Thursday, November 30, 2006

More Free Give Aways Lead to Trouble

A shopping mall in California gave away free gift certificates. They were in balloons that were dropped. The only problem is that 2,000 people showed up for 500 gift certificates. Nine people received minor wounds and an elderly woman went to the hospital as result of the stampede to get the balloons once they were dropped.

Any time the price of a good is 0, you won't have enough to go around and some other way of allocating the good will take place. In this case, people who could move the fastest and knock other people down got the goods.

You can read about this at this site

Tuesday, November 28, 2006

Stephon Marbury: Entrepreneur and Social Activist

NBA star Stephon Marbury has a new shoe that sells for just $14.98. You can read about it here.

He says that kids pay too much for basketball shoes endorsed by big stars (some over $100). He also says that they actually don't cost much to make (under $15). So he wants to make things easier for low-income parents to afford shoes for their kids.

So is this shoe any good? Are kids going for it? Although Stephon Marbury is trying to help people, it is also good old-fashioned capitalism at work. He spotted an opportunity for profit and is under cutting the competition.

Sunday, November 26, 2006

If Prices Are Signals, Are Taxes Noise?

Economists often say that prices are signals. A high price signals to the market that something is relatively scarce. Consumers should minimize their use of it or producers should try to produce more of it. If that happens, the signal has done its job. But what if some "noise" distorts the signal? It won't do its job very well.

In analog and digital communications, signal-to-noise ratio, often written S/N or SNR, is a measure of signal strength relative to background noise. If it is too low, communication is difficult.

What if we called the price-to-tax ratio the signal-to-noise ratio of the economy? It would be a measure of how much a market has been distorted and how poorly the market will perform as a result. A high ratio means the market will work well. As it falls, the market performs more poorly.

Harvard Professor Greg Mankiw issued a challenge to economists to explain the damage done by taxes. It is something that we can show using supply and demand curves, calculating something called deadweight loss triangles. This loss actually grows at a faster rate than the tax grows (impyling that the tax does disproportionate damage). The loss stems from the fact that a tax raises the price, thereby reducing profits for producers since consumers buy less (who are also hurt, obviously paying more and getting less). Sellers and buyers each pay part of the tax, depending on the supply and demand conditions. But that kind of analysis does not work in newspaper columns. He wondered if there was some other way to explain this disproportionate damage without having to explain supply and demand curves and calculating the area of trianlges. Below is what I posted:

"Suppose that the income tax rate is 0%. Then the ratio of taxes paid to disposable income (tax/DI) is 0 since you pay no taxes and 0 divided by anything is zero.

If a tax of 10% is then enacted, the ratio becomes 10/90, since you keep 90% of what you make and pay 10%. This is about .111. So the tax went up 10 percentage points, while the tax/DI went up .111. So they rose about the same amount.

But as the tax rate goes up, very quickly the tax/DI starts rising alot more than the tax rate. If the tax rate goes from 10% to 20%, the tax/DI goes from .111 to .25. If the tax rate then goes from 20% to 30%, the tax/DI goes from .25 to .429. From 30% to 40%, tax/DI goes to .667.

So the tax/DI ratio keeps rising at a faster and faster rate than the increases in the tax rate. Think of this as a noise-to-signal ratio. It can be applied more directly to Mankiw's original question. The more we tax a product, the faster the noise-to-signal ratio increases.

Since economists always say that prices are signals that steer resources to their most efficient use, the greater this noise-to-signal ratio, the less efficient the market will become and this damage accelerates with each incremental increase in price."

What I have below is technical and probably only economists will be interested. But it shows that my noise-to-signal ratio tracks the rise in deadweight loss very well.

Suppose we have a demand line with a slope of -1. Intercept is 11. Supply starts at the origin and has a slope of 1. So equilibrium price is 5.5 and equilibrium quantity is 5.5. An excise tax of 1 raises price to 6 and creates a deadweight loss of .25. My noise-to-signal ratio would be .5 over 5 since the seller pays .5 of the tax and actually receives 5. That ratio is .1. If the tax is 2, the price is 6.5. DWL is 1 (so the tax doubled yet DWL quadrupled). My noise-to-signal ratio would be 1/4.5 = .222. So the tax doubled yet my noise-to-signal ratio more than doubled. In the numbers below, the first column is the tax level, the 2nd is the noise-to-signal ratio and the 3rd is the DWL


If you graph this, up to a tax of 8, the line is almost straight. Beyond that, DWL rises much more slowly as the tax rises. But for the most part, as my noise-to-signal ratio rises the DWL rises at a steady rate.

Thursday, November 23, 2006

Did Forbes Magazine Intentionally Snub the Grand Negus?


Forbes magazine released its annual list of the richest fictional characters (you may have to get past an ad page). Here is their list:

Oliver "Daddy" Warbucks
Montgomery Burns
Scrooge McDuck
Richie Rich
Jed Clampett
Mr. Monopoly
Bruce Wayne
Tony Stark
Prince Abakaliki of Nigeria
Thurston Howell III
Willy Wonka
Lucius Malfoy
Tony Montana
Lara Croft

Where is the Grand Negus, leader of the Ferengi people (from the planet Ferenginar). These are the most succesful entrepreneurs in the galaxy. Surely the Grand Negus has more wealth than Daddy Warbucks. This is an inter planetary incident of galactic proportions.

You can read more about the richest fictional characters here

Tuesday, November 21, 2006

Milton Friedman vs. John F. Kennedy

Below are the first two paragraphs from the introduction to Friedman's 1962 book Capitalism and Freedom. Friedman died last week at the age of 94 (see an earlier entry).

"IN A MUCH QUOTED PASSAGE in his inaugural address, President Kennedy said, "Ask not what your country can do for you - ask what you can do for your country." It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not on its content. Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic "what your country can do for you" implies that government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own responsibility for his own destiny. The organismic, "what you can do for your 'country" implies tht government is the master or the deity, the citizen, the servant or the votary. To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served. He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve. He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.

The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather "What can I and my compatriots do through government" to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect? Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp."

Sunday, November 19, 2006

How to Stop the PlayStation Violence

Just in case you have not heard about the mobs and the shooting associated with PS3 going on sale read PS3 Debuts to Long Lines, Conn. Shooting

People wait in line a long time when these video games go on sale. In effect, the price is too low. So there is a shortage. The number of the PS3 video game consoles that people want to buy at the going price ($500) is much greater than the amount available. Riots and stampedes sometimes break out when things are given away for free. The only difference here is that a price is being paid, but it is still far below the intersection of supply and demand.

To stop people from waiting in line (and encouraging muggers to come by), a much higher price would reduce the quantity demanded. Other products sell every day for more than $500 a pop and there are no problems. The stores should start out selling them at $1,000 and reduce it by $50 or $100 a day to gradually bring them into the market. A few people will buy them the first day at the higher price. But you won't have the lines or the mobs. The stores could even publicize that they will give some of the excess profits to charity. As the price comes down, more people will buy them. But it will be fewer than the mobs we see on the first day now since a few customers will already have theirs and won't need to show up.

How do I know a few people will buy them at such a high price on the first day? The long lines now prove how much people want it. Some will be willing to pay more not to have to stand in line.

Thursday, November 16, 2006

Remembering Milton Friedman, 1912-2006

A great and important economist died today, Milton Friedman (he won the Nobel Prize in 1976). Among his many books are Capitalism and Freedom and the best seller Free to Choose. He was an advocate for free market policies. His ideas on macro polciy have been influential, helping convince central banks and monetary authorities (like the Federal Reserve) to do more to fight inflation. By keeping inflation in check, we all prosper since it makes long-term investing and saving more viable. Many Americans probably don't realize how much we owe to Friedman. It seems like no one recalls that from 1975-1983 both inflation and unemployment averaged 7.7% (inflation has averaged just about 3% since 1983-unemployment averaged 5.75% in the 1990s and 5.11% since 2000).

Here is a brief biographical exerpt of his contributions found at The Conscise Encyclopedia of Economics

"Although much of his trail-blazing work was done on price theory—the theory that explains how prices are determined in individual markets—Friedman is popularly recognized for monetarism. Defying Keynes and most of the academic establishment of the time, Friedman presented evidence to resurrect the quantity theory of money—the idea that the price level is dependent upon the money supply. In Studies in the Quantity Theory of Money, published in 1956, Friedman stated that in the long run, increased monetary growth increases prices but has little or no effect on output. In the short run, he argued, increases in the money supply cause employment and output to increase, and decreases in the money supply have the opposite effect.

Friedman's solution to the problems of inflation and short-run fluctuations in employment and real GNP was a so-called money supply rule. If the Federal Reserve board were required to increase the money supply at the same rate as real GNP increased, he argued, inflation would disappear. Friedman's monetarism came to the forefront when, in 1963, he and Anna Schwartz coauthored Monetary History of the United States, 1867-1960. In it they contend that the Great Depression was the result of ill-conceived monetary policies by the Federal Reserve."

But there is more. This year's winner of the Nobel Prize in Economics, Edmund Phelps, got the award for a contribution that both he and Friedman made (so Friedman could have won two Nobel Prizes). Here is the explanation for Phelps getting the award from The New York Sun

"Mr. Phelps demonstrated in a series of articles published in the late 1960s and 1970 that unemployment could not be reduced or held down by inflating prices. He introduced the concept of "expectations" into the conversation about inflation, arguing that the expected rates of inflation and unemployment play an important role in determining what future inflation and unemployment rates will be: that is, high expected rates of inflation contribute to high inflation. Milton Friedman, a 1976 Nobel recipient and renowned capitalist theorist, advanced a similar theory."

Tuesday, November 14, 2006

Good News on Wages, Income and Wealth

My last entry showed how we were doing well on jobs.

Median family income rose in 2005. The real or inflation-adjusted hourly wage is higher for all income levels than in 1973, according to Janet Yellen, President of the Federal Reserve Bank of San Francisco (she actually used data from Economic Policy Institute). Even the poorest 10% of the workers are 5% higher. That may seem low, especially compared to the 30% jump the top 10% had. But from 1973-95, the bottom 10% actually saw their real hourly wage fall 5%. So things have picked up since then. Go to Yellen Speech and Larger view of graph of wage changes

Real per capita GDP has more than doubled since 1970.

Median real family net worth rose about 31% from 1995-2004 (but only up 1.5% 2001-04). The median removes the bias of the mean or simple average, which could rise simply if those at the very top had large gains. The simple average of real family net worth rose for all income brackets. Go to FED Study

Consumption is up, too. From 1970-2000, real per capita consumption (not counting health care) rose about 85% (and up 8% just since 2000). It is not only the upper income groups who are consuming more. In 1960, the top 20% of income earners spent a little under 6 times more on consumption than the poorest 20%. In 2005 this ratio was just a little above 6. This means both the rich and poor increased their consumption by about the same rate since 1960. Consuming more goods and services contributes to our well being. Got that from the micro principles book by Miller

Sunday, November 12, 2006

Yes, There Are Lots of Jobs Out There

A couple of days ago I discussed jobs, outsourcing and insourcing. Is it hard for Americans to find jobs? Compared to what? I guess historical patterns should be looked at. We could just look at unemployment rates. But that only looks at the number of people out of work relative to the labor force. And you have to be trying to find a job to be in the labor force. So if you gave up looking (became a discouraged worker) you are not even part of the equation. So the data below includes the labor force participation rate.

In 1969, the unemployment rate in the United States was 3.5% But the labor force participation rate (LFP) was just 60.1%. Right now the unemployment rate (UE) is higher, at 4.4% (as of Sept-it will probably be about 4.6% for all of 2006) and the LFP is 66.2% in 2005. So alot more people are trying to find jobs but we still have a pretty low UE. The LFP has actually been as high as 67.1% (from 1997-2000). It will probably average just under 66.2% for all of 2006. For people over 16, that is higher than any year before 1989. Here are the decade averges for LFP starting with the 1950s


So LFP is just a little lower so far this decade than last.

The next set of numbers is the average percent of the entire U.S. population that was employed


The 2000s are just a bit above the 1990s. Now the average unemployment rates


We are not as low as the 1950s and 1960s, but we are much closer to them than we are to the 1970s and 1980s. Now a slightly different breakdown for the 1970s and 1980s

1970 to 1974-5.4%
1975 to 1983-7.7%
1984 to 1989-6.4%

So for all of the attention given to outsourcing and immigrants taking jobs away from Americans, it seems like alot of people are working.


Thursday, November 09, 2006

New Book Uses Economics to Analyze Religion

Can you buy and sell salvation? Well, maybe not. It is probably all up to the big guy upstairs. But there is a new book out called The Marketplace of Christianity by economists Robert B. Ekelund Jr., Robert F. Hébert and Robert D. Tollison. Below are a few brief exerpts from a Chronicle of Higher Education article about it.

"Churches are susceptible to the same corruptions and incentives as any other institutions. "What I think the economic point of view has to offer," one author says, "is that you can say, OK, this is a spiritual institution and it has spiritual goals. And that's all fine and good. On the other hand, it's run by human beings."

The new book extends an argument that the authors developed in a controversial 1996 book, Sacred Trust: The Medieval Church as an Economic Firm (Oxford University Press). (Sacred Trust was written with two more authors, Gary M. Anderson and Audrey B. Davidson.) The scholars argued there that the pre-Reformation Catholic Church exploited its monopoly position just as monopoly industries do, looking for each and every opportunity to raise fees on its trapped "customers."

For example, the authors suggested that the concept of purgatory was invented in the 12th century precisely so the Church could extract financial donations from people who wanted to make sure that their deceased relatives' souls would move from purgatory to heaven. That innovation, the economists argued, allowed the Church to engage in "price discrimination" similar to modern industrial firms. The "doctrine of purgatory," they wrote, "provided the Church an opportunity to enhance its revenues and its power by offering differential prices for assurances of salvation to different demanders."

In The Marketplace of Christianity, the authors move forward into the Reformation, arguing that the Catholic Church reacted to the new "market entrant" — Protestantism — much as AT&T reacted when its own monopoly was broken. Among many other things, they argue, the Church competed by increasing the number of Catholic feast holidays offered in regions where Protestantism closely competed with Catholicism."

For general information about the book, go to

MIT Press

For a review, go to

Publishers Weekly

To read the article from the Chronicle of Higher Education go to

The Supply and Demand of Salvation (you may need to be a subcriber-my SAC students might be able to read it if they are logged into their PALS account or are at a school terminal).

Tuesday, November 07, 2006

Jobs, Outsourcing and Insourcing

Perhaps you have heard about companies laying off workers here in the USA then having low wage workers in some other country do the work. This is usually called "outsourcing." But what if workers in the USA are employed by foreign firms? That is called "insourcing." According to the Organization for International Investment, we had 341,000 insourced jobs here in Texas in 2004 (only New York and California had more). I have not heard any complaints about the jobs Toyota has brought to San Antonio, where I teach.

No one knows if we have more outsourced jobs than insourced jobs. But what happens if there are more outsourced jobs than insourced jobs? Then our unemployment rate goes up. That, however, does not have to be a problem. If our economy falls below what we call the "full employment" GDP, the federal government can, as my students know, increase aggregate demand (AD) or the demand for all goods and services in the economy. This increases GDP, which means more workers will get hired since businesses that produce more goods, ceteris paribus, will hire more workers. So unemployment goes back down. In this case, inflation will not be a problem since the increase in AD happened with GDP being less than the "full employment" GDP (demand shifts to the right in a part of aggregate supply that is relatively flat, so prices rise very little).

If we tried to block outsourcing to protect jobs we would be blocking the gains and benefits we normally see from free trade. Many economists don't think that trade costs us jobs. But if just for the sake of argument that trade did cost jobs, we can get them back, using the policies explained above. Economists Paul Krugman and Douglass Irwin have made this agrument. Krugman suggests cutting interest rates as the way to increase AD.

For information on insourcing in Texas, see Texas is ranked third for 'insourced' jobs

Sunday, November 05, 2006

Should People Be Rewarded For Voting?

A couple of weeks ago, Cynthia Crossen had a good column in The Wall Street Journal about why voter turnout has fallen in the USA. Basically, we don't vote as much as we used to because there is not as much in it for us. That certainly makes sense from an economic perspective, where we assume people act based on incentives. Here are some exerpts:

"Your forebears would be ashamed. In late-19th-century midterm elections, turnout ranged from 65% to 78%. For presidential elections, almost 80% of the nation's eligible Then, in the early 20th century, turnout began falling precipitously. By 1920, less than half of the voting-age population made it to the polls on Election Day.

A 19th-century man (in most states, women weren't enfranchised until 1920) could decide to vote on the spur of the moment, pick up a simple ballot from party headquarters and drop it at the poll on Election Day, where his like-minded neighbors would give him a cheer and perhaps a beer. No preregistration was required, no taxes, no proof of residency, literacy or even citizenship. If, like most people then, he was a party man, his vote might earn him a reward -- a small cash gift or even better, a job with the post office.

Election day was rowdy and festive, a thrilling climax to a political campaign that featured bonfires, barbecues, parades, torchlight rallies and passionate oratory. Politics were social and recreational at a time when there wasn't much other public entertainment.

But many people thought the political parties, which basically ran the elections, were too powerful and corrupt -- that the government should administer elections, and ballots should be secret so party leaders couldn't monitor their flocks' choices. Party symbols, like the elephant and donkey, would no longer appear on ballots, creating a de facto literacy test. The practice of rewarding loyal voters with cash on Election Day was widely outlawed. Competitive exams replaced patronage in awarding government jobs.

And citizens would no longer be able to depend on their party officials to vouch for their eligibility. Voters would have to register themselves in person, well ahead of the election, usually during working hours. Some states even required voters to register every year.

Other broad social trends also damped the electoral spirit. Americans were leaving their small towns, where social ties often reinforced their political biases. Candidates for office began using radio, rather than rallies, to spread their messages, making voters more passive. With the proliferation of other recreational activities -- spectator sports, vaudeville, movies -- Americans no longer needed to look to politics for escape."

Why Don't Americans Like to Vote?
Politics Are Only One Reason
October 16, 2006; Page B1

Thursday, November 02, 2006

Return of the Love Headhunters

Saw an interesting article on Netscape's offbeat news called Disillusioned online daters turn to matchmakers. Here is the beginning of the article:

"Online daters, disappointed by potential partners lying about their age, weight or marital status, are turning to professional matchmakers to find love. Rather than risk taking pot luck online, chief executives, entertainers and politicians are among those paying thousands of dollars to matchmakers to discreetly "headhunt" and vet the perfect partner."

In some cases the fee is as high as $25,000. Besides saying that there is a market for "love," another interesting economic angle might be that by paying a very large fee you are sending a signal to potential mates that you are serious. It is possible that only very serious prospects would pay so much.