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The Optimal Bundle: Volume 66

The Jones Act: Origins and Present-Day Impact

In the wake of the devastation caused by Hurricane Maria, Puerto Rico continues to struggle in its recovery. The hurricane and the relief attempts which followed put a national spotlight on a 100-year-old law called the ‘Jones Act,’ which President Trump waived to help the recovery efforts. The Jones Act governs US cabotage, which is the trade and transport of goods in coastal waters between two points within a country. The law stipulates than any goods transported between US ports must be carried on ships that are built, owned, crewed and operated in the US.

The act is named after Wesley Jones, a Senator from Washington. Jones originally intended for the act to give his state a monopoly on shipping to Alaska, Congress went on to pass the act hoping to stimulate the shipping and ship building industry in the wake of World War 1. While the act helped Wesley’s constituents and benefits ship producers and workers, a number of economists criticize the act for raising shipping costs and prices of goods.

Many defenders of the Jones Act come from the maritime industry, arguing that providing an incentive to produce a greater number of ships bolsters national security by ensuring the US has enough ships in times of war. Supporters also point to the economic benefit, estimating that the Jones Act is responsible for around 650,000 jobs. Revenues gained by domestic carriers and shipyards are also taxed, while foreign owned carriers and shipyards are not. Estimates are that the Jones Act leads to $16.8 billion in tax revenue for federal and state governments.

Despite these arguments many economists recognize the costs associated with the Act. A report by the Cato Institute claimed that by restricting the supply of available ships to transport goods, the act artificially inflates shipping costs. These inflated costs eventually lead to higher prices for consumers. One estimate in a report by the US International Trade Commission states that the Jones Act produces a net welfare loss of $1.32 billion. Critics of the Jones Act also argue that inflated shipping costs make transport substitutes such as trucks and freight trains relatively cheaper, leading to greater wear and tear across US infrastructure over time.

These heightened costs are seen most prominently in overseas US territories and states such as Puerto Rico and Alaska. A report by the Federal Reserve Bank of New York found that it cost $3,063 to transport a twenty-foot container of goods from the East Coast to Puerto Rico while it only cost $1,504 to the Dominican Republic, a country only 85 miles away from Puerto Rico by sea. A separate report by the GAO found that the Act raised Alaskan transportation costs in trade by $163 million annually.

There are a number of policy recommendations surrounding the Jones Act, ranging from its complete abolition to relatively simpler reforms. Potential reforms put forward include exempting overseas territories from the Act, noting the precedent set by the Virgin Islands which have been exempt from the act since 1922. Another reform is to allow US owned but foreign built ships to also be exempt from the act, essentially removing the “American-built” requirement.  Those advocating for the Act’s abolition argue that the economic costs outweigh the conceived national security gains. While the act was intended to increase US ship production, the US has lost 300 shipyards since 1980. Proponents of the Act’s abolition also point towards the net economic loss research has found, noting the gains in tax and employment like come at the expense of other industries.

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With the lively policy debate surrounding the Act and interest groups working on both sides of the argument, it is unlikely that the Act will be modified anytime soon. Although many reports have analyzed the economic impacts of the legislation, more research is needed to fully capture the magnitude of its effects, particularly on overseas territories. However, with many non-economic arguments in support of the Jones Act even additional research may not lead to a consensus among policy makers.

Written by Abdallah Al Rahbi


Holiday Toy Resale

For many of us, the holiday season brings with it an assortment of exciting traditions – whether it be decorating the house, baking Christmas deserts, or gathering together with friends and family. However, for some opportunists this also becomes the time of year to earn their own sizable Christmas bonus with a little bit of market foreknowledge at the expense of procrastinating parents. Most holiday seasons see toys so popular that the gifts can only be found in secondary markets where industrious individuals (or maybe money-grubbing Scrooges) seek to offload their hot items at significant markups to frantic adults looking to deliver on the wishes of their children. While this scheme is simple in nature, the scalper assumes significant risk when determining what toys to target prior to the holiday rush as an incorrect calculation could leave the individual with a mountain of unsold dolls or doohickeys.

There has been a long history of popular toys overperforming manufacturer expectations for any number of reasons and ending up as an underproduced, hard-to-find item for the holiday season. As any graduate of introductory microeconomics can tell you, an unexpected increase in the demand curve will oftentimes produce a shortage in the near-term. This holiday shortage has been well documented throughout the years with well-meaning parents going to vast lengths, both financial and otherwise, to secure the most popular toys for their children. The 1996 Arnold Schwarzenegger movie “Jingle All the Way” prominently features this premise as two rival parents both compete to secure a sold-out toy for Christmas. Dunder Mifflin’s own Dwight Schrute partakes in the capitalist’s favorite holiday tradition as he corners the Scranton market for the wildly popular ‘Princess Unicorn’ dolls and spends the Christmas season offloading them at significant upcharges. Whether it be Tickle Me Elmo or a Baby Yoda action figure, most years see basic supply and demand economics take hold with markups for the most popular toys routinely topping 100 percent of its retail value.

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For those looking to take advantage of this system, the dawn of the internet age and accompanying technology has proved to be a gold rush of Christmas toy reselling. In particular, online platforms such as the popular auction site eBay or Facebook’s more local variant, Facebook Marketplace, have proven to be particularly popular for such activity. These centralized marketplaces vastly expanded the arena in which buyers and sellers could connect as they are no longer limited by the circulation of the local classified ads but are instead able to come together and interact from across the globe. While the internet caused the world to expand, it also caused it to quicken its pace. Another technological innovation that changed the nature of how toys are purchased are computer programs derisively known as ‘Grinch bots.’ These computer bots gained infamy for their prominence in scooping up large batches of tickets to live events in split seconds and their use has been farther extended into the toy industry to capture large quantities of popular items in a fraction of the time an actual shopper would need to complete an order. For traditional toy resellers, this newly arrived practice represents a digital doping that removes the joy of the scalping sport and tilts the playing field in favor of the machines.

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Although it may appear random, certain trends tend to emerge prior to the fervent holiday rush. Much like the investment bankers seeking to find the hidden gem among corporations, the discovery of the hot toy takes a combination of in-depth research and analysis, as well as a certain amount of luck. A number of resources exist that offer tips regarding how to discern the hot items for the holiday season and unsurprisingly the top advice is to consult an expert in the field. This is likely not as cost prohibitive as it sounds since the only real experts in this field are the kids themselves. Unsurprisingly, the children who are consuming the toys in question often have the best insight into what is going to be the hot seller. Whether it be from popular television shows, strategically placed internet advertisements, or chatter around the swing set, children are able to develop a feel for the toy market’s dynamics without even realizing it. Likewise, parents prove to be another valuable source. For the child without an abundant source of disposable income, Mom and Dad become a sounding board for holiday wishes. Another source of valuable informants for the holiday season are the employees working in the stores themselves. While online shopping has taken over a lot of brick and mortar’s revenue, physical retail and its human employees have an ear-to-the-ground advantage that can give big data a run for its money.

Much like stock picking, nothing is guaranteed. However, a savvy toy reseller can minimize risk by developing a strategy, possibly based on some of the above tips, or by adopting their entirely own methodology. And while some may judge this side hustle as Grinch-like, you can take comfort in knowing that you are contributing to the determination of a true, market-clearing price – a price that nets a youngster an exciting present and the reseller a handsome profit.

Written by Josh Rudd


Pay Big to Win Little: The Great College Lie

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There is little doubt as to whether or not the United States high school graduates who do go on to complete a college degree can benefit from doing so—the key word however is can. Not all of those 66% of high school graduates who almost inevitably attend college following a 12-year stint of state mandated education acquire true net economic benefit as a result. This is not an opinion but rather a fact of the situation. It takes no deep search for most recent or past college graduates to merely recall one person, whom they knew on a personal basis, that ultimately would have been better served doing something else for four of their careers most flexible years. With truth, they are quite likely and able to name a number a bit higher than one that perhaps even includes themselves. In the United States despite the myopic incessant pleading demands of universities, attempts continue to be made to sway the public opinion from the previously mentioned ‘can benefit’ from college to a publicly approved ‘will benefit’. This attempt by higher education, if successful, will bring increasingly large waves of enrolled students, or as they should be thought of regarding the university, increasingly large waves of customers. Despite the seemingly well intentioned ‘higher education for all’ approach, the unfortunate bottom line is that education can very often be a painstaking chronically wounding dagger to the bank account that derails the future of individuals. Whether this is through the loading on of student debt or through the indirect forcing of young graduates to forgo many lifetime milestones such as saving for a mortgage or directly forestall the acquiring of important job experience—which may have been as or more valuable than the degree on their resume. As with many of the worlds blanket bumper sticker solutions proposed throughout world history, failing to consider individuals differentiated preferences, needs, skillsets, abilities, desires and wants, is the first step in failure. These economists who champion policy which benefits the few through the short term in exchange for costs that are borne by the many in the long term. Or as put by Henry Hazlitt (Economics in One Lesson), “They overlook the woods in their precise and minute examination of particular trees”.

This next best alternative that has been mentioned without definition thus far is what, in economics, is known as a persons opportunity cost. For college students the opportunity cost—which is the next best alternative if they had chosen not to attend college—varies considerably among individuals and at times is clear and away the more beneficial, drastically less cost intensive, and pragmatic option. However, there is a current problem with opportunity cost, evident in the number of college graduates failing to field jobs—even prior to the pandemic. Take for a hypothetical example Jeffery, a student with no savings or means to pay for an education who has two options following high school; achieve a bachelor's degree in a non-stem major from a mid-level university degree vis a vis boatload of loans from the federal government, or serve as an apprentice for a low wage under a respected, local established master electrician. In previous periods of economic history prior to educational subsidization this was a real question that was too be considered. With no means to pay for university education this person would likely consider the route of apprenticeship and hope to build skills valued within the economy. Yet with the current federal loan and grant system this person must now see his not being able to pay as completely negligible information. He does not need to be able to pay and will in fact be sponsored by the taxpayer in a sense, to attend higher education instead of building skills of trade. Now this is not a problem for society or the taxpayer if this person does indeed apply himself in his studies and has the talent as well as the skills following graduation which allow him to use his abilities to acquire a job and slowly pay back the loans.  Yet another unfortunate truth arises, which is that not everyone has the same level of inherent talent, drive, or luck.  Additionally, not everyone graduates with skills that employers find valuable. The problem if the reader has yet to catch on, is that higher education now has a large number of state subsidized college educated Jefferies who are graduating with vast student debt and skills that employers do not find valuable which leads them to be unable to pay back their loans. These loans are of course offered by the federal government, paid for by the tax payer, and tax payers are eventually going to be on the hook for the bill. That debt will continue build as well as derail lives while this charade continues. Scarcity has been removed from the academic arena and as a result students see rising tuitions, larger class sizes, and higher student dropout rates. These all share relation to one common actor in the economy. In fact, this actor happens to be the most prominent and powerful actors in the entire history of mankind—the United States government.

The first lesson of economics is scarcity: there is never enough of anything to satisfy wants. The first lesson of politics is to disregard the first lesson of economics”.

—Thomas Sowell; Economist and Nobel Laureate

Frequently mentioned to oppose this economic analysis of government subsidized education is the concept of a ‘college premium’—which is annual lifetime difference in earnings between college graduates and non-college graduates. Which is to say, the counter point of those in opposition is “It is entirely unfair and immoral to let only some benefit and achieve this difference in earnings while some people simply cannot afford higher education passed on life circumstance”. Firstly to address the concept of the college premium, it must be mentioned researchers are also quick to point out that these ‘college premium’ studies do not in any way conclude the premium is a result of college degree nor can they even indicate causation. One of the many reasons for not doing so is due to this variation factor:

“…variation among individuals with respect to the costs and benefits from college can be very large. Researchers often worry that those who stand to benefit the most from college are the students who decide to enroll, or that workers would earn higher wages at any level of schooling often tend to acquire more schooling.”

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Now even if the college premium were the case, the waste both intellectually and financially is astounding and even more frightening; it is growing at an astoundingly fast rate. The ladder of which comes as a result of a fundamental, oft mentioned, and largely misinterpreted economic theory—that of supply and demand. By swarming the market of higher education via an array of artificial mechanisms including but not limited to extremely accessible student loans, state and federal grants, and all other resources made bare by the state, the barrier of entry to higher education is lowered below that of what the real natural market would allow. This intervention causes the business incentive structure of college to become utterly warped while simultaneously signaling to students that college is less of an option and more of a distorted requirement. Two dangerous problems that would never have occurred without government intervention. First and foremost, colleges have an immense new incentive system in which universities are rewarded financially through tuition and government funding when they allow as many students to enroll as possible. Of course this causes a diluting of the overall student to faculty ratios—not even considering the immense amount of these ‘faculty’ who are graduate students. Meanwhile students are further disincentivized as they are bombarded with statistics such as the college premium which causes them to neglect any true opportunity costs, a la Jeffery, that would have been apparent without these easily accessible loans paid for by tax payers. The aforementioned market swarming caused by this lower barrier to entry and the artificially increased enrollment total creates excess demand which further vaults the price of college up. In other words, colleges are signaled by the increasingly large enrollment totals that these bachelor degrees they are putting out are such great products and because they are so in demand these prices should go up. It is important to note this demand of college is artificially inflated by the many cost reducers given to those whom the federal government deem deserving. From the easily accessible to the less accessible. Two illuminating statistics related to this point. The first of which laid out in research done by the New York Federal Reserve which states that:

 “Average sticker-price tuition rose 46% in constant 2012 dollars between 2001 and 2012(Figure 1), and despite a sharp deleveraging of other sources of debt by U.S. households after the Great Recession, student debt has continued to grow unabated, and now represents the largest form of non-mortgage liability for households.”

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To run concurrent to the rise in sticker price tuition is additional evidence indicated by the National Center for Education Statistics—a government department that allocates data about undergraduates seeking degrees at accredited higher education universities—which states "Total undergraduate enrollment increased by 37 percent (from 13.2 million to 18.1 million students) between 2000 and 2010”. This supporting evidence for the excess demand theory begs a useful question. If American taxpayers are subsidizing college students at increasingly higher prices, are they at least getting a worthwhile return on investment? That is to say, does human capital—the earned skills from education which derives its utility to people—actually improve marginally with more and more educated people?  Well, if a 2003 Department of Education literacy study of college graduates is any indication, these taxpayers are likely to feel disappointed—the study has notably not been retried. In 1992 the literacy test was administered in which 40% of college graduates scored at the proficient level, in 2003 this number dropped to 31%. The fact is college students simply achieve different levels of return which is almost entirely up to their own good fortune of circumstance and merit. Therefore, is it college graduation and the skills that come with it that create this college premium? Or is it merely that employers' views about higher education which have been transformed through a flood of resumes marked by uniform bachelor's degrees.

It may be useful to conclude with another practical hypothetical. A student with a moderate GPA in his last semester at Princeton is set to graduate and has one final exam to take prior to the big day where he sets off to find a job and build the foundation for the rest of his life. His days of lectures and office hours are over, he is completely finished the learning part of his college education. This student runs into a problem however and on exam day has a horrible stomach bug and therefore receives a zero and must retake the class to graduate. Now does this Princeton student walk up and drop out of the university? After all, he knows in this exact moment all the material in this class and would have passed the final barring his unforeseen circumstance. He has learned all there is to learn. So, what is this piece of paper there to say about what he knows? If the answer is not already evident, it is almost certain the rational student would pony up the tuition to take that class one more time and achieve his piece of paper. This is the situation for many who would be better off just dropping out or never having gone in the first place. When did degrees become more valuable than the learned skills they represent? Well, it was when everyone else looking for a job started to have an accompanying bachelor's degree.

Written by Tucker Pippin


Adjusted Inflation Target Reflects Central Bank’s Forward Thinking

The onset of the COVID-19 pandemic brought with it required lockdowns in cities and towns throughout the world. Up to February of 2020, the US economy had been experiencing a 128-month expansion, with the 2019 Quarter 4 gross domestic product up 4% from its 2018 Quarter 4 value. Additionally, the unemployment rate at this time was at 3.5%, a low the American labor force had not experienced since December of 1969. As businesses began to close and people were ordered to stay at home as the only defense against the virus, unessential workers quickly found themselves jobless and uncertain about the future. Just as the economy had been experiencing its longest economic expansion on record, COVID-19 pushed the unemployment rate up to a staggering 14.7% in April of 2020, with Quarter 2 2020 GDP decreasing by 8.5% from its year-prior value. With an economy experiencing tumultuous downturns and a labor force in shambles, the Federal Reserve began enacting strategies to fight the recession.

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Historically during times like this, the Fed has taken dramatic measures to reduce unemployment and bolster prices in order to both maintain its traditional dual mandate, as well as to provide emergency support to the US economy and financial system. To accomplish this, the Fed employs various monetary policy tools. These tools include open market asset purchases of debt securities, also known as quantitative easing, decreasing required reserves, lowering the Federal Funds Rate target to near zero, reducing the Discount Rate, and providing forward guidance to the economy. While these monetary tools are necessary to spur the economy, the Fed’s use of them in the past has attributed to why these same strategies may not be as effective as they once were.

Prior to the current pandemic, the Federal Reserve’s dual mandate of price stability in the form of a 2% inflation target and maximum sustainable unemployment guided its actions. However, with inflation consistently under its 2% goal and a previous lack of action to interfere with this, the Fed has consistently had less ammunition to combat downturns with each recession the economy experiences. On top of this, economic theories like the Non-Accelerating Inflation Rate of Unemployment (NAIRU) and the Phillips Curve, which examines the relationship between unemployment and inflation, have proven to be currently insignificant. With inflation running well below its desired level, households and businesses may shift their inflationary expectations, potentially causing it to lower even more. As inflation expectations fall, interest rates decline as well, leaving the Fed less space to decrease interest rates to boost employment during economic situations like the present. Additionally, evidence from around the world suggests that once these conditions occur, they can be difficult to overcome and could eventually cause more issues.

Inflation Over Time

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In response to this, the Fed adjusted its monetary policy goals in August 2020. Instead of targeting a 2% inflation goal and raising rates to head off price pressure, the central bank now aims for an average of 2% inflation over time. With this new policy, the Fed will likely target inflation that is moderately above 2% for some time following periods of low inflation. Lower unemployment could occur because of this new goal, as the Fed would be less likely to curtail employment growth out of fear of it causing a higher price level.

Within the stock market, increased inflation typically concerns investors, fearing that it could cause interest rates to rise and stock prices to drag. However, this change in the Fed’s goal could serve as a near-term boom for stocks. Inflation that is growing after periods of being under target lift up earnings. As prices in the market rise, revenue growth increases at a faster rate with healthier margins, benefitting companies and their investors. Another element of monetary policy that is conducive for the market is the forward guidance suggesting that the Fed will hold the Federal Funds Rate near zero until 2023. This low rate environment keeps the cost of borrowing cheap, especially during a time when many businesses are struggling. This forward guidance also benefits growth stocks by significantly reducing risk to their future cash flows. Since increased interest rates can damage prices in this market segment, a period of guaranteed low rates will allow for company growth and investor benefits.

With the world and economy changing and evolving constantly, to expect the Federal Reserve to leave its policy goals stagnant is unrealistic and harmful for the future. By adjusting inflation goals and allowing for moderately higher inflation after periods of low rates, the Fed is attempting to keep the economy from becoming sluggish and prevent the dangers of sustained inflation below target from occurring. Without these changes, the Fed could find itself empty-handed when it’s time to fight the next recession. As global economies continue to change and variables once thought vital diminish, the way we handle these factors should change as well, just as the Fed is currently doing.

Written by Colin Spellman


Sources

The Jones Act: Origins and Present-Day Impact

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Holiday Toy Resale

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Pay Big to Win Little: The Great College Lie

Thomas Sowell, Is Reality Optional? and Other Essays

Oreopoulos, Philip, and Uros Petronijevic. “Making College Worth It: A Review of the Returns to Higher Education.” 

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Adjusted Inflation Target Reflects Central Bank’s Forward Thinking

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