July 26, 2018--Wow Factor!

My favorite economists are those who are behavioral economists. 

They take on the still widespread efficient-market theorists who contend that in markets asset prices (such as stocks and bonds and real estate) reflect and are based on all available information. That people make economic decisions--they buy this or that stock, buy this or that house--by drawing upon all the information that is openly available from billions of transactions. And thus they are behaving rationally. They want their assets to appreciate as much as possible and if the Market is free--free of misinformation and regulations--people will act after careful thought. They will pursue their best interest and thus over time will be rewarded.

In contrast, behavioral economists cite evidence that people do not make financial decisions all that rationally. Emotion, beliefs not based on evidence, play a larger role in people's choices than efficient-market theorists allow.

My favorite example is how people make decisions about which house to buy.

If they were operating in an efficient-market environment they would take into consideration such things as the asking price (does it conform to the value of nearby, comparable houses); what about taxes and the cost of a mortgage (are they affordable); are the infrastructural systems such as the roof and heating system in good shape; are the schools in the area, based on evidence, of high quality; if it will be necessary to commute what are the traffic and public transportation options; what is the local crime rate.

These are among the issues one would expect those seeking to buy a house would have at the top of their list.

One would think so except that behavioral economists cite evidence that the so-called "wow factor" is more important than anything else when people decide which house to buy. 

Though a house for most is the largest deployment of assets they will ever make, how the house "feels" when they enter it for the first time is more important in shaping which house to purchase than if the seller has priced the house fairly.

I confess, when buying real estate, to having been influenced many times by the wow factor. In each case though we did well when we moved to sell the places a few years later, it was more because of good luck than careful investing.

There was very little that was rational or efficient when we chose to buy these properties.

I was reminded of this earlier in the week after reading in the Times about how owners and workers at Banner Metals in Columbus, Ohio are reacting to Trump's tariffs on steel since they are affecting the bottom line at Banner. They are experiencing delays in the delivery of the materials they need to fulfill orders and because of the increase in the cost of steel and aluminum their bottom line and paychecks for both workers and managers are already feeling the pinch. One would thus think there would be widespread discontent, much of it focused on Donald Trump.

Quite the contrary. Part-owner Bronson Jones was quoted as saying--"I'm not looking at what's best for Banner right now. I'm looking at what's best for the national economy. The United States has been taken advantage of for too long."

Line workers are saying versions of the same thing. Acknowledging that they expect to see less in their paychecks beginning this summer. If their "sacrifice" contributes to the creation of new jobs they say they are willing to pay the price.

The rational or efficient market would predict that Banner employees would care only about their own take home money. But something else is at work here. The behavioral economy.

Also in regard to the Trump tariffs we are already seeing their dampening effect on American agriculture. Especially the multi-billion soybean sector. In politically-crucial Iowa, for example, where Trump will hold a rally in a few days, a large portion of their economy is connected to the global market in soybeans. Most of what they produce winds up in Asia, in China where we are engaged in a widening trade war.

To alleviate the effect on farmers, Trump two days ago announced that he directed the Department of Agriculture to spread $12 billion in subsidies around among soybean farmers to help alleviate their pain. And, politically, to see if he can buy their complicity.

Forgetting for the moment how this exposes Trump as anything but a free-marketeer (about how "creative destruction" is necessary to a thriving capitalist economy), farmers and politicians from red farm states are outraged by what they see to be meddling in the free market. As it turns out, what many of them are saying sounds very much like classic behavioral economics.

Take Nebraska Republican senator Ben Sasse--

This trade war is cutting the legs out of farmers and the White House "plan" is to spend $12 billion on gold crutches. This administration's tariffs aren't going to make America great again, they're just going to make it 1929 again.

Sasse, who has thus far been pretty much a down-the-line Trumpian may be sensing something. It could be that Trump's reckless economic moves are beginning to hit close to home and he's beginning to back off.

Wishful thinking? Probably.

June 1, 2018--Jack: Base-Ball

"I don't want to talk about politics," Jack said, waving us off before we could even say hello after running into him in on a perfect morning in downtown Damariscotta.

"I unfriended half my Facebook friends because of politics," he said. I suspected that included me since I haven't seen any postings from him for at least two months. 

"I'm just trying to get the renovation work done on my house and want to lead a calm life. The politics talk has been making me crazy."

I said, "I understand, but you know it's your own fault." He looked at me skeptically and tried to walk on. I trailed after him. "How can you literally run away from the discussions you initiated for months? Years?"

"Like I said," he said with his back half turned away, "I'm through with talking. I want to concentrate on living."

"I'm not blaming Trump's election of you," I said, "But you bear some responsibility. You talked him up for months before he ran and after he beat the odds and won the nomination, all you wanted to talk about was Trump, Trump, Trump. You remember--'your boy?'"

"I need to get back to work," he said but stopped racing ahead and turned toward me, slowing down so I could keep up with him. I'm a little wobbly on me feet, he's full of energy.

"So are you having a bit of a change of heart?" I suspected this might be why he didn't want to talk and had unfriended so many people. Avoidance. Feeling, perhaps, that he was in fact partly responsible for Trump's election but was feeling some disenchantment.

"I don't agree with everything he says or does. Nobody does. But I do agree with some of his issues."

"Some? That surprises me. I would have thought from our conversations that you'd be a happy camper. But give me some examples of things with which you agree and especially those with which you disagree."

"I believe in the tariffs. All around the world they're taking advantage of us. Even our so-called friends  Europe, Canada, and of course Mexico. They're killing us. Especially the Chinese. So he's right now moving, in fact today, to impose them. On steel and aluminum. He promised to do that during the campaign. And by the way, one thing you'll have to agree about--he is good at keeping his campaign promises."

"Even the crazy ones like tariffs. Most Republicans don't agree with them," Rona said. She had caught up with us. "They believe in the free market. That it will take care of everything, including inequality, if the government stops trying to manage the economy. Conservative politicians and economists say this. For every job saved by these kinds of tariffs three down the supply chain are lost."

"We'll see how it works out," Jack said, avoiding eye contact. But he made no effort to move on.

"You really want a trade war with China just when we need them to help us with North Korea?"

"The Chinese are smart. That can do two things at at the same time. Like walk and chew gum. As long as they see it to be in their best interest."

"Speaking of the Chinese," Rona pressed on, "How are you feeling about all those million-dollar trademarks the Chinese recently awarded First Daughter Ivanka? Just days before Trump went against all advise to prop up that Chinese telecommunications firm, ZTE, that everyone, including Republicans, say is a threat to our national security. This feels like play for pay to me."

"Not my favorite thing," Jack mumbled.

"Anything else not your favorite thing?" I poked him, "You said that there are things Trump is doing that you disagree with."

"I'm not sure he should be meeting with the North Koreans. I mean, do you think they're going to give up their nuclear bombs just because Trump acts nice to them and agrees to meet? I doubt it. I think Kim and his henchmen are very smart and are looking to buy time while finishing the work to build missiles that can reach America. They did the same thing with Clinton, Bush, and Obama. Our presidents thought they were making progress with the current Kim's father all the while they cheated and perfected their nukes and missiles."

"So why do you think Trump seems so eager to take a deal?"

"You mean other than winning the Peace Prize?" I nodded. "It's all about his base. People like me," Jack fessed up, "To appeal to them, us, by moving down the checklist of his campaign promises. We talked about that already. He's doing everything he can to get his people to turn out in November and vote. To try to keep the majority in Congress. Especially the House because if he can turn that tide or blue wave around he won't be impeached."

"I agree with that," I said. "You might think about it as base-ball."

Jack moaned, "What a terrible pun. But I do agree. It's all about them. And me. At the moment I've had it about up to here. I'm focused on getting my house painted."

"A lot of people on both sides are concentrating on their houses. On their lives. They, we, are also fed up with everything political. We need a break. Distractions," Rona said, "But those of us who want to see things change in Washington had better not be passive and withdraw from the battle. Tending to our gardens. Our future is at stake."

"I would agree with that," Jack said, "But about the specifics we still disagree. Though I'm not happy with everything. That I'll admit. I'm not in the same place I was 18 months ago. Maybe one day we'll meet in the middle."

"As long as it's my side of the middle," Rona said.

Jack reached out to hug her and then ran off.

Damariscotta