Gonna make you sweat

If I were to tell you that there was an entire industry that overcharged the vast majority of its customers, but those customers were fully aware they were being robbed, and that was the only way to make the business viable, what would you guess?

If you’re a member of a gym, you will be aware that for the first month of the year the place is horribly packed out with sweaty and unfit people, all the classes are booked up and you can’t get on any of the machines you want. If your interaction with the keep-fit industry is more along the lines of walking past the gym on the way to the cake shop, you might be more aware of the equally curious fact that commercial gyms always seem to have a heavily advertised ‘special’ membership deal going on. Paying the full whack listed rate at a gym is actually a pretty difficult thing to do — much more so than paying full freight rack-rate for a hotel room — unless you do the single most expensive thing you can do in physical culture, and join the gym shortly after the Christmas holidays.

SWEATY BETTY Having seen the books of a gym chain or two, we can tell you that the ‘Sweaty January’ phenomenon is not an urban myth or a joke — it’s absolutely fundamental to the economics of the industry and it’s basically impossible to run an economically viable gym without taking it into account. Usually about 75 per cent of all gym memberships are taken out in the month of January. Not only this, but the economics of the industry absolutely depend on the fact that a very great proportion of January joiners will not visit more than three or four times in total before their membership comes to a floundering flop of weight not lost at the end of the year. The founder of Colman’s Mustard used to claim that his fortune was based on the bit of mustard that everyone left behind on their plate, but gym memberships have really pushed things to the limit when it comes to this model of making people pay for a lot more of the product than they have any likelihood of using.


On the bizarre economics of gyms. The spatial inefficiency of gyms is something I hadn't ever spent much time thinking about.

Human nature being as immutable as it is, most gyms are great investments (other than Bally Total Fitness, which reached too far, too fast). In fact, human nature is so predictable that a company like Planet Fitness can come along and offer memberships for just $10 a month and still not be overrun with people. It's found money.

If you're feeling particularly fitness motivated this month, maybe wait a month and see if the impulse passes along with the January prices.

Santa Claus converts Scrooge with new economics

Noted activist investor Scrooge has changed his mind about Santa Claus.

It is not an exaggeration to say that I have undergone a complete conversion in my view of St Nicholas. Warren Buffett advises investors to seek exceptional managers and I now see that few achieve your longevity.
 
You embodied the new economy before the idea had been conceived. St Nicholas is a global business, receiving signals from far corners of the earth and delivering packets over an integrated network. It works at super-high speed, faster than broadband in South Korea, and knows no boundaries. The internet is antique by comparison.
 
Your lack of interest in profitability struck the traditionalist in me as foolish but I have come to understand the virtues of reinvesting revenues over several centuries in order to dominate your market and entrench your monopoly. 
 
Jeff Bezos, your closest logistics competitor, has copied your tactics but, although Amazon crushes small shops, department stores and big box retailers, it cannot topple you.
 
This has helped you to build the biggest social network in the world, putting Facebook to shame. Everyone includes your messages in cards and parents pretend the gifts they buy for their children come from you — you outsource many deliveries at zero cost. By combining a jolly presence with sophisticated viral marketing, you have expanded your reach everywhere

China's birth rate problem

China has changed its one child policy to a two child policy, but it may not do much to rejuvenate its aging population

"It leads to a drop in the proportion of the productive labor force, which in turn raises the average wage level, making China less competitive in labor-intensive industries," Council on Foreign Relations China expert Yanzhong Huang writes in the Diplomat. "If China is approaching its Lewis turning point, a point at which China would move from a vast supply of low-cost workers to a labor shortage economy, it could quickly lose its competitive edge to other emerging economies that still enjoy significant demographic dividends."
 
But here's the really scary thing for China: It's not obvious that ending the one-child policy will solve its demographic crisis. The one-child policy is not, on its own, the key cause of China's graying population — those include China's growing prosperity and increasing opportunities for Chinese women outside the home. It's not obvious that repealing the one-child policy now would be able to make up for the difference.
 
"As UNC demographer Yong Cai has shown, today, even when fertility restrictions are lifted fertility rates don't rise," University of Maryland sociologist Philip Cohen writes in the Atlantic. "People have few children in China today because children have become too expensive—good schools especially cost too much, and the health care burdens of children outweigh the hoped-for future return of a child to care for parents when they're retired."
 

I have yet to hear of a country that's been able to reverse its birth rate decline with cash incentives. I hope one country succeeds just so we get a sense of the price at the indifference point.

Are we more than our ideology?

After predicting he could guess most of an economist's positions after hearing just one of them, Russ Roberts takes a crack at guessing Noah Smith's positions on a variety of policies, and Smith grades him.

Smith is always interesting, and often unpredictable, and those are of course correlated.

Stricter Gun Control: Probably not. I grew up in small(ish)-town Texas, where tons of people had guns and there weren't any shootings that I ever heard of (though probably some accidents). Canada has relatively high gun ownership and very little crime, including few mass shootings. Brazil has a small fraction of the gun ownership we have, and much higher crime. Meanwhile, we've had a huge drop in crime in the last two decades with no real increase in gun control. Let's try to replicate that success before we start disarming the populace. I will admit that my stance on this has wavered recently, in light of the rash of mass shootings, but I still don't think gun control is likely to have a huge effect.
 

Noah's post-mortem is worth a read. I especially like this:

I think this exercise shows a number of different "failure modes" of attempting to model people's policy positions based on an assessment of their ideology. For example:

...

4. People disagree on the facts, not just on values. In general, people with heterogeneous priors about the state of the world will fail to reach agreement even after seeing all of the same evidence. And when people form their policy positions, they consider efficacy of policies, not just whether the intended effect would be a good thing. Russ probably didn't bet that I would be pessimistic about the efficacy of taxing the rich, the usefulness of the ACA's tax credits, or the effectiveness of gun control. He also probably underestimated my uncertainty about the effect of Obamacare on health costs, the usefulness of education spending, and the employment effects of minimum wage hikes.

Crime and punishment

Longer sentences didn’t reduce crime as much as expected because criminals aren’t good at thinking about the future; criminal types have problems forecasting and they have difficulty regulating their emotions and controlling their impulses. In the heat of the moment, the threat of future punishment vanishes from the calculus of decision. Thus, rather than deterring (much) crime, longer sentences simply filled the prisons. As if that weren’t bad enough, by exposing more people to criminal peers and by making it increasingly difficult for felons to reintegrate into civil society, longer sentences increased recidivism.
 
Instead of thinking about criminals as rational actors, we should think about criminals as children. In this light, consider the “Becker approach” to parenting. Punishing children is costly so to reduce that cost, ignore a child’s bad behavior most of the time but when it’s most convenient give the kid a really good spanking or put them in time out for a very long time. Of course, this approach leads to disaster–indeed, it’s precisely this approach that leads to criminality in later life.
 
So what is the recommended parenting approach? I don’t want to get into a debate over spanking, timeouts, and reasoning but one thing all recommendations have in common is that the consequences for inappropriate behavior should be be quick, clear, and consistent. Quick responses help not just because children have “high discount rates” (better thought of as difficulty integrating their future selves into a consistent whole but “high discount rates” will do as short hand) but even more importantly because a quick response helps children to understand the relationship between behavior and consequence. Prior to Becker there was Becaaria and in Beccarian theory, people must learn to associate crime with punishment. When responses aren’t quick, children, just like scientists, have difficulty learning cause and effect. Quick is thus one way of lowering cognitive demands and making consequences clear.
 

Alex Tabarrok on what Gary Becker got wrong about crime and punishment. A great post with lots of broadly applicable wisdom.

I try to apply the same principle of quick, clear, and consistent to the feedback I provide to my teams at work. Much of white collar work, including product management, tends to have slow feedback loops. Often the time between when you come up with an idea and when it ships and elicits feedback from consumers is months. That means very little of that work falls into the category of deliberate practice. Post-mortems, if they even occur, take place long after the key decisions were made.

Some of that is unavoidable, but much of it just requires a change in habit as managers. If you have feedback to share with a team member, share it as soon as possible. Someone didn't lead a meeting as efficiently as possible? Grab them right after the meeting for a quick chat. Have a presentation ready? Practice on someone as soon as possible and gather their immediate feedback.

The higher the cadence of these practice and feedback loops, the more rapid the improvement. Not all such work can be transformed into deliberate practice, but the amount that can be is non-trivial.

For most people, delivering feedback at such a cadence does not feel comfortable or normal in a white collar work environment; it feels paternalistic, even arrogant, and it still does not come naturally to introverts like myself. Certainly many aren't ready to receive notes at such a cadence, either. Much of this may stem from underestimating the amount of rapid feedback and deliberate practice one spends time on in other crafts, like music, sports, cooking, and so on. Going to an arts school helps. I've never received as much feedback as frequently as I did in my undergraduate creative writing classes or in film school.

The case for opening borders

The overwhelming majority of would-be immigrants want little more than to make a better life for themselves and their families by moving to economic opportunity and participating in peaceful, voluntary trade. But lawmakers and heads of state quash these dreams with state-sanctioned violence—forced repatriation, involuntary detention, or worse—often while paying lip service to “huddled masses yearning to breathe free.”
 
Wage differences are a revealing metric of border discrimination. When a worker from a poorer country moves to a richer one, her wages might double, triple, or rise even tenfold. These extreme wage differences reflect restrictions as stifling as the laws that separated white and black South Africans at the height of Apartheid. Geographical differences in wages also signal opportunity—for financially empowering the migrants, of course, but also for increasing total world output. On the other side of discrimination lies untapped potential. Economists have estimated that a world of open borders would double world GDP.
 
Even relatively small increases in immigration flows can have enormous benefits. If the developed world were to take in enough immigrants to enlarge its labor force by a mere one percent, it is estimated that the additional economic value created would be worth more to the migrants than all of the world’s official foreign aid combined. Immigration is the greatest anti-poverty program ever devised.
 

Alex Tabarrok makes the case for opening borders, and it's a strong one. The ultimate NIMBY-ism isn't at the city level, it's at a national level. “Give me your tired, your poor, your huddled masses yearning to breathe free,” but just a few of them, the rest, the masses, they're on their own.

I would not be where I am today had my parents not come to the United States from Taiwan when my dad entered graduate school. Go back further, and my parents were lucky to be able to migrate to Taiwan during the turmoil in the 50's in China. I'm entirely the product of a long line of good fortune.

As noted in Good Luck Being Born Tomorrow, which I've linked to before:

97% of people born tomorrow will be in a country that is authoritarian, communist, doesn’t support same sex marriage, does not allow abortion, supports capital punishment or has seen over ten thousand deaths in recent armed conflicts. Good luck!
 

If you were reborn tomorrow, assigned randomly to be one of the babies born somewhere in the world, your odds of being as fortunate as you are now (I assume you are one of the lucky ones given you're reading this post) are worse than the odds of flipping a coin and drawing heads. A lot worse.

To believe that those not as fortunate deserve no chance to improve their lot, that takes a deep sense of privilege. As Tabarrok notes:

What moral theory justifies using wire, wall, and weapon to prevent people from moving to opportunity? What moral theory justifies using tools of exclusion to prevent people from exercising their right to vote with their feet?
 
No standard moral framework, be it utilitarian, libertarian, egalitarian, Rawlsian, Christian, or any other well-developed perspective, regards people from foreign lands as less entitled to exercise their rights—or as inherently possessing less moral worth—than people lucky to have been born in the right place at the right time. Nationalism, of course, discounts the rights, interests, and moral value of “the Other, but this disposition is inconsistent with our fundamental moral teachings and beliefs.
 
Freedom of movement is a basic human right. Thus the Universal Declaration of Human Rights belies its name when it proclaims this right only “within the borders of each state.” Human rights do not stop at the border.Today, we treat as pariahs those governments that refuse to let their people exit. I look forward to the day when we treat as pariahs those governments that refuse to let people enter.

How to allocate subsidies most effectively

Sometimes you hear something that sounds so much like common sense that you end up missing how it overturns everything you were actually thinking, and points in a far more interesting and disturbing direction. That’s how I’m feeling about the coverage of a recent paper on student loans and college tuition coming out of the New York Federal Reserve, “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs,” by David Lucca, Taylor Nadauld, and Karen Shen.
 
They find that “institutions more exposed to changes in the subsidized federal loan program increased their tuition,” or for every dollar in increased student loan availability colleges increased the sticker price of their tuition 65 cents. Crucially, they find that the effect is stronger for subsidized student loans than for Pell Grants. When they go further and control for additional variables, Pell Grants lose their significance in the study, while student loans become more important.
 
There’s been a lot of debate over this research, with Libby Nelson at Vox providing a strong summary. I want to talk about the theory of the paper. People have been covering this as a normal debate about whether subsidizing college leads to higher tuition, but this is a far different story. It actually overturns a lot of what we believe about higher education funding, and means that the conservative solution to higher education costs, going back to Milton Friedman, will send tuition skyrocketing. And it ends up providing more evidence of the importance of free higher education.
 

Thus begins this piece by Mike Konczal, fascinating throughout. This is a true mystery, because why does tuition rise more student loans are available, and why doesn't it rise just as much if funding comes in the form of Pell Grants? Konczal explains why this is strange:

David Boaz at the Cato Institute has a snarky post in response to the study, saying that “[u]nderstanding basic economics” would have predicted it. This is false, because economics 101 would have predicted the opposite. Economists fight a lot about this [1], but the simple economics story is clear. According to actual economics 101, letting students borrow against future earnings should have no effect on prices.
 
This derives from something called the Modigliani-Miller Theorem (MM), the frustrating staple of corporate finance 101 courses. A quick way of understanding MM is that how much you value an asset or investment, be it a factory or higher education, should be independent of how you finance it. Whether you pay cash, a loan, your future equity, a complicated financial product, or some other means that doesn’t even exist yet, you ultimately value the asset by how profitable and productive it is. In this story, which requires abstract and complete markets, expanding credit supply won’t drive tuition higher.
 
Now what would change your valuation, according to this theorem, is getting subsidies, say in the form of Pell Grants. This would make you willing to buy more and pay a higher price. This is one of the reasons why so much of the economics research focuses on Pell Grants instead of student loans: the story about what is happening is clearer. But, again, extensions of the credit supply, not subsidies, are doing the work here.
 

Conservatives position an increase in the student credit supply as enabling them to borrow against future earnings. I even read somewhere last year about a company that wanted to allow actors or other celebrities to sell ownership of their future owners. You could become a shareholder of, say, Jennifer Lawrence by fronting her some cash now in exchange for her take from future Hunger Games and X-Men movies and whatever else she does.

In the case of education, this entire proposal doesn't work if the increase in credit supply is met with an equal increase in tuition. Why does tuition increase in lock step with credit supply? Konczal isn't sure, and it's the central mystery.

Note that it isn’t clear why students borrowing more against their future is driving increases in tuition they’ll pay. It could be “rational” under arcane definitions of that word. It could be that in a winner-take-all economy, in which those at the top do fantastically and those who don’t make it do not make it at all, leveraging up and swinging for the fences is a smart play. It could be that liquidity and credit are important determinants of the economy as a whole rather than a neutral veil over real resources. It could be as simple as the fact that 18-year-olds aren’t highly calculating supercomputers solving thousands of Euler equations of their future earnings into an infinite future, but instead a bunch of kids jacked up on hormones doing the best they can with the world adults provide them.
 

This article on public options dives in deeper on the topic.

So far, so familiar. The interesting question is what happens when we generalize this logic to other areas, like higher education. Imagine a state that's considering a choice between spending, let's say, $1 million either subsidizing its public university system, enabling it to keep tuition down, or as grants to college students to help them pay tuition. On the face of it, you might think there's no first-order difference in the effect on access to higher ed -- students will spend $1 million less on tuition either way. The choice then comes down to the grants giving students more choice, fostering competition among schools, and being more easily targeted to lower-income households; versus whatever nebulous value one places on the idea of public institutions as such. Not surprisingly, the grant approach tends to win out, with an increasing share of public support for higher education going to students rather than institutions.

But what happens when you bring price effects in? Suppose that higher education is supplied inelastically, or in other words that there are rents that go to incumbent institutions. Then some fraction of the grant goes to raise tuition for existing college spots, rather than to increase the total number of spots. (Note that this must be true to at least some extent, since it's precisely the increased tuition that induces colleges to increase capacity.) In the extreme case -- which may be nearly reached at the elite end -- where enrollment is fixed, the entire net subsidy ends up as increased tuition; whatever benefit those getting the grants get, is at the expense of other students who didn't get them.

Conversely, when public funds are used to reduce tuition at a public university, they don't just lower costs for students at that particular university. They also lower costs at unsubsidized universities by forcing them to hold down tuition to compete. So while each dollar spent on grants to students reduces final tuition costs less than one for one, each dollar spent on subsidies to public institutions reduces tuition costs by more.
 
The same logic applies to public subsidies for any good or service where producers enjoy significant monopoly power: Direct provision of public goods has market forces on its side, while subsidies for private purchases work against the market. Call it progressive supply-side policy. Call it the general case for public options. The fundamental point is that, in the presence of inelastic supply curves, demand-side subsidies face a headwind of adverse price effects, while direct public provision gets a tail wind of favorable price effects. And these effects can be quite large.

Our precious soil

Top cities became hotbeds of innovative activity against which other places could not easily compete. The people clustered together boosted each others’ employment opportunities and potential income. From Bangalore to Austin, Milan to Paris, land became a scarce and precious resource as a result; the economic potential of a hectare of a rural Kentucky county is dramatically lower than that of a hectare in Silicon Valley’s Santa Clara county. And there is only so much of Santa Clara to go around.
 
Yet more Santa Clara could be built, were it not for the second and more distressing factor behind land’s return: the growing constraint imposed by land-use regulation. The Santa Clara town of Mountain View, for instance, is home to some of the world’s leading technology firms. Yet nearly half of the city’s homes are single-family buildings; the population density is just over 2,300 per square kilometre, three times lower than in none-too-densely populated San Francisco.
 
The spread of land-use regulation is not hard to understand. The clustering that adds to local economic vibrancy has costs, too, as the unregulated urban booms of the 19th century made clear. Crowded slums were fertile soil for crime and epidemics; filthy air and water afflicted rich and poor alike. Officials began imposing new rules on those building in cities and, later, on those extending them: limiting heights and building designs; imposing maximum densities and minimum parking requirements; setting aside “green belts” on which development was prohibited. Such regulations have steadily expanded in scope and spread to cities around the world.
 
As metropolitan economies recovered from their mid-20th-century slump populations began growing again. The numbers of people living in the central parts of London and New York have never been higher. And as demand for quality housing increased the unintended consequences of the thicket of building regulation that had grown up in most cities became apparent.
 

Great piece in the Economist about how land has become a constrained commodity, a brake on our economic growth. A lot of wealth has been made off of rent capture, and most of it accrues to the already wealthy while the middle class are saddled with mortgage debt and the poor, who rent, are just priced out of desirable regions.

This is a nightmarish scenario for the economy. It's bad any time you have any constraint on growth, but when that scarce commodity is land, it seems particularly difficult to remove because it has to be done through a political system that is in thrall to the moneyed, connected, real-estate-owning class.

The ugliest effect of the return of land, though, may be the brake it applies to the economy as a whole. One of the main ways economies increase worker productivity, and thus grow richer, is through the reallocation of people and resources away from low-productivity segments to more efficient ones. In business this means that bad firms go bust and good ones grow to great size. Something similar should hold for cities. Where workers can be put to use at high levels of productivity labour scarcity will lead to fast growing pay packets. Those pay packets will attract workers from other cities. When they migrate and find new, high-paying work, the whole economy benefits.
 
Mediterranean Avenue to Boardwalk
But that process is now breaking down in many economies. For workers to move to the high wages on offer in San Francisco, they must win an auction for a home that provides access to the local labour market. The bidding in that auction pushes up housing costs until there are just enough workers interested in moving in to fill the available housing space. Salaries that should be sending come-hither signals are ending up with rentiers instead, and the unfairness can trigger protest, as it has in San Francisco. Many workers will take lower-paying jobs elsewhere because the income left over after paying for cheaper housing is more attractive. Labour ends up allocating itself toward low-productivity markets, and the whole economy suffers.
 
Chang-Tai Hsieh, of the University of Chicago Booth School of Business, and Enrico Moretti, of the University of California, Berkeley, have made a tentative stab at calculating the size of such effects. But for the tight limits on construction in California’s Bay Area, they reckon, employment there would be about five times larger than it is. In work that has yet to be published they tot up similar distortions across the whole economy from 1964 on and find that American GDP in 2009 was as much as 13.5% lower than it otherwise could have been. At current levels of output that is a cost of more than $2 trillion a year, or nearly $10,000 per person.
 

First and foremost, let's acknowledge that this is all solvable if we just relax land use regulations, build more housing, and increase the population density of our urban centers. Supply and demand still works in this universe. For a variety of reasons, some clear to me, like NIMBYism, some not clear to me, that seems intractable. Does the new David Simon show explain how hopeless it all is? I need to watch it so I find some entertainment value in my despair.

If that's a road to nowhere, can the germ of a solution come from the private sector? Tech companies tend to be creative about trying to solve problems that constrain their growth because they arise from a culture of ignoring accepted impediments. For now, though, they haven't made a ton of progress on this issue. At most they've turned to providing shuttle services with wi-fi that widen the geographic footprint in which their employees can live and still get to work.

But that doesn't work if real estate is expensive everywhere within that radius. What's next? Perhaps a deeper investment in conferencing or virtual reality technology to amplify the sensation of proximity and intimacy of even the furthest flung workers? It's long been a promise of technology, but it has yet to be realized in full.

What about turning office space into living space at night when it lies idle? It's sounds ridiculous, but a company did that with the slack time of cars and seems to raise a billion dollars of capital every other week. I know, it sounds terrible, living at the office, but I'm wary of making paternalistic prescriptions about how a person should spend their free time. Some of my closest friends in life are people I spent a lot of time with at the office at Amazon during my years there.

Maybe tech companies will start their own housing developments? The economic productivity of the average productive tech worker likely still exceeds their compensation, and tech companies, led by Google in particular, have been aggressive in pushing into that gap with increased salary, benefits, stock options, etc. Housing is just another form of investment, and they need not provide it for free, it could just be subsidized. Of course, that means they'd need to acquire land, and that, paired with a thicket of land-use regulations, still restrict the human density achievable with even the most aggressive development.

Finally, solving the problem for just tech workers doesn't feel like a path towards solving it for the rest of the population. Frankly, no one feels much sympathy for tech workers these days (with the exception of some Amazonians who are working long hours, though I'm still suspicious; a lot of it feels secretly like Schadenfreude in disguise). Bay Area complaints about high real estate costs are going to fall on deaf ears, even if it's symptomatic of a dangerous trend for our economy, as noted by the Economist article.

Group all the things I miss the most about NYC, and the root of all of them was the unmatched human density. It's not just the visceral sensation of the people around you (which some dislike), but the diversity of businesses and communities that can sprout and thrive when the potential customer base is so large and tightly packed. The variety of entertainment, like theater and museums, the variety of local cuisine, the ability to find someone to share almost any interest, from curling to revivalist arthouse cinema to hip hop dancing.

I have no answers, only a longing for the Bay Area to experience the liveliness of density in the physical world to match that of the the networks and communities they've built in the virtual space, where real estate is cheap and plentiful.