• Everyday economics and performance metrics

    How a Performance Metric Can Lead to a Giant Nail

    Aug 7 • Behavioral Economics, Businesses, Developing Economies, Economic History, Economic Humor, Education, Environment, fiscal policy, Government, Health Care, Households, Labor, Lifestyle, Regulation, Sports, Thinking Economically • 101 Views

    I have been told that the following cartoon’s caption says, “The month’s plan fulfilled.”

    Perverse incentives from government metrics

    From: Krokodil Magazine

    Published in a satirical magazine long before the Soviet Union disintegrated, the cartoon illustrates the perils of central planning. Because the plant manager had to meet a weight related production target, he could point with pride to a single massive nail.

    Also reflecting weight as a key metric, some of the tiny lamps that were in Soviet university dormitories had lead filled bases. Elsewhere, when other metrics were used, similar problems developed. If factory output was a certain number of shirts, the shirts were manufactured but not necessarily the button holes.

    Where are we going? Performance metrics shape our behavior.

    Measuring Income Inequality

    Concerned about how we measure income inequality, economist Ed Yardeni questioned several statistics. Yes, real mean household income has stagnated (red line, below) but on the other hand, we have non-cash income from Medicare, Medicaid and other entitlement programs. If we count entitlement programs, then we have to look at personal income as our metric because those government benefits account for 17 percent of the total. Below, personal income per household is up.Income inequality and statistical incentives

    Yet another possibility takes us to the consumption side of income (rising blue line above) and we have not even gone into the impact of tax payments and the Earned Income Tax Credit.

    You can see above how the line you look at shapes your income inequality story and your response.

    Our Bottom Line: Incentives

    Whether looking at incomes, hospitals, schools, police departments, baseball or beyond, performance standards create a set of incentives that shape how we behave.

    They can remind us of that huge Soviet nail or Michael Lewis’s Moneyball and the Oakland A’s winning team.

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  • everyday economics and crowd wisdom

    What Ants Tell Us About the Wisdom of Crowds

    Aug 6 • Behavioral Economics, Businesses, Labor, Lifestyle, Sports, Thinking Economically • 92 Views

    Eight ants and a Cheerio can teach us how to get a job done.

    Where are we going? To successful group behavior.

    Ant Logistics

    Below you can see a group of longhorn crazy ants lugging a Cheerio.

    But much more is happening.

    At Israel’s Weizmann Institute of Science, when researchers studied how ants transport (relatively) large bits of food, they observed group conformity and individual leadership. As a group, sometimes ants zig or zag in the wrong direction. Then though a new ant joins the crowd and realigns them. Repeatedly they follow the same pattern. The group is off track; a new ant joins them; they adjust their trajectory; they head toward their nest. Although that new ant soon acts as confused as the others, they are saved by the arrival of yet another sister who points them in the right direction.

    Successfully taking the food to the nest required a combination of group and individual behaviors. The group had the muscle while the newcomers brought the brains. As one of the researchers explained, “…In this system, the wisdom does not come from crowds. Rather, some individuals supply the ‘brains,’ and the role of the group is to amplify the ‘muscle’ power of savvy individuals so that they can actually move the load.”

    Our Bottom Line: The Wisdom of Crowds

    In The Wisdom of Crowds, New Yorker columnist James Surowiecki says that crowds can make decisions that are more accurate than individuals. In markets, crowds accurately price sodas and broccoli and tennis lessons. Studies demonstrate that crowds’ guesses cluster around the true number of jelly beans in those huge glass jugs.

    On the other hand, with ants guiding a cheerio, collective decision making will not work unless you have the brains of the newcomer taking the group in the right direction.

    Other examples?

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  • Everyday economics and international trade subsidies

    The Deal That a Chinese Firm Could Not Refuse

    Aug 5 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Growth, Economic History, Economic Thinkers, Fashion, Government, International Trade and Finance, Labor, Thinking Economically • 137 Views

    Making yarn in China has become more expensive.

    The result? Production is shifting to Vietnam, Bangladesh, India…

    …and South Carolina.

    Location Incentives

    Composed of lower tax rates and a large “cash” incentive package, the offer given to China’s Keer Group must have been irresistible. One newspaper says that Keer selected South Carolina as a factory site that would employ 500 people because of a deal that could be worth $90 million. The incentives included a $36 million land subsidy, a sewer and water infrastructure, eliminating property taxes and a 15 year income tax exemption. Sweetening its allure, South Carolina wined and dined Chinese executives during their visit.

    Outsourcing Savings

    Spinning yarn is a capital intensive activity that generates economies of scale. In Keer’s new South Carolina plant, huge machines remove the cotton seeds and dirt, send the fluff to carding equipment and create spools of yarn and thread. Those spools are sent to Asia for the final labor intensive stages of fabric production.

    And this is where it gets even more interesting.

    Once we have a Trans-Pacific Partnership, then China needs a U.S. presence to take advantage of the trade deal. Since she is not a signatory, sending yarn from the U.S. to Vietnam, she can take advantage of tariff free relationships.

    Add to all of this wages that have risen in China and stagnated here and you have a shifting financial landscape that makes the U.S. more attractive. Below you can see China’s increase in manufacturing costs from 2004 to 2014:

    The U.S. is getting more of a comparative advantage for manufacturing textiles.

    From: The NY Times

    Our Bottom Line: Comparative Advantage

    We could say that the comparative advantage for making yarn has shifted from China to the U.S. because China has more of an opportunity cost (sacrificed alternatives).

    Comparative advantage has shifted from China to the U.S.

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  • Everyday economics and traffic congestion

    Some Humor and Insight About Highway Congestion

    Aug 4 • Economic History, Economic Humor, fiscal policy, Government, Innovation, Labor, Lifestyle, Regulation, Thinking Economically • 99 Views

    After yesterday’s post on why we should all ask for more roundabouts, I thought you would enjoy the following from xkcd:

    Transportation infrastructure humor

     

    Where are we going? To how our highways might be better designed.

    Commuting

    As you can see below, we waste a lot of time driving to work:

    A better transportation Infrastructure could reduce commuting time.

    From: Texas A&M Transportation Institute

    And most of us commute by car:

    Why we need innovation from our transportation infrastructure

    From: “On the Performance of the U.S. Transportation System: Caution Ahead”

     

    Our Bottom Line: An Innovative Transportation Infrastructure

    While the xkcd cartoon is whimsical, it can take us to the current state of road design. In a 2013 article, transportation scholar Clifford Winston tells us how our roads might be designed more productively.

    • He reminds us that rather than recognizing rush hour realities, road design is based on “free-flow traffic speeds.” Instead designers could install illuminated lane dividers “that can be adjusted to increase or decrease the number of lanes that are available in response to traffic volume.”
    • Looking at road building and maintenance, he suggests that road builders use thicker pavement that requires less maintenance. The benefit would be less time lost from road repair and less wear and tear on our vehicles.

    I’ve noted only two of Winston’s insights. But his bottom line is that we could do a much better job designing our transportation infrastructure.

     

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  • Everyday economics and the cost of roundabouts

    The Reason We Should Drive Around in Circles

    Aug 3 • Behavioral Economics, Economic Thinkers, Entertainment, fiscal policy, Government, Thinking Economically • 135 Views

    Because roundabouts slow cars down, they speed up traffic.

    In European Vacation, Chevy Chase had some difficulty with a roundabout:

    Where are we going? To the order that roundabouts spontaneously create.

    The Benefits of Roundabouts

    With roundabouts, drivers rarely have to stop. Not stopping creates less congestion and burns less fuel than at intersections where we have to stop and then go. Because we drive slowly and have to pay attention to turn-offs and rights of way, the vigilance that roundabouts require leads to fewer collisions. In the long run, they also can cost less than a new traffic signal.

    The switch to a roundabout brings the number of total crashes down by 40 percent and comes close to eliminating accident fatalities. By contrast, traffic experts have identified 56 points of “potential conflict” in a typical 4-way intersection– 32 that relate to other vehicles and 24 with pedestrians.

    Although we started building roundabouts in the U.S. during the 1990s, they began to multiply only recently. Perhaps because they make people uncomfortable, most communities protest when someone proposes a roundabout. Still though, during the past decade, New York upped its total from 18 to 112. Others will probably follow because the federal government provides fiscal incentives for roundabout construction.

    Our Bottom Line: Spontaneous Order

    Spontaneous order is one reason roundabouts are so successful. Told nothing about how to coordinate, large numbers of people can work together productively. Called spontaneous order by economist Friedrich Hayek, the key is a mutual benefit. All drivers in a roundabout share the incentive to avoid careening into each other, to go in the appropriate direction, to maintain a similar pace. As a result, their roundabout navigation is rather orderly.

    Below, do go directly to 00.45 to see how roundabouts resemble skating rinks.

     

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