• economic news summary and presidential futures markets

    Using Presidential Futures Markets to Forecast Election Winners

    Jan 28 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Financial Markets, Government, Tech, Thinking Economically • 102 Views

    The presidential futures markets have opened at the University of Iowa. To participate, you just place a “bet” on a candidate. Not really a wager, the bets are purchases of presidential futures contracts that vary in price. The average price of all contracts for one candidate conveys the likelihood that he or she will win.

    A similar predictions market, PredictIt explains:

    “PredictIt allows you to make predictions on future events by buying shares in the outcome, either Yes or No. Each outcome has a probability between 1 and 99 percent. We convert those probabilities into US cents.

    For example, Trader A thinks an event has at least a 60 percent chance of taking place so she offers 60 cents for a Yes share. PredictIt matches her offer with that of Trader B, who is willing to pay 40 cents for a No share. Each trader now owns a share in the market for this event on opposite sides.”

    After that, futures owners can buy and sell their shares to all who participate in the market. The result is an equilibrium price that forecasts whether a candidate has a good chance of winning.

    Where are we going? To the power of markets.

    Past Futures

    In the Iowa presidential markets, so far, Donald Trump has had the best numbers. We could translate Trump’s 41 cents into a 41% chance of winning, Rubio’s to 26% and Cruz, 21.7%.

    Forecasting elections with presidential futures markets

    From: University of Iowa

    Meanwhile, on the Democratic side, Hillary was far ahead of Bernie with an average option price of $.75 versus $.277.

    As for the November election, the popular vote will determine the payoff in the Iowa markets. For now, with no specific candidate yet, the futures give the Democrats a slight lead over the Republicans, 51 to 49.

    Our Bottom Line: The Power of the Market

    Maybe a decade ago, seeing former Secretary of the Treasury Secretary Lawrence Summers, I walked over and asked for the most important economic idea I could share with my students. Without missing a beat, he responded, “The power of the market.”

    In presidential prediction markets, we are using the power of the market to generate the forecast wisdom that individuals lack.

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  • economic news summary and outdated regulations

    The Airbnb Threat

    Jan 27 • Businesses, Demand, Supply, and Markets, Economic Growth, Economic History, Economic Thinkers, Government, Innovation, Labor, Lifestyle, Thinking Economically • 105 Views

    Offered as the “Boutique Winter Igloo for 2,” this $200 a night Airbnb listing in Brooklyn, NY had five rental requests. Its owners said they had been awaiting a snowstorm and when Jonas hit, used YouTube tutorials to build it.

     Airbnb impact on outdated hotel industry regulation

    From: Brokelyn.com

    After six hours the listing was removed by Airbnb because, “your igloo, while very well constructed, has failed to meet our occupancy standards.”

    Where are we going? To Airbnb’s impact on hotels.

    The Airbnb Model

    Airbnb is a source of NYC’s short term rentals–as many as 25,000 listings during one night. Seeing $451 million in business siphoned away from September 2014 to August 2015, the hotel industry says what Airbnb does in NYC is illegal. They suggest that Airbnb should be paying taxes, should be observing fire and safety regulations, and should not violate the law that prohibits less than 30-day rentals without the owner/occupant being present. Meanwhile Airbnb advocates point to the extra rental income households receive and the underutilization that renting diminishes. Airbnb adds that it complements the hotel industry.

    You can see below that Airbnb has indeed become a threat:

    Airbnb impact on outdated regulation

    From: qz.com

    I wonder though whether the real threat is outdated regulation. As with Uber, we need to support new business models that fuel our economy.

    Our Bottom Line: Outdated Regulation

    Looking back at a post on questions about the status of Uber’s employees, our bottom line was outdated regulation that also applies to Airbnb:

    Market economies flourish with clearly established rights and obligations. When I sign a contract, I don’t even wonder if the law will enforce it. If I get a patent for a new drug, I know, for now, it is mine. Reducing transaction costs, these kinds of laws make doing business easy.

    By contrast, the new kind of short term rental in the gig economy needs some regulatory catch up. Otherwise, ambiguities will retard innovation and create inefficiencies for consumers and businesses.

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  • Economic news summary and Super Bowl 50

    The Reason CBS Can Charge $5 Million for a Super Bowl Ad

    Jan 26 • Businesses, Demand, Supply, and Markets, Economic History, Economic Humor, Entertainment, Lifestyle, Media, Sports, Thinking Economically • 129 Views

    In many ways, Super Bowl 50 has begun.

    Spoofing the election, the Bud Light Party has this Schumer/Rogen teaser:

    And here is a longer version of the Pokémon 30-second spot:

    Where are we going? To why Super Bowl ads are so expensive.

    Super Bowl Ad History

    Wanting to convey more of a story, firms are airing 60-second ads. Last year 37 percent of brand ads were 60 seconds or longer, slightly less than 2014.

    Super Bowl ads

    The $6 million Ad

    At $5 million this year, the 30-second rate is 11 percent more than last year’s highest price. Meanwhile CBS says that by holding back several spots, it expects to charge a last-minute $6 million.

    Super Bowl ads


    The Big Spenders

    Ads from the top 5 have become a Super Bowl tradition (but GM did skip last year).

    Super Bowl ads


    Judging the Ad Rate

    While a Super Bowl 30-second ad is $5 million, the average cost for a 30-second prime time TV spot is $112,000 and for “The Big Bang Theory,” $344,827. Maybe we could say though that more than 114 million viewers make Super Bowl ad rates reasonable?

    So, the Super Bowl attracts more viewers, some of whom (like me) are more interested in the ads than the game. For businesses, the Super Bowl is a unique opportunity to build brand awareness, increase sales and buoy their stock price.

    Yes…stock price. A University of Wisconsin study actually concluded that from the Monday before the Super Bowl to the Friday after, the stock price of firms with Super Bowl ads outperformed the S&P by 1%.

    But still, why $5 million?

    Our Bottom Line: Monopoly Pricing

    Saying its Super Bowl TV ad inventory for the game is sold out (except for ad time it is holding back for a last-minute sale), CBS can behave like a monopoly, become a “price maker,” and implement monopoly pricing. However, as with all monopolies’ demand curves, there is some price elasticity. Doritos is running one “Crash” ad instead of two.

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  • economic news summary and sell by labels on food

    The Economics of Dating (Labels)

    Jan 25 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Environment, fiscal policy, Government, Households, Labor, Lifestyle, Regulation, Thinking Economically • 110 Views

    On average, each of us discards more than 240 pounds of food a year that costs us close to $371. Asked why in an online survey from Johns Hopkins researchers, people emphasized safety and freshness.

    These were their reasons:

    The tradeoffs of wasted food

    From: “Wasted Food: U.S. Consumers’ Reported Awareness, Attitudes, and Behaviors”

    Where are we going? To the food labels that encourage waste.

    Misleading Dates

    If a container of milk sits on a food store shelf more than 12 days after it was pasteurized, Montana law says the seller has to discard it. In nearby Washington, rather than Montana’s “sell by” date, shoppers see a “use by” date of 21 days.

    Food stores began sharing expiration dates with their customers during the 1970s. The problem though was inconsistency. With no single federal labeling requirement–except for infant formula–the states each decided what to mandate. The result today is sell by, buy by, enjoy no later than, best if used by and a host of other freshness labels that no one has defined for us. Depending on the manufacturer’s intent and the consumer’s interpretation, the label could refer to food safety, freshness, or optimal taste. And even then, when the food reaches our homes, how we handle it will ultimately determine how long it lasts.

    The following map from a 2013 study gives an indication of the labels that states require. Gray states have no labeling regulations:

    Food waste tradeoffs

    From: The Dating Game

    The one common denominator is waste. Those expiration dates are an incentive to discard food sooner than necessary and the reason perfectly good food is not donated to food banks.

    Our Bottom Line: The Cost of Food Waste

    Primarily from fruits and vegetables, the 1249 calories we discard each day is nutrition from which no one will ever benefit. Looking back at production, instead imagine the land, labor and capital, the fresh water, the fertilizer and the transportation inputs that we (or supermarkets) are throwing away when we discard some lettuce. Looking forward, we have the impact of the garbage on the environment if it winds up in a landfill or of the dollars it might require to be recycled or composted. Perceived as dollars, from “harvest to consumer,” the value of the food we wasted in 2010 was approximately $161.6 billion.

    However, for the most interesting discussion of the cost of food waste, do take a look at what John Oliver said (a warning that he uses some racy language):


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  • Snowbound cars Property Rights for Shoveling

    The Good Side of a Blizzard

    Jan 24 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Growth, Economic History, Economic Thinkers, fiscal policy, Government, Labor, Macroeconomic Measurement, Thinking Economically • 128 Views

    The storm started just after midnight on March 12, 1888. One of NYC’s worst, the blizzard brought wind gusts of 60 mph, temperatures of 5°F. and snow accumulation of 21 inches. In a city that depended on the horse and carriage, elevated railway lines and street cars for its transport and above-ground wires and wooden poles for its communications and lighting, the impact was devastating.

    The following beautifully written excerpt from the NY Times on March 13, 1888 described how the storm affected normal people:

    “The milkmen, in fact were in many cases unable to get any milk at the stations on account of the non-arrival of the trains; the news vendors did not have the morning papers at the houses, and the bakers failed to come round with the morning rolls. Thackeray says that it is the small ills of life that worry the most, and probably thousands of New-Yorkers yesterday morning — good, steady churchgoing heads of families when they had to get through their breakfasts without their favorite newspaper, their hot buttered roll, and their fragrant coffee enriched with the boiling milk began to seriously question whether life was worth living after all, with all those trials and tribulations to undergo.”

    Where are we going? To the transportation legacy left by the storm.

    The Storm’s Legacy

    The blizzard of 1888 paralyzed New York’s transport system. Service stopped on the city’s elevated trains because of slippery rails and the drifting snow (said to be as high as 52 feet in Brooklyn). Telephone and telegraph communications were at a standstill because wires were down. Snow storms even generated a debate among city officials about whether to pack down the snow or remove it. Packing it would let the city’s affluent minority use their sleighs. Removal meant the street cars could run.

    You can see how vulnerable NYC’s wiring was during the 1888 blizzard:

    Blizzard of 1888 and a transportation infrastrucure

    From: VirtualNY.cuny

    While the NYS legislature rejected NYC Mayor Hewitt’s plan for rapid transit during February 1888, after the March storm, the outcry for underground transport and wiring reversed the dialogue. By 1894 a subway system to be funded by the city had been approved. On October 27, 1904 the first segment of the system opened. The mandated fare was five cents.

    Our Bottom Line: A Transportation Infrastructure

    Just like urban transport supports economic activity, so too did a U.S. transportation infrastructure fuel growth. Enabling David Ricardo’s comparative advantage, the canals that were dug during the first half of the 19th century and then the railroads that followed made it possible for Northeast manufacturing to connect with Western farmers and Southern plantations.

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