The Chick-fil-A Situation and an Economics Lesson

The economics lesson will come in a moment, but first I want to talk about the situation more generally. But before doing so let me quickly reveal my biases. I am decidedly in favor of same-sex marriage. I have a lot of gay friends. I walked in Seattle’s Gay Pride parade this year. I follow George Takei on Facebook. It’s pretty much the only issue that informs my vote — not the economy, or healthcare reform, or foreign policy. I’ve never heard an argument anywhere near cogent for denying this right to same-sex couples. I also don’t remember having ever eaten at Chick-fil-A — I don’t even know where one is if I wanted to. I will certainly not be eating there in the future.

But as always our discussion of the situation lacks the clarity and precision I prefer. First, let’s state what is obviously true. Chick-fil-A did not donate money to anti-LGBT organizations. “Chick-fil-A” is an abstract human conception. It cannot donate money, just as the table in my dinning room cannot. The idea of Chick-fil-A is useful as a shorthand in many discussions and analysis, and, indeed, has specific meaning and importance in the area of law. But let’s not kid ourselves by conjuring up imagines of everyone at Chick-fil-A gathered around a drumstick shaped conference table one Monday afternoon to determine where this year’s donations would be sent. Undoubtedly, a very small group of people somewhere relatively high up, if not at the very top, made the decision about how to distribute these funds.

I say this only because I fear a certain amount of persecution for those individuals unfortunate enough to be on the front lines of the company’s franchises. I know from first hand experience that many of us know relatively little about the companies for which we work. I would not be surprised if the fry guy, or the checkout guy, or the chicken girl knew nothing of these donations before the recent brouhaha. I say this realizing that the company is outwardly religious in its mission statement. But even if employees were aware of the donations perhaps we should still cut them some slack. I doubt they were attracted to low-level positions at Chick-fil-A because of the company’s questionable values. More probably these employees have relatively few options for employment and are doing the best they can to carve out a living. Sometimes people make tough choices when their livelihood is on the line, and I for one am not going to blame them for that. Sure, some employees share the views put forward by the company’s mission statement, but I’m keeping an open mind as to which employees these might be.

On the other hand, it does seem fairly clear that these donations went to organizations that are openly hostile to same-sex marriage. You can view a complete list of Chick-fil-A recipients here. With a little poking around it seems that promoting traditional family structures is one of the core missions of these organizations. And it is troubling that their budgets are now thousands or, in one case, a million dollars richer.

Opponents have reacted just as they should — protesting, sure, but more importantly not purchasing Chick-fil-A food products. People purchase items when the price of the product is less than the expected value (or utility) they receive. But value is not utilitarian in the strict sense. Embedded in value are all kinds of non-traditional forms of utility like aesthetics, the importance of the brand, and the moral principles of the company compared to the those of the purchaser. (That’s why Apple products can garner a premium despite having nearly identical hardware components). So clearly, using this all-encompassing definition, Chick-fil-A products have lost value in light of recent events. Some have pointed out that Chick-fil-A’s values have not changed for years; but, again, what has changed is the information available in the public forum about these values. Behavior, aptly, responds to new information.

Social movements are an underappreciated aspect of capitalism, but just as surely are part of the modern capitalist system. What is unrecognized by most participants in social movements, however, is that these movements can be very good for the corporations at which they take aim. I don’t mean in some vague sense relating to free publicity and so on, I mean in a real economic sense.

Remember that $5 ATM fee Bank of America proposed charging late in 2011? An online petition against the fee was started by Molly Katchpole, a part-time nanny, and quickly gained over 300,000 signatures, causing BofA to cancel the planned increase. This seems like a victory for consumers, and in some sense it is, but it’s also a victory for BofA because they learned something about the elasticity of their ATM services. The term “elasticity” is used by economists to denote the relationship between quantity and price. If the price increases do consumers cut back a lot, a medium amount, or not at all? A high elasticity means consumers cut back a lot when price goes up. I suppose something like chocolate would be a good example because there are so many substitutes for those who have a sweet tooth. A low elasticity implies the opposite. We might think of cancer drugs as falling into this category. You’re likely to make sacrifices in other areas of your life in order to continue purchasing your cancer medication even if the price, say, doubles. In this second case, there really are no substitutes.

Firms want to charge the highest price possible without losing customers — the price that maximizes profit. But figuring out what that prices is isn’t so easy. Sure, you could do focus groups, but nothing beats 300,000 consumers collectively screaming out, “That’s too much!” “No problem,” says the bank, “we won’t charge that much.” The information embedded in these social movements is extremely valuable. Now there’s a bigger question about why a company is raising prices in the first place — maybe they are losing money or have a poor business model more generally — but elasticity information about particular services can help steer structural reforms in the business and guide executives’ decisions about the best overall method to reduce costs.

The same holds true for Chick-fil-A and the information they were able to garner. The company now has all kinds of demographic data by region (based on franchise location) showing customer loyalty and political beliefs, and can adjust local marketing campaigns accordingly if they so choose. The company also now knows roughly what percentage of total product value is due to their corporate values.Turning to the macro scale, Chick-fil-A now knows how consumers at large will respond to future charitable giving.

Overall technological improvements have caused collective action to work more quickly. Now social movements can easily garner support in days and weeks instead of months and year. But increased technology has also sped up the response time of businesses and likewise increased the sophistication with which firms can analyze the inevitable stream of data that occurs when masses of consumers willingly reveal their preferences and elasticities for particular services.

On net it’s unclear whether the companies or consumers benefit. Perhaps the loss in customers more than offsets the value of the information firms collect. Or perhaps the lost revenue from not being able to implement a $5 ATM fee will lead to more devastating cuts in other areas. Because of technology customers were able to come together and quickly bridge the information gap. Within days, millions of BofA customers knew about the proposed fees and had their outrage validated by strangers across the country. On the other hand, perhaps in the absence of a social movement there would have been a steady leakage of BofA customers away from the bank, with a policy reversal coming only after many more customers had left. The quick response from customers allowed BofA to respond equally quickly, perhaps keeping many customers that would have otherwise left.

But even if particular businesses don’t benefit the industry as a whole surely does since, for example, other major banks can us the BofA experiment to infer information about the elasticity of their own ATM services. In the case of Chick-fil-A, consumers gave a signal to businesses throughout America about the consequences of certain types of corporate giving. BofA and Chick-fil-A were “first movers” in their respective business policies. The widespread response of consumers articulated all kinds of important information to firms throughout America. This information may even counteract the reasons behind the social movements in the first place.

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The State of America’s Retirees

Via Economist’s View, a new study presented at a National Bureau of Economic Research conference examines the wealth of Americans 70 years old and older between 1993 and 2008. It uses data from the Health and Retirement Study, which gives retirees surveys every two years until their death.

On the bright side:

Between 1993 and 2008, it found, unmarried older individuals had median wealth of about $165,000 roughly a year before they died — a figure that includes current and future Social Security income, job-related pension benefits, home equity and financial assets. In the same period, the median wealth for continuously married senior citizens, roughly a year before they died, was more than $600,000.

Not bad you might say. But on the other hand:

[A]bout 46 percent of senior citizens in the United States have less than $10,000 in financial assets when they die. Most of these people rely almost totally on Social Security payments as their only formal means of support…

More than a little depressing. And as the article notes, this doesn’t provide much of a cushion to protect against a wide variety of shocks. Co-author James Poterba frames the policy implications like this:

“There is a lot of divergence in how people are doing,” Poterba says. Those disparities also complicate the public-policy issues relating to the new findings.

“One of the clear messages is that it is very hard to do a one-size-fits-all retirement policy,” Poterba says. “We need to recognize that, for example, if we were to substantially reduce Social Security benefits for those later in life, that there is a share of the elderly households for whom that would translate very directly into reduced income, because they seem to have accumulated little in the way of financial resources.”

Proprietary Trading and the Volker Rule

In response to this Econmix article by Simon Johnson, a professor of mine wrote a short post expressing surprise that more people are not concerned about proprietary trading, or, what he termed, “gambling.” Indeed, NPR Planet Money had a great podcast a couple of years back entitled Gambling With House Money, which discussed the issue of proprietary trading and its risks and benefits. One benefit is market liquidity. On the issue of “gambling” I agree with Adam Davidson: Banks are always gambling with our money. A loan to a small business is a gamble because the business might fail and the loan might not be paid back. The difference is that proprietary trading often deals with more obscure financial instruments and the risk profile, while modeled with sophisticated statistical techniques, in reality is unknown and therefore invites decisions that might lead to financial loss. Small business loans and mortgages, meanwhile, are well-known entities.

However, I would add that if a bank wants to be a going concern, it always has an incentive to stay in the black over the long-run. Though prop trading can use customer deposits, it often uses corporate profits. To the extent that FDIC insurance covers customer losses, it seems to me that a bank should be able to make whatever bets it wants. The Darwinian nature of capitalism should select for those banks that are prudent.

This, of course, assumes a profit and loss system. But a long history of US government bailouts has called into question how much banks should fear going under (i.e. moral hazard may be a non-trivial factor in risky bank behavior). This gets to the point of too big to fail; Simon Johnson has been the most boisterous voice on this front as the econmix article alluded. Moreover, FDIC insurance negates any incentive customers might have to hold banks accountable. Who cares if my bank fails, I still get my money (and FDIC is paid for with bank fees not taxpayer dollars, doubly nice for me as a consumer). Without such insurance customers would undoubtedly be much more scrupulous about where they put their money and banks would be forced to engage in more conservative investment strategies. The same way that without spell check I would be forced to memorize how to spell ‘scrupulous’.

As far as investment banks go, in his book Bailout Nation, Barry Ritholtz argues that the real problem is the high leverage that large financial institutions enjoyed (he claims levels up to 40-to-1 though the SEC has responded thoughtfully to similar claims). Ritholtz also cites the movement away from partnerships as a primary model for investment institutions.  In other words, banks weren’t just gambling, they were gambling with other people’s money. As Milton Friedman long ago advised, “Very few people spend other people’s money as carefully as the spend their own.”

As far as the Volker Rule, its design will likely lead to poor efficacy in practice. Banks clearly need to be able to hedge specifically so they can protect our money. But the line between a hedge and a speculative bet is fine. So fine that banks will always claim they are hedging even when they aren’t. As always, regulatory capture is a concern.

How is GDP like a Honda Accord?

…Oh my gosh, in so so SO many ways. Well, in a couple, at least. Like GDP, the Honda Accord is a pretty good all around vehicle. It is equally suited to city and highway driving, can traverse graveled country roads with relative ease, and can drive in most types of inclement wether. It can get us most places we wish to go and thus is pretty closely correlated to our happiness regardless of our personal tastes and hobbies.

“Oh, no,” say some, “real happiness is dive-bombing through thicketed forests and across small mountain streams.” And how do these bold people prepose we do so? We must buy new, larger tires for our Accord. Outfit it with better shocks and a more powerful engine. Add a roll cage and a winch to pull the vehicle out of ruts. These are the ways we can make our Honda Accord better and really ensure that it can lead us to the healthy, happy life we desire. I say you should just use a different car.

Now back to GDP. It is a popular pastime to point out the narrowness of the measure and suggest ways to improve it. We need to add the contribution of stay-at-home mothers, for instance. Or else we should complain that it doesn’t measure what we really care about like income inequality or literacy rates or any number of other possible national characteristics. But go back to the titular analogy of this post. Like the Honda Accord GDP does not do everything we may want in a car. But also like the Accord, it does most of what we want. GDP is correlated with a wide range of other statistics from happiness, to health, to life expectancy. We first need to recognize how wonderful GDP is as a simple measure of an enormous range of other national characteristics that we care about. Second, the answer to GDP is not to criticize its use as short sighted or to stuff it full of extra amenities as our woodsman wanted to do with our Accord. No economist believes that GDP provides the end-all, be-all state of societal success. Let the Accord be the Accord. Let it be simple, low-cost, versatile, and intuitive. Buy a new car if you want such vastly different features or improved luxury. Indeed, some economists (you’ve probably heard of) are designing new and different measures of national achievement. But this is no mark against the Accord. It does perfectly well what it was designed to do. The problem is that when a woodsman gets his hands on a Honda, there’s no end to where he’ll want to drive.