Monday, December 28, 2009

Are Homemade Gifts Better Or More Special?

That is what world renown economist Daniel Hamermesh says. The article is A homemade Christmas. Here is the relevant passage, which says that making your gifts is
"...an option that is not only cheaper but shows care and thoughtfulness, said Daniel Hamermesh, an economics professor at the University of Texas at Austin and author of “Economics Is Everywhere.” Hamermesh said studies have shown gifts typically cost more than they are worth to the people who receive them, information that should, but often doesn't, tone down frenzied Christmas shopping behavior.

“There is too much compulsion (at Christmas) to buy something nobody wants,” Hamermesh said. “If the point is to ... show that you care, you would do better (to make something) than spend the money.”"

The point Hamermesh makes about gifts costing more than they are worth to the people who receive them is something I discussed a few weeks ago with Is Christmas Gift Giving Inefficient?.

But just because you take the time to make something does not necessarily show that you care more than if, say, you took the time to earn extra money so you could buy a nice gift for someone. Why would taking time to earn money to buy a gift be less worthy or special than taking time to make a gift? And what if you are not good at hand crafts? Or what if your time is valuable? Do we really want President Obama taking a long time to sew his wife a dress?

Economist Steven E. Landsburg had some interesting things to say about gift giving in his book The Armchair Economist: Economics & Everyday Life. From chapter 2:
"I am not sure why people give each oher store-bought gifts instead of cash, which is never the wrong size or color. Some say that we give gifts because it shows that we took the time to shop. But we could accomplish the same thing by giving the cash value of our shopping time, showing that we took the time to earn the money.
My friend David Friedman suggests that we give gifts for exactly the opposite reason-because we want to announce that we did not take much time to shop. If I really care for you, I probably know enough about your tastes to have an easy time finding the right gift. If I care less about you, finding the right gift becomes a major chore. Because you know that my shopping time is limited, the fact that I was able to find something appropriate reveals that I care. I like this theory."

I think it might also mean that you cared enough to get to know the person in the first place. Dilbert had a funny strip on Christmas about this. Here is what happens:

Panel 1
Dilbert: Merry Christmas. Here's a hundred bucks.
Dogbert: And here's a hundred bucks for you.

Panel 2
Dilbert: We could save another step by setting up an electronic transfer with an annual recurring option.
Dogbert: Excellent.

Panel 3
Dogbert: Or we could not give gifts.
Dilbert: Hush your crazy talk.

Dilbert.com

Thursday, December 17, 2009

Colleges And Universities Try To Be Like Hogwarts. What Would Carl Jung Say?

There was an article in the New York Times recently about how schools tell prospective students how they are just like Hogwarts. It was Taking the Magic Out of College by By LAUREN EDELSON. Here are some things she mentioned about her visits to colleges:
"[at one school they play] a flightless version of J. K. Rowling’s Quidditch game — broomsticks and all."

"So I was surprised when many top colleges delivered the same pitch. It turns out, they’re all a little bit like Hogwarts — the school for witches and wizards in the “Harry Potter” books and movies. Or at least, that’s what the tour guides kept telling me."

"During a Harvard information session, the admissions officer compared the intramural sports competitions there to the Hogwarts House Cup. The tour guide told me that I wouldn’t be able to see the university’s huge freshman dining hall as it was closed for the day, but to just imagine Hogwarts’s Great Hall in its place."

"At Dartmouth, a tour guide ushered my group past a large, wood-paneled room filled with comfortable chairs and mentioned the Hogwarts feel it was known for. At another liberal arts college, I heard that students had voted to name four buildings on campus after the four houses in Hogwarts: Gryffindor, Ravenclaw, Hufflepuff and Slytherin."

"[In] Cornell’s fall 2009 quarterly magazine, [it says] that a college admissions counseling Web site had counted Cornell among the five American colleges that have the most in common with Hogwarts. Both institutions, you see, are conveniently located outside cities. The article ended: “Bring your wand and broomstick, just in case.”"

"I’m not the only one who has noticed this phenomenon. One friend told me about Boston College’s Hogwartsesque library, another of Colby’s “Harry Potter”-themed dinner party. And like me, my friends have no problem with college students across the country running around with broomsticks between their legs, trying to seize tennis balls stuffed into socks (each one dubbed a snitch) that dangle off the backs of track athletes dressed in yellow.""

In the same issue of the NY Times, there was a review of a book by the famous psychologist Carl Jung. The review was titled The Symbologist by KATHRYN HARRISON. The book by Jung is titled THE RED BOOK: Liber Novus. One of the passages from the book was was about Jung's belief in the "deep subliminal connections between individual fantasies and world events."

Mixing fantasy and reality. Sounds like what these colleges and universities are doing by comparing themselves to Hogwarts.

Also, since my semester ended, it will be a few weeks until I post again.

Sunday, December 06, 2009

The Ugly Truth About Pirates They Don't Show You In Those Johnny Depp/Keira Knightley Movies

You probably know that there are real pirates, with many of them operating off the coast of Somalia. Their economic impact is particularly interesting. Read Pirate Payoffs Feed Big-Money Lifestyle in Somalia: Big houses, fast cars, easy drugs: Ransom-fed lifestyle creates problems in Somali towns.

For one, the money pouring in is driving up prices. A pair of shoes that used to cost $20 now costs $50, for example. It also causes social problems with so many pirates using alcohol and drugs. "Teenagers threaten their parents that they will join the pirates if they don't get their way." How widespread and accepted is piracy? This quote says alot:

"The price of clothes, shoes and cosmetics is climbing, said Anshur Kamil, a businessman. Pirates don't even have to pay upfront. Those holding ships hostage that haven't yet received ransom can buy goods on credit — at elevated prices — and settle up their debts when the ransom money comes in, villagers say."

Can you imagine walking into a store and buying a pair of Gucci loafers and an Armani suit and telling the clerk "just put it on my tab, I'm good for it because I'm a pirate?" The article also implies that pirates are able to buy brides with their money.

Pirates have set up a stock exchange to find investors. See Somali sea gangs lure investors at pirate lair. This article was discussed at The Marginal Revolution.That article also mentions that it is not hard to attract young men to piracy since there are few legitimate economic opportunities in the area.

Economist Peter Leeson has written a book called The Invisible Hook: The Hidden Economics of Pirates.

Although the Somali pirates make millions of dollars, it still pales in comparison to what the movies make. Pirates of the Caribbean: At World's End took in about $960 million worldwide at the box office while costing about $150 million to make. Then it made about $295 million in DVD sales. And that was just one of the movies.

Friday, December 04, 2009

Is Christmas Gift Giving Inefficient?

In 1993, Yale economics professor Joel Waldfogel published an article titled The deadweight loss of Christmas. The idea is that gift recipients often place a lower dollar value on the item than its actual price. Maybe someone buys you a tie for $20 that you would pay no more than $5 for. So the inefficiency or deadweight loss is $15. Waldfogel estimated that in 1992, the inefficiency or deadweight loss in the United States from Christmas was anywhere between $4 billion and $13 billion.

Not everyone agrees with this. The article Christmas gift giving: a deadweight loss? from Business World mentions:

"the process of gift giving adds value to a gift over and above its retail price. Giving a gift instead of cash says the giver bothered to know what the receiver might want. There are times, in fact, when gifts that weren’t wished for turn out to be most valued. A thing one would not have thought of buying himself might end up a pleasant surprise. Or, an item the recipient might have had money to spend on but never bought for frugal reasons could also turn out to be a gift valued more than its price."

An article from the Economist magazine, "Is Santa a deadweight loss?: Are all those Christmas gifts just a waste of resources?, raised the question "So should economists advocate an end to gift-giving?" Here is the answer they provided:
"There are a number of reasons to think not. First, recipients may not know their own preferences very well. Some of the best gifts, after all, are the unexpected items that you would never have thought of buying, but which turn out to be especially well picked. And preferences can change. So by giving a jazz CD, for example, the giver may be encouraging the recipient to enjoy something that was shunned before. This, and a desire to build skills, is presumably the hope held by the many parents who ignore their children's pleas for video games and buy them books instead.

Second, the giver may have access to items—because of travel or an employee discount, for example—that the recipient does not know existed, cannot buy, or can only buy at a higher price. Finally, there are items that a recipient would like to receive but not purchase. If someone else buys them, however, they can be enjoyed guilt-free. This might explain the high volume of chocolate that changes hands over the holidays.

But there is a more powerful argument for gift-giving, deliberately ignored by most surveys. Gift-giving, some economists think, is a process that adds value to an item over and above what it would otherwise be worth to the recipient. Intuition backs this up, of course. A gift's worth is not only a function of its price, but also of the giver and the circumstances in which it is given.

Hence a wedding ring is more valuable to its owner than to a jeweller, and the imprint of a child's hand on dried clay is priceless to a loving grandparent. Moreover, not only can gift-giving add value for the recipient, but it can be fun for the giver too. It is good, in other words, to give as well as to receive."

Thursday, December 03, 2009

Important Notice About The Final Exam For My Students

As I said in class and on the final test taking guide, the 2nd half of the final will be over the "study questions for final" But there will be 3-4 questions on the 2nd half from the last 4 chapters. Please pass this along to anyone in the class.

For ECON 2301 this means chapters 14-17.

For Econ 1301 this means chapters 14, 15, 17, and "Last Chapter"

Wednesday, December 02, 2009

Can Testosterone Help Women Earn More Money?

You may have heard that women get paid less than men. How big the difference is not always clear. Read Women and the Pay Gap. Now there is research on how testosterone affects pay. This is from the University of Chicago alumni magazine Risky business.

"In general, women tend to avoid the risks that men undertake more frequently, but testosterone may provide an equalizer. Studying the connection between testosterone and high-risk financial careers, Chicago Booth economist Luigi Zingales, comparative human-development professor Dario Maestripieri, and Northwestern University Kellogg School economist Paola Sapienza found that the hormone played an important role for women. The researchers began with a sample of 500 Chicago Booth MBA students; 36 percent of the women chose jobs like investment banking or trading, compared with 57 percent of the men. Higher testosterone levels correlated with greater risk-appetite in women, though not in men. But in men and women with similar testosterone levels, risk-related gender differences disappeared. The findings appeared in the August 24 Proceedings of the National Academy of Sciences."

Sunday, November 29, 2009

Looks Like Some Pretty Good Capitalists Run The Congress

Go to Policy, portfolios and the investor lawmaker: As stock ownership rises in Congress, experts warn of potential ethics concerns from the Washington Post this past week.

Most members of the House of Representatives own stock. The article says "The investments increasingly put lawmakers in the position of voting or advocating on matters that could affect their personal wealth, whether the lawmakers realize it or not."

Politicians who rarely agree on anything might be found to be voting for the same bill if it matters to their pocket book. They are supposed to report what they own but the drag their feet and the records are not very well computerized, so they are harder to analyze. And they are good at this investing stuff. From 1985-2001, the legislators beat the market by .55 basis points a month. In a year that means 6.6 percentage points above the market.

In that time, the market (DJIA) gained just a bit under 1% a month (from 12-31-85 to 12-31-2001). It went from 1,546 to 10,021. So, if you had $1,546 in the market it became worth $10,021. But, if you were a member of Congress, it rose about 1.5% a month and you would have ended up with $26,970. Each dollar in the market grew into $6.48 while for the lawmakers it grew into $17.44.

"The researchers, whose findings were presented at a congressional hearing in July, said the statistics suggest that those unusual returns must be based on lawmakers' access to "government and important social contacts.""

But legislators acting on their self interest is not new. Charles Beard wrote about this in his book An Economic Interpretation of the Constitution of the United States. He argued that self-interest was a big force in how the framers wrote the constitution.

In the 1950s, Forrest McDonald We the People : The Economic Origins of the Constitution, in attempt to refute Beard. But more recently, economic historian Robert A. McGuire wrote a book called To Form a More Perfect Union: A New Economic Interpretation of the United States Constitution. He used modern statistical analysis to show that the Beard thesis may be legitimate.

My students might recall something like this that I talk about on the first day of the semester. Congressmen in the early 1790s voted on the "Funding and Assumption Act" based on how much money they would receive if that bill passed. The bill paid back all of the debts from the Revolutionary War at full value (they were not getting paid back before the Constitution was passed because under the Articles of Confederation all states had to agree to a tax increase-this did not happen much so taxes were never raised to pay back the money the government borrowed to finance the war). But under the Constitution if both the House and the Senate passed a tax increase and the president signed it, it became law.

The debts were securities or bonds. Some congressman owned them. I found how much about half the congressmen owned in these bonds from McDonald's book. The ones who voted yes on the bill had an average of about $6,000 while the ones who voted no had about $700. So it is possible that money influenced the vote.

Friday, November 27, 2009

I Have Alot To Be Thankful For Since I'm Soon Going To Be Rich!!

I got this email a few days ago and it looks like it is from a famous economist. Anybody have any suggestions as to what I should do with $10 million?

"Chairman Federal Reserve Bank New York

We received the instructional letter to credit $10.5million to your account. We wish to let you know that all charges are waived for the sucess of this contract fund to be credited into the your account.

Your respond is required to enable us credit your account without any further of delay and you are also required to get back to us with the reconfirmation of your banking particulars for we to know if what we have in file is correct and to avoid crediting your fund to wrong account.

Please be fast on this matter.

Regards,
Bzen S. Bernanke"

Wednesday, November 25, 2009

Senators And Representatives Get Paid To Talk, But Do We Always Know Who Is Paying Them?

These legislators make lots of speeches and ask questions at congressional hearings. That is part of their job and maybe they like doing that sort of thing (which might explain why they ran for office in the first place). So you might assume that the taxpayers are paying them to talk. But maybe not. The New York Times had an article recently called In House, Many Spoke With One Voice: Lobbyists’. Here is the intro:

"In the official record of the historic House debate on overhauling health care, the speeches of many lawmakers echo with similarities. Often, that was no accident. Statements by more than a dozen lawmakers were ghostwritten, in whole or in part, by Washington lobbyists working for Genentech, one of the world’s largest biotechnology companies. E-mail messages obtained by The New York Times show that the lobbyists drafted one statement for Democrats and another for Republicans."

It later says

"In recent years, Genentech’s political action committee and lobbyists for Roche and Genentech have made campaign contributions to many House members, including some who filed statements in the Congressional Record. And company employees have been among the hosts at fund-raisers for some of those lawmakers."

So it looks like this company is actually paying the representatives to say what they want them to say. This reminds me of an Associated Press (AP) article from way back in 1993 (before the internet was widespread). It described how political action committees (PACs) were requiring senators and representatives to sign pledges of what their positions were on various issues before they got their campaign contributions. Of course, the PACs would not be giving money to politicians on the "wrong" side of the issue. It sounded like vote buying back then and it still does. The article was "Interest Groups Use Pointed Questionnaires As Lobbying Tactic" by Jim Drinkard and was issued by the AP on March 26, 1993. I don't think it is online anywhere.

Friday, November 20, 2009

The Mortgage Delinquency Rate Hits An All-Time High

In two of my classes this week we discussed the housing crisis over the last few years. The latest news is reported in Mortgage loans: Record number are late. According to the article, "In the third quarter, 9.64% of all mortgage loans were delinquent..." and "The combined percentage of loans in foreclosure or at least one payment past due was 14.41% on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey."

In a related article Foreclosure plague: It's spreading, McAllen, Texas is reported to have the fastest growing rate. And with the high unemployment rate, the foreclosure and delinquency rates could go higher. To see a map of the unemployment rates for each state, go to Where does your state rank?

Wednesday, November 18, 2009

Leggo Your Eggo: There's a Waffle Shortage

That is the title of a news article which you can read here. According to the article, "Kellogg is rationing its Eggo products due to flooding and equipment problems at two bakeries. The shortfall could last through mid-2010." So the solution? The article says "Remaining inventory will be rationed to stores across the country "based on historical percentage of business.""

Why not let the price rise? That way there won't be lines of people waiting to get them or people calling the stores or the stores having to establish waiting lists. Are stores going to set limits on how many you can buy? What if you are the first person in the store, are they going stop you from buying all that is there?

Three years ago strange things happened when Play Station 3 came out. Instead of charging a higher price at first, it was at the normal price. So there were long lines and certain people got first dibs. You will be surprised who. Read about that at this link.

Sunday, November 15, 2009

Late Breaking News Bulletin: The depression is over! We're out of the red!

So said an enthusiastic character in the 1934 movie Stand Up and Cheer!. Here is the video clip of the man getting worked up about how everything has turned around. The text is below the clip in case the sound is not good enough.



Here is a link to the video file: We're out of the red!

Mr. Cromwell, I've got great news for you.
The depression is over.
Over, do you realize that.
Factories are opening up.
Men are going back to work by the thousands.
Our farm products are being sold the world over.
Savings accounts are heaping up.
The banks are pouring out new loans.
There is no unemployment.
Fear has been banished.
Confidence reborn.
Poverty has been wiped out.
Laughter resounds throughout the nation.
The people are happy again.
We're out of the red.

Here is the movie's IMBD synopsis: "President Franklin Roosevelt appoints a theatrical producer as the new Secretary of Amusement in order to cheer up an American public still suffering through the Depression. The new secretary soon runs afoul of political lobbyists out to destroy his department." I guess they were trying to make people feel better. Unemployment was 25% in 1933. This was one of the first big roles for Shirley Temple.

Friday, November 13, 2009

Get out of here and get me some money too

That is a line from a song that Peggy Lee (1920-2002) is well known for singing. Below is a video of her singing it with Benny Goodman (1909-86) and his orchestra. KRTU played it on the radio this morning and I have been meaning to post this for awhile. The lyrics are printed below the video.



The video is online at Peggy Lee - Why Don't You Do Right (1943). Here are the lyrics which I got at Why Don't You Do Right.

Why Don't You Do Right

You had plenty money, 1922
You let other women make a fool of you
Why don't you do right, like some other men do?
Get out of here and get me some money too

You're sittin' there and wonderin' what it's all about
You ain't got no money, they will put you out
Why don't you do right, like some other men do?
Get out of here and get me some money too

If you had prepared twenty years ago
You wouldn't be a-wanderin' from door to door
Why don't you do right, like some other men do?
Get out of here and get me some money too

I fell for your jivin' and I took you in
Now all you got to offer me's a drink of gin
Why don't you do right, like some other men do?
Get out of here and get me some money too
Why don't you do right, like some other men do?
Like some other men do

Tuesday, November 10, 2009

For People Who Still Have Jobs, Women's Wages Have Risen Faster Than Men's During The Recession

This was reported in a Wall Street Journal article called Women's Wages Outpaced Men's During Recession. The increase in median wages for women was 3.2% while it was 2.0% for men. The article gives a pretty thorough run down on how various demographic groups have done during the recession. Men now have an 11% unemployment rate while women have 8.4%.

Sunday, November 08, 2009

Being Happy Might Hurt Your Bottom Line

This came up in two articles recently. The first is Don’t Worry, Be Happy: The Warranty Psychology. The article suggests that people are very happy when they make a big purchase like a refrigerator. So they are willing to pay alot for an extended warranty, especially if they got a discount on the product. But the price of the warranty is often too high. If a product has a 10% chance of failure, you don't want to pay more than 10% of the product price for the warranty. But people often do. To avoid this, the article concludes with "The lesson is simple: Stay grouchy while shopping."

The other article is Sadder But Wiser. It discusses research by Joseph Forgas, a professor of psychology at Australia's University. The article says "Sometimes, he finds, it pays to be sad." Also, " a bad attitude makes us more critical of what we are told and less easily duped."

Here is more:

"Not only can a mild malaise keep us from being bamboozled, but we are more perceptive and have sharper, more accurate recall when we're down in the dumps. The professor tested people on their ability to remember items viewed on a cluttered table. On a dreary, drizzly day, people "had better eyewitness memory for what they saw" than those tested "on a bright, sunny day.""

"The Icelandic mood may have been knocked down a peg or two by the collapse of the country's economy, but that may not be such a bad thing. Could it be that Iceland's positive disposition is what got it into such a mess in the first place? If a dour mood dispels credulity, then where better to peddle monumental scams than in a nation awash in good feelings?"

"The method-acting crowd long ago perfected the technique of dredging up memories of life's awful moments to produce compelling stage tears. A similar technique could have business applications. A maudlin and well-timed musing on the death of your childhood dog could save the company millions.

On the flip side, a salesman looking to close a deal should do his best to induce a warm wave of good feelings. Remember, a happy customer is a rather less critical customer. The customer may want to adopt a crotchety counter-strategy akin to the old saw about not going grocery shopping when hungry: Don't do any sort of shopping when you're cheery."


One more thing. Don't have a nice day.

Friday, November 06, 2009

Sports, Economics and Politics Collide When Government Officials Get World Series Tickets

The article is Lawmakers Score Ticket Deal: Baseball Sells Officials Scarce World Series Seats at Face Value, Far Below Going Rate. Why would teams give up profit? My guess is that something else is in the offer, something only politicians can trade. Here is the intro to the article:

"Tickets for Wednesday's World Series game are nearly impossible to come by at face value. But that isn't the case if you are a member of Congress or one of their aides.

Federal lawmakers and people who work for them have gotten their hands on scores of tickets to the sold-out World Series games this year between the New York Yankees and Philadelphia Phillies courtesy of a perk not available to the public.

Major League Baseball and the teams sell a limited number of prime seats to lawmakers and congressional aides at face value, often hundreds of dollars less than the going rate.

The league has sold about 75 World Series tickets to a total of 15 lawmakers or aides in the past week, according to Pat Courtney, a spokesman for Major League Baseball. Mr. Courtney declined to identify which lawmakers and aides sought the tickets.

Because the recipients pay for the tickets, the offer complies with ethics rules for Congress and the executive branch. The arrangement, however, highlights what some ethics watchdogs say is a loophole in recently tightened congressional ethics rules, which ban officials from receiving just about any gifts.

"Anytime you have access to something that regular people don't have, it should be considered a gift," said Melanie Sloan, executive director of the nonpartisan Citizens for Responsibility and Ethics in Washington. "Regular people can't call the Major League Baseball office and get tickets.""

Wednesday, November 04, 2009

Want Your Neighbors To Know How Much You Made Last Year And Your Net Worth? Move To Norway

Every year the govenment publishes the "skatteliste" or "tax list" "to uphold the country's tradition of transparency." Some people say that this is the way democracy is supposed to work. But not everyone agrees. For example

"Besides providing criminals with a useful tool to find prime targets, he said the list generates playground taunts of my-dad-is-richer-than-your-dad.

"The children of people with low wages are being teased about it in the schools," Stordrange said Thursday. "People with low salaries are being met with comments at the grocery store, 'How can you live on these low wages?'""

The article is Lutefisk and loot: Tax records open in Norway

Sunday, November 01, 2009

Some Women Actually Want Polygamy Legalized

The reasons seem to be mainly economic. It was in a
New York Times article. It was an actually an exerpt of another, longer article (link below). Here is what the Times article said:

"Women in Siberia are lobbying to legalize polygamy, a Cambridge University anthropologist reports in The Guardian in London. The critical issue is demography. Population is falling and there are fewer men than women. Caroline Humphrey, the anthropologist, said: “Women say that the legalization of polygamy would be a godsend: it would give them rights to a man’s financial and physical support, legitimacy for their children, and rights to state benefits.” Meanwhile, some Russian nationalists claim that introducing polygamy in the country would provide husbands for “10 million lonely women” and fill Mother Russia’s cradles."


The more in depth article, which discusses research by an anthropologist is 'Half a good man is better than none at all: 'A study of polygamy in Russia suggests we have a lot to learn about how to beat the recession.

Friday, October 30, 2009

Structural Unemployment In The News

In my principles of macroeconomics courses and my survey of economics course we have covered the different types of unemployment. They are seasonal, structural, frictional and cyclical. One of the articles is called Even as layoffs persist, some good jobs go begging. Here is the intro:

"In a brutal job market, here's a task that might sound easy: Fill jobs in nursing, engineering and energy research that pay $55,000 to $60,000, plus benefits.

Yet even with 15 million people hunting for work, even with the unemployment rate nearing 10 percent, some employers can't find enough qualified people for good-paying career jobs.

Ask Steve Jones, a hospital recruiter in Indianapolis who's struggling to find qualified nurses, pharmacists and MRI technicians. Or Ed Baker, who's looking to hire at a U.S. Energy Department research lab in Richland, Wash., for $60,000 each.

Economists say the main problem is a mismatch between available work and people qualified to do it. Millions of jobs with attractive pay and benefits that once drew legions of workers to the auto industry, construction, Wall Street and other sectors are gone, probably for good. And those who lost those jobs generally lack the right experience for new positions popping up in health care, energy and engineering."


The "mismatch between available work and people qualified to do it" sounds very much like how I define structural unemployment in class. This article uses one of the kinds of structural unemployment I discuss in class, when there is a fall in demand for the good or service you help produce. That is what many people face.

Another kind of structural unemployment is when you are replaced by a machine or technology. There is a computer program called "Stats Monkey" that will write a story about a baseball game when it is fed the stats from the boxscore and the complete play-by-play of the game. You can read about it at The Robots Are Coming! Oh, They’re Here. So it looks like some sports writers will be losing their jobs. This is okay as long as computer programs can't write blog entries:)

Wednesday, October 28, 2009

Crime and Punishment: Required Reading in My Economics Class

Okay, it is not the book Crime and Punishment by Fyodor Dostoevsky (this is a link to the entire book online). I will come back to this book. My students are required to read a chapter by this name from the book The Economics of Public Issues. It is only 5 pages long while the famous book is over 500.

One of the interesting things mentioned in this chapter is research by Steven Levitt. It deals with the question of whether or not more police officers means less crime, everything else being held constant. The problem is that cities with high crime rates will have to hire more police officers (it is the opposite for low crime cities). So it is hard to find a meaningful correlation. But this paragraph from the book shows how he got around that problem:

"In the case of police, Levitt has found that election cycles tend to have a strong independent effect on the size of police forces, enabling him to identify the impact of police on crime rates. Because crime is such a hot political issue, both mayors and governors have strong incentives (and the ability) to push for more police funding in election years. The result is that even though police forces in major cities tend to remain constant in nonelection years, they grow by about 2 percent in an average election year. Although this may sound small, it is (1) large enough to have a significant impact over several election cycles, and thus (2) large enough to detect clearly in the data."

So we can see that crime goes down when more police get hired in election years. Each city gets compared to itself, so the problem mentioned above is avoided.

Now back to the Dostoevsky book. Below are two passages that relate to economics and one sounds like the invisible hand.

"But Mr. Lebeziatnikov who keeps up with modern ideas explained the other day that compassion is forbidden nowadays by science itself, and that that's what is done now in England, where there is political economy." (economics used to be called political economy)

"if I were told, 'love thy neighbour,' what came of it?" Pyotr Petrovitch went on, perhaps with excessive haste. "It came to my tearing my coat in half to share with my neighbour and we both were left half naked. As a Russian proverb has it, 'Catch several hares and you won't catch one.' Science now tells us, love yourself before all men, for everything in the world rests on self-interest. You love yourself and manage your own affairs properly and your coat remains whole. Economic truth adds that the better private affairs are organised in society--the more whole coats, so to say—the firmer are its foundations and the better is the common welfare organised too. Therefore, in acquiring wealth solely and exclusively for myself, I am acquiring, so to speak, for all, and helping to bring to pass my neighbour's getting a little more than a torn coat; and that not from private, personal liberality, but as a consequence of the general advance."

More online versions of the book.

Sunday, October 25, 2009

Anxious? High Strung? You Might Be The Ideal Worker

There was an interesting article a few weeks ago in the New York Times magazine called Understanding the Anxious Mind by ROBIN MARANTZ HENIG. It discusses a study of anxiety that looks at subjects from birth as they age. Here is one interesting exerpt:

"LOOKING AT THE neurology of anxiety raises the inevitable question of why a trait that causes so much mental anguish would have evolved in the first place. For the species as a whole, it is most likely an advantage to have some group members who are hypervigilant and who see everything as a threat, always ready to sound an alarm and leap into action. For the individual, though, being inhibited can mean having fewer mating opportunities, not to mention the psychic burden, wearing yourself ragged with a brain that’s always on high alert.

In the modern world, the anxious temperament does offer certain benefits: caution, introspection, the capacity to work alone. These can be adaptive qualities. Kagan has observed that the high-reactives in his sample tend to avoid the traditional hazards of adolescence. Because they are more restrained than their wilder peers, he says, high-reactive kids are less likely to experiment with drugs, to get pregnant or to drive recklessly. They grow up to be the Felix Ungers of the world, he says, clearing a safe, neat path for the Oscar Madisons.

People with a high-reactive temperament — as long as it doesn’t show itself as a clinical disorder — are generally conscientious and almost obsessively well-prepared. Worriers are likely to be the most thorough workers and the most attentive friends. Someone who worries about being late will plan to get to places early. Someone anxious about giving a public lecture will work harder to prepare for it. Test-taking anxiety can lead to better studying; fear of traveling can lead to careful mapping of transit routes.

Kagan told me that in the 40 years he worked at Harvard, he hired at least 200 research assistants, “and I always looked for high-reactives. They’re compulsive, they don’t make errors, they’re careful when they’re coding data.”
He said he would bet that when the United States sends people up in space, the steely, brave astronauts were low-reactive as infants, and the mission-control people down on the ground, doing the detail work that keeps the craft aloft, were high-reactive.

An anxious temperament might serve a more exalted function too. “Our culture has this illusion that anxiety is toxic,” Kagan said. But without inner-directed people who prefer solitude, where would we get the writers and artists and scientists and computer programmers who make society hum? Kagan likes to point out that T. S. Eliot suffered from anxiety, and that biographies indicate that he was a typical high-reactive baby. “That line ‘I will show you fear in a handful of dust’ — he couldn’t have written that without feeling the tension and dysphoria he did,” Kagan said."

Friday, October 23, 2009

What If You Discovered That You Liked Celine Dion? (How One Company Tried To Determine Buyers' Tastes And Preferences)

The article is called The Song Decoders and it was in the New York Times magazine a couple of weeks ago. It is about a company called Pandora. I think the intro gives you a good idea of what they do. It is below but the entire article is very interesting and raises the question of "can you scientifically predict someone's tastes for a given product?" In economics, we say that tastes and preferences affect demand but we usually don't talk much about them. That is what makes this article so important. Now the intro:

"On first listen, some things grab you for their off-kilter novelty. Like the story of a company that has hired a bunch of “musicologists,” who sit at computers and listen to songs, one at a time, rating them element by element, separating out what sometimes comes to hundreds of data points for a three-minute tune. The company, an Internet radio service called Pandora, is convinced that by pouring this information through a computer into an algorithm, it can guide you, the listener, to music that you like. The premise is that your favorite songs can be stripped to parts and reverse-engineered.

Some elements that these musicologists (who, really, are musicians with day jobs) codify are technical, like beats per minute, or the presence of parallel octaves or block chords. Someone taking apart Gnarls Barkley’s “Crazy” documents the prevalence of harmony, chordal patterning, swung 16ths and the like. But their analysis goes beyond such objectively observable metrics. To what extent, on a scale of 1 to 5, does melody dominate the composition of “Hey Jude”? How “joyful” are the lyrics? How much does the music reflect a gospel influence? And how “busy” is Stan Getz’s solo in his recording of “These Foolish Things”? How emotional? How “motion-inducing”? On the continuum of accessible to avant-garde, where does this particular Getz recording fall?

There are more questions for every voice, every instrument, every intrinsic element of the music. And there are always answers, specific numerical ones. It can take 20 minutes to amass the data for a single tune. This has been done for more than 700,000 songs, by 80,000 artists. “The Music Genome Project,” as this undertaking is called, is the back end of Pandora.

Pandora’s approach more or less ignores the crowd. It is indifferent to the possibility that any given piece of music in its system might become a hit. The idea is to figure out what you like, not what a market might like. More interesting, the idea is that the taste of your cool friends, your peers, the traditional music critics, big-label talent scouts and the latest influential music blog are all equally irrelevant. That’s all cultural information, not musical information. And theoretically at least, Pandora’s approach distances music-liking from the cultural information that generally attaches to it."

Wednesday, October 21, 2009

Fed Officials Disagree On Threat Of Inflation

The Fed, or Federal Researve Board, controls monetary policy in the United States. The more money in the economy, the more demand for all goods and services, holding all other factors constant (this total demand is called aggregate demand or AD). The price level in the economy and the total output or quantity produced in the economy is determined by the interaction of AD and aggregate supply (in this case I am interested in something called short-run AS or SRAS-so yes there is a long-run AS but that is not the important issue here).

The graph below shows two possible AD lines. Notice that as AD moves to the right, the price level (and therefore the inlfation rate) will increrase faster and faster. So we need to be careful not to let AD move past QF, which is called the full-employment GDP or level of output. But right now Fed officials disagree as to how close AD is to this point. The closer it is, the more careful we have to be in increasing the money supply.

A Wall Street Journal Article, Fed Vice Chairman Sees Tamed Inflation Threat. Here are the conflicting statements:

""I expect the persistence of economic slack, accompanied by stable longer-term inflation expectations, will keep inflation subdued for some time," Mr. Kohn said. "The substantial rise in the unemployment rate and the plunge in capacity utilization suggest that the margin of slack in labor and product markets is considerable. Long-term inflation expectations remain stable, and inflation itself could move "appreciably lower" should expectations decline, Mr. Kohn noted."

And
"His views contrast with those of others, including St. Louis Federal Reserve Bank President James Bullard, who this week warned that the existence of "slack" could be exaggerated, posing potential inflation problems in the medium term."

In the graph below, I have two AD lines, on representing the comments of each economist. The one for Kohn has alot more room to move to the right without increasing prices or inflation very much. If he is right, then there is alot more the Fed can do to help the economy recover. But if Bullard is right, and if the Fed tries to add money and AD to the economy, prices will rise very quickly because the SRAS line starts getting very steep past QF.

Sunday, October 18, 2009

Beeville, Texas Makes The Wall Street Journal

But, unfortunately, the news is not good. It is all about how the town has been impacted by the recession. The article is Drop in Natural-Gas Prices Deflates South Texas. Here are the first few paragraphs:

"BEEVILLE, Texas -- The county clerk's office in this South Texas town was abuzz last year as natural-gas prospectors pored over property records, searching for the next place to sink a well.

But things are much quieter now in the domed courthouse in the town square; natural-gas prices have plunged and energy companies have pulled way back on drilling, particularly in older gas fields like those that dot this part of the state.

People across the country who heat their houses with natural gas have benefited from falling gas prices, which have dropped nearly 65% from their high in July 2008 of more than $13 per million British thermal units, to about $4.78 per million BTUs on Friday.

But here in Beeville, about 100 miles southeast of San Antonio, the price drop has made life a little tougher. The unemployment rate has climbed to 10% from 6.9% a year ago; the jobless rate is the highest here since 1993 and is among the highest in this part of the state. Residents say there are fewer cars on county roads and fewer customers at the local movie theater's evening shows.

Things were different last year, when oil and gas companies flocked here to search out energy reserves. That push boosted the local economy, starting with landowners who saw fatter royalty checks and industry workers who found themselves in strong demand. It spread, too, through companies that provide services to the industry and the restaurants and stores where the additional money was spent."

Friday, October 16, 2009

Smoking As A Negative Externality

I discussed negative externalities in all of may face-to-face classes this semester. Negative externalities are costs imposed on third parties without compensation. There a was recent story called Smoking Bans Protect Nonsmokers' Hearts by LAURAN NEERGAARD, AP Medical Writer. Here are the key experpts:

"More than 126 million nonsmoking people in the U.S. are regularly exposed to someone else's tobacco smoke. The surgeon general in 2006 cited "overwhelming scientific evidence" that tens of thousands die each year as a result, from heart disease, lung cancer and a list of other illnesses."

A review of

"...11 key studies of smoking bans in parts of the U.S., Canada, Italy and Scotland ...found drops in the number of heart attacks that ranged from 6 percent to 47 percent."

"While heavier exposure to secondhand smoke is worse, there's no safe level ... even less than an hour's exposure might be enough to push someone already at risk of a heart attack over the edge."

"within minutes, the smoke's pollution-like small particles and other substances can start constricting blood vessels and increasing blood's propensity to clot — key heart attack factors."

Wednesday, October 07, 2009

Does The Increase In The Price Of Gold Mean More Inflation In The Near Future?

We are discussing inflation this week in my principles of macro course. In August of 2008, the Consumer Price Index, or "CPI" equaled 219.086 (meaning that what cost $100 in 1983, cost about $219 in Aug. of 2008-that sounds like alot of inflation, with prices more than doubling over this time but it really isn't as I explain below). You can see this data at Consumer Price Index. In August of 2009, the CPI = 215.834. So prices actually fell by about 3.25 points. That is 1.48% of 219.086, so prices are 1.48% lower than they were a year ago. The last year the CPI fell for a whole calender year was 1954.

But, the CPI = 210.228 in December of 2008. So prices have actually gone up since then and they are up by 2.67% (just in 8 months). For a 12 month period, that would be about 4%. But you might have already figured out that prices must have fallen in the last few months of 2008. They also fell in the last few months of both 2006 and 2007. Maybe they will fall again. The CPI was actually 215.693 in June 2009 and dropped to 215.351 in July 2009. With 215.834 in August, we can see that prices are starting to hold steady. It seems like the high unemployment and excess capacity in the economy will keep prices from rising very much.

But, gold recently shot up to 1,045 an ounce, for a new high. That is from the article Gold Jumps to Record as Inflation Outlook Fuels Investor Demand. It said:

"Gold rose to a record on speculation that currencies will depreciate, spurring inflation and boosting the appeal of the precious metal for investors seeking to preserve their wealth.

Gold futures climbed as high as $1,045 an ounce in New York, topping the previous record of $1,033.90 in March 2008. The spot price is headed for a ninth straight annual gain, the longest rally since at least 1948. The dollar fell as much as 0.7 percent against a basket of six major currencies.

“Gold is acting like the ultimate currency,” said Chip Hanlon, the president of Delta Global Advisors Inc. in Huntington Beach, California. “Central banks are following the same monetary course and trying to stimulate and inflate their way back to growth. Everyone’s concerned about the dollar, but it’s not like you can hate the dollar and fall in love with the euro or the yen.”"

As I mentioned earlier, we have actually had a good rate of inflation since 1983. The CPI for all of 1983 = 99.6. Let's call it 100. For all of 2008, it was 215.3. So prices increased 2.153 times. For prices to rise that much in 25 years, they increase 3.11% compouned annually. That is because 1.0311 raised to the 25th power = 2.153. This is very close to what we call price stability. If we started from 1991, over the last 17 years the compouned annual inflation rate is just 2.73%.

Sunday, October 04, 2009

Does It Pay To Go To College?

That is one of the questions raised by a recent NY Times Sunday magazine article by DAVID LEONHARDT called The College Calculation. It mentions that:

"The median earnings of full-time workers with bachelor’s degrees was nearly $47,000 in 2007, according to the Census Bureau. The median for someone who had attended college but failed to get a four-year degree was nearly $33,000, and the median for a high-school graduate was nearly $27,000. Compare these numbers with the typical education debt that a college student has on graduation day — $20,000 — and it’s clear that a college education is worth the debt."

But

"One well-known study, co-written by Alan Krueger... offered some support for the skeptics. It tracked top high-school students through their 30s and found that their alma maters had little impact on their earnings. Students who got into both, say, the University of Pennsylvania and Penn State made roughly the same amount of money, regardless of which they chose."

Other studies come to different conclusions:

"Several studies have found a large earnings gap between more- and less-educated identical twins. Another study compared young men who happened to live close to a college with young men who did not. The two groups were similar except for how easy it was for them to get to school, and the upshot was that the additional education attained by the first group lifted their earnings. “College can’t guarantee anybody a good life,” says Michael McPherson, an economist who runs the Spencer Foundation in Chicago, which finances education research. “But it sure ups the odds substantially.”"

Just to show the issue is not fully settled:

"Yet the skeptics do make one crucial point. Nationwide, half of all students who start college don’t end up with a four-year degree. Not only do these dropouts spend less time in class, but they also miss out on the signalling benefit of the degree — a mark of those who, among other things, have the discipline to finish what they start."

Friday, October 02, 2009

The Unemployment Rate Hits 9.8%, But It Has Been Worse

And it was not that long ago it was worse. Look at the history of the annual unemployment rate since 1970 in the graph below. I am giving 2009 a rate of 9.0, the average montly rate so far.



In both, 1982 and 1983, the UE rate was over 9%. Things could get worse, but we are not there yet. Notice that until very recently, we had been doing well. The following chart shows Percent of population Employed. The recent trend is not good, but we are still higher right now than almost every year before 1985.



Now let's look at inflation. It is pretty obvious we have been doing very well for a long time.



To show how bad things were not that long ago, from 1975-83, the average annual inflation rate and the average annual unemployment rate were both 7.7%. Here are the rates for each of those years.



Data sources were:

Consumer Price Index

Unemployment data

Wednesday, September 30, 2009

Maybe Exercise Can Help Improve Your GPA

There was an interesting article in the New York Times Sunday magazine a couple of weeks ago by Gretchen Reynolds called What Sort of Exercise Can Make You Smarter? Here are some key experpts:

"...exercise changes the structure of the brain and affects thinking."

"...exercise stimulates the creation of new brain cells."

"In an experiment published in the journal of the American College of Sports Medicine, 21 students at the University of Illinois were asked to memorize a string of letters and then pick them out from a list flashed at them. Then they were asked to do one of three things for 30 minutes — sit quietly, run on a treadmill or lift weights — before performing the letter test again. After an additional 30-minute cool down, they were tested once more. On subsequent days, the students returned to try the other two options. The students were noticeably quicker and more accurate on the retest after they ran compared with the other two options, and they continued to perform better when tested after the cool down. “There seems to be something different about aerobic exercise,” Charles Hillman, an associate professor in the department of kinesiology at the University of Illinois and an author of the study, says."

"Why should exercise need to be aerobic to affect the brain? “It appears that various growth factors must be carried from the periphery of the body into the brain to start a molecular cascade there,” creating new neurons and brain connections... For that to happen, “you need a fairly dramatic change in blood flow,” like the one that occurs when you run or cycle or swim."

Sunday, September 27, 2009

Science Proves That Adam Smith Was Right Over 200 Years Ago (sort of)

Adam Smith's "other" book was called The Theory of Moral Sentiments. One point he made there was that we are able to sympathize with other people by trying imagine what they are going through. Here is a key passage:

"As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation. Though our brother is upon the rack, as long as we ourselves are at our ease, our senses will never inform us of what he suffers. They never did, and never can, carry us beyond our own person, and it is by the imagination only that we can form any conception of what are his sensations. Neither can that faculty help us to this any other way, than by representing to us what would be our own, if we were in his case. It is the impressions of our own senses only, not those of his, which our imaginations copy. By the imagination we place ourselves in his situation, we conceive ourselves enduring all the same torments, we enter as it were into his body, and become in some measure the same person with him, and thence form some idea of his sensations, and even feel something which, though weaker in degree, is not altogether unlike them. His agonies, when they are thus brought home to ourselves, when we have thus adopted and made them our own, begin at last to affect us, and we then tremble and shudder at the thought of what he feels. For as to be in pain or distress of any kind excites the most excessive sorrow, so to conceive or to imagine that we are in it, excites some degree of the same emotion, in proportion to the vivacity or dulness of the conception."

Modern science is saying something similar now (although I am not sure if it is the same thing exactly). It was written about in a recent Wall Street Journal article called Tracing the Origins of Human Empathy. Here are some key exerpts:

"our ability to identify with another's distress -- a catalyst for compassion and charity -- has deep roots in the origin of our species"

"our brains are built to feel another's pain"

"we may be hard-wired for empathy"

"our ability to put ourselves in another's place [may be seen in] how chimpanzees and other primates console each other, prefer to share, and nurse the injured...primates are reminders of empathy's antiquity."

"Dr. de Waal contends that empathy, sympathy and compassion are traits shared by every species with a rudimentary capacity for self-awareness."

"All mammals have some degree of it, and I think the origin is in maternal care," Dr. de Waal says. "I think mammals need a mechanism like this because a female needs to be very sensitive to emotional signals that come from offspring."

"Empathy draws us into the life of another's mind. Synapses fire to marshal sensory cues, muster memories and weave intuitions that our conscious minds could never articulate. As a visceral response to others, empathy can manifest in unexpected ways -- through contagious yawning, for instance."

"people better able to identify with another's state of mind also yawn more readily in response to others."

"Emotions are contagious, too."

"empathy arises from the interaction of our oldest and newest brain structures."

"Among our synapses, we do feel another's pain as our own, these brain imaging studies show."

"we respond more readily to those with whom we already feel a bond, either through kinship, community or racial group"

This might also be related to "mirror neurons" in our brains. One exerpt from this article says:
"These data strongly suggest that the insula contains a neural population active both when an individual directly experiences disgust and when this emotion is triggered by the observation of the facial expression of others. Similar data have been obtained for felt pain and during the observation of a painful situation in which was involved another person loved by the observer. Taken together, these experiments suggest that feeling emotions is due to the activation of circuits that mediate the corresponding emotional responses."

Thursday, September 24, 2009

To Arthur (Guinness, That Is)

Today, 250 years of Guinness brewing is being celebrated. So I thought I would mention that Arthur Guinness was profiled at the Heroes of Capitalism blog (unfortunately the blog is no longer active). But you can see that entry by clicking on Arthur Guinness, Hero of Capitalism.

He was also a philanthropist, which you can read about here: The Man: Arthur Guinness: Innovator, campaigner and philanthropist. Here is an exerpt:

"A renowned campaigner and social philanthropist, from the beginning Arthur Guinness ensured his business continually gave something back to his employees, the local community, and Dublin. [Something that has continued as the GUINNESS brand has expanded around the globe]. From healthcare and social benefits for employees to contributing to disaster relief projects around the world, Arthur Guinness' philanthropic legacy is something that defines the GUINNESS brand to this day and will be further enhanced and celebrated in 2009."

Tuesday, September 22, 2009

The Spirit Of My Favorite Economist, Joseph Schumpeter, Will Guide National Economic Policy

To read about this, go to A Vision for Innovation, Growth, and Quality Jobs by Lawrence H. Summers, head of the National Economic Counsel. Here are some brief exerpts:

"During the past two years, the ideas propounded by John Maynard Keynes have assumed greater importance than most people would have thought in the previous generation.

An important aspect of any economic expansion is the role innovation plays as an engine of economic growth. In this regard, the most important economist of the twenty-first century might actually turn out to be not [Adam] Smith or Keynes, but Joseph Schumpeter.

One of Schumpeter’s most important contributions was the emphasis he placed on the tremendous power of innovation and entrepreneurial initiative to drive growth through a process he famously characterized as "creative destruction." His work captured not only an economic truth, but also the particular source of America’s strength and dynamism."

"Why is this blog called The Dangerous Economist? Back in the early 1990s, I wrote a paper called "The Creative-Destroyers: Are Entrepreneurs Mythological Heroes?" It compares the entrepreneur in capitalism to the hero in mythology. I was never able to get it published in an academic journal. One referee even said the idea was dangerous. I doubt much harm would have befallen the U.S. economy had this paper been published. It is now online at

Creative Destroyers

A shorter version is at

Shorter Version

If you clicked on the link about why I chose this name for my blog and then these articles and read them you would have discovered some of the things that I list below and they would have pointed you to Schumpeter.

The process whereby innovations occur was called "Creative Destruction" by Schumpeter in his bookd Capitalism, Socialism, and Democracy. "Creative Destruction" was

"The opening of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation if I may use that biological term-that incessantly revolutionizes the economic structure from with in, incessantly destroying the old one, incessantly creating the new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in" (p. 83).

In his book The Hero with a Thousand Faces, Joseph Campbell described the action of the hero with

"The standard path of the mythological adventure of the hero is a magnification of the formula represented in the rites of passage: separation-initiation-return: which might be named the nuclear unit of the monomyth. A hero ventures forth from the world of common day into a region of supernatural wonder: fabulous forces are there encountered and a decisive victory is won: the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man. "(p. 30)

Campbell (1968) also has a section called "The Cosmogonic Cycle" which "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero" (p. 38). The connection to Schumpeter's theory of creative destruction is clear. A successful entrepreneur simultaneously destroys and creates a new world, or at least a new way of life. Henry Ford, for example, destroyed the horse and buggy age while creating the age of the automobile. But even more to the point is the fact that the hero finds that the world "suffers from a symbolical deficiency" (p. 37) and that "the hero appears on the scene in various forms according to the changing needs of the race" (p. 38). The changing needs and the deficiency may directly correspond to the changing market conditions or the changing desires for products. The entrepreneur IS the first person to perceive the need or opportunity for market profits.

Joseph Campbell's book inspired George Lucas to make the Star Wars movies.

Monday, September 21, 2009

Free Markets vs. Regulation

There were two opposing views in the New York Times a week ago. Here are the articles

Flaw in Free Markets: Humans by Robert Frank

Where Politics Don’t Belong by Tyler Cowen

Frank argues that markets don't work the way alot of people think they do because people are not always rational. Cowen argues that regulations can do more harm than good.

Sunday, September 20, 2009

Determining The Cost Of Pollution Is Hard (Which Makes Finding The Right Government Policy Hard, Too)

This past week in my principles classes I talked about areas where economists generally agree that the government needs to intervene in the economy and that the free market does not give us the best outcome (although economists will disagree about how much intervention we should have). One was the area of negative externalities, that is, things like pollution. One solution is to tax pollution (or the activities that cause them). The ideal would be to tax each unit of pollution exactly as much as the damage it causes in dollars. If each ton of steel causes $100 in environmental damage, then we should tax each ton of steel $100. There is a danger that we tax steel too much and we end up with too little steel produced.

But how do we figure out the cost of each ton of steel produced? Apparently, this may not be easy as the article Hate Calculus? Try Counting Cow Carbon shows. Here is the intro:

"Shoppers soon will be able to buy everything from meat to moccasins based on a number that purports to tell them the products' environmental impact.

Manufacturers and retailers across the globe are working to measure their products' carbon footprints for a variety of reasons, and all of the efforts have one thing in common: The results have the appearance of precision.

But all the decimal points in the world can't hide the fact that measuring carbon footprints is inexact. It is clouded by varying methodologies and definitions -- not to mention guesses."

Friday, September 18, 2009

Monopoly (The Board Game) Helped British POWs Escape During World War II

The article is Get Out of Jail Free: Monopoly's Hidden Maps. From the article:

"During World War II, as the number of British airmen held hostage behind enemy lines escalated, the country's secret service enlisted an unlikely partner in the ongoing war effort: The board game Monopoly.

It was the perfect accomplice.

Included in the items the German army allowed humanitarian groups to distribute in care packages to imprisoned soldiers, the game was too innocent to raise suspicion. But it was the ideal size for a top-secret escape kit that could help spring British POWs from German war camps.

The British secret service conspired with the U.K. manufacturer to stuff a compass, small metal tools, such as files, and, most importantly, a map, into cut-out compartments in the Monopoly board itself."
The maps may have been the key. The article also said:

""It was really exciting," he said [Victor Watson, who helped make the maps]. Although it's impossible to know precisely how many prisoners escaped with the help of the hidden maps, experts estimate that about 35,000 members of the British, Commonwealth and U.S. forces who were taken prisoner during the war returned to Allied lines before the end of the war.

"We reckon that 10,000 used the Monopoly map," Watson said."

Wednesday, September 16, 2009

Should The United States Allow People To Sell Their Kidneys?

In one of my classes we read an article about this from the book The Economics of Public Issues. The authors suggest that we should allow this because thousands of people die every year waiting for a donor. There was a very good article about this recently in The Atlantic Monthly by Virginia Postrel called With Functioning Kidneys for All. The article is excellent, in depth and explains all the problems the system has now.

There have been some alternatives to the completely volunteer system we have had and the payment method. One involves an exchange of donated kidneys between friends of people who need a kidney transplant but who are not compatible with their friend (or relative). Here is how it would work:

"Over the past decade, however, a more promising trade has become possible. In its simplest form, known as “paired exchange,” incompatible pairs are matched. For example, a husband with type A blood wants to give a kidney to his wife, who has type B blood. Meanwhile, a mother with type B wants to donate to her son with type A. So the mother gives to the wife, and the husband gives to the son. As originally developed at Johns Hopkins, paired exchanges involved not only swaps but simultaneous surgeries, so that no one could back out."

But it can be hard to find two pairs of people where the donors match for the exchange. There can be all kinds of medical reasons why one person can't donate a kidney to another. Here is the problem:

"Bartering kidneys has the same problems as bartering anything else. What each side needs has to match perfectly. “In economics, for maybe a hundred years, people have talked about why money is important—because of the difficulties of barter. The phrase that’s come to signify that in economics is The trouble with barter is, you have to find a double coincidence of wants,” says Alvin Roth, a Harvard economist who has designed algorithms for kidney exchanges. “When you think about regular kidney exchange, what that means is, not only do we have to want your kidney; you have to want our kidney—a double coincidence of wants.” Worse, the need for simultaneous operations, requiring four operating rooms and four transplant teams, severely limits where such exchanges can be done. Paired exchange can’t significantly reduce the waiting list."

So there is another system, called "donor chains." It starts with an altruistic person donating a kidney to be used for anyone who is a match. Then a friend or relative of the recipient donates a kidney that goes into the pool of available kidneys. Then a friend or relative of the next recipient donates a kidney and so on. It helps, but it is logistically very hard and the chain can be broken. And these other methods still leave us way short on kidneys. So we still have the question of allowing payments to get more people to give up a kidney. The Economics of Public Issues mentions that Iran has had a system of payments for 20 years and seems to work well. So maybe it is worth looking into.

Update Sept. 17, 10:22 am: A poll of economists included the question "The U.S. should allow payments to organ donors and their families." Here are the results:

STRONGLY DISAGREE(1) 4.7%
DISAGREE(2) 10.9%
NEUTRAL(3)14.1%
AGREE(4) 45.3%
STRONGLY AGREE (5) 25.0%
MEAN 3.75

This is from the article The Policy Views of American Economic Association Members: The Results of a New Survey by Robert Whaples.

Sunday, September 13, 2009

Are Your Friends Making You Fat?

That question was on the cover of today's New York Times magazine. The article was titled Is Happiness Catching? and was by CLIVE THOMPSON.

This article touches on somethings that have already come up in my classes this semester. One has to do with tastes and preferences. This article, although very long, gives us at least one way tastes can be formed, through friends and social networks (as I said in class, economists don't normally try to explain where tastes come from but the article does quote an economist). The other has to do with correlation (or association) vs. causality. As you will see below and in the article, there is some disagreement over whether or not the researchers found a causal link (for example, my friend getting fat caused me to get fat) or if it was just an association (or correlation) if both friends lived near a McDonalds that just opened up (one friend did not cause the other to get fat-they both got fat for the same reason). Also, my last post raised the question of why we have been getting more obese.

Social scientists Nicholas Christakis and James Fowler found that

"...good behaviors — like quitting smoking or staying slender or being happy — pass from friend to friend almost as if they were contagious viruses... [friends] influenced one another’s health just by socializing. And the same was true of bad behaviors — clusters of friends appeared to “infect” each other with obesity, unhappiness and smoking."
Here are some examples:

"A 2000 study of dorm mates at Dartmouth College by the economist Bruce Sacerdote found that they appeared to infect each other with good and bad study habits — such that a roommate with a high grade-point average would drag upward the G.P.A. of his lower-scoring roommate, and vice versa."
"When a Framingham resident (whose residents were part of a long term health study) became obese, his or her friends were 57 percent more likely to become obese, too. Even more astonishing to Christakis and Fowler was the fact that the effect didn’t stop there. In fact, it appeared to skip links. A Framingham resident was roughly 20 percent more likely to become obese if the friend of a friend became obese — even if the connecting friend didn’t put on a single pound. Indeed, a person’s risk of obesity went up about 10 percent even if a friend of a friend of a friend gained weight."
It is not just weight or obesity that can be affected this way. Drinking, smoking, how altruistic you are and how happy you are might also be due to social networks. Gender has an impact. How men and women affect each other can be different. Also, how co-workers affect you can be different from how friends or relatives affect you.

More key exerpts:

"...the simple peer-pressure explanation doesn’t work as well with happiness or obesity: we don’t often urge people around us to eat more or implore them to be happier. (In any case, simply telling someone to be happier or unhappier isn’t likely to work.) Instead, Christakis and Fowler hypothesize that these behaviors spread partly through the subconscious social signals that we pick up from those around us, which serve as cues to what is considered normal behavior."

"...[it] might be driven partly by “mirror neurons” in the brain that automatically mimic what we see in the faces of those around us — which is why looking at photographs of smiling people can itself often lift your mood. "

"...a behavior can skip links — spreading to a friend of a friend without affecting the person who connects them."

"But they theorize that people may be able to pass along a social signal without themselves acting on it. If your friends at work become obese, even if you don’t gain weight yourself, you might become more accepting of obesity as a normal state..."

"This might all be due to "evolutionary roots" "Tribal groups that were tightly connected were likely more able to pass along positive behaviors than those that weren’t.""


Not everyone agrees with the study's findings. Some scienticists say that maybe fat or happy people like to hang out together because in general, we like to be around people who are like us, so it might just be correlaton (or association), not causation. Also, it could be the environment that causes friends to get fat at the same time. Maybe they all live to close to a McDonalds that just opened up. One counter study found that if a high school student was tall, his or her friends were more likely to be tall. You can't catch height from someone else.

But Nicholas Christakis and James Fowler have an answer for that. They say other studies used a "looser" mathematical model (not sure what that means here). But they also found that if person A considered person B a friend but not vice-versa, if person B got fat, then it increased the chance of person A getting fat. But if person A got fat it did not affect the chances of person B getting fat. So if something in the environment caused one person to get fat (like a new McDonalds), it should affect both people. But it did not always do so. That means there has to be another reason. Maybe what you do is affected by what you think other people think is okay.

Friday, September 11, 2009

Should Overweight People Pay More For Health Insurance?

That is the question raised in an article from the New York Times magazine called Fat Tax by David Leonhardt. Here are the key exerpts:

"For all the miracles that modern medicine really does perform, it is not the primary determinant of most people’s health. J. Michael McGinnis, a senior scholar at the Institute of Medicine, has estimated that only 10 percent of early deaths are the result of substandard medical care. About 20 percent stem from social and physical environments, and 30 percent from genetics. The biggest contributor, at 40 percent, is behavior."

"people in their 50s are about 20 pounds heavier on average than 50-somethings were in the late 1970s."

"Obesity is different. A recent article in Health Affairs estimated its annual cost to be $147 billion and growing. That translates into $1,250 per household, mostly in taxes and insurance premiums."

"And yet it turns out that the obese already do pay something resembling their fair share of medical costs, albeit in an indirect way. Overweight workers are paid less than similarly qualified, thinner colleagues, according to research by Jay Bhattacharya and M. Kate Bundorf of Stanford. The cause isn’t entirely clear. But the size of the wage difference is roughly similar to the size of the difference in their medical costs."

"The question of personal responsibility, then, ends up being more complicated than it may seem. It’s hard to argue that Americans have collectively become more irresponsible over the last 30 years; the murder rate has plummeted, and divorce and abortion rates have fallen. And our genes certainly haven’t changed in 30 years."

"What has changed is our environment. Parents are working longer, and takeout meals have become a default dinner. Gym classes have been cut. The real price of soda has fallen 33 percent over the last three decades. The real price of fruit and vegetables has risen more than 40 percent."

Wednesday, September 09, 2009

Sex, Booze and Drugs

Hope that got your attention. It is actually the title of chapter 5 of the book The Economics of Public Issues. There have been some recent news items that touch on some of the issues raised in this chapter.

One has to do with methamphetamines. It is now getting even easier to make it yourself. Read New formula has junkies mixing their own drugs.

Another is the issue of what actually ends up in illegal narcotics. Sometimes cocaine contains rat poison. Not much you can do about that if you are a customer. You can't complain to the police. Now there is something new going into cocaine that you probably don't want. The article Tainted cocaine kills 3, sickens dozens says:

"Nearly a third of all cocaine seized in the United States is laced with a dangerous veterinary medicine — a livestock de-worming drug that might enhance cocaine's effects but has been blamed in at least three deaths and scores of serious illnesses."

And Russia is trying to get its citizens to drink less through govenment programs. It is not working well, just like prohibition in the USA during the 1920s, which was also discussed in the article. Read Russia president takes out after alcohol.

Sunday, September 06, 2009

Farmers Dump Cherries And Let Them Rot

The article is Bumper Cherry Crop Turns Sour: Tons of Unharvested Fruit Rots Under Government Program to Keep Prices Stable. Farmers are destroying their cherries to reduce supply and drive up the price under an old government program. Here are the key exerpts:

"Under a Depression-era federal program designed to keep prices from plummeting, tart-cherry farmers are being told by fruit processors to leave up to 40% of their crop unharvested."

"Thanks to ideal temperatures and fewer frosts, the crop is expected to be the biggest in eight years."

"But the big harvest is coming in just as the troubled economy has exacerbated weakening demand for tart cherries."

"The tart-cherry industry operates under a government-sanctioned plan called a federal marketing order that dates to 1933. It allows farmers and processors to legally regulate supply to keep prices stable."

"Some farmers say they would like to see their cherries donated to food banks, but the cost of processing them is too expensive."

One additional point. They sometimes put cherries on reserve in bumper years like this but there is so much surplus that only a small amount is being used for that. If they did not destroy cherries, the price would fall. But the government policy says the price has to be maintained. The farmers' gain, however, means higher prices to the consumer than would occur without the policy.

Friday, September 04, 2009

Toilet Paper Shortage? Don't Worry, Communist Party (And Granma) To The Rescue!

The article is Cuba faces toilet paper shortage. Here is the intro:

"There's good news and bad news in Cuba.

The bad news: There's a shortage of toilet paper, and officials in Havana say it will not ease until the end of the year.

The good news: Day-old copies of the Communist party's newspaper Granma, a traditional substitute, are available for less than a U.S. penny. And that's six to eight full, if rough, pages per day.

Cuban officials say the shortage is the result of the global financial crisis and three devastating hurricanes last summer, which forced cuts in imports as well as domestic production because of reductions in electricity and imports of raw materials.

But CNN commentator Fareed Zakaria says that ``at the bottom of this toilet paper shortage is Cuba's continuing commitment to its bizarro world of socialist economics.''"

A socialist economy is a command economy. That is one of the three economic systems my students learn about in the first week of the semester. The other two are the market and the traditional economy. Socialist economies often have problems like this when they rely on planning. When unforseen events happen they may not be flexible enought to adjust and adapt very quickly.

To learn more about these issues, go to Robert Heilbroner's article on Socialism. Here is a key exerpt:

"Through the 1960s the Soviet economy continued to report strong overall growth—roughly twice that of the United States—but observers began to spot signs of impending trouble. One was the difficulty of specifying outputs in terms that would maximize the well-being of everyone in the economy, not merely the bonuses earned by individual factory managers for “overfulfilling” their assigned objectives. The problem was that the plan specified outputs in physical terms. One consequence was that managers maximized yardages or tonnages of output, not its quality. A famous cartoon in the satirical magazine Krokodil showed a factory manager proudly displaying his record output, a single gigantic nail suspended from a crane."

Wednesday, September 02, 2009

Thanks To "Tarantula" You Can't Hide Your Money From The Government Anymore

It used to be that you could put your billions of dollars in a Swiss Bank account and the U. S. government would not know about it. That meant you would pay less in taxes. But a "disgruntled former UBS [bank] employee," code named Tarantula, has helped the U. S. government find out who some of the depositers are who have accounts in Switzerland. You can read all about it in the following NY Times article: A Privileged World Begins to Give Up Its Secrets

Sunday, August 30, 2009

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

There was an intersting article in the New York Times a few weeks ago called I Say Spend. You Say No. We’re in Love. by Catherine Rampell. Here is the intro:

"Despite the old saying “opposites attract,” scholars have found that in almost every way imaginable, people tend to choose mates who look, sound and act as they do. But in the area perhaps most fraught with potential conflict — money — somehow, some way, people gravitate toward their polar opposite, a new study says. “Spendthrifts” and “tightwads” (which, as it turns out, are actual academic terms) tend to marry the other. Unfortunately, these dichotomized duos report unhappier marriages than people with more similar attitudes toward spending."

The rest of the article explains the research that has been done on this by marketing and psychology professors.

Monday, August 24, 2009

Does Evolutionary Psychology Support Joseph Campbell's Belief In The Need For A World Mythology?

The mythologist Joseph Campbell wrote a book called The Hero With A Thousand Faces which inspired George Lucas to make the Star Wars movies. Campbell often talked about the need for a new world mythology. This issue came up in a fascinating article in yesterday’s New York Times called a “A Grand Bargain Over Evolution” by Robert Wright. It discusses how “religion and science are actually compatible” because “evolutionary psychologists have developed a plausible account of the moral sense.” The part of the article that reminded me of Campbell is below. Then that is followed by quotes from him that are very similar. He died in 1987, so his remarks were very prophetic.

Here is the NY Times quote:

“Clearly, this evolutionary narrative could fit into a theology with some classic elements: a divinely imparted purpose that involves a struggle toward the good, a struggle that even leads to a kind of climax of history. Such a theology could actually abet the good, increase the chances of a happy ending. A more evolved religion could do what religion has often done in the past: use an awe-inspiring story to foster social cohesion — except this time on a global scale.

Of course, religion doesn’t have a monopoly on awe and inspiration. The story that science tells, the story of nature, is awesome, and some people get plenty of inspiration from it, without needing the religious kind. What’s more, science has its own role to play in knitting the world together. The scientific enterprise has long been on the frontiers of international community, fostering an inclusive, cosmopolitan ethic — the kind of ethic that any religion worthy of this moment in history must also foster.”

Now what Campbell had to say. From page 112 of the book An Open Life: Joseph Campbell In Conversation With Michael Toms.

Michael Toms often interviewed Campbell at KQED in San Francisco for the radio program New Dimensions. Here they discussed social fragmentation. The following two paragraphs are from Campbell.

“And there's going to be [social fragmentation] for a long time. Unfortunately, many of the new mystically motivated movements are reactionary against other peoples. We have this "Power" and that "Power" and the other "Power." These are delaying actions. People are afraid to move into the free fall of a totally new way of looking at others. So the new mythology to come must be a global mythology, and it's got to solve the problem of the in-group by showing that there's no out-group. We're all members of a society of the planet, not of one particular place, and the fact that the three main religions of the Western world-Judaism, Christianity, and Islam-can't live together in Beruit is a refutation of all three in terms of their value for the contemporary world. They're monstrous! We must begin to realize that each is saying in his own language what the other is trying to say in his. There must be brotherhood and cooperation. Because unless that comes, we're going to blow ourselves to smithereens.

Every single one of the old horizon-bound mythologies reserved love for the in-group, and aggression and denigration were reserved for the out-group. Now, something's got to break that. And when we see that picture of our planet taken from the moon, the question arises: What are we going to do with our aggression? How is it going to be absorbed into love and transmuted from gross matter to gold? I think teaching "I-thou" relationships, rather than the "I-it" relationships, which [theologian Martin] Buber spoke about, is the first step. The teaching of humanity rather than the teaching of in-group appreciations is what's important.”

I think that Campbell clearly talked about the same thing as what Robert Wright did in the Times article. He mentioned narrative and awe-inspiring story as something that could foster social cohesion. This is the mythology that Campbell discussed.

If you are wondering why an economist is discussing this, click on the link above which explains the name of this blog. It has to with entrepreneurs being like heroes from mythology. Campbell thought so, too and you can read about that at Joseph Campbell on Entrepreneurship

Wednesday, August 12, 2009

Two Champions Of Entrepreneurship Win The Presidential Medal Of Freedom

They are Noble Peace Prize winning economist Muhammad Yunus and the late congressman Jack Kemp. You can read about this at President Obama Names Medal of Freedom Recipients. Here are the testimonials for these two winners:

Jack Kemp
Jack Kemp, who passed away in May 2009, served as a U.S. Congressman (1971 – 1989), Secretary of Housing and Urban Development (1989 – 1993), and Republican Nominee for Vice President (1996). Prior to entering public service, Kemp was a professional football player (1957 – 1969) and led the Buffalo Bills to American Football League championships in 1964 and 1965. In Congress and as a Cabinet Secretary, Kemp was a self-described "bleeding heart conservative" who worked to encourage development in underserved urban communities. In the years leading up to his death, Kemp continued seeking new solutions, raising public attention about the challenge of poverty, and working across party lines to improve the lives of Americans and others around the world.

Muhammad Yunus
Dr. Muhammad Yunus is a global leader in anti-poverty efforts, and has pioneered the use of "micro-loans" to provide credit to poor individuals without collateral. Dr. Yunus, an economist by training, founded the Grameen Bank in 1983 in his native Bangladesh to provide small, low-interest loans to the poor to help better their livelihood and communities. Despite its low interest rates and lending to poor individuals, Grameen Bank is sustainable and 98% percent of its loans are repaid – higher than other banking systems. It has spread its successful model throughout the world. Dr. Yunus received the Nobel Peace Prize in 2006 for his work.

Dr. Yunus has is own website at Muhammad Yunus.

You can read more about Jack Kemp at PRIVATE SECTOR; Coaching Entrepreneurs for Profit and Jack Kemp: A Champion of Small Business.