Saturday, September 9, 2017

Stupid Economist Tricks: Hurricane Pricing

Image via The Pediatric Insider.
On September 5 professional economist Tyler Cowen was explaining over at Bloomberg (via Edroso's Twitter feed) about how

Price Gouging Can Be a Type of Hurricane Aid

Higher prices can help resources get to the people who need them most.
And on September 6 we began hearing about airlines dealing with the advent of Irma by jacking prices up almost exactly 900%:

Because who needs a flight out of Miami most? The one who can afford to pay $3600 for the privilege. By Paul Ryan's famous definition of freedom—

America's a free country, so if you can't afford it you obviously don't really need it. That's just logical.

Cowen went on to explain that if you're against price gouging you're just a tool of big business:
I wish to suggest that price gouging, in spite of its obnoxious-sounding name, is usually the best of a set of bad alternatives. If you are inveighing against high prices after a storm, basically you are lining up with the interests of American big business, at the possible expense of storm victims.
This is because suppose you catch a Best Buy in Houston selling bottled water for $42.96 a case,
as shown in this photo. A customer can take out his or her smartphone, snap a photo and post it on social media. The photo may go viral, and many people, including the legal authorities, will be mad at the company.
Then the Best Buy will apologize and lower the price, which is what happened, as Cowen notes, which may not sound like a bad outcome to you if you're not a libertarian economist. But what if lowering the price or not raising it in the first place causes the store to sell out of bottled water?
let’s say that the local big-box store sells out quickly during an emergency and has empty shelves for water. If those photos circulate, they will be interpreted as signs of general tragedy and want, rather than selfish corporate behavior. 
That's right, people, if the store doesn't jack up prices in the face of a hurricane, consumers may not realize how selfish the store is being! How is that fair?

And that's not even all! The lack of price gouging could lead to... price gouging, or, worse, water getting into the hands of the friends and relatives of minimum-wage workers (instead, I guess, of the friends and relatives of professional economists):
If the store doesn’t raise prices, attentive customers may buy up the whole stock, resell it during the emergency and price gouge themselves. Or store employees may funnel the scarce goods to their friends and relatives. Don’t think the alternative to corporate price gouging is necessarily a fairer outcome...
(Cowen seems to have no clue that the store can, and will, impose restrictions of the two-to-a-customer type to prevent the former, out of that same corporate selfish desire to gratify as many customers as they can.)

I don't know that I've ever seen a flimsier argument-shaped thingie in my life, though Cowen's out today with an argument that Harvard ought to admit more legacy students (they're already at over 30% for the Class of 2021, says Cowen, though a news source says it's 29%) so that they'll make more money, as long as they promise not to spend it foolishly:
The topic of legacy admissions at top U.S. colleges seems to represent an anti-egalitarian perpetuation of privilege, a kind of affirmative action for the wealthy that must be stopped. In reality, the acceptance of students who are close relatives of previous attendees is where top schools make their money. These schools should take in more legacies, provided they put the extra money to good use.
Actually, that's not where they make their money directly—undergraduate tuition, where the legacy admissions are the ones most likely to pay full fare, represents just 6.4% of operating costs, according to Cowen; the big money is from donations, including alumni donations
from families that have a tradition of donating to Harvard, if only to help their children get in the door. More legacy admissions will mean more resources at Harvard’s disposal. In short, why not expand the profit centers of America’s top universities?
Why not lower admissions standards for a certain class of people in order to obtain bribe money? asks this noted opponent of affirmative action.

I'd say one reason is Harvard's doing fine financially as things are, in spite of serious investment losses to the endowment last year, and especially fine in terms of attracting donations:
The operating surplus for the year was $77 million or 1.6% of revenue, slightly higher than last year’s operating surplus of $62 million or 1.4% of revenue. Overall operating revenues increased 5.6% to $4.78 billion, and expenses were up 5.3% to $4.70 billion.... 
The Harvard Campaign is making an enormous difference to the health and vitality of the University. Since the start of the Campaign, current-use giving has increased by 46% from $289 million in fiscal year 2012, prior to the launch of the Campaign, to $421 million in fiscal year 2016, and now comprises 9% of our revenues (as compared with 7% in fiscal year 2012). Gifts to the endowment, split interest agreements, and gifts to capital projects of $628 million in fiscal year 2016 are up 130% since fiscal year 2012, and are fortifying our ability to fulfill the University’s core mission while also creating a campus for the 21st century.
Personally I'd just as soon see them all nationalized and legacy admissions eliminated as at Oxford and Cambridge, not to mention everywhere in Europe. It doesn't seem to hurt quality over the long term (in this year's Times Higher Education World University Rankings, as in last year's, four of the top five, Oxford, Cambridge, Cal Tech, and MIT, don't do legacy admissions, while Stanford at 4th and Harvard at 6th do). But in the meantime, surely increasing the proportion of the children of hedge-fund managers and bonds traders in the student body mix is not going in the right direction; though I guess it would help get a Harvard education to "the people who need it most," defined in Cowen-Ryan terms as the people with the most disposable income.

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