Truck and Barter

Local Redevelopment

The economy in the Washington DC region continues to boom with incredibly low unemployment and uncredibly high housing prices. Outlying regions are growing housing as fast as slow-growth restrictions permit, but inner regions, like Alexandria, VA are almost completely developed. Hence, old commercial sectors--like Landmark Mall--will be razed and replaced with a combination of dense housing and open-air shopping. They will also add housing to a BJ's wholesale club:

Freeman execs say they would like to take advantage of zoning that would allow for a residential component to the 120,000-square-foot BJ's Wholesale Club but would need approval from the city and the store, which has options on a long-term lease. Although the company has a residential division that builds golf communities, it has never done an urban project and is considering potential development partners.

Baja Fresh Meeting

I'm sitting here in the internet cafe, and am eavesdropping on a fascinating conversation between a regional manager of Baja Fresh and 6 (hispanic) franchisees of different stores. They are discussing how executives are flying in to examine the stores and personnel in the Northern VA area over the next few days. Here are some details of the conversation:

Be well dressed and prepared.

Sales: Clarendon dropped down, after July 4th, for some unknown reason. Rosllyn had a good week. A $1700 and $1300 dollar day...

It seems that sales of $31K or $32K a month is very good.

Why is it that one store can run with far smaller paper costs than other stores?

Now they're talking about the misuse of wrappings of fajitas and avocados... the want to let customers ask for bags, since the costs of automatically providing them are high... do not keep them out! inventory of paper goods appears cyclical, which means inventory is not being kept low.

Forecasts of monthly sales must be in by Tuesday? Redo the projections including the most recent historical information.

Now they're looking at montly sales per hour of manpower. The store in Pentagon City is doing very well; not so in Manassas... Clarendon had $22.5K of sales in 533 manhours...

P&L;: Will be emailed to everybody. He's now teaching them how to read a P&L;!

Rent was $41K in Pentagon Row over 10 months, contingent on sales...

Food Safety: You are the general manager of the business. It's my responsibility to support you; call me if and when you need it. I trust your judgement.

I'm not sure how baja was run before, but now...

(The regional executive keeps looking at me suspicously, so I should go...)

My take: These details of running a profitable business are so mundane but essential. How did we ever think central planning would work?

UPDATE:If your food and labor is over 50% of sales, you're in trouble. Most restaurants run 50%-60% direct labor. Where the executive came from, everything is frozen and premade (14% labor + 27% food). Baja can't get those numbers, but must work at it. The Baja numbers for Virginia--61%--without management costs.

Baja lost $50K in Virginia last month. Clarendon lost money last month. In fact, a lot of them lost money... Whose store made money? One guy--$2600 last month.

Why are there no female franchisees at this meeting?

Paleolithic Economics

An interesting new study links the rise in the number of old(er) members of paleolithic societies to massive leaps in human development.

Rachel Caspari of the University of Michigan and Sang-Hee Lee of the University of California at Riverside believe that groups in which old people survived better were more successful, in turn allowing more people to live into old age.

"There has been a lot of speculation about what gave modern humans their evolutionary advantage. This research provides a simple explanation for which there is now concrete evidence -- modern humans were older and wiser," Caspari said.

Of course, the news is of some interest on a "hard-science" basis alone. But really, that's something the paleontologists, biologists, and more will have to grapple with. What I got out of the story was something a little different: intelligent economic actors, solutions to collective action problems, and the provision of public goods.

The finding, published in this week's issue of the Proceedings of the National Academy of Sciences, supports the so-called "grandma hypothesis," Caspari said.

This credits grandmothers with helping to raise their extended families, contributing to a group's success.

When the bulk of your time is spent on personal subsistence, little time is left for other pursuits, like caring for children. Getting older would reduce an individual's ability to spend time on the more rigorous part of subsistence living (hunting, back-breaking gathering, etc). However, one who reaches an older age will have some better insight into longevity on the very grounds of their existence, and the growth of that person's child to child-bearing age. Suddenly, trade is possible. One hunts, while the other offers better treatment of growing children. Even if the older person were still able to get the smaller amount of food necessary to sustain their own lives, it makes more sense for them to provide education and childcare, while the younger person attends to other matters. Ricardo didn't invent comparative advantage, he gave us a great way to think about it. The better care given to children, the more likely they will be to reach old age, at which point they can contribute their knowledge for the care of the newest generation. Increasing returns to childcare and education, indeed.

Of course, any grandmother (or -father) will know this. But there's more to the story apparently:

Caspari and Lee rechecked their numbers and analysis.

"But then we started to think about it and thought we really shouldn't be surprised, because there is a behavioral change that took place over time at the same time," Caspari said.

"You start to see a change in symbolic behavior. You see art. You see a large number of people being buried with jewelry, with body ornaments."

Now, I don't know about you, but that sounds an awful lot like productivity gains, specialization of production, and substitution effects for leisure time. Without seperating out those who hunt better, and those who are more able to care for members of a family, no one would really have the time to become interested or skilled in art or crafts of any kind. That the art and jewelry making continued signals, in my mind at least, some general preference for the creation of it -- that is, the group found utility in having art made over having a weaker member not hunt for him or herself. Ask any mother how leisurely it is to raise a child, and I think we can say that not all cave-painters or jewelery crafters were simply women back in the cave doodling while the kids were asleep. These are specific choices made by those who had to spend a great deal of effort wondering about where the next meal was coming from. Attend a play, concert, movie, the opera, or really any art event today, and the people who attend are those who don't have to spend that time making money (finding the next meal, wrapped in a modern monetary system).

Rational choice theory may have some oddities and discrepancies with the real world, but I think it's hard to say that it doesn't have some serious traction.

So, yes, sure sure, the anthro is all cool, and the fossil record is, you know, spiffy...but I'd say this is a pretty interesting economic find...

Supply and Demand Immigration

Today I was flipping through the channels on my radio when I stumbled across Bill O’Reilly discussing the porous border between the United States and Mexico. He offered a solution to the “problem” (whether or not it is actually a problem is another blog in itself). Mr. O’Reilly’s suggestion is that California, New Mexico, Arizona and Texas use their National Guard forces to patrol the border. He continued on saying that within a few months so many people will get caught that the “coyotes” who smuggle paying customers over land will no longer be able to charge high prices based on guaranteed success. Those high prices are what ensure that there are many “coyotes” in business. If the success is no longer guaranteed, the argument goes, prices will drop, “coyotes” will go out of business, and illegal immigration will decrease substantially. What about smuggling people over water? Bill says that it’s not efficient enough so no one will resort to it on a large scale. Using economics, the border would be secure if we simply take Bill’s advice. Right?
Unfortunately O’Reilly has failed to take into account the fact there will still be millions of people who want to cross the border. Think of immigration as a market. Safe border-crossings are the commodity, “coyotes” are the suppliers, and those who wish to come into America are the buyers. The National Guard may reduce the amount of safe crossings that are produced in the short-run. However, given the huge demand for safe crossing, “coyotes” are more likely to innovate new ways to sneak across undetected than they are to quit altogether. Furthermore, while I have extremely little knowledge of oceanic smuggling operations (about as much as O’Reilly, I’d guess), I know that if the price people are willing to pay is high enough, someone will figure out how to make it worth the costs. Remember, 70 years ago commercial air travel was thought to be unfeasible too.
Trying to reduce the incidence of a specific transaction, if both parties are voluntary participants, is pretty darn close to impossible. We can see that fact in the market for illicit drugs. America has focused on reducing the supply of drugs. Yet considering the quantity of the resources devoted to stopping the supply, most experts would agree that we don’t capture even half of the drugs that are sold in America (I believe 10%-15% is a more accurate estimate). Similarly, even if we reduce the supply of safe border-crossings we have done nothing to decrease the desire of people to enter the United States. Mr. O’Reilly falls prey to the assumptions that most politicians and pundits succumb to: a fundamental misunderstanding of the incentives that regulation creates. I suspect that “coyotes” will probably always have newer, smarter ways to deliver their goods because they have a keen financial interest in doing so. Maybe we should pay Border Patrolmen extra for each illegal border crossing they prevent. It might be more effective. At the very least it’s a more interesting debate.

More On Piracy

One in three software programs in the world is pirated? Might be, according to a study by the Business Software Alliance.

Among key findings:

-The piracy rate in the Asia/Pacific region was 53 percent, with dollar losses totaling more than $7.5 billion.
-In Eastern Europe, the piracy rate was 71 percent, with dollar losses at more than $2.1 billion.
-In Western Europe, the rate was 36 percent, and dollar losses totaled $9.6 billion.
-The average rate across Latin American countries was 63 percent, with losses totaling nearly $1.3 billion.
-In the Middle Eastern and African countries, the rate was 56 percent on average, with losses totaling more than $1 billion.
-In North America, the piracy rate was 23 percent. The losses totaled more than $7.2 billion.

Here's a link to an English-Language version of the study. (UPDATE: The link was bad. A link to a PDF of the study is on the right hand side of this page.)

The process to fight piracy is a good example of what Taggert has identified as arms races. The ongoing dance between those seeking better protection and those looking for ways to break the protection could last for a while, with no clear winner. Harping on my continual comparison, we need only think of the drug war to see the potential for long-term, high-cost efforts on both sides that ultimately result in the same outcome we have now: for those who want it, pirated software will be possible, and one it is, it will be made available to others at far lower cost than the original privacy breaking. The payoffs of breaking the protection are high enough to insure some people will do so, with the frequency of such an event increasing as the certainty of being caught diminshes as happens in places with softer intellectual property laws.

Of course, making code open-source across the board could be one major swipe against piracy. Delivery methods are more proprietary, harder to recreate, and far more controllable in the long run. Code can be had, but help installing it, good tech support, documentation, free updates, and more; well, that just might cost you. Digital music could be cheap, but a blank CD might run you 10 bucks a pop. Could it be that content, in the digital age, is simply becoming a commodity?

A Little Piracy Goes a Long Way

As I've mentioned before, the developing world might be a perfect place for open-source software to get a foothold. While the benefits of open-source products are numerous, the only one that really matters in the very short-term view of most places that are barely able to scrape together the money for one or two computers is the price. And, in the developed world, price has been one of the things open-source software has been able to compete on.

But what happens when the advantage is taken away? It turns out that, in Iraq at least, a good name will get you pretty far.

Reports from inside [Iraq] say curious citizens are keeping Internet cafes filled to capacity, that eager students are returning to universities to learn how to program and that high-end computer workstations can be bought for as little as $150 in city marketplaces.

But even with all the growth, there is still one aspect of technology that has yet to penetrate the country's borders: open-source software. With software piracy so rampant that a CD copy of almost any program can be bought for just 2,000 dinars, or $1, the demand for free software just isn't there yet, according to Ashraf Tariq and Hasanen Nawfal.

{...}

"Most of them just heard about Linux but are afraid of trying it. For home users things are worse -- for them, a computer equals Windows, and vice versa."

Just how hard do you think Microsoft will push to fight piracy in this case? "Path dependence" as an economic argument for resulting equilibria situationas is often a sort of last resort argument, an admission that for whatever reason, "things happened in such a way as to get us here, and now too many people cosider it too costly to shift to something different." One of the problems with it is that the starting point down a certain road is often hard to identify. Seems to me, though, that we might be able to pick this out as the starting point for the growth of Microsoft in Iraq.

Add to the argument certain biases in trade policy:

Though the United States has eased several restrictions governing the export of goods and technologies to Iraq over the past year, "publicly available" software, like Linux, remains caught in limbo because it implements certain security standards -- namely, strong encryption.

Linux developers say strong encryption is necessary to protect the security of businesses and Internet users. American policy makers believe it's a tool that terrorists may use to hide their communications from law enforcement officials. In light of the current war on terrorism, the latter argument has so far prevailed -- meaning anyone wishing to send a copy of Linux to Iraq must first obtain permission from the Department of Commerce.

Meanwhile, the Department of Commerce has classified Microsoft Windows and Sun Solaris as "mass-market encryption products," meaning that the vendors can ship them to Iraq without a license, according to Don Marti, president of the Silicon Valley Linux User Group and editor of the Linux Journal.

Simply because there are more Windows products available now, it's easier to sell them elsewhere. Economies of scale at its finest. The distinction, you'll no doubt have noticed, is rediculous. "Mass-market" is being defined here by volume rather than by sales outlet. Windows is "mass-market" because it is available more places, whereas Linux -- though sold through the same stores -- is not because of limited availability.

For reference, here is the relevant section of the Code of Federal Regulations for dealing with encrypted/encryption products.

Get the country hooked now, and they'll be more likely to come begging for more later. (You know, the similarities between software and illegal drug industries are so close, I don't understand why someone doesn't attempt to use insight from the latter to help explain the patterns of the former. Why do people shell out such high prices for such bad software? Why do they keep going back to the same provider when they can be hurt so badly by viruses? )

Quick Pointer

For more on the health insurance issue, Arnold Kling has an interesting column up at Tech Central Station.

Rather than initiating the poor into the wonderful world of insurance company rules and claims-filing procedures, Fogel suggests that we would do more good by directly providing them with prenatal and postnatal care, health care education and mentoring, child health screening in public schools, and neighborhood public health clinics.

As I mentioned in the comments below, my reading of current health care issues would make me think that Fogel's right by saying that the poor under-utilize certain kinds of health care: preventative care, most notably. The later -- drastically higher -- cost of catastrophic health care is shifted towards other consumers then.

Just more reasons that I'm not sure the real issue facing the country is health care insurance per se, but rather the cost of health care provision.

Do the uninsured subsidize the insured?

Did you ever play with one of those liquid-filled balloon-like toys that, when you squeeze one end the other end extends, usually displaying a picture of a snake of some sort? The impression was supposed to be that the snake was inching along at the effort you expend on one end, since the whole contraption was wrapped in on itself. I remember being fascinated with the mechanics of it when I was young. There seemed to be change and progress, despite the clear lack of introducing new liquid or removing the old. I'm no expert, but something about the issue of health insurance in this country strikes me as similar to this old toy.

Case in point, this (to me) odd editorial from the USA Today: Uninsured billed unfairly.

According to the article, the uninsured are facing higher prices for their health care than the insured, since hospitals charge insurers less, and face a cap on the price they can charge to medicare patients. The article sounds almost incredulous that hospitals are attempting to recoup their cost of operation in places like care for the uninsured. Rather than be shocked at the behavior, I'm personally shocked at the surprise this seems to have aroused in the op/ed writers. Though, I suppose I shouldn't be since they've brazenly declared their poor reasoning from the outset:

Scott Ferguson, a retired artist without health insurance, was billed $66,900 for treatment of a heart condition at St. Anthony Central Hospital in Denver last December. If he had had insurance, his attorneys claim, the tab would have been about $10,000. Last month, he joined a lawsuit that accuses St. Anthony and other non-profit hospitals of reneging on promises to provide charity care in exchange for their tax-exempt status.

Well, yes, the bill for the insured would be lower, as that's the very point of having insurance. Pooling risk makes it possible for the insured to recoup some of what they've previously spent on the insurance. Sure, Mr. Ferguson has a higher bill, but he also hasn't had to face a couple hundred dollars a month in insurance costs. The act of having the insurance should, by definition, make the payments lower. How this shows anything aside from poor logic, I have no idea. Rather, it's this that makes me the most alarmed:

Ferguson's experience highlights the double whammy against uninsured patients who aren't poor enough to qualify for Medicaid. Not only do they have to pay their own medical expenses, but they often are victims of price-gouging by hospitals that offset the lower fees they charge insurers, which have the clout to demand deep discounts.

Worse, many hospitals employ strong-arm collection tactics that include garnishing wages, seizing homes and seeking arrest warrants. The financial impact can be severe. Medical bills are the second-leading cause of personal bankruptcy, a 2003 Harvard University study found. The unfair disparity in hospital fees is just one price society pays for a health care system that leaves 44 million without insurance and few with protections from exorbitant charges that have little relation to actual costs.

I suppose it's my fault for being surprised, since I had always assumed that people simply understood the relationship between prices and costs. It's not obtuse economic theory. Every day, in almost every part of the globe, people are assembling goods and seeking to sell them. It's a truly rare individual who isn't attempting to at least recoup the cost of production in the price of the good. After all, if they keep taking less than the thing cost to produce, they will soon have no money with which to produce more.

Why should health care be any different? If a hospital costs a certain amount to run, then, through the prices charged to all those who use its services, it will need to cover that cost in order to keep running. Telling a hospital that it can only charge certain amounts to certain people, it's only natural that the gap between the price charged and the cost incurred must be covered somewhere else. You can squeeze the balloon in one place, but that just means the liquid will rush to someplace else; it doesn't just leave.

And notice the odd reasoning in the second paragraph above. Insurers, according to this piece, are able to demand massive discounts in the prices they face; but the problem is that too few people are uninsured. Extending insurance coverage would, by extension, mean that everyone takes advantage of the discounts offered to insurers, right? What happens, then, to the gap that isn't being covered? The hospital hasn't gotten cheaper to run. The cost of provision of care hasn't become more efficient. Instead, every consumer (the insurer) is simply paying less. Either hospitals will close, or someone else will have to pick up the tab: if it's not the person needing health care, and its not the insurer, then who? The only likely candidate I can think of is the government. Which means, ultimately, the people. So not only would we all pay for insurance, but we'd also end up paying for the subsidization of hospitals. After all, in this article and my example, there has been no change in the cost of health care provision.

Unless something can poke a hole in the balloon -- that is, reduce the growing costs of health care provision -- the extension of insurance strikes me as just squeezing one end and calling it progress.