s look at what’s going to happen in Oregon. The state’s employment department estimates that about 301,000 jobs will be affected by the rate increase. With employment of almost 1.8 million, that means one in six workers will be affected by the steep hikes going into effect on July 1. That’s a big piece of the work force. By way of comparison, in the past when the minimum wage would increase by five or ten cents a year, only about six percent of the workforce was affected.

This is going to disproportionately affect youth employment. As noted in my testimony to the legislature, unemployment for Oregonians age 16 to 19 is 8.5 percentage points higher than the national average. This was not always the case. In the early 1990s, Oregon’s youth had roughly the same rate of unemployment as the U.S. as a whole. Then, as Oregon’s minimum wage rose relative to the federal minimum wage, Oregon’s youth unemployment worsened. Just this week, Multnomah County made a desperate plea for businesses to hire more youth as summer interns.

It has been suggested Oregon youth have traded education for work experience—in essence, they have opted to stay in high school or enroll in higher education instead of entering the workforce. The figure below shows, however, that youth unemployment has increased for both those enrolled in school and those who are not enrolled in school. The figure debunks the notion that education and employment are substitutes. In fact, the large number of students seeking work demonstrates many youth want employment while they further their education.

OregonYouthUnemployment

None of these results should be surprising. Minimum wage research is more than a hundred years old. Aside from the “mans bites dog” research from the 1990s, economists were broadly in agreement that higher minimum wages would be associated with reduced employment, especially among youth. The research published this week is groundbreaking in its data and methodology. At the same time, the results are unsurprising to anyone with any understanding of economics or experience running a business.

This post was originally published at Truth on the Market.

Do we really need an expert witness?

Yes, you do.

This week’s decision by the Seventh Circuit in Cripe v. Henkel Corp., No. 17-1231 (June 7, 2017), written by Judge Frank Easterbrook, is a reminder for litigators of the importance of mastering the fundamentals. The court held that the plaintiff in a personal-injury action had failed to disclose any experts, or provide any expert reports, under Fed. R. Civ. P. 26(a)(2) to rebut the defendant’s expert on causation. When the defendant moved for summary judgment, the trial court granted the motion, given that there was no contrary evidence. The Seventh Circuit affirmed, reaching the profound conclusion that “[y]ou can’t beat something with nothing.”

From Foley & Lardner LLP.

The Squawk Box effect on CEO pay

From the Wall Street Journal:

How big is the CNBC effect? “CEOs who appear in CNBC interviews will earn $210,239 more” on average in the following year, the professors say, compared with similar CEOs who didn’t go on.

CEOs of small companies see a bigger bump. The effect for CEOs in the smallest firms was $130,925 greater than for CEOs in the largest companies, even though big business CEOs usually get paid more.

Cable TV is better than print. A CEO who got more print coverage than average in a year got a tiny boost in pay the next year.

How to get better voter turnout in close races

  1. Take a poll.
  2. Make sure media reports the poll.

From NBER:

Closer elections are associated with greater turnout only when polls exist. Examining within-election variation in newspaper reporting on polls across cantons, we find that close polls increase turnout significantly more where newspapers report on them most.

 

Refugees pay more in taxes than they collect in benefits

Research from the National Bureau of Economic Research:

Using the NBER TAXSIM program, we estimate that refugees pay $21,000 more in taxes than they receive in benefits over their first 20 years in the U.S.

Other findings:

  • Refugees that enter the U.S. before age 14 graduate high school and enter college at the same rate as natives.
  • Among refugees that entered the U.S. at ages 18-45, after 6 years in the country, these refugees work at higher rates than natives but they never attain the earning levels of U.S.-born respondents.

Could US corporate taxes get any worse? How about a border adjustment tax?

The current US corporate income tax code is extraordinarily complex. It tends to favor larger companies. It also tends to favor companies who can squirrel away their profits overseas. Even worse, it really favors companies that can afford to hire lobbyists to create loopholes and to hire lawyers and accountants necessary to exploit the loopholes.

The US has the highest corporate tax rate in the developed world, which is especially harmful to mid-size and smaller firms. Even with the high tax rate, the US collects much less in taxes (on a relative basis) than its peers, as shown in the figure below.

A border adjustment tax would reduce (or eliminate) the corporate income tax. It would alter the current corporate tax structure by essentially imposing a tax or levy of 20 percent on all imports – including components and parts used in assembly – while exempting US exporters from any taxes. In other words, US companies would no longer have to report revenue generated by their overseas sales as taxable income. At the same time, they could no longer claim expenses incurred by importing goods and materials as deductible from their federal tax obligation.

The proposed border adjustment tax may be the most revolutionary idea in corporate tax reform in decades. If approved, it would transform the corporate income tax code into something similar to the European value-added tax or VAT. Overnight, the tax would create new categories of corporate winners and losers and will most likely drive up prices for US consumers.

  • Winners: Export-driven companies, including manufacturers of electronic equipment, machinery, aircraft, munitions, cars, and tobacco. Indirect winners would be small and medium sized business that benefit from a vastly simplified tax code.
  • Losers: Any business that relies heavily on imports including retailers, foreign car dealers, toy manufacturers, and oil refineries. Major retailers like Walmart and Target that get many of their products from Asia and other markets with cheap labor would be hard hit by the border adjustment.

There’s a chance that the BAT may be DOA. Republican senator Lindsey Graham has said that he can’t find even 10 votes in the US Senate for the current boarder adjustment tax proposal.

Nevertheless, the current US corporate tax system is a massive drag on business growth and doesn’t even do a good job at what it’s supposed to do – generate tax revenues. At this point it’s difficult to conceive of a scheme that could be any worse than the corporate tax system currently in place.

In case you were wondering … here are the top imports and exports by state. It seems Wisconsin spends a lot of money on imported sweaters.

“We haven’t seen numbers like this in a long time” – small business confidence soars

Small business optimism is at its highest level since 2004, according to a National Federation of Small business survey. Small businesses expect to see increased sales, hire more employees, and expand capital investment.

“We haven’t seen numbers like this in a long time,” said NFIB President and CEO Juanita Duggan. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy.”

Source: Small Business Economic TrendsNFIB | NFIB

$5 million lawsuit alleges Raisinets boxes “recklessly” underfilled

Stuff like this gives lawyers a bad name.

A lawsuit filed Tuesday in a California federal court claims Nestlé packages some of its Raisinets in opaque movie-theater-style containers that lead customers to believe they are buying a full box, when in fact only 60% of the box contains chocolate-coated raisins.

The plaintiff—Sandy Hafer, a California resident who allegedly bought Nestlé’s Dark Chocolate Raisinets—claims that she and other candy consumers had relied on Nestlé’s “deceptive packaging” in deciding to buy the Raisinets. According to the suit, which seeks class-action status, had Ms. Hafer and others known the boxes weren’t full, they wouldn’t have bought the candy or would have paid significantly less.

Stuff like this gives regulators a bad name.

Federal law governing “slack fill”—or the empty space in a container—says a container is filled in a manner that is misleading if it contains slack fill that doesn’t have a functional purpose, like protecting the package’s contents.

The lawsuit seeks at least $5 million in damages that would include refunds for potential class members, plus any interest accrued. A 3½-ounce box of Raisinets sells for $1 at Target Corp. stores and has as many calories as a McDonald’s double cheeseburger.

Source: Raisinets Boxes ‘Recklessly’ Underfilled, Lawsuit Alleges – Law Blog – WSJ

Kenneth Rogoff: Four percent growth is not impossible

Kenneth Rogoff was the chief economist of the International Monetary Fund from 2001 to 2003.

[I]f the US economy really does have massive quantities of underutilized and unemployed resources, the effect of Trump’s policies on growth could be considerable. In Keynesian jargon, there is still a large multiplier on fiscal policy. It is easy to forget the biggest missing piece of the global recovery is business investment, and if it starts kicking in finally, both output and productivity could begin to rise very sharply.

Source: The Trump Boom? by Kenneth Rogoff – Project Syndicate

Wells Fargo meets the Wehrmacht: employee rewards and risky behavior

Employee of the Month. Sounds like a great idea. For the price of a cheap plaque and a good parking spot, bosses can motivate employees to deliver superior service. So the thinking goes.

Academics call it “status competition.” And sometimes it backfires.

Wells Fargo has been accused of opening millions of fake bank accounts. Employee compensation was tied to opening new accounts and workers could lose their jobs if they didn’t meet targets. They also had status competitions.

According to the Miami Herald, the east coast region for Wells Fargo was run by Laura Schulte for about five years. Staff recall her sales promotion called “Schulte’s All Stars.” A 2010 copy of the all star list obtained by Bloomberg ranked managers by a mix of metrics, all gauging volume in different ways. Some workers were on track to be in the “Schulte Hall of Fame.” Sure, targets were hit, but laws likely were broken.

What this have to do with the Wehrmacht?

Research published by the National Bureau of Economic Research highlights the tradeoff between the benefits of higher performance against the costs of risky behavior using an … um … “interesting” data set.

In World War II, the German air force had a version of employee of the month. It was a daily bulletin called the Wehrmachtsbericht, produced by the propaganda department and broadcast daily over the state controlled media.

Being mentioned by name in the bulletin was one of the highest forms of recognition used by the German armed forces. Only 1,200 of the 18 million men in the armed forces were mentioned by name in the bulletin.

German pilots would get mentioned for an extraordinary number of air victories. Here’s Hans-Joachim Marseille’s mention in the bulletin on June 18, 1942 (his second mention):

First Lieutenant Marseille shot down ten enemy planes in a 24 hour period in North Africa, raising his total score of aerial victories to 101.

The bulletin served two purposes. The first, as propaganda to raise morale among the German people. The second, was to inspire German soldiers to achieve top performance.

But did it work?

The researchers divided pilots into two groups: top-ranked pilots and everyone else. Top ranked pilots were in the top 20 percent of victories (number of enemy planes shot down). Everyone else was in the other 80 percent.

A statistical analysis of pilots victories found that performance overall improved in the periods after a pilot gets a mention in the bulletin. The highest ranked pilots saw a 20 percent increase in their scores while the lower ranked pilots saw a modest increase.

What’s the cost?

It’s safe to say that dogfights are a dangerous undertaking. To shoot down an enemy plane, the pilot has to put himself in harm’s way. A pilot seeking to increase his score is increasing the chances that he’s going to get shot down himself.

Top-ranked pilots saw no significant change in their “exit rate.” The other 80 percent of pilots saw their exit rate increase by 20 percent—and, in some cases, more than double.

Overall, the gain in “victories” from mentioning pilots in the bulletin was outweighed by the loss in pilots from taking additional risks.

There’s a management lesson: Incentives can spur superior service, but can also encourage risky action. Think through the implications of your incentives.

Research roundup: Hacking, gaming, working, reorganizing

  • On hacking, President-elect says, “I’ll tell you what: no computer is safe. I don’t care what they say.” He may be right. Even major law firms are getting hacked. [Wall Street Journal]
  • Pokemon Go was a big hit last summer. Super Mario Run is running out of steam. Mobile gamers don’t like to pay $10 upfront to play a game. [Wall Street Journal]
  • Fed researchers say an aging population and people staying longer in school are causing low labor force participation.  . . .  But are people staying in school because they can’t get jobs? [St. Louis Fed]
  • If a country’s economy is heavily dependent on agriculture, higher food prices may reduce poverty. [Marginal Revolution]

Signs are pointing to strong growth for the U.S. economy and that’s a big deal

Global growth will pick up faster than previously expected in the coming months as the Trump administration’s planned tax cuts and public spending fire up the U.S. economy, the OECD recently announced, revising its forecast upward from earlier this year.

In its most recent Economic Outlook, the Organization for Economic Cooperation and Development projected the U.S. economy would grow by 2.3 percent in 2017 and to 3 percent in 2018. Global growth is expected to accelerate from 2.9 percent this year to 3.3 percent in 2017 and reach 3.6 percent in 2018.

Markets have shown some early confidence that the economy will improve with the new administration. The Dow Jones Industrial Average is up almost 5 percent since election day and the S&P 500 is up more than 3 percent. Consumers seem to be sharing the confidence with early reports of strong retail sales for Black Friday and Cyber Monday.

During his campaign, Mr. Trump pledged to boost infrastructure spending by as much as $1 trillion, although the details of how that would be financed are sketchy. He has also promised to cut corporate and personal income taxes. In addition, changes to employment regulations and the Affordable Care Act are expected to spur hiring by businesses and bring more Americans into full time employment.

Costly and onerous overtime rules imposed by the Obama administration have been blocked by a federal judge and are likely to be overturned during the Trump administration. Changes to the ACA are expected to jettison mandates triggered by having more than 50 employees or by working more than 29 hours a week. Be prepared for more people working more hours.

Financial reforms are on the way with an expected overhaul of Dodd-Frank. House Finance Committee Chairman Jeb Hensarling and others in Congress have laid out the key principles they say will guide financial reforms: restoring rule of law to the regulatory process and allowing banks to regain control of their own lending and other business decisions so long as they are credibly taking risks with their own funds rather than relying on the protection of taxpayers. This may be the end of “Too Big to Fail.”

Rising interest rates will strengthen bank profits and provide a tailwind to encourage more lending while also slowing the growth in housing prices.

Does growth really matter? Yes, it’s a big deal

When economists talk about growth, they are trying to get a handle of how much better (or worse) off are we versus a year ago. Are we getting richer or poorer or just standing still? When we talk about growth, we talk about year-over-year percentage growth rates. But, what is a “good” growth rate?

Here’s some perspective, looking back in time.

Average incomes doubled from the bottom of the Great Depression in 1933 to the middle of the post-war boom of 1950—a space of just 17 years. Over that period, incomes grew an average of 4 percent a year. Incomes doubled in less than one generation.

It took another 27 years afterward (1950 to 1977) for incomes to double. The people watching the TV show Happy Days were twice as rich as the people portrayed in the show. That amounts to an average annual growth rate of 2.5 percent a year.

Then, after that, it took another 38 years (1977 to 2015) for incomes to double. Over that period of time, average incomes grew by 1.8 percent a year. It took almost two generations for incomes to double.

A difference of 1.5 percentage points in the growth is the difference between doubling incomes every generation or doubling every other generation.

Think of it this way. Since 2010, GDP growth has been about 2.2 percent a year. At that rate, it would take more than 30 years for incomes to double. If that growth can be boosted to 3 percent a year, incomes would double eight years faster. That’s a big deal. That’s one reason stock prices rise on even modest upward revisions to GDP forecasts.

Look on the flip side, regulations and taxes that stifle growth—even if by less than one percent—can have serious long run effects on our standard of living. When a politician says, “Well it’s just half a percentage point off the growth rate,” you should answer, “Well that’s another five to ten years we lose in income growth.” That’s a big deal.

So, let’s get out there and grow this economy. Your kids and grandkids will thank you for it.

Steep price hikes under Obamacare: Taking “affordable” out of the ACA

 

obamacare-exchange-oregon-2017Health insurance prices on the Obamacare exchanges have been published on HealthCare.gov, and it’s not good news. Higher premiums, higher deductibles, and fewer choices.

Fewer plansLast year, residents in Portland, Oregon had a choice of 87 plans. This year, we get only 37 plans from which to choose.

Higher premiums: For my family of 2 adults and 4 kids, the average premium has increased by $290 a month—that’s a 25 percent increase. The cheapest plan is $939 a month, but you pay $50 just to walk into the doctor’s office. That’s $50 per person, per visit. That adds up.

Higher deductibles: To make matters worse, deductibles have increased.

  • Last year, several plans had zero deductible. This year, only one plan has zero deductible (Kaiser Permanente KP OR Gold 0/20).
  • Last year, three plans had the highest deductible of $13,700. This year, 10 plans have a deductible of $14,300. If you have to burn through $14,300 of your own money before any meaningful health coverage kicks in, what the heck are you paying for?

Cheap plans are a bad deal. Bronze plans are sold as the most “affordable” plans. But they come with some high costs. The lowest deductible is $10,000. And, as noted earlier, the cheapest of the cheapest plans have outrageous copayments for primary care visits.

Let’s compare the plans. Look at the figure above.

Gold plans have premiums averaging $1,700-$1,800 a month (that’s more than $20,000 a year).

  • The cheapest Gold plans are all Kaiser Permanente plans, which means you have to haul yourself all over town to see your doctor and you have to get a referral to see a specialist. What you’re saving in money, you’re spending in time and frustration.
  • The next best alternative is a Moda plan with a $1,000 deductible for $1,732 a month (Moda Health Plan, Inc. Beacon Be Protected)

Much of the ACA attention is focused on Silver plans. Last year, I was able to get a zero deductible Silver plan for $1,100 a month. That was pretty good, but the provider pulled out of the Obamacare exchange, so that plan’s gone.

  • For 2017, the “best” Silver plan has a $4,000 deductible and a monthly premium of $1,261 and, again, it’s a Kaiser plan.
  • For $1,285, Providence offers a plan with a $5,000 deductible (Providence Health Plan Connect 2500 Silver).

Bronze plans are such stinkers that they are not even worth considering. For almost every Bronze plan, there is a Silver plan with a similar premium and a lower deductible.

That’s what happens when regulators load up scads of things as mandated “preventive services” (i.e., no out-of-pocket) and forbid insurance underwriting to manage risk. We end up with high premiums and high deductibles, when most people would prefer lower premium with “just in case” coverage.

Welcome to 2017: Fewer choices, worse choices, and higher prices. When November 1 rolls around, it might be worth checking out the plans available off the ACA exchange.

Ban the box backfires

“Ban the Box” laws prevent employers from conducting criminal background checks until well into the job application process. (“Ban the Box” comes from the check box on many job applications asking, “Have you every been convicted of a crime?”)

Proponents of “Ban the Box” claim that by ignoring an applicant’s criminal record until late in the application process, ex-cons would have better employment opportunities.

A secondary goal is to reduce racial disparities in employment.

New research suggests that “Ban the Box” has backfired.

We find that [Ban the Box] policies decrease the probability of being employed by 3.4 percentage points (5.1%) for young, low-skilled black men, and by 2.3 percentage points (2.9%) for young, low-skilled Hispanic men. These findings support the hypothesis that when an applicant’s criminal history is unavailable, employers statistically discriminate against demographic groups that are likely to have a criminal record.

Source: NBER

Global trade stalls while protectionism expands: Are you ready for a trade war?

Global trade is slowing and protectionism is growing. Trump and Clinton will make it worse. Are you ready for a trade war?

In October, our newsletter sent up a warning flag that growth in global trade seemed to be slowing down.

Now, it appears the growth in global trade has stopped.

Export-Growth-EconMinute

 

In the U.S., it’s even worse. As shown in the figure above, U.S. exports have decreased by 4 percent over the past year. That’s a reduction of $95 billion.

Recent research finds world export volumes peaked and flattened in early 2015. The same finding holds for import volume and for total volume (export plus import). In other words, no matter how you measure it, world trade has come to a standstill. And, it’s a worldwide halt in trade growth. Both industrialized countries’ and emerging markets’ trade volumes have stalled.

So what?

Trade is a big deal and it boosts the U.S. economy. Yes, even trade with Mexico. Yes, even trade with China. Strong exports did more to pull the economy out recession than $830 billion stimulus blowout.

In 1960, 20 percent of homes in the U.S. didn’t have a phone and no one had a cell phone. Today, even the homeless have mobile phones. One big reason is trade that has driven down the price have having a phone.

As trade improves incomes in China, India, and other developing countries, that money will be spent on imports from the U.S. By 2020, per capita income in China is projected be $6,000 higher than today. That’s a billion or more people with huge increases in purchasing power.

There’s a national security component, too. Evidence is building that that the more trading partners a country has, the less likely it will be to engage in a war. That was the entire basis for the European Economic Community, which morphed into the EU.

Who’s to blame?

Research indicates protectionism is a big reason for stagnating trade. Across the world, countries have adopted policy initiatives harming foreign commercial interests. In recent years, protectionist measures outnumbered free trade measures by a 3-to-1 margin.

In the U.S., both Clinton and Trump have campaigned on anti-trade issues. Both Trump and Clinton have openly opposed the Trans-Pacific Partnership.

  • Trump says he’s against “bad trade deals,” but hasn’t named a trade deal that he think’s is “good.”
  • Clinton once praised TPP as the “gold standard” of trade deals, but has since reversed her position.

While we can never predict what will happen once Trump or Clinton enter the White House, it’s clear that pro-growth trade policies are not a priority for either Trump or Clinton.

There’s an old saying that protectionism is a politician’s delight: It delivers clear benefits to those that are protected, while spreading the costs across the public. In this way, protectionism is one of the worst forms of cronyism. Cronies can always get trade deals while the unconnected sit on the sidelines. Be prepared for a short list of winners and a long list of losers as world trade dries up.

The challenge to business, your business: How to make money in the age of protectionism, if you’re not a crony?

If you’re an importer, line up suppliers who won’t be subject to onerous trade rules. Or, set up a U.S. subsidiary who can technically satisfy the new rules. Yes, it’s a pain.

If you’re an exporter, find strategic partnerships in the countries with why you do business. A joint-venture with a local partner (such as a distributor), may allow you to satisfy “local content” rules without providing actual local content.

Economics International and Economics On Demand.

The world is facing rapid change and increasing uncertainty. But, every change presents an opportunity and uncertainty can be reduced.

Economics International Corp. brings common sense to complexity. We work on issues involving litigation, regulation, and public policy.

If you need an open mind and a fresh to review your business, Dr. Fruits will spend a half day or more learning your business and your markets and make himself available for consultation and research. It’s Economics On Demand. For a monthly fee, Dr. Fruits will be on-call to answer your questions, dig up research, crunch numbers, run workshops, or give speeches. Discount for up-front annual payment. It’s designed to be flexible, so you can pick anEconomics On Demand plan that’s right for your business. Emailfruits@econinternational.com or call 503-928-6635 and we can discuss your needs.

Thriving in the face of change: 3 business lessons from Pokémon Go

Pokémon Go is a free-to-play location-based mobile game available on iPhones and Android devices.

The game allows players to capture, battle, and train virtual creatures, called Pokémon, who appear on device screens as though in the real world. It makes use of GPS and the camera of compatible devices.

The game’s been out a week, and it’s a huge hit. But, a lot of people – including business people – seem downright hostile to the game. Big mistake!

The unexpected success of this game provides three lessons for businesses faced with change and innovation.

Lesson #1 – Accept. It’s natural to have a gut reaction to new things. Often that gut reaction begins with “I don’t understand it.” The next gut reaction is, “I don’t like it.” My Facebook feed is filled with grumpy folks telling Pokémon hunters to go home, get a life, or get a job (or all three).

It doesn’t matter if you like Pokémon Go. It’s here. And it’s here to stay. It might be a summer fling, or it might be around for a while. Bell bottom trousers were a fad, but they were a fad that lasted a decade. May as well accept the fact that millions of people are playing a game that gets them out of the house and walking around the community.

Lesson #2 – Understand. How does this thing work? When an innovation hits the scene, don’t ignore it – understand it. Learn how it works, how it works for users, and how it can work for you.

Facebook was built for college students. When it first came out, most older folks didn’t understand it and couldn’t understand why anyone would use Facebook.

Today, the average Facebook user is about 35 years old. More than 1-in-4 Facebook users are age 50 or older. Almost two-thirds of Americans get their news from Facebook. Facebook has grown from a quirky website that no one understands (what the heck is a “poke?”) to a massive piece of Internet real estate that almost everyone uses.

Pokémon Go gets people out and about. People go where Pokémon go. People hang out where Pokémon hang out. “Lures” are goodies that attract Pokémon to a site for 30 minutes. Lures can be purchased for 99 cents. Think about it. Now think about it as a business wondering how to attract new customers.

Lesson #3 – Adapt. How can I profit from it?

Look at these signs seen in front of businesses once the Pokémon Go rage took off. Who do you think is making money off of this new innovation?

One business is turning away customers with a nasty message: “Pokémon are for paying customers only.” That’s another way of saying, “We don’t want your business.”

The other business has adapted and embraced a source of new customers by offering a discount. “This place seems cool, let’s take a break and have a drink.”

Still other businesses have found entirely new opportunities. For less than $2 an hour they can drop a lure at their business and get dozens of potential new customers. That’s pretty cheap marketing. And, yes, a lot of businesses like bars, restaurants, and coffee shops have used the game to lure new customers.

In Oregon, an Uber driver turned to Craigslist advertising $30 for a two hour ride during which he would “drive you around Portland Metro area while you play Pokemon Go.” The fee includes snacks and beverages along with stops along a route that includes “all the PokeStops and Gym Trainers.” This entrepreneur saw an opportunity and jumped on it. (Note: He’s probably not charging enough.)

Everyday, we’re faced with change. With change comes risk and opportunity. Accept, understand, and adapt and you may be able to profit.

Economics On Demand

The world is facing rapid change and increasing uncertainty. Every change presents an opportunity and risks can be managed.

If you need a set of fresh eyes and an open mind to review your business, Dr. Fruits will spend a half day or more learning your business and your markets and make himself available for consultation and research. It’s Economics On Demand.

For a monthly fee, Dr. Fruits will be on-call to answer your questions, dig up research, crunch numbers, run workshops, or give speeches. Discount for up-front annual payment. It’s designed to be flexible, so you can pick anEconomics On Demand plan that’s right for your business. Emailfruits@econinternational.com or call 503-928-6635 and we can discuss your needs.