AEIdeas The public policy blog of the American Enterprise Institute Sun, 31 Aug 2014 05:21:28 +0000 en-US hourly 1 Restaurant economics – why don’t popular ones raise prices? Sat, 30 Aug 2014 21:17:16 +0000 read more >]]> It’s often a puzzle to economists why the most popular restaurants – the ones with long lines and long waits to get a table or a reservation – don’t raise their prices or charge for reservations? The Priceonomics blog addresses this apparent “economic mystery” in an article titled “Why Don’t Restaurants Charge for Reservations” by looking at the super-popular “State Bird Provisions” restaurant in San Francisco, here’s an excerpt:

If you want to dine at State Bird Provisions, you’ll have to get in line. The small restaurant, winner of the James Beard Award for Best New Restaurant (2013) and a Michelin Star, only accepts a few reservations that are snapped up as soon as they are released — at midnight, sixty days in advance. So nearly every day, people line up on Fillmore Street in San Francisco an hour or more before State Bird’s 5:30pm opening time to score a table.

It may seem silly to line up for State Bird Provisions in a city full of renowned restaurants and good food. But as anyone who has eaten brunch in the city knows, San Franciscans view long restaurant lines as social proof more than as a deterrent. Besides, State Bird offers determined diners a relative bargain. While its offerings are not cheap — even without indulging on wine, bills can reach $50 per person — State Bird’s prices are more modest than almost any other local Michelin Star restaurant.

This makes State Bird something of an economic mystery. If economists owned popular restaurants like State Bird, they would take one look at the long lines and raise prices. After all, the overwhelming demand is pretty clear. Or at the very least, given how reservations disappear like Coachella tickets, they would start charging for them. In fact, since restaurants do not do this, a number of startups in San Francisco and New York City have started to sell reservations to users, often by reserving tables and scalping them.

In contrast to the executives who run large restaurant chains, the restaurateurs behind celebrated restaurants and local favorites are often chefs first rather than professional managers. This raises the question: Are restaurants like State Bird Provisions, which seems to resist simple economic analysis, the exception or the norm? And if they are the norm, is that because it is somehow self-defeating to raise prices even at booming restaurants? Or are chef proprietors a unique breed in the business world, immune to supply and demand and content to leave money on the table?

Read more here and find some answers to those provocative questions.

Update: In response to the post, Robyn makes the following comment that warrants this update to the post:

“If economists owned popular restaurants like State Bird, they would take one look at the long lines and raise prices. ”

That’s because most economists are number crunchers, and don’t have a clue as to the customer psychology of a service oriented business, where yes, reputation and the cachet associated with being a customer is extremely important, but you don’t want to limit your customer base with unnecessarily high prices. That amounts to “negative advertising”. Suddenly raising prices just because you can is one of the fastest ways there is to trash your reputation.

Here’s an alternative, edited version of Robyn’s comment:

That’s because most economists are number crunchers, and don’t have a clue as to the customer psychology of a service oriented business, where yes, reputation and the cachet associated with being a customer is extremely important, but you don’t want to limit your customer base with unnecessarily high prices long, excessive waiting times of several hours. That time wasted waiting in line amounts to “negative advertising”. Suddenly raising prices waiting times with below-market prices just because you can is one of the fastest ways there is to trash your reputation.

In other words, there is an opportunity cost to waiting in line for an hour, and that cost should be considered in the full cost of the meal at popular restaurants: Time Cost + Money Cost = Full Cost. By keeping the money cost low, restaurants like State Bird Provisions are raising the time cost of eating there, and thus raising the full cost of the dining experience – why shouldn’t that be a form of “negative advertising”? Perhaps those restaurants are appealing to those consumers who place a low value on their time and are more cost conscious, and are losing business from those diners who have a higher time cost and are less price sensitive. By raising monetary prices, wouldn’t at least some popular restaurants be better off by appealing to a different group of consumers with more inelastic demand curves and with a higher opportunity cost? With higher menu costs and shorter wait times, wouldn’t some restaurants generate higher overall sales revenues, along with higher tips for the wait staff from higher menus prices?

Economists might not “have a clue as to the customer psychology of service oriented business,” but we understand “opportunity cost” pretty well, and it is only by ignoring the fact that time is a precious, non-renewable resource that we could make the statement that high monetary prices might limit your customer base while ignoring the equally plausible assumption that high wait times would also limit your customer base. After all, “time is money,” and excessively high wait times for a table at a popular restaurant unnecessarily raises the full cost of the dining experience.

Here’s my solution so that restaurants can appeal to both groups of customers (elastic demand and low opportunity cost, and inelastic demand and high opportunity cost): Allocate half of the tables in the restaurant on a first-come, first-served basis that might require waiting for one or two hours, and allocate the other half of the tables by reservations in advance, with a premium reservation charge of $10-$20-$30-$40 per table?

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Markets in everything: Anti-Obamacare practice booms, along with a growing network of market-based providers Sat, 30 Aug 2014 15:30:12 +0000 read more >]]>

Skyrocketing health insurance premiums are pushing patients and Obamacare enrollees to The Surgery Center of Oklahoma (the “Free market-loving, price-displaying, state-of-the-art, AAAHC accredited, doctor owned, multispecialty surgical facility in central OK), explains the center’s director Dr. Keith Smith in the CNBC video above.

Dr. Smith and his clinic are members of a growing network of market-based medical providers that belong to the Free Market Medical Association, a national group “dedicated to bringing together physicians, surgeons, providers, facilities, and support businesses; providing necessary resources to promote a successful industry; and defending the practice of free market medicine without the intervention of government or other third parties. The association’s website provides the interactive “Free Market Map” below with the following statement: “Our members represent a new movement in healthcare. Price competition works to increase quality and lower cost in every market, and our members are competing to lower the cost of health care. We are all working together to drive down the cost of healthcare and increase the quality of care accessible by everyone.” Each symbol on the map represents a clinic, hospital or medical practice that offers market-based medicine with transparent pricing.


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Is the secret to better economic growth this simple — E-I-E-I-O? Sat, 30 Aug 2014 15:23:18 +0000 read more >]]> So this year is not shaping up much better, growth-wise, that any other year during the Not-So-Great Recovery. What should we be doing right now to move from stagnation to acceleration? Here is MIT’s Andrew McAfee, co-author with Erik Brynjolffson of “The Second Machine Age,” giving some good policy advice on a recent EconTalk podcast episode:

In the book, Erik and I talk about the Econ 101 playbook, just to convey this idea that there are very simple macroeconomic things that we should be doing that we’re doing a pretty poor job of right now. And my mnemonic for them is–I have the “Old McDonald” theme song running in my head–it’s EIEIO.

We should be doing a better job on entrepreneurship, on infrastructure, on education, on immigration, and then the ‘O’ is original research, or basic research. You’d have to go very far left or very far right before you find a well-trained economist who would disagree that government has a role to play in all these 5 areas. We’re doing a mediocre to actively lousy job in all those 5 right now. …

Immigration is just so easy, right? Like I said earlier, we have the world’s most ambitious, tenacious, dedicated entrepreneurial people begging to come here, and we’ve put these Kafkaesque hurdles in their way. At every level, from education to H-1B visas. Other countries have made progress in getting a startup visa in place. If I were designing a way to hamstring economy I could not do better than what we are doing with immigration policy right now.

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Friday evening linkage Fri, 29 Aug 2014 22:46:39 +0000 read more >]]> oil1. Chart of the Day. Daily US oil production surged above 8.6 million barrels last week for the first time since October 1986, almost 28 years ago.

parking2. Map of the Day. Unpaid NYC parking tickets per UN diplomat by country, 1997-2002. Source: Forbes article “The World’s Most Corrupt Diplomats, As Told Through Parking Tickets.”

3. Who’d a-Thunk It? 40% of UK managers avoid hiring younger women to get around maternity leave? The costs of maternity leave are too high and women ‘aren’t as good at their jobs’ when they return, according to a survey of 500 managers.

4. The Beloit College Mindset List for the College Class of 2014, e.g. #1 “During their initial weeks of kindergarten, they were upset by endlessly repeated images of planes blasting into the World Trade Center, see full list here.

5. The criminalization of American business: The US legal system has become an extortion racket, according to The Economist:

Who runs the world’s most lucrative shakedown operation? The Sicilian mafia? The People’s Liberation Army in China? The kleptocracy in the Kremlin? If you are a big business, all these are less grasping than America’s regulatory system. The formula is simple: find a large company that may (or may not) have done something wrong; threaten its managers with commercial ruin, preferably with criminal charges; force them to use their shareholders’ money to pay an enormous fine to drop the charges in a secret settlement (so nobody can check the details). Then repeat with another large company.

6. Nanny Statism. California college students engaging in sexual activity will now first need “affirmative consent” from both parties?

7. Creative Destruction: Music Album Sales Fall to A New Historic Low.

8. Food Fact: Vs. a McDonald’s Big Mac, a Chipotle burrito has 3.3% more fat, 31% more cholesterol and 157% more sodium, and twice as many carbs.

9. One Word: Bearings: The Achilles Heel of Wind Turbines

10. Good News. Despite income differences, Americans of all backgrounds have never enjoyed such equality in length of life as today.

Bonus Quotation of the Day.



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Pakistan’s government cedes democratic ground, asks army to mediate in political crisis Fri, 29 Aug 2014 19:37:47 +0000 read more >]]> Late on August 28, two weeks after Pakistani opposition parties began a protest movement to topple the sitting government, Pakistan’s historically politically overactive army officially stepped into the fray to mediate an end to the crisis. The army’s overt involvement in the political crisis, ostensibly at the request of the embattled government, is a deplorable blow to Pakistan’s democratic development and likely signals the end of the government’s ability to control the formation of key foreign and security policy.

More background on the political crisis is available here, here, here, here and here.

The ongoing sit-ins in the heart of Islamabad’s government quarter have outlasted most expectations. The Imran Khan-led Pakistan Tehreek-e-Insaf (PTI) party and the Pakistan Awami Tehrik (PAT) party, led by firebrand cleric Tahirul Qadri, although initially independent of each other, now coordinate their moves so as not to be left behind by the other.

While Pakistan’s Parliament has staunchly supported Prime Minister Nawaz Sharif against the PAT’s and PTI’s demands that he resign his post, national sympathy has grown for Qadri over the government’s intransigence and unsatisfactory action in filing a criminal case against several government officials, including Sharif, after a police crackdown on a protest in Lahore in June left 14 PAT supporters dead. In response, Qadri directed his supporters to take steps that appeared to signal impending violent clashes: PAT protestors melodramatically began dressing in funeral shrouds and digging graves around their protest camp.

The government, having been unable to get the PTI and PAT to budge during fitful face-to-face negotiations sessions, turned to its would-be savior of last resort: the army. A growing body of evidence suggests that Sharif, who has met with army chief Gen. Raheel Sharif (no relation) three times in the last nine days, has been crafting a deal in which the army ensures the survival of Sharif’s government and his continued premiership in exchange for “sharing space with” (a Pakistani euphemism for ceding control to) the army on foreign policy and security issues.

Multiple government and opposition negotiating teams entreated the PTI and PAT to continue a dialogue for nearly two weeks with little success. When Gen. Sharif invited Qadri and Khan to the table following the government’s request that the army formally mediate the crisis, the two made a beeline for army headquarters, revealing that forcing a military intervention in the crisis had been a key goal of theirs from the outset.

The main opposition parties are understandably miffed: after backing the government to the hilt against the protest movements, the government, without consulting the opposition, turned to the army and sacrificed the supremacy of parliament on the altar of its own survival. Prime Minister Sharif may survive this crisis, but he will do so at the cost of allowing the army to regain its prized control over strategic policy issues.

Sharif, who remains popular despite the crisis, should perhaps consider going back to the people to seek a fresh mandate against the PTI, PAT, and the army. If he does not, he can expect to run a lame government for his remaining four years in office.

Follow AEIdeas on Twitter at @AEIdeas.

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Responding (again) to arguments I didn’t make Fri, 29 Aug 2014 18:54:15 +0000 read more >]]> A sign that you’ve hit the mark is when people respond to arguments you didn’t make rather than the ones you did. My recent Wall Street Journal piece on progressives’ response to the rising Social Security deficit made a very simple point: you’d think a bigger shortfall would cause progressives to take Social Security reform more seriously, but instead the consensus position is now to expand Social Security, paying for that expansion with the tax increases they once proposed to fill the program’s funding gap.

Last week, New York Magazine’s Jon Chait ignored this core argument and instead took my piece as an (unfair) critique of President Obama. And now Boston College’s Alicia Munnell takes my point to be “that Social Security costs bounce around, that we don’t really know what’s going on, and that six years from now they could quadruple once again.” Except that this isn’t what I argued (or really even hinted at).

But Munnell hits on a broader point, in that my piece cited figures published by the Congressional Budget Office rather than Social Security’s Trustees/actuaries. In part this was because my article was written before the most recent 2014 Trustees Report was released, but it was mostly because CBO’s figures – back when they showed a lower shortfall than the Trustees – were the go-to for progressives looking to poo-poo the problem. So I’m citing the agency they cited.

Munnell points out that CBO’s figures have been less predictable than those from SSA, saying:

That [CBO’s] deficit for 2008 was way below that of the Social Security actuaries and its 2014 deficit way above. It is bouncing around in inexplicable ways. While the CBO has been a great resource for budget debates, it has not been helpful when it comes to Social Security.

I’m not sure that the changes in CBO’s projections are inexplicable if you read their reports, nor that the seeming stability in SSA’s figures don’t represent an institutional disposition that numbers not change a great deal from year to year.

But the larger issue is the claim that CBO’s work “has not been helpful when it comes to Social Security.” CBO surely can defend itself, but over time I’ve found a lot to admire in their work. They’ve developed a more sophisticated computer model than SSA both for projecting the system’s finances and for analyzing the distributional impacts of reforms. CBO’s treatment of investment risk and general uncertainty is also better than SSA’s (good enough to convince me I had been wrong…) CBO is very good at making their output understandable to policymakers and the public. And in the times when I’ve disagreed with the agency or had questions about their results, I’ve found CBO’s staff to be both open-minded and forthcoming with details. I thought that back when CBO showed a lower deficit than SSA, and I still think that now.

Follow AEIdeas on Twitter at @AEIdeas.

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Will a ‘Recovery Fall’ + Facebook help Democrats keep the Senate? Fri, 29 Aug 2014 17:27:53 +0000 read more >]]> Despite many forecasts that 2014 would be the year the US economic recovery finally — finally! — would hit its stride, that optimism has so far been unfounded. While job growth has been stronger, not so GDP growth and wages. Disappointing news for Democrats hoping that economic acceleration would help their candidates in the midterm congressional elections. With September approaching, time has run out for that theory. Or has it? From The New York Times last month:

Nonetheless, the Democratic pollster Peter D. Hart, who works with Mr. McInturff, the Republican, on polls for NBC News and The Wall Street Journal, predicted “the economy may produce a positive wild card” for Democrats. He also took issue with Mr. McInturff’s contention that the year’s political dynamic is “set.” While Democrats suffer from the fact that Senate battles are mostly in conservative states that Mr. Obama twice lost, Mr. Hart said, “in this era of social media, the old formula — that anything that happened after July 1 did not count in terms of the economy — is no longer the case.”

So even though the economy has been meh all year, if the September jobs report to be released on Oct. 3 or the third-quarter GDP report to be released on Oct. 30 come in gangbusters, they will alter the political landscape. The good econ numbers will blow up on Facebook and Twitter (#RecoveryFall) and be the subject of numerous BuzzFeed listicles. Optimism will rise. Democratic voters will get enthused. The GOP will fail to take the Senate on Nov. 4.

Anyway, I think that’s the theory. Two problems: First, the economy doesn’t seem to be a big vote changer in midterm elections. National Journal: “A plethora of political-science research suggests the economy, except in extreme circumstances, doesn’t matter much in midterm elections anyway. A boost in growth certainly wouldn’t hurt, but its effect on candidacies would be indirect and minor.”

Second, for a good economic surprise to help the Dems, there needs to be a good economic surprise. And the chances of that seem to be uncertain, at best. A Barclays research note from this morning:

Personal spending in the US fell 0.1% m/m in July, well below our forecast and the consensus (both 0.2%). Personal income was also softer than we had expected, rising only 0.2% versus our forecast of a 0.4% gain. Headline and core PCE inflation rose 0.1% m/m and are now up 1.6% y/y and 1.5% y/y, respectively. Both readings were in line with our forecast. Adjusting for inflation, real personal spending fell 0.2% on the month and weakness was broad based, as declines were registered in durables, nondurables and services. The largest drop came in durables, which is unsurprising given the 14.3% (q/q saar) rise in durable goods consumption in Q2. However, we were not expecting weakness in the remaining categories. Altogether, the report suggests a much softer start to consumption in Q3 and is a negative for our GDP tracking estimate as the level of real personal spending in July is below the Q2 average. After today’s report, we are now tracking 2.2% for Q3 real GDP, down five-tenths from 2.7% prior to the report.

In other words, the third-quarter — as of now — is looking like a fairly typical one for this anemic recovery. And it’s that persistent weakness is why “71 percent think the country is on the wrong track, [and] 60 percent believe the United States is in a state of decline,” according to a recent WSJ survey.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

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Quotation of the day on State power vs. social power… Fri, 29 Aug 2014 16:07:54 +0000 read more >]]> ….. is from Albert Jay Nock’s article “The Progressive Conversion of Social Power into State Power“:

It is unfortunately none too well understood that, just as the State has no money of its own, so it has no power of its own. All the power it has is what society gives it, plus what it confiscates from time to time on one pretext or another; there is no other source from which State power can be drawn. Therefore every assumption of State power, whether by gift or seizure, leaves society with so much less power. There is never, nor can there be, any strengthening of State power without a corresponding and roughly equivalent depletion of social power.

HT: Dennis Gartman in today’s The Gartman Letter

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What we’re reading today: August 29, 2014 Fri, 29 Aug 2014 16:01:47 +0000 read more >]]> Check out the top pieces we’re reading today on the economy, technology, education, and more.

1.)The Atlantic goes inside Google’s secret drone-delivery program here.

2.) From WSJ: Ebola virus outbreak could hit 20,000 within nine months, warns WHO.

3.) Is Ed reform tripping with a testing high? asks Jap P. Greene at Education Next.

4.) Eric Pianin looks at why we’re so down in the dumps about the economy in his piece at The Fiscal Times.

5.) US workers, kick off Labor Day weekend with some depressing charts, says Quartz. Here’s one of them:

Labor's share of US national income

6.) IEEE explains how to turn tires into batteries for electric cars.

7.) Money is not the answer for our bloated public education system, according to Diana Furchtgott-Roth in e21.

8.) From the IMF blog comes a post titled “More jobs that pay decent wages: How to fight poverty in the US.”

9.) Neil G. Ruiz at Brookings writes on the geography of foreign students in US higher education: origins and destinations.

10.) From MIT Technology Review: Massive internet outage points to flaws in policy and technology.

Follow AEIdeas on Twitter at @AEIdeas.

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Markets in everything: Market-based alternatives to Obamacare Fri, 29 Aug 2014 15:59:34 +0000 read more >]]> 1. Concierge Medicine (as reported by WAAY-TV in Decatur, AL):

With the Affordable Care Act in full swing, there’s a growing trend across the nation that’s changing the way patients get treatment. And now concierge medicine is being offered at The Heartbeat Away Clinic in Decatur, Alabama. “What I’m doing is unprecedented” said Nurse Practitioner Kimberly Samuel. “I’m not accepting any insurance whatsoever.”

“I’m doing a concierge type medicine where people pay a monthly amount. It’s a very minimum amount and I’ll see them as often as they would like to be seen” said Samuel. Samuel charges a monthly or yearly membership fee that starts at $50 for an individual and $100 for a family of 4. The fee includes appointments or walk-ins for reduced wait times, 24 hour access by phone or email, and 45 minutes for each visit. The fee also includes a wellness panel with blood work.

Two weeks ago, Samuel opened the clinic to cater to those who don’t have insurance after researching the growing trend of concierge medicine in larger cities. By eliminating the cost of billing insurance companies, Samuel can cut overhead expenses up to 40 percent and transfer the savings to her patients.
A growing number of doctors are going the concierge route due to what some call a costly amount of insurance regulations and red tape in Obamacare. Samuel said cutting out the middleman allows her to focus more on her patients.

2. Oklahoma Doctor Making a Run Around Obamacare (as reported by

About a year before the birth of Obamacare, Dr. Keith Smith, director of the Surgery Center of Oklahoma, posted all the prices for his center’s surgeries online. Today, he’s in expansion mode, looking to build two more operating rooms. His fastest-growing group of patients? Obamacare enrollees.

Though armed with Obamacare health insurance plans, the patients are saddled with high deductibles. Looking for alternatives, some of them fly from around the country to the Surgery Center of Oklahoma, where the cost of care and travel together amounts to less than their deductibles under their Affordable Care Act plans.

The Surgery Center of Oklahoma is a physician-owned operation that does not take Medicare or Medicaid and only selectively works with private insurance plans. Patients pay in cash or with cashier’s checks.

“Even if someone has this (Obamacare) insurance card in their pocket, they are soon going to find out that it’s worthless,” Smith said, citing both higher prices and doctor shortages under Obamacare. “Coverage doesn’t mean care.” As proof, he points to the fact that among his first waves of patients to the center were Canadians, who though covered under their country’s socialized health care system, found themselves in the back of a long line of patients in desperate need of care.

Smith and others argue Obamacare is moving America even farther away from the real solution to its health care woes. What’s needed, they say, is a free-market model in which Americans are not just patients, but health care consumers.

MP: Look for more of these types of market-based health care solutions as patients look for alternatives to government-managed Obamacare.

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