• Everyday economics and the butterfly effect from container ships

    The Beginning of Terminal Gridlock

    May 5 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Growth, Economic History, Environment, Government, International Trade and Finance, Labor, Lifestyle, Macroeconomic Measurement, Thinking Economically • 135 Views

    More than a year behind schedule, now it looks like the Panama Canal will reopen next April. Hoping to compete against the Suez Canal for the world’s very largest container ships, first the Panama Canal had to expand.

    Where are we going? To terminal gridlock.

    Container Ships

    Our story starts in 1950. At a typical port, flour or clothing or raw cotton was packed in barrels or bags or crates. Transported by truckers to loading docks, shipments were stored in local warehouses or placed under roofed piers before boarding the boat.

    Below, longshoreman were probably loading bags of flour onto a vessel. While the picture dates back to the 1920s, it would also have represented a 1950s port.

    Supply chain externalities at pre-1950 ports.

    There was a better way.

    In 1956, a North Carolina trucker, Malcom McLean, rigged an oil tanker with 58 trailer trucks. Not the whole truck, but just the cargo containers were placed in slots on the vessel in Newark N.J. When they arrived in Houston, rather than unloading the containers’ contents, they were hoisted onto “running gear” and off they went to their destination.

    You see the difference. Whereas moving your cargo 1,000 feet from the street to a ship could have taken as long as an entire ocean trip, instead it took moments because nothing had to be unloaded and reloaded. Cost plunged from $5.83 to less than 16 cents a ton as did pilferage, damage and the number of longshoremen.

    Only a year later, they started stacking containers in vessels and the rest of the story is supply chain history.

    Supply chain externalities from bigger container vessels.

    Fast forward to 2015.

    Terminal Gridlock

    With higher bridges and deeper water, East Coast ports in the U.S. have prepared for the behemoth vessels that will cross the new Panama Canal. Most though are still not prepared for the infrastructure that 14,000 containers will need after they arrive.

    In Portsmouth, Virginia, one trucker reported an 8-hour delay picking up a load of bedding—two hours getting to the terminal, and then six inside. Three large vessels had arrived—too much for the port to handle. In Newark, they need more chassis to unload vessels.

    Externalities from congested harbors

    And the Panama Canal has not even reopened yet!

    Our Bottom Line: Supply Chain Links

    I guess there is a reason we call it a supply chain. Huge container vessels are more efficient than ever. But at many of our ports, the other links in the chain need to catch up.

    Supply chain problems from container ships.

    No Comments on The Beginning of Terminal Gridlock

    Read More
  • Everyday economics and Chinese Deposit Insurance Secures Healthy Markets

    The Reversed Role of Chinese Deposit Insurance

    May 4 • Behavioral Economics, Developing Economies, Economic History, Financial Markets, Government, Households, Money and Monetary Policy, Regulation, Thinking Economically • 198 Views

    While deposit insurance in the U.S. generated confidence, in China it might make people uneasy.

    U.S. Deposit Insurance

    Confirming the precarious state of banking, notes in hotel rooms told visitors to President Roosevelt’s inauguration that they couldn’t pay for rooms with checks from out-of-town banks. Two days later on March 6, 1933, the new president declared a national banking holiday. He wanted people to know that after the holiday only healthy banks would reopen. Equally reassuring, on January 1, a newly created Federal Deposit Insurance Corporation (FDIC) would guarantee their deposits up to $2500.

    Designed to prevent the self-fulfilling prophecy of bank runs, the idea of deposit insurance worked. Because people felt their life’s savings were protected by the government, they no longer rushed to withdraw whatever was available. Compared to more than 9,000 failures in the previous four years, only nine banks collapsed in 1934.

    China

    In China, in a way, the opposite is happening. It has been 16 years since a big bank failed in China. Under the watchful eye of the Chinese government, all deposits were implicitly guaranteed.

    No more.

    Starting May 1, only deposits up to Rmb500,000 ($80,600) will be insured. Hoping to encourage more market activity, the Chinese have also said they will remove interest rate caps. No longer capped, interest rates can then be used as a competitive strategy. And you know what happens. Because some banks might engage in riskier behavior, depositors will need insurance.

    IMF Countries

    By creating explicit deposit insurance, China will be joining 112 of the 189 countries in an IMF survey. Here is the overview:

    High income countries are most likely to have deposit insurance schemes.

    Deposit insurance by nation's  income.

    From: “Deposit Insurance Data Base”

    Consequently, Western nations have the most explicit deposit insurance.

    How deposit insurace varies

    From: “Deposit Insurance Data Base”

     

    However, not all deposit insurance schemes are equal. Some create more safety than others.

    Deposit insurance safety net quality

    From: “Deposit Insurance Data Base”

     

    Our Bottom Line: Deposit Insurance

    The U.S. and China used deposit insurance to support market activity. The former, though, introduced more insurance while the latter had to create less. However, both knew that banks are the heartbeat of a market system.

    2 Comments on The Reversed Role of Chinese Deposit Insurance

    Read More
  • Long lines reflect people's tradeoffs.

    Self-Signaling by Standing in Line

    May 3 • Behavioral Economics, Demand, Supply, and Markets, Entertainment, Fashion, Labor, Lifestyle, Thinking Economically • 187 Views

    Shake Shack lines are legendary. Although wait time averages 30 to 40 minutes at their Madison Square Park location in NYC, still 1500 customers buy their burgers each day. If we assume that during the past 10 years 1500 people waited at least 20 minutes daily, then the total would be close to 109.5 million minutes.

    You can see below that as of Shake Shack’s tenth anniversary on June 12, 2014, combined customer wait times would have been more than two centuries.

    Shake Shack wait times

    From: Huffington Post

    Where are we going? To the tradeoffs that lines create.

    The Reasons We Stand in Line

    If we stand in line to self-signal, that 20 minute wait at Shake Shack confirms our foodie status. Or you can let the world know that you are a trendy techie by entering Apple’s never ending queue for the newest iPhone. Meanwhile, at Disney World in Tokyo, couples display their mutual commitment by enduring the hours-long wait for inexpensive personalized leather bracelets.

    Still, you must be thinking that some of us just don’t do lines.

    Instead we could hire a line stander. Last week, the Supreme Court line started forming at 6 am, 100 hours before the oral arguments for the same sex marriage case began. But for $50 an hour a line stander could have done the wait. In NYC, the founder of Same Ole Line Dudes says people hire him for events like sample sales and getting SNL tickets. (Interesting that you might pay him $25 for the first hour and then $10 each additional half hour to avoid a sale line.)

    Our Bottom Line: Tradeoffs

    Whenever I think of the tradeoffs that lines create, time first comes to mind. The decision involves whether the value of the wait is worth more than whatever would have occupied that time slot.

    We could even ask if 208 years of Shake Shack wait time is worth society’s opportunity cost.

    No Comments on Self-Signaling by Standing in Line

    Read More
  • The econlife.com Weekly Roundup

    Weekly Roundup: From Free Delivery to Expensive Coffee

    May 2 • Businesses, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Government, International Trade and Finance, Labor, Lifestyle, Macroeconomic Measurement, Thinking Economically • 120 Views

    Our Posts Roundup

    How Starbucks competes Sunday 4.26.15

    A new image for Starbucks…more

    everyday economics and progressive punishment for speeding ticks Monday 4.27.15

    The reason for a $58,000 speeding ticket…more

    everyday economics free trade TPP Tuesday 4.28.15

    All we need to know about TPP free trade …more

    Everyday economics and A 13 month calendar would create positive externalities. Wednesday 4.29.15

    The problem with a 12-month year…more

    everyday economics and robots picking grapes Thursday 4.30.15

    Why robots work in vineyards…more

     

    everyday economics and free delivery creates time and money tradeoffs. Friday 5.01.15

    How we pay for free delivery…more

    Ideas Roundup

    • competitive market structure
    • monopolistic competition
    • progressive punishment
    • progressive taxation
    • comparative advantage
    • free trade
    • opportunity cost
    • positive externalities
    • sunk cost
    • standardization
    • productivity
    • supply chain
    • incentives
    • tradeoffs

     

    No Comments on Weekly Roundup: From Free Delivery to Expensive Coffee

    Read More
  • everyday economics and free delivery creates time and money tradeoffs.

    There’s No Such Thing as a Free Delivery

    May 1 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Innovation, Macroeconomic Measurement, Tech, Thinking Economically • 142 Views

    As of the beginning of April, Amazon’s Prime Now customers in six cities could choose between paying $7.99 for a delivery in one hour and a free delivery in two. Ordering my Jacob’s Wonderbar Coffee from Philz in San Francisco, I could have gotten next day delivery in N.J. for $74.11. (I selected regular mail from the USPS.)

    Where are we going? That “last mile” is about more than delivery time.

    The Buy and Sell Sides of Free Delivery

    The Customer Side

    As a customer, we care more about “free” delivery than fast delivery. In a survey, a group of online shoppers said that 75 percent of the time they chose the least expensive shipping option even if it meant a multi-day delay. A teeny 1 percent of the time, speed trumps all else.

    The Retailer Side

    Retailers know that they can use delivery time to differentiate themselves from other similar sellers. However, free delivery is expensive. We could even say “free” delivery has become a commodity that retailers sell. Comparing shipping expenses and payments, the difference for Amazon in 2013 was a whopping $3.54 billion ($3.1 billion in payments; $6.64 billion spent on shipping).

    To offset the expense, retailers are responding with order size incentives:

    Tradeoffs free shipping order thresholds

     

    A second response is coming from innovative third parties (as here at Econlife). Because, for example, the cost of same day delivery will make it unscalable for the retailer, more providers will enter the market and normalize price.

    Our Bottom Line: Tradeoffs

    The bottom line is that there is no such thing as a free delivery. Instead, consumers and retailers experience a host of tradeoffs that relate to time and money.

    Always, I guess we should “Remember that time is money.”

    Ben Franklin (1748 Advice to a Young Tradesman)

     

    No Comments on There’s No Such Thing as a Free Delivery

    Read More