Looking for those willing to work for less than they are worth.

Women only earn 77% of what men do.

Blacks only earn about 75% of what whites do.

Hispanics only earn 70% of what white do.

So I will take the world by storm.  I will hire all the Hispanic women that are willing to work for 54% of what white men will work ( 77% times 70%) and I will have a huge competitive advantage.

I have hired, managed and promoted (and occasionally fired) women before. It worked out well.

I trust women.  I trust black employees.  I trust Hispanic employees. But if they will do the same work for half the rate of white men, I have the chance to really kick butt and create a competitive advantage by dumping the white males (especially the old ones like me).

Here is my question:  Once I hire them and we are leaving the competition in the dust, do you think they will continue to work for a major discount just because they like me?  Maybe not (You might refer to the current wages in the NFL, NBA and Major League Baseball.)

So for all those  women that are willing to work for 77% of what men earn, please let me know. You might make me rich.  For any Black Americans out there that are willing to work for 25% less than whites please send me an email because I will hire you in a New York minute.  And of course any Hispanic women that are willing to work for 46% less for the same work that I pay a white man, I am your biggest fan (although I may doubt your sanity). I am always looking to create a competitive advantage.

I am color blind, could care less about your religion, your sexual orientation or if you are a man or a woman.  All you have to show me is that you are smart, hardworking, will show up every day and I will give you a try.

The problem with no competition!

I have written about startups here at Lucky and Good and the ones that I have written about are the successful ones. 

How about a story about a startup that failed? [as of January 14, 2014]

This company was the idea of Evan Baehr and Will Davis (former Capitol Hill staffers and Harvard Business School graduates). Their idea was to create a service that would stop you from receiving junk mail [hardcopy junk mail in your physical mail box, not computer junk mail] and in the process you would receive all your desired mail [that is bills, letters, correspondence, etc.] in digital format, on-line or over you smartphone for only $4.99 a month.

These two got funding from Silicon Valley and Peter Thiel (Facebook and PayPal backer) and launched a test in the Austin, Texas market. According to all the reports I have seen these entrepreneurs were only limited by their ability to expand to meet demand. Users were all over them wanting to use the service. 

They named the service  “Outbox” and all they needed to expand the concept big time was the cooperation of the USPS.

The idea was pitched to the USPS with the following up-side for the USPS. The Post Office would receive the full benefits of stamped envelops without having to deliver those envelopes (one of the biggest cost to the USPS). That is to say that the USPS would never have to deliver a letter from New York to L.A. if it was known that Outbox was going to deliver it on-line. This would save the USPS a large chuck of money and they would still pick up the full profit from each stamp item that Outbox delivers.

Well, the USPS did not like the idea and told Evan and Will so at a meeting in DC. where Postmaster General Donahoe told the entrepreneurs: “You mentioned making mail service better for our customers; but the American citizens aren’t our customers—about 400 junk mailers are our customers. Your service hurts our ability to serve those customers” and “Your market model will never work anyway. Digital is a fad. It will only work in Europe.”

Interesting don't you think? Of course you must remember that the USPS is not part of the Free Market and so does not have to compete with anyone else. Of course the USPS is losing money every day but it does not have to worry about innovation and improvement to stay in business because it has the government's deep pockets backing it.

What do we learn from this? You are not the USPS's customer...unless you are one of the nations 400 “junk mailers” and the USPS does not have to worry about competition. 

Thanks to Mark J. Perry at AEI for pointing this out....

Jerry

Trade-offs

A bit of economic theory today; well, I do seem to do a lot of economic ranting so this is not unusual and you should be used to it by now.

A rule in economics is that there are "trade-offs". Most of us can always get more of something but only at the cost of not getting something else. We can, as reasonable folks, disagree about many things (I want a Ford Super Duty Pickup and you want a Toyota Prius, I have my reasons and you have your reasons). We all can make smart, informed decisions on any issue as long as we understand that there are trade-offs and we understand the impact of these trade-offs.

Lets consider one trade-off involved in the minimum wage. A government imposed minimum wage will make employers less likely to hire people because it will cost the employers more of their profit. The trade-off here is that although some people will be earning $0.0 per hour [because they don't have a job] other workers will be made better off by X amount per hour. The trade-off for the employer is that because of the higher wage he is forced to pay, thus cutting into his profits, he will have a larger pool of workers to chose from and so will have more efficient and productive workers which should increase the production of the goods he is providing for sale and thus increasing his profit.

This is not a new idea. Philip Wicksteed discussed it in his 1910 book The Common Sense of Political Economy where he talks about how it is in the interest of the powerful Trade Unions to give people with jobs a higher wage at the expense of those looking for jobs.

To have any type of intelligent debate about minimum wage, or economic issues, requires that the people debating the issue have an understanding of the trade-offs.

Jerry

The Rigid Class Structure in the US

Oh yes, the rigid class structure in the U.S. that is based on income. Dr. Mark Rank followed a number of Americans [ages 25 to 60] over a 44 year period to determine how rigid the class structure is. Here is what they found. 

"It turns out that 12% of the population will find themselves in the top 1% of the income distribution for at least one year. What’s more, 39% of Americans will spend a year in the top 5% of the income distribution, 56% will find themselves in the top 10%, and a whopping 73% will spend a year in the top 20% of the income distribution."

"Yet while many Americans will experience some level of affluence during their lives, a much smaller percentage of them will do so for an extended period of time. Although 12% of the population will experience a year in which they find themselves in the top 1% of the income distribution, a mere 0.6% will do so in 10 consecutive years."

"It is clear that the image of a static 1 and 99 percent is largely incorrect. The majority of Americans will experience at least one year of affluence at some point during their working careers. "

So it appears that the United States is a land of opportunity and that this is a land where a large majority of people will experience both wealth or poverty at some point in their life.

As Thomas Sowell has been trying to tell us for years now "Alarmists are not talking about real flesh and blood people. They are talking about abstract categories like the top or bottom 10 percent or 20 percent of families or households. So long as all incomes are not identical, there will always be top and bottom 10 percents or 20 percents or any other percents. But these abstract categories do not contain the same people over time."

Jerry

The model for the European Union versus the Europe of 1500

I am really enjoying Paul Kennedy's 1987 book The Rise and Fall of the Great Powers.  It focuses on the shift in powers in Europe starting in 1500.

Libertarians will be confirmed and central planners dismayed by a fundamental premise of the book: Centralized power over the long run stunts economic progress and wealth.  The author does not state it quite so succinctly but here is the longer version in his own words:

"The story of 'the rise and fall of the Great Powers' which is presented in these chapters may be briefly summarized here. The first chapter sets the scene for that follows by examining the world around 1500 and by analyzing the strengths and weaknesses of each of the 'power centers' of that time-Ming China; the Ottoman Empire and its Muslin offshoot in India, the Mogul Empire; Muscovy; Tokugawa Japan; and the cluster of states in west-central Europe. At the beginning of the sixteenth century it was by no means apparent that the last-named region was destined to rise above all the rest. But however imposing and organized some of those oriental empires appeared by comparison with Europe, they all suffered from the consequences of having a centralized authority which insisted upon a uniformity of belief and practice, not only in official state religion but also in such area as commercial activities and weapons development. The lack of any such supreme authority in Europe and the warlike rivalries among its various kingdoms and city-states stimulated a constant search for military improvement, which interacted fruitfully with the newer technological and commercial advances that were also being thrown up in this competitive, entrepreneurial environment. Possessing fewer obstacles to change, European societies entered into a constantly upward spiral of economic growth and enhanced military effectiveness which, over time, was to carry them ahead of all other regions of the globe."  

Ironically, the rules and regulations of the European Union are generally about creating uniformity, broad legal standardization and more and more centralization of power in Brussels.  What will historians be writing about its long term economic impacts in another 600 years?

The Rationality of Science

This quote about the rationality of "science" in Mark Buchanan's wonderful book Ubiquity: Why Catastrophes Happen is a terrific discussion about the rationality of science.

 "Science is of course, about inventing and testing ideas, and coming to beliefs through conversation with nature; it is decidedly not about being told 'how it is' by some authority. 'Science,' as Richard Feynman once expressed it, 'is belief in the ignorance of experts' - and, one might add, in the possibility of becoming slightly less ignorant through careful investigation. But while this is true, there nevertheless a great naivete in any view that would see the scientist as some kind of autmaton driven by the Holy Trinity of Rationality, Objectivity, and Open-Mindedness. Scientists are human beings, and since all science takes place in the setting of a community of researchers, scientists can influence other scientists."

So as we investigate the seriousness of Global Climate Change and start to consider what we might do about it, please consider that scientists have been wrong in the past and will be wrong in the future.  

And when we only fund and publish those with the mainstream thinking, that does not constitute real science according to Buchanan's definition of science.

Abolishing private property rights

Ever hear of Armen A. Alchian? One of the best econ thinkers on Price Theory and his 100 birthday was yesterday. Wish he were still around to impart more wisdom to us.

Dr. Alchian said: "The worst outcome by far occurs when property rights really are abolished." 

This is a well proven theory known as the “Tragedy of the Commons”. A political economist at Oxford University, William Forster Lloyd, explained this theory in 1832. Looking around England he found that common, not privately owned, pastures were devastated and of little economic value while privately held land was not. Lloyd's answer was that each user of the common was guided by self-interest. When the carrying capacity of the commons was fully reached the owner of a herd would ask "Should I add another animal to my herd?" and because the person owned the animal and not the pasture, adding an animal would be a gain for him while the loss would be “communized” among all the various herd owners using the pasture. In this privatized gain would exceed the herdsman's share of the commonized loss.

Now property rights not only have to do with the private ownership of pastures, property rights has to do with the private ownership of the product of your hands and mind.

Now if you consider the ACA (Affordable Care Act) you will see that the Tragedy of the Commons may be applied. The commons in this case is medical service. A limited number of care providers [doctors, nurses, etc.] and an expanding number of people demanding care that may or may not be necessary but is free. I may have a cold or an upset stomach and so go to the doctor, so the demand will exceed the carrying capacity of the health system.

Jerry

How close are we to predicting earthquakes or the next bear market?

“The future is an excellent topic for any author. By the time you realize I was wrong about everything I predicted, I will be dead.”—Scott Adams, creator of the Dilbert comic strip

Actually there are plenty of predictions – just none that you can count on.

Earthquakes and sudden stock market crashes do not fit nicely into Newtonian models (where Sir Issac could predict quite accurately over 300 years ago where Saturn would appear in the sky in a few days). Even when we put our sharpest mathematicians on the job of predicting these things, they don’t do much better than a 12 year old using a dart board. Sure, the experts can tell us that there will be another big earthquake in Los Angeles and that the stock market will drop by at least 10%. But today they can’t get the timing or the magnitude right. And they can’t identify the single straw that breaks the camel’s back. In the meantime, we may have smooth sailing in Los Angles for the next 20 years and the stock market might last for several years without experiencing a major hit – although I would bet against it.

These are complex systems that involve countless forces (some understood and many not) that react with differing exponential forces. In other words when factor A accelerates at a rate of X then factor B might respond by a factor of X squared or X^6.8 . And getting exponential factors wrong throws off the accuracy of the forecast much more dramatically than getting linear factors wrong. For example the difference of 5 X 3 versus 5 X 4 is 15 versus 20.  But the difference between 5³ versus 5⁴ is 125 versus 600.  A small error in an exponential dimension is much more significant than a small error in a linear factor.

For both earthquakes and financial markets, we don’t even know all the aspects we need to watch let alone having the ability to actually track them all. And we are not even close to understanding exactly how each variable impacts all the others. Consider how a butterfly flapping its wings might change the results.

The “Butterfly Effect” whose name was coined by Edward Lorenz derives from the idea that a hurricane might result from whether or not a butterfly flapped its wings thousands of miles away.  It is similar to the notion of a single snow flake being just enough to start an avalanche. The single snow flake results in an avalanche which knocks down a forest. The forest was the home to a large butterfly population. Eventually the ensuing chain of events results in the ocean warming by a degree or two and before you know it a hurricane is headed for the Florida Keys. It’s like the Direct TV commercial: Don’t Fall Into a Dinner Party: “When you pay too much for cable, you feel powerless. When you feel powerless, you want to take the power back. When you want to take the power back, you take Karate. When you take Karate, you want to use your Karate. When you want to use your Karate, you become the fist of goodness. When you become the fist of goodness, you run along rooftops. And when you run along rooftops, you fall into a dinner party.  Don’t fall into a dinner party. Get rid of cable and upgrade to DirectTV.”

These complex systems involve so many interrelationships that we just don’t understand them nearly well enough to be able to make useful predictions. Granted, once a hurricane is in the neighborhood, the models are reasonably good about extrapolating to where it will end up in a few hours. But forget about knowing where and when the next hurricane will originate.

Back to earthquakes. The earth’s crust is on about 62 miles thick and made up of 7 primary tectonic plates (and numerous secondary and tertiary ones) that float on the molten liquids inside the earth. These plates tend to snuggle up to one another, move in opposite directions and resist each other’s movement via friction forces. For example, the Pacific Plate (the largest plate at about 40 million square miles and covers about 20% of the earth) creeps slowly northwest. The 810 mile San Andreas Fault separates the Pacific Plate from the adjacent North American Plate which moves in the opposite direction (southeast). Earthquakes happen when the tectonic plates suddenly shift - releasing energy like a massive spring that has been sprung. Most of the time this movement is small - for example the average relative movement between the Pacific and the North American plates is only about 1.3 to 1.5 inches a year. But earthquakes are like trying to move heavy furniture by sliding it across an uneven floor. You push and you shove and the darn thing won’t budge until all of a sudden it lurches. This is the essence of an earthquake, a sudden staggering movement between two tectonic plates.

So why can’t we predict when the next big quake will happen? First, imagine the difficulty in understanding the friction forces where one plate meets another. There are plenty of other smaller faults that connect to and also influence the action. To model this system would consider the stress building all along the fault, and adapting the model to account for different kinds of rock, shapes and surfaces of the edge of the plates, temperature and then maybe – maybe, maybe one could simulate and predict when a violent movement would suddenly happen. We ain’t close.

And if you think predicting the next big quake is tough, imagine the process of forecasting when the stock market will tumble next (I will go out on a limb and guarantee that it will tumble sometime). It is a function of economic growth, company earnings, unemployment rates, changes in tax rates, wars, attitudes about work and innovation, natural catastrophes, the tendency of the government to enforce anti-trust laws, changes in technology, global economic shifts, heat waves, droughts, minimum wage laws, immigration policies, new import tariffs by other countries, and changes in demographics (to name just a few). Each of these factors influences other factors and when you throw the results all into a pot, mix them together, it is tough to understand their relative importance. The words of nineteenth-century writer William Gilmore Simms apply tenfold: “I believe that economists put decimal points in their forecasts to show they have a sense of humor.”

So far we are nowhere near having models that come anywhere close to predicting the what, where and when.

Back in 1984, scientists predicted with what they proclaimed as a 90 to 95% confidence level the next earthquake of about 6.0 (Richter scale) would happen in Parkfield, California (about half way between San Francisco and Los Angeles, in Monterey County) sometime before 1993. They didn’t use the kind of detailed model envisioned above.  Instead they simply reviewed the frequency of the large earthquakes (over 5.5 magnitude) which had happened in 1857, 1881, 1901, 1922, 1934, and 1966 and extended the historical pattern. But 1993 came and went and this bold prediction turned out wrong.  The next 6.0 quake didn’t arrive until 2004.

The 1984 earthquake prediction is similar to the kind of predictions we hear all the time about the stock market.  For example, pundits will state that we are due for another bull or bear market based on the time since the last one, assuming that there is some kind of order to the market. These predictions are typically based on small sample sizes and they usually sound quite plausible.  And they sometimes even get lucky.  One might also get lucky picking the winning numbers in the next lottery. But in the long run this kind of forecast has limited usefulness.

Some things are simply far more difficult to predict that others. That is why I a am a little skeptical about the precise forecasts we hear about global warming. I accept that more CO₂ in the air is a warming factor. But this is far from the only influence that affects the average temperature around the world.  There is simply no way to fully understand all the chain reactions and secondary and tertiary factors and how they all impact each other. 

The Billion Dollar Bracket

Below is a picture of my grandson Alec’s NCAA bracket. Note that he predicted that UConn would beat Kentucky in the finals. Hooah!! But his bracket was not quite perfect – he only got 32 out of the 63 picks right.  Nevertheless this placed him at #15 in his group of 132,787.

The top 20 brackets in the Quicken Billion Dollar Bracket Challenge each won $100,000. The winner had 49 correct picks and #20 had 44 correct picks.

It all sounds so close to perfection (49/63 = 78%), but the reality is that even the top bracket had miles to go before he made it.

Imagine if you got the first 49 out of 63 games right. You still had 14 picks to go. If you had a 60% probability of being right on the rest of the games then your odds of getting it 100% right would be .6 to the 14^th power which is .0784%, or just shy of 8 in 10,000.

Quicken got plenty of buzz for sponsoring the contest.  One writer estimated that they had received over a billion social media and PR impressions. We never heard what they paid Warren Buffet to insure the perfect bracket (I would love to know).  But it took the Oracle of Omaha about 10 to 15 minutes to do the calculations and accept the deal. He said: “I hope I did it right.”

And of course the grand prize of $1 billion would be awarded over 20 years. If you wanted it all up-front, you would receive a mere $500 million. And Buffet didn’t even figure that it would cost him that much.  He said that if someone went into the final game on Monday, April 7 with a perfect bracket.  If you won the final game you would receive $500 million (less a small cut for Uncle Sam). If you had a 50% chance of being right (if you had Kentucky to win, you were better than that since they were a two and a half point favorite) then the expected value of your position was 50% X $500 million or $250 million. But you would have received a phone call from Warren that morning offering you perhaps a deal where he bought out your bracket right then in exchange for a check for $100 million. My guess is that 95 out of a hundred Americans would take Buffet’s offer in a heartbeat. So really Buffet was only at risk of losing $100 million and not $1 billion.

If one randomly completed  a bracket with a 50% chance of getting any one pick correct, the odds were 1 in 9.2 quintillion (that is a million trillion) of ending up with a perfect bracket. Of course the early picks should be a bit easier than the later ones. When  #1 Wichita State faced off against my old school #16 Cal Poly, you had pretty good odds if you bet on the favorite. But favorites inevitably fall and they fell at a regular pace throughout the rest of the tournament.

    

It was a fun tournament and a terrific promotion but any time that Warren Buffet wants to lay off a tiny slice of his action, I’m all ears.

Does Robert Reich need a refresher course in economics?

Could it be that Robert Reich [see Reich's bonafides below]* needs a refresher in economics? In his blog he tells us that the issue of a higher minimum wage is settled [much as global climate change is settled science]. 

One of his statements is that: “A $15/hour minimum is unlikely to result in higher prices because most businesses directly affected by it are in intense competition for consumers, and will take the raise out of profits rather than raise their prices.”

Let me see, if you are a business in a highly, “INTENSE”, competitive market then all you have to do is lower your profit margin and you can pay your minimum wage workers more.

The problem with this approach is that a business in a highly, intense, competitive market has already cut its profit margin as low as it can. Any of you folk that are running a business please tell me if I am wrong.

I learned in economics 101 that a highly intense, competitive market will, by its very nature, eliminate excess profits and in this type of market there are only a few things that the owners can do to stay in business. The businessman can: hire fewer minimum wage workers, reduce the number of minimum wage workers, reduce the non-pay benefits, charge more for the product/service that these minimum wage workers provide, or [and as the most likely case] a combination of the above actions.

These are what are called “unintended consequences” of government action.

Jerry

* ROBERT B. REICH, Chancellor’s Professor of Public Policy at the University of California at Berkeley and Senior Fellow at the Blum Center for Developing Economies, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the twentieth century. He has written thirteen books, including the best sellers Aftershock and The Work of Nations. His latest, Beyond Outrage, is now out in paperback. He is also a founding editor of the American Prospect magazine and chairman of Common Cause. And he has a new film, Inequality for All.

How to make a little more money!

How about a bit of economics today.

The point of running a business is to make a profit. Do we agree that this is just basic economics? The business folks I know are not in business to go bankrupt by doing things like charging less for their product than it takes to produce it.

Now most (all?) business folks need resources and they must attempt to procure those resources at the least cost and I have been taught in economics that labor is a resource that has a cost.

If we agree with this premise then can you answer the following question?

Why don't all businesses, being in business for a profit, hire only women to do whatever job needs to be done? I mean I see the complaint in the media that women are paid less than men (some say $0.77 on the dollar) so it would make economic sense to hire the women for less (anywhere from 15% to 23% less than men) and get rid of those high paid men.

Man, if I had a business I would have an all woman staff if I could save almost 23% per head on each of my worker.....

What am I missing here?

Jerry

The business of writing

Writing books results in a few big winners but many more losers – especially with about 30,000 books self-published every month.

It is also a lesson in the Law of Supply and Demand.  I have priced my book Lucky and Good ( the ebook version) as high as $11.99 each and as low as $.99.  That is not quite right.  For five days every 90 days I have a chance to give my book away FREE.  (I make it up in volume.) 

This is an interesting experiment in pricing and more importantly the Law of Supply and Demand. I raised the price of my book recently from $9.99 to $11.99 to see how it might impact sales.  It worked – nobody bought it at the higher price. And then this last weekend, I used two out of my five free days via Amazon to give the darn thing away - 1,469 customers downloaded it.  Hooah!

Now if I could only sell 1,469 ebooks every two days at a price of $9.99 each, I would be sitting fat and happy (actually I already qualify for both).  But clearly I would be richer because my annual income would be: 1469 copies (per two days)/ two days * 365 days per year * $9.99 (retail price) * 35% (the author’s royalty on Amazon = $937,385 per year.  You gotta love it unless you live in California or New York City.

The problem is that I can’t sell as many at $9.99 as I can give away for free.

I never wrote this darn thing to make a living.  I wrote it because I had a few things to say and I ended up enjoying the process of creating it.  But the experience is  a reminder of the 13th/14th-century Mamluk scholar, Ibn Taymiyyah who first described  the Law of Supply and Demand (without using that label):  “If desire for goods increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down."

If you have an idea or two about how I can get 700 plus downloads a day at $9.99 per copy, I’d love to hear them.

Thanks!

John

P.S. - The current price is $4.99.

An old joke - but it still works!

After a busy day of trout fishing, two guys are in their pup tent about to get well-deserved sleep when they hear a bear hovering outside their tent. One of them starts to put on his tennis shoes. His friend asks: "What are you doing? You can't out run the bear." and his "friend" says: "I don't have to out run the bear, all I have to do is out run you."



(Click on the photo to see it.)

How does the 'Free Market' work?

Down at the grass roots it is very simple. You got something I want, I got something you want, we make a deal, we both walk away “richer” for the transaction. Man I love garage sales, don't you?

An example that I found today concerns the ride sharing service 'Lyft' in San Francisco [which is spreading across the country except where do-gooder government is getting in the way]. Now Lyft uses a computer app to connect people that need a ride with people that have a ride.

They talk.

They make a deal.

They both 'ride' away 'richer' for the transaction.

Grass roots, free market economics at work.

Now this app has spawned economic growth. Sort of like the TV 'spin off' shows from 'All In The Family'. You remember them don't you? [Maude, Good Times, The Jeffersons, Checking In, etc.]

In San Francisco there are some folks that want to get in on providing this ride sharing but they have a problem. They don't have a car. Well, another startup company called Breeze has stepped in to help. Now guess what [drum roll], Breeze rents cars to these people that don't have cars but who want to share rides. The CEO and co-founder of Breeze, Jeff Pang, saw a demand: “There is huge demand from people who don’t own cars to be part of the ride-sharing economy...” and he jumped into this Free Market to meet that demand and, as collateral damage, is making a profit for himself. Yes, I know, just another evil, rich, greedy, fat cat wanting to make a profit off the backs of the poor working class, but I digress.

Who would have thunk' it. The need for some folk to get a ride is met by a simple computer app which generates the demand for other folks to have a car to provide the ride and everyone is richer for the deal. Well, most everyone. In the Free Market there will always be some folks that fail. The price we pay for taking risk in a Free Market [can't the government do something about that and keep folks from failing?]

BTW: Would you believe that there are unintended consequences? Aren't there always? The unintended consequences that I can think of off the top of my head are: More people carpooling which leads to less fossil fuel used which leads to a reduction in CO2 emissions which leads to less global warming [you get the idea]. That's the big one but then we can go with: More people carpooling which leads to less traffic congestion which leads to reduction in the need for parking which leads to more open space in the city which leads to more parks with trees which leads to the absorption of CO2 emissions which leads to less global warming [sorry, already gone there.

Jerry