Sunday, March 29, 2009

The Ranger (The San Antonio College Newspaper) Quotes My Second Favorite Economist

The article is Students fear recession will affect education. My second favorite economist is the guy who says:

"If you save $4,000 a year for 40 years and earn an annual rate of return of 8 percent, you will have a million dollars."

So, you might wonder, if this guy is only my second favorite economist, who is my favorite? Hint: it is not Adam Smith, Milton Friedman, John Maynard Keynes, Simon Kuznets, Martin Feldstein, Skidelsky or even Dambisa Moyo (but she is third, for rather obvious reasons).

The first student to email me the correct answer (who is Cy's favorite economist) will get 5 points added to your next test. I will allow you to get 4 tries. After 4, you're done. Another hint: It will be "safe" to search for the answer even if you thought it might not be.

Thursday, March 26, 2009

South Park Tackles The Economy

There is an episode called "Margaritaville" which you can watch if you go to

It is about the current economic problems. Click on where it says Margaritaville. It is very funny and creative. If any of my students think they see anything in the episode that reminds you of what you have learned this semester, I would like to get your comments. Also, the father of one of the creators of South Park is an economics professor.

Hat Tip: Eddika Shestko

Wednesday, March 25, 2009

Do You Always Learn More From Failure Than Success?

Try googling:

"learn more from failure than success"

and you get over 1,000 hits. But the New York Times Sunday business section had an article called Try, Try Again, or Maybe Not. It discusses research that calls this idea into question. Here is the intro:

"IF at first you don’t succeed, it doesn’t matter that you tried. That seems to be the message of a working paper prepared recently by a team at Harvard Business School. The study found that when it comes to venture-backed entrepreneurship, the only experience that counts is success."

Here is another key passage:

"The study looked at several thousand venture-capital-backed companies from 1986 to 2003.

Professor Gompers and his co-authors Anna Kovner, Josh Lerner and David S. Scharfstein found that first-time entrepreneurs who received venture capital funding had a 22 percent chance of success. Success was defined as going public or filing to go public; Professor Gompers says the results were similar when using other measures, like acquisition or merger.

Already-successful entrepreneurs were far more likely to succeed again: their success rate for later venture-backed companies was 34 percent. But entrepreneurs whose companies had been liquidated or gone bankrupt had almost the same follow-on success rate as the first-timers: 23 percent.

In other words, trying and failing bought the entrepreneurs nothing — it was as if they never tried. Or, as Professor Gompers puts it, “for the average entrepreneur who failed, no learning happened.”"

Sunday, March 22, 2009

What Economists Say About "March Madness"

The first article is March Madness It Is, Economically by ANDREW ZIMBALIST. Does all the money from the NCAA basketball tournament help the schools? No:

"Amid this cornucopia, the schools themselves are usually the losers. According to the NCAA's latest Revenues and Expenses report, in 2005-06 the median Division I men's basketball team generated revenue of $480,000 and had operating costs of $1.33 million, yielding a net operating loss of $850,000. If capital expenses and full university overhead were included, these results would be even more dismal."

But the coaches do well:

"In 2005-06, the head coaches of the 65 Division I teams in Madness had an average maximum compensation of $959,486, with the top paid coach earning a guaranteed salary of $2.1 million and a maximum salary of $3.4 million. Equally startling, the average compensation of these 65 coaches is double or more that of the typical university president."

But if your school has a winning sports team, doesn't that mean more applications? Maybe, but:

"Not surprisingly, those high-schoolers who apply to a college because it has a good basketball team do not tend to score high in the SATs or in class rank. As a result, basketball success may temporarily drive up applications, but it does not raise the quality of the student body."

The other article is The Real March Madness by RICHARD VEDDER and MATTHEW DENHART. One thing they mention is that the student-athletes get very little of the revenue they generate in the form of scholarships. Then:

"If all of that money from ticket sales and television rights isn't going to student-athletes, where does it end up? In 2006, salaries for coaches and administrators accounted for nearly 32% of total athletic-department expenses."

It is true that some students go to the pros and make big money. But

"Of course, for the students who go on to the pros, putting off their financial bonanza won't be a big deal. But most college athletes do not make the pros. They may not even end up with the basic skills necessary to succeed in other workplaces, since only a minority of student-athletes in major sports even graduate (25% in top-ranked University of Connecticut men's basketball, for example). Long practices and missed classes make it difficult to succeed academically. A recent study funded by the Andrew W. Mellon Foundation shows the academic performance of athletes is lower than non-athletes even at Division III schools."

Friday, March 20, 2009

Housing And The Financial Crisis

Economist Mark Thoma gives a good overview of all the factors that came together to create the financial crisis with Who's the Villain in the Crisis? Of course, housing is part of the story and it makes me think of what my wife and I have encountered over the last several years while looking for a house (we rent an apartment now).

It always ended up that once we figured in a down payment of about 20%, that our monthly payment, including the mortgage, fees, taxes (maybe condo fees in those cases), etc. would be $300 (or more) a month than our rent. And the house that we looked at would not be as nice as our apartment, maybe it would be a little smaller and required some work. Then there would be a lawn to mow. Sometimes the backyard was just dirt that would turn to mud when it rains.

Some people say that if you buy a house "you build up equity." So? That only does you any good if later on take out a home equity loan (some owners have been borrowing against their equity or the value of their homes for consumption spending-I don't know how much this went on but less is going on now since the price of houses has fallen). Even if you can sell your house at a profit years later, you then have to find another place to live. If you buy another house, then it eats up your profit (unless you are lucky enough to find an under priced house or are just plain good at finding bargains). You could move back to an apartment and enjoy spending the profit, but you are right back where you started.

Also remember that if you are spending alot less on an apartment over the years, then you are also building up money due to compound interest, just like building up equity in your house. There was never any guarantee that home values would continue to rise so you had no guarantee that housing would be a better investment than putting the money in, say, a retirement account.

Then you could say, "at least you have a house, it is a place to live." But so is an apartment. And recall that the houses my wife and I looked at were not so great. Our rent was much less than what our monthly house payments would have been. I have had extra money taken out of my paycheck for my retirement account. So in that way, I have been building up equity.

And the strange thing is that housing prices did not rise as much in San Antonio as they did in other parts of the country. The discrepancies between buying a house and renting an apartment would have been bigger elsewhere, meaning they made less economic sense. It seems like we all should have been able to figure out something was terribly wrong. Maybe some peopled did, but not many of us.

This site shows that the vacancy rates for apartments were high and still rising when the crisis hit Housing Vacancies and Homeownership. Homeowners can deduct their interest payments from their tax returns and government sponsored entities like Fannie Mae make it easier to buy houses. One reason given for this has been that homeowners are better citizens and more community minded so that there are positive externalities from owning homes. But it might not have been a good idea to push so many people into home ownership. Maybe people who liked to buy and own houses in the past were good citizens and community minded. It is not clear that owning a house made them that way.

Tuesday, March 17, 2009

Two Items: Jay Leno And Arthur Guinness

In honor of St. Patrick's Day, the Heroes of Capitalism blog has an entry on Arthur Guinness, founder of the Guinnes brewing company. A true hero, indeed! They mention that "Guinness signed a 9000-year lease in 1759 with St. James Gate Brewery for an annual rent of £45."

Now to Jay Leno. He is doing a free show in Detroit. He mainly wanted it to be for people who have lost their jobs. So free tickets were given away. But some of them are getting sold on eBay, reportedly for as much as $800. Leno does not like this, which you can read about in Leno: Take tickets for free show off eBay. He doesn't want people making money off the idea. But an unemployed worker might be better off with $800 than going to see Leno's show. I don't think Leno should object to that. Either way, unemployed workers are helped.

But Leno brought this on himself. People only had to say they were unemployed to get the tickets. Since we know that there is no such thing as a free lunch, there is the possibility that some people who are not unemployed got tickets for the sole purpose of selling them. Maybe Leno should have required proof of being unemployed, but still let people sell them. Let the unemployed worker choose what makes him or her better off, money or Leno's show. Leno also could have charged for a show in Detroit and tell everyone he was going to donate the money to the poor or unemployed. A benefit show.

Harvard professor Greg Mankiw also addresses this issue with Jay Leno disses the free market.

Update: EBay Halts Sale of Free Leno Tickets

Sunday, March 15, 2009

Prohibited Goods Easily Got Into Texas Prisons

To read all about it, go to Prison contraband was booming trade, an article in today's Express-News. Guards smuggle in items for the prisoners and if they get caught they usually face mimimal penalties. What are some of the items that prisoners can get there hands on?

"Knives and drugs, cell phones and smokeless tobacco. Even McDonald's hamburgers. Texas prisons were a virtual bazaar of prohibited and illicit goods smuggled in by guards and correctional employees who rarely faced the harshest punishment possible when caught, according to a San Antonio Express-News review."

It seems that it is hard to stop markets from forming when people want something, even prisoners. It may be hard for the state to punish the guards too much since their salaries are low. If you fired all the guards who broke the rules, you might not have enough. The article also mentions that at a low pay, the guards are tempted to make a little extra cash helping the prisoners. What do you have to lose but a low paying job. And again, the penalties are not that severe if you do get caught. Friends or relatives of the prisoners often contact the guards to get the trades and sales going.

Update: Another article states:

"For months, perhaps longer, the Montague County Jail was "Animal House" meets Mayberry. Inside the small brick building across from the courthouse, inmates had the run of the place, having sex with their jailer girlfriends, bringing in recliners, taking drugs and chatting on cell phones supplied by friends or guards, according to authorities. They also disabled some of the surveillance cameras and made weapons out of nails."

Go to Texas jail was an Animal House, authorities say.

Sunday, March 08, 2009

When Will the Recession Be Over?

To find out what 11 experts said last week in the NY Times go to When Will the Recession Be Over?. The experts include economics professors (one Nobel prize winner) and private sector executives. Here is the one from Alan Blinder (all entries are about this link):

"It Can’t Last Forever

HERE’S the hard truth: Nobody knows when this recession will end. Economic forecasting is a dark art, and predicting when recessions begin and end is its weakest link. That said, my best guess is that growth will return in the fourth quarter of this year. Why?

First, recessions don’t last forever. If the economy continues to slide through the third quarter, as I anticipate it will, this will be the longest American recession since World War II. Housing must hit bottom at some point. For several years now, declining expenditures on homebuilding have subtracted roughly a percentage point from gross domestic product growth. The change from minus 1 percent to (at least) zero will add a full point to growth. Auto sales are also not likely to keep falling at recent rates. Second, Washington’s large economic stimulus should add more than 5 percent to real gross domestic product over two years.

Third, the price of oil plummeted from a peak of around $145 a barrel last summer to around $40 a barrel today. Since the $145 price was fleeting, let’s call the “true” decline from $100 to $40, which means the bill Americans pay for imported oil fell by about $300 billion dollars a year.

But here’s the rub. My forecast assumes that no other (big) shoes will drop. Sad to say, shoes have been dropping like rain.

Alan S. Blinder is a professor of economics and public affairs at Princeton and a former vice chairman of the Federal Reserve."

Friday, March 06, 2009

Slave Redemption in Sudan

In my ECON 1301 class this week we read chapter 8 of the book The Economics of Public Issues. It seeems like a good idea to buy a slave and set him or her free. But the "redeemers" have often wanted to buy large groups of slaves to redeem. This has encouraged people to capture slaves in the first place. Then it puts more money in the hands of the slave traders who buy more weapons. Some people runs scams, selling people that were not really slaves. Below are links to the three articles listed in the book's bibliography.

The False Promise of Slave Redemption

Ripping Off Slave ‘Redeemers’

Fake slaves con aid agencies in Sudanese liberation scam

The following link has links to lots of info on this issue and different views

Policy Debate: Do slave redemption programs reduce the problem of slavery?

Finally, there was a movie made in 1971 that you can read about at the Internet Movie Database called Skin Game. It was about a fake slave being sold over and over again as a scam. Here is the synopsis:

"Quincy Drew and his black friend Jason O'Rourke have pulled off every dodge known for conning a well-heeled sucker, but it wasn't until they hit on the old skin game that they started to clean up. The game is simple. Jason, though born a free man in New Jersey, poses as Quincy's slave as the pair ride through Missouri and Kansas in 1857. Quincy picks a likely mark in each town, sells Jason to him for top money and rides out of town. Then Quincy and Jason get back together on the road to another town, because if Jason can't just run off after dark, Quincy finds a way to spring him loose."

Tuesday, March 03, 2009

A Video of My Lecture On Entrepreneurs As Heroes

I gave a talk in 2007 at Pepperdine University called "Who Says Entrepreneurs Are Heroes?" You can watch it if you click here. It was part of the HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL. You can also watch it by clicking on the arrow in the picture below. I come on after a short introduction by Elliot McGucken, who put the conference together. After about the 2 minute introduction I come on and it lasts about 18 minutes. You can read a text version of this at Who Says Entrepreneurs Are Heroes?


Sunday, March 01, 2009

Yes, The Most Profitable Industry Involves Drilling (But Not The One That You Would Expect)

To see the list of the most profitable industries in the last 12 months, go to Sageworks. Here is the list. Notice that some of them are medical or legal. Those industries have a very important barrier to entry, a license. This is something that comes up in my micro class and my ECON 1301 class. Insurance is there and in many states there are lots of costly regulations that act as a barrier. Mining might involve either big start up costs or control over a natural resource. Barriers to entry keep out new competitors, allowing the existing firms to keep their above average profit rates.