Tag: Cost of living

We recently purchased a new refrigerator. When I placed the order, I also requested the removal of the old refrigerator. When the movers arrived, they looked at the old refrigerator and decided it was larger than the new one, and therefore they were entitled to an additional charge. This was completely absurd. Part of the reason for replacing the refrigerator was our desire to get a larger one than the old one. There wasn't even one dimension: height, width, or depth, that the new refrigerator wasn't larger than the old one. I knew this because I had measured countless times to ensure it would fit in the kitchen niche. So, I did not pay the extra charge, and because of the unpleasant incident, I also refrained from tipping. A blessing in disguise. The discussion about the refrigerator dimensions led me to examine the specification stickers of the old and new refrigerators:

On the right is the new 632-liter Samsung refrigerator. On the left is a 500-liter Crystal Industries (Amcor brand) refrigerator. The Samsung refrigerator is about 20% larger (shout-out to the movers), but take note of each refrigerator’s power consumption. The larger Samsung consumes 150W, while the Crystal consumes 300W. It is both smaller and requires more electricity. The ratio of capacity to power consumption is about 0.6 watts per liter for the Crystal and about 0.24 watts per liter for the Samsung. In other words, relative to size, the Samsung refrigerator consumes less than half the electricity of the Crystal refrigerator. In monetary terms, this translates to savings of about 300–400 shekels per year (depending on how long the refrigerator door is open).

How does all this relate to the stock market?

The two refrigerators show us two types of efficiency that have occurred since 2008, when the older refrigerator was purchased:

Technological optimization

As time goes by, technology improves and things work more efficiently. In the field of refrigerators, for example, they have learned to build compressors that can change their speed (inverters) instead of the previous generation that only knew how to turn on or off. Improved materials engineering has enabled better insulation. New refrigerants allow reaching the same temperature with less energy, and more. In the field of refrigerators, we have seen an improvement of about double. In other fields, the improvements are incomparably larger. When I was a child, for my father to correspond with his brother who lived in the U.S., he had to send a letter, and it was both relatively expensive and took about a week to arrive. Long-distance phone calls were limited to people much wealthier than us. Today, an email reaches the U.S. instantly at zero cost, and a phone call, whether on a regular phone or via WhatsApp, costs almost nothing, even if you make a video call. We could continue with these examples and more.

Business Efficiency

The old refrigerator was manufactured in Israel. There may have been an economic justification for this in the past. I doubt it. If the refrigerators manufactured in Israel had better technology and cost-effectiveness than refrigerators from other parts of the world, Israel would be exporting refrigerators. The fact that only Israeli citizens bought refrigerators made in Israel shows that these refrigerators likely didn't have a competitive advantage (a combination of quality and price). Assuming I was rational in 2008 as well, I assume that Amcor refrigerators made in Afula were superior. This likely happened due to tariffs or the prevention of imports in various ways, as was customary in the past. The discussion about preventing imports or giving local manufacturers an advantage through tariffs that make imports more difficult is a long one. Intuitively, people hear about, for example, 300 workers in a refrigerator factory in Afula who would lose their jobs if Samsung refrigerators from Thailand replaced Amcor refrigerators from Afula. In practice, the result of preventing imports is usually that all citizens live at a lower standard of living than they could have (they receive inferior products in terms of quality/price), and the less obvious result is that even the workers we supposedly wanted to protect live at a lower standard of living – when you produce a product that has no right to exist without protection, you usually receive lower wages on the one hand and still pay a higher price for that same product (or other protected products). Of course, there may be certain individuals for whom the shock of layoffs would be difficult to handle, but the goal of economic management is to maximize general welfare. Not the welfare of one individual or another, whether they are a tycoon or a laborer. Historically, we can see that many things we greatly feared, such as widespread unemployment due to the free import of footwear and clothing, and consequently the closure of small factories that provided a lot of low-wage work in the periphery, did not lead to unemployment in Israel. We were left with very low unemployment, but with a much greater welfare for all citizens.

As an interesting anecdote, refrigeration in the Jezreel Valley actually expanded rather than contracted. Instead of the Amcor factory, which likely had no advantage for Israel in producing home refrigerators compared to Thailand, there is the Ricor company in Kibbutz Ein Harod. This company produces refrigerators in which Israel has a significant advantage: miniature refrigerators that don't cool to minus 10 degrees like a home refrigerator, but to tens of degrees below zero. These refrigerators are used in thermal night vision equipment. They represent the pinnacle of Israeli engineering in miniaturization and efficiency (when a soldier carries your "refrigerator" on their back, it's better if the battery is small). If we assume that the Israeli worker switched from producing home refrigerators in Afula to producing high-tech refrigerators in Ein Harod, it's clear that her contribution to the product increased, and accordingly, general welfare significantly increased (more tax revenue), and she can also be paid a much higher salary. This is, as mentioned, alongside the fact that she herself, her extended family, her neighbors, etc., can buy a cheaper refrigerator for their homes.

Efficiency in general makes everyone earn more and naturally leads to a rise in stock prices on the stock exchange. Stock prices do not rise continuously because there are always additional forces, and therefore it is an average rise over time with local volatility.

Footnote

Articles of this type often include comments like "You have no heart" or "Not everything needs to be measured with a fine-tooth comb," etc. These are recurring criticisms of Economists. In practice, an economist is not coincidentally in the same academic department as social work. They both strive for the exact same goal – improving the welfare of all people in society. The means are different, the goal is the same. I admit that when you see an advertisement like this from the sixties (starring the late Arik Einstein):

If you want some more of this good stuff

It triggers a wave of nostalgia and a desire to return to those good old days when life was supposedly simple, people went to the factory, worked, came home in the evening, and lived a reasonable life.

Reminder: In the sixties, and often in the eighties, there were cars without air conditioning. Many apartments also lacked elevators and air conditioning. People also smoked on buses without air conditioning. The idea of a car for every worker (family) sounded like a joke. Nobody really wants to live like they used to. Anyone willing to live like they used to with "only" today's average salary would achieve financial prosperity beyond their imagination. The idea of preserving domestic production of something usually stems from habit. Most of us don't want Israeli-made cars like in the sixties because we are not used to Israeli-made cars. We also don't aspire to Israeli-made televisions like there were in my parents' home (Silora). Again, it's a matter of habit. It's good for countries to produce the things they are most efficient at. As a wealthy country, we will never be the most efficient at things that require a lot of unsophisticated manual labor. On the other hand, as an educated country, if we preserve this, we can always be leaders in things that require high human capital. The advantage is that human capital is rewarded much more than cheap labor.

As always, you are warmly invited to leave comments in the talkbacks or via email/phone rimon@effm.co.il 0545232799

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Economists are often accused of thinking about money/the bottom line, etc., and not about people. 

Another claim is that economics is a rather simple science (if it is one at all) and that anyone with common sense understands it (or, alternatively, that economics is not a science but merely opinions). 

"The El Al "storm" provides an opportunity to discuss economics and its role in our lives. 

With the publication of the financial reports, it turned out that El Al earned quite a bit of money by continuing to fly during the war, while other companies refused to fly to Israel. El Al charged a higher price for the flights and therefore also earned more. 

Early disclosure: I have no connection to El Al other than that I have not yet received a refund for a ticket canceled due to Corona, and I was supposed to receive the credit over a year ago. This doesn't matter, El Al is just an example for the sake of discussion. Many other examples can be found in the field of vegetables, transportation, medicine, or indeed in any other field. 

See, for example, the words of a leading (non-financial) media personality:  

or the newspaper headline (financial):

Intuitively, it's really annoying. Someone is left alone in the market because a war started and then they "take advantage" of the situation and raise prices.

First, should the anger be directed at the company that continued to fly? It's a bit like the beginning of a meeting where a third of the attendees don't show up, and then the manager begins angrily addressing those in front of him, those who *did* arrive. If one wants to be angry at someone, maybe it should be at the companies that stopped flying? Never mind, let's get back to the discussion. We're not here to be angry at anyone (except for whoever hasn't repaid my COVID debt). 

Suppose there are 1,500 people in New York who want to go to Israel, and there are only 500 seats on the flight. How do we decide who gets on the plane?

Accepted methods to do this: 

1. First come, first served. Registration opens. First to buy, first in. 500 inside, 1000 outside. 
2. Raffle. 1500 want. 500 can. Let's do a raffle. 
3. A committee that will determine who really needs to fly right now. In addition, of course, an appeals committee to review the decisions of the first committee. 

Of course, it's possible to combine methods. For example, a lottery only among those deemed eligible by the eligibility committee, and so on. Each method is used in different places. For example, a combination of eligibility and lottery is the basis for providing a discount voucher of over a million shekels in the 'Price for the Occupant" project. Eligibility based on place of residence allows for an income tax discount.

A first-time buyer is inside and others are outside, which is how you buy a movie ticket. 

No matter how we turn things, we'll end up with 1,000 disappointed people. When an economist looks at the problem, they tell themselves, "I know I have to disappoint 1,000 people in the first stage, but I'm looking for a method that:" 
A. Do not only consider the quantity of disappointments, but also the quality of the disappointment. There is a difference between being disappointed by arriving home a day later after a trip, and arriving a day later when, on that very day, your wife announced she was in early labor. 

B. Address the number of disappointed people not only today but in general, and not only today but also the next time a similar event occurs. 

c. Address the quality of life of people even in routine times.

 The emphasis here is that an economist, having been trained in the Social Sciences Department of the university, always strives to maximize welfare, not profit. Want to maximize profit? Go into accounting in the Management Department :). I also recommend this in private life. Seek well-being, not profit. But that's for another article. The economist says to himself, "On one hand, I have a benefit: a direct flight from the US to Israel, and on the other hand, a cost: the price to be paid for the flight." Ostensibly, the flight is a product with uniform benefit for everyone. In practice, for the person whose wife has gone into labor, the flight has a much greater benefit than for the person who was initially debating whether to stay an extra day in New York and for whom the inability to get on the flight is not significant at all. If we decide to allocate tickets by lottery or by "first come, first served" (the first wins, the second cries), it is highly likely that we will not allocate the tickets efficiently. Everyone paid the same, but in terms of happiness/well-being, we could have made a different allocation that would have been much more successful. Even with a committee system, we would probably allocate tickets mainly to those who knew how to speak best, and anyway, by the time the committee makes decisions for 1500 people, the plane will have already departed. We need a method that is fast and efficient for allocating tickets. So far, no method has been found that allocates them more efficiently and maximizes happiness more successfully than the free market system. The price of the ticket rises during a shortage until some people say to themselves, "At this price, I'd rather pay for an extra day in the hotel." This method sometimes seems unfair. Why should the rich get on a flight just because they are rich? Why should a company profit more because there is a war?

It is told about a man whose house a fairy visited. She told him she was ready to grant him any wish, but he should know that his neighbor would receive double. The man did not hesitate for a second and asked the fairy to take out one of his eyes.

So yes, it's unpleasant to hear, but there are people for whom life is easier and more pleasant. Being rich, beautiful, and healthy is better than being poor and sick. In any case, this method of price increase until those for whom the high price is not suitable, whether they are poor or rich, is the method that will likely ensure the greatest number of people the satisfaction (maximization) of pleasure because they will be able to Decide Whether to go to great lengths to catch the flight or give it up and save the money. It’s important to remember that in this case, the painful price hike everyone has been talking about applies to tickets from New York. Each passenger had the option to choose a non-direct flight. For example, flying to Athens at the regular price and then taking a direct flight to Israel from Athens. Even if all flights to Israel tripled in price, a threefold increase on a 200$ flight from Greece to Israel is less painful than a threefold increase on a 1000$ flight from New York to Israel. A non-representative example from the web:

This is a wonderful example. A wealthy person who can afford a business class flight to New York. Decides that he Prefer Not to fly now, but at a later date, thus making room for someone for whom the flight is more important. He could also have decided that instead of business class he would fly economy class or that instead of a direct flight he would take a flight with a layover in Athens (or Dubai or elsewhere). And choose Don't do that. If El Al were forced to fly at low prices, it's likely that this person's and others' ability to choose would be denied. The supply of flights would necessarily be lower, and the question of whether they would be on the flight or not, and even perhaps in which class they would sit, would be the result of a lottery/committee or some other decision-making method.

You can also look at it the other way around. Let's assume that lawmakers implemented price controls on flights so that companies couldn't raise them. It's not at all certain that more people would manage to get from the US to Israel. In fact, it's quite certain that fewer people would manage to do so, and the standard of living would decrease:

1. When the price rises, airlines have more incentive to return to flying. A company willing to fly at the previous price has an incentive to divert flights from other routes to the route that has become more profitable, and perhaps even increase flight offerings, for example by leasing aircraft.
2. Alternatively, if the price is capped, the company may stop flying on this route and move its operations to more profitable routes. You'll say, "Then we'll force it to fly." Okay, so by being forced, it will provide the minimum in terms of service and frequency.
3. Changes to routes, flights, and flight cancellations are something I assume all companies would prefer to avoid. A company that chooses to fly to Israel takes on a risk during this period. Every company expects some compensation for that risk. If, in addition to the geopolitical security risk (boycotts), a regulatory risk is added that interferes with determining the "correct" price for a ticket, there will be fewer companies. We already know that the price we previously thought was the "correct" price for a flight turned out to be much higher than the price charged by low-cost carriers. I have previously written about the Minister of Economy who, when the price of Corona masks rose to twenty shekels per mask, declared he would impose price controls and limit the price to a "correct" price of 3 shekels. Fortunately, that minister did not fulfill his promise, and shortly thereafter, the high price encouraged more importers to bring in masks, and the price dropped to about thirty agorot per mask – a tenth of the "correct" price.

Every time someone tries to set a "correct" or "fair" price, or any other name, they create one of three things:

1. Shortage. In this situation, no matter the price, many are unable to buy the product. A black market is often created.
2. A price higher than the market price that would eventually be set: Companies convince the determining official what the correct price is, and the price does not change with market conditions.
3. Inefficiency: When a company's "appropriate" profit is predetermined, it is encouraged towards inefficiency. A company can always earn less, for example, by raising salaries or ignoring hidden unemployment.

We are partners

We saw above that there are two options for dividing the seats, and in any case, two-thirds of those who want to fly will be disappointed. In the lottery method, one-third buy and one-third remain. In the highest price method, the first third fly, and two-thirds remain. But... there's a small difference: part of the additional revenue the company earns is distributed to the remaining two-thirds and to the rest of the country's citizens through higher taxes. Some also argue that in El Al's case, it's unfair because El Al received a bailout during Corona. Of course, the examples above can be changed to any company you want, including Arkia, which did not receive assistance. But as someone from whose pocket a small part of the assistance came, and who still pays taxes, I should actually be happy that El Al is making a lot of money while I forgo a flight, thus returning what it received more quickly.

You are invited to write your opinion below. For quiet and good days. Rimon: 054-5232799 rimon@effm.co.il

I request to dedicate this article to the memory of Major Nail Fiq Fouarssa from the town of Maghar in the Galilee. Nair, a 43-year-old company commander, was killed on the northern border and left behind a wife and child. The 11th casualty from the Druze community in Iron Swords.

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