• Consolidating the debate to winners and losers allows us to economize on time spent debating, in much the same way that stereotypes allow us to economize on scarce information to make an evaluation. It’s much easier (intellectually lazy?) to decide whether you like one group over another than it is do sound economic analysis on policy. Humans are social animals and we prefer making evaluations based on social standing over logic or cost-benefit reasoning.
• Not all groups exhibit the same propensity to vote, so by framing issues in terms of winners and losers, politicians can pander to groups who vote en masse, potentially at the expense of other well-represented groups. Also related here is simply that some groups are much larger in number than others and hence capture more votes.

But there are serious problems with framing things in this way.

The first is simply that economic exchange is not a zero-sum game; most exchanges in a modern society are a positive-sum game. Evolutionary psychology creates a strong tendency for humans to believe that games are zero sum, since for most of our evolutionary history they were (and in many cases were actually negative-sum). But with the advent of economic growth driven by specialization and trade, wealth and well-being can be created out of thin air. The millions of economic transactions occurring daily produce an enormous number of small net-positive exchanges which create wealth. Those who create wealth – whether on a small or large scale – largely do so *not* at the expense of others. In the real world, often it’s winners vs. winners, not winners vs. losers. People simply win at different magnitudes.

Secondly, identifying who wins and who loses is different than identifying the magnitude by which the winners win and the magnitude by which the losers lose. In committing this error, most policy discussions simply boil down to which group we feel more compassionate for as a victim, even if the degree by which some group “loses” in aggregate is far more than the degree by which the other group “wins”.

Third, identification of who is the winner or loser may actually be incorrect (or, more ambiguous than is commonly thought). To give an extreme example, let’s imagine a law was passed tomorrow granting a minimum wage of $20/hr. Most would believe the winners are the poor and the losers are companies employing minimum-wage workers. Let’s leave aside identification of the loser there to the next point, but it’s by no means a foregone conclusion that the poor “win”, as such an enforcement of wage above where many workers’ productivity lie is likely to cause higher unemployment (this is basic supply/demand/elasticity economics). So even within the proclaimed group of winners, some people lose big time by loosing their jobs, but many others win by getting higher pay. Since the laws of economics are more powerful than the laws of politicians, the real minimum wage is always $0. Someone who makes $0 (job lost) is clearly worse off than someone who happens to keep their job and make $20/hr. So who wins on net? It’s fairly ambiguous and depends on 1) the nature of each employee’s utility function, and 2) the percentage of jobs lost. To be clear, I’m not debating the validity of minimum wage as a policy tool here; I’m merely pointing out that even in such a simple example, identification of winners and losers is often fraught with error or at best uncertainty.

Fourth, even if the identification is correct, it may be incomplete: there may be others winners or losers that haven’t been identified. Most instances of this involve the well-known tendency for humans to focus more on benefits or costs that are high in magnitude but low in number than those that are low in magnitude but high in number. This mis-identification of costs and benefits occurs almost any time the government is asked to intervene to grant privileges onto some special class of people, company, or industry, where there are usually more (but more diffuse) losers than are commonly thought.

Back to the minimum wage example, although Wal-Mart and other companies certainly do lose, they aren’t the only losers – and I would argue not anywhere near the biggest loser. Firstly, shareholders of such companies ultimately lose, since corporations are a legal abstraction of shareholders, many of whom are not considered to be in the same group of people as corporate management so abhorred. Even more importantly, consumers across the board lose a result of higher prices they pay for merchandise, especially goods and services that are very labor-intensive. What’s ironic here is that in many cases, consumers purchasing goods/services produced by minimum wage workers are more likely to be poor themselves, imposing a more disproportionate cost on low-income consumers – the very people advocates claim to be helping.

Another example is trade restrictions favoring some particular industry. If we slap tariffs on food imports, lots of American farmers may win (and the presumed loser is foreign food produces, which is true). But in reality the biggest loser by far – loosing by far more than the American farmers do – are American consumers, having to pay individually slightly higher prices for food which in aggregate is an enormous amount of money. But these consumers are diffuse; they incur costs that are low in magnitude but extremely large in number. The political incentives of such groups who may be small in number but suffer large gains or losses individually to organize them also make them more vocal, which is perhaps why they are not identified as losers to begin with.

Fourth, framing a debate in terms of winners and losers tends to fallaciously see policy affecting those groups as being a static system, whereas it’s actually quite dynamic: policy decisions often affects the behavior of individuals in ways unaccounted for, altering a) the very relationship in the system they seek to change, b) incentives in the economy as a whole, outside the winning/loosing groups. This is perhaps the most important insight from economics that policy makers and voters routinely misunderstand – comparing initial policy intentions with actual results reveals the law of unintended consequences quite well. This is why economists know to evaluate policy in terms of the incentives created or destroyed (and post-hoc, the actual results that took place), not on the proclamations of those making legislation, or the intentions embodied therein.

One example of (a) is tax policy, whereby increasing marginal tax rates on one group of people but not others is often thought to be simply a matter of “math” (just multiply the marginal tax delta by income and that’s your increase in tax revenue). But the very change of marginal tax rates creates behavior changes that most assuredly increases revenue by less than you’d expect by straight “math”. This effect can in rare cases be so extreme, it actually swamps out the straight math calculated revenue increase entirely, as people work less or are incentivized to shift income in such ways to avoid taxation beyond the simple marginal increase. Though estimating these behavior changes may be difficult, and their magnitude debatable, it’s important to understand that they do exist and do distort the relationship.

I encourage you to think about these issues next time a politician or someone else frames a policy debate in terms of winners and losers; reality is much more nuanced than many would have you believe. An understanding of economics, statistics, and cognitive psychology goes a long way to seeing public policy issues clearly. We must always be aware of our own biases and natural tendency to commit cognitive errors, for our natural tendencies and inclinations are often dead wrong; economics is often very non-intuitive. Failing to do so produces bad policy and impoverishes our well-being more than would be necessary.

1. What do you think is the most effective way to decide what the price should be for a product or service? Why? What results would you expect from your proposed mechanism in terms of shortages and surpluses in the market?

2. What do you think is the most effective way to decide what the price for labor should be in a labor market (total compensation)? Why? What results would you expect from your proposed mechanism in terms of shortages and surpluses in the market?

3. If the answer to question #1 differs from that of question #2, what characteristics of the product/service markets vs. labor markets would cause this mechanism to be different? Why?

4. What economic effects would you expect “collective bargaining rights” for government unions to have on the following groups of people: a) existing employees, b) potential employees, c) taxpayers.

5. What economic effects would you expect “collective bargaining rights” for private sector unions (working for a company in perfect competition) to have on the following groups of people: a) existing employees, b) potential employees, c) taxpayers, d) shareholders of the company, and e) consumers of the good or service being produced. Relative to question #4, would you consider these effects to be a) more adverse, b) less adverse, or c) about the same? Why?

6. Many people believe public sector workers fighting for “collective bargaining rights” are “underpaid”. Explain the term “underpaid” in the context of your answer to question #2.

7. Many people believe that the answer to question #4a is “positive” (existing employees get more) and #4c is “negative” (taxpayers pay more). This would suggest a government-imposed wealth transfer from taxpayers in general to existing employees working for the government. Would you consider this wealth transfer a) socially optimal, b) socially suboptimal, or c) doesn’t make a difference. Why?

8. If the answer to question #7 is “a) socially optimal”, what other other mechanisms for achieving the net effect of aforementioned wealth transfer exist within the government’s control, and how do their relative efficiencies/effectivenesses compare? BONUS: If this wealth transfer is socially optimal, what marginal increase to this wealth transfer would cause it to stop being socially optimal (where is the “interior maximum” of the optimization problem).?

It is well understood in economics that cartels are anti-competitive in the sense that they are, by definition, agreements among competitors to fix prices above their market-equilibrium prices.

9. What economic effects would you expect price-fixing cartels to have on the following groups of people: a) employees of the cartel members, b) shareholders of the cartel members, c) consumers of the cartel’s products/services. Taking care not to double-count, would you expect the net social effect to be negative, positive, or zero? Why?

10. Most modern governments have laws against cartels from fixing prices, under the implicit assumption that the answer to question #9 is unambiguously “negative”. Do you agree with these laws against cartels? Why or why not?

12. What economic differences exist between cartels collectively setting prices and labor unions collectively bargaining on total compensation?

13. If included in the answer to any of your questions above includes a claim along the lines of, “people are not products and services” – setting aside for the moment that “labor” is being demanded, not “people”, how is the distinction of what’s being demanded economically relevant to the economic forces at play? Be specific.

14. Does the current budget direction (cutting vs. increasing) have economic relevance to policy question of whether or not “collective bargaining rights” are socially “good” or “bad”? Why or why not?

BONUS QUESTION (Public Choice Economics): Referring back to question #4, how do you expect the *average magnitudes* of the effects to differ amongst the three groups? What might the differences in these magnitudes suggest about incentives for each group to petition the government (protest, lobby, etc.)? Assuming these efforts to petition are successful in making policy changes in favor of each group’s members, are these incentives aligned with what you would consider the socially-optimal policy choice?

I am genuinely interested in responses (in the comments). Inquisitive readers interested in how economists answer these questions and more in almost total unanimity should refer to the article on Labor Unions from the Concise Encyclopedia of Economics. Also, but more broadly, excellent lecture notes on labor market regulation and labor unions from the economist Bryan Caplan.

There are of course benefits of doing things at the same time as others.  Having a standard work day from 9AM to 5PM ensures that business to business transactions and meetings almost always occur at a mutually-convenient time.  Having lunch between 12 and 1:30 ensures that you’re probably able to find a lunch buddy.  Stopping work at 5PM means you’ll probably can enjoy time with your spouse at the exact same time he or she can enjoy time with you.  These are all matching benefits – doing things at the same time has value to you because it produces more matches in transactions, and this is indeed a very good thing.

On the flip side, however, there are costs in goods and services that are rivalrous and in relatively fixed supply within the short time period they are demanded.  Road systems clog up in the morning and after work as everyone commutes at the same time, exposing substantial time and gasoline costs on some households.  Many restaurant establishments are jam-packed during the business lunch hour, incurring time costs or uncertainty costs (in the sense that you aren’t certain you can even find a seat).  Starbucks from 8-9AM almost universally has long waits just to get a cup of coffee.  Many people simply do not realize how much time they spend per week waiting in lines, driving in traffic, or other time derivable directly from simple resource contention/demand spikes.  They’re exhausted and “overworked”, and it’s no wonder.

You might wonder why supply doesn’t increase for many phenomena that exhibit fluctuating demand based on time of day.  The reason is that it can be inherently costly or downright impossible to fluctuate supply based on time of day.  A restaurant can’t easily hire more staff to *only* work between 12 and 1.  That same restaurant can’t magically add more seats to their establishment during busy times.  Roads have fixed capacity in the short run.  Shopping mall parking lots are fixed in size.

Demand/supply constancy has efficiency benefits since it makes the best use of scarce resources that exhibit some fixed cost component.  Time-based spikes and demand peaks are often not efficient and end up imposing time or monetary costs.  In the sense of resource contention, it would be more efficient for everyone’s commutes to occur individually at random times of the day, not all at the same time. Even the most trafficked freeways in Los Angeles would have plenty of capacity if current throughput were spread out 24 hours a day.  Contention for restaurant tables would be eliminated if eating times weren’t so culturally rigid.  Even something as simple as shopping would be far less stressful if shopping malls had a steady but constant stream of traffic.

Knowing the patterns of society today, with this in mind, I’ve taken to deliberately doing things at odd hours.  I each lunch either at 11AM or 2:30.  If I have to drive anywhere, I make sure it’s not between 8-10AM and 4-7PM.  If I have to go shopping or run other errands, I always do so at odd hours when I feel resource contention will be relatively low.

The same reasoning explaining intra-day demand spikes applies to multiple days.  Since commercially everything is so busy on the weekend, I work on weekends and instead take time off during the middle of the day on weekdays when no one else is shopping or using the tennis courts.  I also benefit in this sense by taking my free time during the hours that experience the most sun and warmth in San Diego.

Going back to the recognized benefits, this of course only really works for activities you expect to be doing yourself or with another person who follows your modified life schedule.  If most of your friends take their lunch from 12 – 1, you might be eating alone if you feel it’s best to eat from 2:30 – 3:30.

It’s unfortunate that work hours are so rigid that most people can’t take advantage of dips in resource contention this way even if they wanted to.  But I’d encourage anyone to look for opportunities to evade resource spikes.  Doing so saves you much more time than you might imagine.  I feel refreshed rarely ever waiting in lines or getting stuck in traffic here in Southern California.

This to me is a huge benefit of being self-employed that has nothing per-say to do with job security. There’s no reason why my efficiency-maximizing schedule couldn’t be sustainable for full time employment. Society just expects you to work 9-5, period – it’s rigidity, and I don’t think it’s good.

Despite all this, experiences with JetBlue at the beginning and the end of my pass this year have produced serious misgivings about JetBlue as a company and their ability to competently manage customer data, so much so that I’ll unfortunately be actively avoiding JetBlue for “regular flights” outside of the AYCJ pass.

Problems with JetBlue began my first day on September 7th when my first flight from Rochester to JFK was delayed over 4 hours due to a mechanical problem (non-weather delay, entirely JetBlue’s fault).  That day I was supposed to fly to Phoenix, and then back from Phoenix to JFK on a red-eye the very next day.  Due to the delay, I was going to miss my connection to Phoenix and as a result there was no way I would even be able to go to Phoenix.  The gate agent assisting all the displaced customers was very kind and graciously offered to switch my flight to an early flight to Las Vegas instead, and then back from Las Vegas later that night (to be clear: changing my destination from Phoenix to Las Vegas).  She even set me up with a hotel in JFK, saying that she would forward my information to JFK and once I arrived in JFK I should talk to a representative to get the hotel voucher.  I warned her to make sure my original Phoenix flights were canceled, otherwise I’d be penalized with a $100 no-show fee for AYCJ.  She handed me a boarding pass for my morning JFK -> LAS flight.

I eventually got to JFK on the 4-hour delayed flight, though upon talking to a rather rude representative in Terminal 5 it was clear the gate agent never forwarded the information.  I had to fight my way to get the hotel I was promised back in Rochester airport.  That night I checked the All You Can Jet page and saw all of my original flights (including Phoenix), with nothing about Las Vegas, despite having a boarding pass in my hand.  The next morning before my flight I called JetBlue and after literally 40 minutes on the phone with a rather unhelpful representative, she told me that I did *not* have a ticket for the flight that I literally had just boarded (continued talking to her right up until the plane door closed), and that no reservation existed for my flight from Las Vegas back to JFK.

Once I got in Las Vegas I realized that my confirmation number for coming back to JFK now had two flights on it: PHX -> JFK, and LAS -> JFK, which is absurd – two obviously-conflicting flights on the same confirmation number.  I called again to try to sort this all out, and after 90 more minutes on the phone and talking with three people (including what was a “supervisor” at All-You-Can-Jet), I was told some mix-up had been made and that the original gate agent should not have changed my flight.  I learned that the boarding pass I was originally handed was not a confirmed ticket but something akin to a standby passenger boarding pass.  My Phoenix flights also remained, which the phone representative told me would be taken care of.  The woman who was a “supervisor” and AYCJ assured me that my pass would be fine and I would not be incurred a no-show fee.  At this point, after wasting over 2 hours of my valuable time at Las Vegas (where I had little time to begin with) sorting out a colossal mix-up on JetBlue’s end, I thought everything was fine.  But it was not meant to be.

A few days later when I ended up in San Francisco (days after the originally-booked Phoenix flights), I got an e-mail notice informing me that I had no-showed for one of my flights and that my All-You-Can-Jet pass was canceled (!!).  So much for being assured, twice, my pass would be fine.  I got back on the phone and after close to two hours of waiting and being passed between multiple people (including one dropped call), I finally was assured once again that the mix-up was resolved and that my pass was re-activated (despite the website not saying so).  Apparently even though my Phoenix flights were canceled in the main reservation system, they remained in some separate queue that staff manually examined for missed-flights (wow), which was why it took them 2 days to even notice I “didn’t show” for the the Phoenix flight I was never supposed to be on to begin with.  Within two hours, the website finally showed my pass as being reactivated and I thankfully was able to check in at SFO to my flight.

This entire episode is entirely unacceptable and shows a colossal failure on JetBlue’s end at a number of levels:
1. The gate agent did not properly book my hotel.
2. The gate agent did not properly ticket my outgoing flight.
3. The gate agent did not properly cancel my Phoenix flights (though this apparently would still have caused the no-show problem since that queue is “separate”).
4. The gate agent assured me that my AYCJ pass would be fine with respect to no-show fees, which was not the case.
6. The gate agent left no notes about any of this, which caused other problems down the line as I tried to explain the situation to other agents.
7. The All-You-Can-Jet supervisor on the phone assured me my AYCJ pass would be fine with respect to no-show fees, which was not the case.
8. At one point, my confirmation number had two obviously-conflicting flights (PHX->JFK, LAS->JFK) occuring at the same time.
9. The agent I spoke to originally on the phone as of no help except telling me that I did not have a ticket for a flight I had literally just boarded (later learned the boarding pass was not from a ticked reservation per #2).
10. My AYCJ pass was canceled for a no-show on flights that shouldn’t have even existed to begin with.
11. Most frustrating of all: I spent a total of over four hours my time on the phone and four hours in cell phone minutes resolving problems that should have taken no more of 15 minutes of my time (and problems that should never have occurred to begin with).  Had these problems surfaced at less convenient times I may have even not been able to check into flights due to the pass cancellation mistake.

Although I was a little rattled by this experience, I was happy that everything was resolved (though warned my fellow AYCJ-ers on Twitter to not let a gate agent change flights) and went on 15 more flights on a total of 23,000 miles without problem and had a great time most of the month.

While in San Diego, my last destination, I got an automated phone message that my final AYCJ flight from San Diego to Rochester had been canceled due to weather.  I suspect this was probably due to a delay of the incoming flight combined with hefty departure fees SAN airport charges after 11:30PM due to noise issues at the airport.  I called in to rebook travel, and after waiting on the phone for over an hour (in part due to the need to transfer me to the “AYCJ Department”) an AYCJ representative  told me there was no other way they could re-route me to Rochester that day and that – contrary to any indication of such on the so-called “Customer Bill of Rights” – I was unable to get a refund (fair enough) or voucher for a future flight (not fair enough) because All-You-Can-Jet flights have “zero cash value”.

JetBlue’s “Customer Bill of Rights” is listed here:
http://www.jetblue.com/about/ourcompany/promise/index.html

Under the “Cancellations” section, this states: “All customers whose flight is canceled by JetBlue will, at the customer’s option, receive a full refund or reaccommodation [sic] on the next available JetBlue flight at no additional charge or fare.”

I certainly didn’t have much of an option.

The agent on the phone mentioned that JetBlue does have an agreement with American Airlines, but that only agents at the airport can make the decision to re-route on another airline.  Well, San Diego Airport has a very small JetBlue presence with only a few flights a day.  I certainly was not going to take public transit to the airport unnecessarily early and risk not being able to get flight on another airline later that night when JetBlue agents at SAN airport became available.  Since JetBlue was unable to accommodate me, I had to spend $250 (luckily a very cheap amount given it was a same-day flight) on a separate United Airlines flight back to Rochester.  This really wasn’t a huge deal to me, but I don’t find JetBlue’s policy as stated by the phone agent to be consistent with the Bill of Rights.

These mishaps leave me with a general feeling of incompetence about JetBlue as a company that does nothing but increase the uncertainty cost to me of flying them again by choice.  Outlining this and other problems I’ve encountered throughout the month:

Technical Imcompetence:

1. For at least two months, JetBlue’s website has not worked in Google Chrome for making a reservation (just hangs at the intersitial page).  That a company of this size doesn’t bother to test their application in Chrome is ridiculous, though sadly not that surprising given their competitors’ crapping websites.

2. When JetBlue announced the first day to book flights on the AYCJ pass, they told us to watch http://www.jetblue.com/aycj for a link to book flights.  The day before this was done, one could view the HTML source code of the page and find the link right there in plain text – just commented out via HTML.  Not only was the link there, but the target of the link (http://aycj.jetblue.com/) appeared live and well, way before the booking window.  Though I didn’t do so to abide by the rules, I could have easily booked flights before the opening window.  Apparently JetBlue’s application deployment methodology is to uncomment some lines in their HTML source code.  Is some teenager running their website?

Data Management Incompetence:

1. The day JetBlue allowed folks to book flights on the pass, there was an uproar over certain cities not being available for booking.  While it didn’t affect me, that was just silly.

2. JetBlue’s management of AYCJ flights seems completely separate from their normal flight reservation system.  Flights booked through AYCJ are copied/registered on the main booking site, but that’s where the connection stops.  This lead to my confirmation number having two obviously-conflicting flights and having my pass falsely canceled despite being assured to the contrary by two different JetBlue representatives.

3. JetBlue appears to have staff manually checking some queue to check if customers have missed their flights.  Really guys – this isn’t automated?

Representative Incompetence:

1. As previously described in my story, gate agents are clearly not trained enough to know what is or is not possible regarding accomodating flight delays and missed connections, at least when it comes to AYCJ.  In my case this incompetence costed me over 4 hours of wasted time trying to track down and resolve the problem over multiple phone calls (see “Customer Service Incompetence”).

2. From what I can tell, JetBlue has poor resource allocation in place for customer service representatives.  During normal times, staffing appears adequate – but just wait until some weather comes up or some other systemic problem hits customers.  Waiting in line for hours to reach customer service and dropping phone calls (as has happened to me four times with JetBlue today) reflects a collosal disrespect for customers’ opportunity cost of time.

3. Due to AYCJ being in a “different department”, any call relating to AYCJ (even inquiring about a simple flight) involves transferring the call to AYCJ.  Not only does doing so place you in another long queue (sometimes longer than the original one), but this actually forces the original agent to wait with you (!!).  It can’t even imagine how many hours JetBlue pays agents to wait on the phone with customers reaching other departments they’re trying to transfer to; utter waste.  I even asked during one of these sessions if I could be called back so as not to waste my valuable time or cell phone minutes, and no – they have no mechanism for stopping their call queue if the customer hangs up.

Misleading Bill of Rights:

JetBlue’s Customer Bill of Rights states: “All customers whose flight is cancelled by JetBlue will, *at the customer’s option*, receive a full refund or reaccommodation on the next available JetBlue flight at no additional charge or fare”.  Taken literally, *this statement is false for flights booked on the AYCJ flight*, that is unless you consider a “full refund” to be “$0″.  JetBlue will try to find an alternate flight for you.  In my case, no alternate flight was available or the day I had to be back in Rochester, and employee #10065 “Travis” claimed that all AYCJ flights have “zero cash value”, and so no refund or flight voucher can be issued.  I can perhaps see no refund being an option (though even if so, this should clearly stated as an exception in the Bill of Rights) since the question of “cash value” isn’t easy to answer, but at the very least they should offer a flight voucher.  After all, even without a flight voucher I’m taking up one of their flights (perhaps more “valuable” than my original one) if they have to re-book me.  Instead I spent $250 out-of-pocket on a different airline to compensate myself for this canceled flight.

Despite enjoying the actual flying experience on JetBlue and being overall extremely satisfied with the tremendous value the AYCJ pass provides, these problems have forced me to waste my valuable time correcting problems that JetBlue should never have had, and cost me $250 for a replacement of a canceled flight for which no compensation was offered,  counter to JetBlue’s own “Customer Bill of Rights”.  With so many positives about JetBlue, these problems are an unfortunate scar on an airline I would otherwise love to support.  Though I’d do the AYCJ pass again in a heartbeat, I’m ashamed to say that I’ll be actively avoiding JetBlue on my “regular” flights for the time being, due to the uncertainty cost further problems or time waste originating in JetBlue’s organizational incompetence.

I realize that the problems I’ve encountered are probably rare, and it seems JetBlue customers overall have excellent experience, particularly on the All-You-Can-Jet pass.  I wouldn’t necessarily dissuade anyone from flying JetBlue, but this recent experience gives me reservations about doing so.

UPDATE

As if the evidence collected that AYCJ is a total data hack-job isn’t already enough, it looks like JetBlue has just suspended my AYCJ pass for no-showing to my flight that they canceled. Glad I have no more flights so I don’t have to spend another 2 hours on the phone resolving such a ridiculous issue.  Good riddance, JetBlue.

First let’s be clear that when I’m talking about “additional fees” I’m referring only to those that are applied no matter what to the price of an item, not fees that truly represent something additional that the customer can choose to purchase.  In, fact many of these are good because they properly align incentives for consumption and production.  For example, many people recently were irate over the fact that airlines began charging fees for checked baggage (even for one checked bag).  In principle I support this concept as it separates two distinct costs of providing airfare and allows the consumer to make the choice that maximizes his utility all while properly aligning incentives.  If I’m someone who likes to pack big on a short business trip simply because I can, I’m exerting an extra cost on the airline in terms of fuel and baggage handling time whether I realize it or not.  When I pay the price to have the luxury of checking such a large amount of luggage, that cost is immediately apparent to me and I’m equipped with the knowledge and choice to decide whether or not carrying the cost-producing luggage is really worth $30 to me.  If it isn’t, then I’ve made both myself and the airline better off by packing lighter – I saved money and the airline saved cost of fuel.  Whether it’s worth it or not in my particular case is irrelevant, the point is that incentives are aligned and consumer choice increases, both noble goals of public policy.  This all being said, in practice many of the additional baggage fees were not revenue-neutral for the airlines (they didn’t decrease ticket prices that on average would have kept revenue constant).  Most consumers of course didn’t like that, but in general I am strongly in favor of separating prices for produces and services if doing so yields a revenue-neutral outcome.

So back to additional charges force-added to produces and services.  A classic example of this are airfares.  Go on to British Airways or US Airways websites and when you look up fares all you will see is some base price which is completely meaningless.  You have to go the extra step to find out what your additional fees and charges are.  Now I think the reason companies do this is twofold:

1. The initial lower price entices you to look more and the initial impression (which is very important when price shopping) is that the produce or service is inexpensive.
2. Many consumers feel ripped-off when the believe the company is pocketing your money.  By stating part of the total price as a “fee”, consumers are duped into believing that this is necessarily some direct cost incurred by the company and hence the money isn’t really “going to” the company.  Of course this is rarely true but the psychology is still there.

Another related example to extra fees, although not befalling 2) above, is sales tax.  Prices are always quoted before sales tax because they appear to be lower.  However, unlike other “fees”, sales tax really is a cost incurred by the company – it goes straight to the government.   In fact it could be argued that there would be a transaction efficiency gain for companies accepting cash if sales tax were baked in to the price since the well-known price tactic of using prices on dollar boundaries minus one cent ($9.99) would reduce the need for cashiers to dispense and hold change.

Whether it’s a tax or a fee charged by a company, these extra charges impede efficiency of the price system in a capitalist economy.  When taxes and extra fees become a fact of every day life, finding out really what you’re paying becomes more time consuming and hence more costly.  Some companies have capitalized on this frustration by reporting the full cost.  Websites abound comparing full prices (even including sales tax based on where you live) of various products.  Airline comparison shopping services such as Priceline report the full price of your flight and don’t force you to waste time determining what taxes and fees are, because frankly I could care less what the price I pay for an airline ticket is comprised of (whether it’s tax or base price) – all I care about is the final price I pay.

I also have a feeling that many consumers do not completely take the full price into account, much to the benefit of companies engaging in these practices.  In other words I believe that if all prices were forced to be the actual amount you pay out of pocket, including all taxes and fees, the savings rate in America would rise.  It would be a very interesting economic study to analyze changes in state sales tax rates and calculate price elasticities to see if effective price changes due to sales tax are more or less elastic than prices changes not related to the sales tax rate.  I think people are far less sensitive to effective price changes resulting from sales tax because they think far more about the sticker price they see than the final price they say, partially because calculating it exactly before checking out requires some thought or a calculator.  

Although it won’t ever happen because of the ways companies can keep charging additional fees to their benefit, the economy as a whole would be more efficient if on every product and service you purchased you were presented with the full and entire price you are actually paying.  That’s all consumers care about.

Now I frequent bookstores quite a bit – twice a week, sometimes more – simply because I love the environment and the ability to sit down and ready a book while drinking coffee at a spot away from home.  But rarely do I actually ever purchase a book at a book store.  Typically I’ll go to a bookstore and look through any book I’m thinking about buying, note the title, then go straight to Amazon.com and order them.  More than once I’ve actually ordered books from of Amazon.com while sitting in the cafe on my computer of Borders or Barnes & Noble.

I could see perhaps a 10% price difference being counteracted with the advantages of brick-and-mortar stores, but Amazon’s discounts are usually an effective 30-40% or more (especially after no sales tax in many states).  This is a huge price difference and in any other industry I don’t think producers offering significantly higher prices for identical products would be in business much longer.

Although I really am stumped as to why this occurs, one potential answer is simply the culture – older generations are used to stopping by their neighborhood book stores to pick up books.  With smaller bookstores, peoples’ claim to “support their local community” might also explain some of this (while even then people’s actions with their wallets tends to contradict what they say), but are you really supporting your “community” by buying books at large changes like Borders or Barnes & Noble?

Among younger generations the most plausible explanation is simply a string desire to have the product immediately.  It’s the same reason why many people buy stuff at stores like Circuit City even though the same product is available through the internet (at sites such as NewEgg) for significantly cheaper – they inherently place a high value on having the product in their hands immediately; they don’t like to wait.

Given this last point, it is truly phenomenal to me then when I hear (often) a bookstore employee telling the person that the book they are looking for is out of stock but that they can order it for pickup or shipped directly.  Doing this completely takes away the “have it now” advantage of brick-and-mortar stores, so why would anyone ever actually say yes to having Borders order a book for you at list price when you go go home and order the same book delivered right to your home through Amazon?  This truly makes no sense to me, the only explanation being some peoples’ lack of facility with computers (though navigating Amazon isn’t rocket science).

If you’re an avid book reader and buy books at Borders or Barnes & Noble, why don’t you just buy them from Amazon?

Claims are made that the oil companies are “price gouging” and as a result oil company executives are dragged before Congress, forced to explain basic economics to the politicians too inept to have studied it to begin with.  I’m sure you’ve heard by now the claim that Exxon Mobil made “record” profits in 2007, a whopping sum of $40 billion.  Lots of financially-dull people quote this figure even though it’s utterly meaningless outside the context of revenue (except to point out that these companies are indeed large), which is a little more revealing: Exxon Mobil’s profit margin (profits as a percentage of revenue) were 10.9%.  If you’re under 35 your mutual fund probably averages more than this. Since Exxon Mobil is such an evil company that’s profiting enormously from the American consumer’s pain at the pump, it surely must be the most profitable large company right?  Of the Fortune 500 companies (which yes.. actually includes 500 companies), 138 had higher profit margins than Exxon Mobil.  The other two major oil giants, Chevron and Connoco Phillips, had profit margins around 7%.  Hardly sounds like windfall profits to me, and this even in a time of of a heightened oil futures market, where one would expect oil company profits to be larger than normal.  In fact, many other industries have significantly higher profit margins, but you never see anyone complaining about them.   So next time your family member mentions the $40 billion figure, ask them to guess what the profit margin was (if they understand what that means) and you’ll likely get absurd answers like “60%”.  Then serve them a healthy dose of reality.

The next target for the villain-seekers is the evil “speculators” on the oil futures market that “artificially” push up oil prices and need to be “controlled”.  Explaining how the oil futures market work to every day gas price complainers is an exercise in futility, but the economic theory on this is rather clear: futures markets efficiently allocate risk in commodity prices to those best able to study and analyze the market.  The effect on prices over the long term is a smoothing-out effect of what would otherwise be a more volatile market.  As we know from finance, risk/volatility inherently must carry a risk premium relative to less risky assets deriving from the principle of risk aversion.  So with lower risk comes lower prices in the long run.  However, this also means that at time of high-price speculation, the price of oil is probably higher than what it would be without speculation.  This is the fact many complain about, however the other side of the coin is that at a time of low-price speculation, the price of oil is probably lower than what it would be without speculation.  Over the long run, however, prices, theoretically speaking, are lower.  So not only are commodity futures markets not harmful, they are efficient and helpful to the economy as a whole.

Interestingly this same concept of volatility was brought to my mind as soon as I read the absurd description of a Facebook group a few months ago saying we can lower gas prices by choosing one day to NOT buy gas.  The non-reasoning implicit in the idea aside, one would actually expect this tactic to increase gas prices as a result of increased demand volatility as well as less ability to maintain an efficient, smooth daily supply of gasoline to stations.

Another area of volatility for companies in America is regulation and litigation, which in some cases is a huge risk to the operation of a business.  If the American government has almost unlimited power to slap regulations on a company’s core product, risk of revenue production increases which, all else held equal, makes that company less valuable.  This certainly applies to oil companies as well and when politicians pander to voters’ serious lack of economic understanding by “punishing” the oil companies with “windfall profits taxes” and other such gimmicks, this makes doing business and revenue production more risky for these companies.  The point here is that we don’t need the regulation to actually take place for it to harm the ability of oil companies to supply oil (yes, this does drive up prices… oil is a highly competitive market with little ability for individual companies to “control” prices, despite popular myths).  I can assure you the oil futures traders (and all financial traders… in stocks, commodities, otherwise) pay close attention to potential regulation that would affect the market in which they operate.  The mere talk of regulating oil companies could cause price changes. The mere talk of regulating industries like tabacco and other “hated” industries reduces the market value of their companies.

As such, you can do your small part to reduce gas prices by stop bitching about the oil companies and the speculators and stop allowing politicians implementing borderline insane policies to pander for your vote.  Make regulation risk for oil companies as low as possible and let them do what they do best in a competitive market – supply energy .

Though I have no statistical evidence, based purely on my experience, I intuitively believe that variance in productivity or “output” in IT – and in software engineering in particular – is significantly higher than most other fields, enough for a standard deviation of orders of magnitudes. I find it entirely reasonable to believe that a talented software engineer can easily produce literally 20x more “output” than a lower-mediocre developer. I don’t think the labor market in IT has entirely captured or adjusted for this fact and is instead stuck representing variance in productivity that is more common in traditional jobs.

It is no wonder then that talented people are leaving large organizations in droves when they are not being properly compensated (salary, work environment, intellectual stimulation, etc.), mostly as a result of managers failing to recognize the important of talent in organizations and the huge variance in applicants’ ability. Bruce writes:

“Large companies tend to lose the really talented IT engineers and hold onto the less talented ones, when they should been actively seeking to do just the opposite. And the effect tends to be self-reinforcing: the worse an IT shop becomes, the harder it is to get really talented and effective IT engineers to join it and the harder it is to retain them if they do.”

Indeed the effect is self-reinforcing because environments not conducive to intellectual stimulation have a snowball effect.

To me the differences in hiring practices between smaller agile startups and larger more “traditional” companies are striking. A few points; but first note that I am using the term “large company” to represent not necessarily a company that is large but a “traditional” company not in-step with what I believe to be effective hiring IT strategy, certainly this would not apply to companies like Microsoft and Google which are of course “large”:

1. Large companies tend to overestimate equality – in many facets, but in particular workforce talent. This leads them to believe this variance in ability is significantly smaller than it is.
2. Large companies with IT departments feel pressured to have compensation variance in IT parallel compensation variance in other departments, even when there is no strictly economic rationale for doing so. Doing this emphasizes the continuum extremes: talented people want to leave for higher-paying opportunities and the lesser-able want to stay and hold on to their high salary (important: high relative to the work output, measured in comparison others in the department).
3. Large companies tend to over-emphasize the “work your way up” approach to salary levels, starting most entry-level applicants at roughly the same rate with yearly increases or bonuses, completely ignorant to actual work output or high differences in starting ability.
4. Large companies are less frequent to acknowledge or point out differences in ability and output at work as doing so is politically incorrect or something that is just “not talked about”.
5. Large companies are for some reason less likely to fire people for reasons of “opportunity cost” – opportunity of hiring better people. Instead people are only fired if they are actively holding an organization back. Firing someone because they are not producing work output per dollar that is on par with either another existing person or another person they could get is an entirely reasonable and economically-justified (in many cases) reason for firing someone, but this just doesn’t happen because of many management and personal reasons (“But I feel bad!”). More on this in the future!

In contrast, many smaller companies and start-ups seem have a much better ability to recognize of this fact: talented people, dollar-for-dollar often simply bring significantly more value to a company, after compensation, than average or lower-quality people. Ultimately this reflects an imbalance in the labor market which I’ll explore later, but you’ll notice that many smaller companies will pay for and try to get younger people based on their talent and experience, not on their age. For many companies there is no “typical” salary – you are paid what you are believed to be worth. These companies actively seek out talented people whereas “large companies” want their applicants to make themselves “worthy” to work there – the completely wrong approach.

Many small companies are reaping the benefits of this labor market imbalance and doing very well. Companies like Google who deliberately seek out high talent and pay their developers extremely well are sucking up talent from other companies not doing so and as a result becoming extremely successful even around a business model that many Wall Street analyzes puzzle over.

By no means do I think what I’ve just described applies to all “large companies” and I use that term very loosely. More accurately, there are companies that “get it” and companies that don’t. The great thing about the free competitive market is that the companies that get it will succeed and those that don’t won’t. In the next few decades companies are going to need to wise up or face major problems with the effectiveness and cost of their IT departments.

1. Publishers are mostly placed in a monopoly position when selling textbooks because there is a natural asymmetry in “demand” for the book. Specifically, the person making the choice is not the person actually paying for the book. In a traditional part these two roles are always joined, but in the case for college textbooks the college professor choses the book while you pay.
2. As a result of (1), there is no natural incentive whatsoever for professors to choose “reasonably-priced” books, since the professor incurs no costs to himself for chosing a high-priced book; those costs are totally borne by the students. In fact, there may be a negatively aligned incentive here: it is reasonable that professors would specifically choose high-priced information-loaded book to make absolute sure that the student is loaded with information as to reduce personally liability: “Student: We never covered this in class! Professor: Well, it was in the book!”.
3. As a result of (2), a feedback loop begins to occur whereby professors demand books packed with more and more information, leading to book publishers/suppliers to oblige and create more and more textual opulence in their books. A quick look at any modern accounting book really enforces this reasoning – there is a ton of content in these books that can’t possibly ever be levered in class. Books now contain a huge array of practice problems, review notes, practice quiz questions, online websites, interactive software CDs, DVDs, etc. My own experience has found that the raw content-to-useful content ratio to be extremely high in many books. Some classes I barely touch a few pages of the book for reference, after spending hundreds of dollars.
4. Some professors teach their class in a way that a textbook is an optional “additional aide” and not particularly required for operations in the class. This places more choice in the student – not in which actual book is chosen – but rather whether the book chosen for them is worth buying at all. This is to be applauded. Regretfully, several other professors take a dramatically different approach whereby the books materials seem to replace any planning or personal organization on the professor’s part regarding class structure. I’ve seen some professors who don’t use any of their own notes or slides whatsoever, instead relying on the textbook’s templated problems and PowerPoint slides. This is great for the professor but a shitty deal for the student, which is effectively forced into buying the book so that he can answer homework problems from the end of each chapter.
5. Although I have no source to back this up, I remember reading somewhere that in some instances professors receive morally-dubious gifts or financial rewards for choosing a particularly textbook. Textbook publishers seem desperate to woo college professors into choosing their textbook, knowing a professor overseeing 100 students in the classroom represents a huge profit opportunity for the publisher.
6. Now I’ve established reasoning for why new books are so expensive. But what about used books you might say? One of the most frustrating problems is that textbook publishers are very quick to publish new editions of textbooks, with semantically meaningless differences, as a way to differentiate new books from old books and crowd out old books from the market, further increasing their monopoly power. Note that the depravity of this technique rests somewhat on the subject area in question. Computer-related books seem more apt for version updates than books on calculus – a science that in its basic form hasn’t changed in decades. I find that this is a huge problem with the current college textbook market and is probably the first area I would look towards if any regulatory pressure was enacted.
7. Some publishing companies point to relatively modest profits as salvation from attacks against the market in which the operate. However, I am skeptical of these arguments since as outlined in (3) these arguments assume a fixed book being produced. I am arguing that far less verbose and opulent books could be used and produced for a much cheaper price. In other words, professors are devoting more time and energy into the book production process than would occur in a perfectly competitive situation. Go to any Barnes & Noble and look at the math section. There are some $10 books on advanced mathematics that contain more practical information than several $180 calculus books combined.

I think it’s fairly clear that by it’s very nature the market for college textbooks represents a near-monopoly state where consumer surplus takes a back seat to producer surplus of publishing companies. Here are some potential solutions that I’ve thought about:

1. Establish more and greater access to clearing houses for used books that sidestep the bookstore’s heavily inefficient used book buyback process to make used books more readily available and the market more fluid as a result.  My friend Dan Leveille has created BookMaid.com to address this problem at RIT, and done so excellently.  One particular inherent problem with establishing sites such as these is that the service being offered inherently a network good, which in theory works more efficiently as one massive popular system than several systems spread about. Half.com may be getting there, but it is less personal than your own-campus book trading website.
2. Properly align incentives for professors to choose reasonably-priced textbooks. Once situation would be essentially to have professors pay some fixed multiple of the book price, but done so in a revenue-neutral way (give professors some money, then force them to pay for the actual books they choose). Doing something like this may align incentives against academic quality unfortunately, but I’m sure much more well-thought-out schemes are out there. Aligning incentives in this instance and in most instances is absolutely crucial for a good, well-working outcome.
3. Enact institute policy, per department, that restricts the rate at which professors may request required edition changes to books. For example, in Calculus perhaps professors, once choosing a book, may not change the required edition for 6 years. This would enable used books to better-compete with new books in the marketplace, perhaps driving down the price for new books in the process.
4. Enact institute policy requiring professors to justify major features of the textbook they choose and defend their choice in front of a strict panel. If a professor chose a book with all this additional software CD and DVD crap, he would have to justify its use to the student and justify the marginal cost is worth it. This can get a bit iffy and overhead and overly-regularly attitudes by institutions may fall into chaos. I don’t know.
5. Have the federal government step in on publishers and tighten up regulation on business practices, including but not limited to – how professors are solicited for textbook purchases.
6. A very POOR idea: price controls in the market for textbook. The federal government simply dictates maximum prices. Price controls are one of those bizarre policy instruments that always seem to get implemented in the heat of an emotional political situation without one thread of economic evidence that they work nearly as well as alternatives, if at all.