Sunday, April 18, 2010

The Economy Affects The Birth Rate

Our discipline assumes that economic factors influence behavior. Here is a good example. Read Older Moms' Births Still Up in U.S. Here is an exerpt:
"The new report on births was issued Tuesday by the Centers for Disease Control and Prevention. It's based on a review of more than 99 percent of birth certificates for the year 2008 — the first full year of the recession. Overall, about 4.2 million babies were born that year, a 2 percent drop from 2007. It's the first annual decline in births since the start of the decade.

Experts say the most likely explanations are the recession and a decline in immigration to the United States, which has been blamed on the weak job market.

Some early birth information for the first six months of 2009 indicates a continuing decline of about 3 percent in total births, CDC officials said."
"The one exception to the trend was the birth rate among women in their 40s, who perhaps felt they didn't have the luxury of waiting for better economic times.

The birth rate for women in their early 40s rose a surprising 4 percent over the previous year, reaching its highest mark since 1967. The rate for women in their late 40s also rose, slightly."

Friday, April 16, 2010

Are Speculators Heroes?

Maybe. This past week in my macro courses I talked about the money demand motives. One of them is the speculative motive, so I explained what a speculator is. Very often speculators are maligned. But sometimes they perform a valuable service by figuring out a resource will be more scarce in the future and then bidding up the price of that resource today. That sends a signal to markets that we all need to economize on that resource or try to provide more of it. That doesn't mean that everyhting speculators do has a good result, just that it can.

It was said that speculators are heroes in the NY Times article titled Those Wall Street Gamblers Might Not Be Bad After All. From the 3-21-10 edition, p. WK 5. It was by NELSON D. SCHWARTZ. Exerpts:
"“If there are heroes in the financial system, these are the heroes,” said Frank Partnoy, a professor of law and finance at the University of San Diego. “They’re the people who bet against Enron, who bet against Lehman and warned it was insolvent.”

It’s not just academics who are coming to the defense of speculators. Earlier this month, BaFin, the regulatory agency that oversees financial markets in Germany, concluded that speculators weren’t behind Greece’s problems. A more likely cause was that investors were simply wary of lending the Greek government any more money following years of heavy borrowing and widening budget deficits."

"“Every time the market goes down, they blame short-sellers and speculators,” said Jim Chanos, a famous short-seller who manages more than $6 billion and was among the earliest voices to warn about Enron as well as the credit crisis. But his trades aren’t gambles at all. “We do as much fundamental research as anybody,” he said.

If that’s the case, speculators are far from being a plague on the markets. Instead, they help reduce risk by taking on the other side of popular trades, resisting the herd mentality that creates bubbles in the first place."

"The speculator “loves freedom, detests cant and abhors restrictions,” Edward Chancellor wrote in his 1999 book, “Devil Take the Hindmost: A History of Financial Speculation.”

According to Mr. Chancellor, a financial strategist in Boston, speculators aren’t motivated by greed, after all. Instead, idealism fuels their trades.

“The essence of speculation remains a utopian yearning for freedom and equality which counterbalances the drab rationalistic materialism of the modern economic system with its inevitable inequalities of wealth,” he argued in his book."

"Victor Niederhoffer, a legendary hedge fund manager and self-described speculator..." said “But when my daughters ask me if my job is as important as the butcher’s, the doctor’s or the scientist’s, I answer that the speculator is a hero, and has been throughout history.”"

Wednesday, April 14, 2010

My New York Times Letter

You can read it at A Consumption Tax, Revisited. It also contains a link to the article that my letter addressed. What got printed in the paper on Sunday was cut down from what I actually sent. Here is my originla letter:
"On balance, Robert Frank’s proposal for a consumption tax on high income families may be a good idea (“Hey, Big Spender: You Need a Surtax,” March 21). But there may be some potential downsides that we should keep in mind. He suggests that reduced future consumption spending (as a result of the tax) won’t cause a fall in total spending in the economy because investment spending will rise to pick up the slack. But if businesses know that consumers will be cutting back, they have less of an incentive to build new plant and equipment. There will also be reduced incentives for people to earn, since, if they cross the threshold, they will start paying these consumption taxes (which are also progressive, exacerbating the problem). The rich might turn, as they often do, to smart lawyers and accountants to help them hide their income. This would waste talent in our economy. Finally, a luxury surtax in the early 1990s failed to generate the expected revenue while at the same time causing layoffs for workers."

Sunday, April 11, 2010

Why Are Some Private Colleges And Universities So Expensive?

It seems that they have something everyone wants: prestige. Who wouldn't want to go to Harvard or Yale, for example? And then these schools seem to know what everyone is willing to pay and then they charge it. This is all explained in the WSJ article Why Top Colleges Squeeze You Dry by ANDREW MANSHEL. Here is an exerpt:
"I learned that the most prestigious and desirable institutions have a good deal of information about the shape of the demand curve for the families seeking to obtain elite higher education for their offspring. These schools have the capacity to estimate with some precision how many applicants will go elsewhere for each additional dollar they charge in tuition and fees. Each sets its tuition so as to produce a targeted "yield"—the percentage of accepted students who actually enroll there. If in any year we over- or under-estimated the price changes made by the other schools, and we had moved up or down in rank, we corrected the following year by raising or lowering tuition by more or less to compensate. We essentially followed the price leadership of the wealthiest, most prestigious institutions."
There is some financial aid. But that amounts to basically charging different students different prices based on their ability and willingess to pay. Economists call this price discrimination.

Why price discrimination raises profits

1. If a firm can get a higher price from some customers than others they increase their profits.
2. If a firm can lower the price for others who might not have bought the product to begin with, they also increase their profits.

Necessary Conditions for Price Discrimination

1. The firm must face a downward sloping demand. Monopolies do but firms in perfect competition do not (their demand, also their MR line, is flat).

2. The firm must be able to readily (and cheaply) identify buyers or groups of buyers with predictably different elasticities of demand (senior citizens have a more elastic demand and will shop around more since they have more time so restaurants might give them a discount).

3. The firm must be able to prevent resale of the product or service. If a student can buy a movie ticket for $6 while everyone else pays $8, the firm will lose money if the students turn around and sell their tickets for $7. So the theater can prevent resale by checking student IDs to make sure people holding the lower price ticket really are students.

What do the schools do with all the money they get? It mainly goes to the faculty and administrators. 60%-75% goes to salaries and benefits. Schools also spend alot of money on "...the "arms race," the constant effort to refurbish and build new physical facilities."

Friday, April 09, 2010

Does Everyone Pay Taxes?

No, not exactly. Everyone pays some kind of taxes, but many people don't pay any federal income taxes. See Nearly half of US households escape fed income tax: Recession, new tax credits have nearly half of US households paying no federal income tax. It is possible that "...a family of four making as much as $50,000 will owe no federal income tax for 2009..." Also, "...the top 10 percent of earners -- households making an average of $366,400 in 2006 -- paid about 73 percent of the income taxes collected by the federal government."

"The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment."
How does the family of four making $50,000 eliminate their income tax liability?
"The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769.

With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly.

The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15."

Wednesday, April 07, 2010

Economy's Excess Capacity Keeps Inflation Low

See the WSJ article titled Economy's Excess Capacity Reins In Prices: Latest Data Give Fed Room to Maintain Rock-Bottom Interest Rates; Initial Jobless Claims Decline for Third Straight Week. Here are the first three paragraphs:
"The vast economic slack left over from the recession continues to keep inflation in check, leaving companies and workers with little leeway to ask for price or wage increases.

Consumer prices were flat in February—and even with volatile food and energy removed from the equation, the needle barely moved: Prices ticked up a scant 0.1%, the Labor Department said Thursday. Over the past year, prices have increased 2.1%, or 1.3% omitting food and energy, the smallest rise in six years.

Behind these numbers stands a huge excess—of workers, factory space and homes. Until more of the nation's productive capacity comes into use and starts pulling workers off the unemployment line, the sellers of everything from golf clubs to paving machines have little ability to raise prices. The problem is exacerbated by continued tightness in credit, which makes it harder to rev up economic growth through bank lending to soak up the economy's lingering slack."

We can see how this works in the following graph:

A GDP of $9 trillion is the "full-employment" GDP (QF). That gives us the lowest rate of unemployment compatible with "price stability" (price stability is an an annual inflation rate of 3% or less). As GDP increases, more workers are hired, so unemployment falls. But if GDP is below QF, firms cannot raise prices, as the article states. There is slack or "excess capacity" in the economy. That means that there will be very little pressure on prices. Resources are not very scarce and product prices don't have to be increased (or increased very much) to call them back into service.

But as GDP increases, resources become more scarce as more bidders want them. The more GDP increases, the faster prices increase. Also, less efficient resources get called into service and less efficiency means greater cost. The higher costs get passed along to the consumer in higher prices. But the graph and the article suggest that as GDP increases and the unemployment rate falls, we will not see much inflation soon.

Also, interest rates won't have to be increased since there is little danger of AD going past QF. Sometimes the FED will raise interest rates to slow down private spending (both consumption and investment) to keep AD from moving too far to the right. But the article suggests that this will not happen.

Sunday, April 04, 2010

Has The Recession Been Hard On College Graduates?

Yes. But it has been hard on many people. This issue came up in a recent WSJ article titled College Grads' Outlook Grim: Students Begin the Search Early, Look to 'Plan-B' as Campus Recruitment Falls. Here some key exerpts:
"Companies have cut back hiring and when they do have jobs, they have plenty of experienced applicants to pick from. College graduates typically need further training and seasoning, so many employers are skipping college career fairs this year or tapping former interns if they need fresh talent."

"But there are some bright spots: The unemployment rate for people ages 20 to 24 with a bachelor's degree was 7.2% in March, down from 7.6% a year earlier and below the 21.9% jobless rate for those in the same age group with high-school degrees only.

Preliminary data from a spring poll of employers by the National Association of Colleges and Employers show college-graduate hiring could rise 3% to 5% this year after falling 22% last year."

"... business and technical majors are likely to see the most demand, particularly as Wall Street resumes hiring."
So it looks like things will be better this year than last year. Also, things are much worse for people without college degrees, as the above figures indicate. High-school only people had an unemployment rate nearly 3 times that of those with college degrees from ages 20-24. I looked at something similar a few months ago with How Recessions Affect Young People. One thing that post mentioned is that those who graduate during recessions see their lifetime incomes cut quite a bit.