The Dangerous Economist

Obama Plans To Slow Rising Tuition

2012-01-30T09:14:00.000-08:00

See Obama Details Plan to Curb Tuition By LAURA MECKLER and STEPHANIE BANCHERO of The Wall Street Journal.

Part of the problem is "...concern about the rising costs of college tuition, which have increased by an average of 136% over the past 20 years, adjusted for inflation."

Here are some key excerpts:

"[Obama] wants to withdraw federal campus-based aid from colleges and universities that increase tuition too rapidly or fail to provide a "good value" for the money."

"William Powers Jr., president of the University of Texas at Austin, said he supports using a threat of funding as a lever to get specific outcomes, but said there could be nasty debates about how those outcomes are measured. "This could be fabulously successful, or not, depending on the details and implementation.""

"Mr. Obama would change that by rewriting the formula so that schools that keep tuition down and that provide "good value" would be rewarded with more money. The White House did not say what would constitute "good value," but said the new formula would include measures such as graduation rates and debt repayment.""

This might put pressure on teachers to pass students so they can graduate and keep their school's graduation rate high enough.

"Some critics warned that federal efforts to control tuition costs amount to price controls, while others pointed out that the $2.7 billion the plan affects is tiny compared to total spending in colleges and universities."

There is always a danger that a price ceiling (the type of price control mentioned) can cause shortages, as I mentioned in class last week. A lower price enforced by the government raises the quantity demanded while lowering the quantity supplied.

Now it may be more complicated than what a simple supply and demand graph would show. Higher education might be what is called "monopolistic competition," where firms have some pricing power. That does not mean, though, that price controls will work. The government would have to somehow know the right level of tuition for every school.

With competition intense, schools bid for superstar faculty which raises tuition. Also, they have been competing with amenities like better dorms and facilities. Colleges also offer scholarships to the best students, meaning others pay more. See chapter 18 of the book The Economics of Public Issues, 16e.

But some of the higher tuition has been covered by financial aid. See a post from March, 2010 called As college costs rise, sticker shock eased by student aid. From 2004-09, the net price that students pay, once financial aid is taken into account, actually fell.

U.S. GDP grows 2.8% to its fastest pace in 1-1/2 years, but slower than expected

2012-01-27T17:59:00.000-08:00

Click here to read the article from the New York Daily News.

"Economists, however, had been betting on a slightly faster fourth-quarter pace of 3%."

That might not seem like a big deal, just .2% less than expected. In my macro courses we read a chapter in the book The Economics of Macroissues. The chapter discussed how nations with common law systems, where property rights are better protected than in nations with civil law systems, have higher growth rates. I pointed out to my classes that even a small difference in growth rates ends up causing a very big difference in per capita incomes due to the annual compounding effect.

The table below shows how much per capita income would be at various rates after 100 and 200 years. Assume we start with a per capita income of $1,000. If we grow 2.0% per year, after 100 years it will be $7,245. At 2.1% per year, it would be $7,791 or about $700 more. That is how much that little .1% matters. The difference over 200 years is about $11,000. After 100 years at 2.5% per year, per capita income would be $11,814. That is $4,000 more than the 2.0% rate. Small differences in growth rates add up to big differences over time.

Using the latest GDP figures for another example, if we grow 3.0% a year for the next 30 years, and if per capita GDP now is, say, $50,000, it would reach $121,363. But if it only grows 2.8% for 30 years, per capita GDP would be $114,488. That is $6,874 less than if we grow 3.0%

Per Capita Income After 100 and 200 Years At Various Annual Growth Rates (Starting With $1,000)

What We Give Up for Health Care

2012-01-25T15:44:00.000-08:00

Interesting article by Ezekiel J. Emanuel in Sunday's NY Times. Click here to read it. He is a doctor. One of his brothers is mayor of Chicago Rahm Emanuel who is also former White House Chief of Staff under Obama.

One of the first lessons every semester is that there is no such thing as a free lunch or that everything has an opportunity cost. Here are some excerpts:

"The more we spend on health care, the less we can spend on other things we value."

"Over the past 30 years, health care inflation has been a major reason average wages have remained stagnant. For employers, the cost of labor is total compensation — wages plus benefits. As the cost of benefits rises, wages tend not to rise, or to rise much more slowly. According to the Bureau of Labor Statistics, as health care costs skyrocketed between 2000 and 2009, workers’ total compensation increased by 1.3 percent per year, but workers’ hourly wages alone increased by just 0.7 percent per year, significantly below the rate of inflation.

During those 30 years, the only sustained period when real hourly earnings increased was 1990 through 1998 — which coincided almost exactly with a period of unusually low increases in health care costs."

"Last year, Medicaid spending was estimated to account for nearly a quarter of total state spending — the largest portion of their budgets — and it’s getting only more expensive."

"And so states have turned to cutting funding for public education — the next biggest item in their budgets."

"as health care costs rise, so too do the number of uninsured Americans. According to an analysis I did a few years ago, for every 10 percent increase in the average cost of family health insurance premiums, the ranks of the uninsured (excluding seniors covered by Medicare) increased by 0.55 percent. When premiums doubled between 2000 and 2009, the percentage of Americans who were covered by employer-sponsored health insurance dropped to 61 percent from 69 percent."

"We cannot have it all."

"...we could speed up the implementation of payment reform, stop Medicare payments for tests and treatments that provide no benefit and endorse competitive bidding for medical goods and services."

What Is Economics According To Keynes?

2011-12-07T09:47:00.000-08:00

This might be an appropriate way to end the semester. I will not be keeping to my regular schedule until the next semester starts. Here is the quote from Keynes:

“The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions.”

I saw this in Know What You’re Protesting by Harvard Economis Greg Mankiw in Sunday's NY Times.

Economists also like parables and fables. Perhaps these are part of the apparatus or techniques that Keynes mentioned. So here is a post from January 2010 on this.

Nobel Prize winning economist Paul Krugman wrote the following in Slate magazine back in the 1990s:

“Economic theory is not a collection of dictums laid down by pompous authority figures. Mainly, it is a menagerie of thought experiments--parables, if you like--that are intended to capture the logic of economic processes in a simplified way. In the end, of course, ideas must be tested against the facts. But even to know what facts are relevant, you must play with those ideas in hypothetical settings.”

Here is the link to the article the quote is from: The Accidental Theorist. He has a brilliant example of how labor saving technology does not increase unemployment.

University of Rochester economist Steven Landsburg wrote the following in his book The Armchair Economist: Economics & Everyday Life:

“But as Aesop discovered some time ago, the details of reality can disguise essential truths that are best revealed through simple fictions. Aesop called them fables and economists call them models." (p. 34)

And

"Economists love fables. A fable need not be true or even realistic to have an important moral. No tortoise ever really raced against a hare, yet “Slow but steady wins the race” remains an insightful lesson.” (p. 40)

So when you see an economics professor draw PPFs on the board which show the tradeoff between houses and cars or when we draw supply and demand curves, we know that these are "simple fictions." But, by assuming, for example, that there is a society that makes only two goods and has one resource (labor, say), we can learn something important, like the The Law of Increasing Opportunity Cost.

Keynes vs. Hayek

2011-12-04T16:41:00.000-08:00

Probably most people have seen this video or know about it. We watched it in my macro classes this week. There are actually two videos. Here they are in order. My class saw the second one. Then there is a link to readings over these issues.

Fear the Boom and Bust

Fight of the Century: Keynes vs. Hayek Round Two

Get the Story Behind the Fight of the Century

If you want to tell Russ Roberts, the economics professor who made the video, what you think, go to Fight of the Century in the classroom

Fight of the Century with Polish subtitles

Economist Mark Thoma on making dollars available to troubled European banks

2011-12-02T11:18:00.000-08:00

Mark Thoma teaches at the University of Oregon. This is from his Wednesday article at CBS Money Watch. See Will the Fed's move to help Europe hurt the U.S.? Here it is:

"(MoneyWatch) Central banks in the U.S., England, Canada, Japan and Switzerland along with the European Central Bank announced on Wednesday that they are taking steps to make dollars readily available to troubled banks in Europe. The plan is to reduce the cost of loans between central banks -- these are known as liquidity swaps -- so that dollars are cheaper to obtain.
What are the central banks doing?

The worry is that the financial troubles in Europe will cause problems similar to when Lehman failed in the U.S. An event such as a default on government loans, a bank failure or even just the fear that such events are just around the corner can cause short-term money markets to tighten up. If this happens, then it will be harder for banks to obtain the money they need to fund their operations. Many banks make money by borrowing short and lending long, and make a profit on the spread between short and long interest rates. When the short-term money markets dry up, these banks lose the ability to obtain the money they need to stay liquid and that puts them in danger of failing.
Why are the central banks taking this step?

One reason is to make sure that the banks have the liquidity they need to stay afloat. A widespread domino-like cascade of bank failures would be disastrous and this provides insurance against that possibility. In addition, even without bank failures a loss of liquidity is troublesome. As liquidity dries up, interest rates rise and the loans that businesses and consumers need become harder or impossible to get. That can have a large negative impact on economic activity.
How does the plan work?

These swaps are loans between central banks. For example, the Federal Reserve in the U.S. might swap dollars for euros with the European Central Bank, and then the European Central Bank can lend those dollars to banks that are in trouble.

Why can't the European Central Bank provide liquidity in euros? Why are dollars needed?

The dollar is still considered a safe haven, and when troubles erupt in financial markets, the demand for dollars goes up considerably. Providing extra euros doesn't help when the banks want to be in dollars.
Is there any possible downside? As a taxpayer, will it cost me money to help the Europe mess?

Since these are loans between central banks -- the U.S. Fed will not lend to any foreign banks directly -- there is essentially no risk to the U.S. If the Fed makes a loan to the European Central Bank, and the ECB lends the money to a bank that later fails, it is the ECB that is on the hook for losses, not the U.S. The European Central Bank would still be obligated to pay back the U.S. in full.

The other possible downside is that the short-term expansion in the Fed and other central bank balance sheets that would come with these loans will stoke inflation fears. But since these loans have an expiration date (i.e. the balance sheet will be expected to contract at some point in the future), this shouldn't be a big problem.

Finally, note that while this move can ease financial market conditions, it does nothing to address the underlying problems creating those conditions. So this is no substitute for the difficult decisions that Europe must make to overcome its troubles."

What has happened to the distribution of wealth in recent years?

2011-11-30T09:25:00.000-08:00

Here are a couple of links that look at this quesion.

Ponds and Streams: Wealth and Income in the U.S., 1989 to 2007 by Arthur B. Kennickell of the Federal Reserve.

Go to page 34, Table 3. The gini coefficient for net worth went from .7863 in 1989 to .8120 in 2007. As the gini coefficient gets closer to 1, the distribution gets less equal (the gini coefficient can go from 0 to 1).

This link from the Cato Institute shows different estimates of what the top 1% owns. The EPI actually shows the top 1% owning less of the wealth in 2007 than it did in 1989 or 1998.

Cato link.

Here is some related information.

Click here to see the data

At this link you can see the gini calculated after taxes and transfers and, it seems, is adjusted for household size. For all people in the mid 2000s, the US has .38 and the OECD average is .31.

Here are the mid-2000s Ginis for household income in selected countries After taxes and transfers and accounting for household size. The U.S. is not that much different.

Australia 0.3
Canada 0.32
France 0.28
Germany 0.3
Italy 0.35
Japan 0.32
Korea 0.31
OECD Total 0.31
United Kingdom 0.34
United States 0.38

Is Willpower An Untapped Resource?

2011-11-27T18:23:00.000-08:00

In economics we say that there are three resources: land, labor and capital. Maybe willpower should be added as a fourth resource. See Willpower: It’s in Your Head by GREG WALTON and CAROL DWECK. Greg Walton is an assistant professor of psychology at Stanford. Carol Dweck, a professor of psychology at Stanford, is the author of “Mindset: The New Psychology of Success.” Excerpts:

"...attributing failures of willpower to our fixed biological limits justifies our procrastination as well as our growing waistlines. But are these theories correct?

We don’t think so."

"...we confirmed that willpower can indeed be quite limited — but only if you believe it is. When people believe that willpower is fixed and limited, their willpower is easily depleted. But when people believe that willpower is self-renewing — that when you work hard, you’re energized to work more; that when you’ve resisted one temptation, you can better resist the next one — then people successfully exert more willpower. It turns out that willpower is in your head."

"...we found that people who believed that willpower was not limited continued to perform well on the second task, making few mistakes, even after facing the difficult initial task. They were not “depleted” and kept on doing well."

"...we found that anyone can be prompted to think that willpower is not so limited."

"During stressful times, like final-exam week, students who believed that willpower was not limited reported eating less junk food and procrastinating less than students who did not share that belief. They also showed more academic growth, earning better grades that term than their “pessimistic” counterparts.

Furthermore, when we taught college students that willpower was not so limited, they showed similar increases in willpower."

"People who think that willpower is limited are on the lookout for signs of fatigue. When they detect fatigue, they slack off. People who get the message that willpower is not so limited may feel tired, but for them this is no sign to give up — it’s a sign to dig deeper and find more resources."

"...when people believe in willpower they don’t need sugar..."

"It’s also a question of what kind of people we want to be. Do we want to be a people who dismiss our weaknesses as unchangeable? When a student struggles in math, should we tell that student, “Don’t worry, you’re just not a math person”? Do we want him to give up in the name of biology? Or do we want him to work harder in the spirit of what he wants to become?"

Economists debate issues at new online policy forum

2011-11-25T17:39:00.000-08:00

See IGM Economic Experts Panel. Here is the description:

"This panel explores the extent to which economists agree or disagree on major public policy issues. To assess such beliefs we assembled this panel of expert economists. Statistics teaches that a sample of (say) 40 opinions will be adequate to reflect a broader population if the sample is representative of that population.

To that end, our panel was chosen to include distinguished experts with a keen interest in public policy from the major areas of economics, to be geographically diverse, and to include Democrats, Republicans and Independents as well as older and younger scholars. The panel members are all senior faculty at the most elite research universities in the United States. The panel includes Nobel Laureates, John Bates Clark Medalists, fellows of the Econometric society, past Presidents of both the American Economics Association and American Finance Association, past Democratic and Republican members of the President's Council of Economics, and past and current editors of the leading journals in the profession. This selection process has the advantage of not only providing a set of panelists whose names will be familiar to other economists and the media, but also delivers a group with impeccable qualifications to speak on public policy matters.

Finally, it is important to explain one aspect of our voting process. In some instances a panelist may neither agree nor disagree with a statement, and there can be two very different reasons for this. One case occurs when an economist is an expert on a topic and yet sees the evidence on the exact claim at hand as ambiguous; although we try to word the statements carefully to avoid this, it will no doubt happen at times, and in such cases our panelists vote "uncertain". A second case relates to statements on topics so far removed from the economist's expertise that he or she feels unqualified to vote. In this case, our panelists vote "no opinion".

The panel data are copyrighted by the Initiative on Global Markets and are being analyzed for an article to appear in a leading peer-reviewed journal."

Did The Recession Help Lower The Birth Rate?

2011-11-23T18:22:00.000-08:00

See Birth Rate Continues to Slide Among Teens by TIMOTHY W. MARTIN in the 11-18 WSJ.

"The birth rate among American teens fell to its lowest recorded level last year, according to a government report, a decline that experts attributed to more-effective sex education and the effects of a tough economy.

There were 34.3 births per 1,000 people 15 to 19 years old in 2010, a 9% drop from 37.9 births the previous year, the Centers for Disease Control and Prevention said Thursday. The rate has fallen in 17 of the past 19 years.

"We haven't seen a one-year decline like this since the mid-1940s," said Stephanie Ventura, a demographer for the CDC and a co-author of the study.

The nation's total number of births fell 3% last year, to four million from 4.1 million in 2009, the third straight year of declines.

The drop was steepest among teens, however. Teenage birth rates peaked in 1991, when there were 61.8 births per 1,000 teens. Over the past two decades, the rate has gradually declined. Fewer teenagers now report having had sexual intercourse than in previous decades. And those who are sexually experienced are more likely to have used contraception than teens in the past, according to CDC data.

In recent years, the federal government has invested millions of dollars in more than 30 sex-education programs that research has shown to lower teen birth rates, according to teen-pregnancy experts. In previous decades, it was unclear which approaches would work and which wouldn't, said Bill Albert, chief program officer at the National Campaign to Prevent Teen and Unplanned Pregnancy, a nonprofit, nonpartisan group.

The programs now have "become less of a body-parts conversation and more talking about relationships," he said.

The rough economy may also dissuade teens from wanting children, because they see their parents or older relatives struggling financially, Mr. Albert said.

Birth rates fell for most ages and all races, a sign that the sluggish economy is leading more women to delay having children. Birth rates fell during previous economic downturns, Ms. Ventura of the CDC said.

Women in their 20s and 30s reported declines, and only women aged 40 to 44 years old saw a rise, increasing 2% to 10.2 births per 1,000 women.

The nation's total fertility rate—the number of children any woman is expected to have in her lifetime—dropped to 1.9, slipping under the 2.1 rate that demographers agree is required for a population to replace itself.

The rate of caesarean deliveries dropped for the first time in 1996. Ms. Ventura said that was an encouraging sign, as the surgery carries more risks than conventional birthing and is costlier."

Did The Housing Crisis Bring Benefits To College Students?

2011-11-20T16:03:00.000-08:00

See Animal McMansion: Students Trade Dorm for Suburban Luxury from the 11-12-11 NY Times. Excerpts:

"While students at other colleges cram into shoebox-size dorm rooms, Ms. Alarab, a management major, and Ms. Foster, who is studying applied math, come home from midterms to chill out under the stars in a curvaceous swimming pool and an adjoining Jacuzzi behind the rapidly depreciating McMansion that they have rented for a song.

Here in Merced, a city in the heart of the San Joaquin Valley and one of the country’s hardest hit by home foreclosures, the downturn in the real estate market has presented an unusual housing opportunity for thousands of college students. Facing a shortage of dorm space, they are moving into hundreds of luxurious homes in overbuilt planned communities."

"The finances of subdivision life are compelling: the university estimates yearly on-campus room and board at $13,720 a year, compared with roughly $7,000 off-campus. Sprawl rats sharing a McMansion — with each getting a bedroom and often a private bath — pay $200 to $350 a month each, depending on the amenities.

Gurbir Dhillon, a senior majoring in molecular cell biology, pays $70 more than his four housemates each month for the privilege of having what they enviously call “the penthouse suite” — a princely boudoir with a whirlpool tub worthy of Caesars Palace and a huge walk-in closet, which Mr. Dhillon has filled with baseball caps and T-shirts."

"A confluence of factors led to the unlikely presence of students in subdivisions, where the collegiate promise of sleeping in on a Saturday morning may be rudely interrupted by neighborhood children selling Girl Scout cookies door to door.

This city of 79,000 is ranked third nationally in metropolitan-area home foreclosures, behind Las Vegas and Vallejo, Calif., said Daren Blomquist, a spokesman for RealtyTrac, a company based in Irvine, Calif., that tracks housing sales. The speculative fever that gripped the region and drew waves of outside investors to this predominantly agricultural area was fueled in part by the promise of the university itself, which opened in 2005 as the first new University of California campus in 40 years."

60 Minutes: Insider trading is legal for members of Congress-but it is nothing new, it started in 1790

2011-11-18T18:41:00.000-08:00

See Congress insiders: Above the law?. Here is a brief excerpt:

"* Members of Congress have bought stock in companies while laws that could affect those companies were being debated in the House or Senate.

* At least one representative made significant stock purchases the day after he and other members of Congress attended a secret meeting in September 2008, where the Fed chair and the treasury secretary informed them of the imminent global economic meltdown. The meeting was so confidential that cell phones and other digital devices were confiscated before it began."

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 wrote a book called 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 that I talk about this on the first day of the semester. Congressmen in 1790 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 (bonds or securities) 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 $6,800 while the ones who voted no had about $764. So it is possible that money influenced the vote.

Here is a passage from John Spencer Bassett's book about the "Funding and Assumption Act" The Federalist System, 1789-1801:

"All the speculating class, in Congress and out of it, were zealously in favor of the scheme; and while it was till being debated they were trying to by all the means known to their class to buy up, even in the remote parts of the country, the old bonds at the depreciated values."

Here are they guys who voted yes and their dollar value of their bond holdings:

AMES 35
BASSETT 0
BURKE 5252
BUTLER 0
CLYMER 14000
DALTON 12
DCARROLL 227
ELLSWORTH 5985
FITZSIMMONS 2668
GALE 4252
GERRY 50000
GROUT 0
IZARD 20865
JOHNSON 0
KING 10000
LANGDON 27921
MORRIS 11000
PARTRIDGE 2195
PATERSON 0
READ 341
SEDGWICK 1680
SHERMAN 7729
STRONG 10903
STURGES 189
SUMTER 0
WADSWORTH 1625
WHITE 1619
WLSMITH 11910

Now the no votes

BALDWIN 2500
COLES 0
FEW 640
GILMAN 1025
GRIFFIN 0
HARTLEY 0
LIVERMORE 0
MADISON 0
MATHEWS 0
MJSTONE 3814
MOORE 0
MUHLENBERG 0
SCOTT 127
WILLIAMSON 2600

The San Antonio College Student Newspaper, "The Ranger," Has A Front Page Story On "Occupy Wall Street"

2011-11-16T18:18:00.000-08:00

Here is the link:

Occupy movement only beginning, political science professor says

I submitted an op-ed piece in reply. It is below. I guess I will find out on Monday if they print it.

I am very concerned about the front page article the Ranger did on the Occupy Wall Street Movement.

I can understand and sympathize with the protesters. Unemployment is especially high for young people. I got my B.A. in 1982, a year when the unemployment rate was over 9%. It was again the next year. In fact, both unemployment and inflation averaged 7.7% over the nine years from 1975-1983. I began college in the middle of that difficult economic period. It was also a time of bailouts. The government bailed out Chrysler and Continental Bank.

The article said that "the movements' focus is big business and the government's failure to regulate big business." They also seem to be concerned about inequality and how much money the top 1% makes. I believe that the movement is either wrong about these issues or overstates their importance. And their solutions could harm the economy in the long run. How exactly regulations and taxes can harm the economy is not widely understood. So let me try to explain.

Let's take regulation. Many feel that it was a lack of regulation that caused the financial crisis. This is a highly debatable point. Experts like Nobel Prize winner Gary Becker, Peter Wallison, Jeffrey Friedman, Columbia University economist Charles Calomiris and Stanford University economist John Taylor have written on how it was regulations that were the main cause. Banks were told to lower their lending standards which caused the demand for houses to reach unsustainable levels. Even the business writer for the New York Times, Gretchen Morgenson, has written a book which lays at least part of the blame on the government created Fannie Mae and Freddie Mac.

It also may not be true that we don't have enough regulations. Federal spending by regulatory agencies is about nine times higher today than it was in 1970 (adjusted for inflation). Thousands of pages of new regulations are added every year.

But if we did add even more regulations, how will we make them work? Does each regulator do more work or do we hire more regulators? If the latter, we run into what economists call "the law of increasing opportunity cost." We have to keep taking better and better workers out of the private sector to join government agencies. Fewer goods and services will be produced. The cost of regulation will grow exponentially.

Regulators are also subject to "capture" by the interests they are supposed to be monitoring. They end up not serving or protecting the public since they may have already worked in that industry and regular people don't have time to watch what government agencies do.

Regulations cost about 8% of the national income each year since we need to pay the cost of the government agencies and businesses must spend money to comply with regulations.

Much has been made of the growing inequality problem. One way to measure this is the "Gini coefficient." The higher it gets, the less equal the distribution of income (it ranges from 0 to 1). Yet the Gini coefficient for full-time workers only rose from .31 in 1970 to .40 in 1994. It has basically been unchanged since then. So by that count, then, inequality is not especially worse now.

It is true that the top 1% of earners have seen their share of income rise. But 57% of those in the top 1% in 1996 were not there in 2005. The incomes of the top 1% fell about 16% from 2007-09 while the median income fell just 1.5%. The number of people making $1 million or more per year fell 40%.

People are also not stuck at the bottom. Of those in the lowest one-fifth of incomes in 2001, 44% had moved to a higher "quintile" by 2007. That may not be enough income mobility for some, but I think it is still quite a bit. More people might move between income brackets in Europe than the U. S., but the generally lower incomes in Europe make that easier.

Those at the bottom of the income ladder may be doing better over time than is commonly believed. To measure incomes over time, we need to adjust for inflation. But economists have discovered that we should not use the same price index for the rich and poor. The one for the poor has not risen as much over time. Once this is taken into account, we can see that incomes have not stagnated as much as is normally believed.

Many propose higher tax rates on the rich to deal with inequality. Yet this can lead to problems when recessions hit. The higher income earners are now seeing their incomes fluctuate more and they go down more than for most people in recessions. If we rely too much on them for tax revenue, it will mean extra large budget deficits in recessions, as many states have seen recently. In 2007, the top 1% paid about 37% of all federal income taxes. The more we rely on them for revenue, the bigger the problem will be in the next recession.

Taxes have another problem. They cause increasingly exponential damage to economic efficiency. Taxes distort economic activity. If I normally buy a shirt for $20 and then if that shirt is taxed, say, $5, I may choose not to purchase it. That is a loss for me and for the seller. Our total losses are called the "deadweight loss." It turns out that if you double a tax, the amount of inefficiency or deadweight loss quadruples. So every one-percentage point increase in taxes causes more harm to the economy than the previous one.

The damage to the economy from extra regulations and higher tax rates does not have to be great. Even if incentives to work and produce are only slightly diminished and inefficiency rises marginally, the costs in the long-run can be great due to the compounding effect.

The per capita GDP from 1980-2009 grew 1.95% in the US and 1.83% in the EU. That difference may seem small. But, if, for example, per capita income was 20,000 in both the US and EU in 1980, the per capita income (or GDP) now would be 35,015 in the US and 33,839 in the EU, a difference of $1,176. Maybe not a big difference, but it might matter to many families. But after 100 years the US income level would be 12% higher. After 200 years it would be 26% higher.

We also have to realize that recovery from a recession caused by a financial crisis takes more time than in other recessions. This is what research by economists Carmen Reinhart and Kenneth Rogoff has shown.

So I think we should be careful about adding more regulations or higher tax rates to our economy. Let's not rush into anything based on what the Occupy Wall Street movement says. The occupiers would probably site other statistics or interpret them differently. But let's recognize that theirs is not the only valid view on these issues.

Vehicle Exhaust Linked To Brain-Cell Damage, Higher Rates of Autism

2011-11-13T15:40:00.000-08:00

See The Hidden Toll of Traffic Jams by ROBERT LEE HOTZ, science writer for the WSJ. In my macro classes earlier this semester I talked about externalities like pollution. The ideal policy to me would be to tax any activity equal to the costs it imposes. This article shows what some of the damages are. Excerpts:

"New public-health studies and laboratory experiments suggest that, at every stage of life, traffic fumes exact a measurable toll on mental capacity, intelligence and emotional stability."

"So far, the evidence is largely circumstantial but worrisome, researchers say. And no one is certain yet of the consequences for brain biology or behavior. "There is real cause for concern," says neurochemist Annette Kirshner at the National Institute of Environmental Health Sciences at Research Triangle Park in North Carolina. "But we ought to proceed with caution.""

"Recent studies show that breathing street-level fumes for just 30 minutes can intensify electrical activity in brain regions responsible for behavior, personality and decision-making, changes that are suggestive of stress, scientists in the Netherlands recently discovered. Breathing normal city air with high levels of traffic exhaust for 90 days can change the way that genes turn on or off among the elderly; it can also leave a molecular mark on the genome of a newborn for life, separate research teams at Columbia University and Harvard University reported this year."

"Children in areas affected by high levels of emissions, on average, scored more poorly on intelligence tests and were more prone to depression, anxiety and attention problems than children growing up in cleaner air, separate research teams in New York, Boston, Beijing, and Krakow, Poland, found."

"The evidence is growing that air pollution can affect the brain," says medical epidemiologist Heather Volk at USC's Keck School of Medicine. "We may be starting to realize the effects are broader than we realized.""

"...children born to mothers living within 1,000 feet of a major road or freeway in Los Angeles, San Francisco or Sacramento were twice as likely to have autism,..."

"Scientists believe that simple steps to speed traffic are a factor in reducing some public-health problems. In New Jersey, premature births, a risk factor for cognitive delays, in areas around highway toll plazas dropped 10.8% after the introduction of E-ZPass, which eased traffic congestion and reduced exhaust fumes, according to reports published in scientific journals this year and in 2009. The researchers, Princeton University economist Janet Currie and her colleagues at Columbia University, analyzed health data for the decade ending 2003."

M1 and M2 show big gains in the last 12 months

2011-11-11T16:02:00.000-08:00

For the data, see Money Stock Measures from the Federal Reserve.

From October 2010 to October 2011, M1 was up about 21% while M2 was up about 9.9%.

From November 2009 to November 2010, M1 was up about 8.1% while M2 was up about 3.1%.

So the last 12 months have seen much bigger increases than in roughly the previous 12 months.

The CPI was up about 3.87% from September 2010 to September 2011. From November 2009 to November 2010, the CPI was up only 1.1%. From September 2009 to September 2010 it was also up only 1.1%. Maybe all the extra money is leading to some inflation.

It seems like the big increases in the CPI came early in this year. The numbers below show the annualized rate of inflation for each month (from the previous month). For example, if the price rise from January 2010 to February 2010 lasted 12 months (compounding, of course), the annual rate of inflation would have been just .30%. Obviously we had some big increases from January to May this year. When May ended, prices were 3.1% higher than at the end of December. If that rate were to last a whole year, we would have an inflation rate of about 7.6%. So it looks like things have slowed down a bit. But who knows for sure with all the money out there. It does depend on the velocity, too. The Sept. 2011 CPI was only about .4% higher than the May 2011 CPI.

2010
Feb. 0.30%
Mar. 5.04%
Apr. 2.10%
May 0.93%
June -1.17%
July 0.25%
Aug. 1.67%
Sep. 0.70%
Oct. 1.50%
Nov. 0.51%
Dec. 2.08%

2011
Jan. 5.87%
Feb. 6.08%
Mar. 12.35%
Apr. 8.01%
May 5.79%
June -1.28%
July 1.07%
Aug. 3.36%
Sep. 1.84%

Click here to see CPI figures

The numbers below show the annualized rate of increase in both M1 and M2 for each month (from the previous month). First M1.

2010
Feb. 17.13%
Mar. 6.30%
Apr. -8.81%
May 3.66%
June 14.07%
July 2.18%
Aug. 15.14%
Sep. 16.92%
Oct. 7.07%
Nov. 28.78%
Dec. 7.58%

2011
Jan. 15.43%
Feb. 14.65%
Mar. 11.25%
Apr. 6.27%
May 21.99%
June 10.01%
July 43.05%
Aug. 83.32%
Sep. 15.98%
Oct. 9.01%

Now M2

2010
Feb. 10.05%
Mar. -3.04%
Apr. 1.52%
May 5.71%
June 4.17%
July 2.26%
Aug. 6.53%
Sep. 6.82%
Oct. 5.73%
Nov. 5.36%
Dec. 4.65%

2011
Jan. 3.40%
Feb. 8.66%
Mar. 3.86%
Apr. 4.40%
May 7.16%
June 12.30%
July 30.07%
Aug. 34.42%
Sep. 6.08%
Oct. 3.59%

U.S. exports and imports as a percentage of total output, 1869-2005

2011-11-09T09:40:00.000-08:00

Below is a graph from Macroeconomics (6th Edition) by Andrew B. Abel, Ben S. Bernanke and Dean Croushore. A question about this came up in my micro class this week. Here is how they describe the graph in the book:

"U.S. exports and imports,1869-2005 The figure shows U.S. exports (black) and U.S. imports (red), each expressed as a percentage of total output. Exports and imports need not be equal in each year: U.S. exports exceeded imports (shaded gray) during much of the twentieth century. During the 1980s, 1990s and early 2000s, however, U.S. exports were smaller than U.S. imports (shaded red). Sources: Imports and exports of goods and services: 1869-1959 from Historical Statistics of the United States, Colonial Times to 1970, pp. 864-865; 1960-2005 from FRED database, Federal Reserve Bank of St. Louis, research.stlouisfed.org/fred2/series/BOPX and BOPM; output is from Fig. 1.1."

The output data from Fig. 1.1 comes from an article by Christina Romer.

“The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908.” Journal of Political Economy 97 (February 1989): 1-37.

The percentages seem a little higher than other sources, though. Click on the graph to see a much larger version.

Does It Pay To Be A Garbage Miner?

2011-11-06T16:02:00.000-08:00

This past week in my microeconomics class, we read a chapter about trash in the book The Economics of Public Issues. It raised the issue of how can we reduce the amount of trash we have and how do we get rid of the trash we do have.

For some people, though, going through garbage is a job. See Guatemala's trash 'miners' risk lives to find gold by ALBERTO ARCE of the Associated Press. Excerpts:

"A torrent of gray, toxic water spews from a drainage tunnel and surges along the ravine, tumbling along garbage that has fallen from the Guatemalan capital's main landfill 1,000 feet (300 meters) above.

Despite the foul odors, the danger of unstable piles of garbage collapsing and the chance for heavy rain to suddenly raise the water level, dozens of people are busily at work searching for jewelry and other metal scraps knocked loose from the trash."

One worker said:

""I found a bracelet with 9 grams (0.32 avoir ounces) of gold. I got 2,000 quetzals ($256) for it."

It may not seem like much, but it's almost as much as the monthly $270 minimum wage in this Central American nation."

"If the scavengers don't find jewelry, they collect screws, faucets and other recyclable metal items that they can sell for 85 cents a pound. That amounts to twice the minimum wage for an average trip.""

What happened to income of the top 1% from 2007-2009?

2011-11-04T08:38:00.000-07:00

See The Rich Get Poorer by Greg Mankiw, Harvard economics professor. Here is his blog post:

"Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396."

That works out to a 1.5% drop in median income and a 16.1% drop in income for those in the top 1%.

Mankiw also mentions a paper that shows "that high-income households have riskier-than-average incomes." That is, incomes for the top earners fluctuate alot more than for everyone else. That paper is The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares by Jonathan A. Parker and Annette Vissing-Jorgensen, both of Northwestern University. Here is the abstract:

"We document a large increase in the cyclicality of the incomes of high-income households, coinciding with the rise in their share of aggregate income. In the U.S., since top income shares began to rise rapidly in the early 1980s, incomes of those in the top 1 percent of the income distribution have averaged 14 times average income and been 2.4 times more cyclical. Before the early 1980s, incomes of the top 1 percent were slightly less cyclical than average. The increase in income cyclicality at the top is to a large extent due to increases in the share and the cyclicality of their earned income. The high cyclicality among top incomes is found for households without stock options; following the same households over time; for post-tax, post-transfer income; and for consumption. We study cyclicality throughout the income distribution and reconcile with earlier work. Furthermore, greater top income share is associated with greater top income cyclicality across recent decades, across subgroups of top income households, and, in changes, across countries. This suggests a common cause. We show theoretically that increases in the production scale of the most talented can raise both top incomes and their cyclicality."

The Deficit Trials 2017 A. D.

2011-11-02T15:29:00.000-07:00

I recall a commercial like this back in 1985 or 1986. It paints a bleak picture of America in the future, presumably caused on the growing national debt ($2 trillion then, almost $15 trillion now). I think this thing is way over the top but there may be some real dangers from the debt that I mention below. You might have to watch a brief commercial for some product first. We have been covering the deficit and debt this week in my macro classes. If the embedded video does not appear, use the link below it.

Ridley Scott - W. R. Grace Deficit Trials by angelseyth

Real problems the national debt might cause

1. About 28% of the debt is owed to foreign citizens (that is according to the textbook by Tucker-it is probably closer to 30% now). When they get paid back, they come and buy American goods. That leaves fewer goods for Americans (who can't afford to buy as much due to higher taxes that were needed to pay back the debt). BUT THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE.

People borrow money all the time to buy houses and cars. Then they pay it back to a person outside of their family or household. We don’t consider this a burden since the money was put to good use. Right after World War II, the national debt was 120% of the GDP. This was much higher than it is now and we survived. No one complains that we borrowed to win the war.

2. Raising taxes might hurt economic incentives. At higher tax rates, people might want to work and invest less. Fewer businesses might expand and fewer news ones created since you will get to keep less profit. But again, THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE. Also, if taxes only go up a little, and the debt is slowly paid off each year (like after WW II), it may not hurt too much.

3. We may have fewer government services in the future if we pay back the debt by lowering government spending. But this means that we are trading more government services today for fewer in the future. THIS IS NOT NECESSARILY A BAD THING IF THE MONEY IS SPENT WISELY (which everyone not might not agree on).

For more info ee Reinhart and Rogoff: Higher Debt May Stunt Economic Growth from the WSJ blog last year.

"To all the reasons to worry about the rapid rise in government debt in the wake of the financial crisis, add another: It’ll stunt our growth.

In a new paper presented Monday at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard study the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: Countries with a gross public debt debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.

The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013.

“If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies,” says Ms. Reinhart.

The relationship between government debt burdens and growth is even stronger for emerging-market economies, Ms. Reinhart and Mr. Rogoff find. For countries above the 90% threshold, average annual growth was about three percentage points lower than for countries with public debt of less than 30% of GDP. The countries above the threshold also experienced much higher inflation: prices rose more than twice as fast as in countries with small debt burdens."

What is the unemployment rate for people with college degrees?

2011-10-30T16:21:00.000-07:00

4.2%. The median weekly income for college grads is $1,072 while it is $636 for high school grads. See Gloom Widespread as College Grads Face New Math By DAVID WESSEL of the WSJ. The news is not all great for college grads, though. Excerpts:

"On average, wages for workers with four-year college degrees fell by 8.6% adjusted for inflation between 2000 and 2010, according to government data."

"To be sure, data on wages and incomes don't give a complete picture. They don't count increasingly costly health benefits that many employers provide nor tax breaks enacted to cushion the recession's blow. Nor do they include aspects of life that don't show up in paychecks, from the iPhone to the growing odds of beating cancer.

And Bruce Meyer of the University of Chicago and James X. Sullivan of Notre Dame, who argue official income data paint an overly gloomy picture, note that Americans managed to keep spending in the 2000s while incomes lagged. In an American Enterprise Institute working paper, they cite consumer surveys that suggest inflation-adjusted spending of the typical household (excluding out-of-pocket medical care, education costs and retirement savings) rose 16% in the 1990s and another 16% in the 2000s—some of that fueled by an unsustainable borrowing binge."

"The unemployment rate for recent college grads is 10.7%. More than 14% of Americans between 25 and 34 (5.9 million in all) are living with their parents, up significantly from before the recession. Nearly a quarter of them have bachelor's degrees."

Untangling the Long-Term-Unemployment Crisis

2011-10-28T16:26:00.001-07:00

Click here to read this article by David Wessel of the WSJ. Excerpts:

"...according to Fed governor Daniel Tarullo...there is little evidence that the bulk of today's unemployed would still be unemployed if the economy were growing faster or that the bulk of today's unemployment is, in the jargon of economists, "structural.""

""Most of the difference between the prerecession and current unemployment rates is attributable to an aggregate demand shortfall," said Mr. Tarullo"

"The Labor Department counts 14 million unemployed and 3.1 million job openings, or 4.6 jobless workers per job opening. Before the recession, the ratio was 1.5. If every opening were filled instantly, there would still be many unemployed."

"Wages aren't rising. "We don't see rapid wage growth almost anywhere, which is what you would expect if firms were bidding up the wages of qualified workers and were unable to find qualified workers among the unemployed," said Harvard University's Lawrence Katz."

"We had a fast-advancing economic decline with layoffs and hiring freezes in a broad range of sectors of the economy. That is not consistent with an increase in structural unemployment being the big explanation," Mr. Tarullo said."

"Data gleaned from help-wanted ads, surveys and government tallies did hint at a growing mismatch during the recession between skills jobless workers have and those employers want, but that "mostly has receded since 2009," says Mike Elsby, a University of Edinburgh economist."

"...between 12% and 33% of the five-percentage-point increase in the unemployment rate is due to this mismatch."

"...there was reasonable speculation that those who couldn't sell their houses wouldn't move to where the jobs are. But the latest data suggest that phenomenon is, as Mr. Elsby puts it, "quantitatively negligible.""

Women and the pay gap

2011-10-26T11:32:00.001-07:00

This is a post from April 2007. This issue came up in one of my micro sections this week.

The American Association of University Women issued a report. One of the things it says is:

"Ten years after graduation, women fall further behind, earning only 69 percent of what men earn. Even after controlling for hours, occupation, parenthood, and other factors known to affect earnings, the research indicates that one-quarter of the pay gap remains unexplained and is likely due to sex discrimination."

I emailed them the following question but have not heard back (not even now as of October 26, 2011):

"So the 69 percent means that women earn 69 cents for every dollar that men make ten years after college. That makes the gap 31 cents. But when these other factors are accounted for, one-quarter of the gap remains. Since one-quarter of 31 is 7.75, that means when all other factors are held constant, women earn 92.25 cents for every dollar that men make. Is my interpretation correct? How does this compare to what other studies have found? Is this gap changing over time? Were any other causes for the remaining 7.75 cents examined besides sexual discrimination?"

An article by Steve Chapman gives a different view than the American Association of University Women on this issue. Here is a passage from his article:

"I asked Harvard economist Claudia Goldin if there is sufficient evidence to conclude that women experience systematic pay discrimination. "No," she replied. There are certainly instances of discrimination, she says, but most of the gap is the result of different choices. Other hard-to-measure factors, Goldin thinks, largely account for the remaining gap -- "probably not all, but most of it.""

Will Dropouts Save America?

2011-10-23T16:01:00.000-07:00

Click here to read this interesting article from today's NY Times. Excerpts:

"...nearly all net job creation in America comes from start-up businesses..."

"If start-up activity is the true engine of job creation in America, one thing is clear: our current educational system is acting as the brakes. Simply put, from kindergarten through undergraduate and grad school, you learn very few skills or attitudes that would ever help you start a business."

"...most students learn nothing about sales in college; they are more likely to take a course on why sales (and capitalism) are evil."

"You don’t learn how to network crouched over a desk studying for multiple-choice exams. You learn it outside the classroom, talking to fellow human beings face-to-face."

"True, people with college degrees tend to earn more. But that could be because most ambitious people tend to go to college; there is little evidence to suggest that the same ambitious people would earn less without college degrees..."

"AFTER all, there is not one job market in America, but two. The formal market we always hear about — jobs that get filled through cold résumé submissions in reply to posted ads — accounts for only about 20 percent of jobs.

The other 80 percent get filled in the informal job market."

"You don’t need a degree (and certainly not an M.B.A.) to start a business and create jobs, nor is it even that helpful, compared with cheaper, faster alternatives."

Should companies give healthy workers a break on their health care costs?

2011-10-21T19:32:00.000-07:00

The issue of who deserves government financed health care came up in one of my classes a couple of weeks ago. Megan McArdle had a post at her blog that reminded me of that called Give Me Liberty and Give Me Death?. Here it is:

"Ezra Klein has an interesting article about the Cleveland Clinic's move to cut its own health costs by somewhat curtailing the choices that its employees can make about their lifestyle:
That left enforcement. The clinic tracks its employees' blood pressure, lipids, blood sugar, weight and smoking habits. If any of these are what the clinic calls "abnormal," a doctor must certify that the employee is taking steps to get them under control. Otherwise, no insurance rebate. The idea is to force employees to have regular conversations with their doctors about wellness. If they participate, they can lock in the rates they were paying two years ago. The savings amount to many thousands of dollars.

It appears to be working. Not only has the clinic cut its health-care costs, but its employees are also getting healthier in measurable ways. Workers have lost a collective 250,000 pounds since 2005. Their blood pressure is lower than it was three years ago. Smoking has declined from 15.4 percent of employees to 6.8 percent.

In one sense, the clinic has achieved the health policy ideal: cutting health-care costs by making people healthier. But consider how the clinic has done it -- tying premiums to personal decisions, firing smokers, tracking employee metrics, eliminating popular sodas and foods from campus. By making it harder and more expensive for employees to be unhealthy, the clinic has radically overstepped the traditional, laissez-faire approach of employers to their workers' personal habits.

It also opens the door to onerous forms of discrimination. The clinic no longer hires smokers. Will the obese eventually face similar hurdles? What about fans of fast food? The experiment might work at a famed medical center where the CEO plausibly argues that aggressive leadership in health care is central to the institution's mission. But would it work at General Motors? Caterpillar? Wal-Mart? Medicaid and Medicare?

Roizen thinks it can -- and should. He estimates that an aggressive program could cut federal health spending by $300 billion to $600 billion a year. If he's right, then simply instituting such wellness reforms could cut the federal deficit by far more than the Simpson-Bowles commission or the congressional supercommittee would.

Perhaps unsurprisingly, I'm pretty skeptical. Let's start by asking what the selection bias was. Cleveland fired two high-profile doctors who wouldn't quit smoking. One imagines that employees who do not want their employer nannying them about their gym time and alcohol consumption probably decline to work at the Clinic.

Selection bias will produce good results for the selecting organization, but you cannot replicate its results on a nationwide scale; fat, smoky people have to work somewhere (or go on welfare). If this became common, you'd see legislative pushback in the form of discrimination lawsuits and legislation. I'm betting there are more obese workers/voters than there are people who hit the gym five days a week.

There's also the question of lifetime cost profile. Cleveland mostly isn't covering people in that expensive last year of life; that honor tends to go to Medicare and Medicaid. Cleveland saves money if its workers have fewer smoking-related problems, but if that keeps them alive long enough to get Alzheimer's, their lifetime health cost may go up.

Now, you can certainly argue that it's still a net gain--people live longer, healthier lives. And I agree that longer and healthier lives are a worthy goal. But from a cost perspective, I suspect that there's less to the Cleveland model than meets the eye."

Can Economists Learn To Be Ethical?

2011-10-19T14:29:00.000-07:00

I'm not sure you can teach this old dog a new trick like that. See Economists Pen a Code of Ethics By JUSTIN LAHART of the WSJ. Excerpts:

"Academic economists are moving closer to adopting a code of ethics in response to criticism that ethical lapses in the profession helped precipitate the 2008 financial crisis.

Many economists work with companies, financial firms, governments and other organizations that are eager to tap their expertise. That has opened them up to charges that the often lucrative consulting fees they were receiving first blinded them to the risks to the economy heading into the financial crisis and then steered them toward offering policy responses that benefited their clients. But because the potential conflicts of interest weren't generally known, government officials, the news media and the public took their assessments at face value.

The American Economic Association, the largest professional society for economists, decided last January to consider creating ethical guidelines for its membership. That is something that other academic associations, such as the American Sociological Association, have already done, but that the AEA for years resisted.

The group's change of heart was partly motivated by the public attention the documentary "Inside Job"-winner last February of an Academy Award-drew to the consulting relationships of several influential economists. Among them: Harvard University's Martin Feldstein, who served on the board of American International Group Inc. in 2008, when the government saved it from the brink of collapse, and Columbia Business School's Frederic Mishkin, a former Federal Reserve governor, who in a 2006 report sponsored by the Iceland Chamber of Commerce painted a bright picture of that remote country's economy, two years before it collapsed."

"The group is focusing on providing disclosure guidelines to economists when they face conflicts of interest, Mr. Solow said."

These are related articles that discuss Adam Smith and moral sentiments:

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

Adam Smith vs. Bart Simpson

Adam Smith vs. Ace Ventura

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

2011-10-16T16:50:00.000-07:00

Life is full of tradeoffs, as we often say in economics. But a recent study suggests that couples who make money and material things less of a priority have better marriages. So it looks like you can trade money for love. See Materialism May Erode Couples' Relationships. Excerpts:

"Couples who place money and material things high up in their order of priorities are generally less happy than couples who believe money and possessions are not important, researchers from Brigham Young University, Utah, USA reported in the Journal of Couple & Relationship Therapy. The authors say their research confirms The Beatles lyrics "Can't Buy Me Love" holds true - "the kind of thing that money just can't buy is a happy and stable marriage"."

"Their statistical analysis found that couples who did not feel money and possessions were important scored approximately 10% to 15% higher on marriage stability and other relationship measures, compared to those who did."

"...the detrimental effects of materialism occur despite income levels - i.e. it has a negative effect on those with and without money."

See earlier posts on related topics:

What Do Men In China Need To Get A Bride?

Adam Smith, Marriage Counselor

A Special Valentine's Message On Romantic Love

Can You Put A Price Tag On Love?

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

Return of the Love Headhunters

Was Steve Jobs A Hero?

2011-10-14T18:25:00.000-07:00

I provide some thoughts and links below, but first, a brief commercial message:

If you understand the title of this blog, you know I that I think that Jobs was a hero.

The NY Times recently said that Steve Jobs isn't particularly heroic

They had an interesting article about teaching character in schools but they had the following passage:

"The CARE program falls firmly on the "moral character" side of the divide, while the seven strengths that Randolph and Levin have chosen for their schools lean much more heavily toward performance character: while they do have a moral component, strengths like zest, optimism, social intelligence and curiosity aren't particularly heroic; they make you think of Steve Jobs or Bill Clinton more than the Rev. Martin Luther King Jr. or Gandhi"

See "What if the Secret to Success Is Failure?"

Here is an article which says Jobs was a hero:

Why Steve Jobs is my hero by Sunil Sethi

Here is an article which says Jobs was not a hero:

Jobs no hero to working class by Harold Meyerson

Some Information On This Year's Winners Of The Nobel Prize In Economics

2011-10-12T17:07:00.000-07:00

See Nobel Winners Saved Macroeconomics After Keynes by Edward Glaeser, writing for Bloomberg (Edward Glaeser is an economist as well). The winners were Thomas Sargent, of New York University, and Christopher Sims, of Princeton University, for work on “empirical macroeconomics.” The article mentions some things that we have been discussing or will soon discuss in macro:

John Maynard Keynes

The business cycle

Milton Friedman

Phillips curve

The relationship found between unemployment and inflation

Expectations

Economics Helps Swedish Poet Win The 2011 Nobel Prize in Literature

2011-10-09T12:09:00.000-07:00

See Swedish Poet Transtromer’s ’Translucent Images’ Win Nobel from Bloomberg Businessweek. Excerpts:

"Tomas Transtromer, a Swedish poet and translator known for his depiction of nature and his economy of form, won the 2011 Nobel Prize in Literature.

He won the prize “because, through his condensed, translucent images, he gives us fresh access to reality,” the Swedish Academy said today in Stockholm."

"His lyrical, surreal works explore the natural world, “falling somewhere between dream and nightmare,” the Griffin Trust for Excellence in Poetry said on awarding him a Lifetime Recognition Award in 2007."

(some students might not be surprised to see economics and nightmare go together)

How Much Tax Revenue Could Legalizing Marijuana Raise?

2011-10-07T14:50:00.001-07:00

This question came up in class this week and a student sent me a link about it. See The Budgetary Implications of Marijuana Prohibition by Harvard economist Jeffrey A. Miron. Here is the Executive Summary:

•Government prohibition of marijuana is the subject of ongoing debate.
•One issue in this debate is the effect of marijuana prohibition on government budgets. Prohibition entails direct enforcement costs and prevents taxation of marijuana production and sale.
•This report examines the budgetary implications of legalizing marijuana – taxing and regulating it like other goods – in all fifty states and at the federal level.
•The report estimates that legalizing marijuana would save $7.7 billion per year in government expenditure on enforcement of prohibition. $5.3 billion of this savings would accrue to state and local governments, while $2.4 billion would accrue to the federal government.
•The report also estimates that marijuana legalization would yield tax revenue of $2.4 billion annually if marijuana were taxed like all other goods and $6.2 billion annually if marijuana were taxed at rates comparable to those on alcohol and tobacco.
•Whether marijuana legalization is a desirable policy depends on many factors other than the budgetary impacts discussed here. But these impacts should be included in a rational debate about marijuana policy.

"Data guys" More Important In Business Due To "Moneyball"

2011-10-06T19:18:00.000-07:00

See When Data Guys Triumph by CADE MASSEY and BOB TEDESCHI, NY Times business section, 10-2-11.

Oakland A's general manager Billy Beane and author Bill James are entrepreneurs who created a whole new way of running baseball teams based on statistics and this creative spirit is starting to have an impact in the business world.

The Nobel prize winning physicist Richard Feynman said that "science is the belief in the ignorance of the experts." By challenging the experts in baseball, Beane and James were true scientists, asking questions and looking at data in new ways. Excerpts:

"JOSHUA MILBERG has plenty of business cred: an M.B.A. from Yale, experience in the mayor’s office in Chicago, a job as a vice president for an energy consulting firm. But all of that, Mr. Milberg says, matters less than his reputation as “the data guy” — someone who can offer insights through statistical analysis. And for that, he and a growing number of young executives can credit none other than “Moneyball: The Art of Winning an Unfair Game,” by Michael Lewis."

The book "...examines how the Oakland Athletics achieved an amazing winning streak while having the smallest player payroll in Major League Baseball. (Short answer: creative use of data.)

These managers are savvier with data and more welcomed in business circles in part because of the book."

"At its heart, of course, “Moneyball” isn’t about baseball. It’s not even about statistics. Rather, it’s about challenging conventional wisdom with data."

"This evangelism has created opportunities for the analytically minded."

The article calls this work "creative empiricism."

"But “Moneyball” dramatized the principles behind these forces: a reliance on data to exploit inefficiencies, allocate resources and challenge conventional wisdom — and thus broadened their appeal.

“Moneyball” traces Billy Beane’s use of unorthodox analytics to the work of Bill James. Working as a baseball outsider, Mr. James began self-publishing his analysis and commentary in 1977 and built a passionate following."

"Once people see the value of a batter’s O.P.S. — on-base plus slugging percentage, a key measure in the book — it’s a short step to applying similar principles in their own organizations."

"Generation Moneyball isn’t yet in charge. But as the Nobel laureate Max Planck once said, “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.”"

How Well Do You Really Know The Rules of Acquisition?

2011-10-02T20:12:00.000-07:00

Where would the economy of this quadrant of the galaxy be without the entrepreneurial spirit of the Ferengi? What is the foundation for their insatiable thirst for profits? It must be the aphorisms, guidelines, and principles called the Rules of Acquisition.

Rule number 1 is "Once you have their money, you never give it back."

My two favorites are

Rule 34: War is good for business

Rule 35: Peace is good for business.

And the one that has saved me more times than I can count

Rule 59: Free advice is seldom cheap.

A Reversal Of Structural Unemployment?

2011-09-30T19:37:00.000-07:00

See Supermarkets start bagging self-serve checkouts: More supermarkets bagging do-it-yourself checkout lanes in name of customer service by Stephanie Reitz of the Associated Press. Excerpt:

"Big Y Foods, which has 61 locations in Connecticut and Massachusetts, recently became one of the latest to announce it was phasing out the self-serve lanes. Some other regional chains and major players, including some Albertsons locations, have also reduced their unstaffed lanes and added more clerks to traditional lanes.

Market studies cited by the Arlington, Va.-based Food Marketing Institute found only 16 percent of supermarket transactions in 2010 were done at self-checkout lanes in stores that provided the option. That's down from a high of 22 percent three years ago.

Overall, people reported being much more satisfied with their supermarket experience when they used traditional cashier-staffed lanes.

Supermarket chains started introducing self-serve lanes about 10 years ago, touting them as an easy way for shoppers to scan their own items' bar codes, pay, bag their bounty and head out on their way. Retailers also anticipated a labor savings, potentially reducing the number of cashier shifts as they encouraged shoppers to do it themselves.

The reality, though, was mixed. Some shoppers loved them and were quick converts, while other reactions ranged from disinterest to outright hatred -- much of it shared on blogs or in Facebook groups.

An internal study by Big Y found delays in its self-service lines caused by customer confusion over coupons, payments and other problems; intentional and accidental theft, including misidentifying produce and baked goods as less-expensive varieties; and other problems that helped guide its decision to bag the self-serve lanes."

Here is what I say about in class (which we covered this week):

"Structural unemployment: unemployment caused by a mismatch between the skills of job seekers and the requirements of available jobs.

One example of this is when you are replaced by a machine. We don’t have as many bank tellers any more because people use ATMs. Another example is when there is a fall in demand for your product, so you get laid off, like with typewrites since people now use computers. A third example is geographical, when the jobs are not in your region of the country."

Why is college so hard?

2011-09-28T16:26:00.000-07:00

Here is the link:

Why is college so hard?

College degrees that can attract employers

2011-09-25T18:20:00.000-07:00

Click here to read the article. Here are the top 5 they listed:

Degree #1 - Bachelor's in Business Administration

Degree #2 - Bachelor's in Computer & Information Sciences

Degree #3 - Master's in Business Administration (MBA)

Degree #4 - Bachelor's in Health Care Administration

Degree #5 - Bachelor's in Marketing/Communications

Of course, by the time you graduate, things may have changed. Maybe too many people will go into these majors, lowering the potential salary.

Will There Be A Pumpkin Shortage This Year?

2011-09-23T14:49:00.000-07:00

See The Great Pumpkin Shortage: Stormy Summer Limits Supply In Northeast By MEGAN GIBSON of Time.com. Here is an excerpt:

"As much as we hate to admit we need pumpkins - NewsFeed answers to no vegetable - this time of year we really do. Unfortunately for those of you in the Northeast, pumpkins might not be so readily available for your Halloweening needs.

Thanks to Tropical Storm Irene and an especially stormy summer, there are severe reported shortages in pumpkin crops across the region as bad weather conditions have led to higher numbers of rotten vegetables. Which means that pumpkin seekers could be paying double for their Jack-o'-lantern canvases in some places and, in others, they could be out of luck entirely.

What's a Halloween lover to do? Now just because you didn't see this shortage coming, doesn't mean there's no hope for you. Now that you know, however, your first course of action should be to move quickly. David Dumaresq of Farmer Dave's told CBS that you should "[b]uy your pumpkins soon for the best availability because there's not going to be too many around this year.""

Of course, if everyone tries to "move quickly," that could make the price rise sooner. This relates to one of the shift factors of demand, expectation of future price. If buyers expect higher prices in the near future, demand today increases which will cause the price to rise.

Then sellers will reduce supply in anticipation of the higher price, further speeding up the price increase. My guess is that sellers try to project consumer behavior on this and will raise the price based on this.

But if the price actually doubles, then that would eliminate the shortage. We have the supply line moving to the left, raising the price and lowering the quantity bought and sold. Yes, fewer people will get pumpkins this time of year, but there is no shortage.

Josh Hamilton’s grand slam causes a flooring and countertop shortage

2011-09-18T17:55:00.000-07:00

Click here to read the story. Or just read it here:

"ARLINGTON, Texas (AP)—A Dallas carpet company has had trouble with its website much of the day, thanks to Texas Rangers slugger Josh Hamilton(notes).

The Rangers beat Cleveland on Wednesday night, helped by Hamilton’s grand slam. It just so happened that CC Carpet was offering free flooring and countertops to customers in September if the Rangers outfielder hit a grand slam.

Hamilton did his part and the company has to pay up. Not long after the hit, the company’s website crashed and it’s been spotty Thursday.

CC Carpet president Steve Fitzgerald says the promotion will cost his company about $500,000 but it’s covered by insurance."

Could Those Hours Online Be Making Kids Nicer?

2011-09-16T18:20:00.000-07:00

What would Adam Smith say, especially the one from Wednesday's post? Click here to read the Wall Street Journal article about this. Maybe Facebook and Twitter have positive externalities. Excerpts:

"Time spent online may be helping people learn to be more empathetic and make more friends in real life.

A growing body of research indicates the widespread use of texting, emailing or posting on social-media sites has social benefits."

"...digital communication can lead to more or better friendships online and off, greater honesty, faster intimacy in relationships and an increased sense of belonging, in addition to practical social benefits like an expanded circle for networking."

"...technology appears to enhance real-world relationships..."

"People use digital communication primarily to interact with people they are closest to offline, not with strangers. The communication tightens the bonds between them..."

"... technology-driven communication may be particularly helpful for people who are shy or anxious in social settings."

"Anxious students reported greater shyness and discomfort than non-anxious students in face-to-face groups. In the chat room, however, they said they felt significantly less shy, more comfortable and better accepted by their peers."

"Socially anxious participants were more likely to make decisions and lead the group when they were in the chat room than when face-to-face with others."

"Frequent communication online could serve as practice for in-person social interactions..."

"...empathy could indeed be recognized and communicated through written, online communication."

"Digital communication also appears to bolster individuals' sense of community and group identity..."

"Students reporting low self esteem who actively used Facebook were more likely to say they felt a part of the Michigan State community than low self-esteem individuals who didn't use Facebook as intensely..."

Adam Smith vs. Bart Simpson

2011-09-14T19:36:00.000-07:00

In March of 2010, I attended a lecture by Paul Zak, a neuro-economist from Claremont Graduate University, at the Mind Science Foundation. This week in my micro class I talked about utility and how consumers behave. neuroeconomics is all about looking inside our brains to see what makes us tick.

Zak has studied how our behaviors are affected by the presence in our brains of a chemical called oxytocin, which can affect how generous we are. The more oxytocin you have have, the more generous and empathic (or sympathetic) you are. So he calls oxytocin "the moral molecule." It helps us identify with others and understand their feelings and situatons. Oxytocin can also increase when people trust you or are generous to you.

What does this have to do with Adam Smith? He wrote a book 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. This is directly related to oxytocin. In September 2009 I had a post on this called Science Proves That Adam Smith Was Right Over 200 Years Ago (sort of). That will provide you with more details.

Where does Bart Simpson come in? Professor Zak showed a video clip from the "The Simpsons" that illustrated sympathy, a concept that Adam Smith wrote about in the above mentioned book. To watch a lecture by professor Zak (very similar to the one he did here in San Antonio), go to The Moral Molecule. The Bart Simpson clip starts at the 7:40 mark. Bart's mom tells him to look at his sister and try to feel what she feels. Exactly the kind of thing Adam Smith talked about.

Oxytocin also facilitates trust. Economies need trust because not everything can be put into a law, a contract or be monitored. Your boss can't watch you every second to make sure you don't slack off on the job. We trust banks and our pension funds not to take the money and blow it all in Vegas. We trust our government officials not to accept bribes. Yes, we have rules and regulations against these things. But if we had to have a rule for everything and if everyone was being watched constantly, it would be too costly to our economy. Trust helps quite a bit.

Here are two articles about professor Zak's lecture from the San Antonio Express-News:

Emerging field offers insight into human virtues

Humans release ‘niceness' chemical

More information about neuroeconomics can be found at:

Neuroeconomics Explained, Part One

Neuroeconomics Explained, Part Two

Some Reasons Why Firms Are Not Hiring

2011-09-11T14:53:00.000-07:00

See What's Wrong With America's Job Engine?: Wary Companies Rely on Temps, Part-Timers, Hire Overseas by DAVID WESSEL, WSJ 7-27-11. Excerpts:

"That's largely because the economy is growing much too slowly to absorb the available work force, and industries that usually hire early in a recovery—construction and small businesses—were crippled by the credit bust.

Then there's the confidence factor. If employers were sure they could sell more, they would hire more. If they were less uncertain about everything from the durability of the recovery to the details of regulation, they would be more inclined to step up their hiring."

"Something else is going on, too, a phenomenon that predates the recession and has persisted through it: Changes in the way the job market works and how employers view labor.

Executives call it "structural cost reduction" or "flexibility." Northwestern University economist Robert Gordon calls it the rise of "the disposable worker," shorthand for a push by businesses to cut labor costs wherever they can, to an almost unprecedented degree.

Looking back at the percentage of Americans with jobs in the 1990s (rising) and the 2000s (falling), Princeton University economist Alan Krueger estimates that 70% of today's job shortage is simply cyclical, the result of a disappointing recovery from a deep recession. But he attributes 30% to changes in the job market that began a decade or more ago."

"In the most recent recession and the previous two—in 1990-91 and 2001—employers were quicker to lay off workers and cut their hours than in previous downturns. Many also were slower to rehire."

"Between the end of 2007 (when American employment peaked) and the end of 2009 (when it touched bottom), the U.S. economy's output of goods and services fell by 4.5%, but the number of workers fell by a much sharper 8.3%."

"At the worst of the 1980-82 recession, 1 in 5 of the unemployed were "temporary layoffs." In the recent recession, the proportion of temporary layoffs never exceeded 1 in 10. In part that's because fewer Americans work in factories, where production can be stopped and restarted; if a restaurant doesn't have enough customers, it goes out of business.

"When layoffs are temporary, subsequent recalls can take place quickly," say economists Erica Groshen and Simon Potter of the Federal Reserve Bank of New York. When layoffs are permanent, job recovery is slower, they say. If the employer wants to hire, there's the time-consuming chore of sifting through applications.

Corporate employers, their eyes firmly fixed on stock prices and the bottom line, prize flexibility over stability more than ever. The recession showed them they could do more with fewer workers than many of them previously realized."

"58% of employers expect to have more part-time, temporary or contract workers over the next five years and 21.5% more "outsourced or offshored" workers.

"Technology," McKinsey says, "makes it possible for companies to manage labor as a variable input. Using new resource-scheduling systems, they can staff workers only when needed—for a full day or a few hours."

Temporary-help agencies are playing an ever-larger role"

"Workers, in short, now can be hired "just in time.""

"Because they can hire temps almost instantly, there's little need to hire in anticipation of a pickup in business."

"When they do hire, big U.S.-based multinational companies are more able and more willing to hire overseas, both because wages are often cheaper there and because that's where the customers are."

"some employers insist they can't find workers with the skills they need at wages they can afford."

"difficulty in hiring workers "with specialized technical skills, particularly in the health-care and technology sectors."

But workers without college degrees find well-paying jobs scarce."

Links To Differing Opions On President Obama's New Economic Policy Proposals

2011-09-09T19:35:00.000-07:00

First, here is a link from the White House about the proposal:

Fact Sheet: The American Jobs Act.

Here is a quick summary from Megan McArdle (who writes for The Atlantic Monthly):

Tax cuts: $250 billion

•Payroll tax rebate on first $5 million in payroll, which the president says will reach 98% of American companies, plus complete rebate for new hires or raises
•Extending payroll tax cut
•Extending 100% expensing of business investment
•(A bunch of regulatory streamlining that is likely to have little effect and is bizarrely classed as a tax cut)
•Tax credits for hiring unemployed veterans, particularly those with service-connected disabilities
•$4,000 per worker for hiring workers who have been unemployed for more than six months

Infrastructure: about $100 billion

•$50 billion for new infrastructure projects
•$10 billion for an infrastructure bank
•$15 billion to rehab vacant and foreclosed homes/businesses
•Some undisclosed sum for getting high speed wireless to "98% of American"
•$25 million to rehab schools

Direct assistance: About $100 billion (?)

•Continuing the extension of unemployment benefits
•Various retraining/wage support ideas that are supposed to help the structurally displaced to transition into new careers.
•$35 billion for preserving/hiring teachers, cops and firefighters
•Federal assistance in refinancing to current mortgage rates

Now links to the various opinions:

Obama's Job Plan: Mostly More of the Same (by McArdle)

Obama’s Jobs Bill: A Reasonable Plan (by Justin Wolfers, economics professor at the University of Pennsylvania)

Obama’s Costly, Unaffordable, Harmful New Stimulus: The “American Jobs Act” (by Hans Bader of the Competitive Enterprise Institute)

A missed opportunity (by Scott Sumner, economics professor at Bentley University)

Obama’s Job Speech Full of Bad Ideas (by Chris Edwards of the Cato Institute)

Obama’s Jobs Speech: Bolder Than Expected (by Mark Thoma, economics professor at the University of Oregon)

Jobs plan may create 1 million jobs - economists (from CNN)

Republicans make nice, but wary of Stimulus 2 (from CNN)

Your Co-Workers Might Be Killing You

2011-09-07T18:54:00.000-07:00

Interesting article by Jonah Lehrer, from The Wall Street Journal, 8-20-11. Click here to read it. Here are some excerpts:

"...jobs don't just take a physical toll—they also exact a mental price. When people experience chronic levels of stress—and this is precisely what happens when our workplace is unpleasant or demanding—their risk of suffering from a long list of ailments, such as Alzheimer's, heart disease, depression and even the common cold, is dramatically increased."

"..."psychosocial" factors, such as work-related stress, are the single most important variable in determining the length of a life."

"...the factor most closely linked to health was the support of co-workers: Less-kind colleagues were associated with a higher risk of dying."

"...middle-age workers with little or no "peer social support" in the workplace were 2.4 times more likely to die during the study."

"...worst kind of workplace stress occurs when people have little say over their day. These employees can't choose their own projects or even decide which tasks to focus on first. Instead, they must always follow the orders of someone else."

"...a lack of control at the office was deadly—but only for men. While male workers consistently fared better when they had some autonomy, female workers actually fared worse. Their risk of mortality was increased when they were put in positions with more control."

Do looks matter?

2011-09-04T17:56:00.000-07:00

See Ugly? You May Have a Case by DANIEL S. HAMERMESH, professor of economics at the University of Texas, Austin. From the 8-28-11 New York Times. Excerpts:

"...being attractive also helps you earn more money, find a higher-earning spouse (and one who looks better, too!) and get better deals on mortgages."

"...one study showed that an American worker who was among the bottom one-seventh in looks, as assessed by randomly chosen observers, earned 10 to 15 percent less per year than a similar worker whose looks were assessed in the top one-third — a lifetime difference, in a typical case, of about $230,000."

"Most of us, regardless of our professed attitudes, prefer as customers to buy from better-looking salespeople, as jurors to listen to better-looking attorneys, as voters to be led by better-looking politicians, as students to learn from better-looking professors. This is not a matter of evil employers’ refusing to hire the ugly: in our roles as workers, customers and potential lovers we are all responsible for these effects."

"You might argue that people can’t be classified by their looks — that beauty is in the eye of the beholder. That aphorism is correct in one sense: if asked who is the most beautiful person in a group of beautiful people, you and I might well have different answers. But when it comes to differentiating classes of attractiveness, we all view beauty similarly: someone whom you consider good-looking will be viewed similarly by most others; someone you consider ugly will be viewed as ugly by most others. In one study, more than half of a group of people were assessed identically by each of two observers using a five-point scale; and very few assessments differed by more than one point."

Small Changes In Growth Rates Add Up Over Time

2011-09-02T09:07:00.000-07:00

In my macro courses we read a chapter in the book "The Economics of Macroissues." The chapter discussed how nations with common law systems, where property rights are better protected than in nations with civil law systems, have higher growth rates. I pointed out to my classes that even a small difference in growth rates ends up causing a very big difference in per capita incomes due to the annual compounding effect.

In early 2010, Paul Krugman mentioned that the per capita GDP since 1980 has grown 1.95% in the US and 1.83% in the EU. But we should also remember that small differences in growth rates compound over time. If per capita income was 20,000 in both the US and EU 29 years ago, the per capita income (or GDP) now would be 35,015 in the US and 33,839 in the EU, a difference of $1,176. Maybe not a big difference. But after 100 years the US income level would be 12% higher. After 200 years it would be 26% higher.

The table below shows how much per capita income would be at various rates after 100 and 200 years. Assume we start with a per capita income of $1,000. If we grow 2.0% per year, after 100 years it will be $7,245. At 2.1% per year, it would be $7,791 or about $700 more. That is how much that little .1% matters. The difference over 200 years is about $11,000. After 100 years at 2.5% per year, per capita income would be $11,814. That is $4,000 more than the 2.0% rate. Small differences in growth rates add up to big differences over time.

Per Capita Income After 100 and 200 Years At Various Annual Growth Rates (Starting With $1,000)

William Breit, Trinity University economics professor, has passed away

2011-08-31T18:22:00.000-07:00

I only met him once or twice. But alot of people knew about him and many bloggers have expressed their condolences. He began his academic career as a student at San Antonio College in 1950 after graduating from Jefferson High School. He went on to write many books and was well known in the economics profession. Here are some of the blogs that marked his passing:

William Breit has passed away

Bill Breit, RIP

Bill Breit

Here is a great news story about him:

Dr. William Breit Is Selected SAC's Outstanding Former Student for 2005-2006

Breit co-authored some very fun and interesting economics murder mysteries. The one I really liked was Murder at the Margin. This link has more info:

Murder mysteries

Here is a link to info on his other economics books:

His other books economics books

There really is a marriage market in many countries

2011-08-28T18:17:00.000-07:00

See Supply, Demand and Marriage by Robert Frank, New York Times, 8-6-11. Excerpts:

"IN some cultures, romance isn’t nearly as important as cash when it comes to choosing a marriage partner. And even when money plays no explicit role in selecting a mate, courtship customs are governed by the venerable economic model of supply and demand.

Under the dowry system in India, for example, parents of older brides would typically pay more to prospective grooms. Men with better jobs would receive larger payments, too.

In short, there really is a marriage market in many countries around the world, and economic principles apply to it. In markets with a preponderance of women seeking partners, the terms of trade shift in favor of men. If more men are seeking partners, the reverse is true. Two cases in point are the baby-boom generation in the United States and the current youth cohort in China."

"Before the 1960s, cultural norms encouraged celibacy before marriage. The breakdown of those norms has been widely attributed to the introduction of oral contraception, which gave women an unintrusive way to protect themselves against an unwanted pregnancy. The pill no doubt played a role — perhaps a very big one — but skeptics object that effective alternative forms of contraception had long since been available.

The supply-and-demand model bolsters the skeptics’ concerns. Biologists describe a fundamental asymmetry in the sexual strategies favored by males and females in vertebrate species. Males, whose sex cells are cheap to produce, tend to favor more transient sexual relationships, whereas females, for whom pregnancy and birth are far more costly, tend to favor greater commitment. The sexual revolution, which bent cultural norms toward male preferences, may thus be partly explained by the excess demand for grooms in the 1960s.

An imbalance in the opposite direction characterizes the contemporary marriage market in China. The Chinese government’s one-child policy, combined with a cultural preference for sons and technologies that permit selective abortion, have helped to create a large sex-ratio imbalance among young Chinese. For every 100 women in that group, there are now more than 120 men.

According to market models, the terms of trade in the Chinese marriage market should have shifted sharply in favor of women. And evidence suggests that young Chinese women and their families have in fact become much more selective in recent years.

They appear, for example, to focus more critically on the earnings potential of prospective mates. Because house size is often assumed to be a reliable signal of wealth, a family can enhance its son’s marriage prospects by spending a larger fraction of its income on housing. (Other families can follow the same strategy, of course, but when all families do so, the resulting homes are still reliable indicators of relative wealth.) Such a shift appears to have occurred."

"...families with sons built houses that were significantly larger than those built by families with daughters, even after controlling for family income and other factors. They also generally found that the higher a city’s male-to-female ratio, the bigger the average house size of families that have sons.

Mr. Wei reports that many families with sons have begun to add a phantom third story to their homes, one that looks normal from the outside but whose interior space remains completely unfinished."

There is "...evidence that men are more likely to make risky financial investments in cities with higher male-to-female ratios. Their specific finding was that significantly more local businesses are started in such cities."

Elliot McGucken's Hero's Journey Mythology video set to Beethoven!

2011-05-30T08:55:00.000-07:00

Go to

THE HERO'S JOURNEY MYTHOLOGY CODE OF HONOR

It is filled with great pictures, music and interesting and inspiring quotes from many great philosophers and entrepreneurs. He is working on a book on this topic.

Elliot created the HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL: THE GREAT BOOKS RIDE AGAIN and like me he has related the work of Joseph Campbell on the hero in mythology to entrepreneurship.

Click here to go to Elliot's website

Do Married Baseball Players Get Paid More Than Single Baseball Players?

2011-05-08T16:19:00.000-07:00

There is a research paper by two economists Productivity, Wages, and Marriage: The Case of Major League Baseball. Here is the abstract or summary:

"Using a sample of professional baseball players from 1871 - 2007, this paper aims at analyzing a longstanding empirical observation that married men earn significantly more than their single counterparts holding all else equal. There are numerous conflicting explanations, some of which reflect subtle sample selection problems (that is, men who tend to be successful in the workplace or have high potential wage growth also tend to be successful in attracting a spouse) and some of which are causal (that is, marriage does indeed increase productivity for men). Baseball is a unique case study because it has a long history of statistics collection and numerous direct measurements of productivity. Our results show that the marriage premium also holds for baseball players, where married players earn up to 20% more than those who are not married, even after controlling for selection. The results are generally robust only for players in the top third of the ability distribution and post 1975 when changes in the rules that govern wage contracts allowed for players to be valued closer to their true market price. Nonetheless, there do not appear to be clear differences in productivity between married and nonmarried players. We discuss possible reasons why employers may discriminate in favor of married men."

It seems like they do a good job using ceteris paribus conditions (but I have not read the whole paper). They seem to be holding player quality or performance constant and they say that the control for selection. There is always the possibility that women prefer to marry men who make more money (in general married men make more but that does not mean that getting married caused their salary to go up). Somewhere they say that the 20% difference only applies to the top 1/3 of players.

For other views and discussions on this issue go to

When labour market research goes to the ballpark

Married MLB players earn more than single MLB players of the same quality?

Degrees ranking highest in terms of employment

2011-05-06T18:36:00.000-07:00

In case any of my students are interested knowing more about the job market, see Degrees That Employers Want. Here are the top six they list:

#1 - Health Care Degree

#2 - Business Administration Degree

#3 - Computer Science Degree

#4 - Accounting/Finance Degree

#5 - Engineering Degree

#6 - Marketing Degree

Of course, if many students see this and go into these areas, they won't pay as much or be as secure if their markets get flooded.

Keynes vs. Hayek

2011-05-04T09:47:00.000-07:00

Was 1800 (approximately) A Pivotal Year In Human History? Robert Fogel, Francis Fukuyama, And Deirdre McCloskey All Seem To Think So

2011-05-01T14:09:00.000-07:00

Robert Fogel is a Nobel Prize Winning Economist. Here is something he said recently:

"Technology rescued humankind from centuries of physical maladies and malnutrition, Mr. Fogel argues. Before the 19th century (1800), most people were caught in an endless cycle of subsistence farming."

See Technology Advances; Humans Supersize.

Francis Fukuyama, author of the famous book The End of History and the Last Man, has a new book out. Here is an excerpt from a review of that book:

"But it is true that Mr. Fukuyama tracks a quest for "order" that often falls short of its goal until a decisive threshold is reached around 1800.

By then the Industrial Revolution—even at its earliest stages—had unleashed the forces of production in ways hitherto unimaginable, allowing for abundance rather than scarcity, not least in the production of food. But the threshold proved to be more than a matter of escaping "the Malthusian trap" of hunger and overpopulation. In the years surrounding the French Revolution, Mr. Fukuyama believes, politics began to shape itself—at last—into an orderly and sustainable form.

Obviously, political order had been achieved before then, but in a fitful and incomplete way. In Mr. Fukuyama's view, a durable political order can arise, and societies can fully thrive, only when a state is formed, when the state itself operates according to a rule of law, and when the state becomes accountable—that is, when it must answer to its citizens. Until the threshold point around 1800, he says, all three properties rarely existed together."

See From Dynasty to Democracy: Nations did not find stability, or sustained prosperity, until they became accountable to their citizens.

Deirdre McCloskey is a highly respected economic historian whose latest book is Bourgeois Dignity: Why Economics Can't Explain the Modern World. Here are some quotes from her:

"Modern economic growth—that stunning increase from $3 a day in 1800 worldwide to now upwards of $130 a day in the richest countries, and anyway $30 as a worldwide average—can’t be accounted for in the usual and materialist ways. It wasn’t trade, investment, exploitation, imperialism, education, legal changes, genes, science. It was innovation, such as cheap steel and the modern university, supported by an entirely new attitude towards the middle class, emerging from Holland around 1600. (It has parallels in classical music and mathematics and politics, in all of which the Europeans burst out, 1600-1800.)

Economics of the usual sort, whether Samuelsonian or Marxist, can’t get at why Europeans and then the rest of us started around 1800 to become insanely innovative. A new dignity for innovation and its market applications can: that’s a sociological change, supporting sensible economic policies.

What you can learn from the history is that stasis reigned until we discovered dignity and liberty for ordinary people, and in particular for the disturbing, irritating class of entrepreneurs."

See Don’t be snobbish towards merchants & entrepreneurs, and you’ll develop

Does Money Buy Happiness?

2011-04-29T09:35:00.001-07:00

Some research suggest no. But more recent research says yes. See these two links:

Money buys happiness after all

The happiness wars

How the Economy Works

2011-04-27T17:17:00.000-07:00

That's the title of a book I just finished reading and I have mentioned it recently in my macro classes. Here is the link to the Amazon page: How the Economy Works: Confidence, Crashes and Self-Fulfilling Prophecies. It is by Roger Farmer, who is the chairman of the UCLA economics department.

If you have taken principles of macroeconomics and want to learn more, this book might be a good place to start. Here is the summary from Amazon:

"Farmer explains the differences between classical and Keynesian economics and shows how they influenced the policy debate that developed after the 2007 world financial crisis began and exploded into a global disaster, with the collapse in the U.S. of Lehman Brothers in the fall of 2008. Along with a history of economic thought from 1776 to the present (noting it is incomplete), the author offers his suggestions for preventing future financial crises. “The correct response to the crisis is to set in place, in every country in the world, an institution to control the value of national stock market wealth by targeting the rate of growth of an index fund.” “Central banks should use changes in the size of their balance sheets to prevent inflation from rising too high or too low. They should use changes in the composition of their balance sheets to prevent bubbles and crashes.” This challenging book will appeal to the academic community but not to a broad range of readers."

There's A New Book On The Economics Of College Sports

2011-04-24T17:59:00.000-07:00

It is called Big-Time Sports in American Universities, by Charles T. Clotfelter. It was just reviewed in The Wall Street Journal. See Calculating the Score.

Here are some excerpts from that review:

"Pity the poor presidents of colleges with major athletic programs. Football coaches are not just better known than the administrators, the coaches also tend to make a lot more money. And professors lag even further behind. In 1986, the presidents at 44 public universities with teams in the five most established athletic conferences actually made, on average, a little more than their coaches: $294,000 for the presidents, $273,000 for the coaches; full professors earned about $107,000. By 2010, the professors' income, adjusted for inflation, had climbed 32%. University presidents' pay had gone up 90%. The football coaches' pay jumped to more than $2 million—it had "increased by an astounding seven and a half times," Charles T. Clotfelter writes in "Big-Time Sports in American Universities.""

"The book's central theme is that the time has come to end the strange dichotomy on college campuses, where athletic and educational departments exist in parallel universes and regard each other warily. University leaders "typically ignore" athletics "when putting together a formal statement listing their institution's essential functions and objectives."

The unwillingness to acknowledge the centrality of major sports on many campuses makes no sense. Football and basketball teams are, for starters, a huge physical presence, with their gigantic stadiums (Bryant-Denny Stadium at Alabama seats 102,000) and large arenas (the Dean Dome at the University of North Carolina holds nearly 22,000). "Whether or not universities like to admit it," Mr. Clotfelter says, "big-time athletics must be counted as one of their significant activities.""

"And one of their significant economic centers. The author notes that critics complain "how few big-time programs break even or make a profit." Sounds scandalous, right? Despite millions that pour in from TV contracts, merchandise and ticket sales, and other sources, athletic departments barely make ends meet. But as Mr. Clotfelter observes, "arbitrary administrative decisions"—like billing the athletic department for students' phys-ed classes—muddle any net-profit analysis. And there's no way to measure the role that a high-profile team might play in attracting better students and alumni donations."

"At 58 universities with major athletic programs in 2010, 72% of students graduated, but only 56% of football players and 42% of basketball players received a diploma."

Can The Fed Prevent Inflation By Paying Banks Interest On Their Excess Reserves?

2011-04-22T16:54:00.000-07:00

This week in my macro classes we covered the Federal Reserve (Fed) policy tools that are used to control the money supply in the economy. Ceteris paribus, the more money in the economy the more aggregatge demand (AD) we have. To see how this affects the economy, go to this post from back in 2009 Fed Officials Disagree On Threat Of Inflation. It shows a graph that explains how AD affects the economy.

The Fed sets the "required reserve ratio." This tells banks what percentage of their deposits they must keep on reserve. If they keep more on reserve than they have to, the extra amount is called excess reserves. The Fed now pays banks interest on these excess reserves.

But lately, banks have been keeping alot of excess reserves. This is because of the recession and the financial crisis. Banks want to make sure they have enough on reserve and are leary of lending too much money. The borrowers might not be able to pay it back. And businesses and consumers have been reluctant to borrow since they too fear they might not be able to pay it back.

To see a good chart on excess reserves, go to Why Are Banks Holding So Many Excess Reserves And Will Those Reserves Fuel Future Inflation? (from the blog "Carpe Diem" by economist Mark Perry). The chart shows that until about the middle of 2008, excess reserves were about zero. Now they are over $1 trillion.

But what might happen if the economy starts to improve and everyone gains confidence. Then banks start lending alot more money and spending increases rapidly. Could this cause inflation? One view is that the Fed just has to raise the interest rate it pays banks on excess reserves to keep them from lending too much. The banks will prefer to keep the excess reserves and earn income from the interest rate rather than lend it out. This would keep AD from increasing past the full-employment GDP into the steep part of the short-run aggregate supply curve (see the post I mention above).

The Possible Impact Of A Lower Credit Rating For The U.S. Government

2011-04-20T11:35:00.000-07:00

Last week I talked about problems the national debt might cause. Now this week Standard & Poors says that the government has a one in three chance of seeing it lose its AAA rating (the best rating).

See

U.S. debt finally draws serious warning by Terry Savage, a financial columnist for The Chicago Sun-Times

and

Debt worries turn up heat on Congress to act by Jim Spencer of Minneapolis Star Tribune.

Here is an excerpt from Spencer:

"For financial experts and political combatants here and in Minnesota, Monday's double dose of fiscal foreboding carried an unmistakable warning: Do something about the nation's debt.

The day began with news of a possible downgrade in the nation's credit rating and quickly turned into the stock market's worst day in a month as traders reacted to growing doubts that leaders in Washington could find a way out of the debt crisis.

"This was people on Wall Street [speaking] who are agnostic on politics," said U.S. Rep. Tim Walz, D-Minn. "Either we listen to what they said [Monday] or we pay a horrific price."

When Standard & Poor's switched its outlook on the nation's AAA credit rating from stable to negative, it raised the possibility that Americans could find more of their taxes spent on interest instead of public services. The cost of loans to consumers, government and businesses would go up, as well, suppressing an already fragile economic recovery.

"It's kind of scary," said Murray Frank, a University of Minnesota finance professor, adding that the announcement "is taking one of the central pillars of the world's economy and saying it is not grounded.""

Now one from Savage:

"Interest on the national debt is the third-largest federal spending category. In the last 12 months, the Treasury has paid more than $400 billion in interest — and rates are currently at historically low levels. A ratings drop could cost the taxpayers billions in extra interest payments every year. Worse, the higher rates needed to entice borrowers also would negatively affect our economy.

The United States still maintains its “triple A” bond rating, but the downgrade warning signifies concern that Congress will not act prudently to rein in deficit spending.

In its statement, S&P emphasized “the importance of timely bipartisan cooperation and action on fiscal reform.”"

The Wall Street Journal has an article with a chart showing how annual interest payments on the debt will change in the near future. They also say that it was $200 billion this past year. See As Budget Battle Rages On, a Quiet Cancer Grows

What Do Men In China Need To Get A Bride?

2011-04-17T15:48:00.000-07:00

See For Many Chinese Men, No Deed Means No Dates from the NY Times. Excerpts:

"Although there are few concrete ways to measure the scope of involuntary bachelorhood, more than 70 percent of single women in a recent survey said they would tie the knot only with a prospective husband who owned a home.

Among the qualities they seek in a mate, 50 percent said that financial considerations ranked above all else, with good morals and personality falling beneath the top three requirements. (Not surprisingly, 54 percent of single men ranked beauty first, according to the report, which surveyed 32,000 people and was jointly issued by the Chinese Research Association of Marriage and Family and the All-China Women’s Federation.)

The marriage competition is fierce, and statistically, women hold the cards. Given the nation’s gender imbalance, an outgrowth of a cultural preference for boys and China’s stringent family-planning policies, as many as 24 million men could be perpetual bachelors by 2020, according to the report.

Zhang Yanhong, a matchmaking consultant at Baihe, one of the country’s most popular dating sites, said many disheartened men had simply dropped out of the marriage market.

“This fixation on real estate has twisted the popular notion of love and marriage,” she said. “Women are putting economic factors above everything else when looking for a mate, and this is not a good thing for relationships or for society.”"

"Many women are unapologetic about their priorities, citing the age-old tradition in which men provided a home for their brides, even if that home came with a mother-in-law."

"With such women on the prowl, even men who do have their own homes have come up with techniques to weed out the covetous and the inordinately materialistic."

Do We Need To Raise Taxes On The Wealthy?

2011-04-15T09:18:00.000-07:00

I submitted an op-ed article to the San Antonio Express-News about this issue. It looks like it will not get printed. In it, I disagreed with the idea that we need to raise taxes on the wealthy and upper income groups. The article that I responded to was Millionaires and their tax request.

What I submitted is below. One thing I should add is that economist Veronique de Rugy wrote at the Reason magazine site the federal government has never been able to collect 21 percent of GDP in tax revenues. Even in the 1950s when the highest tax rate was over 90%.

"I disagree with investment banker John Kortenhaus who wants to increase taxes on the wealthy (“Millionaires and their tax request,” April 2).

For one, he says “trickle-down” economics doesn’t work, that the spending of the rich won’t create jobs. But we would have to compare this to how well government spending creates jobs and some economists are skeptical of that, too. There is no guarantee that the federal government will spend the money wisely.

Then he says “the wealthy ought to pay progressively higher percentages of their incomes in taxes because they benefit more” from government. It might be true the rich get more from government, but that does not necessarily prove progressive taxes are a good idea.

Let’s look at a flat-rate tax system. With a tax rate of 20%, someone earning $100,000 pays $20,000 in taxes, ten times what someone who earns $10,000 pays.

That seems equitable: You make ten times as much, so you benefit ten times as much from government. Paying ten times as much in taxes covers your benefits.

I am not aware of any scientific study that proves the rich receive disproportionate benefits from government.

He also says “many inherited their wealth.” But according to the book The Economics of Macro Issues, “current living standards are chiefly determined by the incomes people have earned for themselves” and not inheritance.

He then also says some inventors are lucky and don’t deserve their high incomes. But how would the government figure out who was lucky and should have to pay progressive taxes and who was not lucky?

I don’t think they could and making all high-income people pay progressive tax rates and punishing some who don’t deserve it seems like using guilt by association.

Maybe someone like Bill Gates could not have gotten so rich one-hundred years ago since there were no computers.

This only shows that all of us are much better off than people once were. It does not tell us that the rich have disproportionately benefited from progress. The typical low-income person is also much better off now, too.

Where does all this progress come from? Partly from entrepreneurs, some of the people Mr. Kortenhaus wants to tax so much.

Recently the eminent economic historian Deirdre McCloskey said around the year 1800 economic growth took off because societies started to treat entrepreneurs, their innovations and their drive to earn high incomes with dignity.

High taxes on the rich might hurt the innovation that benefits us all. Is punishing them a good vision for America?

We have income mobility, too. From 2001-2007, 44% of the top income earners fell out of the top bracket (top fifth). High incomes may be fleeting. Why punish some for having a good year with extra-high taxes?

Relying too much on the rich for tax revenue can hurt budgets in a recession. The Wall Street Journal recently reported that high income earners saw even bigger losses than everyone else in the recession. That partly explains the big deficits in many states.

In 2007, 37% of federal income tax revenue came from the top 1% of income earners. If we tried to get even more revenue from them, when the next recession hits and they see larger than average income drops, the federal deficit will grow even more.

I do agree with him on eliminating some deductions and loopholes that allow the rich to pay less in taxes, but let’s be careful before we make the system even more progressive.

Finally, full disclosure: I am not a millionaire even though the one car I own is a Honda Civic."

Why is college so hard?

2011-04-13T13:21:00.000-07:00

This was a guest column I wrote that appeared on The Ranger website (that is the school paper for San Antonio College). Here is the link:

Why is college so hard?

Smokers and the obese cheaper to care for, study shows

2011-04-10T13:35:00.000-07:00

See Smokers and the obese cheaper to care for, study shows from the New York Times. The idea is that the healthy live longer and that tips the scales to make them more costly. Excerpt:

"The researchers found that from age 20 to 56, obese people racked up the most expensive health costs. But because both the smokers and the obese people died sooner than the healthy group, it cost less to treat them in the long run.

On average, healthy people lived 84 years. Smokers lived about 77 years and obese people lived about 80 years. Smokers and obese people tended to have more heart disease than the healthy people.

Cancer incidence, except for lung cancer, was the same in all three groups. Obese people had the most diabetes, and healthy people had the most strokes. Ultimately, the thin and healthy group cost the most, about $417,000, from age 20 on.

The cost of care for obese people was $371,000, and for smokers, about $326,000.

The results counter the common perception that preventing obesity will save health systems worldwide millions of dollars."

Why High Taxes To Pay Back The Debt Might Be A Problem For Economic Efficiency And Future Economic Growth

2011-04-08T08:44:00.000-07:00

This is a continuation of Wednesday's topic.

Suppose that you buy a new shirt every month for $20. But now there is a high tax on shirts to help pay back the debt so that the price is $35. You might not buy that new shirt. Many other people might not, either. Then some stores go out of business and some t-shirt makers lay off workers. This will slow down economic growth in the future.

Also, if taxes are especially high, businesses will have less incentive to invest (build new factories, stores, restaurants, buy new capital, etc.). Less capital means less economic growth. The problem with taxes is that each incremental tax increase causes more harm to economic efficiency than the previous increase (and probably harms economic growth more). I will explain more of this below.

But also remember that just a small drop in the growth rate hurts us in the long run. For example, in the last 30 years or so, the annual growth rate in the real GDP in the U.S.has been about 2.8%. If per capita GDP goes up 1 percentage point less than that to take population growth into account, we would have a per capita growth rate per year of 1.8%.

If 30 years ago per capita GDP was $27,500 then today it would be about $46,900 (actually close to what it really was last year). But what if we had only grown 1.3% per year? The per capita GDP would be only $40,500. That would be $6,000 less, which is big and that kind of difference just keeps getting bigger over time and that is only a .5% lower growth. This big difference is due to compound interest.

Below is a letter to the editor of the WSJ I wrote a few years ago. It helps explain the exponentially growing damage that taxes cause:

"Stephen Moore did a great job explaining how complicated our tax code is and how high taxes have gotten relative to what was originally promised in 1913. One other way to see the insidiousness of taxes is to realize that they are just as much the "noise" in the economy as prices are the "signals." The income you get paid is the price for your services and therefore signals the value of those services. But taxes reduce the clarity of that signal (hence, they are noise) by reducing how much of your pay you actually get to keep. As taxes increase, the noise-to-signal ratio in the economy increases even more, meaning distortions, and the misallocation of resources they cause increases disproportionately. For example, if the income tax rate is 10%, you keep 90% of your income. The noise-to-signal ratio is .111 (or .1/.9). But if the tax rate goes up by .10, or to 20%, the noise-to-signal ratio goes up even more, by .15 to .25 since you keep 80% of your income. The .25 comes from .20/.80 equaling .25. Another .10 increase in the tax rate increases the noise-to-signal ratio by .179 from .25 to .429. Then going from a 30% tax rate to a 40% tax rate makes it go up by .238, from .429 to .667. Every tax increase causes increasing damage to the economy's ability to efficiently allocate resources."

This is consistent with the fact that deadweight loss also grows exponentially with tax increases. There will be some links to deadweight loss at the end of this post (my students can simply look at the appendix to chapter 3 in their textbooks). But the idea is that a tax on a good causes the problem mentioned above when the price of a shirt increases.

In supply and demand, if an excise tax has to be collected by the seller, the supply line shifts up by the amount of the tax. In the graphs below, the green triangle shows the deadweight loss or the total economic harm from the tax.

In the first graph, the tax on the good is $2 per unit, so the supply curve shifts up by $2 (the red line represents the new supply line). The area of the green deadweight loss triangle is 1 (one-half times the base times the height (I turn it sideways to make a base of 2)).

But in the second graph, the tax is doubled. It is $4 per unit, so the supply curve shifts up by $4. Now the area of the deadweight loss triangle is 4. So we doubled the tax but the damage caused has quadrupled. This shows that tax increases cause exponential damage to economic efficiency, which harms economic growth in the future.

If the supply line gets shifted up by $20 (if taxes were that high), then there would be no market left at all.

Links on deadweight loss:

Deadweight loss

Deadweight loss

Gross public debt exceeding about 90% of annual economic output can slow growth

2011-04-06T11:52:00.000-07:00

See Reinhart and Rogoff: Higher Debt May Stunt Economic Growth from the WSJ blog last year.

"To all the reasons to worry about the rapid rise in government debt in the wake of the financial crisis, add another: It’ll stunt our growth.

In a new paper presented Monday at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard study the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: Countries with a gross public debt debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.

The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013.

“If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies,” says Ms. Reinhart.

The relationship between government debt burdens and growth is even stronger for emerging-market economies, Ms. Reinhart and Mr. Rogoff find. For countries above the 90% threshold, average annual growth was about three percentage points lower than for countries with public debt of less than 30% of GDP. The countries above the threshold also experienced much higher inflation: prices rose more than twice as fast as in countries with small debt burdens."

I will post more about this on Friday. But the big issue for me is that taxes might have to rise so much that they hurt economic growth. The loss of economic efficiency or deadweight loss grows faster than taxes. That is, every one percentage point increase in the tax rate causes more than a one percentage point increase in deadweight loss.

In the long run, that slows down growth in the economy. Even if the economy only grows 0.1% less or 0.2% less than otherwise, those losses compound every year and after 30 years we start to see big losses in our incomes (or they don't grow to as much as they could have).

North Dakota Is Number One!

2011-04-03T16:04:00.000-07:00

See Why North Dakota May Be the Best State in the Country to Live In. The state has the lowest unemployment rate (3.8%), in 2009 had the third highest GDP growth rate, the fourth lowest crime rate and the state government has a budget surplus. Why?

"North Dakota's economic good fortune is pretty much a function of being a major producer of two very in-demand commodities: wheat and oil, both of which have seen huge global price increases. The state is the country's #1 producer of durum wheat -- that's what pasta is made from -- and is also a major grower of other crops including barley, pinto beans, and flaxseed."

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

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

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

Obama To Pitch For The White Sox

2011-04-01T07:30:00.000-07:00

April first 2011 will go down in history. Click White Sox Sign Obama For Left-handed Bullpen Support to read all about it.

Fourth Quarter GDP Revised From A 2.8% Increase To A 3.1% Increase!

2011-03-30T17:26:00.001-07:00

My students know how exciting this news is. See 4th Quarter U.S. GDP Revised Up to 3.1% Growth.

Why is this exciting? Let's suppose that per gapita GDP is $50,000 (it is a little less than that right now). Now what if over the next 20 years GDP (actually real GDP) rises every year by 3.1% instead of just 2.1%? How much difference will this make?

First, we need to say what the annual per capita GDP increase will be. Per capital GDP is GDP divided by population. What if we assume that population grows 1% per year. Then instead of an increase in per capita GDP of 3.1%, it would be about 2.1% (and instead of 2.8%, it will be about 1.8%).

Compounding an annual increase of 2.1% over 20 years would leave us with a per capita GDP of $75,460. That is more than $3,000 above what it would be if we grow only 1.8% per year ($71,188). An extra $3,000 in everyone's pocket is exciting news.

One technical note. When you see numbers like this reported in the media, real GDP did not increase 3.1% in the fourth quarter. It means that if it increased at the rate it actually did for that quarter for a whole year, then the yearly increase would be 3.1%. It would have increased about 0.766% for the quarter. If it does that for 4 straight quarters, the GDP will end up being about 3.1% higher than it was before.

Will The Real Multiplier Please Stand Up?

2011-03-27T14:37:00.000-07:00

In the past few weeks in my macro classes, we have talked about the government spending multiplier. But not all economists agree on what the numerical value of the multiplier is. See Much ado about multipliers: Why do economists disagree so much on whether fiscal stimulus works? from "The Economist" magazine in Sept. 2009. Here is an excerpt:

"Different assumptions about the impact of higher government borrowing on interest rates and private spending explain wild variations in the estimates of multipliers from today’s stimulus spending. Economists in the Obama administration, who assume that the federal funds rate stays constant for a four-year period, expect a multiplier of 1.6 for government purchases and 1.0 for tax cuts from America’s fiscal stimulus. An alternative assessment by John Cogan, Tobias Cwik, John Taylor and Volker Wieland uses models in which interest rates and taxes rise more quickly in response to higher public borrowing. Their multipliers are much smaller. They think America’s stimulus will boost GDP by only one-sixth as much as the Obama team expects."

Factors Influencing The Price Of Gas

2011-03-25T19:42:00.000-07:00

See Gas prices are about more than just oil. Here are some excerpts:

"Gas prices rise when oil prices rise, and fall when oil prices fall — except when they don't. What you pay at your gas station depends on an array of factors, from what happens on an exchange in New York to what the competition is charging."

"Sellers of commodities, like gas station owners and refineries, price their product based not on what it costs to produce it, but on what it costs to replace it. Stations like the Plainfield BP, which gets shipments of gas several times a week, must constantly adjust their prices to keep up with the changing costs of their shipments.

Oil is the biggest factor in gas prices. It accounts for 50 to 70 percent of the cost."

"In the next few weeks, gas prices are expected to rise as refiners switch to a more expensive blend of gasoline designed to help protect against evaporation during the warmer summer months."

"A wholesaler like BP or Gulf each has its own formula for setting the rack price. In an attempt to smooth out the spikes and dips of the market, a wholesaler usually buys some of his fuel through long-term contracts. The rest is bought on the so-called spot market, priced at a given moment by a benchmark like the New York Harbor gasoline price."

""If gasoline prices drop a dime, a station will only pass along one or two pennies a day," says Patrick DeHaan, an analyst at GasBuddy.com, a website that collects and publishes retail gas prices. "They are slower to pass along the discount because they need to make up for money they lost when prices went up.""

88% Of Bavarian Doctors Give Their Patients Placebos

2011-03-20T14:11:00.001-07:00

See Half of all German doctors prescribe placebos, new study shows: Placebo cures shown to help with depression and stomach complaints – in Bavaria, 88% of doctors have prescribed them. They might help save money, too. Here are excerpts:

"The report says placebos, from vitamin pills to homeopathic remedies or even sham surgery, can prove highly effective in various treatments."

""Placebos have a stronger impact and are more complex than we realised. They are hugely important in medicine today," says Christoph Fuchs, the managing director of the BÄK.

The report recommends that students and doctors should be taught about placebos and their usage.

"Placebos can maximise the effect of medication," says Robert Jütte, author of the study and a BÄK board member.

"They can reduce undesirable side-effects and are a more efficient usage of our healthcare budget.""

"Recent research, he said, showed that placebos had helped 59% of patients who had been suffering from an upset stomach. Used to treat depression, placebos have the same effect as antidepressants in about a third of cases.

The efficacy of a placebo depends on many factors, according to the report, including the size and colour of a pill.

The more expensive the placebo, the higher the success rate, the study found, and intravenous injections are shown to be more effective than oral medication.

It's also a question of trust. Placebos produce better results if a patient feels their doctor understands their concerns, and believes they are being taken seriously, the study says."

I have blogged about this before. See

Study: Half of American Doctors Give Patients Placebos Without Telling Them.

Can A Product Work Just Because It's Expensive?

Placebos: The More You Think They Cost, The Better They Work

People Waiting In Line For The Apple iPad 2 Is Socially Wasteful So The Price Should Be Extra High The First Few Days

2011-03-12T09:04:00.000-08:00

See Woman Sells First Spot in iPad 2 Line For $900. She waited in line for 41 hours. This benefits no one one. No goods or services are created. It is wasted time and is inefficient. The iPad 2 starts at $499.

Apple should charge a higher price to begin with to avoid these long waiting lines. There is a shortage at the $499 price the first few days. They could start at $1000 and lower it $100 each day until it is back down to $499. Once these waiters get one they sell them for a very high price to someone else anyway and some go even higher than $1000 when sold on eBay.

Apple could get some great PR by donating the extra profit to charity. They could use that money to donate computers to schools. People who bought at the extra high price early on could get a t-shirt that says they support the Apple school computer initiative. So they could get to brag about their "donation."

Is It Getting Too Expensive To Go College?

2011-03-09T13:09:00.000-08:00

Hedge-fund manager and author James Altucher says he will not be sending his kids to college. See Rethinking College as Student-Loan Burdens Rise. This link has both an article and a video clip. (Hat Tip: Frances Minten)

But remember that on average, college grad makes about 75% more a year than someone who only has a high school diploma. So let's say that if a high school grad makes $24,000 a year then the college grad is making $42,000. That is an extra $18,000 a year and it won't take long to make up for the $100,000 average cost of going to college.

Here are some earlier posts on related topics:

Maybe That College Degree Is Not As Valuable As You Thought

As college costs rise, sticker shock eased by student aid

Does It Pay To Go To College?

The EU Says Insurers Can No Longer Discriminate On The Basis Of Gender

2011-03-06T16:25:00.001-08:00

See EU Closes Insurers' Gender Rate Gap from The Wall Street Journal, 3-2-11. This is actually bad news for women. Here are some key excerpts:

"The European Union's highest court declared illegal the widespread practice of charging men and women different rates for insurance, setting in motion an overhaul of how life, auto and health policies are written across Europe.

Two Belgian men had challenged the higher life-insurance premiums charged to members of their sex, arguing that it was discriminatory. In a ruling Tuesday, the Luxembourg-based European Court of Justice agreed.

The judgment can't be appealed. It will have vast implications: Insurers routinely charge women, who live longer, lower premiums for life insurance; young male drivers, who statistically cause more accidents, pay higher premiums for auto policies."

"A study last year commissioned by the British insurers' group found excluding sex would have a particular impact on the auto policies of young women, whose premiums could rise by as much as 25%."

The Problem In The Middle East Might Be The State Preventing Entrepreneurship

2011-03-04T16:54:00.000-08:00

I saw this article mentioned at Carpe Diem, the blog of economist Mark Perry. It links an article in the New Yorker by James Surowiecki called The Tyrant Tax. Here is one paragraph:

"Healthy economies need a thriving and independent private sector, where resources are allocated by markets and competition, and where small and medium-sized businesses can flourish. But in most of the Middle East the state and big business are so tightly intertwined as to be indistinguishable, and competition has been discouraged in favor of central planning and private monopolies. It’s hard for entrepreneurs to start and run a business. Minimum capital requirements tend to be high, so you can’t get started without lots of cash, and getting business licenses and registering property are frequently arduous. Political favoritism is rampant, and byzantine regulations are difficult for outsiders to navigate. It’s instructive that the young man whose self-immolation helped set off the protests in Tunisia had had his fruit cart confiscated for violating some government rule."

and

"The state’s intrusive presence forces much economic activity off the books—in Egypt, eighty-five per cent of small businesses are in the “informal” sector—and this reduces growth, since informal businesses have a hard time getting credit or expanding beyond a certain size."

and

"Strict regulations enable the government to protect its friends in the private sector from competition, and bureaucrats line their own pockets, becoming further indebted to the system."

and

"Not surprisingly, when autocratic regimes in the region have tried to change their economies they’ve done so primarily with an eye toward maintaining power. In the past decade, countries like Egypt, Jordan, and Algeria have made vaunted public commitments to reform. But, as a recent study by the political scientist Oliver Schlumberger shows, reform did not, for the most part, aim at introducing genuine free-market competition, the most important feature of a healthy capitalist system. Instead, it strengthened what he calls “patrimonial capitalism”—a system in which the key determinant of success is how close you are to those in power."

Qatar Is The New Number One

2011-03-02T18:17:00.000-08:00

In per capita GDP, that is. The table below shows the the top 10 countries in per capita GDP based on the the CIA's 2010 estimates (they are not all from 2010-Liechtenstein's estimate comes from 2007, for example).

Click here to go to the CIA World Factbook. The numbers are based on "purchasing power parity," which means the differences in cost of living between countries is taken into account. But it does bother me that our most recent estimate for Liechtenstein is from 2007. With all their riches, they could be a threat. So maybe the CIA should pay closer attention to them.

Update 3-4: Commentor "Sparrow" mentioned that Qatar uses slave labor. Here is a UN report on that Trafficking in Persons Report 2008 - Qatar. Here is a recent news story Online Petition Asks Qatar to Fight Human Trafficking in Advance of World Cup.

From The Life Is Not Fair Catergory: Better Looking, Tall, Thin People Make More Money

2011-02-27T16:01:00.001-08:00

See Ways Your Appearance Affects Your Paycheck. Here are some excerpts:

"Men who are at least 6' tall make an average salary of $5,525 more than their shorter, 5'5 counterparts..."

"... 1% increase in body mass [for a woman] results in a 0.6 percentage point decrease in family income..."

"people with above average looks typically received premiums in pay of 5% or more, and that less attractive people "suffered a salary penalty of up to 9%.""

Here is some research from a few years ago that explains why looks might matter from an evolutionary perspective:

"So you think beauty is in the eye of the beholder? Think again. According to new research from the University of Exeter in Great Britain, the preference for pretty faces over ugly ones is embedded in our brains from the moment of birth and possibly prior to birth.

Newborn babies come fully equipped with built-in preferences, including a preference for an attractive face, that help them make sense of their new environment, report the BBC News Online and Newsweek magazine. The Exeter researchers showed more than 100 infants two images that were placed side by side. One was of an attractive face, while the other was a less attractive face. The babies, ranging in age from five hours old to two days old, spent about 80 percent of the time looking at the attractive face, while barely glancing at the unattractive face.

"You can show them pair after pair of faces that are matched for everything other than attractiveness. This leads to the conclusion that babies are born with a very detailed representation of the human face," Dr. Alan Slater, a psychologist at Exeter, explained to the BBC News. Why would infants have this capability? "It helps them to recognize familiar faces--particularly that of the mother--and it helps them in learning about the social world. Attractiveness is not simply in the eye of the beholder, it is in the brain of the newborn infant right from the moment of birth and possibly prior to birth," he added.

When those babies grow up, the preference for pretty faces doesn't change. And it crosses all cultures and geography as well. When an insular European is shown the faces of two Africans, the one he chooses as most attractive is also the same one an African chooses. And it works the other way around when an African is shown the faces of two Europeans.

"Although we think that standards of facial beauty vary over time and culture, they don't actually change that much," Slater explained to Newsweek. The evidence indicates that there is a biological and universal standard."

So don't blame a man when he can't help but look at a pretty face! He's biologically programmed that way."

The Percent Of The Civilian Noninstitutional Population Employed Since 1970

2011-02-25T17:33:00.001-08:00

(This is a post from last October with an update at the end, including a link to a comaparison of unemployment rates in different countries from 2002-09)

I talked about unemployment in my macro classes yesterday. If you go to this site by the Bureau of Labor Statistics called Employment status of the civilian noninstitutional population 16 years and over, 1970 to date, you can see unemployment rates going back to 1970. It also shows the percent of the civilian noninstitutional population that is employed. The graph below shows how that has changed over time.

The general trend since 1975 has been up, although it has flutctuated. Unfortunately, it has been going down for a couple of years and we are well below the high of 64.4% in the year 2000. It was 59.3% in 2009.

But the average for the years 1970-84 was 58%. So we are still above that. That does not mean what we have is good. But it just puts what is currently going on in perspective.

Some will say that we have a large prison population, so they are not part of the figures and that prison population has been growing. In 2008, the U. S. prison population was 1,610,446. See Prisoners in 2008. Suppose we increase the number of people in the civilian noninstitutional population by that amount. Right now it is 235,801,000. The new figure will be 237,411,446. Now let's keep the number employed the same, at 139,877,000. That would 58.9% employed, still higher than the average from 1970-1984.

Now there were some tough economic times in that earlier period. But we survived and we weren't exactly destitute. So although the economy is not doing well right now, maybe things are not so bad.

Update: For all of 2010, the percent employed in the US was 58.5%. From 1975-83, the average annual unemployment rate was 7.7% and the the average inflation rate was also 7.7%. The average annual percent employed in that period was 58.21%, still less than what we had in 2010 or any other recent year. The last 9 years averaged 61.9%.

Click here to see international comparison of unemployment rates by country.

Also, here is something from the Wall Street Journal last December about how GDP growth is related to unemployment:

"Okun's Law," as it came to be known, has been tweaked over the years, and now states that for every two percentage points the economy grows above its long-term trend annually, unemployment falls by a percentage point.

Most economists peg the economy's long-term trend rate at about 2.5%, which is roughly where economists polled by The Wall Street Journal estimate growth stands in the current quarter.That means, according to Okun's Law, that the economy isn't growing fast enough to bring down unemployment."

We Spend A Much Smaller Percentage Of Our Incomes On Food And Clothing Than We Used To

2011-02-23T12:21:00.000-08:00

Economist Mark Perry has posted two great graphs at his blog (links to the two entries are below). But here are the graphs, They show that over time the percentage of our income that we spend on food and clothing has been falling. It looks like in 1950 that about 30% of our income went to food and clothing combined. Today it is only about 12.5%.

Here are the links to his two posts on this:

As a Share of Income, Americans Have the Most Affordable Food in World & It's Never Been Better

As a Share of Income, Clothing and Footwear in U.S. Are More Affordable Today Than Ever Before

Can Some Places Really Be The "Best" Places To Retire To?

2011-02-20T12:50:00.001-08:00

See The Best Places to Retire Outside the U.S.

But if people really believe this and many of them go to a given country, things won't be very fun due to the crowds (which reminds me of something that Yogi Berra said about a restaurant: "nobody goes there anymore, it's too crowded").

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

This applies to any of the countries on the list in the article. Once everyone sees it as a good deal, they start going there. Only people with unusual tastes will really enjoy it. That is, you will have to like what that country has to offer alot more than the average person or the crowds and congestion will erode your enjoyment. That country won't be any better than anywhere else for retirement. Other places will be just as desirable.

Incentives Matter, Even When It Comes To Returning Bottles

2011-02-19T08:57:00.000-08:00

See Shades of 'Seinfeld': Maine bottle scam alleged form the AP. Here are the first two paragraphs:

"A memorable "Seinfeld" episode features Kramer and Newman taking thousands of cans and bottles to Michigan so they can get a nickel more per container than they would in New York, but beverage distributors say there's nothing funny when it happens for real.

In Maine, which has a more expansive bottle-redemption law than neighboring states, three people have been accused of illegally cashing in more than 100,000 out-of-state bottles and cans for deposits, the first time criminal charges have been filed in the state over bottle-refund fraud, a prosecutor said.

A couple that runs a Maine redemption center and a Massachusetts man were indicted this week for allegedly redeeming beverage containers in Maine that were bought in other states."

And here is more:

"An estimated 90 million cans and bottles are fraudulently cashed in each year in Maine, costing beverage distributors $8 million to $10 million, said Newell Augur, executive director of the Maine Beverage Association.

People from other states — especially New Hampshire, which has no "bottle law" — routinely redeem loads of cans and bottles in Maine, Augur said. Redemption centers pay customers 5-cent refunds on most beverage containers and 15 cents for wine and liquor bottles. The centers, in turn, get that money back from distributors, plus a 3 1/2- or 4-cent handling fee per container."

And

"Officials estimate that up to 1 billion beverage containers are sold in Maine each year. Containers sold in other states, however, carry the Maine deposit stamp because it's not cost-effective to change labeling for each state."

Adam Smith, Marriage Counselor

2011-02-16T14:28:00.000-08:00

That is an article from the NY Times. Click here to read it. It is by Jenny Anderson, co-author of the book “Spousonomics,” written with Paula Szuchman (as you can probably guess, I am continuing with the Valentine's theme from Sunday).

They discuss how using incentives and economic theories like loss aversion, game theory and information processing costs can improve your marriage. The two authors answered questions at Freakonomics.

Finally, neuro-economist Paul Zak explains why romance in the workplace is important. Go to The Container Store Cheers Office Romance, Love This Valentine's Day. Here is an excerpt:

"Research has shown that a loving work environment causes the brains of those in it to produce the neurotransmitter oxytocin, which motivates people to care for the people around them, the company says, citing the findings of Paul Zak, founding director of The Center for Neuroeconomics Studies and professor of economics psychology and management at Claremont Graduate University.

In 10 years of research, I have shown that when we are loved and trusted, we in return love and trust others," Zak told WalletPop.

"Love is the foundation for all economic exchange which, at its core, is about serving others. Love creates employee engagement, builds customer loyalty and creates sustainable businesses. Imagine that: the best business practices derive directly from love.""

A Special Valentine's Message On Romantic Love

2011-02-13T11:30:00.000-08:00

Below is a repeat of last year's Valentine's day post. First there are a couple of new links:

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

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

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

Now the economic definition of romantic love.

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

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

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

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

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

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

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

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

New Technologies Open Up Oil And Gas Reserves

2011-02-11T10:33:00.000-08:00

In one of my macro sections this week we read a chapter from the book The Economics of Macro Issues about technology. It mentions how better techniques have expanded our proven reserves of resources like oil. Some more cases of this were in the news recently.

One was New drilling method opens vast oil fields in US from the Associated Press. Here is an excerpt:

"A new drilling technique is opening up vast fields of previously out-of-reach oil in the western United States, helping reverse a two-decade decline in domestic production of crude.

Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day — more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers."

Something similar has happened with natural gas. See IEA doubles global gas reserves estimates from the BBC. Here is an excerpt:

"The world may have twice as much natural gas than previously thought, according to the rich nations' think tank the International Energy Agency (IEA).

The world may have 250 years of gas usage at current levels thanks to "unconventional gas" from shale and coal beds, Anne-Sophie Corbeau, senior gas expert at the IEA told BBC News."

It also has a nice picture explaining the new technique (I pasted it below). The authors of The Economics of Macro Issues also have a book called The Economics of Public Issues. Here is an interesing excerpt:

"In 1914, for example, the Interior Department announced that there was only a ten-year supply of oil left. That same department told us in 1939 that there was a thirteen-year supply. Then in 1951 we were told that oil wells would run dry in the mid-1960s. President Jimmy Carter in the 1970s said that we would use all proven reserves of oil in the world by the end of the 1980s."

Should Children Be Forced To Visit Their Aging Parents?

2011-02-09T17:39:00.000-08:00

A couple of weeks ago I had a post about something from SuperFreakonomics, how children are more likely to visit their parents in nursing homes if the parent is rich (and if they have a sibling, since they are in competition for the inheritance). Now it turns out that China might force children to visit their parents. A proposed law would allow parents to sue their children if they don't visit. It is not clear how often they would have to visit or for how long. See China Might Force Visits to Mom and Dad from the NY Times. Here is one tidbit that has economic implications:

"In Shandong Province, for instance, a court ordered three daughters to each pay their 80-year-old mother between 350 to 500 renminbi, roughly $53 to $75 a month, after the mother claimed that they ignored her and treated her like a burden, The Qingdao Evening News reported this month."

Will Computers Replace Professors?

2011-02-06T13:37:00.000-08:00

This past week in one section of my macro class we read a chapter about technology and how people respond to it from the book The Economics Of Macro Issues. It mentioned Luddites, people who destroyed industrial equipment in England in the early 1800s. They were weavers who lost their jobs to new machinery. See What is a Luddite? by Steve Anderson at Utah State University.

Today, the New York Times had an article called Online Courses, Still Lacking That Third Dimension by Randall Stross. It raised the question of computers doing the teaching, making it possible to do away with professors. Here are some excerpts:

"“We should focus on having at least one great course online for each subject rather than lots of mediocre courses,” Bill Gates suggested in his 2010 annual letter for the Bill & Melinda Gates Foundation.

Developing that best-in-the-world online course — in which students would learn as much, or more, than in an ordinary classroom or a hybrid online class — requires significant investment. The Open Learning Initiative at Carnegie Mellon University, which has developed about 15 sophisticated online courses, mostly in the sciences, spent $500,000 to $1 million to write software for each. But neither Carnegie Mellon nor other institutions, which are invited to use its online courses, dares to use them without having a human instructor, too."

'Separately, many universities have put free videos online featuring their best lecturers. And Academic Earth, an aggregator Web site founded in 2009, makes the lectures easy to navigate. It says it offers 150 full university courses.

But even when lectures are accompanied with syllabuses, handouts, sample problem sets and other aids that Academic Earth has for some of its courses, is the experience really complete? The Massachusetts Institute of Technology also shares the raw materials of courses in its OpenCourseWare program. For the benefit of autodidacts who aren’t M.I.T. students, it strives to publish materials online for every M.I.T. course. But students cannot interact and do not receive vital feedback about their own progress that an instructor or software provides.

“Unlocking the Gates,” by Taylor Walsh (Princeton University Press) is a recently published history of M.I.T.’s online venture, as well as those of Columbia, Harvard, Yale, the University of California, Berkeley, and others. Comparing the book’s case studies, I found that Carnegie Mellon seems to have made the most progress in developing fully self-contained online courses. Anyone can use them free, with the proviso that Carnegie Mellon doesn’t offer credit.

But course credit can be earned at other institutions if instructors send their students to the site. Students pay nominal course registration fees, generally $15 to $60, and Carnegie Mellon sends data about each student’s progress to the instructor at the student’s home institution.

Carnegie Mellon, however, does not use these online courses as replacements for its own humanoid instructors. “Any tuition-driven, private university would have a hard time being the first one to make a change as drastic as offering an entirely automated course,” Ms. Walsh told me recently."

Even If You Don't Like Sports, You Might Be Paying For Them

2011-02-04T12:40:00.000-08:00

See The Price of Football That Even Nonfans Pay by Mark Frost. From the Wall Street Journal, page D6, February 3, 2011. Cities spend tax payers money on stadiums. They don't always generated the hoped for benefits and some cities are still paying for stadiums that have be demolished. Here are some excerpts from the article:

"...the state (i.e., the taxpayers) still owes about $110 million in debt on the old Giants Stadium."

"Harris County, Texas, still owes about $32 million in debt on the Houston Astrodome, which opened in 1965 and was dubbed the "Eighth Wonder of the World." The RCA Dome in Indianapolis, which was demolished in 2008, still has about $60 million of outstanding debt and will not be paid off for at least 10 years. Even tiny Vero Beach, Fla., longtime home to Dodgers Spring Training, is on the hook for some $17 million in debt after the Dodgers moved to Glendale, Ariz., two years ago. Pima County, Ariz., taxpayers similarly still have to pay $21.3 million in stadium debt after the Chicago White Sox and Arizona Diamondbacks moved their training camps to Phoenix from Tucson."

""The problem with tearing down stadiums early isn't the debt," said Neil deMause, who co-wrote "Field of Schemes" (Bison) and blogs at a website with the same name. "It's the revenues that you're giving up by allowing teams to move into new buildings with sweetheart leases.""

"...there was nothing functionally wrong with the old Yankee Stadium, the old Giants Stadium, or many other stadiums that have been replaced over the past decade. The problem was that the old stadiums didn't generate enough luxury revenue. So New Jersey, which is about $36 billion in debt at last count, gave up about $15 million in annual tax revenue so that the Giants and Jets could be more profitable."

"The politicians spent the money that was originally intended to pay off the debt on other things. It's a common problem. Revenues get diverted to other programs and the stadium debt gets refinanced."

"The other problem is that cities often overestimate how much revenue a stadium tax will generate—and they often do it to make the new tax and the new stadium more palatable to the citizenry."

If Profits Are Up, Why Is The Unemployment Rate Still Over 9%?

2011-02-02T16:09:00.000-08:00

See Profits Are Booming. Why Aren’t Jobs? by Michael Powell. From the NY Times, 1-9-11. Here are some of the reasons he gives as possibilties:

"More so than in the past, many American-based corporations earn a great portion of their profits overseas. And thanks to porous tax laws, these companies return fewer of those profits to American shores than in the past.

“The big American companies are really global,” said Robert Reich, former labor secretary for President Clinton. “They can show big profits from foreign sales. G.M. is making more Buicks overseas than in the United States. There’s no special pop for the United States worker.”

Key corporate sectors, too, have undergone a Darwinian pruning during the last three years. In the financial arena, a few hyperprofitable firms now stand where many more once stood.

“If you’re Goldman and Morgan Chase, and you once had to compete against Bear Stearns and Merrill Lynch, well, of course it’s easier now to show a profit,” said Daniel Alpert, managing partner of Westwood Capital L.L.C., an investment banking firm. “If you have a modest reduction in expenses, and an industry consolidation at the same time, that translates into a massive increase in earnings.”

Surviving corporate leaders drew sobering lessons from their near-death experience of 2008 and 2009, when brand-name corporations nearly ran short of the cash needed to meet payrolls.

“They found the financial system was nowhere near as safe as they thought — they no longer think they can borrow as quickly,” said Simon H. Johnson, an economics professor at M.I.T. and former chief economist for the International Monetary Fund. “So the amount of cash that they think they should have for precautionary purposes is way up.”

Interest rates are so low that traders can pile up profits by exploiting the spread between a near-zero funds rate and rates on Treasury bonds. This allows some corporations to mark profits without selling much or hiring anyone.

Desmond Lachman, a former managing director at Salomon Smith Barney who now serves as a scholar at the American Enterprise Institute, a conservative policy center, sees corporate leaders reshaping their worlds.

“Corporations are taking huge advantage of the slack in the labor market — they are in a very strong position and workers are in a very weak position,” he said. “They are using that bargaining power to cut benefits and wages, and to shorten hours.” That strategy, Mr. Lachman said, serves corporate and shareholder imperatives, but “very much jeopardizes our chances of experiencing a real recovery.”

These profits, however, may not be as large as they seem. Justin Fox, editorial director of the Harvard Business Review Group, dices the question of productive corporate profits still more finely in a recent column. He figures that pre-tax domestic corporate profits exclusive of the financial sector are the best measure of the “underlying health of business in America.”

He’s not terribly impressed. Profits for these companies “repeatedly topped 12 percent in the 1950s and 1960s,” he writes. But in the third quarter of 2010, this sector’s share of national income stood at 7.03 percent.

Some economists, conservative and liberal, divine forbidding portents in all of this. If profits and employment no longer rise and fall together, they worry, then an already strained social compact will grow yet more frayed.

Market bulls applauded in November when the Conference Board revealed that consumer confidence was on the rise. But David Rosenberg, an economist at the investment firm Gluskin Sheff, noted that this increase owed entirely to the optimism of higher-income Americans, who are feeling better and better."

31% Of Americans Cheat On Their Spouses--About Finances

2011-01-30T13:51:00.000-08:00

See Is Your Partner Cheating On You Financially? 31% Admit Money Deception. It seems selfish to cheat. If there is any circumstance in which people might not follow their own self-interest, it would be with their significant other. Yet many people admit to doing it.

A related post from last Sept. was Should You Break Up With Your Fiancé If They Have Too Much Debt?

This cheating undermines trust in the relationship. One woman says she does not tell her current husband about the child support she gets from her first husband that she puts in a secret bank account.

Here are some excerpts:

"Among both offenders and victims, the leading money crimes were hiding cash, minor purchases and bills. Meanwhile, a significant number of people admitted hiding major purchases, keeping secret bank accounts and lying about their debt or earnings.

“A third of the population admits to not being honest with their spouse,” says NEFE chief executive Ted Beck. “That is a big number. These indiscretions cause significant damage to the relationship.”"

"Among couples impacted by financial infidelity, 67% said the deception led to an argument and 42% said it caused less trust in the relationship. Perhaps most alarming, 16% of these respondents said the money lie led to a divorce and 11% said it led to a separation."

"According to the survey, over half of all financial cheaters admitted hiding cash (58%) or minor purchases (54%). NEFE’s Beck says this is particularly concerning, as small lies often compound over time to become increasingly larger and more harmful deceptions. Of the offenders, 30% have hidden a bill, 16% have hidden a major purchase, 15% had a secret bank account, 11% lied about their debts and another 11% lied about the amount of money they earned."

Want Your Kids To Visit You When You're In A Nursing Home? Then Be Rich

2011-01-28T08:21:00.000-08:00

See Do We Really Only Care About Ourselves? What Makes People Give? Economists Say Charity Almost Always Has Strings Attached from ABC News. They talked to Steven Levitt and Stephen Dubner, authors of the books Freakonomics and SuperFreaknomics (links to their Amazon pages are below).

Here is an excerpt:

"What the "SuperFreakonomics" duo found at retirement homes surprised them.

"If you're a parent in a nursing home, the best predictor that your child will show up is if you, the parent, are quite rich," Levitt said. "Children of rich parents are much more likely to show up in nursing homes than are children of poor parents."

But even that wasn't a guarantee.

"If you didn't have to compete against your brothers and sisters to go and get the bequest, you didn't show up at the nursing home," said Levitt.

It may sound depressing to think that's what drives us, but as Dubner said, "It would be depressing if we were all just cruel and selfish all the time, but we know we're not."

Americans donate $300 billion to charity every year, according to Giving USA 2009. Clearly, we are incredibly giving. So what gives? Is this pure altruism or does something else motivate us to give?"

The whole question of how selfish or altruistic we are is one of the more important issues in economics. We normally assume people act on their self-interest. We may be altruistic, but how much?

They also mention that good looking people raise more money for charity than average looking people. People like the benefits of giving, like when a college names a building after them. So what sometimes looks like an altruistic act might be motivated by self interest. And if people are altruistic, how come we never have enough kidney donors?

They also give a different view on the famous Kitty Genovese murder and the question of whether or not 38 people watched her get killed and did nothing.

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

and

SuperFreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance.

Small Changes In Growth Rates Add Up Over Time

2011-01-26T09:06:00.000-08:00

In my macro courses we read a chapter in the book "The Economics of Macroissues." The chapter discussed how nations with common law systems, where property rights are better protected than in nations with civil law systems, have higher growth rates. I pointed out to my classes that even a small difference in growth rates ends up causing a very big difference in per capita incomes due to the annual compounding effect.

About a year ago, Paul Krugman mentioned that the per capita GDP since 1980 has grown 1.95% in the US and 1.83% in the EU. But we should also remember that small differences in growth rates compound over time. If per capita income was 20,000 in both the US and EU 29 years ago, the per capita income (or GDP) now would be 35,015 in the US and 33,839 in the EU, a difference of $1,176. Maybe not a big difference. But after 100 years the US income level would be 12% higher. After 200 years it would be 26% higher.

The table below shows how much per capita income would be at various rates after 100 and 200 years. Assume we start with a per capita income of $1,000. If we grow 2.0% per year, after 100 years it will be $7,245. At 2.1% per year, it would be $7,791 or about $700 more. That is how much that little .1% matters. The difference over 200 years is about $11,000. After 100 years at 2.5% per year, per capita income would be $11,814. That is $4,000 more than the 2.0% rate. Small differences in growth rates add up to big differences over time.

Per Capita Income After 100 and 200 Years At Various Annual Growth Rates (Starting With $1,000)

The Recession Cleaned The Air, Another Example Of How Life Is Full Of Tradeoffs

2011-01-23T13:41:00.000-08:00

One of the first things I teach each semester is how there is no free lunch. If you want more of one thing you have to give up something else. This is usually when I talk about scarcity, opportunity cost and the production possibilities frontier.

The recession has been painful for many people. But the air is probably cleaner than it otherwise would have been. See Recession Special: Cleaner Air from last Sunday's NY Times. Here are some excerpts:

"emissions of global warming gases in the United States are down.

According to the Energy Department, carbon dioxide emissions peaked in this country in 2005 and will not reach that level again until the early 2020s."

"“The recession has led to a smaller economy, less activity and less energy consumption,” said Revis W. James, director of the Energy Technology Assessment Center at the Electric Power Research Institute, a utility consortium.

Electricity consumption had been growing at a rate of 1 percent to 1.5 percent a year, but the recession brought on the steepest drop in decades. When demand fell, the utilities cut back on the use of their least-efficient generating stations, the ones that emit the highest amounts of carbon dioxide per kilowatt-hour."

Milton Friedman vs. John F. Kennedy

2011-01-21T07:27:00.000-08:00

Yesterday was the 50th anniversary of Kennedy's famous inaugural address. You might have noticed that Google commemorated it. Many writers have commented on it this past week. Below are the first two paragraphs from the introduction to Friedman's 1962 book Capitalism and Freedom. Friedman won the Nobel Prize in Economics in 1976.

"IN A MUCH QUOTED PASSAGE in his inaugural address, President Kennedy said, "Ask not what your country can do for you - ask what you can do for your country." It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not on its content. Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic "what your country can do for you" implies that government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own responsibility for his own destiny.

The organismic, "what you can do for your 'country" implies tht government is the master or the deity, the citizen, the servant or the votary. To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served. He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve. He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.

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

Would You Pay $250,000 To Get Your Friends' Respect?

2011-01-19T16:24:00.000-08:00

This is the question rasied by the article Is Law School a Losing Game? (from the NY Times) The article discusses how law school graduates are having a harder time finding good paying jobs as lawyers. In the last 10-15 years many more students have graduated but law firms have cut their staffs. Some students end up tens of thousands of dollars or even hundred of thousands of dollars in debt to pay for law school. The schools seem to fudge the numbers as to how many of their graduates actually get jobs. Many students don't make anything close to a six-figure salary.

But here is something interesting about one student, who is now $250,000 in debt:

"Mr. Wallerstein, for his part, is not complaining. Once you throw in the intangibles of having a J.D., he says, he is one of law schools' satisfied customers.

"It's a prestige thing," he says. "I'm an attorney. All of my friends see me as a person they look up to. They understand I'm in a lot of debt, but I've done something they feel they could never do and the respect and admiration is important.""

That seems like alot of money to pay to get respect. It just does not seem necessary for the price to be that high.

Tough Professors Are Better For Students In The Long Run

2011-01-16T16:06:00.000-08:00

See One Measure of a Professor: Students' Grades in Later Courses: Course sequences may indicate instructors' strengths, but colleges find the data hard to tease out. It was in the Chronicle of Higher Education (it might only available to subscribers but I'm not sure).

The research shows that although tougher professors don't give out as many A's and B's, and their student evaluations are not as good, their students do better when they get to upper level (junior and senior level) classes.

It can be hard to find this out. A study like this needs "ceteris paribus" conditions. That is, all other factors have to be held constant (something discussed in the first chapter of probably all principles of economics texts). For example, if good students intentionally take tough profs, then we can't be sure why they did better later. Was it because they were better students or because the profs were tough and upheld high academic standards?

But at the Air Force Academy, here is why they have "ceteris paribus" conditions:

"All students at the academy are required to take a common core of 30 credits. No matter how much they might hate Calculus I, they still have to take Calculus II. Most course sections are small—about 20 students—and students have no discretion in choosing their sections or instructors. Finally, every Calculus I section uses the same common tests, which are graded by a pool of instructors. (One instructor grades Question 1 for every section, another instructor grades Question 2, and so on.)

All those factors make the Air Force Academy a beautifully sterile environment for studying course sequences.

Mr. West and Mr. Carrell (the economists who did the study) didn't have to worry that their data would be contaminated by students self-selecting into sections taught by supposedly easy instructors, or male instructors, or any other bias. They didn't have to worry about how to account for students who never took the follow-up courses, because every student takes the same core sequence. And they didn't have to worry about some instructors subtly grading the tests more leniently than others."

Sitting Too Much Can Damage Your Health, But Taking Breaks May Help Offset The Effect

2011-01-13T11:24:00.000-08:00

A few days ago the news media reported on a newly published study that said that:

"Spending lots of free time glued to the TV or computer screen can hurt your heart and shorten your life, no matter how much exercise you get when you're not riding the couch, a new study suggests."

See Too much TV time may hurt your heart by Anne Harding. The research was done by Emmanuel Stamatakis, Ph.D., an epidemiologist at University College London. The article also says:

"Why is sitting harmful? It's not entirely clear, but animal studies have shown that prolonged sitting slows down the action of an enzyme (lipoprotein lipase) that breaks down fats in the blood, such as cholesterol and triglycerides. When the enzyme activity slows, levels of those substances climb. This is a "very plausible explanation" for the findings, Stamatakis says."

It concluded with "Stamatakis and his colleagues are now investigating whether getting up and walking around or even just standing can help counter the ill effects of sitting."

But just today another article came out about research which says that taking breaks will help. See Taking Short Breaks From Sitting May Help Waistline and Heart: Even a little more activity spread through the average workday boosts health, study suggests by Alan Mozes.

This research was done by Genevieve N. Healy, of the Cancer Prevention Research Centre at in the School of Population Health at the University of Queensland in Herston, Australia.

""This research suggests that even small changes to a person's activity levels [as little as standing up regularly] might help to lower cardiovascular risk. These changes can be readily incorporated into the person's day-to-day life [including the work environment]. Stand up, move more, more often, could be used as a slogan to help get this message across.""

Dave Brubeck, Economist

2010-12-08T13:23:00.001-08:00

Okay, he isn't an economist. But he is one of my favorite musicians and composers. He did say something related to economics, though, in a recent Wall Street Journal article. See Ranching's Loss, Jazz's Gain. Brubeck has been in the news lately because he celebrated his 90th birthday on Monday, Dec. 6. Here is the quote:

"Mr. Brubeck also has taken heat for prospering in a profession that isn't supposed to pay well. "It never has," he responded dryly. "My wife Iola and I were always very careful with our money. When I started out, Joe the butcher in our San Francisco neighborhood would ask me weekly if I wanted beef bones for our dog. He knew we didn't have a dog. I'd take them to make soup. I'd also go to the farmer's market to pick up discarded fruits and vegetables. We saved every penny.""

Here are some links so you can watch and hear some of his music performed:

Take Five

Blue Rondo à la Turk

The saxophonist is Paul Desmond. Eugene Wright on base and Joe Morello on drums.

Okun's Law

2010-12-05T16:11:00.000-08:00

In my macro classes when I talk about how the unemployment rate falls when GDP increases (because greater output usually requires more workers), I usually say something like "but we probably need at least some minimum increase in GDP to see the unemploymet rate go down." This where Okun's Law might come help out. See Mr. Okun Saw This One Coming: Jobs Report Follows His 'Law'.

This is the key passage:

""Okun's Law," as it came to be known, has been tweaked over the years, and now states that for every two percentage points the economy grows above its long-term trend annually, unemployment falls by a percentage point.

Most economists peg the economy's long-term trend rate at about 2.5%, which is roughly where economists polled by The Wall Street Journal estimate growth stands in the current quarter.That means, according to Okun's Law, that the economy isn't growing fast enough to bring down unemployment."

See also Arthur M. Okun from the Library of Economics and Liberty.

And Is Okun’s Law Really Broken? By JUSTIN WOLFERS.

Thrift Might Be Okay Nowadays

2010-12-03T19:13:00.000-08:00

See In a tough economy, old stigmas fall away. For example, more people are using layaway, even the wealthy.

"The old stigmas are the new realities," says Emanuel Weintraub, a New York-based retail consultant. "Now, people don't have a problem saying, 'I can't afford it.' It's a sign of strength."

Here is some evidence:

"Store-branded groceries now make up 22 percent of total sales, up from 20 percent before the recession, according to The Nielsen Co. The private-label business is worth $500 billion a year, so even a 2 percentage point change means $10 billion."

"At an Aldi location in Chicago on a recent evening, shoppers didn't care that the only recognizable brands were the Splenda sweetener, a Butterball turkey and a few kinds of candy.

Six no-name grocery items - macaroni and cheese, potato chips, cream cheese, sour cream, olive oil and guacamole - cost about $10. The same six brand-name items cost $22 at the nearby Dominick's."

"New research from American Express found that the super-affluent, which it defines as those who put at least $7,000 a month on their credit cards, spent 24 percent more on fast-food last spring than the year before. They spent 12 percent more on fine dining."

See an earlier post, Frugal Is The New Sexy.

Does Wealth Make Us Happier?

2010-12-01T16:00:00.000-08:00

In my micro class, the last chapter we covered dealt with incomes and wealth. The question "does money buy happiness?" is perennial. Matt Ridley wrote a column about some new happiness research recently in The Wall Street Journal. See Wealth Makes Us Happier, But Why? Here is an exerpt:

"As Buddhists have long recognized, attaining our desires doesn't seem to bring satisfaction, just further restlessness. This is no surprise to evolutionary psychologists. Natural selection shaped human nature to be ambitious, not to settle for contentment. The person who kept striving to be successful left more offspring behind than the Epicurean hedonist.

So the pursuit of happiness turns out to be as frustrating as hunting the holy grail. Forcing people to be jolly seems to be counterproductive. Having children, which we do to make ourselves happy, generally makes us a bit unhappier in practice.

If you ask people whether suffering a disabling accident would make them unhappy a year after the event, they say "of course." But if you ask people who were disabled in an accident a year before if they are unhappy now, they say "no." For some people at least, happiness almost seems to have a thermostat: After good or bad things happen, we return to our own personal levels of contentedness.

Nonetheless, people say they've been getting slowly happier. In 45 of 52 countries, happiness has risen during the past 30 years. This coincides with people getting richer. Contrary to myth, rich countries have slightly happier citizens than poor countries. Of course, it's possible to be rich and unhappy, as many a celebrity deliciously reminds us. A study done in the 1970s bolstered the cheering (for the rest of us) notion that rich people are not necessarily happier, but it has since been challenged by larger statistical samples, especially in the work of Betsey Stevenson and Justin Wolfers at the University of Pennsylvania.

What is it about prosperity that brings happiness? Rather than having more "stuff," it is probably the freedom that wealth buys, letting us make choices about our lifestyle—where to live, who to marry, what to wear. The political scientist Ronald Inglehart argues that the big gains in happiness come from living in a society that frees you to be yourself—"

Another interesting article is The pursuit of happiness: Author seeks to take its measure and find where people are most content. It quotes former University of Chicago psychologist Mihaly Csikszentmihalyi. He said "Without dreams, without risks, only a trivial semblance of living can be achieved."

Some earlier posts on happiness:

Does Or Can Money Buy Happiness?

Interesting Book: Stumbling on Happiness

Does Money Make You Mean?

I wonder if you can be mean and happy at the same time.

Robot Journalists-A Case Of Structural Unemployment?

2010-11-28T12:41:00.000-08:00

In macroeconomics, the definition of "structural unemployment" is usually something like "unemployment caused by a mismatch between the skills of job seekers and the requirements of available jobs." One example is when machines replace workers. Now there is a company that has created computer programs that will look at the statistics in the box score of college basketball games and then write a story about it. If any sports writers lose their jobs, they will be structurally unemployed.

See When the Software Is the Sportswriter by Randall Stross of The New York Times. It explains how StatSheet, the company involved, does it: "it just uses template sentences and a database of phrases that numbers about 5,000 for now." Here is one story written by the computer software based solely on the statistics of the game:

"Ohio State has already started living up to monumental expectations with a good first game. On November 12th on their home court, the Buckeyes waxed the Aggies, 102-61. The game lacked a lot of drama, with Ohio State up 52-25 at halftime and never letting up.

Ohio State was able to win by overpowering North Carolina A&T in rebounding and assists.

Ohio State used a big advantage on the boards to win the possession battle with 60 rebounds to 22 for North Carolina A&T. Ohio State spread the ball around and got 24 assists compared to 8 for North Carolina A&T.

Deshaun Thomas was the leading scorer for the Buckeyes with 24 points in 20 minutes. Jared Sullinger contributed 14 big rebounds.

Ohio State has incredible expectations for this season, and this victory over the Aggies was a good start.

When we look to our next game, we see a tenacious team in Florida on November 16th."

Some researchers at Northwestern University have been working on this, too. It was mentioned in a The Robots Are Coming! Oh, They’re Here
. by David Carr. Sportswriter King Kaufman had some interesting observations in the comments section.

This is okay as long as computer programs can't write blog entries:)

The Robots Are Coming! Oh, They’re Here

Who Was Alex P. Keaton's Favorite Economist? Milton Friedman

2010-11-26T12:26:00.000-08:00

Click on the following video link to find out:

Who Was Alex P. Keaton's Favorite Economist?

You will only have to watch a few minutes to find out. It is from the 1980s sitcom "Family Ties." Michael J. Fox played Alex Keaton. In this episode he tells another character that Milton Friedman was his favorite economist.

Friedman came up in macro recently while discussing the money supply and the differences between Keynesians and monetarists.

Here is what IMDB has to say about the show:

"A couple who were ardently leftwing political activists in the sixties face the problems of raising a family with children who have strongly conservative views."

Click here to go to the IMBD page about the show.

Were The Pilgrims Capitalists Or Socialists?

2010-11-24T13:38:00.000-08:00

See The Pilgrims Were ... Socialists? from The New York Times. There seems to be some controversy. One story has them owning property in common and not doing well until they went with private property. Not everyone agrees with that version of history. Here is what seems to be the most interesting thing from the report:

"Historians say that the settlers in Plymouth, and their supporters in England, did indeed agree to hold their property in common — William Bradford, the governor, referred to it in his writings as the “common course.” But the plan was in the interest of realizing a profit sooner, and was only intended for the short term; historians say the Pilgrims were more like shareholders in an early corporation than subjects of socialism.

“It was directed ultimately to private profit,” said Richard Pickering, a historian of early America and the deputy director of Plimoth Plantation, a museum devoted to keeping the Pilgrims’ story alive."

So when you eat turkey tomorrow, you might really be celebrating that great American institution...the corporation. Makes me feel real patriotic.

This part was interesting too.

"The competing versions of the story note Bradford’s writings about “confusion and discontent” and accusations of “laziness” among the colonists. But Mr. Pickering said this grumbling had more to do with the fact that the Plymouth colony was bringing together settlers from all over England, at a time when most people never moved more than 10 miles from home. They spoke different dialects and had different methods of farming, and looked upon each other with great wariness."

"“One man’s laziness is another man’s industry, based on the agricultural methods they’ve learned as young people,” he said."
"Bradford did get rid of the common course — but it was in 1623, after the first Thanksgiving, and not because the system wasn’t working. The Pilgrims just didn’t like it. In the accounts of colonists, Mr. Pickering said, “there was griping and groaning.”"

"“Bachelors didn’t want to feed the wives of married men, and women don’t want to do the laundry of the bachelors,” he said.

The real reason agriculture became more profitable over the years, Mr. Pickering said, is that the Pilgrims were getting better at farming crops like corn that had been unknown to them in England."