Journalists: Learn Economics!

One of my favorite news articles from the past year is this:

What an Arrow Shaft Has to Do With a $700 Billion Rescue Plan

It's great for a bunch of reasons.  First, it ties directly in to a big public policy issue.  The big bailout bill had everyone talking, so it was great for getting people interested in economics.

Second, it tied in directly to material I cover in my MBA classes. This is great for motivating why MBA students should try to master economic thinking.  

Third, there's something a little sneaky going on... and everyone likes a good coverup.

The story is this: The bailout bill included a bunch of stuff that was completely unrelated to the bailout.  One was an elimination of the 43-cent excise tax on "natural-wood, unreinforced arrow shaft(s) suitable for use with bows with peak draw weights under 30 pounds."

What was this doing in the bailout bill?  The Senate needed to get House votes, so the bill was stuffed with a bunch of tidbits intended to make House members happy.  Peter DeFazio, an Oregon Democrat, had voted no on the bill --- and Rose City Archery is a big arrow maker, located in DeFazio's district. 

But the really great thing is this quote, from Rose City Archery CEO Jerry Dishion:  "'We don't get a penny,' he said, disputing reports that removing the tax would mean a windfall for Rose City Archery."

Dishion argues that the only beneficiaries of the tax reduction will be "school districts and the Boy Scouts and Girl Scouts organizations that buy his company's arrows."

Whaaaaaaat?

Simple analysis of demand and supply curves is enough to tell us that Rose City Archery will almost surely benefit.  If schools and scouting organizations don't pay this tax, then the price buyers pay will be lower... and they'll demand more arrows.  And this will mean more business for Rose City, and higher profits.  The only exception is if demand for arrows is perfectly inelastic --- this would mean that the quantity of arrows demanded doesn't increase when the tax goes away.  But I doubt this is going on here.  Seems to me that school districts and scouting organizations might have (a) limited budgets, and (b) lots of choices about what sorts of activities to put in front of kids. A reduction in the price of archery would probably mean more of it. 

I wish the reporter had followed up with this question:  "Mr. Dishion, what you said about not getting a penny is true only if demand is perfectly inelastic.  Can you provide us with some evidence on this point?"

Eat Global, Vote Local

A colleague from graduate school --- I won't name him but he's a well
regarded economic theorist --- somehow stumbled upon my blog post
about voting and commented:

> Presumably the probability that the
> decision ends up in court declines in the margin of victory. Thus, by
> voting one reduces the probability of the decision being made by
> courts.

(Oh, and a shout-out to my Stanford homies --- is that what the kids
are saying these days?)

This point is certainly right, so it's not the case that the benefit
of voting is literally zero as I argued below.

To offer my own add-on to his point, suppose that the burden of proof
in a court case is likely to be on on the side that lost the vote
count. So even if I'm in a 5-4 majority that's reviewed by the
courts, my side may have an easier time prevailing in court on account
of my vote.

But I think it's still the case that the pundits are misinterpreting
Florida 2000.

I think they argue that the lesson that from Florida 2000 is that
"Every vote counts because look how close Florida was."

My response to that is that I already knew that vote tallies could be
close --- that's the whole reason I voted in the first place. But
the Florida experience suggests that what REALLY matters is the view
that the courts take of close elections, not the tally in the close
election itself. So my lesson from Florida 2000 is that my vote
matters even less than I thought it did.

Sad, I know.

But the whole reason to revisit this is the following: Think about
the elections where you ARE likely to be pivotal. Those are the ones
where your vote matters most.

And which elections are those?

Local elections.

If you have a vote for a mayor, a city council person, a zoo bond,
whatever... Those are the elections where your vote will matter. Your
vote --- especially if you are voting in Utah --- is really, really,
really unlikely to affect the presidential election. So don't waste
your time getting informed about the McCain vs. Obama tax plans.
Instead, spend your time getting informed about the city council, the
state legislature, the aviary. That's where your vote is likely to
actually matter.

(I'll return to "Eat Global" in an upcoming post, don't worry.)

Auctioning Football Seats

A couple of PMBA groups submitted this article:

Jets to Auction Seats on eBay

This article is a good answer to a question I often get: "How can I price optimally if I don't know what the demand curve is?"

The Jets get to sell these seat licenses once and only once, so it's not possible for them to do pricing experiments to determine the elasticity of demand. So an auction is a good alternative.

This is pretty similar to what Google did with their IPO a few years back. As with the selling of seat licenses, Google gets to sell these shares once and only once. In a typical IPO, a firm will set a price. If the set price is lower than the market clearing price, then the IPO is "oversubscribed." In this case, the underwriter (usually a big investment bank) will determine which of the potential buyers are allowed to buy.

Oversubscribed IPOs have two big problems. First, the firm is selling its shares for less than the market thinks the shares are worth. This means the firm is leaving money on the table. Second, oversubscribed IPOs have the potential for abuse, as investment banks would often allocate the underpriced shares to favored clients.

If the set price is too high, then the issue is undersubscribed, and all heck breaks loose.

Google circumvented all this using an auction. Google asked investors to submit something like a personal demand curve. Investors gave a list of how many shares they were willing to buy at each price.

Example: I'm willing to buy 100 shares if the price is $50 each. If the price is $40 each, then I'll buy 120. If the price is $30, I'll buy 140.

Then Google took the demand curves and said "We have X shares to sell... What's the price at which quantity demanded (given these demand curves) is equal to quantity supplied?" That was then the price that each buyer paid.