On efforts to control prices

Today, I was reading news stories about hand-sanitizers and masks being sold online for ten times their normal prices amidst the worldwide coronavirus outbreak. Given the circumstances, apparently Google and Amazon are prohibiting sales on their platforms at exorbitant prices. They are private companies so I have no qualms about what they decide to do, but their responses reminds me of historic efforts imposed by the government to control prices of various goods and services.

These price control efforts I’m thinking of are mandates like “anti-price gouging laws” that prohibit sellers from raising prices of products beyond a government-set percentage in case of a natural disaster, “rent control laws” that make it illegal for landlords to charge rent over a certain allowed annual percentage increase, and “minimum wage laws” that set the floor for how low of a wage an employer is allowed to pay to its employees.

On the surface, these issues seem pretty simple. Charging a high price for necessities that people need in times of a natural disaster, increasing the rent on someone struggling to pay rent, or hiring unskilled workers for the benefit of business-owners while taking advantage of cheap labor, all seem wrong. In a perfect world, we wouldn’t have to do any of that. But the world is not perfect, and a lot of discussions I have been having around this topic tend to miss an important aspect: what would we giving up by implementing such laws, and are these decisions being made as a result of weighing the pros and cons to make sure that we are not causing unintentional harm? To help me understand the topic, I have been researching counterarguments against price-control measures. The opposing views are not often talked about especially in the liberal state of California where I live. My goal is that we can all think critically about such laws in order to be an informed voter, because these issues often come up in local elections.

Rent Control
Let’s start with rent control by considering the case of San Francisco, a city notoriously known for its lack of housing and exorbitant prices despite its rent control laws.

According to the citywide ordinance in San Francisco, an owner of a rental unit may not increase the rent by more than 5% annually against a current tenant. Given the current severe housing shortage in San Francisco, there is a drastic difference between how much a landlord can charge a tenant who already lives in a unit and wants to stay, compared with how much a potential new tenant moving in is willing to offer for the same unit. Rent control laws are popular among the public because the name suggests that it should control the rent, making it affordable for more people to live in that area. Because of that, many politicians in the past have implemented them to gain the support of the voters. However, a careful study of the topic reveals that rent control laws are ineffective at best in what it claims to do (to control the rent), and actually result in the opposite effect. Rent control is the main driver in rising rents, homelessness, and gentrification in an area, harming people, especially the poor.

To understand the topic better, it helps to first to put ourselves in the shoes of the landlords, such as an owner of an apartment complex. Remember that rent control law results in a large price difference between what future tenants are willing to pay, and what a landlord is allowed to charge the current tenant. As a result, the owner has all the incentives to kick out the current tenant for a new tenant. But that is often difficult to do, so the next best thing is to convert the rental unit into other forms of investment, such as commercial buildings or luxury condos for sale, which will command very high prices and offer a better investment opportunity than being a landlord. Such an incentive placed city-wide by an ordinance leads to an even greater shortage of rental units in the city, as more and more rental units get converted to serve other purposes, while very little new rental-units are being built in the city. Even as the city is expanding and businesses are moving in which should also have a corresponding demand increase for housing, investing in rental units is not as attractive as other forms of investment. The resulting shortage almost always means higher prices in the long run for the remaining rental units due to low supply and high demand. As prospective tenants bid up the prices for their chance to move into the city, rent becomes exorbitant. The people hurt most by rent control laws are the poor. Many rich future tenants pay bribes to the landlords to secure rental units. Some tenants even secretly sublet their unit at market price significantly above what they are paying to the landlord. In fact, my friend was recently paying $1600/month to his roommate to share a unit in San Francisco in which she has lived before him, signaling that the fair market value for the unit should be around $3200. Despite that, his roommate was paying significantly less than that to the landlord, because the landlord was forbidden by law to collect the profit from the arrangement between my friend and his roommate. No wonder that less and less investors want to supply rental units in such a city. As an investor, if I cannot collect the fair profits from my investments, I will forego the opportunity to invest in something else with my capital.

So a law designed to make housing affordable for people has the exact opposite effect as it causes a shortage and drives up the cost of housing. The story is much the same in other places that have implemented rent control: New York, Los Angeles, Washington D.C., and Oakland which are all facing increasing rent and homelessness.

Compare them to Tokyo, a large city with no rent-control laws. Tokyo has enough housing for people of all income levels because supply of housing has steadily increased in proportion to its population-growth historically. In Tokyo, a low-wage worker earning an equivalent of about $10 per hour can afford to live in one of the cheaper rental units in the city whose market rate is around $400, or about 25% of his monthly earnings, as long as he is okay with not living in the most convenient areas of the city. He would also likely have to live in a very small studio unit, and take a few more subways to get to work than the rich who tend to live in more central areas. It may not be the most ideal living situation, but it is comfortable enough, and it sure beats being homeless or having to live hours away from your place of employment, as workers in San Francisco often must do.

Speaking of homelessness, Tokyo has a homelessness population of about 1 per 10,000 residents. Compare that to New York city and Los Angeles, with a dismal 67 and 40 homeless persons for every 10,000 residents, respectively.

Anti-Price Gouging Laws
Let’s turn our attention to price-gouging laws. In California, its anti price-gouging statute prevents a merchant from raising the price of any item by over 10% in response to a declared emergency, such as a natural disaster. In theory, such a law sounds good, as it should keep items affordable for the poor, who tend to be the most vulnerable when disaster strikes.

However, forbidding prices to go up ignores the fact that in case of a natural disaster, the demand for certain products can rise significantly in a very short amount of time, driving up the market rate for various products. The very definition of what used to be “normal” does not apply anymore, as there is a new normal price determined by the sudden spike in demand. If merchants are not allowed to raise the price of these products, these products will immediately sell out, and their prices will rise any way through the secondary and black markets, as people who make it to the stores first will hoard these items, often to stock up for emergency or to sell them at a much higher price that people are now willing to pay given the new circumstances, leaving little for the poor for a chance to get the products. An anti-price gouging law cannot fight the market forces to control the prices as it intends to do.

What is the effect, then, of such a law? It turns out that it is very similar to rent-control laws mentioned above. When a law prevents price of a product to rise in response to the current market conditions, producers of that product don’t have a strong enough incentive to produce more of that product, and the merchants of that product who operate in multiple regions to divert its normal supply chains to provide more of that product to the area where price is rising, signaling the highest need. Because of the lack of incentives on these key players in the market, laws preventing price hikes lead to a severe, ongoing shortage of the product in question. A price hike may be unfortunate, but as long as incentives are allowed to fluctuate freely with changing market conditions, high-prices prevent people to hoard an item unnecessarily in the short term, and prices come down quickly as more suppliers start providing the product to the affected area. This is a much more desirable effect than an ongoing shortage.

For example, an ongoing shortage of masks in an area devastated by a wild fire could mean life and death for many of its residents, and it is tragic that anti-price gouging laws can indirectly kill people by failing to incentivize the market forces to bring more masks to the area. It is one thing to be skeptical of free market forces when it comes to topics like health insurance and the environment which have externalities that the market fails to address, but a whole another to ignore its efficiency of providing a high-demand product in a high-demand area. Free market forces act significantly faster to solve a simple shortage than a government bureaucracy trying to supply the product in such a scenario. The government does not have the right connections to the producers and the merchants to devise an effective policy overnight to save the lives of these people, while a web of producers, delivery services, and retail stores responding to the market forces are very effective to quickly divert products to areas in need.

Economists are often criticized for simplifying the world with sketches of supply and demand curves on a napkin to explain such phenomena, but there is an important wisdom to be gained by trying to understand how supply and demand works at the most basic level. I liken it to future mechanical engineers who study about frictionless inclined-planes in their introductory physics course, even though no such object exists in the real world. The education obtained here is nonetheless crucial to the career of this future engineer or the future voter in understanding more complex topics.

Anyone who studies the history of price controls cannot deny that government-imposed price control measures have consistently led to severe shortages any time the market price for any product goes above the price allowed by law. The gasoline shortage during the 1970’s oil embargo, the shortage of apartments in rent-controlled cities, food and basic necessities in Venezuela under Hugo Chavez’s policies placing a cap in their prices, the shortage of doctors in countries where the government imposes how much a doctor can charge for various services, are all examples of this. It is just difficult to see the causal negative effect of these policies because under normal circumstances, market prices for most services and products do not go above the level imposed by the government. When it does suddenly many years later, the politician who implemented such an erroneous and mistaken economic policy (often with praise from the citizens at the time of implementation) is usually long gone from the office, as society is left to deal with the devastating consequences, wondering why the shortage does not get solved even as people suffer.

Minimum Wage Laws
Finally, let’s turn our attention to minimum wage laws. Perhaps this is the most controversial of the three price control laws I mentioned today, because it affects the most number of people on a daily basis. It is also the most complex of the three, with its long-term effects not completely understood given the complexities of the labor economy. The key difference between a minimum wage law and the other two laws I mentioned above is that a minimum wage is a “floor” placed on the price of labor setting a certain minimum, as opposed to price-control measures such as rent control and anti-price-gouging laws, which are “ceiling”s setting some maximum level.

The typical Econ 101 textbook states that a price floor results in surplus, while a price ceiling results in a shortage. So the minimum wage law, which effectively sets a floor on wage, should cause a surplus in the available labor, meaning higher unemployment rates. The simple explanation may miss some key insights because of the long-term effect on the well being of the economy when people, especially the young, forego working for other high value activities such as education. Also, it is possible that businesseses may be underestimating the value of a worker and underpaying them. Paying too much for a worker hurts the bottom line for obvious reasons, but paying workers too little could also be damaging too if the wages are so low that a job loss does not hurt, in which case those workers have little incentive to be actually productive at work.

The key argument for minimum wage law is that by setting the minimum to a “livable wage” to meet the basic living conditions, poverty should be eradicated. It sounds beautiful in theory.

But at the same time, it doesn’t take the most intelligent economist to see that you can’t just raise the minimum wage to any price you wish. For example, raising the minimum annual salary to $100,000 for everybody sounds great at first if we can all earn a six-figure income starting tomorrow and live in abundance. But if such law were to be implemented, any employee who does not produce that kind of profit for the employer with his or her skills will be laid off soon, as there is no reason whatsoever for the business to keep such a person on staff. Engineers, doctors, and lawyers already earning a six-figure salary will likely keep their jobs, while many people will lose their jobs, at least temporarily, as the economy slowly adjusts to inflate the price of everything to negate the effect of a higher income, at which point people can be employed again.

So by common sense, we can’t set the minimum wage to $100,000/year without causing massive unemployment in the short run and inflation in the long run. So what is the result of a more realistic minimum wage, such as $15/hour, that many proponents argue for?

In the short term, it will not change much of anything for most people in their mid-careers, because they are already earning wages well above $15/hour anyway. The only people initially affected by the law are people currently working for under $15/hour. By the same logic as the example of the $100,000/year minimum wage above, with a $15/hour minimum wage, companies will have an incentive to layoff anyone whose work and skill does not produce a profit to the business equivalent to $15/hour. These are mostly people in entry-level jobs with little experience nor knowledge on how to do the jobs effectively yet, such as students or people straight out of prison working at their first job.

Even though the proponents of minimum wage often cite how impossible it is to raise a family on minimum wage, it is important to recognize that a majority of people working minimum wage jobs are actually not raising families. They tend to be young, inexperienced workers working their first job to gain a footing in the world of work. For such people, an opportunity to work and build experience, regardless of any wage, may be more important than a higher wage, and a minimum wage law inevitably means that some of them will be unemployed because their market wage is worth less than what the law allows.

Of course, young people finding a difficult time finding employment can forego work now and focus on their education which also lead to future opportunities, and that is not a bad thing. So I don’t know whether the overall effect of minimum wage laws on society are positive or negative in net, although I suspect the effects are pretty small considering the vast size of the economy as a whole and the wages of people which are mostly above minimum wage anyway. Minimum wage workers represent only about 0.1% of the economy in terms of number of workers. Regardless, to those few workers, a minimum wage law may mean a disruption to their career, because the law may prevent an employer to hire a worker at a price that they both agree on as being beneficial to both parties. There are certainly instances when workers will be willing to take a wage below the mandated minimum because they can benefit from the work experience. If the law unintentionally prohibits such a contract between a business and a potential hire even though both parties are willing, it has done harm to those parties.

One irony of the minimum wage law is that its proponents are often economic liberals (in the American sense) who generally favor government intervention to control business sizes. They claim that corporations are getting too large and that is bad for competition. But they fail to recognize that minimum wage laws favor large corporations, as they are the ones who can afford to pay a higher wage, while small businesses are more likely to go out of business because they tend to have much smaller profit margins and thus are hurt the most by having to pay a higher wage.

Proponents of minimum wage laws should critically think about these trade-offs before coming to any conclusion.

Summary
My goal in analyzing price control laws today was to frame the conversation as a trade-off between pros and cons after having understood both sides viewpoints, rather than an emotional argument about right and wrong which will never lead to good policies. These are nuanced topics with no one right answer, so being aware of the implications is crucial. Policies and their effects are not simple to understand. It is not about implementing what satisfies our emotions. Every policy has trade-offs that must be considered. Have we thought about what those might be? If not, let’s think them through. After we’ve done so, are the trade-offs worth it? These questions must be driving our conversations.

cup of coffee anyone?

There once was a peculiar coffee shop called “Akaneya”, located by the train station in Karuizawa where their baseline coffee started at double the price of a typical coffee at other cafes. Not only that, Akaneya’s secret menu is rumored to have included a cup of coffee that costs upward of $100.

Karuizawa is a rural little town that my family used to visit during the summer to get away from the Tokyo heat. You may also know it as the home of a recent season of the reality show “Terrace House” on Netflix, which is a very interesting cultural phenomenon worth checking out for anyone interested in how some Japanese young adults go about their lives.

Back to coffee. What’s really interesting about Akaneya’s coffee is in its philosophy and history. The first Akaneya opened its doors in Kobe, a large city in west Japan. Its owner, Mr. Funakoshi, had suffered from medical issues throughout his life and reasoned that he could not work a normal day job like everyone else. About all he could handle was to own a small coffee shop, and not only that, his goal was to work as half as much as a typical coffee shop owner. What interesting aspirations! Can you imagine going into any job and right off the bat claim “my goal is to work as half as much as others”? Well that was precisely his goal.

He got to thinking how he can achieve this. He set a goal to serve about fifty or so customers in a day. He figured that the coffee must be priced high to not attract too many customers, but he had some pride. He wouldn’t allow himself to serve anything whose quality didn’t justify its high price. A coffee that tastes bad but is expensive just for expensive’s sake was of no interest to him. And so began his journey to figure out what exactly makes one fine cup of coffee.

His first stops on the journey were the various operators that import and process coffee beans. He carefully observed how they work, and asked them questions until he was confident in his understanding of how this industry operated and the important concepts that end up affecting the taste of the final product, the brewed coffee.

This was 1966 and as such times were different. Of all the coffee bean processors in Japan, there was only one that roasted the beans using charcoal. He decided to buy the beans from them. But instead of letting this operator blend the beans as they saw fit like any other coffee shop would, he brought back a variety of beans in order to decide on a blend himself after much trial and error. He made each cup of coffee to order using the pour over technique, which was eventually made popular in other coffee shops in Japan (and later in other countries as well), but putting in so much work into each cup was certainly not the norm at the time, as no other coffee shop was known for doing the same.

His meticulous research did not stop at the coffee itself. For the best drinking experience, he also needed to find the right cup. He looked into cups made domestically and internationally, made from a variety of materials, and eventually found cups to his liking in Okura Touen, a Japanese producer of fine artistic china, after visiting various factories and observing the pride that each put into their work, as well as the conditions, cleanliness, and management of the factories.

With all this research and preparation, he opened his first coffee shop in Kobe, Japan, and it did better than he expected, which meant he was working more than he would have liked. Remember, his goal was to open a coffee shop that did not attract many customers. Eventually he left the operations of this busy shop to others, and opened up another location in the rural Karuizawa where the population is small and people would typically only visit during the summer months. This store was more to his liking, and he was working less, just like he wanted to. He spent his newfound free time learning about various things, and unexpectedly, the second floor of the shop eventually became a secret meeting place where various important officials and higher-ups of society would come and talk to Mr. Funakoshi for inspiration, to learn from his profound insights about business and the world.

So goes the interesting story of the Akaneya coffee shop and its founder, Mr. Funakoshi. What’s the point you say? Well, whatever lesson you learn from this is up to you. At the very least, it’s a fascinating story of the irony of life, about a guy who ended up successful because he didn’t want to work. Perhaps herein lies an important aspect of work: be creating something that you can be proud of.

Why trade happens

Recall that a few weeks ago, I learned that the $5 Trader Joe’s bags are being sold for $25 in Japan, and that really fascinated me. We’ll be revisiting this topic from time to time.

Today, I want to focus on one aspect of this phenomenon: “Why Trade Happens”.

By the way, it is a very hot day in Southern California, and I am writing this from the comfort of an air-conditioned coffee shop. I paid $3 for my decaf ice-americano and a seat at the cafe. Why should you care? Because fundamentally, trading my money for coffee is not any different from all trades that happen globally at massive scales every single day, which leads me to today’s key point: Trade happens because it benefits both parties. Once you understand this, you start to see the world a little differently.

In my case, I gladly traded my $3 for a table in this cafe, because to me, this comfortable spot where I can work on this hot day was way more valuable than the three dollar bills in my wallet. However, for the coffee shop, the opposite is true. To them, the $3 was more valuable than the coffee, so they gladly gave up their cup of coffee away in exchange for my $3. The trade made both of us better off, and we can rest happy that both parties contributed to the betterment of the other. Isn’t that beautiful? And just imagine, trades like this happen everywhere, every day, at unimaginable scale that makes the entire world’s economy function.

Access to the world’s market has been so important that it has lifted more people out of poverty than all of the well-intentioned non-profit volunteer organizations put together. There are tremendous advantages that come to allowing trade to happen freely; it brings costs of goods down, it makes us more efficient, and lives are improved everywhere. It is no accident that when governments try to intervene or restrict trade (or even worse, regulate how much of what should be produced and how much they should be sold for), the economy tanks. No economist is surprised that the Soviet Union has collapsed, and North Koreans are going hungry. I am amazed to see how there are so many well-intentioned but ignorant people today who have forgotten the brutal history of socialism’s collapse, and think that somehow the world will be better if it returns.

But there is a caveat to all of this. Our challenge is to carefully consider policies so that the market can continue to function effectively, while intervening in areas in which the market fails, such as when we act in ways that seem to grow the economy but actually doesn’t (like our increasing dependence on fossil fuel), or when we undermine important aspects of society that have tremendous long-term benefits but the free market will fail to provide because it benefits the entire society as a whole, and not one company (like providing high-quality education for everyone , or mandating a universal health care). Even though it may seem like drilling for oil and cutting back on education is a cheap and easy way to pay back some of our federal deficits and grow the economy, the growth that occurs in the short-term must be balanced with the long-term harm. Most people I know, even Trump supporters, at least agree with me on the point that it’s pretty difficult to grow our planet’s economy if we destroy the planet.

As you can imagine, the trading of Trader Joe’s bags are not too different from my trading my money for a cup of coffee. The bags are sold in Japan for $25 because those trades make both the buyers and the sellers better off, at least in their eyes. Who are these buyers and sellers and why do they act the way they do? We can discuss that in a future post, but today, I want to finish off by pointing out that there exists a common misunderstanding in which people assume that certain things are expensive because the sellers of such goods are evil. You know what I’m talking about if you’ve been surprised to see those $4 bottled-water or $18 sandwiches at airports. But before we make such judgements of merchants who sell these goods and services at outrageous prices, we need to remember today’s key point: trade happens because it benefits both parties.

Some people feel annoyed when they see water being sold for $4 at the airport and blame the merchants for such evil doing. Their anger is understandable because after all, not everybody pays attention in an economics class, but misplaced. Don’t think that the airport stores are charging that price because the store-owners have bad intentions of stealing your hard-earned money. Think again. Even if you refuse to buy that water, there are plenty of other people who are perfectly willing to buy them. I know that there are such people, because if there weren’t, the stores would have lowered the price a long time ago (or have really old water that they can never sell). So is the store to blame for this? Or are they simply charging a price that the buyers are willing to pay?

Another example that is a little more significant and relevant in recent political and economical discourse is the rising price of housing in certain places, namely New York City, coastal California, and Washington state where this is becoming a serious problem. Sometimes, landlords and developers are blamed for such high prices, but that comes from the same misconception. If you have understood today’s point, you should know that rent is simlar to other goods in that it becomes high when there are many people willing to pay it. You cannot blame the landlord, then, for charging that market rate. Why would they charge $500 when there are people willing to pay $1000? If any of us were in their shoes, we would do the same, so it is not right to criticize them. So who is to blame for the high cost of living?

The good news is, economists have studied this topic pretty extensively, and they actually know of data-driven solutions to make housing more affordable to people of varying levels of income, which is a topic for my next post. The bad news is, emotionally-charged political debates that disregard everything that econmists have figured out, and politicians who play to people’s ignorance and emotions to get more votes, get in the way of implementing such solutions.

One big motivator for me to keep writing posts like this is to educate more people about economics, because we are all voting citizens. Let us not forget that stupid politicians are in office only because we put them there.

On monopolies and antitrust laws

“Amazon is getting too big, it’s like a monopoly. I’m scared that they are going to take over the world. Other sellers cannot compete with them, and that’s not good.”

That was a concern my friend expressed recently. I was reminded of it again today, because the authorities of the European Union apparently have the same misunderstanding of what constitutes a monopoly. Today, the E.U. announced a fine on Google worth over $5 billion, claiming that Google’s partnerships with hardware makers such as Samsung, Huawei, and HTC to make Google’s applications the default services on the devices are in violation of antitrust laws.

Simply put, this ruling is not warranted. (Disclaimer: any views I express here are my own, and they are not of my employer, Google. For that, refer to their official blog.)

Antitrust laws exist for a simple reason: to prevent a monopoly from taking advantage of its status to remove competition from the market. Here’s a couple of examples of what might constitute a violation of antitrust laws:

  1. If my local cable company works out a deal with the politicians to make it illegal for other competitors to enter the market, then promptly jacks up the price of its services.
  2. If Google and Apple were to secretly agree that instead of competing to offer good products at good prices to the consumers, they would both jack up their respective phone prices (iPhone and Pixel) to some ridiculous amount.

Honestly, either of the above wouldn’t bother me at all because we’ll all be just fine without cable TV or smart phones, but still, I can see that such actions could be considered a violation of antitrust laws.

Now, let’s be clear about one thing. There is a big difference between a company who gets big because it has removed competition through corruption and has broken antitrust laws, and a company who gets big because the services and the products that they provide are so valuable to the consumers that so many of them choose to use it. So which is the case for Amazon and Google?

The reason Amazon is big is NOT because they are evil and they are taking advantage of all of us. Amazon is big because everybody chooses to use Amazon, which in turn makes them profitable. Why do we all choose to use it? Is Amazon our only choice? No, of course not. We can all stop using it any day, if we wanted to. But we don’t want to. We use Amazon because they offer better prices on many goods compared to their competitors, and that is a good thing for the consumers. That is far from a monopoly taking advantage of its status to jack up prices that it puzzles me why people confuse the difference. It might suck for a store owner about to go out of business due to increased competition, but the whole point of antitrust laws is to encourage this kind of competition, not to stop it. If that store owner were to argue he is going out of business and therefore Amazon must be harming the economy, he would be wrong. It is actually good for the economy for a company who does the job more efficiently to get more of the business, incentivizing businesses who don’t do it as well to step up their game and do it better. If they fail at that, they’ll go out of business as they should in a healthy economy, and hopefully they’ll go on to do something else with their time and resources to benefit the society in another way. Fallacies in economic thinking often comes from only thinking about a negative aspect of a small part of the economy (in this case, the store owners), so let’s make sure that we don’t forget about the positive aspects on the rest of the economy, which in this case obviously includes the consumers, but also the manufacturers whose customer-base has suddenly expanded to the entire world thanks to Amazon.

When it comes to Google and the Android platform, again, it would be wrong to say that they have taken advantage of their position to the detriment of the consumers. First of all, they have not at all removed the competition, and they aren’t trying to. Android is an open platform precisely because Google’s mission is to make the world’s data accessible to anyone and everyone. There are so many choices when it comes to Android devices, from over a thousand manufacturers. The competition in this market is alive and well, and there are many affordable options for the consumers because of it. Some of the manufacturers may have agreed to a contract with Google to pre-install Google’s apps, but it’s not as if they were forced to do so. If they thought that Google’s apps were bad and it would’ve been better to install other apps instead in order to sell more of their devices, they would have. Why didn’t they? Their choice. Customers also don’t have to use these manufacturers’ devices. So why do they? Again, their choice. And I didn’t even mention the competition from non-Android (which basically means iOS) devices, which is also a very healthy competition, so really nobody needs to use an Android device if they all choose to use iOS. Why don’t they all switch to iOS? Again, their choice. (Starting to see a pattern here?) All this competition is good for the consumer, and plenty of choices exist as we speak. There’s nothing confusing here, and I can’t put it any simpler. Despite the competition, customers are still choosing to use Google’s applications because of their high quality. These apps provide them with something valuable. When’s the last time Google Maps helped you navigate and avoid a traffic jam? It happens all the time for me. And recently at a sushi restaurant in Tokyo, I saw a Korean girl use Google Translate to figure out how to say her favorite fish, then proceeded to put in her order in Japanese.

My coworker told me about a time he witnessed a family at an airport attending a sick child, and a nurse happened to be nearby to help. They didn’t speak the same language, so they used Google Translate to communicate. Were they forced to use it? No, they chose to because it was useful and it provided them with something they needed.

The economics behind Trader Joe’s bags: An Introduction

I went grocery shopping today at a nearby Trader Joe’s store. As Joel (my cashier today) was ringing up the items I had picked, he asked me in typical Trader Joe’s fashion, “any exciting stuff happen today?” By the way for anyone who hasn’t been to a Trader Joe’s before, their cashiers tend to strike up conversations with you.

I mentioned to him that I learned some Spanish phrases on Duolingo this morning, and asked if he had tried the app too. It turns out that he uses it for learning Japanese, and he started talking to me in pretty good Japanese: “watashi wa nihongo wo hanashimasu. Trader Joe’s no baggu wa nihon de ninki desu.” (I speak Japanese. Trader Joe’s bags are popular in Japan.)

Clearly that second phrase is not something he learned directly from Duolingo, so he must have taken his learning a bit further, and I was very proud of him for that.

Then he proceeded to tell me about an interesting phenomenon: the $5 Trader Joe’s reusable bags are being sold in Japan for $25. “There is a black market for Trader Joe’s bags in Japan,” he claims.

Of course the “black market” part is a joke because there’s nothing illegal about me buying a few of these bags and selling them in my home country, but I got curious so I searched on some Japanese peer-to-peer shopping sites, and sure enough, these bags are indeed being sold in Japan for around $25.

This fascinated me, because as an educator at heart, I could not stop thinking about what a great lesson in economics this makes. Any curious student of mine, when told about this phenomenmon, would have asked me: “Well why does a $5 Trader Joe’s bag sell for $25 in Japan? Can I get rich by starting a Trader Joe bag business in Tokyo?”

It turns out that answering this seemingly simple question requires a solid understanding of some of the most important economic concepts, such as “supply and demand”, “scarcity”, “free market”, “division of labor”, “tradeable vs non-tradeable goods”, “exchange rate”, “purchasing power parity” and many more.

So let’s delve into those topics in future posts. But first, why should you care? For starters, economics is really interesting, but more importantly, I believe that a firm grasp of economics is essential for any citizen of a modern society. Not only are we affected profoundly by the economic decisions we make in our lives, we are also voting citizens, and as such, we ought to understand the philosophies behind each of the fiscal and monetary policies we support. The field of economics, contrary to popular belief, is not just about money. At its core, economics is about making the best use of limited resources to improve society.

Fallacy of a tariff

This week, Donald Trump announced that he is imposing tariffs on foreign steel and aluminum, tweeting “To protect our country we must protect American steel!”

This is a completely illogical policy. It is not at all based on sound economics, and the result is a significant net-negative on America’s (and also the world’s) economy.

It is shocking to me that tariffs are still a thing. Politicians all over the world keep making this mistake, and I am starting to wonder, are they really ignorant, or are they simply doing this to gain votes from ignorant voters even at the cost of the damage done by their stupid policy?

The fallacy in this kind of thinking stems from a simple omission: the mistake of only regarding the positive effect on a small subset of the economy (in this case, the American metal industry) while ignoring the negative effect on the economy of the country as a whole.

So let’s actually think through this issue and figure out what happens to America’s economy as a result of the imposed tariff on metals.

First of all, we must recognize the reason we import any commodity in the first place. The United States imports foreign metals because there happen to be other countries who produce that same metal more efficiently than we do. This makes perfect sense, why would we pay more for an American metal, when we can just import the same exact metal from another country for cheaper?

A person thinking only about the American steel industry then comes to the erroneous conclusion that foreign metal industries are bad for America, because we should be producing more of the metal here “to put America first, and to bring back our jobs.”

This results in a policy like this tariff on foreign metals. Now, those foreign metals are artificially made more expensive in the United States. Because of this, other American industries that need metal to produce their products are now forced to eat the cost by either buying the artificially expensive foreign metal, or the already expensive American metal.

And here is the problem. Now all of a sudden, an American car, say, that used to be made out of inexpensive metal imported from overseas, is suddenly forced to be manufactured from more expensive metal made in America. To the consumer, that means this car is more expensive than it used to be. That naturally leads to the consumers buying less American cars and switching over to cheaper alternatives such as Japanese cars. At best, we “saved” a few jobs in the American steel industry at the cost of jobs lost in the American car industry. In addition to those lost jobs, the American consumers also now have less money, because many goods are now costing more than they used to. The effect of that lost money is hard to trace, but it means less money in the system that could have been used to buy some product in some other industry, so that unknown industry is now short of the need to create that product which directly means less jobs in that industry. I used cars as an example above but the damage is actually distributed across a countless number of industries.

It doesn’t take a doctorate degree in economics to understand the damage of such an erroneous policy if we just simply follow the exchanges. Yet we keep falling for it. To me, there’s no better reminder that our education system has failed to do its one job: to educate citizens to think critically. It concerns me greatly that we continue to fail to make informed decisions based on sound logic and reason. Why don’t we ever stop to think to ourselves for a second, “wait, why is this politician doing this, and what’ll actually happen as a result?” and calling them out for their stupidity without resorting to tribalism and choosing sides based on the politicians’ image, party loyalty, or our views on just one or two issues that we happen to care about that doesn’t even matter that much, like gun control, our fight against terrorism, and many other statistically insignificant things that the profit-driven news programs made us believe are the most important issues? All this while ignoring issues that are actually much more significant. It seems crazy to me that so much of our recent discourse has been about our outrage at things like lack of gun control or Trump alluding to arming of teachers which was no more than a ploy to garner attention, while we go on ignoring things that harm a lot more people, like the lack of equity of access to education, dangers of bad nutrition, and the countless subsidies, tariffs, and regulations that politicians have enacted throughout history that do nothing more than to harm our productivity and, naturally, our quality of lives.

After explaining all of this, some people wonder, “but isn’t it bad for us to support other countries’ economies by purchasing their goods, making us less competitive?” Ok, a fair question, but actually, no, not at all. If other countries are willing to sell us their goods, we are paying them with the money that, in order for them to get any value out, must be invested back in America. It is an exchange. Mathematically, the amount of all imports and exports for any given country must always balance out. If not in forms of tangible goods, then in the form of currency exchange that will eventually be traded for a tangible good in some future timeframe. By enabling free global trade, we enrich the entire world’s economy. This isn’t a controversial issue: economists of all political inclinations agree on this point, other than the fake economists who make a living through their ties to special interests. If we instead artificially cut off the flow of trade, we impoverish more people.

On rent control

Santa Ana, a city in Orange County, CA near where I live, is considering implementing rent control. This is disturbing news to me, because basic economics principles and past failed efforts to control rent in other cities convince me that this effort, if implemented, will not only fail to solve the problem of expensive rent, but will make the problem worse.
A policy’s outcome is much more important than its intention, so we should never implement a policy just because the people who proposed it had good intentions. Of course we all want affordable rent, so the question is, how do we achieve that? If we want to make rent affordable, we have to look at the root cause: why is rent not affordable in Santa Ana right now? What led to this?
 
Rent control is like putting a bandage on a wound, it treats the symptom, not the root cause. That’s right, high rent is merely a symptom of some other poorly-instituted policy or restriction that cause a shortage in the number of housing units available per capita, so that’s what we ought to target if we wished to actually make a difference. There also exist other factors here that we cannot control, like the great California weather, which makes this a very ideal place for people to live in. We can’t change that, and as a result rent will always take up a higher percentage of people’s income here than it would in other places. With that said, we can still optimize the policies to make housing more affordable, if not cheap.
 
When rent is artificially kept low in certain units below what the market is willing to pay, that leads to a smaller amount of funds available in the economy which would have been invested in more housing. That in turn causes a lack of housing and an overall rise in housing costs. It also incentivizes wasteful use of land. That’s because if market forces naturally raise the cost of housing, people who can’t afford it have one of two options. Either they will find a roommate (which alleviates the economy of the need for one extra room, which is a win), or they will move into a smaller, more affordable space, also a win for the person and the system, because the person can continue to live, and it creates an opening for someone else in the economy, helping to maintain the cost of housing slightly lower. And that’s exactly what is supposed to happen when a city has a housing shortage, short of building more units. But if that cost is artificially kept low through rent control, they will stay in that space instead just because they can. While that might be great for the person who was lucky enough to get that rent-controlled space, that leads to less space available for the rest of the population, leading to a higher overall housing cost, based on the principle of supply and demand. And no, we cannot enforce rent control in every single unit, because the only way to make that happen is through subsidies. Nobody will invest in building or managing housing units in which they are only allowed to charge a fraction of the market rate for rent, because that means a loss of money for the investor unless their work is subsidized by the government. But keep in mind that every single dollar spent in subsidy has to be funded through taxes either now or in the future, and that money comes directly from people. So the effect of rent control, if gone far enough to build new rent-controlled living spaces, is that we will have taken money away from people through taxation, and into the pockets of investors, developers, and property managers.
 
I am from Tokyo, a city that has become a mega-metropolis while still maintaining affordable housing for people of all income levels, and it did that primarily by not restricting land development. When you allow the free market forces to determine how much housing should be built to meet the demands of the the industries in the city and what ought to be its price, miraculously, housing stays affordable for everyone. Some of my American friends who are used to living in gigantic living spaces according to Tokyo standards may say to me, “But you can’t get the same quality of life in Tokyo for the same price. Sure housing may be affordable, but you’re living in a much smaller place for what you pay compared to California.” And that’s exactly right! That is indeed the optimal (and only) way to keep housing costs low for everyone in a city with growing industries. And guess what, that doesn’t diminish people’s quality of lives as much as forcing people to move to far away suburbs only so they can commute into the city for two hours in their gas-guzzling SUVs. So maybe California has something to learn from Tokyo. Because I live in Orange County now, this is an issue I care about deeply. I too want it to be a place where housing is affordable for all people, no matter their income. I ask that policy makers carefully consider the impact of their decisions. Please make decisions based on sound data and logic, and not just on emotions.