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    The Magic of 49

    May 6 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Government, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 880 Views

    Sometimes, one employee makes a huge difference.

    In France, one extra worker can mean that a firm needs to create worker councils, establish profit sharing, and report to employee representatives when firing people for economic reasons.

    BUT…that worker has to be #50.

    As a result, there are 2.4 times as many businesses in France with 49 employees as with 50. When a growing enterprise hits 49 workers, a typical entrepreneur starts a second company rather than expand beyond 50. Or, that person avoids hiring #50.

    During February 2010, software maker Viveo Group decided to lay off approximately 60 people from the 180 it employed. Required to present the plan to its worker councils, Viveo ultimately found itself in court with a rejected proposal because the company had forecast an 18% sales increase. But then, on May 3, the appeals court said a healthy company could lay off workers. If the firm had lost, it would have had to restore the jobs and pay 2 1/2 years of missed wages to its former workers.

    Our bottom line: With the French youth unemployment rate at 23%, the issue is jobs and less of the labor market rigidity that government has perpetuated. Enable businesses to make their own firing decisions and then they will have more of an incentive to hire the 50th worker.

    Looking at nearby French and German towns, this NY Times article contrasts their business cultures. For my facts about France’s labor market regulations, the Viveo example, and added facts about France’s labor market rigidities, this Bloomberg Businessweek article is a good source while this Reuters article describes the Viveo court decision. Also, you might want to look at eurostats for youth unemployment data.

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  • money dollar sign

    A Fine That Backfired

    May 5 • Behavioral Economics, Households, Regulation, Thinking Economically, Uncategorized • 886 Views

    Sometimes, deterrents won’t work.

    Our story begins at several Israeli day-care centers. Because some parents were picking up their children after dismissal time, two economists suggested a fine. To their surprise, the number of latecomers more than doubled after it was announced. And even when the fine was eliminated, more parents were late.

    Discussing the results, one of the economists shared a personal experience. Feeling uneasy about a late pick-up for his young child, he “drove like crazy” to the day-care center whenever he ran late. However, after they imposed a $3 charge for any delay, he said to himself, “It’s not worth risking your life for $3.”

    You can see what happened. The cost changed. Initially, the dollar cost was zero but the moral or social cost was high. The $3 charge, though, “crowded out” the intangible cost and made a late pick-up “cheaper.”

    Our Bottom Line: Newly articulated penalties can have unintended consequences. I wonder whether Dodd-Frank will surprise us.

    To read more about the day-care experiment, you might enjoy this paper by economists Uri Gneezy and Aldo Rustichini, this article, and sections of Predictably Irrational and Freakonomics. A recent econlife post also looked at when dollars crowd out community values.

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  • Decisions Have An Opportunity Cost That Require Tradeoffs

    Now or Later?

    May 4 • Behavioral Economics, Economic Debates, Economic History, Government, Households, Labor, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 639 Views

    Reading about why people have a tough time delaying gratification, I started to think about countries.

    First people…

    A part of your brain–the insula–becomes more active when faced with an unpleasant task like dieting or seeing your team lose. Two MIT professors discovered that you can add paying with cash to the “unpleasant list” but not credit cards. As one of them said, “The nature of credit cards ensures that your brain is anesthetized against the pain of payment.” The result? You buy a lot more when you postpone payment (and pain) by charging it.

    Next, countries…

    Countries also have been postponing payment and pain. Greek and Spanish pension obligations will soar during the next 40 years. Currently averaging between 20-30 percent of GDP for most euro zone countries, entitlement spending on public pensions, health care, and unemployment insurance is rising.  Like cash vs. credit, aren’t overextended entitlement programs examples of current pleasure that will generate considerable future pain?

    The Bottom Line: Will it ever be politically viable to realign incentives so that current gratification can be delayed in favor of future economic growth?

    My facts about the insula and our shopping decisions, and my quotes, came from Jonah Lehrer in Wired and his book, How We Decide (p. 86).  For the graphs and analysis of overextended entitlements, I consulted this NBER working paper. You might also want to look at economist Allan Meltzer’s new book, Why Capitalism.

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  • Large planetoid in empty space

    Asteroids and the Wild West

    May 3 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Innovation, Macroeconomic Measurement, Uncategorized • 563 Views

    I’ve been wondering who should own an asteroid.

    This takes me back, for a moment, to colonial Massachusetts. When many of the first colonists arrived, they farmed communal fields where some got less and others got more. Soon though, unhappy sharing, those with less moved westward. Their goal? Generate wealth on their own fields, farms, homes.

    As a result, from one new settlement to the next, moving westward, public property became private property.

    Maybe, an asteroid is rather similar.

    A new firm, Planetary Resources, with funding from by Google’s creators and Avatar’s James Cameron, has its eyes on the wealth of the universe. Beginning with robotic earth orbiting observatories for collecting and selling data about asteroids, their ultimate objective is to mine asteroids.  Space based platinum could be worth billions. (A new statistic? GUP–Gross Universe Product)

    One glitch might be the 1967 United Nations Space Treaty. Signed by the US and 99 other nations, the treaty says that, “Outer space, including the Moon and other celestial bodies, is not subject to national appropriation by claim of sovereignty, by means of use or occupation, or by any other means.” One researcher called outer space a “celestial commons.”

    Does that include asteroids?

    The Bottom Line: I am concerned about incentive. Everywhere, private property provides the incentive to innovate and develop resources.

    And that returns us to the massive resource wealth of the US that entrepreneurs developed because it could become their private property.

    Reading about Planetary Resources in these articles was such a pleasure, here, here, and here.

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  • For Food Trucks, it’s More Than a Space Race

    May 2 • Uncategorized • 946 Views

    By Mira Korber, guest blogger.

    It all sounded so tidy. I thought operating a food truck was simple. (1) Get up in the morning, (2) secure the best parking space, (3) sell food. I was wrong.

    While the parking space is critical to a food truck’s success, there’s more to the story. 3,000 wheeled watering-holes take to the NYC streets each year, and financial feast or famine for the truck owners depends on a number of factors.  After listening to a Planet Money podcast, I thought wide sidewalks, the sunny side of the street, and someplace with few restaurants and hoards of hungry office employees would guarantee profits. According to interviewee and Rickshaw Dumpling truck driver Kenny Lowe, there exists a “mystical spot in midtown that every truck driver dreams of.”

    But then, Lowe  went on to discuss the government’s rules:  no vending from metered spaces, avoid fire hydrants, remain 20 feet from entrances to public buildings, and 200 feet from any school. By the way, you may have to violate one or more of these rules to get a good spot for the day. If the spot is truly fruitful, parking tickets are a small transaction cost when you can make thousands thanks to the location. And one more thing about location: drivers have to watch out for agile food carts, which, in Lowe’s opinion “always win.”

    Here’s another massive difficulty: securing a permit for the food truck, an issue of occupational licensing. It’s a question of markets vs. government regulation in the form of issuing permits. Food truck operators have to apply for permits validating the safety of their product, and only a limited number of permits are released each year.

    Again, it sounded simple. It’s $200/year for a permit. But then the Wall Street Journal illuminated some complications. The waiting list for a permit is over 2,000 applications long. What happened next? Logically but regrettably, the black market blossomed. An illegally rented permit can fetch over $14,000/year. With protectionism (only 3,000 permits are allowed simultaneously), the black market is unlikely to disappear.

    The Bottom Line: The food truck industry is more complicated than monopolistic competition on wheels.  Before that competition can even occur, drivers must contend with congested streets, parking restraints, government regulations, and acquiring fresh produce, not to mention the expanding black market for permits.

    The greatest challenge may be to determine which regulations are valid regarding how much should these trucks be allowed to compete. Of course health and safety is the number one priority, but should other regulations prevent trucks from entering the business?

    All you want to know about parking spaces and food trucks here, from Planet Money. NYC.gov on applying for a food truck permit. The WSJ on food truck permit black market prices. Thoughts on industry regulations from Slate. And an Econlife post about occupational licensing and markets vs. government.

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