How it Plays Out…

So I wrote earlier this week about Chris Carter still being an unsigned free agent after leading the National League in home runs last season.  I expected that someone would sign him before the season began, but it’s hard to know what was holding things up.  Was he looking for a multiple year contract?  Was he setting his salary sights too high?  I haven’t see what might be known about that, but as a reminder, I said in that post:

Additionally, a player like Carter, who is not a fantastic fielder or base runner has limited use in the major leagues.  Your “power hitter” can play limited positions in baseball, especially in the National League.  You’re limited to first base, left field, and the designated hitter (in the American League only).

An AL team did sign Carter…the New York Yankees.  The Yankees consistency have one of the highest payrolls in Major League so the money isn’t a major issue for them.  They signed Carter for a one year, $3.5M contract.

Carter earned $2.5 million with the Brewers in 2016 and he could provide some pop to a Yankee lineup that needs it, especially after losing Carlos Beltran (22 home runs) at the 2016 trade deadline and Brian McCann (20 home runs) to a trade with Houston this offseason.

Source: What Are The Yankees Getting In Chris Carter?

Economics are economics.  What the marketplace (in this case MLB teams) values gets more money, and what the marketplace has a lot of becomes less valuable.  Carter perhaps could have stayed in Milwaukee for a one year contract at $3.5M but by the time he and his agent were ready to go to that price/term the Brewers had moved on.  There may have been a broader market for the power hitter earlier as well, but the longer he waited the less valuable he became because fewer teams were in the market for a hitter with limited mobility.

I was talking with a co-worker today about one of the things I like about following baseball.  I get the “fix” on big negotiations and crazy deals and intelligent decision-making with zero responsibility.  Additionally I get to see the results in a fairly short time span, when most of the work decisions I make take months and years to work themselves into results.  Most of what happens in baseball, at least at the level I have been following, works out in hours or days, and at worst in a few months.  We know already what happened to Chris Carter and that he’ll be wearing Yankee Pinstripes and showing up at their Spring Training in Tampa in just a few days.  Likely he makes the big club and he’ll be playing against the Red Sox and Orioles in April..and may even get to hit a homer against the Brewers when they come to Yankee Stadium in July.  I’m sure that would be fun for him!

Medicine, Economics and the Future

Economics matters.  And so do incentives.  When young people are thoughtful in choosing a course of study before or during college, they’ll consider some of the following:

  • What will I be good at?
  • What could I enjoy doing?
  • What careers will be easy to find jobs in?
  • What fields of study will lead to a career that pays well?j

Now consider this:

The United States faces a shortage of as many as 90,000 physicians by 2025, including a critical need for specialists to treat an aging population that will increasingly live with chronic disease, the association that represents medical schools and teaching hospitals reported Tuesday.

via U.S. faces 90,000 doctor shortage by 2025, medical school association warns – The Washington Post.

So what’s driving the expected shortage?  It’s obviously not young people deciding that medicine is a bad choice for finding work.  Health care demand will continue to rise for some time.  And as for people being good at it or enjoying it, I have a hard time imagining that the current generation of college students is any less intelligent than previous ones nor does seem likely to have a smaller subset who are attracted to careers serving and helping others.

So what’s left?  Two possibilities:  either 1) there are just fewer people seeking higher degrees or 2) those seeking higher degrees are concerned medicine won’t pay well enough to be worth the investment.

The first one is undeniably true.  We are facing a demographic winter, and the baby boomers and generation X did not have enough children to support the needs of our current societal expectations as the boomers retire.

But what of the second possibility?  How could it be true?  If there is a shortage of physicians coming, and the demand for health care is almost certainly increasing, how will those careers not be increasing in income potential?  If the laws of supply and demand work, less supply (fewer doctors) and more demand should increase the potential earning for a doctor very quickly.  And that should lead to it being a more attractive choice and over time the shortage would be a non-issue.

But sadly, supply and demand will not drive up the potential income in health care.  That’s because there are price controls set by the number one purchaser of health care goods:  Medicare.  Since doctors cannot negotiate prices with Medicare (either they take Medicare patients for the stated price or they don’t take Medicare patients at all) it makes the earning potential shrink drastically.  Medicare and Medicaid (also price controlled) account for almost half of all health care spending.  This gives the government the ability to keep prices controlled, which in turn makes the medical profession less attractive, especially considering it takes longer to finish the schooling.

If health care is truly to be a working industry long term, and we want young men and women to think practicing medicine for 30-40 years is an attractive profession, we have to allow the free market to work there.  And that’s precisely what we have continued to avoid doing with almost every reform for the last 60+ years.

Engaged patients + free markets in health care will bring an efficient, affordable, high quality industry to us, and that’s better for everyone old and young alike.

 

Understanding Economics is Important

Here’s a short section of an article I read in the WaPo last week (note the title):

The purchases you make at a store surrounded by free customer parking are effectively taxed to make that parking possible.

Glass puts this “invisible sales tax” at about 1 percent, given estimates that parking makes up about 10 percent of the cost of developing a store, while rents make up around 10 percent of a retailer’s costs of operating it. That 1 percent, Glass argues, is then passed on to consumers in the cost of goods you buy at said store (which was built with, well, parking).

via How cheap parking makes a lot of life more expensive – The Washington Post.

So what do you think?  Was this worth a spot in a major newspaper?  The title is intriguing, right?

But seriously?  There are a thousand things that affect the cost it takes to do business in any field, and that includes retail.  But parking increasing prices by 1%?  That’s news?

People try to make arguments all the time about how this or that affects your life.  Most states have a sales tax.  There’s not a single state I can name that has one lower than 3%.  But 1% of the cost of an item being due to parking is somehow a big deal for the college-educated author of this article.  The author wants you to be up in arms that if you bike to a store you’re paying an extra 1% to subsidize people who want to park there for free.  The author never once considers that maybe having smaller stores that are aimed at walking traffic would raise the cost more than 1% in distribution and transportation cost or in loss of economies of scale.

Understanding basic economics and critical thinking is important.  Articles like this hit my news feed every day and there are really smart people out there making bad arguments because they don’t question their basic assumptions or consider the unintended consequences of the changes they’re pushing or advocating.

Don’t be that guy.

Disrupting the Cycle of Generational Poverty

Part of my biggest concern with how we handle poverty is that I am convinced that most of our current efforts and methodologies actually perpetuate multi-generational poverty rather than providing potential escape from the cycles.  Here’s a look at disruptive innovation applied to poverty cycles:

Disrupting the cycle of entrenched poverty and poor health can tip the world on its axis. And innovation has the ability to drive massive improvements in the health and well-being of children, communities, and countries.Put together, “disruptive innovation,” a term Clayton M. Christensen brought forth in his book The Innovator’s Dilemma, is more than a winner-takes-all game where one technology replaces another or where a business that does the job faster and cheaper replaces an existing, lucrative one. To me, it’s about game-changing, curve-bending opportunities to drive impact—not necessarily through technologies like Amazon’s Fire Phone, which is now caught up in this debate, but through vision, adaptation, and a die-hard commitment to collaboration.

via Disruptive Innovation: Where It Matters Most | Stanford Social Innovation Review.

It’s worth a read.  I hope to write more on the economics of poverty later, but for now this article, plus what the Dream Center is doing to break the cycle here in Peoria is all I have time to give you:

Young people are in big need. Growing up, they are surrounded by sin, drug use, and garbage on TV, in movies and on the Internet. Early in life they know much more than any young person should. As a result, we have a broken society, and thousands of broken children living with rage, every sort of perversion, and a devastating loss of hope. We strive to teach our young people to have a vision. Young people are enticed by the glamour and promises of this world. We believe we need to instill in them to be dreamers at a young age, but in a God-given way.

via History Makers | What We Do | Dream Center Peoria.

Feel free to leave thoughts in the comments…this is something I will definitely get back to writing more on when I’m done with school.

Liberty and Privilege with a Side of Economics

Some point to government regulation as protecting the masses from conniving corporations who want nothing more than to defraud helpless consumers.  Consider a contrary opinion from the folks at the Cato Institute:

In fact, Pew’s comparable smart-phone ownership figure for whites is 53%, but the difference is not statistically significant. With regard to income, Pew finds a 9 point difference in smartphone ownership between those making < $30,000 and those making between $30,000 and $49,999. Most of that difference seems to be accounted for by age, however. Among 18-24 year olds, 77% of those making < $30,000 own a smartphone vs. 81% for those making $30,000 to $74,999.So pretty much everyone who wants one now has a cell phone which is rather more functional than the old hand cranked variety, and the majority of young people, at all income levels, even have smartphones. That’s a relatively high level of equity, coupled with excellence. Brought to you, again, by a competitive industry. Could the federal government’s Lifeline a.k.a., “ObamaPhone” phone subsidy programs be helping out? Certainly, to some extent. Though it’s far from true that every low-income American’s cell phone is paid for by Uncle Sam.

via Equity vs. Excellence. Or…A Crank Phone in Every Home! | Cato @ Liberty.

Remember it’s not in the best interest of a corporation to rip people off.  Certainly it’s going to happen, and we don’t need regulation to punish people for fraud.  It’s illegal whether the industry is regulated or not.  But for a corporation to thrive in the long term they have to produce something the masses want.  Imagine if the iPhone suddenly rebooted (whether you’re in the middle of a call or not) every 47 1/2 hours without warning.  Could users adjust?  Certainly.  Would they be standing in line when the next iPhone comes out, though?  Would they continue, once the tech websites all gave it horrible reviews, to shell out $500 (or $300 with a 2 year contract) for it?  Nope.  Surely a few people might get duped, but Apple stock would crash faster than Superman trying to turn back time to save Lois Lane and the product would get pulled before they lost what was left of their reputation.  No regulation is necessary:  the market will fix it.

I’m old enough to remember when telecommunications was more heavily regulated.  Small towns still had party lines.  Most phones were wired to the wall and came in one color and were owned by Ma Bell.  Deregulation of telecom has brought us to the point where half of all young people don’t have a land line, not because it’s too expensive, but because cell phones (mobile technology) are cheap enough for anyone to afford.  It’s not that long ago that only rich folks had mobile phones.

Read the article and consider what regulation is actually in the best interest of the masses.

Price Discrimination in Real Life

Another of the topics from class last weekend was price discrimination.  From Wikipedia:

Price discrimination or price differentiation is a pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets or territories. Price differentiation is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy.  Price differentiation essentially relies on the variation in the customers’ willingness to pay.

via Price discrimination – Wikipedia, the free encyclopedia.

You see price discrimination all the time, but probably not notice it that way.  Bulk pricing is one of the most popular form of pricing for demand.  Another is student or senior discounts.

I came across a recent example of price discrimination from upstart Uber:

Without a surge pricing mechanism, there is no way to clear the market. Fixed or capped pricing, and you have the taxi problem on NYE—no taxis available with people waiting hours to get a ride or left to stagger home through the streets on a long night out. By *raising* the price you *increase* the number of cars on the road and maximize the number of safe convenient rides. Nobody is required to take an Uber, but having a reliable option is what we’re shooting for. See my post on Surge Pricing here.

via Uber Blog – Surge Pricing Followup.

Uber figured out that demand surged in particular times (like New Year’s Eve) for their services, and was able to adjust to it.  Surge pricing, when it works, can be really effective for allowing price to signal in the market.  If the price is going to surge on New Year’s, more Uber drivers, the argument goes, will party a different day and be ready to make some money driving a partially intoxicated celebrant home.  Supply and demand, right?  And higher prices will typically bring more market entries (contrary to what the FTC assumes, sadly, as I pointed out yesterday).

Another “famous” example of price discrimination is Coca-Cola’s attempt to price vending machines for beverages higher on hot days:

It was not one of the great marketing moments in the company’s history. In Internet chat rooms and newspaper editorials around the world, angry Coke drinkers denounced the idea. The word “gouging” got tossed around a lot. Pepsi gleefully accused its rival of exploiting consumers.

Coke responded by running away from the heat-seeking vending machine as fast as possible. Company spokesmen said that Mr. Ivester was talking hypothetically and there were no plans to add a summer surcharge. Coke was actually looking for ways that vending machine technology could lower the cost of a drink, they added.

via Why Variable Pricing Fails at the Vending Machine – New York Times.

And it failed.  And why?  In my opinion it was because it wasn’t really demand surging, it was an attempt to take a correlation (temperature up) and assume that it meant consumers would pay more.  But vending machines are, whether in reality or psychology, a one price shop for consumers.  We’re used to pricing changes on airline tickets, but not at the coke machine we stopped at yesterday.  It didn’t work.

The goal in price discrimination is to gain profits from consumers who are willing to pay more while gaining sales from consumers who aren’t.  If you can create a price strategy that works, you can succeed.  But be careful, because the wrong assumptions could just cost you your shirt.

Mergers and Markets

I posted yesterday talking about my Pricing and Competition class from this past weekend.  I didn’t want to delve too deeply into the topic of mergers and FTC approval for “case studies” but we talked during the day about some specific mergers and merger attempts including Coca-Cola/Dr. Pepper, Sirius/XM, USAir/American Airlines, etc.

Consider the following:

”The proposed mergers could substantially reduce competition in the distribution and sale of carbonated soft drinks in the United States,” the commission said in a statement after the vote late this afternoon. A spokesman for the F.T.C. said it would seek a preliminary injunction in Federal court against the companies and would sue in court if the companies decided to go forward with their announced merger plans.

”These mergers were so outrageous and so harmful to consumers that even the Reagan Administration realized it had to oppose it,” said Senator Howard M. Metzenbaum, Democrat from Ohio. ”If they are allowed to proceed, they will permit two giants to dominate the industry and consumers will pay for it with higher prices.”

via F.T.C. ACTS TO BLOCK SODA DEALS – NYTimes.com.

Now this is the mid 1980s, so beverage choices were somewhat limited.  Snapple wasn’t big until the 1990s.  Energy drinks didn’t exist much.  Starbucks was a blip with six locations, all in Seattle.  So things were different.  But still I ask you:  how high could the price of soda get before people started drinking water?  Even in vending machines in hotels a soda can’t get more than $3 from people too lazy to walk next door to CVS, right?

Competition, when it falls away, can drive up prices.  But is that the government’s business to keep prices low?  I don’t think so.  And the higher soda prices got, what would happen?  More little companies would spring up (how hard is it to make cola or root beer?) because of the higher margins and drive prices back down.  If anything, the lack of a merger may have delayed innovation in beverages.  Who could know?

And the (took 17 months to finally approve) the Sirius/XM merger:

After fine-tuning to garner a majority vote of commissioners, the list of concessions demanded by the FCC will sand Sirius XM’s gears for years to come:

via The Lesson of the XM/Sirius Merger | Cato Institute.

Sirius and XM were the pioneers in the satellite radio industry.  I was an early Sirius subscriber, and found it a great product.  But between the two of them they had a very small part of the audio entertainment market…why was a merger delayed because they were the only two in Satellite radio?  It makes no sense to me.  Both could have gone bankrupt in the process while waiting for the FTC to approve the change, while terrestrial radio continued, as well as on line streaming, MP3s, etc.  Prices for their services are up from before the merger.  But in order to make money they probably had to go up anyway, and for them to agree to raise prices together would have been illegal.  So we could have lost the choice of satellite radio by the government delaying (or not approving) the merger, when it should be obvious to anyone that the two firms were not just competing with each other.

And since the government has such a great track record of increasing competition and helping prices drop, right?  Have you heard of Southwest Airlines?

Southwest Airlines was originally incorporated to serve three cities in Texas as Air Southwest on March 15, 1967, by Rollin King and Herb Kelleher. According to frequently-cited story, King described the concept to Kelleher over dinner by drawing on a paper napkin a triangle symbolizing the routes (Dallas, Houston, San Antonio).

Some of the incumbent airlines of the time (Braniff, Aloha Airlines, United Airlines, Trans-Texas, and Continental Airlines) initiated legal action, and thus began a three-year legal battle to keep Air Southwest on the ground. Air Southwest eventually prevailed in the Texas Supreme Court, which ultimately upheld Air Southwest’s right to fly in Texas. The decision became final on December 7, 1970, when the U.S. Supreme Court declined to review the case without comment.

via History Of Southwest Airlines.

Southwest spent three years in court before they flew a single flight.  Does this sound like pro-competition?  Southwest has done more than any government agency ever could to reduce the price of airline travel, by bringing something unique to the market.

The issue here isn’t whether the government makes the right choice or not in FTC merger approvals.  The issue is that people and firms should be free to make their own choices, and that the market will drive down prices and drive up quality, if we will let it.  When the government gets involved, it becomes political.  And freedom of choice in products is protected by the government staying out of the way, rather than denying companies the ability to merge in a way that can be more effective.