Cocktail Signaling in Vietnam

Those who are used to Western style cocktails and prefer to drink their alcohol in the form of cocktails should tread carefully in Vietnam. A general rule of thumb is that drinks will be worse than you expect them, regardless of the venue. Even in the States, a bar with live music, a dance floor or other entertainment expected to have worse then average drinks. But in Vietnam, even a nice hotel bar with a long cocktail menu will mess up anything more complicated than a rum and coke - and that's if they have rum in the first place, more often than not they'd only be serving whiskey or vodka.

This should be expected - in a country with a GDP per capita of under 2000 US dollars, liquor from the Western world is an expensive luxury. Those in a position to afford the liquor will be more likely to drink it straight, and have an expensive bottle to signal how wealthy they are to their friends. One of the principles involved in finding good food, taken from Tyler Cowen, is that the quality food rises or falls to meet the quality demanded by the consumers. Expecting to find good cocktails in a place where no one drinks them is akin to hoping to find good Chinese food in a community with no Chinese residents. 

And even in the United States, appreciation for well made cocktails only really heated up in the past decade or two. Vietnam's cocktails might most closely resemble those made in the US in the 80's, "...when artificial flavoring and sweeteners were introduced, and fresh squeezed juices and class liquors deemed "our Grandfather's booze" were pushed to the side."

Still, there are some places that put effort into making cocktails according to modern Western sensibilities. Hiring a bartender who actually knows what they are doing and providing them with fresh ingredients is relatively expensive compared a getting bartender whose comparative advantage is just their foreign language skills and giving them off the shelf mixers, so the bar wouldn't just lay out another cocktail menu and expect people to know that their cocktails are going to be good. They show that they have some really interesting stuff going on.
The above bar, Angelina, is attached to one of the most expensive hotels in Hanoi. They have a few very involved cocktails on the front of their menu that cost between 150% to 200% the price of the rest of their drinks. When ordered by someone not sitting at the bar, the waiter will invite them to the bar to look at how these cocktails are made (it's a drink and a show). These drinks are relatively labor intensive and the process is relatively complicated - and sometimes dry ice is added around the drink for no reason at all. The final result is a drink that both costs and tastes like it was made in NYC. The important thing is that the other cocktails at this bar are also made very well. By showing that they are serious about cocktails the customers can order the cheaper classic drinks off of the menu without worrying that about being stuck with a random green sickly sweet concoction. 

Regarding the Seahawks Restricted Ticket Sales

There is some controversy around the way the Seahawks are selling tickets to the AFC title game. They aren't letting fans from the state of their opponents, the 49ers, buy tickets. They are only being sold locally.

" wanting to cheer on the Niners in the January 19th NFC Championship Game in Seattle will not be able to buy tickets through the Seahawks, as the team is restricting sales to only zip codes in Washington, Oregon, Montana, Idaho, Alaska, Hawaii, and parts of Canada."

This ticket ban is aimed at keeping both distant ticket scalpers and opposing fans out of the ticket buying process. The tickets would sell out either way, so this is unlikely to impact the Seahawks organization financially - if anything the slight increase in home field advantage that this generates helps raise their longterm value. What the restriction really does is gives more consumer surplus to Seahawks fans. People who buy tickets are getting something worth much more than face value, as suggested by the inflated price of tickets on secondary markets, so keeping tickets local means more Seahawks fans will benefit.

One of the big selling points that sports teams arguing for stadium subsidies use is that it brings in tourists for local businesses. Seattle's stadium, CenturyLink Field, was publicly funded after a long debate. And this game will surely bring in fans from outside of Seattle, but there is no question that making the visiting team's fans buy tickets on the secondary market will mean fewer visitors. It will be interesting to see if this gets brought up the next time an owner threatens to leave a city without public funding (especially if the Seahawks need a new stadium at some point in the next few decades).

Unfortunately that probably won't be the case - there has been agreement among economists that subsidies are a waste of public money for some time, and yet subsidies persist almost every time a team threatens to leave a city without a team. Maybe proponents of public funding for stadiums should just come out and admit that the subsidy is for local sports fans and isn't about economic development.

Indirect Spending and Uber's Self Interested Surges

The farther people get away from handing over cash, the less inclined they are to count their dollars closely.  Nowadays stores need to accept credit cards because very few people carry sufficient amounts of cash, but when stores started to accept credit cards and agreed to pay the fees it was because they realized that customers would buy a lot more when cash didn't change hands right away and utilizing a credit card was more convenient than offering and managing store credit. Academic studies have long found this to be the case as well. The introduction to a 2001 paper by Prelac and Simester, Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay, lays out some of the history.

"Since the 1970's there has been growing evidence supporting the frequently heard conjecture that credit cards encourage spending. For example, it is known that peoplewho own more credit cards make larger purchases per department store visit (Hirschman  1979), and that restaurant tips are larger when payment is by card (Feinberg 1986). There  is also evidence that credit card users are more likely to underestimate or forget the amount spent on recent purchases (Soman 1999). Perhaps the most compelling evidence, however, is that offered in an experimental analysis of the effect by Feinberg (1986). In that investigation participants were asked how much they would be willing to spend for various consumer products in a setting where credit card paraphernalia ostensibly unrelated to the task were displayed on the experimental desk. He found that by so decorating the experimental setting, he could boost hypothetical willingness-to-pay estimates by 50± 200%, relative to the estimates of a control group. We refer to this increase as the credit card premium."

If the mechanism for increasing the willingness to pay isn't liquidity but the indirect nature of the transaction, then making the transaction even more indirect should increase the willingness to pay even more. It's a large part of why subscription models and cellphone based payment systems are so popular these days. Consumers like the convenience and companies like the additional spending. The most talked about startup taking advantage of indirect spending is Uber, in which consumers just call a car on their phone and don't have to deal with inputting their credit card after the first time. They don't even have to look at the final price of the service as they leave the car if they don't want to look at their phone - the bill still settles.

However, things sometimes come to a head when the indirect spending is so high that consumers feel ripped off afterwards. Uber calls their prices during periods when supply is low relative to demand "surge pricing."  After NYE and a few snowstorms, times when prices need to rise for supply to meet demand, the consumer hangover has been enough to generate articles about the issue in the NYT  (Hat Tip: Huey K), among other places. Uber's justification is that without their dynamic pricing there would be shortages. But as the NYT mentions, an entity moving pricing up and down to accommodate demand in real time is very different from facilitating a real market where the bidding price of the consumers and the asking price of drivers are transparent to each other. Exposing just how much a price increase brings in new drivers would go a long way towards reducing consumer anger over high prices.

And given that Uber takes a 20% cut of their 7x surge prices (Lyft's cut remains the same when they raise prices), they are anything but a disinterested broker trying to optimize supply and demand - surges mean profits. The combination of consumers being disconnected from the payment process and pseudo monopoly pricing power is a dangerous one, as many people have found out the day after NYE. Frequent users of Uber should hope that competitors such as Lyft remain viable in the face of Uber's price cuts to their discount service. It would be interesting to see how profitable a business utilizing convenient indirect payments could get in the absence of effective competition.

NFL Ticket Demand Probably Didn't Fall

I noticed a story about NFL playoff tickets today. Some of the games are in danger of not selling out and this would result in local TV blackouts for the broadcast of the games. The story is being sold as if demand for NFL tickets is down.

"It would be a tremendous embarrassment to the league to have three of four playoff games blacked out locally, and likely, the tickets will get sold somehow to avoid that scenario. But there's a bigger issue here. Is this the most stark example that NFL fans aren't too excited to go to games anymore?"

But that story is wrong. What is really happening is that the NFL forecasted demand incorrectly. They are charging much higher prices for the tickets - tickets for the wildcard game that isn't selling out are priced higher than their divisional championship game in 2012. So the demand didn't necessarily fall, but the price point did rise and we are seeing that fewer tickets are sold as a result of this.

The headline should read "NFL teams mis-forecast ticket demand and may need to lower prices to sell all of the tickets on time*." But that doesn't make as a good a story.

*For most products it makes sense to keep the price level high enough so that there is supply left over because prices low enough to sell out don't maximize revenue. In general, if a good sells out it means it was priced too low. But for NFL games there are additional consequences to not selling out, from local blackouts of the game to negative signaling about the popularity of the teams playing.

The Cost of Dining Out in Japan - A Recent Tourist's Perspective

I was only in Tokyo for five days, but one thing really stands out to me: it's pretty cheap to eat as a tourist in Japan these days.  We've had really good meals for relatively small amounts of money. A sushi dinner that included tons of toro, ikura, uni and eating until we were full ran well under $40 per person. A yakitori dinner that included drinks only cost $25 per person when in the US something similar with smaller portions was over $80 each. This food was in found in Tokyo, but in areas where less tourists and expats are found such as Naka Meguro, Nishi Shinjuku and surprisingly in Asakusa (which is high up on the list of tourist destinations, though the sushi found there was far away from the temples).

There are a few reasons why the food was so cheap.

1. The currency. Since Shinzo Abe most recently came to power promising an escape from deflation, the yen has been selling off verses the dollar. If the yen were still at 80 prices would be about 30% higher from my perspective and things would not feel quite as cheap.

2. I live in SF. San Francisco is getting more expensive every year as businesses cater to many newly affluence workers that are less price sensitive than other parts of the world. Combined with supply constraints and higher labor costs this means SF meals get expensive quite quickly. Meals also feel cheaper when we don't have to pay for service separately

3. I'm comparing medium to high end SF restaurants to average/low end Japanese restaurants. I'm mistaking authenticity for quality and comparing apples to oranges. This is entirely possible but judging by both food quality and services the Japanese restaurants are winning.

4. Japan's high prices are found in consumer staples and real estate. By staying outside the most popular destinations we've avoided the real estate issues. Outside of the high cost areas the only surprisingly high prices we saw were in the occasional purchase of consumer non-durables. These are caused by regulations which generally prevent big box retailers from entering the market and driving down prices.

Towards the end of the trip we did find some expensive restaurants. A meal at a random Udon shop in a Ginza mall was significantly more expensive than a comparable meal in SF. We also managed to find some expensive steak at a very good little steak house, which was good enough to justify its high price. Sushi at the Tsukiji Fish market was as expensive as it was in SF and the quality was similar or worse (We were comparing it to a great experience the day before in Asakusa), but we've been told that we went to the wrong sushi place at the market. We also managed to find some bad value Japanese food in an alley famous for its yakitori. The proprietress decided that us being foreign meant that we wanted our grilled skewers drenched in teriyaki sauce, so it's hard to tell if this area would have had good food at reasonable prices if we had been able to effectively communicated.

But in general, the low prices and high quality food were found by eating local styles of food in areas away from those frequented by tourists or expats. Traveling to Tokyo and trying to eat American style food and staying in Ginza or Roppongi would probably be a way to increase costs with the main benefits being more english language menus. 

With inflation picking up in Japan, now might be a good time to book a trip. Just make sure you eat in the right areas of Tokyo.

The Lucas Critique and Patents

The Lucas Critique is the idea that when policy targets a variable that is supposed to be correlated with a desired outcome, that variable will become decoupled from the desired outcome. That is because by targeting the variable the rules of the game have changed, and with new incentives the variable may no longer be tied to the same causal chains. This critique was originally applied to large scale macroeconomic models that relied on extrapolating observed relationships after one variable is manipulated via policy, but the critique applies more generally as well.

I've posted before about today's disconnect between innovation and patents, but I didn't realize how directly the Lucas Critique applies. Policy was actually set up to increase patents in an attempt to revitalize the economy. Gordon Crovitz explains in his WSJ column: (Hat tip: MR)

Today's patent mess can be traced to a miscalculation by Jimmy Carter, who thought granting more patents would help overcome economic stagnation. In 1979, his Domestic Policy Review on Industrial Innovation proposed a new Federal Circuit Court of Appeals, which Congress created in 1982. Its first judge explained: "The court was formed for one need, to recover the value of the patent system as an incentive to industry."

At the time, policy advisors believed that patents were correlated to economic productivity. This set the stage for today's world, where the correlation between patents and productivity might now be negative. That's because so many of today's patents end up functioning as primarily as a tax on the companies who are moving into new markets. Google spent billions of dollars buying Motorola for its patents to protect its Android ecosystem so it would be armed in the patent wars. Money is being spent on patent portfolios, patents which often describe absolutely trivial ideas, when this money could otherwise be spent on real research (or at least buying companies that did real research and have a functioning product to show for it). 

From 2007 to 2011, the CBO found that 89% of the increase in patent lawsuits come from software patents. A recent bill by the House of Representatives targets patent trolls (20% of the lawsuits come from non-practicing entities), but after IBM and Microsoft lobbied to protect software patents the bill does little to stop the patent arms race between large corporations.

The Supreme Court is hearing CLS Bank v. Alice Corp soon, a case about whether a computerized escrow process is patentable. Reform seems very unlikely to happen congress right now, but it will be interesting to see what comes out of the Supreme Court.

Truth in Nigerian Chain Letters?

Nigeria is looking for $50 billion dollars in missing oil cash. Apparently someone at the Nigerian National Petroleum Corp misplaced the cash.

"The NNPC failed to remit to the government 76 percent of oil revenue earned from January 2012 to July 2013"

Not all of it is missing oil money. Some of the money is missing because oil was exchanged directly for refined product. And even if that is the case it's still likely that some of the refined product was itself stolen from the government. But even though there are probably quite a few Nigerians with this misplaced money, it's pretty unlikely that they need access to a random US bank account. I'm pretty sure they've already figured out how to get it out of the country on their own.

A Protest That Encourages the First Mover

Most protests against the government are costly and dangerous things. Protesting involves leaving work in the middle of the day (a population with a low employment to population jobs makes protests more likely for numerous reasons) to go to a city center and face off against police who are armed and have the existing regime backing them up. It's particularly dangerous to be among the first protestors entering this situation, because the police are much more likely to arrest a small group of initial protestors whereas it is logistically difficult to do the same thing to a large mob.

Given these constraints, it's a wonder that significant protests against the powers that be get started at all.  A small group with a special combination of courage and foolhardiness, combined with a focal point that will assure marginal potential protestors that they won't be the only ones, is generally needed to get the ball rolling.

Recently, large amounts of protestors have taken to the streets in Kiev, where the Ukrainian people are upset that their President Viktor Yanukovych is so far in the pocket of Putin that he blocked an EU free trade deal favored by many. (It might be that Yanukovych gave in to Russian pressure because he worried a recession induced by Russian sanctions would lose him the election in 2015, but the result is the same.) In this case the focal point wasn't just Yanukovych's rejection of an EU trade deal, but the brutal way the police broke up the initial protest composed of those first movers.

What's interesting is that there is an idea is floating around for an additional method of protest that encourages Ukrainians to join the protest and join noe. The strategy is simple: Encourage people to move their money out of the overvalued and pegged Ukrainian hryvnia into other currencies. Even better is taking the money out the banking system entirely.  If enough people do either of these actions, the Ukrainian Central Bank will struggle to hold up the banking system. Even if they only change currencies, Ukraine will be forced to weaken their currency as their reserves are low and they are running a current account deficit. This is a really interesting strategy for the following reasons:

1. Symbolically, it has citizens protesting an economic injustice with micro-economic sanctions of their own.

2. Unlike most forms of economic protest, it imparts potential benefits to participants outside of just increasing the chance that their demands will be met. Protests are usually relatively dangerous, but in this case it might be the only way to be safe.

3. It encourages the first movers, as the sooner the currency is converted to a more stable currency the less they risk from devaluation. And if enough people withdraw their deposits then a bank holiday might be declared in which those slow to join in will lose access to their money.

4. If it causes a devaluation then Yanukovych is more likely to lose the next election. 

The potential for turmoil already has Ukraine's Central Bank Governor scrambling, he released a message to the public telling them not to withdraw deposits and vowing that he would do everything needed to ensure stability.

Like all protests, the government has numerous ways of fighting back against this type of move. Figureheads with too much to lose should still be reluctant to join in. And additional capital controls can be imposed once the problem becomes obvious. But the overall lesson of finding ways to make it not just morally right, but safe and prudent for people to join a protest is an idea that more first mover protestors should think through.

It will be interesting to see how the situation in Ukraine develops. 

A Chart of Misallocated Capital

A recent VOX article looks at what has gone wrong with Italy's productivity.  In Italy, total factor productivity has actually fallen over the decade of the 2000s. One of the contributing factors is that there has been investment growth in sectors with falling productivity, rather than investment growth in sectors with higher productivity. 

"Investment and TFP Growth, Italy vs. Germany (1995-2006; 2 digit manufacturing sectors)"
In this chart, Italy's manufacturing sectoral investments are contrasted with Germany's. In Germany, many of the sectors seeing higher productivity growth often receive more investment. Not all sectors require additional investment just because their productivity is rising. Competitors outside the country might outcompete local producers even when productivity is improving or rising productivity might mean that the total demand for the product is taken care of by current producers. But it's instructive to note that there is widespread acceptance that Germany is the healthy economy while Italy is quite unhealthy.

This misallocation of capital is correlated to Italy's inability to incorporate information and communications technology into their businesses the way the United States and other countries have done over the past few decades. Inefficient management practices, such as a focus on tenure and equality over performance based metrics, which have been found to hinder technological adaptation, are more common in Italy than in comparable Eurozone countries.

But this ineffective economy also provides a great answer to those who wonder why capital allocation is important in the first place. When the normal capital allocation process breaks down we will see scenarios like the above chart, magnified significantly. The capital allocation process can break down for many reasons, ranging from group think and herd behavior to government regulations favoring the less productive sectors.  But in either case, it will generate a scenario like the above chart where less efficient sectors are getting unproductive investments at the expense of more productive sectors.

Assorted Links

1. Think tanks, charities and other non-profits need to be more aggressive in combating internal theft/fraud/embezzlement. As long as employees know that the worst case scenario of stealing is that they will have to pay back the money then stealing will be a positive expected value move for those with the opportunity and a lack of morals.

2. Arnold Kling talks about "The Great Factor Price Equalization" in which we are given one of the better explanations for wage stagnation in the developed world.  If it's the second time I've linked to this article it is because it is important. This link was inspired by a really bad article from the CEPR on a similar topic - except the CEPR's economist writes in a such a way to indicate that they believe that an increase in supply should lead to an increase in price. 

3. Beer goggles just got more dangerous. I'm sure comedians will come up with better jokes than that. Referencing this chart, we see that weight limitations mean that plan B does not work among about 25% of white US 30 year olds.

4. Politics is not about policy, and other views from Robin Hanson. This link deserves its own post but is very much worth reading.