Friday, March 24, 2017

How Long Have Economists Known About The Shortcomings Of GDP?

I occasionally hear about people who say we need a better measure of our economic welfare than GDP. But economists are not blind to its shortcomings. The textbook I use for my macro class includes a discussion of these issues. For example, GDP does not take into account how the quality of goods changes over time or how much leisure time we have and how that has changed over time.

There is also production that takes place outside of the market place. Economists have been aware of this since GDP was first created.

See What's the Value of US Household Production? by Timothy Taylor, Managing editor of the Journal of Economic Perspectives. He presents some comments made by economist Simon Kuznets in 1934. Kuznets was the author of the 1934 report to Congress "National Income, 1929-1932." He also won a Nobel Prize in Economics in 1971.

Here is one part of that report, from Mr Taylor's post:

"Kuznets wrote in 1934:
"The volume of services rendered by housewives and other members of the  household toward the satisfaction of wants must be imposing indeed,  when totaled for the 30 million families comprising the population of  this country; and the item is thus large enough to affect materially any estimate of national income. But the organization of these services  render them an integral part of family life at large, rather than of the specifically business life of the nation. Such services are, therefore, quite removed from those which gainfully occupied groups undertake to perform in return for wages, salaries, or profits. It was considered  best to omit this large group of services from national income, especially  since no reliable basis is available for estimating their value. This  omission, unavoidable though it is, lowers the value of national income  measurements as indexes of the nation's productivity in conditions  of recent years when the contraction of the market economy was accompanied by an expansion of activity within the family. ... Thus, the estimates submitted in the present study define income in such a way as to cover primarily only  efforts whose results appear on the market place of our economy.  A student of social affairs who is interested in the total productivity  of the nation, including those efforts which, like housewives' services,  do not appear on the market, can therefore use our measures only with some qualifications.""
Taylor also mentions "The value of household services was equal to about 37% of GDP in 1965, but is currently equal to about 23% of GDP."

Click here to learn more about Kuznets' contributions to economics

Friday, March 10, 2017

The percentage of 25-54 year-olds employed increased in February

One weakness of the unemployment rate is that if people drop out of the labor force they cannot be counted as an unemployed person and the unemployment rate goes down. They are no longer actively seeking work and it might be because they are discouraged workers. The lower unemployment rate can be misleading in this case. People dropping out of the labor force might indicate a weak labor market.

We could look at the employment to population ratio instead, since that includes those not in the labor force. But that includes everyone over 16 and that means that senior citizens are in the group but many of them have retired. The more that retire, the lower this ratio would be and that might be misleading. It would not necessarily mean the labor market is weak.

But we have this ratio for people age 25-54 (which also eliminates college age people who might not be looking for work)

The percentage of 25-54 year-olds employed is 78.3% for February. It was 78.2% in January. It is still below the 79.7% in December 2007 when the recession started.  Click here to see the BLS data. The unemployment rate was 4.7% in February. Click here to go to that data.

Here is the timeline graph of the percentage of 25-54 year-olds employed since 2007. Notice how we had been rising before 2016 but it seems to be flattening out.



Here it is going all the way back to 1948

Thursday, March 02, 2017

What Industries Have The Highest Profit Rates?

See The Most Profitable Industries in 2016 by Mary Ellen Biery of Forbes. A student asked about profit rates in class recently since this comes up when we cover market structures. For example, we expect firms in perfect competition to earn an average profit rate or rate of return because, if they are above average, more firms enter, driving prices and the profit rate back down. When there is not enough competition, firms can stay above average. Excerpts:

"Which U.S. industries are the most lucrative? The answer depends on how it’s measured, but based on pre-tax net profit margin, the top money-makers include specialty service providers in accounting, law, health care and real estate, according to the latest ranking from Sageworks, a financial information company.

Accounting-related companies (accounting, tax preparation, bookkeeping and payroll service companies) are the most profitable, with net profit amounting to 18.3 percent of sales, on average, based on a financial-statement analysis for privately held companies for the 12 months ended June 30.  Legal services firms and real-estate leasing companies are tied for second and third in profitability, with average net profit margins of 17.4 percent. These industries often make the cut for Sageworks’ annual ranking.
Sageworks Most Profitable Industries 2016

“Some businesses tend to have healthier bottom lines by the very nature of the industries that they operate in,” said Sageworks analyst James Noe. Many of the most profitable industries sell services rather than products, he noted, so their operations don’t require raw materials or other up-front costs that would wind up in the middle of their income statements and eat into the bottom line. “They don’t sell or produce finished goods,” he said. “They don’t make the tractors to sell to farmers or they don’t buy groceries to sell to consumers. In other words, you don’t need plastic to provide an audit for a company; it’s just mostly human capital that’s being utilized, and that lends to a high margin generally.”

Among privately held companies across all industries, the average net profit margin for the 12 months ended June 30 was 7.7 percent. Through its cooperative data model, Sageworks collects and aggregates private-company financial statements from accounting firms, banks and credit unions. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private-company financials in order to provide a more accurate picture of the companies’ operational performance."

Here is the 2015 list

Here is another good link on profit rates

Thursday, February 23, 2017

Is it okay to propose to your sweetheart with a diamond that was made in some drab office park?

See Forget the ring: Lab-grown diamonds are a scientist’s best friend by Sarah Kaplan of The Washington Post. It provides not just some of the economics of the industry but also some insights on the techniques of the process and the scientific uses of these lab created diamonds.

One of my classes this week read a chapter about cartels in the book The Economics of Public Issues. It included a short discussion about De Beers and what has happened to their monopoly power in the diamond market. It declined over time as more countries started mining diamonds (they once had a 90% market share and it is now 31%). They also faced anti-trust issues for the ways they tried to control the market (see additional link at the end).

But now lab-grown diamonds are starting to have an impact as well. Here are excerpts from the The Washington Post article:
"At a drab office park in a Washington suburb, in an unmarked building's windowless lab, Yarden Tsach is growing diamonds.

Not rhinestones or cubic zirconia. Diamonds. Real ones. In a matter of eight weeks, inside a gas-filled chamber, he replicates a process that usually takes billions of years in the bowels of the planet. Carbon atom by carbon atom, he creates nature's hardest, most brilliant and — if decades of advertisements are to be believed — most romantic stone."

"Until the middle of the past century, all of the world's diamonds originated more than 1 billion years ago in the Earth's hot, dark interior. Tremendous temperatures and pressures forced the carbon atoms there to link up in a flawless, three-dimensional lattice that would prove incredibly strong and equally effective at bending and bouncing light. The result was a crystal — a gem in the rough that, once cut and polished, would dazzle with unmatched radiance.

Yet getting those stones up to the surface has required an enormous — and sometimes bloody — effort. The environmental impact of diamond mines is so sprawling that it can be seen from space. The humanitarian cost of some gems is also staggering: children forced to work in mines, “blood diamonds” sold to finance wars. The Kimberley Process, which certifies diamonds as “conflict free,” was established in 2003 to stem the flow of these stones into the global market."

"Traditional diamond producers say only a small fraction of diamonds are suspect these days because of steps they've taken to ensure that mines are socially and environmentally responsible. They push back against the appeal of lab-grown stones, suggesting the man-made versions aren't on par with those dug out of the ground. The most recent ad campaign from the Diamond Producers Association, which features hipster couples frolicking amid gorgeous nature scenes, is called “Real is Rare.”

Their argument is unspoken but clear: No one should propose to a sweetheart with a gem that was made in some drab office park."

"Scientists have been creating diamonds since the 1950s, mimicking the conditions deep within the Earth by heating carbon to extreme temperatures while squeezing it in a hydraulic press. But it took them several decades more to cultivate large gem-quality stones. These were still not as large or as clear as the best traditional diamonds, and most were colored yellow or brown from the nitrogen required to stabilize the growing process. Still, the traditional diamond companies were on edge.
“Unless they can be detected,” a Belgian diamond dealer told Wired in 2003, “these stones will bankrupt the industry.”

Today, nearly a dozen companies worldwide produce diamonds that are all but indistinguishable from mined stones"

"Sales of lab-grown stones make up about 1 percent of the global commercial diamond market, but a 2016 report from investment firm Morgan Stanley suggested that proportion could jump to 7.5 percent by the end of the decade. In one unlikely scenario, analysts said, lab diamonds might become so ubiquitous that the entire traditional market collapses.

After all, that market depends on sentiment and scarcity. The combination is what made De Beers's famous “a diamond is forever” campaign so potent. It turned diamonds into the ultimate symbol of eternal love, stones that were to be treasured and never — perish the thought — resold. The genius strategy has helped to ensure diamond companies control supply.

But lab-grown jewels shatter the illusion. They can be made on demand, in a matter of weeks, and they cost an estimated 10 percent to 40 percent less than a gem that comes out of the ground. Technology being what it is, it's likely they'll get even cheaper."

Here is the additional link:

De Beers – Rulers of the Diamond Industry:The Rise and Fall of a Monopoly by William Yu of The University of California at Berkeley

Thursday, February 16, 2017

San Antonio cracks top 25 on U.S. News and World Report's "Best Places to Live"

Click here to read the article. Excerpts:
"San Antonio is considered the 23rd best place to live in the United States, according to U.S. News and World Report.

The Alamo City cracked the top 25 in the magazine's 2017 edition of its Best Places to Live in the U.S. list, which ranks major metro areas on a number of factors including unemployment, annual household income, cost of living, education, health care and migration.

The magazine said the nation's seventh-largest city is "as comfortable as an old pair of jeans. It offers big-city amenities and world-renowned attractions coupled with a relaxed and inviting atmosphere." It also said that San Antonio residents benefit from living in a destination city in that they have year-round access to attractions such as Six Flags Fiesta Texas and SeaWorld San Antonio, while also being complimentary of its arts and culture, citing the Majestic Theater, the Tobin Center for the Performing Arts and the McNay Art Museum, along with the Alamo and the rest of the historic Spanish missions. The report on San Antonio also noted that the missions have been designated a World Heritage Site by UNESCO."

"Here are the top 10 cities on this year's list:
  1. Austin
  2. Denver
  3. San Jose, California
  4. Washington, D.C.
  5. Fayetteville, Arkansas
  6. Seattle
  7. Raleigh-Durham, North Carolina
  8. Boston
  9. Des Moines, Iowa
  10. Salt Lake City"
I'm usually skeptical of any "best places" lists because if those places are so great, more people will move there, driving up the cost of living. Then it might not be such a great place.

Suppose that San Francisco is 6 times better to live in than Omaha, Nebraska (as of 2015). That is about how many times higher the median home price is in San Francisco. There is definitely more to do and more great sights in San Francisco, but it costs alot more to live there.

If SF were so great, everyone would leave Omaha and head to SF. But they don't. This is where  the "Indifference Principle"comes in.

If people really believe that SF is better many of them go there, but things won't be very fun due to the crowds (which reminds me of something that Yogi Berra said about a restaurant: "nobody goes there anymore, it's too crowded").

Prices of everything will be bid up. This also illustrates what economist Steven Landsburg calls the "Indifference Principle." "Except when people have unusual tastes or unusual talents, all activities must be equally desirable."

This applies to SF. Once everyone sees it as a good deal or great place, they start going there. Only people with unusual tastes will really enjoy it. That is, you will have to like what that SF has to offer alot more than the average person or the crowds and congestion and high prices will erode your enjoyment. It won't be any better than anywhere else to live. Other places will be just as desirable.

If home prices were only twice as high in SF, then lots of people will move there because it is such a great place. But then that drives up the home prices and eventually there is no advantage to moving to SF. All of its extra benefits are eaten up in higher costs of living. 

Friday, February 10, 2017

A Special Valentine's Message On Romantic Love

The first one is Researchers at AAAS Annual Meeting Explore the Science of Kissing. The following quote gives you an idea of what it is all about: "Kissing, it turns out, unleashes chemicals that ease stress hormones in both sexes and encourage bonding in men, though not so much in women." I guess economists call this "interdependent utility functions." Meaning that what brings one person pleasure brings brings the other person pleasure, and vice-versa.

The other is Cocoa Prices Create Chocolate Dilemma. The article opens with "Soaring cocoa prices are creating a Valentine's Day dilemma for chocolate makers. They don't want to raise retail prices when recession-weary consumers are trying to limit their spending." The problem is crop diseases in Ivory Coast and Ghana. You might need to be a WSJ subscriber to read the whole article.

Here is a new article from yesterday's San Antonio Express-News (2-13-2011). Romance in bloom at workplace: Survey indicates 59% have taken the risk-filled leap. It seems like many people admit to having a romance at work and/or meeting their spouse at work. So what starts out as economic activity leads to some other needs being met.

Now the economic definition of romantic love.

 Abstract: "Romantic love is characterized by a preoccupation with a deliberately restricted set of perceived characteristics in the love object which are viewed as means to some ideal ends. In the process of selecting the set of perceived characteristics and the process of determining the ideal ends, there is also a systematic failure to assess the accuracy of the perceived characteristics and the feasibility of achieving the ideal ends given the selected set of means and other pre-existing ends.

The study of romantic love can provide insight into the general process of introducing novelty into a system of interacting variables. Novelty, however, is functional only in an open system characterized by uncertainty where the variables have not all been functionally looped and system slacks are readily available to accommodate new things. In a closed system where all the objective functions and variables must be compatible to achieve stability and viability, adjustments in the value of some variables through romantic idealization may be dysfunctional if they represent merely residual responses to the creative combination of the variables in the open sub-system."

The author was K. K. Fung of the Department of Economics, Memphis State University, Memphis. It was from a journal article in 1979. More info on it is at this link. The entire article, which is not too long, can be found at this link.

Then there was this related article: Love really is blind, U.S. study finds. Here is an exerpt:

"Love really is blind, at least when it comes to looking at others, U.S. researchers reported on Tuesday.

College students who reported they were in love were less likely to take careful notice of other attractive men or women, the team at the University of California Los Angeles and dating Web site eHarmony found.

"Feeling love for your romantic partner appears to make everybody else less attractive, and the emotion appears to work in very specific ways in enabling you to push thoughts of that tempting other out of your mind," said Gian Gonzaga of eHarmony, whose study is published in the journal Evolution and Human Behavior.

"It's almost like love puts blinders on people," added Martie Haselton, an associate professor of psychology and communication studies at UCLA."
More links:

How to Be a Better Valentine, Through Economics by economist Paul Oyer.

Here’s what science says is the secret ingredient to making your love spark 

Can Giving Up Money And Material Things Lead To More Love?

What Do Men In China Need To Get A Bride?

Adam Smith, Marriage Counselor

A Special Valentine's Message On Romantic Love

Can You Put A Price Tag On Love?

Do Opposites Attract? Not Usually, Except Maybe When It Comes To Money

Return of the Love Headhunters

eHarmony To Provide Personal Counselors To Help You Find Mr. Or Ms. Right

Economist Paul Zak, aka Dr. Love (he studies the brain with "neuroeconomics")

This is your brain on love   (brain scans and biology seem to confirm the economic definition given above)

Dollars & Sex: The Blog of Economist Marina Adshade

Do Women Really Value Income over Looks in a Mate? by Marina Adshade

Friday, February 03, 2017

The percentage of 25-54 year-olds employed was unchanged in January

One weakness of the unemployment rate is that if people drop out of the labor force they cannot be counted as an unemployed person and the unemployment rate goes down. They are no longer actively seeking work and it might be because they are discouraged workers. The lower unemployment rate can be misleading in this case. People dropping out of the labor force might indicate a weak labor market.

We could look at the employment to population ratio instead, since that includes those not in the labor force. But that includes everyone over 16 and that means that senior citizens are in the group but many of them have retired. The more that retire, the lower this ratio would be and that might be misleading. It would not necessarily mean the labor market is weak.

But we have this ratio for people age 25-54 (which also eliminates college age people who might not be looking for work)

The percentage of 25-54 year-olds employed is 78.2% for January. It was also 78.2% in December. It is still below the 79.7% in December 2007 when the recession started. . Click here to see the BLS data. The unemployment rate was 4.8% in January. Click here to go to that data.

Here is the timeline graph of the percentage of 25-54 year-olds employed since 2007. Notice how we had been rising before 2016 but it seems to be flattening out.


Here it is going all the way back to 1948