Market Power

Musings by an academic economist on the power of markets and the power over markets.

Friday, January 28, 2005

Inflation Target

People speculate about what the Federal Open Market Committee (FOMC, the primary monetary policy making body, headed by Alan Greenspan, of the US Federal Reserve System) is going to do about interest rates. One may hear "Will the Fed raise interest rates by a quarter percent" as if the FOMC will wave some magic wand and raise all interest rates by a quarter percent. In reality, when the FOMC makes an announcement about altering interest rates, it has made an announcement on the level to which to drive a particular interest rate, the federal funds target rate, which is just that - a target, not a real interest rate. The announcement is merely a public commitment of the level to which the Fed wants to direct the actual Federal Funds Rate.

The Fed is contemplating making public an inflation rate target, but nothing is imminent. See the Wall Street Journal article here.

A snippet:

As Federal Reserve officials prepare to raise interest rates again to keep inflation from rising, they are grappling anew with an old question: Should they aim for a specific inflation number?

On the agenda for next week's two-day meeting of Fed policy makers is a discussion of whether the Fed should set a numerical objective for inflation and, if so, what it should be, according to people familiar with the matter. The Fed ponders such long-term topics twice a year, and no formal decision is likely. Nor is an explicit, public inflation target on the table.

The Fed is required by law to maintain stable prices, but it doesn't quantify that objective as a specific inflation rate. Doing so needn't be the same as setting an explicit target, which implies a duty to adjust interest rates when inflation goes above or below the specified range. Still, if Fed officials can ultimately agree on a number -- a big if -- it would be an important change from its generally successful practice of letting investors infer from its actions what constitutes acceptable inflation.

Many central banks have committed to meeting an explicit target for inflation, believing a target makes them more transparent, credible and accountable. But the Fed is unlikely to join them under Chairman Alan Greenspan, who thinks a target limits his discretion to respond to differing risks as he sees fit.


Thursday, January 27, 2005


It's not what you think. I was thinking of the National Hockey League Pressure Appliers. According to John Palmer over at the Sports Economist, those applying pressure to get a deal done may be the banks that have loaned so much money to the hockey team owners to build their stadiums.


Wednesday, January 26, 2005

Bill Gates, Sex Kitten?

There's something creepy about a dreamy eyed Bill Gates. See more of Bill here at Iowa Law Girl.


Tony Kornheiser on Jacksonville

Sheesh. If he says this about Jacksonville, what does he think of the Twin Cities??

Have you ever been to Tampa? It's heaven, if you like Waffle Houses.

Jacksonville makes Tampa look like Paris!

Jacksonville has this one great thing, the TPC course with the island green on No. 17. (Which is actually in Ponte Vedra.) And the rest of it can be described with this phrase, "Welcome to Hooters."

And this:

My friend Tony Reali, "Stat Boy" on the "PTI" show, flew to Jacksonville a few months ago to emcee some dopey trivia contest. And when he walked off the plane, he got a whiff of something that almost brought him to his knees -- it was Jacksonville -- and he made the not uncommon observation, "This place smells."

"I am from Staten Island, and I have lived in New Jersey," Reali explained. "I know bad smells. This was right below Secaucus."

But how does the smell compare to Sioux City's?

Read more here.


Tyler Cowen on Labor Unions

Tyler Cowen at Marginal Revolution has this piece on why labor unions are declining in the US. His last comment:

It remains a puzzle to me why unions are so strong in Hollywood, ....

I don't know about Hollywood, but he doesn't mention how ubiquitous labor unions are in Major League Sports (one of the commenters to the piece mentions this). Professional sports leagues, especially baseball, provide interesting studies of how labor unions form. On one hand, you've got an industry made up of a few firms with a lot of monopoly power in their local markets, so there are rents available for unionized workers to capture. And before free agency, you've got a labor market that bears the hallmarks of monopsony power (a monopsony is a market where the buyer of a good has control over the price of the good - in this case, the "good" is sports playing skills). Those are two good ingredients for cooking up a batch of unionism.

But why don't college football and basketball players unionize?


Hockey Substitutes and Complements

I posted this over at the Sports Economist, but some of my students may find it interesting as well. I posted earlier about what hockey players and hockey teams are doing to while away the time away from NHL games. What are hockey fans doing? As we'd expect, subsitute forms of entertainment have seen a boost while complementary forms of entertainment are feeling a bit of a pinch. On the subsitute side, minor league hockey attendance is doing well. So is college hockey, especially in NHL cities where current college hockey teams, historically, that typically have attendance below capacity. On the complementary side, some sports bars in Toronto, Ontario aren't doing so well.


Natural Disasters and Price Fluctuations

This very interesting article appeared in this morning's Wall Street Journal (paid subscription required) on the effect the tsunami had on the Banda Aceh economy. First of all, regardless of what you've heard, the tsunami is not going to be good to the overall economy of Banda Aceh or any other economy devastated by the tsunami. More to the point, here is the first quote:

The economy of Banda Aceh has been turned upside down by calamity, generosity and opportunity. The earthquake, the tsunami and the arrival of thousands of foreign aid workers bearing food, goods and money have combined to warp prices, wages and rents in this devastated city at the northern tip of the island of Sumatra. The price of salt is up because the coastal salt makers have been wiped out. Beef is down because of fear of disease. Fresh fish is up, but few want to buy any. Rumor has it that fish are contaminated because they have been feeding off corpses swept out to sea.

Nowhere has the uproar been more pronounced than in the housing market. Perhaps half the homes in Banda Aceh were destroyed by last month's earthquake and the tsunami that followed, leaving more than 125,000 people around the city living in tent camps, according to the United Nations. Now not only do the survivors need housing, but so do the aid workers here to help them.

Last summer's hurricanes that hit coastal areas of the US did a lot of damage and there were many instances of price spikes, so-called "price gouging", that occured in markets for things such as bottled water and construction services. We are seeing some similar things going on in Banda Aceh, but a primary diffence between Banda Aceh and the areas hit by the hurricanes is the huge loss of life as a result of the tsunami. This has put a damper on the upward price shocks.

Here is a graphic from the article detailing price changes and primary reasons:

[ ]

Another quote:

...Said Firdaus, the 35-year-old owner of Rajawali Furniture, has no customers for the polished dining-room sets and entertainment centers his carpenters make. Moreover, Mr. Said has seen a surge in the price of nails, finishes and wood. His only client at the moment is a Swedish aid organization that is paying him $390 apiece to build 20 two-stall, white outhouses with zinc roofs and turquoise squat toilets for the refugee camps. His monthly profit has plunged about 75%, to roughly $400. He expects his business to boom when rebuilding begins.

At Lambaro market, Marhaban, a 48-year-old poultry dealer smeared with chicken juices, wouldn't budge when two women in head scarves offered him the pre-tsunami price of 20,000 rupiah -- about $2.25 -- for a scrawny chicken. Mr. Marhaban, who like many other Indonesians uses only one name, wouldn't part with it for less than $2.60. The tsunami decimated his own flock, so now he has to bring in chickens from the city of Medan, a 12-hour truck ride across the mountains. Before the disaster, he sold 500 chickens a day; now he's lucky to sell 150. "The situation is very unstable right now," he said.

Price gouging is normally reserved for criticizing producers. They, supposedely unfairly, take advantage of a natural disaster to make a profit. Can the same be said of consumers who know businesses are having trouble selling their wares because of the death of so many former customers?

Another quote:

Fishmongers are in worse shape than poultry peddlers are. Many fishermen were killed or left boatless when their coastal villages were crushed. Many fish sellers died, too. One who survived is Ismail Husein, who lost his wife and their five children to the tsunami. His stock at Sibreh market, less than 10 miles outside Banda Aceh, consists of just a few small blue tuna and other fish shipped from across Sumatra.

Counterbalancing the short supply is diminished demand. Worried about contamination, many people here are afraid to eat fish these days. So while Mr. Ismail is charging more per fish now, he is selling fewer of them. His pre-tsunami daily profit, about $11.25, has been cut by 80%.

For my principles students: that's an example where both demand and supply shift. If Mr Ismail's prices are indicative of the market, then he believes that supply shifted more than demand did. What leads us to this conclusion?

Another quote:

The Indonesian government's food logistics agency, Bulog, keeps an eye on the prices of staples, especially rice. The agency maintains a 30,000 metric ton rice stockpile in warehouses around Aceh province and has released 5,000 tons into the market to keep the price near its target of roughly 15 cents a pound. The government is considering intervening to reduce the prices of sugar, flour and palm oil, said Tito Pranolo, Bulog's director of business development. "The market is not working right now."

A good deal of the problem, he said, is the fierce competition for truck freight from Medan. Aid groups use the undamaged city as a distribution center and have hired fleets of trucks to carry relief supplies to Banda Aceh, pressing up costs for private traders.

Aid agencies are also bidding up the price of cars, thousands of which were destroyed by the tsunami. Irfan Juliansyah, 34, used to have a one-man-band act playing "My Way" and other standards at the Kuala Tripa Hotel restaurant. The tsunami flattened the hotel, so he now rents his flashy Daihatsu jeep to Catholic Relief Services and hires himself out as its driver. As a musician, he earned about $540 a month. His jeep pulls in $1,800 a month, a huge sum in a country where per capita income was $710 in 2002, according to the World Bank.

The market is working like it should be working. Just because prices of some goods increase does not mean that a market is working poorly or unfairly. Indeed, the price increases are needed to bring in resources to produce stuff now in higher demand. The graphic above says that a whole chicken cost $2.25 before the tsunami and now costs $2.60... why doesn't it cost much more? One reason given in the graphic is that chickens are now trucked in from Medan. The resources used to make chickens have alternative uses, and the price increase signals producers that chickens are now relatively more valuable than before. Had prices not been allowed to increase, would there have been enough food to feed those in Banda Aceh?

I also find it interesting (not surprising) that the influx of aid (and thus aid workers) have increased demand for various products, increasing their prices.


Eddie Van Halen

Eddie Van Halen turns 50 today. Eddie is one of the pre-eminent guitarists of all time (at least in this guitar player's humble opinion), but doesn't make the top 50 in some lists these days (he's number 70 here). Not only was Eddie a great guitar player, he invented many of the techniques still used today (by those guitarists gutsy enough to actually play lead guitar - or is it a demand phenomenon?). In my mind, his closest rivals in terms of greatness from that era and in that style of music would be the late Randy Rhodes and Michael Schenker - one of the signs of greatnes: his work still reverberates today.


Tuesday, January 25, 2005

Fun Ad

Here are a couple of weird internet ads. Here's one for the VW Polo. Here's one called "The Subservient Chicken." I got the chicken to scratch its butt, sit on the couch, run around, and sit on the chair - all at my command. Just for fun, have it flip you off.

Thanks to the Eclectic Econoclast for the tip.


The Yips

The Yips are associated with golf. The yips are supposedly uncontrollable movements that mess up even the easiest of putts. According to the link, the yips have been linked to a neurological problem while others have linked it to anxiety that comes from pressure situations. Lord knows I have experienced the yips. Heck, I experience the yips at the tee of a par 5 straightaway with no hazards!

Are the yips are a more common phenomenon in sports? Marty Schottenheimer can't win the big one. He's come to the brink many times with three different teams, and can't make the big dance. In the playoff game against the Jets, Schottenheimer had a meltdown that may be indicative of a man under intense pressure to take the next step Bill Cowher has had his difficulties too. Stormin' Norm Stewart, legendary coach of the Missouri Tiger basketball program for 32 years, never made the Final Four.

There are many factors at play in these instances. But if the yips are a psychological phenomenon and are related to performance anxiety in espeically pressured situations, then the yips may be a factor in the inability of these coaches to claim the top prize.


Smoking Cessation - Private

A company in Michigan has given its employees incentives to quit smoking: it's firing those who smoke - anywhere.


Monday, January 24, 2005

Conspicuously Absent

Sammy Sosa has not been included in this year's Cubs calendar. I realize what he did at the end of last year was, shall we say, reprehensible, but where's the love? Did this exclusion raise the value of the calendars or lower its cost?


Racial Profiling

Today's Beckner-Posner blog is about racial profiling. Here are Becker's comments. Here are Posner's. If you have time, check out the comments under Posner's post. There's a war in them thar comments!

The Eclectic Econoclast has some observations of use on these posts.


Ethanol Mandates

Tim Pawlenty, the governor of Minnesota, has proposed to push legislation in the state that would require all gasoline sold in the state to contain 20% ethanol. See here and here and see here for a Google Search with several pertinent results.

Why does this have to be mandated "from above"? From the first link:

“We want to move Minnesota dramatically and boldly toward the development and use of more ethanol and alternative fuels,” Pawlenty said.

Ethanol is made from corn and mixed with gasoline. Experts have said it burns cleaner than normal gasoline.

OK, clean air is nice. But air quality is not that big of a problem in Minnesota. If we want alternative fuels, I think a good place to start is to have a high price of gasoline so that demand for alternative fuel sources will increase and create incentives for people to find and develop alternative sources. What else is at play here?

He said that increasing the use of renewable fuels was one way to lessen the country's dependence on foreign oil.

“Frankly, our national energy policy is going to benefit to the extent we can encourage other states to follow our lead,” he said.

Are we really dependent on foreign oil or do we consume it because other countries have a comparative advantage in producing oil?

Minnesota is the only state that mandates the use of ethanol in gasoline. If it is such a great alternative resource and is so clean burning, why aren't other states, say Colorado and California, following Minnesota's lead? Why would increasing the mandated proportion from 10% to 20% cause others to follow our lead?

OK. What else matters?

Pawlenty said his plan would be a “huge boost'” to Minnesota farmers. ` “I don't have any numbers, but I think we can say in rough terms that it's going to be very significant,” Pawlenty said.

and later....

About 17 percent of the corn crop is now being used for ethanol, said Minnesota Agriculture Commissioner Gene Hugoson.

“When you look at the opportunities that exist for agriculture in Minnesota, for that matter throughout the United States, to be involved with a renewable energy becomes a win-win situation,'' Hugoson said.

Now we are getting somewhere.... a special interest - specifically the farm interest - want to increase the demand for one of their products. I have no doubt that it will be a "huge boost" to farmers. The mandates will increase the demand for corn which will increase the price of corn. But what about the collateral effects to consumers?

I imagine that the reason that there is already not 20% ethanol in gas right now is because the costs of doing so outweigh the benefits. If Shell put ethanol in its gas and began to draw consumers away from Texaco, Texaco would have incentive to put ethanol in its gasoline.

There is an externality argument to be made. Burning marginally cleaner gasoline mostly helps other people, not the person buying the gas. The gas buyer doesn't account for all the benefits from using the cleaner gas, only his/her private benefits. But just because there is an externality does not make it appropriate to mandate the use of the ethanol.

This mandate, if it passes, will also push up the value of land used to produce corn which will give incentives to farmers to take other crops out of production, pushing up the prices of these goods. If demand for these crops is inelastic, expenditures will increase as well. Corn is also used in animal feed, so the mandate should also increase the prices of pork, beef, etc to consumers (PETA may come out in favor of this mandate! Farmers and PETA - talk about strange bedfellows!).

This proposal has bipartisan support. If it didn't, the unsupportive party would not get much support from the farmers.