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    Pizza Price Wars

    Apr 5 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Humor, Labor, Thinking Economically, Uncategorized • 850 Views

    No one wins a pizza war.

    Having read a NY Times article about a pizza price war in NYC, I was curious about the supply side of the pizza business. So, this afternoon, I interviewed my local pizza counterman.

    The pizza price war in midtown NYC involves 3 almost adjacent pizza places. Originally charging $1.50 a slice, one of the three dropped its price to an astonishingly low 75 cents and soon, a second shop did also.

    One owner’s reaction, “I’m thinking, God help me.” Another was researching NYC pricing laws for pizza to see if 75 cents a slice was illegal. Still though, they said price could slide to 50 cents and less.

    But here is the problem. Listening to my pizza man in NJ, I could see that climbing commodity prices affected him. Wheat for the flour, tomato for the sauce, 1500 pounds of mozzarella each week at $2 a pound, and a fuel surcharge for each delivery he receives. He estimated that the ingredients for a pie cost him $5 and that at best, 75 cents a slice was break even.

    So why engage in a price war? Yes, there is minimal product differentiation, consumers are price sensitive and they exhibit little “brand” loyalty. However, a price war can be a negative sum game. In this war, no one wins.

    The bottom line: Pizza shops compete in monopolistically competitive markets. While price competition is typical, they can engage in non-price competition by making their product unique.

    My sources: Costs are from the counterman at Hickory Pizzeria in Chatham, NJ. Information about the NYC price war is from the NY Times. Discussion about the downside of price wars is from here and here and here.

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    Government Guidelines and Unintended Consequences

    Apr 4 • Behavioral Economics, Economic Humor, Government, Labor, Thinking Economically, Uncategorized • 861 Views

    Sometimes government guidelines can have unintended consequences.

    Government travel guidelines:

    At a networking reception, the General Services Administration spent $1900 on 400 “petit beef Wellington” snacks and $2000 on 400 “mini Monte Cristo sandwiches” and it (sort of) all made sense.

    Called the government’s personal shopper by one journalist, the General Services Administration (G.S.A) is an independent federal agency that does some of the purchasing and building management for other government agencies. The uproar though, is over money that it spent on itself–close to $822,000–at a Las Vegas training conference for 300 people during 2010.

    I checked the G.S.A. website for travel guidelines. There appears to be a lodging cost per diem limit of $99 for Las Vegas. According to all news articles, conference planners adhered to lodging cost constraints. From what I could discern, though, award ceremonies had no such ceilings. So the rooms were inexpensive. The unintended consequence?  The catered award ceremonies were extravagant.

    Government nail guidelines:

    For my class discussion of unintended consequences, a  9/10/90 New Yorker article about factory quotas in the former Soviet Union by economist Robert Heilbroner is perfect. As he described it, “If the output of nails was determined by their number, factories produced huge numbers of pinlike nails; if by weight, smaller numbers of very heavy nails. The satiric magazine Krokodil once ran a cartoon of a factory manager proudly displaying his record output, a single gigantic nail suspended from a crane.”

    The bottom line: Whether looking at guidelines for health care, financial regulation, travel expenses or nail production, it is tough to shape human behavior because unpredicted incentives always seem to create unintended consequences.

    My sources: From CNN and the NY Times for the Las Vegas Story; GSA travel expense guidelines document; the New Yorker archives for a 9/10/90 article from Robert Heilbroner.

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    Pasty Tax Issues

    Apr 3 • Demand, Supply, and Markets, Economic Debates, Economic Humor, Government, Households, Labor, Macroeconomic Measurement, Regulation, Uncategorized • 581 Views

    The UK’s pasty (PASS-tee) tax battle is a good story. But, moving beyond the humor, it has considerable significance.

    First the story:

    Taxing the pasty has created a major flap in the UK. The pasty looks like meat in a pastry pouch, high in fat, maybe more than 500 calories, a take-out hand held basic. Because pasties cool before people buy them, they had been exempt from the 20% hot take-out sales tax. But not any more.

    Part of the uproar relates to the current British government’s “upper crust” image as people who would view a pasty with distain. Pasty supporters say the Conservative government is out of touch. Pasties are the working man’s lunch.

    Really though, the story is about…

    1. How to generate revenue. The UK has .7% economic growth for 2011, 8.4% unemployment and a massive deficit. Hoping to maintain London’s allure as a financial center, they have lowered recently elevated tax rates for the most affluent. Called the granny tax, pension exemptions have been diminished. The pasty tax is expected to raise $167 million.
    2. Whether you want a regressive tax. Defined as taxes that take a higher per cent of the earnings from those who earn less rather than those who earn more, a regressive tax is usually a sales tax. As a percent of the price, it is a different proportion of each purchaser’s income. By definition, the pasty tax is regressive.
    3. And, KISS (Keep It Simple, Stupid). This is the law: “the tax now applies to food ‘heated for the purposes of enabling it to be consumed at a temperature above the ambient air temperature and which is above that temperature’ when purchased.” One news article asked if “the buyer could ask to have it cooled to get it tax-free?”

    A final thought: The National Federation of Fish Fryers was delighted.

    My sources: An AP article on the pasty tax. BBC articles here and here on UK economic stats. A Telegraph article on the granny tax.

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    A New Kind of Keynesian?

    Apr 2 • Economic Debates, Economic History, Economic Thinkers, Financial Markets, Government, Macroeconomic Measurement, Uncategorized • 785 Views

    Reading about John Maynard Keynes’s investing acumen in last Saturday’s Wall Street Journal, I wondered whether being a Keynesian could involve more than your attitude about the role of government.

    So, as a teacher, I created this “Am I a Keynesian?” quiz:

    1. When you get your lowest mark in economics on a standardized test, do you blame the test writers? On the British civil service examination that got him a job in the India Office in 1907, Maynard Keynes received the second best grade. Hearing that he had fared worst on the economics section of the exam, he said, “I evidently knew more about the Economy than my examiners.” And, he was right.
    2. Do you own an auspicious art collection? Using profits from currency speculation in 1919 and 1920, Keynes purchased paintings by Seurat, Picasso, Matisse, Renoir and Cezanne.
    3. Are you a good investor? Keynes was an extraordinary investor. Reacting to his mediocre record during the 1920s, he switched his investing style from a macro approach to a long term bottom-up stock picking perspective and his returns soared. The results have been cited as better than Peter Lynch, Warren Buffett and John Templeton.
    4. During the morning, do you remain in bed to sip your tea, read reports, and call stockbrokers? Every day, for a half hour after awakening, Keynes started working in bed.
    5. Would you like to marry a Russian ballet dancer? Described by Sylvia Nasar as, “a Russian ballerina with a voluptuous body and a droll sense of humor but no obvious intellectual interests,” Lydia Lopokova married Keynes in 1925. (The Keyneses honeymooned at her parents’ home in St. Petersburg. He had a lot to say about the Russian economy.)
    6. Do you sound like a mathematician? Having met with Keynes during the early evening on May 28, 1934, FDR said, “he had ‘a grand talk with Keynes and liked him immensely’ but complained that he talked like a ‘mathematician.'”

    During his talk with FDR and in a subsequent NY Times letter to President Roosevelt, Keynes recommended deficit spending to jumpstart the economy.  And that is why, today, those of us who supported the $800 billion, 2009 stimulus spending are Keynesians.

    My sources: The Worldly Philosophers by Robert Heilbroner, Grand Pursuit by Sylvia Nasar, John Maynard Keynes by Robert Skidelsky, Keynes and Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott. And, this WSJ article.

     

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  • Industries afflicted with Baumol's Disease have slower productivity growth.

    Should Supreme Court Justices Know Economics?

    Apr 1 • Demand, Supply, and Markets, Economic Debates, Regulation, Thinking Economically, Uncategorized • 500 Views

    Just some thoughts today about economics and the Supreme Court. Listening to Tuesday’s oral arguments,  I became concerned about some economic basics. Markets and insurance were key ideas. However, no one defined a market and insurance was initially mischaracterized.

    In my  econ class, we define a market as a process. Determining price and quantity, markets have a demand and a supply side. On the demand side are buyers who are willing and able to purchase different amounts of a good or a service at different prices. Correspondingly, on the supply side are sellers who are willing and able to provide different amounts of goods and services at different prices. In class, we assess markets through the impact of the participants. However, Justice Ginsburg suggested that “…the people who don’t participate in this market are making it much more expensive for the people who do; …”

    As for insurance, Justice Kagan said, “…health insurance exists only for the purpose of financing health care…We don’t get insurance so that we can stare at our insurance certificate. We get it so that we can go and access health care.” Accurately, the attorney for the respondents (opposing the individual mandate) said, “…I’m not sure that’s right. I think what health insurance does and what all insurance does is it allows you to diversify risk. And so it’s not just a matter of I’m paying now instead I’m paying later. That’s credit. Insurance is different than credit…”

    Curious, I checked the Justices’ bios. Justice Kennedy attended the London School of Economics. Otherwise, I found little evidence of economics in anyone’s background.

    My bottom line: Economic thinking provides a disciplined approach that would be meaningful when deciding the scope of the Commerce Clause and defining health insurance.

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