4/27/2016

Making Good Memory(s) in Volatile Times

The semiconductor is a viciously competitive market. It is capital intensive with little margins. To survive in the semiconductor world, one truly must be on the top of its game. According to a recent article, Samsung will be able to use its competitive advantages to leverage market shares.

Market analysts have seen a slowing trend in microchip demand, and future forecasts are looking bleak. Companies like Intel, Toshiba, Hynix and Micron all stand to lose a large percent of their operating income, upwards of 65% in this quarter. Intel has even been forced to cut 12,000 jobs to cushion the impact. How is Samsung surviving this brutal slowdown? Samsung has positioned its competitive advantages in technology. Samsung’s investment in technology has given them a first mover’s advantage. With this first mover’s advantage Samsung has also moved up the learning curve, and in this time of hardship that knowledge will payoff greatly. Samsung is years ahead of its competitors in manufacturing, allowing them to decrease the size of their chips, permitting more chips per wafer. Also the smaller chips take up less volume and consume less energy, which has differentiated their product and increased their profit margins. These advantages alone will help bolster Samsung’s strategic position, yet, its greatest advantage is vertical integration.


Not only is Samsung an industry leader in the semiconductor business, it also happens to be an industry leader in the smart phone business as well. Samsung generates its own demand for microchips, and with its vertical integration, they can capitalize on both ends of the spectrum. In reality, Samsung may lose some profits, but the market shares it stands to make easily outweigh the cost. In these volatile times Samsung looks forward to making good memory.

CEREC CAD/CAM Technology: Vertical Integration in Dental Practices

Have you ever cracked or broken a tooth and needed a crown? If so, you know what a pain it can be. The traditional method for getting a crown is:
  1. You go to the dentist, and the dentist examines the tooth and determines you need a crown.
  2. The dentist numbs the area and then prepares the tooth.
  3. The dentist or dental assistant makes an impression of the tooth while you try not to gag on the impression material.
  4. The impression is sent off to the lab.
  5. The dentist puts a temporary crown in place.
  6. You wait 1-3 weeks for the crown to be made by the lab.
  7. You return to the dentist and have the permanent crown placed.

CEREC CAD/CAM technology offers dentists the opportunity to vertically integrate and make crowns in their offices, decreasing the need to use an outside dental lab. This innovative technology gives patients a more convenient and stream-lined method to get a crown:
  1. You go to the dentist, and the dentist examine the tooth and determines you need a crown.
  2. The dentist numbs the area and then prepares the tooth.
  3. The dentist makes an optical impression of the tooth using a camera.
  4. The CEREC machine's 3-D software takes the optical impression and converts it to a virtual model that the dentist can fine tune.
  5. The model is sent to the milling machine where burs carve the crown out of an all-ceramic block in about 20 minutes.
  6. The dentist polishes and places the crown.

The biggest advantage of CEREC technology is patients can have a crown done in one office visit, rather than two. This advantage may increase the amount of crowns the dentist does every month because patients may be more likely to choose this dentist over one that does not have a CEREC machine.

Is this vertical integration worth the $100,000 investment?

An analysis of the costs associated with doing a crown would need to be performed by each individual dentist or dental practice to determine if purchasing a CEREC machine is financially beneficial.

Using some numbers found in SPEAR, I made a simple table to analyze costs:

Monthly Costs Associated with Placing a Crown
Traditional Method CEREC Method
Fixed Costs Variable Costs Fixed Costs Variable Costs
    Lab Fee $250 CEREC Payment $2,000 Operatory Set Up  $50
    Impression Material $25     Block and Burs $40
    Operatory Set Up [1st visit] $50     Distilled Water and Powder $2
    Operatory Set Up [2nd visit] $50        
Total Cost Traditional X Total Cost CEREC Y

If Total Cost CEREC (Y) is less than Total Cost Traditional (X), a dentist or dental practice may want to invest in the CEREC machine.
  

Inside Money In SERE

Like I wrote in the last post, I don't normally post on this blog at all. But I have a story from the spouse of an undergraduate student that I'd like to be able to refer future students to. I don't really have a place to put it online, so I'm putting it here.

Occasionally on this blog I have accepted posts from students explaining how economics relates to specific aspects of their job. I don't encourage that because it's talking shop.

Anyway, I mostly teach principles of macroeconomics. In there, we talk about money. One of the simpler topics, but still a new one to many students, is that money is broader than currency. For example, checks are money, but they aren't currency.

A more nuanced topic is inside vs. outside money. Outside money is currency (printed by the government, or its representatives) and reserves (issued by central banks). Inside money is everything else: checks, savings accounts, CDs, repurchase agreements, and so on.They're called inside and outside because inside money is created by us doing our thing inside the financial system, while outside money comes from outside the financial system. Most students (and many people out in the public) think outside money is a lot more important than it actually is. As I sit here, I'm trying to recall, but I don't think I've used outside money since the weekend, but I've payed bills all week with inside money.

An even subtler topic is that people will create inside money out of anything handy, if there isn't enough inside or outside money around to suit their needs. This is what we do when we write each other IOU's.

The classic textbook example of this is POW's using cigarettes as money in the camps. So I told my undergraduates that story (which was written up in a famous paper about 70 years ago by an economist who ended up as a POW in Germany in World War II). When I was finished, a student raised her hand and said: they still do that in survival school in the Air Force. I was a bit shocked, but she explained that her husband had been through it. He agreed to let me interview him about it, and here's what I got. This is MG's story.

****************************************************

Air Force pilots are required to do survival training: 3 stints, once in their career, for about 20 days in total.

One of those exercises is called SERE: Survival.Evasion.Resistance.Escape. The training is done at a remote location in Washington. A team of about 8 pilots goes through the training together. They are abandoned in the wilderness one morning with 2 MRE's each. They need to survive for a week. They are also allowed to bring a small pack with extra goodies.

MG was told by pilots who had been through the training before to bring cigarettes. MG told them he didn't smoke. The veteran pilots told him it didn't matter: pilots used cigarettes as money during SERE.

So, MG brought 5 packs. Other pilots brought even more. Many of the cigarettes in the group were quickly smoked by the smokers.

That's one thing I tell principles students about what gets used as inside money: it should not be readily consumable. Other features are more obviously related to money: small, light, of fairly certain quality, divisible into small enough units, low rate of depreciation, and so on.

After a while, inflation set in. The price of a bag of skittles eventually rose to 3 cigarettes. Cigarettes were also traded on the spot for (actual) currency, or in exchange for jobs during SERE training.

Cigarettes were even traded for large sums of money to be repaid after training was over. This is very much like how repurchase agreements work in the real world: a firm gives up an asset to another firm for money today, with an agreement to repurchase at a known price on a future date (in the meantime the buyer gets to keep any income generated, plus the price difference). Repurchase agreements are often done in the real world in multi-billion dollar transactions. In the SERE training, the exchange rate hit 1 cigarette handed over immediately for $100 payable in cash when they returned to base. MG saw a transaction like that finalized.


Peak Pricing at Universal Studios Hollywood

Normally, I don't post on this blog at all. But an old student sent in something that they felt was appropriate — and I can't really make them write a post, can I?

This concerns the new pricing policy at Universal Studios Hollywood.

Airlines have changed prices with demand for decades. But for theme parks, it has usually been one price for all. Now they will discount for people buying online, with a bigger discount for people who buy online and book for a historically slow day of the year.

As an economist, I find the explanation that this is a form of peak pricing, like used by hotels or Uber, to be a bit lacking. My reason for this is that the cost of going to the park always included the monetary price of the ticket, plus the non-monetary price of standing in lines. For me, the park cost more on busy days no matter what.*

But the article also mentions that Universal will use this pricing method to help manage its operations. To me, this actually makes more sense. At off-peak times, costs are low for customers both in monetary and non-monetary terms. Yet the park still needs to be staffed. My guess is that this new policy is helping them get a handle on overstaffing on slow days.

* Hands down, the emptiest park I was ever in was DisneyWorld on the Tuesday before Thanksgiving. Kids were in school, there were no conferences in Orlando because of the holiday, and vacationers had yet to arrive. My wife and I did the whole park before 5 in the afternoon, with several rides gone on more than once.

4/24/2016

The Growing Demand For Connected Devices And IoT

You can hardly go through a day without being personally in touch with a connected device. Most of us carry a smart device, or own at least one device that is connected to the internet. I'm especially interested in the growing market for connected devices, also known as the internet of things (IoT), given I'm currently employed by a major manufacturer of connected home devices. What is most stunning, is the predicted contribution that the industry of IoT will have on our economy. As the upcoming generation becomes more technology savvy, so is their hunger for devices that intermingle with their everyday lifestyles. Simply stated in an article titled, "Projecting the Growth and Economic Impact of the Internet of Things," it covers insights of several economic impacts of the growing connected world. This ranges from growing efficiencies of a business, to decreasing the cost of healthcare. There is a device available for tracking just about anything these days including your health, productivity, lifestyle, and daily habits to name a few. The enormous amount of money that consumers and businesses are willing to spend on connected devices creates new jobs, and allows those individuals running a business to become more connected to their consumers, their productivity, and improve internal operational efficiencies. Consumer products consist of staying in touch with others, or staying connected with their personal belongings. For example, I'm currently able to remotely check my thermostat, locks, lights, and garage door, all from my smart phone. This gives me peace of mind when I'm away, and in return, I spend my hard earned money to purchase products that give me that connectivity.

In the rush to be the first technology firm to market with a new connected device, there is a risk of being the first-mover in the technology industry. The research and development alone is very expensive to produce a connected device, not to mention the marketing it takes to get the word out promoting the newly invented technology. So if you come out with a device that becomes a hit, you can almost immediately expect copycats to enter the market and bench off the success of the first to market. The only way to combat this, is to create a barrier of entry by applying for a patent that protects the exclusive right to sell a unique product for a given period of time.

So next time you are ready to go to bed, and you turn on that new app on your smart phone that tracks your sleep, know that you are contributing to the emerging market predicted to reach 40 Billion by 2019. Not to mention the predicted overall economic value of $14.4 Trillion by 2025. Now those are some numbers you can't ignore.

Projecting the Growth and Economic Impact of the Internet of Things

4/23/2016

The Organic Panic

A growing demand in today’s market is the desire for organic produce. The trend of the green initiative has slowly grown over the past decades but is starting to gain serious momentum. Where there is a demand, there will be businesses trying to capitalize on this demand.  A recent article in the Huffington Post states that Costco has now overtaken Whole Foods in the market of organic produce. Now, the only problem that Costco faces is a shortage in supply.

Costco has established a large membership base through the use of its two-part pricing and block pricing strategies. Costco’s focus is to bring in high quality product at a low cost, and sell in high volume to make up for the smaller margins. With Costco’s benefits it offers its member (cash back, no questions asked returns, and low costs) a high percentage of their members renew their subscription year after year. As Costco has stepped into the organic market, the millions of customers have shown their preferences and are purchasing even more organic food than can be supplied. What is Costco’s response to this demand?

To help supply organic produce, Costco has made exclusive deals with certain farmers to sponsor them and help subsidize their costs. Organic farming can be a long and expensive process to produce certified organic food. Farmers live on such razor thin margins that this process, plus the lower yield, can cripple most farming operations before they even harvest a single crop. Most farmers cannot even take the risk to become certified. Costco is attempting to shoulder some of this risk to help solidify its future supply of organic goods. This only makes me wonder if, in the future, Costco will expand its vertical integration to roll out its own Kirkland brand of organic grown produce. As the demand for organic food increases, supply will only become more scarce. Many businesses will have to take high risks to win in this organic panic.

Volkswagen’s “Clean Diesels”

Volkswagen has advertised its TDI Clean Diesel engines for years as having fewer emissions and better fuel economy compared to gas engines. Many people purchased Volkswagens with the TDI Clean Diesel engine because of the company’s advertisements. Recently the truth about these “clean diesels” was revealed, and some TDI owners and the United States government are not happy.

In September of 2015, Volkswagen’s “clean diesel” scandal was exposed when the United States Environmental Protection Agency (EPA) issued the automaker a notice of violation of the Clean Air Act. The EPA found that newer models of the TDI engines were equipped with software to cheat emission testing. This software made it so the emission-controlling equipment in the TDI Clean Diesel engines only worked when it sensed the car was being tested for emissions. This equipment was deactivated during normal driving conditions. The software resulted in “clean diesels” emitting almost 40 times the amount of nitrogen oxide (NOx) allowed by the Clean Air Act. These “clean diesels” have heavily polluted the air with harmful NOx emissions, which can cause respiratory diseases such as emphysema, bronchitis, and asthma.

The “clean diesel” scandal is a prime example of negative externalities. Negative externalities are costs suffered by a third party who is not involved in the production or consumption of a good. In this case, the TDI Clean Diesel engines are the good that is being produced by Volkswagen and consumed by those individuals driving vehicles with those engines. The third party is those individuals who inhale the air polluted with NOx emissions. The costs suffered by the third party include, but are not limited to, respiratory illnesses, hospitalizations, and premature deaths associated with the inhalation of NOx emissions.

AAA RATING FOR SUBPRIME MORTGAGE BONDS!!!

ARE YOU SERIOUS???

 I have great news for pension funds, investment banks, and municipalities around the world! Another pool of subprime mortgage backed securities have earned a AAA rating from Moody’s Investors Service. The New Residential Mortgage Loan Trust 2016-1 mortgage bond is a securitization of over $261 million of first-lien prime, subprime, and Alt-A mortgages that were originated from 2001-2005. Over 75% of the 1,789 loans within the portfolio consists of subprime and Alt-A originated mortgages. These are same type of mortgage-backed securities, from the same timeline, originated from the same pool of lenders, and rated by the same rating services that helped cause the American subprime mortgage crisis of 2007-2008 - leading into the Great Recession of 2008-2009. The only difference is that now these mortgages are 11-15 years seasoned.

Moody’s Investor Service gives several reasons why they have rated the bond AAA. They claim that based upon the age of the loans in the pool, the originators of the loans are less relevant. (I highly doubt that some municipalities whom lost millions of dollars within Norway and Ireland would agree with this analogy.) As a mortgage professional of 25 years and having been responsible of helping over 10,000 clients, I believe when names such as Countrywide Home Loans, GMAC Mortgage, and American Home Mortgage (all defunct) show up on a bond, investors should show a certain level of concern. Moody’s also compares the 12-month default rates of prime (1.6%), subprime (3.7%), and Alt-A (3.1%) mortgages. They then discuss the expected default rate of this portfolio at 5.4%. However, if you where to look at the research done by both CoreLogic and the U.S. Federal Reserve, it appears that the rate of default rate continue to increase as time progresses for the years referenced in the portfolio – especially for loans originated during years 2004-2006. Thus, for loans originated during this time, that are within the said portfolio, the default rate continues to climb. 

Moody’s also mentions that the weighted average updated loan-to-value (LTV) ratio was 60.7% and FICO score was 697. What was not mentioned was the average combined-loan-to-value (CLTV) in the portfolio. During the 2001-2006 period, a very popular mortgage product was the 80/20. Meaning, one would acquire an 80% first lien position mortgage and simultaneously obtain a 20% second lien position mortgage. This would establish a 100% combined-loan-to-value transaction. This exact transaction, that was prevalent during 2001-2006, is what prevents these borrowers from refinancing or selling today. Another consideration is the extremely low interest rate environment and steady increase of home prices over the last few years. Many loans in this portfolio could be sitting on adjustable rate mortgages on either their first mortgage or second mortgage. When interest rates rise (and it is not “if” they rise, just “when”) this will negatively affect the borrowers whom these loans are issued. Combining increasing interest rates, with a reversal in home prices, and these “new” mortgage backed securities that have loans that have been traded, swapped, and repackaged numerous times could once again create catastrophic results for the bond holders and borrowers. 

I have been working as full-time professional in the mortgage industry before, during, and after the subprime mortgage crisis. This has perhaps given me a little more insight then most. Perhaps my opinion is skewed due to what I have seen and lived through. However, when it comes to some of the mortgage-backed securities that have been recently introduced and received such high ratings from the Big Three creit rating agencies (Moody’s, Fitch, and Standard & Poor’s) I have serious concerns. From the opinion of a “street guy”, who meets with clients every day, I have to honestly say that if these borrowers who took out loans between 2001-2006 could refinance, they would. The reason is, mortgage rates from 2001-2006 for a 30 year fixed rate mortgage ranged from the 7.15% to 5.23%, and the current interest rate environment is at 3.75%. However, something is preventing them from doing it. Whether it be too high of a LTV or CLTV, too low of a credit score, not showing enough income, or not having the right characteristic standards established – it takes just ONE of those items to prevent them from obtaining a new mortgage. The same items that prevent these borrowers from obtaining a new mortgage are the same reasons their existing mortgage maintains a greater risk for the bondholders who purchase the portfolios that are holding these loans. 

The advantage to these portfolios is they have loans in them that have an interest rate that is well above today’s existing interest rate environment. Investors love the high rates of return these mortgage backed securities from 2001-2006 can produce. However, in some cases, these investors are restricted in what they can invest in; held to only investing in securities that are AAA rated by the credit agencies. The supply of these types of mortgage-backed securities with high returns are low; the demand for these types of bonds with high returns with AAA ratings are very high. However, as it has been for a very long time, without the ratings the bonds are much less valuable. Wall Street has a huge incentive to get these securities into the hands of investors at the highest rating possible. When there are huge incentives for some, the likelihood of misrepresentation or self-interest actions are much higher. My skepticism prevents me from just accepting the 60.7% average LTV, the average FICO score of 697, and the 88.4% of the loans being current or with only one 30 day late in the last 24 months. Anyone who understands both statistics and mortgage lending could cherry pick individual loans that could produce a good looking portfolio, that creates strong averages, but could be a time-bomb just waiting to explode. I say proceed with extreme caution before trusting a credit agencies rating – we saw what happened last time!







And the “Gun Salesman of the Year Award” goes to….President Obama?

You can’t argue with the facts, since President Obama took office back in 2008 gun manufacturing is up 140 percent, gun sales have hit record highs, and there are finally more guns in America than people. This boon in weapon manufacturing and sales is being appropriately coined the “Obama effect”. This “Obama effect” can be seen in overall gun sells per month over the past 8 years. Starting with the election of 2008, we saw gun sells hit 1.1 million the first month after President Obama took office (which was a record at that time) 4 years later we saw sales in January 2013 hit 2 million.

What these spikes in gun sales prove is that government truly does have a huge effect on markets. Just the mere notion that guns might become harder to purchase has set the gun market afire. This assumption of decreased gun supply/availability causes buyer and sellers to react in ways contrary to normal market behavior. We see price gouging by the sellers, hoarding by buyers, and manufacturers struggling to keep up with the new demand. It goes without saying that we see the same effects in the ammunition industry.

Changing gears really quick. We all know America has a love affair with guns and in my opinion - rightly so. There are countless research papers and statistics showing that by arming citizens we see less crime. One major publication arguing this point is a book by John Lott titled “More Guns, Less Crime”. This book helps the reader better understand gun control and why governments are so involved, it also helps explain the effects of government policies on the gun market.

Ultimately, I don’t think gun sales will go anywhere but up. People’s fear of the future will continue to drive sales and manufacturing. With the upcoming election of Hillary Clinton as president I  see no reason why the gun market will slow. I do think this must be a bittersweet moment for the gun makers and sellers as a whole. On one hand you have a president trying to put you out of business, yet on the other hand the mere fact that the president is trying to put you out of business is great for business.

 http://johnrlott.blogspot.com/          
      

4/22/2016

Why can't Kmart be successful while Target and Walmart thrive?


If you have ever walked into a Kmart, you can understand why they are closing 68 stores this summer. I can’t remember the last time I set foot into one of their stores. Kmart was once a profitable discount retail store that was the leader of an industry that included Walmart and Target. Time has not been good to Kmart and they are now closing multiple locations. Kmart never created a niche market for itself. When anyone thinks of Walmart the perception of low prices comes to mind. When it comes to Target, a customer will pay a little extra for higher quality products. What do you get at Kmart? They offer such a wide variety of high and low quality products that it gives off the impression that even they don’t know their competitive advantage.

Kmart started off with success and had great economies of scale. They knew where to cut costs and spend money to stay in business. However, Kmart became complacent and didn’t continue to find ways to improve the economies of scale and use the economies of scope to their advantage. Eventually these cost cutting activities turned into diseconomies of scale. They started losing more money than they were making. Mismanagement is the main culprit of their failed success. They were not able to identify a competitive advantage and they didn’t know how to manage their economies of scope. There was no direction or reason to their actions and the business functioned like a chicken with its head cut off. There is plenty of demand for discount retail stores but Walmart and Target don’t even need to participate in predatory pricing to steel business from Kmart. Kmart just doesn’t have a loyal consumer base and can’t attract new customers. Kmart only has itself to blame. It was only a matter of time before they were on the verge of bankruptcy.


Sears and Kmart are closing 78 more stores

4/20/2016

The Effects of Whisky

Having always wanted to be a sophisticated Scotch guy, I only ventured to higher end whisky brands that was naturally, Scottish made.  I wasn't wrong with this, however I was quite ignorant to whiskies, themselves.  While there's nothing wrong with a good Scotch, that type of whiskies doesn't cause a local and global stir like simple economics of Japanese whiskies.  There is strong demand for these popular and award winning whiskies leading to shortages and higher prices also.

Other than supply and demand, there's unique perspectives of Japanese whiskies and real the impact to other goods.  Such as stated in the article of the rice farmer, a good such as the whiskies with the barley imports is influencing local rice production such that the paddy's owner is becoming a niche marketer.  The paddy farmer decided instead of suffering a decreasing rice market for alcohol production to shift his market to barley.  It would be interesting to see associated marginal costs for the farmers after increased local production and the distilleries, pre- and post, the increase of local production and further more the purchase of local goods.  Obviously, there must be enough financial justification for the paddy farmers' decision, to switch to or incorporate barley farming.

The article makes an interesting assertion about locally grown barley, that it costs five times as much  The Japanese government does provide subsidies for barley farms, which isn't much of a surprise considering Japan's global rank of importing and most countries have similar programs for other various types of farming.  I am curious why is locally produced barley more expensive, but that's not for this post.  However, I would like to see the financial details to show the effects of the decision of entering the barley market, even if it's just the short-run.  Hopefully, I'm fortunate enough to try some Yamazaki Sherry Cask 2013.

Japanese Whisky

4/19/2016

The Auto Parts Cartels Are Costing Me Money

Our family has reached a crossroads, and it's finally time to upgrade the old family wagon to accommodate our growing family.  It has been several years since our last car purchase, and I've had no reason to pay any attention to car prices during that time. So I was shocked as we began our search only to find that our budget, being based on an average median household income, wouldn't go very far. I couldn't avoid the big question, what could possibly make a depreciating asset that serves no greater purpose than getting from point A to point B worth so much money? Granted there are many costs that go into manufacturing a vehicle that aren't directly associated with the cost of parts and labor, but that can be the topic for another blog post at a later time. So what is driving the cost of producing a vehicle on the parts side? In such a competitive market as vehicles, there must be a reason for such inflated auto prices. After doing a little research, I discovered an ongoing issue that our government is combating on a global scale. I was surprised to find articles addressing the issues we face relating to auto parts cartels, or in other words, organized crime in the auto parts industry. This is a crime where like manufacturers are colluding and price-fixing auto parts supplied to auto manufacturers. When I think of a cartel, my mind goes straight to imagining a criminal organization running the drug trade. But in addition to chasing drugs across the border, there is an ongoing investigation into colluding auto parts manufacturers underway by the U.S. Antitrust Commission. They are actively seeking and prosecuting those individuals or companies violating the Sherman Antitrust Act of 1890, where auto parts manufacturers are price-fixing and colluding. These criminals are running the risk of being subject to penalties such as hefty fines and imprisonment if their criminal activity is discovered.

So as my search continues for the new family vehicle, and I continue to be baffled by the extremely high cost of a new car, I must now ask myself if I'm being directly impacted by the organized crime ring of auto parts cartels. I guess the high pensions being paid in the auto industry is only one of the contributing factors of inflated car prices.

Car parts price-fixing fines for Hitachi and Mitsubishi Electric
More auto parts cartels uncovered – do sanctions not deter competition law contraventions?




4/18/2016

San Fran Housing Costs on the Decline

The city of San Francisco has had an inflated housing market that could come to an end with its prices beginning to decline for the first time in almost four years.   In a year over year report there has been a decrease in housing prices with an estimated 2% drop.  Most notably from the report was that demand of housing in San Francisco was declining.  The March YOY report suggested that there was a decrease of houses sold of 22%.  Using the reports suggested percentages; we can conclude that that there is a price elasticity of demand of eleven. Due to the cost of living in the city, there have been arguments from others that the San Francisco market price was inelastic, which is proven to be invalid.  The actual effect of decrease in demand-increase in supply is making a change in the market’s equilibrium.  The housing market in San Francisco will continue to decrease until the demand becomes balanced with the supply. 

While it is simple to see that the decrease in demand of houses has also decreased the sale prices of them, there is another variable that could come to be a factor over the next couple years.  As the start of the San Francisco housing prices decreasing, the state of California has approved an increase to minimum wage.  Since the house market price of San Francisco was high with a possible cause of the lack of willingness for consumers to purchase housing; that may all change with the possibility of the ability to purchase.

The price elasticity of demand value suggests that the housing prices will continue to fall until that value becomes one or less.  That would require either an increase in demand, the price continues to fall, or the supply decreases.  However, increasing minimum wage could cause an effect to the market equilibrium and slow down the price decrease.  It will be interesting with the current and future speculation from either consumers or housing suppliers and if that speculation could impact the market.


Women, as good as men. Just cheaper.

Everyone is aware there is a wage gap. If you are unaware, here is a quick update. Men earn more than women – it’s a fact (according to most). It is calculated that women earn as much as 21.7 percent less than their male counterparts.

 According to an article by Fortune, this gap is a detriment to all, not just women. This disparity in wage is claimed to be part of the reason we see poverty among working single mothers. Fortune also claims that the wage gap actually widened in 2015, which shorts women up to $500k over the life of their career and won’t pay women equal pay for another 117 years. I am sure the numbers have some validity, however, the article doesn’t broach the question, “Why is there a wage gap?” or better yet, “Is there really a wage gap?”

My suspicion is that maybe we are just looking at wage discrimination. Much like price discrimination is good for selling products across multiple demographics, wage discrimination is good for hiring across multiple demographics. These demographics can range from location, ethnicity, and even sex. So rather than assuming companies are acting like men from the 1940’s and 50’s, we should be analyzing labor numbers. Let’s take a look at 78.3 percent, which is the percentage of income women make compared to men. Now take a women that works full-time, all year, and divided it by the median annual earnings for the year and you come to 78.3 percent or something close to that, depending on where you get the numbers. What this calculation doesn’t take into consideration is individuals. Instead of measuring across the workforce as a whole, shouldn’t we be looking at individuals with similar attributes? If we take a man and woman with similar education, labor-force participation rates, and productivity attributes, do we still see the 21.7 percent gap in wages? Studies show that we don’t, and that in reality the number is significantly smaller.

So if it’s not sexism, what is it? In the end what is found is that women want different things than men. Women are more prone to taking time off rather than pay raises. Women would rather not join the rat race and stay late every night. They have family as more of a priority than men do. This difference in priorities results in women working less hours, and getting fewer promotions, which in turn lowers their earning potential. I propose that instead of calling it a “wage gap,” we should more appropriately call it a “priorities gap.”

Here Are 5 of the Most Infuriating Facts About the Wage Gap

As protesters push for $15 an hour, minimum wage issue stalled in Missouri

Over recent years low wage employees have pushed and clawed to raise the minimum wage to $15 per hour. In California and New York they succeed. The plan is to have the new minimum wage in place by 2020. In other parts of the country low wage workers continue to pursue the same dream to get their minimum wage to increase. In St. Louis low-wage workers participate in one-day strikes in order to get their employers to take notice. Missouri has had many bills passed by lower-level forms of government only to be vetoed and then resubmitted and passed but blocked by state legislature. The case to finally raise minimum wage has been taken up to the Missouri Supreme Court. Everyone is currently waiting for a decision to be handed down.

What these employees don’t understand is that if minimum wage is increased, people will lose their jobs. This is a classic example of supply and demand. These restaurants need workers to meet the demands of customers. With a low minimum wage, employers are able to staff more people to meet those demands. Once that minimum wage is raised, what was being paid to two employees will be spent on one employee. The demand for workers will still be there but the supply will be greatly reduced because these companies can’t afford to pay the same amount of people more money. These companies won’t all of sudden have more money.  This new wage hike will raise fixed costs to pay salaries. In order to cut costs the logical thing would be to fire their workers. Furthermore, more responsibility will be placed on the remaining employees and the costs may be greater than the benefits. Whatever the competitive edge a company might have could be compromised because of lack of employees. For example with fewer employees the quality of products may be diminished. Although it seems like a great idea to help out the lower class, it will also mean the loss of jobs for many people as well. Catch 22.

As protesters push for $15 an hour, minimum wage issue stalled in Missouri