Truck and Barter Where Sympathy and Hedonism Collide
Friday, August 29, 2003
BY
Kevin
Greenspan's Cost-Benefit Analysis
Sometimes Mr. Greenspan speaks his mind clearly. Today he said that monetary policy is nothing but an enormously complex and continually-updated cost-benefit analysis (CBA):
Indeed, given our inevitably incomplete knowledge about key structural aspects of our ever-changing economy and the sometimes asymmetric costs or benefits of particular outcomes, a central bank seeking to maximize its probability of achieving its goals is driven, I believe, to a risk-management approach to policy. By this I mean that policymakers need to consider not only the most likely future path for the economy but also the distribution of possible outcomes about that path. They then need to reach a judgment about the probabilities, costs, and benefits of the various possible outcomes under alternative choices for policy....
In implementing a risk-management approach to policy, we must confront the fact that only a limited number of risks can be quantified with any confidence. And even these risks are generally quantifiable only if we accept the assumption that the future will replicate the past. Other risks are essentially unquantifiable--representing Knightian uncertainty, if you will--because we may not fully appreciate even the full range of possibilities, let alone each possibility's likelihood. As a result, risk management often involves significant judgment on the part of policymakers, as we evaluate the risks of different events and the probability that our actions will alter those risks.
In essence, when choosing to do anything, the Fed limits its policy options based on the admittedly shaky results of formal economic models, and then add their own informal judgement on top of it. I can't speak for the relative efficiency of economic policy using CBA as opposed to simple rules, but Mr Greenspan does:
Rules by their nature are simple, and when significant and shifting uncertainties exist in the economic environment, they cannot substitute for risk-management paradigms, which are far better suited to policymaking.
But formal economic models, with their constant linear assumptions, are just far more complex--and malleable--rules. You give them inputs (like overnight lending rates and inflation), and they give you outputs (like GDP growth). Models are sets of mathematical equations. If you give them the same exact inputs, they'll always give you the same exact outputs.
In Greenspan's mind a "simple" rule gives you no flexibility to see how different inputs give you different outputs. But I'd rather think that a simple rule states the optimal input--no matter your prior belief in the structure of the economy. The simple rule states that some things work better if not controlled. That's a very simple equation; and it implicitly states that your complex models are wrong.
As Chairman of the Fed, Mr. Greenspan uses his complex models to balance the catastrophic cost of a low-probability event like a deflation-induced depression against what he must believe is the low cost of a very low but guaranteed persistent inflation.
But he still realizes that simple rules can be correct in the long run:
Nonetheless, in the tradition of Milton Friedman, it is difficult to disregard the long-run relationship between money and prices. In particular, since 1959 unit money supply, the ratio of M2 to real GDP, has increased at an annual rate of 3.7 percent and GDP prices have risen 3.8 percent per year.
I have no idea how the Fed quantifies the cost of the continual rise in the price level, but I'd love to see that someday.
John Tagliabue reports in The New York Times that many French believe that the unfortunate deaths of 5,000 to 10,000 French elderly in the recent heat wave were the fault of the national government--not the families of the deceased:
Pascal Champvert, the president of the French umbrella organization of homes for the aged, said, `'One has the impression that only now France is discovering its elderly."
He refused to blame families, saying in an interview with Le Monde that French society was responsible.
"The government presents the problem as if the solution were private," he said, but the response had to be "collective, by means of taxes and contributions."
To pretend that individuals could have done nothing to help the elderly is just pathetic.
Mr. Champvert, president of Adepha, a group trying to represent all the old age homes in France, is a using the unnecessary deaths of people in their own homes to justify an increase in government contributions to the eldercare businesses he represents. He wants more money, and more elderly under their care.
The interview in Le Monde that quotes Mr. Champvert and others trying to avoid blaming the families is auto-translated by Google here. Here's more from Mr. Champvert:
To face the total problem of the old people, Mr. Champvert claims a true "Marshall plan" for the old people. "a true start is necessary: it is radically necessary to change policy of the old people. One needs an ambitious plan ", exclaims the president of Adehpa, which estimates that " 7 billion euros " would be necessary in the long term. The professionals would also wish that the president of the Republic make old people a national priority as well as the handicapped people.
Meanwhile some people know who to blame, and how to act in times of grief:
"People have lost their sense of responsibility. They think the government is going to resolve every problem in their life," said Nadia Finkielman, lending moral support to a grieving friend at a Paris morgue where mourning families prepared to bury their dead.
We don't really care about diversity all that much in America, even though we talk about it a great deal. Maybe somewhere in this country there is a truly diverse neighborhood in which a black Pentecostal minister lives next to a white anti-globalization activist, who lives next to an Asian short-order cook, who lives next to a professional golfer, who lives next to a postmodern-literature professor and a cardiovascular surgeon. But I have never been to or heard of that neighborhood...
The United States might be a diverse nation when considered as a whole, but block by block and institution by institution it is a relatively homogeneous nation.
Relatively homogenous compared to what?
Mr. Brooks,
come to my apartment building, 4600 Duke Street. Just ride the elevator up and down for 10 minutes, and you'll find that integration you're looking for. Our ~350 studio to 3 bedroom apartments cost from 75K to 150K, in an area where a small rambler goes for 350K--so we're not the rich folk you seem to know. We're officers in the military, students, taxi-cab drivers, maintenance men, secretaries, waitresses, local politicians, and even doctors. Some of us have kids, some don't, and many live alone. We come from all corners of the earth, with diverse racial backgrounds, with a panoply of languages and religions. Some of us rent, most of us own. No one group dominates another.
Also, most of us don't know one another--and we like it that way.
There is a difference between those people you live next to and those with whom you socialize. The diversity of 4600 is in many ways, a surface-level integration. However, in other ways, it's real. In a diverse community like 4600, ethnic and racial segregation within groups is the norm, but not an uniform, iron-clad law.
For the most part, we didn't choose to live together. We chose to live in 4600 because its low price, spacious rooms, large windows, and convenient close-to-DC location present an affordable housing alternative. I can't imagine any of us chose 4600 because of its diversity.
On the contrary, many chose it because it's large size means there are significant populations of their own ethnic or religous group. They would agree with Brooks, "What we are looking at here is human nature. People want to be around others who are roughly like themselves. That's called community." Many extended families own multiple apartments, and see 4600 as a means of keeping close together.
There are tensions at 4600. I've been called a racist immigrant-hater because I repeatedly asked my non-white immigrant neighbor to lower the volume on her television after 11PM. She soon learned that my wife is an immigrant, and that in the end, I care not a whit about her race, nationality, or religion--only about her civility. We still say nothing to each other if we meet in the hallway. But most people are cordial and very friendly.
Brooks asks, "Look around at your daily life. Are you really in touch with the broad diversity of American life? Do you care? For me diversity is at arm's reach, and I find that despite my interest in other cultures, I leave other people alone almost all of the time, and I would say that other people are not missing out too much by keeping mostly to themselves.
I am not Commodore Matthew Perry who quietly threatened Japan if it would not open for trade. I know that many people don't want to trade their personal lives. I'm all for diversity, as long as we can find it in our own ways, and we're not required by intellectuals to feel guilty about leaving each other alone.
Jonathan Gewirtz responds to my objection below. I'll think about his comments for a while and reply later.
Until then, I want to share some more information on digital disposables. First, in addition to Ritz Camera, Walgreens also has a digital disposable camera--in fact it's the same camera!
Also, this article states that my optimism about a growing disposable market is incorrect:
Maybe it's just in time. After showing steady gains for years, sales of what might now be called analog single-use cameras are faltering, according to Information Resources, Inc. (IRI), Chicago, IL, with private label dollar volume off 4% to $126.3 million for the 52 weeks ended 3/23/03.
Overall disposable camera sales were down 1% to $696.6 million for the same period, and while that doesn't count Wal-Mart, Bentonville, AR,
Wal-Mart doesn't have any store brand cameras
And I've found data on single-use camera sales that tell an interesting story:
That sales in dollar terms are decreasing, but sales in unit terms are increasing, tells me that competition (and innovation) are very strong in this market.
According to the source of the data, "Much of this [unit] growth is due to the approximately 9 percent of U.S. households that now use one-time-use cameras exclusively for all their picture-taking activity." Presumably they're also attracted by the decreasing prices...
What I really want to know is why people use disposable cameras? Why is this such a large part of the overall photo market? For events such
as weddings, where single-use cameras can be placed at each table, there seems to be no easy replacement. If a lot of usage is a matter of convenience, then I would say that the rent-a-camera market will not easily replaced even by cheaply-owned digital cameras.
I think the data I need to resolve such questions is held in Chapter 4 of the 2003 US Consumer Photo Buying Report, but you have to be a member to the Photo Marketing Association to access it.
Readers might also be interested in some history. According to this site:
Fuji introduced the first modern, one time use or disposable camera in 1986. But it wasn't a new idea. Almost one hundred years previously in 1888 Kodak sold a roll film camera that was returned intact to be developed and printed.
Fuji sold a ton of the disposables and then Kodak joined the bandwagon in 1987. Kodak points out that they meet every need. There are models for
indoor, outdoor, panoramic and under water photos. Film is high speed, wide latitude, and fairly fine grain negative color for prints. Ilford does offer a black and white alternative.
The two most popular disposables are the Fuji Quick Snap and the Kodak Max. Both are available as an outdoor and as an indoor with flash...
Other companies make similar disposables. They include Agfa, Konica, house brands and generics. Most cameras seem to give the best results when used at a distance of four to 20 feet. That is how most people pictures are taken...
By 1990 Kodak realized the cameras were returned in an almost new condition and that they could be recycled with new film. Now they estimate that 77% of all brands of disposables are returned for recycling. This is better than the rate for aluminum cans. The average Kodak is now reused more than three times.
See also Part1 and Part2 of a negative digital disposable user review.
The apparent idea behind this product, which seems generally inferior to conventional digital cameras and even disposable film cameras, is to make money for the retailer by forcing the consumer to pay to have his photos printed. (Given the flimsiness of the camera, I suspect there is also substantial markup built into its price.)
I'm going to take a contrarian point of view on this one.
There are positive reviews out there, most notably this one, in which the author writes "Dakota Digital meets and beats single-use film cameras in both convenience and flexibility..." However he also writes, "My informal test results were mixed."
To me the disposable digital camera is better marketed as a competitor for the disposable film camera, rather than as a film-to-digital crossover aid.
As in everything, there are tradeoffs between digital and film disposables:
The digital camera will let you delete the last photo (which I personally would find useful)
The resolution is about 2 megapixels. Picture color is inferior to Kodak disposable cameras, although clarity is often higher.
The camera might be flimsy, but it still is a lot better constructed than its film counterparts
The total price of digital is higher than film, if you don't get a CD with your film pics; about the same if you do.
There are two ways I see that Ritz can make money with the digital disposable model; both require lowering the total costs of disposable camera renting and printing. The first cost savings will come from the elimination of film development. The second could come if inspecting and reusing the "disposable" camera is cheaper than making a film throwaway.
I think this will be profitable only when they 1) upgrade the picture quality to meet disposable film camera standards, and 2) get enough volume to pay off their fixed investments in technology.
Jonathan also writes:
This business model won't work, for the same reason FedEx's ZapMail business model didn't work. In both cases the merchant attempts to rent technology that consumers find more advantageous to own outright.
I understand this argument, but I think about the market differently.
Consumers are already renting a particular technology (disposable film cameras) because they find it cheap and convenient to do so. The existence of digital cameras that people can own has not changed their minds. (In fact, since 19% of all film developed is from single-use cameras, customer demand to rent disposable technology is high).
Do customers who want the convenience of a disposable camera care how their pictures are stored inside the camera?
If Ritz can come up with a similar quality and lower cost alternative to disposable film cameras, I think the company will succeed. Also, if Ritz comes up with a LCD-screened and higher picutre quality throwaway camera for the same or slightly higher price than film, I think they will succeed. In my mind, if customers want digital-camera features in a disposable, they will be willing to pay for them.
Vladimir Putin wants even more political control over former Soviet Republics. Hence, his attempt to get Ukraine, Belarus, and Kazakhstan to sign a "free trade" pact:
"We have differences in approach, but no matter how deep they are and how difficult it is for us to move toward a single economic space, objective processes in the world's economy linked with the so-called globalization will push us toward this path," Putin said at the meeting with officials from four nations in charge of the integration plans.
What Putin means by "differences in approach" are the different political and financial interests of the oligarchs who dominate all of these countries. What free trade means to this elite will always be unclear. Still, you have to like Putin's intelligent usage of the (translated) phrase "so-called globalization" against the anti-globalization crowd who customarily use it in childish mockery.
Russian Deputy Prime Minister Viktor Khristenko said Friday that it might take five to seven years for the four nations to create what they call a "single economic space" with the free movement of goods, capital and labor. He said that the four nations had agreed to take a flexible approach to integration that would help alleviate differences between their economies and gradually harmonize legislation.
I'll believe it when I see it. Currently, there is no free movement of labor within each of these countries--not to mention the difficulties in moving (legally) from one country to the next.
Laura Mansnerus writes in The New York Times that:
the cost of education turns the social logic of the suburbs upside down. Havens for families are expensive to run, and many of the people who run them are trying to draw childless couples, single people, retirees — anybody but children.
"It shows that the economics of the suburbs are out of phase with the original purpose of the suburbs," said Robert Fishman, a professor of urban planning at the University of Michigan and the author of "Bourgeois Utopias" (Basic Books, 1989), a history of suburban growth.
Here, economics can be used to emphatically disagree.
The suburbs are not "out of phase"--unless you ignore the "family welfare" component of the public school system. In my view families with school-age children use public schools as one means to redistribute income from tax-payers without school-age children to themselves. When other people pay for their kids' schooling, parents leave themselves with more disposable income.
Families with school-age children moving in to a neighborhood would not cause a fierce reaction if they were allowed to exclude their children from public schools (and school taxes), and pay their own way. However everybody seems to have come to expect other people to pay for their kids' education.
Suburbs that operate "free" public schools are getting exactly what they wanted--affordable K-12 education for all local children. It should not surprise them that people are taking them up on their offer.
Havens for families are expensive to run, but we are kidding ourselves by focusing primarily on how much schools cost to run. The real divisive question is who is paying for whom. Perhaps rising tax bills will making us consider alternative models of education allocation and financing. Probably not:
Urban experts and politicians say it is a problem that communities will wrestle with for years.
This should keep the federally-funded education researchers going for a while.
OK: The article cited above was really about how local governments are using zoning laws to exclude families with children from their communites, by not permitting the construction of housing such families generally desire. I think that such local zoning maneuvers, while truly ugly and pathetic, are the clear (though unintended) consequences of 1) using taxpayer subsidies to force the market price of K-12 education far below willingness to pay, and 2) the perceived (or actual) degradation of school quality in more urban areas.
I would like to announce a new trader in the global economic marketplace.
Michael Kevin Brancato was born on August 5 at 23:10. He and his mother are well. If Michael could stop sucking on everything and anything, he would thank you all for your advice, encouragement, and concern.
He's just out of the womb, and already propping up Consumer Spending.
My week-long absence from T&B is now at an end. Look forward to new posts very soon.
Once I finish my exams, posting should come at least 5 times a week.
Shopping online can be a learning experience--in either a good or bad sense. For me the best place to shop online is NexTag. This company is one of the many "marketplace" websites on which consumers can search for the lowest current market prices on consumer durables.
Like competing sites, Nextag lets shoppers review each product and the stores from which they've purchased. Most reviews are sensible and thorough; just like on Amazon, you can vote for which reviews are best.
What's unique about Nextag is that for each product, they show a graph of its price history as long as it has been listed on their website.
I think this is really neat. Here's the low-price history for an 80GB Maxtor Internal hard drive. Of course the drastic decline in price is not representative of all products, but it's not uncommon either.
Economists tend to focus on "the price" of a product, instead of the more realistic price "swarms" or distributions one finds in the real world. To assist us economists, Nextag lets us drill down for more detail--with the low, high, and median prices.
These sites have unified formerly segregated consumer marketplaces in the US and Canada--especially for consumer electronics. Searching for a popular product--like a camcorder or camera--will yield dozens of stores selling it. Searching for an unpopular product--like printer toner--will yield several stores at most. Nextag also provides a graphical history of the number of stores selling the product.
I would also like to note that graduate students in economics have no formal theoretical explanation for the continual decrease in prices, although we have a good story: the introduction of continually better products, or of the same-quality products made more cheaply, drive down the relative value of the older products to consumers.
The business model of Nextag is clear. Nextag, itself, makes money from selling advertisements and slots to "featured stores". It may or may not get a cut of the sales made by linking from their site--I don't know.
UPDATE:Calibex is a twin-sister site of NexTag. It provides the same information, from the same database, solely with a different face.
Sometimes the most accurate empirical data are anecdotal:
Retail prices, on the other hand, are public information. Marijuana comes in as many grades as pipe tobacco, with a similar kind of price-spread. An eighth of an ounce of marijuana on California's open market ranges from $20 for the low-end stuff ("brick weed") to $60 for the high-grade -- the connoisseur's weed, if you will, claimed to be the equal of any on the planet. There is something of a volume discount, so you can get the highest-quality pot for about $360 an ounce. In other words, it is literally worth its weight in gold.
Relatively homogenous compared to what?
What's unique about Nextag is that for each product, they show a graph of its price history as long as it has been listed on their website.
