The Price of Being A (Bleacher) Bum in Minutes

While I don’t have time to flesh this thought out completely, it is something I have been carrying around with me for years (like old luggage). 

We are constantly bombarded by today’s version of a journalist writing stories (to motivate advertising spending) of high prices that are used out of context.  I recently was sent an excerpt from a Montgomery Ward catalog circa 1932, which nostalgically told of those cheap prices of yesteryear:  $1.99 for a pair of ladies’ leather shoes;  9 cents for a pair of ladies anklets (those are socks, to you Millennials); and so on.  But there is no context there.

The Going To the Sun Road was completed in 1932.  A 50 mile stretch of highway built across the vast remote wilderness of the continental divide within Glacier National Park at the Canadian border, it is literally carved out of rock.  And for the people who built it, minimum wage was 10 cents an hour.  Granted, this period was during the depression era and no one wants to say they are merely better off than being depressed.  Nevertheless, let’s put that in context and take it forward. 

At 10 cents per hour, a pair of Montgomery Ward ladies shoes cost 20 hours’ worth of pre-tax minimum wage work in 1932. And a pair of socks cost another hour’s work. 

The following is a chart I built from various sources of data, and, like the Sodoku games in the airline magazines, I left blanks.  Note that my home state of Illinois has a slightly higher minimum wage than the national minimum wage.

Let's set aside tax considerations for simplicity. If we translate Federal minimum wage of $7.25 in 2011 to 20 hours of spending, that same pair of ladies shoes would cost $145.00.  Clearly, the price of shoes in minimum wage minutes has gone down since 1932, except for those purchased by my daughters.

This exercise can be repeated ad infinitum with prices of one’s own choosing.  Let’s step away from Ward’s ladies shoes for a moment and look at gasoline and milk.  Nationwide, a gallon of gas has not really increased in price since the first “Arab oil shock” of the early 1970s, provided the price is denominated in minutes of minimum wage work per gallon.  Oh, sure, there were a few spikes, such as 2007 and 2008. But things have settled down in the retail gasoline market and the price is about 20 to 25 minutes.  By the way, the box around the pre-1976 era denotes leaded gasoline prices.

Milk, unlike gasoline, has decreased dramatically in price (again, minutes of minimum wage work per unit, only this time the unit is a half gallon).  The early data is for home delivery of a bottle of whole milk.  The latter data is for store purchase of a gallon, divided by 2.  Despite the inconsistency in the data, note that the price of a half gallon of milk has declined from just under an hour of work in 1940 (51.2 minutes) to about 13 or 14 minutes of minimum wage work.  That is, in 2012 the price of milk is less than one-third what it was in 1940, in terms of minutes of minimum wage work, and less than half what it was in 1969 (31.43 minutes).

Ah, 1969.  What a year it was for those poor fans of the Chicago Cubs.  Setting that story aside to be told by a real Cubs fan, let’s look at Cubs ticket prices.  In 1969, even a bum could afford to sit in the bleachers for an afternoon game at Wrigley Field for $1.00 (not including the cost of a glass of Hamm’s).  That was less than an hour’s worth of minimum wage work.  In fact it was 37.5 minutes, which was about the price of a half gallon of milk. Looking at today’s bleacher tickets, which are now sold by section, the dollar price ranges from $69 to $111, depending upon one’s bleacher seating preference.  Even using the higher Illinois minimum wage rate of $8.50, the price of a Cubs ticket ranges from just above 8 hours of minimum wage work to THIRTEEN HOURS of minimum wage work, translating to an increase of 13 to 21 times (that’s 1300 to 2100 percent) over the cost in 1969.  Remember, milk is down more than 50% and gas is only slightly higher.  So the Cubs/milk price ratio went from 37.5/31.43 to 487.06/12.78 (or 783.53/12.78 for the better bleacher seats).  This represents a Cubs/milk price ratio change of 1.19 to 38.11, or increase of 3,200 percent!  And at the higher bleacher prices, it is an increase of 5,152 percent.

Professional sports are only one area of the entertainment industry. Expanding our thoughts into other areas, rock n’ roll concert tickets which were $3 or $3.50 in 1969 are frequently $100 or more in 2012 (Kenny Chesney for $180?).  What is that in terms of minutes of minimum wage work?  What about a movie date for teenagers?

I keep thinking we have succumbed to higher prices for entertainment (in terms of minutes of …).  But I think back to Ron Santo, Billy Williams, Ernie Banks, Don Kessinger, Fergie Jenkins, Randy Hundley and the like, and I realize we not only have higher prices, but we also have a different definition of entertainment.  There was once a fandom that paid to be present with a team that had a heart and a soul.  Now we pay huge prices to watch a jumbotron in person and other expensive distractions, while the latest version of a roster is presented by upper management.  Yet my milk is fortified and I get mileage additives in my gasoline.

Mike M.

Cobwebs in My Yogurt: Are Organic Commodity Prices Converging or Diverging?

One of my all-time favorite “discoveries” while an undergraduate student was encountering what is known as “The Cobweb Theorem” or “The Cobweb Model.”  While the Cobweb Model doesn’t offer guidance on as many facets of life as Mario Puzo’s “The Godfather” (“Leave the gun; take the cannoli”), it does incorporate a time element that impatient mobsters will never internalize: the delay.

Rather than repeat or re-post a good explanation of the Cobweb Model, I refer you to Wikipedia’s wonderful explanation and diagrams: http://en.wikipedia.org/wiki/Cobweb_model

But what does that have to do with my yogurt?

As the strawberry example in the first Wikipedia paragraph hints, in most organic commodity markets there is nearly a full year’s delay between observing a market price and seeing an outcome related to production quantity decision.  For an organic dairy producer, the supply of organic corn for feed is characterized in the supply curve, while the demand for organic corn for feed by the dairy producer depends on the profitability of feeding organic dairy cows at different organic feed prices.  Consumers aren’t represented in my labeling of Wikipedia’s charts, one of which I copied below so you wouldn’t have to keep flipping back and forth.

As a corn grower, you can respond to high organic corn prices by growing more corn (more acres), as when price P1 causes a shift from Q1 to Q2. But when quantity Q2 is supplied in the market, price P2 must prevail to clear the market.  My organic dairy operations are profitable and the supply of organic yogurt expands (so to speak).  But before I can count my milk check money, you, as a reasonable steward of your economic resources, cut production of organic corn from Q2 to Q3 because the price P2 is too low for profitable organic corn production.   Maybe you decide to put the land into organic rutabagas instead, to make more money. 

The following year, when Q3 is produced, my organic dairy peers and I fight over the reduced supply of organic feed corn in an economic manner, by bidding the price up all the way to P3.  Yikes.  Clearly, some of us need to sell some cows if P3 is going to prevail in the feed market.  Who can make money at that price?  And so it goes, year after year.

Now, there are two fundamental determinants of whether I can clear the cobwebs from my mind.  The first, as the Wikipedia article elegantly illustrates in both math and layman’s terms, is the concept of elasticities, or in graphical terms, the relative slopes of the supply and demand curves (you can think of elasticity as responsiveness to price). If the price elasticity of demand is greater than the price elasticity of supply (demand is less steep than supply), prices will tend to converge, dampening out the year-to-year effect.  This scenario is characterized (between you and me) as me, the organic dairyman, being able to adjust my cow numbers in response to organic corn prices faster and more readily than you can adjust your corn acreage in response to corn prices, stabilizing prices by expanding and contracting demand quickly. While this notion is appealing, it is biologically inconsistent.  Cows take longer to bring into production, since becoming mothers is what causes them to let down milk, right?  They are adults.  If I cull the cows, they cannot be easily replaced within a few years.  In contrast, corn can be seeded or not each year.  Thus, it is intuitively consistent, though merely a maintained hypothesis, that organic dairy production is less elastic to organic corn price than is organic corn production. Thus, it follows that we would expect the markets to diverge, having an increase in price volatility.

 While the data is thin, there is some data.  USDA’s Ag Marketing Service recently reported the organic feed corn prices appearing in this chart. (http://www.ams.usda.gov/mnreports/lsbnof.pdf)

For comparison, I made the chart below of prices of conventional corn received by farmers from USDA data.

A similar pattern exists for organic soybeans.  Both organic corn and soybeans were trading at slight premiums to their conventional GMO cousins a few years ago. In fact, in the summer of 2010, there was barely any premium for organic corn over conventional corn.

Current organic prices are more than twice conventional prices, indicating wide price variation in one-year steps.  Smells like divergence, doesn’t it?  If you want to go back a few years, you will notice that tremendous price premiums for organic feed commodities existed for a short while prior to 2010.

Lastly, there is another determinant in clearing up the cobweb problem, and that is the concept of rational expectations.  Continuing our hypothetical situation, you are going to act rationally based on your expectation of the organic corn price next year at harvest.  I am going to act rationally based on my expectation of the organic corn price after harvest and beyond.  But the organic pricing system is broken, or was never completely built.  Conventional grain markets have futures markets for determining the price 3 months from now or 18 months from now.  Organic markets have avoided any correlation with conventional markets and have no analog for forecasting prices 12 to 18 months forward.  Therefore, we cannot expect a convergence of expectations because these markets have not adopted the stabilizing characteristic of reference pricing. 

My yogurt is destined to have more cobwebs before it has fewer.  Altogether, the evidence points toward more chaotic pricing in organic commodity markets, with shortages and high price premiums followed by severe over-production/under-utilization until something changes.  I’m pretty sure a futures market or a reference pricing mechanism would help.  And I’d like a definitive measurement on some of those squigglies, as C. Robert Taylor called them, specifically the price elasticities of supply and demand in a multi-market framework.

Inexpensive Capital Contributes to Unemployment

In the current U.S. economic and political environment, capital is relatively free. It has almost zero cost, provided one can acquire any.  The interest rate is near zero, implying there is plenty of fungible money.  The federal government has adopted a set of policies to ensure capital has an even lower cost, through tax credits, favorable tax treatment of capital gains compared to ordinary gains, and immediate expense deductions of limited amounts of capital for tax purposes.  In fact, there is a much-used section of the tax code (1031) allowing "tax payers" to not pay taxes on the sale of capital items, provided they accepted like-kind property in exchange for their property instead of cash within 18 months.  (Example: Person X trades Person Y 100 acres of suburban sprawl for 10,000 acres of tillable land.)  Yet, people are concerned about the rate of employment growth.  Why the conundrum?

In the olden days of post-WWII economic growth, job creation was supported by lowering the cost of capital.  Capital was in short supply and therefore expensive.  The complementary inputs of capital and labor were needed to provide economic growth.  The Kennedy administration introduced the Investment Tax Credit in the early 1960s to further lower the cost of capital, to encourage investment that would employ the growing population. 

In the current economic environment, however, capital and labor are more often substitutes for each other, not complements.  So, when economic policy encourages capital instead of labor, one would naturally expect companies to invest in capital to replace labor.   Capital is cheaper than labor in the U.S. And capital is frequently more productive.  Economic theory is clear that the appropriate amounts of capital and labor to use are determined by equating the inverse price ratio of the two inputs (Pcapital and Plabor) to the ratio of the marginal productivity (MP) of each input. Thus, the amount of each input to use is where Pcapital/Plabor = MPlabor/MPcapital. When the price of capital is zero, one expects the amount of labor utilized to be minimized.

In other countries labor is cheaper than capital.  Consider the BRIC(S) countries.  I have seen small squadrons of people carrying 25kg and 50kg bags around warehouses, up stairs to blending mixers, and other places.  These people would have been replaced by conveyors, elevators, sensors and other equipment in the U.S.  But capital is too expensive in many areas to consider substituting it for labor.

I am not suggesting a U.S. policy change to support jobs for people to carry 50kg bags.  In fact, I do not know why we consider “economic impact” of events to include the bed sheet changing and dishwashing jobs that we import people to perform and subsequently complain about them “taking jobs.”  Job quality and job quantity are not synonyms.

Rather, I am suggesting that we stop emphasizing one economic input over another and let the markets equilibrate as they may.  We have encouraged capital so much that we have an oversupply and an underutilization of both capital and labor.  And we are still paying for encouraging people to have used capital unwisely.

Erecting barriers to entry, including raising the minimum efficient size or scale to compete through lack of enforcement of antitrust law, has fundamentally contributed to capital and labor being substitutes at low and moderate amounts.  It takes a large investment for capital and labor to be complements in the way envisioned by current, conflicting policy.

Mike M.